June greetings from Dallas, Seattle, Birmingham, and, by the time most of you read this, Charlotte/ Concord/ Davidson (family graduation pic from Memorial Day weekend shown – Jimmy, the graduate, at center). This is the last edition of The Sunday Brief – a tough sentence for me to write, yet I am encouraged and overwhelmed by hundreds of you who have taken time to send congratulatory notes and reflect on how valuable this column has been each week.
A Few Parting Thoughts
Rather than dive into a wish list or other litany of things that need to be changed, I’ll leave you with some interesting data points:
- Cash is king. It’s a trite statement many of us learned in business school, but here’s the economic reality for some in our industry (figures are pulled from each company’s most recent earnings releases and do not include off balance sheet items. Debt also does not include post-retirement benefit obligations or deferred tax liabilities which would add tens of billions in “debt” to the lower section):
Company Cash Debt Net Debt
Apple $233 billion $72 billion -$161 billion
Google $73 billion $5 billion -$68 billion
Microsoft $103 billion $44 billion -$59 billion
Facebook $21 billion none -$21 billion
Amazon $16 billion $8 billion -$8 billion
Total $446 billion $129 billion -$317 billion
Company Cash Debt Net Debt
AT&T $10 billion $131 billion $121 billion
Verizon $6 billion $110 billion $104 billion
Comcast $6 billion $56 billion $50 billion
Sprint $4 billion $34 billion $30 billion
TWC $1 billion $24 billion $23 billion
CenturyLink $1 billion $20 billion $19 billion
Total $28 billion $375 billion $347 billion
Many of you commented that the value creation updates we did throughout the years helped keep things in perspective. The “Four Horsemen” (which became five after Facebook went public in May 2012) have created hundreds of billions of dollars of market capitalization over the past seven years. While that number is staggering, what is more telling is how, despite the efforts of investment banking and shareholder activist professionals, each of the Five Horsemen has been able to keep a strong negative net debt position.
Some of this cash is stranded overseas and would be taxed if repatriated. But, for comparative purposes, the balance sheets of non-network participants in the Internet economy clearly have more liquidity and leverage opportunities than traditional players.
- The average selling price (ASP) of a new Android device is plummeting while Apple is flat. Here are two charts released this week from the Business Intelligence folks:
Since the blossoming of the Android ecosystem in 2010, the gap between the average selling price of a new Apple and Android smartphone as ballooned to $443. This gap had been less than $200 as late as 2011. With the advent of less expensive devices in Bangladesh, China, Indonesia, India, Japan, Mexico, the Philippines, and Russia (roughly 3.6 billion total population), Android has established a “default user experience” position with smartphone users in these countries.
This is not to say that Apple faces an imminent danger. Plenty of used iPhones from other countries will make their way in to India and other places, and will still carry the cache of the Apple brand. However, this infiltration can only occur as smartphone changeover continues, and the latest earnings report from Apple shows that upgrades are slowing down. As go upgrades, so go refurbished devices. This result may be pleasing to some, but it was clearly on Apple CEO Tim Cook’s mind as he traveled throughout Asia last month (see this Forbes summary for more details on Cook’s India trip).
Could Apple institute a program in the developing world like Android One without compromising quality? Do they have any choice, especially with an alliance forming between China’s Apple wannabe Xiaomi and Microsoft (see more here)?
- T-Mobile’s Uncarrier 11: Time to Stock Up? If the rumors are to be believed, T-Mobile will launch a loyalty app on Monday that will offer free stock to customers who refer others to T-Mobile. This on top of pizza, movie rentals, and other items that likely come with any loyalty program (I have not heard that one of the loyalty items would be $100 off a smartphone, but hoping that is among the options).
Offering stock to customers is unique and different. A few will see the inherent long-term financial opportunity it represents. Last year, Gallup updated their poll on investment trends (full report here and summary chart nearby). What they found was unsurprising: Since the economic collapse of 2008-2009, fewer Americans are invested in the stock market, especially if their annual income level is less than $75,000.
Stock does not taste as good as pizza and certainly does not provide the entertainment value of The Revenant or Star Wars. A chance to earn my way to a free iPhone 7 with 10 new T-Mobile referrals? Sign me up. A free Samsung fast charging system for being a customer for 5 years? Count me in. Company stock for being a customer and signing up for an app? Too hard and too much of a hassle for many who distrust the market and whose last memory of a financial investment was a losing one.
There’s a lot more to talk about (see AT&T’s transcript from the Cowen & Company conference last week here, or Cricket’s large outage here or the full report of Apple’s outage here), but I’ll close by simply saying that I will continue to have opinions over coffee, lunch or dinner in Charlotte – come see me and let’s talk. The pen is taking a break, but I am not.
As of June 6:
VP/ GM – Flash Wireless
1000 Progress Place NE
Concord, NC 28025
(816) 210-0296 mobile
EDITOR’S NOTE: It’s best to print out the first page of the attached before reading this column.
Mid-May greetings from Charlotte and Dallas, where graduation week is beginning. As a result, there will be no Sunday Brief over the Memorial Day weekend. Our final column will be on June 5. Thanks to the hundreds of you who have sent well wishes and expressed how much this column has meant to you over the years.
In many of the well-wishing email exchanges, I have asked “What column has been the most impactful to you?” Without a doubt, it’s been the “Dear ________” letters. Right behind that, however, are the Android World chronicles. This week, we’ll take a final look at the devices being offered by each of the four largest wireless carriers, and discuss some of the Android N features that were revealed this week at Google’s annual conference. But first, a couple of shout outs.
ExteNet’s acquisition of Telecom Properties Inc. was announced on May 11 (pricing and terms not disclosed). For those of you who are not familiar with TPI, they are a Dallas-based firm that specializes in providing custom Distributed Antenna Systems. Specifically, TPI has built up a broad portfolio of sports venues (e.g., Madison Square Garden, AT&T Stadium, others) that serve multiple wireless carriers. This is a great outcome for both companies and congrats to Jimmy Chiles (picture nearby), Jeff Alexander, and the rest of the TPI team on their successful exit.
Also, AT&T announced the acquisition of Quickplay Media this week from private equity powerhouse Madison Dearborn Partners for an undisclosed amount. Kudos to Wayne Purboo (pictured), founder and CEO of Quickplay, for his steadfast leadership through a rapid growth period (according to the announcement, Quickplay has more than 350 employees and contractors). This acquisition fills in a critical piece for AT&T, and will enable seamless distribution of DirecTV content to wireless subscribers. More on Quickplay’s capabilities here.
It’s (Still) an Android World
Back when we wrote the first Android World column a few years ago (here’s a link to a June 2011 version), the thesis was that Google’s commitment to an open architecture was spawning a shakeup in the smartphone manufacturing world, and that Android represented a far greater threat to Apple’s market leadership than anyone anticipated. We also talked about the damaging effects of Android on Blackberry and Nokia (now Microsoft).
What we did not anticipate was how significant the changes would be. The HTC Dream (aka, the T-Mobile G1), announced in September 2008, seemed exactly like that – a dream, ready to be dashed by Apple as they rode iOS into consumer smartphone dominance.
Had Apple played their exclusivity hand differently with Verizon, Sprint, and T-Mobile, the outcome might have been domination. But Verizon dove in head first with Android, announcing the first DROID lineup in September 2009 (for some history, here’s the original “I Don’t” commercial). When it came time to introduce their first LTE phone (the HTC Thunderbolt) in 2011, it was not introduced on an iPhone but on Android (commercial here – For those of you who do not follow the industry closely, Verizon introduced the iPhone 4 in February 2011 and the Thunderbolt the following month).
And Verizon was not the only US wireless carrier to announce a flagship Android phone. In March 2010, Sprint announced the HTC EVO (still one of their all-time best sellers – 2011 commercial here) which featured 2.5 GHz WiMax services through their Clearwire partnership. It was launched three months after the original announcement and put Sprint on the map ahead of Verizon’s Thunderbolt launch. Sprint would not receive iPhone access until October 2011, and only then with a 30 million device commitment.
Android steadily became known as the platform for innovation, flexibility, speed… and sugary sweet operating system names. The ecosystem was developing nicely. Then came the Samsung Galaxy S III in 2012. Prior to this time, Samsung was just another player in the Android ecosystem with HTC, Motorola, LG, and Kyocera. After the release of the S III, Samsung assumed the mantle of smartphone leader, launching the Note II and Mini product versions by that fall.
The nearby chart tells the rest of the story – Android, led by Samsung, began to grow – quickly. China, and then India, emerged as the largest addressable market opportunities (in 2012/ 2013, neither was a large Apple market). Android suppliers such as Micromax, Spice and Karbonn in India (see phone comparison here) filled the nearly insatiable demand for smartphones, so much so that the Android One reference platform was announced in 2014.
Bottom Line: From nothing, Android assumed an 80% market share in about just over five years. Nokia/ Microsoft Windows OS are reduced to a few Stock Keeping Units (SKUs) in the back of the store or the bottom of the website, Palm and Symbian vanished, and Blackberry has been clinging since 2012. Google continues to be focused on Android inter-operability with VR, Chrome, Android wear, Nest, and other platforms. In response, Apple released the iPhone SE which out of the gate was categorized as “not for the US but for the developing world.”
Where does this leave us today? Here’s the latest Android World matrix:
For those of you who are not familiar with the format, a few notes. Represented are 24-month pricing from each of the major carriers’ websites (research undertaken from May 19-21). The underlying operating system is color coded. No refurbished or out of stock models are shown, and, for the purposes of comparison, we have used AT&T’s Next 18 month rates (which require 24 payments despite the name). Where needed, we have also indicated Sprint’s leased (as opposed to Equipment Installment Plan) as well as T-Mobile’s Extended LTE equipped devices.
There are several interesting developments. First, the iPhone SE is currently out of stock on most carrier websites with phones ordered today not expected to be delivered until late June/ early July (see link here and here). The extent to which this has been a deliberate move by Apple (some going so far as to call it a bait-and-switch) is debated; The Sunday Brief sides with the camp that it’s driven by supply constraints as Apple readies an even less expensive version (for a really good historical matrix of Apple pricing, see this Macworld article).
Second, Sprint isn’t leasing as many models as they have in the past. Currently, the models covered by the iPhone forever and Galaxy forever lease constructs are the Samsung Galaxy S7, S7 Edge, and Note 5 as well as the iPhone 6S and 6S Plus. Everything else is Equipment Installment Plan (EIP) based. This is half of the ten models offered for lease in October. Sprint’s crazy deals on iPhone 6S devices with trade-in ($15/19 monthly lease rates for 24 months) are now a thing of the past – you will now shell out a similar amount as for an EIP but receive the right to automatically upgrade as soon as the next generation is released.
Net-net, this is a positive for Sprint because they get out of the residual value estimation business. While the upgrade process is slowing down (implying there might be a supply-driven residual opportunity), the risk of being stuck with a large number of off-lease devices still exists. It also will help financial analysts more accurately ascertain a comparable EBITDA rate for Sprint.
It’s also interesting to note that Sprint has thrown out both Windows and Blackberry by design. No Blackberry Classic or PRIV or Passport. No Lumia anything. Keeping it simple for the customer (as well as customer service reps) – smart move.
Finally, one cannot help but notice the shrinking bottom layer (< $10/ month EIP) of this chart which will likely continue to shrink in future years. AT&T really has two offered devices below $10, and it would not be surprising to see Verizon at this level shortly. Driving this is the growth of Bring Your Own Devices, something quite common in the MVNO/ Wholesale world and now beginning to show up with each of the Big 4.
Have a look at the Motorola X for sale on Glyde (16 GB – works on AT&T – $77.25 refurb; $90 new – $6 shipping). It’s a good deal for a 4.5 star rated phone on PhoneArena: Android Lollipop compatible, 4.7 inch screen, 316 ppi, 10 MP camera with an HD camcorder, 2GB RAM, 16 or 32 GB ROM, 2200 mAh battery, 802.11 ac Wi-Fi. All for $80 with shipping. And fully compatible (except for Band 12) with the T-Mobile network if things don’t work out with AT&T.
This story is repeated hourly within the Android world (Apple iPhones tend to hold their value better). Like we saw with free phones in the subsidy days, the prospect of a gently used model with complete freedom to move between (some) carriers is enticing for bargain shoppers. And this is going to get even easier with the rise of soft SIM devices (see the latest Apple iPhone carrier compatibility chart here or the Google Nexus LTE network specifications here). For many, a device is simply going to be a means to access a network full of applications. Until the value proposition of faster networks catches up, customers are more than content than to postpone upgrades.
Bottom line: Android is big – really big. From last week’s Google I/O conference (see video summary from The Verge here), it’s about to get even bigger and more integrated into the full Google product line. Google excels at software development, but not necessarily software integration. Android’s future depends on its most complex challenge: an integrated end state.
Thanks for your readership and continued support of this column. No column next week for the Memorial Day holiday, but if something comes out on the Open Internet Order, we’ll be ready with a quick analysis on the website. As a result of the job change, we are not going to accept any new readers, but you can direct them to www.mysundaybrief.com for the full archive. Thanks again for your readership, and Go Royals!
Mid-May greetings from Cleveland, the Deep South, and Dallas (Dallas Jesuit College Prep pictured – they won their first state championship this weekend). Thanks to the hundreds of you who have sent well wishes and expressed how much this column has meant to you over the years.
A few of you have asked “How do I stay informed about the industry?” While it is not as in-depth as this column, I think Ben Evans weekly is one that you should add to your list. If you subscribe to his free newsletter (arrives late Sunday/ early Monday), you’ll get 10-12 links to decent articles, statistics, and opinion. Not much verbiage, but a very good column.
Jeff Miller, one of the leading economic voices in the United States and a new-found friend, is the exact opposite. His lengthy columns (latest here) are a combination of economic analysis and market research. It will not be an industry column, but if you want thoughtful perspectives on the macro trends which shape demand within our industry, Jeff’s column can’t be beat.
Lastly, I cannot say enough the friendship and support of Jeff Mucci, the editor of RCR Wireless. Jeff has resurrected telecom publishing (I remember the day he bought RCR Wireless and came to visit me at Sprint for help) and made researching the industry less of a task and more of an adventure.
This week, we’ll weave in earnings, discuss the implications of the new Charter/ TWC/ Bright House, and discuss the future of broadband in America.
Understanding Broadband’s Tomorrowland
Trying to figure out a catchy title for describing broadband trends in the United States is tricky. Everyone knows that broadband speeds are growing (we are all witnesses), total connections are skyrocketing, and business model shifts are beginning to take place that signal step-functions of demand growth (ask Hulu, Disney and others). Without a doubt, there will be growth, but how much and where will it come from?
Nearby is the adoption rate of 25 Mbps or higher speeds ranked by state. This is taken from Akamai’s 2015 State of the Internet report (full report here). While 25 Mbps is a fairly arbitrary figure established by the FCC (a key figure in the competitiveness evaluation of the Comcast/ Time Warner Cable merger), it is a proxy for the new residential world: concurrent high-bandwidth usage.
What’s important in this report is neither that Delaware and the District are topping the list (small geographical footprints can help this), nor that the vast majority of these states will still be in Verizon FiOS territory (8 of the 10 states). It’s the annual growth rate. When speeds are available, customers will adopt in record numbers, up to an economic ceiling.
There are many in the traditional telco and cable communities with whom I have had the following conversation over the past four years:
Provider: I don’t see the need to deploy [select new technology]. There’s no use case for that speed level.
Me: That’s the wrong question.
Provider: Can you envision how people will use 300/500 megabits or 1 Gigabit per second?
Me: Yes. Over the top (OTT) streaming, especially at 4K speeds. Resolutions will force more bandwidth needs per second. But it’s still the wrong question.
Provider: Well, what’s the right question?
Me: Can you make higher speeds affordable to more than 80% of your homes passed? Specifically, can you provide 75 Mbps or more for the same rate as 12 Mbps and make more money in the process?
Provider: Why would I want to do price down service?
Me: Which is more important, the total economic value created or the margin percentage on a given product line?
… and the conversation continues from there. Most product managers struggle with the idea that customers value availability over utility.
Instead of being in the telecom service provider industry, imagine that we were producing automobiles and trucks. Using the current utility theory, no one should be paying $45-60K for a gas guzzling BMW X5 or Infiniti QX80 or $80K or more for a Cadillac Escalade.
But they are. BMW X5 sales are up 17% form 2014, Cadillac Escalade 2015 unit sales up 18%, and QX80 sales are up 21% (full data table here). Combined, these three models sold 110K units in 2015. Consumers purchased these vehicles because of proven brand and performance, not for utility.
Envisioning tomorrow’s broadband world begins with the assumption that many/ most consumers would buy more bandwidth if the performance was consistent and the price/ value tradeoff was right ($10 for 50 Mbps more). It continues with the assumption that bandwidth downgrades will be rare (and driven by economics, not availability).
It ends with the fact that product lines are quickly blurring between connectivity and content delivery. High Speed Internet services are quickly becoming the “new video.” The interface between these lies in a next generation of set-top box which merges Over the Top (OTT) content with traditional broadcast media, live with on-demand content, and sponsored versus subscribed business models.
This model lends itself to traditional broadband providers who enjoy owner’s economics for connectivity. That is, if they change their thinking from “What will customers use?” to “What will customers value?” That’s the key to understanding broadband’s Tomorrowland.
Charter Merges with Time Warner Cable and Bright House Networks: What’s Next?
This week, thousands of cable executives will gather in Boston for the 2016 Internet and Television Expo. There will be endless discussions on the competitive threat posed by 5G wireless services (which only poses a threat for about 50% of the consumer segment; business competition could prove to be much more significant), the financial impact of political advertising on second quarter earnings and profits (especially in states like California and Indiana), and what the FCC could do to the industry with a more progressive administration (think Unbundled Network Elements or UNE- Cable).
Walking tallest at this week’s show will be John Malone and Tom Rutledge. In the vein of “Good things come to those who wait,” this duo has stood firm in their vision to consolidate a fractured industry and steer its direction. This vision became reality on Thursday when the California Public Utility Commission decided to unanimously approve the Charter/ TWC/ Bright House merger (LA Times article here).
At the federal level (see here for full filing), the new Charter agreed to several conditions, including:
- Providing an affordable High Speed Internet solution to at least 525,000 homes nationwide;
- No data caps for at least seven years;
- Overbuilding (likely with a nationwide Multi-Dwelling Unit initiative) one million homes nationwide in an effort to increase competition;
- Free interconnection and favorable qualification conditions for content companies wishing to peer with the new Charter;
- Agreeing not to undermine the viability of Over the Top providers for the next seven years.
These conditions are far more stringent than those imposed on any other wireline merger. Will they hamstring Charter’s ability to compete?
The simple answer is no. While the name is new, the underlying organization will remain the same for the next few years. Charter territories will continue to lead with 60 Mbps service to residential and business customers (nothing slower is available). Time Warner Cable will continue to offer a wide variety of speeds starting at 3 Mbps for $14.99/ month (full listing of Dallas, TX offerings here). All of these speeds with come without caps.
Meanwhile, Charter will intensely focus on growing the next generation of services, currently called DOCSIS 3.1 (see this LightReading article for a good primer on this technology). As we discussed in the earlier segment, Charter will be working to make 100 Mbps a replacement to the current 60 Mbps in the near future and to use its global purchasing power to keep modem costs low (and available for direct purchase). Having a standard 100 Mbps rate will provide a near-term competitive advantage versus DSL. On top of this, Charter will continue Bright House and Time Warner Cable’s rich history of municipal Wi-Fi deployments, likely leveraging their large business footprints to provide improved coverage and speeds.
The greatest near-term changes to the new Charter will likely be in their commercial services unit. Coordinating fiber deployments (including potential small cell services to carriers), improving site serviceability tools and revamping trouble management will be some of the first changes seen in 2016. Also, the years of work put in by Time Warner and Bright House to build a joint Internet backbone will be immediately noticed by Charter customers.
On the cost side, self-service will become the mantra for both consumer and business customers. Whether this will include all existing products or is confined to newly launched products remains to be seen (to keep incremental headcount low during the transition to DOCSIS 3.1, it’s likely some self-help capability will be needed for legacy products). Strong self-service tools will also mitigate the customer service “ping pong” that can happen with many mergers.
Bottom line: The new Charter will continue the traditions of their predecessor companies: speed, quality, consistency, service availability, and value. To continue their pro forma growth trajectories, they will need to put more tools in the hands of their customers and define a brand around simplicity and speed. Having Liberty Global’s purchasing power will help with overall cost structures, and some franchise trading (known in the industry as “re-clustering”) will improve economics even further.
Thanks for your readership and continued support of this column. Next week, we’ll wrap up our earnings analysis and hopefully have some comments on the Open Internet Order. As a result of the job change, we are not going to accept any new readers, but you can direct them to www.mysundaybrief.com for the full archive. Thanks again for your readership, and Go Royals!
EDITOR’S NOTE: Last week’s Sunday Brief (which focused on Verizon’s earnings and their relationship with Tracfone) incorrectly indicated that T-Mobile was owned by America Movil. The statement should have read that Tracfone is owned by America Movil. Apologies for any confusion this may have caused.
May greetings from Paris (where it was unseasonably cold – entrance to the Louvre at night is pictured) and Dallas (where it is unseasonably wet). This week has been full of earnings news for both the wireless and broadband wireline, as well as Internet companies such as Amazon. Given the attempt to be brief each week, we are going to focus on T-Mobile today, and will tackle the earnings progress from Comcast, Time Warner Cable, Charter, Sprint, CenturyLink and AT&T through the remainder of May.
Before diving into T-Mobile earnings, I am pleased to announce that I’ll be joining the ranks of full-time employment starting in early June. I’ll be running the North American wireless business for ACN, a Charlotte-based direct marketer/ MVNO with three wireless carriers as networks and strong growth potential. ACN has been a client for over three years and their management team is exceptionally strong. Distribution and handsets are two of the important factors when running an MVNO; ACN excels in the former with more than 81,000 sales makers in the United States and growing operations across 23 additional countries.
Many of you understand my love for the Tar Heel state, and especially my alma mater, Davidson College. It’ll be good to re-root there after a 24-year absence. As a result of my new job, the Sunday Brief is going to cease publication after the June 6 issue. I’ll be suggesting other interesting blogs and news outlets for you to peruse, and we’ll keep www.mysundaybrief.com up and running (with better indexing) for the next year or so. I’ll still surface as a guest writer, panelist and speaker periodically, but the weekly written Brief is going to disappear into the summer breezes. If you need more than that, you’ll have to swing by Charlotte and try for a special luncheon edition (or coffee, or happy hour, or … ).
What Can Stop T-Mobile?
T-Mobile announced earnings on Tuesday morning (full package here), and the results were strong across the board. Prepaid was especially strong (807K net adds; 3.84% monthly churn), as Metro PCS took share from Sprint (retail as well as Boost/ Virgin) and other smaller brands. T-Mobile’s opportunities continue to expand as their LTE and 700 MHz (Band 12) networks grow.
Rather than a straight dive into their earnings or comparing their progress to the “To Do” list we built after the first quarter release, I thought it might be beneficial to talk about three factors that would cause T-Mobile’s momentum to be derailed. Their metrics were good, and sensing the possible headwinds is not easy to do, but here’re a few thoughts about what could derail their three-year winning streak:
- They could run out of spectrum (or the cost to densify the existing spectrum could be too steep). T-Mobile has made it clear for a long time that they need to 600 MHz capacity to meet data needs (50% annual growth adds up after a few years). On the earnings call, they were quick to describe their $7-8 billion trove available for the auction.
One of the important announcements surrounding spectrum available came on Friday, when the FCC announced that 126 MHz of spectrum would be available (the amount by market varies, but the vast majority of markets have 10 blocks of 10 MHz spectrum available with minimal interference). The bottom line of this announcement is that there will be plenty of spectrum for bidders to purchase.
Could Comcast, NTT DoCoMo, America Movil and other spectrum speculators bid up the 30 MHz in the reserve auction and make the spectrum too expensive for T-Mobile? It’s technically possible, but the likelihood is remote. Could the FCC have generously qualified some spectrum as being “unimpaired” that takes years if not a decade to clear? Perhaps, but again, the chance is very remote.
After Friday’s announcement, the exact opposite scenario becomes more likely: T-Mobile shows up at the auction and bids $8 billion for a large swath of spectrum (30 MHz by 30 MHz being the best case) which sets the company up for capacity for the next decade.
- T-Mobile could face a formidable challenge from Comcast following the auction. As we reported in two weeks ago in The Sunday Brief, Comcast is the largest cable provider yet the least leveraged (even after they buy Dreamworks SKG for $3.8 billion). If no one shows up to the 600 MHz auction, Comcast could see this as a rare buying opportunity and deploy the spectrum as a defensive measure against Verizon and AT&T. This would represent a pivot of sorts from their current relationship with Verizon (Pivot was the name of the product that Comcast, Cox, Time Warner Cable, and Bright House Networks formed with Sprint a decade ago).
There’re a lot of “ifs” in the previous paragraph. Comcast would have to pay $5 billion or so for spectrum covering their territory, and another $5 billion or so to have a robust nationwide network (even with the ample supply described above, which should keep overall bid levels in check). While they would have a distinct advantage with owner’s economics on the bandwidth going to each tower (although Zayo, Level3, or regional players to unseat Comcast as a supplier), they would not have a competitive advantage when it comes to constructing, operating, and maintaining tower assets.
On top of this, Comcast lacks the retail distribution network to distribute traditional smartphones. With enough promotional money, Best Buy or WalMart could provide that network, but it’s unlikely that Comcast would be able to avoid the store requirements (people, capital, inventory, etc.). Because smartphones are critical to daily lives, the thought of shipping devices through Amazon will not work – stores will be required. T-Mobile has an extensive exclusive dealer network and has the process of operating and maintaining a store down to a science.
A merged Comcast/ Sprint (post-bankruptcy) presents an entirely different competitor. We’ll know more about Sprint’s overall health and the prospect of paying their long-term debts after they announce earnings next week, but if Comcast could receive regulatory approval, a Sprint combination would erase the problems described above. If Comcast had 600 MHz, and Sprint brings 2.5 GHz (and minimal indebtedness), the resulting fiber-dense, data-focused, content-capable entity that would result could threaten T-Mobile… in 5-7 years.
The chances of Comcast receiving regulatory approval for the acquisition of any telecommunications asset without giving up a lot in the process is practically zero unless the new FCC Chairman is a former Comcast employee (or cable executive). While matchmaking dreams create theoretical possibilities, T-Mobile’s greatest competitive threat would likely come from an America Movil expansion with Sprint of Verizon, not from Comcast.
- Regulations (including those tied to M&A activity) could fetter T-Mobile’s ability to expand. This scenario does not entirely stop T-Mobile’s progress, but merely stunts their growth. The worst-case scenario (without M&A activity) goes as follows:
- The FCC retains the right to regulate wireless carriers as utilities (a.k.a., “Full Title II”). Note: Appeals Court analysts believe that if anything gets thrown overboard in their ruling, it’s the FCC’s ability to regulate wireless carriers as utilities. What’s important to remember is that the Wheeler FCC will continue to press for increased regulation so long as they believe competition will be helped. They feel vindicated from their decision to disallow the Sprint/ T-Mobile merger.
- Using their newfound rights, the FCC establishes a rule disallowing any sort of metered/ slowed content distribution, including Binge On, sponsored data efforts like Verizon’s FreeBee, and the like. Also, the FCC rules that offering products that inherently operate at slower speeds than their underlying networks/ devices allow (a four-cylinder governor on an eight-cylinder engine) is also illegal. This would force eliminate the practice of data precedence (more on that here) and potentially make the MetroPCS product less competitive.
- Also, the Congress, in conjunction with the FCC, could move to unbundle wireless access (perhaps as a part of a broader unbundling of broadband), forcing T-Mobile and the rest of the industry to provide would-be competitors wireless access at long-run incremental costs (a TSLRIC for wireless). While this might make some content providers salivate, the probability that the FCC and Congress would extend Title II into full unbundling is about as probable as a Bernie Sanders administration receiving Republican support for their tax proposals.
Of course, the FCC could discover plenty of ways to reduce pricing competitiveness short of full price regulation (which is extremely unlikely). They could also open up even larger swaths of unlicensed (WiFi) spectrum at lower 900 MHz spectrum bands (called ISM for Industrial, Scientific, and Medical) and create an effective competitor to 600, 700, and 800 MHz carrier-owned frequencies. This possibility received a real boost when the WiFi alliance announced the HaLow band at this year’s Consumer Electronics Show (CES). More from their announcement here. Cable companies would likely support more 900 MHz WiFi as it would increase the value and reach of their Cable WiFi footprint for both out-of-home consumer web browsing and small business customers.
None of the regulatory scenarios described above consider additional FCC conditions attached to a proposed merger, either with Sprint or another carrier (e.g. US Cellular might be a good fit in the North Central US, but the complex ownership structure with parent TDS would need to be resolved). Any Sprint acquisition concessions, even under a friendly scenario, could hurt T-Mobile’s current growth trajectory (although they would be acquiring a large base of customers).
While spectrum concerns, new entrants, and increased government regulation could possibly thwart T-Mobile’s momentum, it would require a cocktail of all three plus an economic downturn plus the collapse of global credit markets to derail their locomotive. $650 porting/switching incentives from Verizon and AT&T implemented in Q1 2016 have not worked. Claims of an inferior network have not worked (especially as T-Mobile’s network is expanding). Denigrating their metropolitan focus with racially/ethnically charged word association games has not worked. And thoughts that management would grow complacent and “take a breather” is a pipe dream.
Bottom line: It will take a lot of factors, working in tandem, to slow T-Mobile’s progress. Anything is possible, but as of now, spectrum supply, handset supply, relatively low tablet churn exposure, and improved network quality make continued growth the most likely scenario.
Thanks for your readership and continued support of this column. Next week, we’ll compare AT&T, Comcast, Charter, Time Warner Cable, and Level3 earnings in less than 200 words. As a result of the job change, we are not going to accept any new readers, but you can direct them to www.mysundaybrief.com for the full archive. Thanks again for your readership, and Go Royals and Sporting KC!
April greetings from Louisville (last night’s Thunder Over Louisville pictured), Dallas, and, by the time most of you read this, Paris. There has been no verdict yet from the Appeals Court on the Open Internet Order (kind of surprising), so this week’s column will focus on Verizon’s earnings. However, to get started, we’ll talk about the latest foray from Comcast in the set top box kerfuffle.
Comcast’s Xfinity Partner Program Announcement and the FCC’s Reaction
This week, Comcast announced an alternative to the FCC’s set top box mandate: the development of the Xfinity TV Partner Program (and App). This enables Comcast subscribers to access their programming from Roku boxes, Samsung Smart TVs, and other devices that enable access (Comcast even committed to customizing their app for devices that do not support HTML5).
In the aforementioned blog post, Comcast has an interesting reference to its search feature:
As part of the Xfinity TV Partner Program, Comcast is prepared to provide consumers with a capability to search through Comcast’s video assets from a device’s user interface with playback of a selected asset via the Xfinity TV Partner app. However, in order to provide a cohesive customer experience, such integrated search needs to include more than just this app; it must also include similar data from other video apps as well.
Comcast appears from this paragraph to not only be providing an alternative to the $230/ yr annual expense many pay for set top boxes, but also appears very open to allowing other video content to be shown alongside their app.
In a related announcement, Comcast and Roku (see nearby picture) have joined forces to bring the Xfinity TV app to the Roku player and Roku TV. As we discussed in our first column on the topic, Roku has a meaningful market share in the streaming device market alongside Amazon, Apple, and Google (see nearby chart). Enabling each of their devices with Comcast’s app will reduce the number of Xfinity set-top box rentals that are needed. This also might allow expansion of existing video services to rooms where set-top boxes do not exist (Time Warner Cable used this tactic when launching their Roku partnership in 2013 and has a very unique trial going on with Roku in the NYC area described here).
Comcast enabling Xfinity without a cable box; Time Warner trialing plans that include free Roku equipment instead of a traditional cable box; Suddenlink actively offering TiVo in lieu of their cable boxes. All of these innovations should make the FCC happy, right? Their regulatory initiative forced Comcast’s hand and now consumers will have a choice between a cable box and more innovative solutions. Here was the FCC’c comment on the Comcast announcement to electronics publisher CNET:
While we do not know all of the details of this announcement, it appears to offer only a proprietary, Comcast-controlled user interface and seems to allow only Comcast content on different devices, rather than allowing those devices to integrate or search across Comcast content as well as other content consumers subscribe to.
This seems to indicate a “goal post move” by the FCC. President Obama clearly stated that the FCC was trying to solve the $230/ yr set top box rental problem in last week’s weekly radio address (device competition is the basis of section 629 of the 1996 Communications Act which gives the FCC the authority to issue the NPRM). Now that Comcast has announced their willingness to allow Xfinity content in a manner that is not tied to owning/renting a Comcast box, but the FCC has redefined the problem to be unintegrated content and the lack of comingled choices. Simply put, the FCC does not believe that Comcast, Time Warner Cable, Charter, or their partners Tivo or Roku solve the content organization problem, which has replaced the set top box affordability problem.
Bottom line: Comcast’s actions are a step in the right direction. The FCC is wrong to move the goalposts, and it’s highly unlikely that they have the authority to define how Electronic Programming Guide content is organized. They should let the market determine how channels are presented (if you do not have a Roku or Tivo box, I would urge you to find a friend who does, look at their experience and imagine a Comcast TV channel alongside the current pay and free choices).
Looking for Meaning in Verizon’s Quarterly Earnings
Verizon reported earnings (link here) that generally met expectations on Thursday. They have already completed several items on their 2016 “To Do” list. Here’re some takeaways on their earnings release:
- The Frontier transaction is closed. As a result, debt is being reduced, and cost structure rationalization is continuing for the remaining wireline unit (Verizon reported that the EBITDA margin for the wireline unit without the divested properties is 19% – see nearby chart). Realizing a lower cost structure has been a long-time initiative for Verizon, but the divestiture of a more profitable unit clearly brings the labor cost challenge into focus. Less debt, but more sales required in a geography that is growing more slowly than in the South and West. Reducing the cost structure is going to be a big challenge, and the cost attribution to wireless/ 5G is likely how they will achieve it (see point #2 below).
- The XO acquisition is going to provide Verizon with a lot of intra-city fiber. In discussing the Boston FiOS buildout, CFO Fran Shammo stated that $300 million of incremental capital expenditures would be needed over the next 5-6 years to complete the footprint expansion. That’s a rounding error to Verizon’s overall annual expenditures, likely attributable to both 5G and FiOS, which should help Verizon’s ability to competitively price services in Boston (building out Baltimore and Virginia will likely require more new capital due to XO’s lack of fiber in these markets).
- Wireless customers are holding on to their smart devices longer than they did during previous years. Verizon’s postpaid upgrade rate was 5.8%, down from 6.5% in Q1 2015 and lower than most analysts expected. This had a mixed benefit: Fewer upgrades helps churn (0.96%, a strong figure), but fewer Equipment Installment Plan upgrades lowers in-quarter revenue. Verizon also commented that more wireless subscribers renewed their devices on traditional subsidy-based plans than they expected.
- “The Tracfone brand is our prepaid product.” That’s a huge admission from Verizon and perhaps the first time they have been that bold and clear. Here’s the full quote from Fran Shammo in response to a question about AT&T and T-Mobile’s prepaid gains:
Our retail prepaid is above market. We’re really not competitive in that environment for a whole host of reasons and it’s because we have to make sure that we don’t migrate our high-quality postpaid base over to a prepaid product. If you look at the competitive nature, they are doing it with sub brands. They are not really doing it with their brands. And quite honestly, we use the Tracfone brand as our prepaid product. Tracfone has been extremely successful for us. It’s not something that we disclose any more on reseller, but it continues to increase on the high-quality base of Tracfone, so that’s really where we use and go after the prepaid market. More to come on this during the year, but currently that’s how we operate under the prepaid model.
This alliance makes a lot of sense. AT&T is likely to bundle Cricket with DirecTV in the (near) future, and T-Mobile is using MetroPCS to take share from Boost/ Virgin (Sprint) and Tracfone, so the opportunity to have a strong relationship with any particular carrier is limited. While not surprising to those who follow the wholesale wireless industry, it was a pretty big statement from Verizon. It will be interesting to see if America Movil, the parent company of Tracfone (and a direct competitor to AT&T Mexico), views the relationship in the same manner.
- Verizon is aggressively pursuing new content acquisition. Their strategy, which involves investing in content creation companies with well-known media outlets such as Hearst (see announcement here), is in its infancy. But Verizon is not playing for second place. On the conference call, they announced that they were focusing on leading mobile-first content that did not originate in the home. Awesomeness TV (Verizon now a 25% owner) is the #1 digital brand for females ages 12-24 with 160 million views and 53% growth, and Complex TV (acquired with Hearst – see announcement link above) is the #1 digital brand for males aged 18-24 with monthly unique viewers of 54 million and 300 million total views per month.
Since many teens do not watch content in the den or family room, this is a different but wise strategy nonetheless. For most in this demographic, the screen in their pocket is their TV.
Here’s the rub: While available to all wireless subscribers, Go90 isn’t zero-rated unless you are a Verizon postpaid wireless customer. Perhaps the announcement to which Verizon was alluding in the quote above with Tracfone was a deal that zero-rates Go90 content. That would be a game changer.
Verizon is changing. They led off their investor presentation with the chart to the right. While this may seem like déjà vu for those of us who remember the AOL/ Time Warner merger, it is different. Mobile advertising and targeting did not exist, and Time Warner Cable did not have a national wireless footprint capable of distributing zero-rated content to 100 million existing customers. Verizon has the unique opportunity to create a vertically integrated entertainment company, and, unlike AT&T, will emerge as a focused challenger.
History is not kind to transformations like the one Verizon is pursuing. Regulations change (although Title II freedom from the anticipated Court ruling would be a plus to this strategy), organizational catharsis sets in, and cost challenges tend to take these ambitious efforts off track. As soon as Verizon shows signs that their content strategy is impacting their wireless gross additions, we at the Sunday Brief will become believers. There are many risks to this strategy, however, and we remain skeptical.
Thanks for your readership and continued support of this column. Next week, we’ll compare AT&T and Verizon’s wireless and broadband results as well as examine the implications of the Open Internet Order ruling if it is released. Until then, please invite one of your colleagues to become a regular Sunday Brief reader by having them drop a quick note to firstname.lastname@example.org. We’ll subscribe them as soon as we can (and they can go to www.mysundaybrief.com for the full archive). Thanks again for your readership, and Go Royals and Sporting KC!