Greetings from Dallas and Paris, France, where the days are still gray but spring is definitely around the corner. This has been a full week of telecom earnings, with AT&T, Sprint, and Time Warner Cable reporting Q1 2013 results. On top of this, MetroPCS shareholders overwhelmingly approved the revised terms proposed by T-Mobile two weeks ago, and they began their telecom honeymoon.
As we highlighted in last week’s Sunday Brief, there was a postpaid net earnings surprise with both AT&T and with Sprint. AT&T reported 296K net postpaid subscriber additions, but many analysts estimated that postpaid retail smartphone growth was zero or even negative. Sprint’s situation was more acute, losing 560K subscribers overall and only gaining 12K on the Sprint CMDA/ LTE platform. Overall, Sprint and T-Mobile are much closer on rolling four quarter losses than they have been in a while:
Speculation continued that Verizon Wireless would purchase Vodaphone’s portion of their JV for $100 billion, although many of Vodaphone’s investors believe that’s about $30 billion too light. Regardless of investor posturing, VZW has the ability to retire all of their remaining debt in the next quarter, so decisions need to be made about earnings distribution.
In cable news, Time Warner Business filled their President position with Cox and MCI veteran Phil Meeks, the second time in seven years that Cox has produced business leadership for one of their larger cable peers (Bill Stemper moved from Cox to Comcast in August 2006). As we will discuss below, while Time Warner Cable has done a good job with their current leadership, a higher gear is needed to capitalize on tremendous market opportunities. Phil is a relentless individual whose kind style masks an intense competitive spirit and attention to detail. Changes are coming at Time Warner Cable.
Lastly, as many of you noticed, I re-surfaced on Bloomberg last Friday, not because my plate was empty but because they agreed to let me write the script. While I did not address WalMart’s launch of the iPhone (the segment was already at four minutes), many of the previous Sunday Brief themes were front and center. Several of you are pros at doing TV interviews, and I welcome your constructive feedback as this was my first TV in seven years.
Before digging into earnings, a quick and painless request to help out two companies I am advising – StepOne, Inc. and SNAPJAW. If you are attending CTIA, StepOne needs your vote for the Emerging Technology of the Year. The company, which provides “Predictive Service Solutions for Connected Devices” is entering their first large growth period and accolades are important. Please vote here and encourage your friends to support this innovative company who is reinventing service through your smartphone.
Serial entrepreneur Alex Panelli is the CEO of SNAPJAW, a product that allows your license place holder to reflect your feelings about life, the driver behind you, or your favorite sports team. I have had a lot of fun with this company, and Alex and his team have put a lot of thought into keeping the product safe, cheap, and fun. They have begun the Kickstarter process which includes a SNAPJAW at an incredible price. Click here to learn about their cool product and help out these entrepreneurs. They have 22 days left to raise $37K+. If 10% of you participate at the $149 level, they have raised their money, and you will get a SNAPJAW ahead of everyone else and be the envy of the neighborhood. That’s the power of the Sunday Brief.
As the title of this week’s Sunday Brief implies, we are entering a new phase in the Broadband Wars. Last August, with recently introduced shared data pricing plans for consumers from AT&T and Verizon Wireless, the telecom world entered a brief “Golden Age.” Revenues and margins were actually beginning to rise, smartphone and new application rollouts were keeping the industry hip and innovative, and new and faster networks were either promised or already implemented. Capital was widely available on excellent terms, and valuations were good enough to attract foreign investment. Life was grand.
As many of you point out to me each week, there are still profits, but golden is not the word to describe where the wireless industry is headed. More postpaid customers are headed into no-contract arrangements (even for families), and data allocation between devices is not easy to understand and forecast. Ubiquity of the iPhone and Galaxy lineups across the industry makes it easier to switch carriers, and the gap between new (promotional) and existing customer (upgrade) pricing is widening. One of you went so far as to add the word “flake” in between Golden and Age. The industry is by no means in danger of collapse, but the dynamics are changing faster than ever.
The cable industry is also reaching a turning point. The Triple Play offerings so popular several years ago have run their course (see Time Warner’s chart at right), and home phone’s attractiveness has waned/ disappeared (Time Warner Cable lost 35K residential subscribers in Q1 and revenues are headed lower). Video margins are sinking (Time Warner’s video subscriber base sank by 119K subscribers in the quarter driving down revenues 1.5%, with programming costs rising 6.8%), with viewers increasingly being peeled off to device-specific third-party content options. Cable values are continuing to rise solely because of two product lines – High Speed Data and Commercial (Ethernet) Services. With the exception of Comcast (who now owns NBC Universal), the relationship between cable and content is as divisive as ever. Something’s gotta give.
Next we enter the “Now What?” phase in telecom. This is where marketing, product, and distribution replace network milestone metrics. Capital spending levels begin to fall (as witnessed by AT&T’s $4 billion revision to total Project VIP expenditures), and retention and loyalty become the buzzwords (again) for the industry.
The wireless industry begins their explanation phase, answering the following questions:
- How many data/ tablet/ M2M/ other device connections does it take to replace one smartphone loss? Many analysts were surprised by AT&T’s disclosure that postpaid subscriber additions were driven by tablets, not smartphones. In fact, postpaid smartphone subscriber growth was negative (this is consistent with previous Q1 results).
- Why will customers purchase the same (iPhone5, Galaxy S4, Blackberry) device from you through the retail channel when they can get the same network for nearly half the cost through WalMart’s StraightTalk service? (Note: This is only the case for 3G iPhone5 usage today on Verizon. I am projecting the question on the assumption that wholesale competition will only increase along with handset/ operating system loyalty).
- How do we ensure net add stability in the prepaid market segment? Sprint disclosed on their earnings call that they would be lowering their prepaid base by 1.3-1.4 million subscribers in Q2, wiping out more than five quarters of gains, thanks to tighter restrictions on government-subsidized phone service (a.k.a., the “Obama Phone”). Sprint’s (including Nextel) subscriber growth for the past six quarters has been driven by prepaid:
This is a mammoth reset of the base, and, while it has little effect on revenues, does highlight subscriber volatility (vs. postpaid) in this segment. Sprint begins the second quarter with an active user base equal to 4Q 2011 levels.
- How quickly can companies migrate to LTE? How will network size and scope be used to drive further postpaid gains? This is the most critical question facing the wireless industry. Handset innovation is advancing at a slower pace than it was a few years ago. LTE delivers faster webpages/ Facebook statuses/ sports score updates for many, but how many are using tablets and smartphones to drive person-to-person (Facebook) communications or step function improvements in business productivity? And, as we discussed last in last week’s column, why is it important to deliver network consistency to 300 million Americans as opposed to 200 or 250 million?
These questions have not been answered. They require a keen understanding of the customer base, applications market, chipset costs, in-building coverage and cloud computing. Frankly, they can be answered without regard to Rich Communications Services (higher quality voice for those 25 minutes or fewer that one fifth of the postpaid base uses) or VoLTE adoption. Marketing takes center stage, and network, while critical, moves into the background.
Twenty years ago, the long-distance industry faced the same dilemma – multiple competitors, similar networks (after a decade of fiber deployments), and arcane regulatory structures. After Sprint rejected the idea (folklore confirmed this week through my Sprint sources), MCI proceeded to aggressively roll out a billing change called Friends & Family (F&F). As this link to the commercial implies, 1990s-style data mining led to a five million customer shift in just about a year.
It’s time for another “F&F.” Cable needs it. Wireless (except Verizon Wireless) needs it. What coalition will lead this next phase in the Broadband War? Will the cable + VZW relationship create “Double Data” bonuses for all VZW families who are also Comcast, Time Warner or Cox Triple Play subscribers? Will super-fast in-building deployments (paid for with Project VIP capital) reward all of those “Bring Your Own Data” devices with free or discounted service if they use AT&T in the office(but not Sprint or T-Mobile)? Will Salesforce develop a premium product which pays for additional LTE data charges incurred by mobile users?
These are all within grasp. They are not technological triple somersaults. But they require targeted messaging, an experimental culture, and flexibility. Marketing is the critical element in the next front of the Broadband War. New alliances will create strange bedfellows. The action begins in 2013 – stay tuned.
For more detailed analysis and daily updates, bookmark www.mysundaybrief.com on your website. Thanks again for the many Sunday Brief referrals. If you have friends who would like to be added to this email blog, please have them drop a quick note to firstname.lastname@example.org and we’ll add them to the following week’s issue. Have a terrific week!
Greetings from Dallas and Atlanta. Tragedy and horror exploded on both sides this week in Boston and West, Texas. Our prayers are for the many suffering, rescuing and recovering. These events remind us how much we appreciate those who run to trouble, protecting those they may not even know.
Outside of the tragic news coming out of Boston, it was a fairly eventful week in telecom. Verizon and America Movil (parent of TracFone) both announced earnings, which we will discuss below. Google decided to buy the municipal fiber network in Provo, Utah (as opposed to building one from scratch). (Note: a report out on Friday seems to indicate that they received a bargain basement price for the asset.) Time Warner Cable announced that they will be adding live, out-of-home streaming of live TV on Apple devices (others already offer some streamed content, but TWC’s deployment looks to be the broadest lineup yet). And then there is the much anticipated Samsung Galaxy S4 release, with phones starting to ship next week. In a sign that demand for the new Galaxy will be brisk, Sprint is now sold out of pre-ordered S4s.
Speaking of Sprint, they received an unsolicited bid from DISH this week which generated a few dozen emails, texts, and phone calls asking for my take on the transaction. At the end of the day, Sprint’s Board (see link to see their current members) has the following to consider:
Softbank: $4.03/ share in cash and 30% ownership in the recapitalized Sprint
DISH: $4.76/ share in cash and 32% ownership in the new DISH/Sprint
$0.73/ share results in a ~$2.2 billion cash difference between the two offers (using 3.01 billion outstanding shares). What is harder to determine is the value of the remaining equity interests – Does the recapitalized Sprint have the opportunity to create more value than DISH shares?
This leads to the following question (and, before you answer this question, please refer to the attachment): “How broad and deep does Sprint’s data (LTE) network need to be to compete effectively against AT&T and Verizon Wireless?” We have raised this question in several Sunday Briefs, citing the fact that Sprint is heavily dependent on third party networks (namely Alltel, which is now owned by Verizon Wireless) for voice and 3G data coverage. Until their announcement this week with C-Spire, a regional provider focused on Mississippi, Memphis, Mobile and the Florida panhandle, Sprint had not reached an LTE roaming agreement with any other provider.
The attachment shows the current data coverage state of three networks (as of April 20). At the top is Verizon’s LTE and 3G network for the Southeastern US. They have committed to take lighter shades of red to dark red in the next 90 days. Even if they miss that by a quarter, they remain the clear leader (Verizon’s LTE network covers 287 million pops in the US today, and they have ~15 million remaining to fully cover their 3G CDMA footprint).
As we have discussed previously, an LTE-focused network means more efficiency: Lower costs per GB, the opportunity broadly to implement Voice over LTE (VoLTE) without a lot of handoffs, and lower handset subsidies resulting from single-mode chipsets are three of the myriad of benefits a new and faster network brings.
The second network (lower right) is AT&T’s, with the current (HSPA) data network covering just over 290 million pops (LTE to be deployed by the end of 2014). Project VIP, as we have discussed several times, is the most ambitious network enhancement that suburban/ ex-urban/ rural America has seen in the past 50 years. Particularly in the Southeast (BellSouth territory), AT&T will focus on deep coverage from fixed wireless data and DSL improvements.
In the lower right is Sprint’s current 3G network, excluding roaming (source: Virgin Mobile’s website. See Straight Talk’s map on right for a nationwide view). There is a lot of white (and not a lot of orange) in Sprint’s map, highlighting the continued dependence by Sprint on ALLTEL/ Verizon for roaming throughout the Southeast (the situation is more bleak in the Western US as the Straight Talk chart shows).
Without self-sourced LTE coverage, Sprint will need to deploy and extensively use other carriers’ networks (namely Verizon and AT&T). Even if LTE capacity is available, those GB of data will not be cheap.
A recapitalized Sprint (courtesy of Softbank), however, will have a balance sheet that can combat this issue (an extra $10-15 billion in network build will help both in-building and regional coverage). It is hard to determine how DISH will a) cross market to customers in the white area (where DISH has a distribution advantage over cable for video) and b) raise money as a highly levered company to expand the orange service area in the attached charts. It is not clear from their conference call that DISH’s management has performed a granular assessment.
If Sprint’s network looked like VZ or AT&T, DISH’s offer would be extremely compelling, but can DISH pull off a network expansion to achieve the cross-marketing synergies it promises in their proposal? It’s unlikely given the $11 billion of expense and $2 billion of capital synergies they have included in their estimates. (The full DISH presentation on the Sprint acquisition is here. Synergy slide is page 4).
There will be plenty more to discuss on the Sprint/ DISH offer in coming weeks. While Sprint’s Board has a lot to consider, it’s fairly apparent that DISH is not going away. Engagement will be critical – there’s a sequence here that can create competitive differentiation for Softbank, Sprint, and DISH (and perhaps T-Mobile).
After analyzing this week’s earnings announcements from Verizon and America Movil, plus the positive surprise from T-Mobile, I noticed a gap that does not seem to have been picked up by the telecom community. The news from this week signals a 300-600K postpaid subscriber surprise by either AT&T or Sprint.
Here are the facts as we know them today:
- T-Mobile stemmed their Q1 contract losses by 300,000 (losing 199,000 as opposed to 510,000 in Q1 2012). Branded prepaid customers also increased for T-Mobile.
- The T-Mobile improvement did not affect Verizon Wireless’ numbers. VZW actually accelerated their postpaid subscriber gains (from 501K to 677K).
- In turn, Verizon also announced on their earnings call that through TracFone, they had added over one million customers in the quarter over WalMart’s MVNO called StraightTalk (to those of you who politely corrected my network choice in the column on WalMart, look again. You were duped into believing the color and not the coverage of the network in the StraightTalk collateral).
At a minimum, #1 and #2 above mean at least 478K subscriber losses need to be absorbed by AT&T and Sprint (or the postpaid market miraculously grew in what is historically the weakest quarter of the year). However, given the size of iPhone’s addition through StraightTalk, one has to believe that the net effect is actually higher. As the chart below shows, there are only two places this postpaid growth can come from – AT&T and Sprint.
Let’s assume that AT&T has 200K postpaid additions for 1Q. That would imply a 400K loss by Sprint just to keep the total postpaid net additions growth on par with 2011’s Q1 level (again, none of this includes the portion of StraightTalk/ TracFone growth that came from postpaid customers). Sprint’s loss would be closer to 700K to match 1Q 2012’s level.
While many analysts are expecting an increase in net losses for Sprint due to lower iDEN recapture rates, the news thus far this month (T-Mobile stems sub losses, VZW increases postpaid gains, and TracFone launches their iPhone offering and adds over 1 million net new subscribers through VZW) cannot be good. Either Sprint had modest losses (and AT&T breaks even on postpaid subscribers) or Sprint’s losses were steep.
Clearly, there will be no positive surprises next week. After AT&T announces earnings Tuesday afternoon, we’ll have a pretty good idea what Sprint’s number will be. We’ll also know the extent of subscriber movement across the industry. Stay tuned for a full roundup next Sunday and throughout the week at www.mysundaybrief.com.
Thanks again for the many Sunday Brief referrals. If you have friends who would like to be added to this email blog, please have them drop a quick note to email@example.com and we’ll add them to the following week’s issue. Have a terrific week!
Greetings from Dallas, Kansas City, St. Louis, Des Moines, and Davidson, NC (truly a busy week). On Thursday, Mark McDowell of ACTA Wireless (right in picture) and Tom Noyes of Starpoint LLP (left in picture) joined me for a panel discussion at Davidson College on the future of wireless and mobility. For the students who attended, it was a treat. To have one of the top seed/ start-up investors in wireless paired with one of the global experts in mobile payments (see Tom’s blog here) was an eye-opening experience. The best part is that Tom, Mark, and many of you who live in the Charlotte area will have the opportunity later this year to foster college-level entrepreneurial ambitions. Thank you, Professor Ben Baker and President Carol Quillen for the opportunity to speak to the student body. We enjoyed it immensely.
This has been an event-filled week. As we wrote about in last Sunday’s brief, the T-Mobile/ MetroPCS merger came to a decision point, and, when the votes were counted, T-Mobile decided to revise their offer. The revised offer format should be no surprise to readers of this column – a $3.8 billion reduction of intercompany debt from $15.0 billion to $11.2 billion (which keeps the ratio of net debt to EBITDA at 3.0) and a reduction in the interest rate on the corresponding debt by 50 basis points (0.5%). There is also an extension on the lock-up period (how long Deutsche Telekom needs to hold their stake in the new entity) to 18 months. Complete details on the revised terms are outlined here.
The new MetroPCS shareholder approval date has been set for April 24 and, given the approval by three of the largest MetroPCS shareholders, it should sail through. The completion of the merger, combined with the launch of the iPhone at T-Mobile last Friday, will result in a new wave of competition, challenging both Sprint and AT&T.
Attention now shifts to the Clearwire/ Sprint deal. Over the past two weeks, Clearwire has received two offers of interim funding from Crest Financial and Aurelius Capital. Combined, the two offers would enable Clearwire to obtain $320 million in convertible debt financing at terms that appear to be less dilutive to the Clearwire shareholder (the conversion price is 33% lower than under the current two deals). It also appears that these deals will also be offered independently of the Sprint financing, meaning that if Clearwire could not obtain financing in the latter half of 2013, they could continue to draw on the Sprint line of credit. This would in effect extend the option period for finding alternatives to Sprint’s offer an additional 120 days. While details beyond the letters from Crest and Aurelius have not been disclosed, both of these offers appear to be compelling for the Clearwire shareholder.
Sprint’s easiest action would be to match the conversion rate for any additional draws to eliminate any strengthening of outside parties. Whether they will amend the terms of their credit line remains to be seen, but Sprint will need to show its hand in the next two weeks. Given the T-Mobile/ MetroPCS shareholder momentum, postponing the conversation with activist shareholders is a costly alternative. It’s a classic case of “the devil you know vs. the devil you don’t.”
Finally, in hardware news, two items thus far in April deserve special note. First, one of the companies highlighted in a previous Sunday Brief, Ubiquisys, was acquired by Cisco for $310 million. This gives Cisco additional in-building momentum with mobile providers. Also, on Friday, the Department of Justice gave its blessing to the acquisition of Motorola’s Home broadband unit by Arris. Approval was assisted by the infusion of $150 million from Comcast into Arris for a 7.85% stake. After all of the transactions have been completed, Google and Comcast will own ~24% of Arris.
We’ll leave other commentary on news stories to the www.mysundaybrief.com website. If you would like an RSS feed to the site, you can sign up by clicking on the “Follow” tab on the bottom right of the main screen.
Last week, we indicated that we would scour the AT&T and Verizon analyst meetings for news that would assist in understanding first quarter earnings. However, the April 4 discussion by Fran Shammo at the Deutsche Bank conference (see transcript here) contained the same news as the February 25 Morgan Stanley conference (which was the topic of the Sunday Brief entitled “Verizon’s Transition Advantage”). AT&T’s last conference was on March 12 and can be obtained here.
Given a lack of news leading up to Verizon’s quarterly earnings this week, we will start a two-part series on the non-contract (a.k.a. “prepaid”) market. The dynamics around prepaid call for close examination because they reveal which activities generate the most value in the telecom marketplace for each segment. They also provide interesting price points around voice and data which help us better understand the impact of LTE on pricing.
To make the dynamics easy to understand, we will classify a “low end” device as one with a $25-35 voice plan, unlimited text and optional data plans. These plans are generally offered in groups or “buckets.” Smartphone alternatives will be examined in an upcoming Sunday Brief (likely in May and combined with the overall semi-annual smartphone analysis).
Here’s a representative sample of AT&T, Verizon Wireless, TracFone, Net10, and WalMart Straight Talk offerings:
There are several interesting things to note about this chart. First, AT&T and Verizon have a branded prepaid offering for a minute-based plan – Sprint and T-Mobile do not, although GoMobile is a sub-brand of T-Mobile. Both AT&T and Verizon appear to be competitive in this segment, with device prices in the $15-20 zone for basic phones and $50-60 for camera and keyboard-equipped devices.
Secondly, this low end appears to be profitable for each carrier (except T-Mobile). Even with WalMart’s basic Straight Talk plan, there is room for $20 in costs to cover texting (likely $2-3/ month for 1000 messages) and 2G/3G data usage (likely $4-5 in activity for most 2G/3G devices). Net10 (which is owned by TracFone) also has strong margins thanks to fewer minutes in their $30 plan.
Plenty of opportunities exist to add valuable services to these plans. Most common (especially with unlimited voice plans) are international variations, which allow customers to call an array of countries (specifically Mexico, China, Japan, Europe, and India) for one low monthly fee. In addition, there are some limited applications (namely navigation) that carry a monthly fee.
T-Mobile’s newly introduced GoSmart plan takes the value prize, however, breaking the $30 barrier for unlimited talk and text. Heavy talkers that do not travel outside of the T-Mobile calling area should take advantage of their aggressive plan. This is probably one of the reasons why T-Mobile posted such impressive Q1 results (GoSmart launched in February 2013). With an Unlocked smartphone (E-Bay $30-50) and a GoSmart GSM card ($8), total phone costs for the first year would top out at $418 or about $35/ month.
The low end of the pre-paid market (voice-centric; buckets of minutes; $30 or less target price point) is admittedly shrinking as consumers decide to make the leap to smartphones. However, according to IDC, there are still ~30 million low-end users in the US. That’s a lot of gross additions for T-Mobile and WalMart to add over the next 2-3 years. It’s a $12 billion market segment with decent margins that no one is talking about.
Next week, we’ll recap Verizon earnings, and, space permitting, follow up with some additional observations on the prepaid market. As always, you can catch daily updates as well as the complete Sunday Brief archives at www.mysundaybrief.com.
Finally, one of the start-ups I am advising, StepOne Inc., is up for a CTIA Emerging Technology Award. StepOne provides predictive self-service solutions for connected devices, making the service experience more personal and productive. If you are attending CTIA in May, please vote for StepOne by clicking here.
Thanks again for the many Sunday Brief referrals. If you have friends who would like to be added to this email blog, please have them drop a quick note to firstname.lastname@example.org and we’ll add them to the following week’s issue. Have a terrific week!
Greetings from Dallas, Sarasota, and Tampa/ St. Petersburg, Florida. It’s been a very interesting week in telecom, and, as approvals are completed or underway for two large transactions, it’s worth spending some time recapping activity and looking ahead to the strategic implications.
Next Friday, MetroPCS shareholders will vote on whether to approve their merger with T-Mobile (owned by Deutsche Telekom). In the near future, Sprint shareholders will vote to approve their merger with Softbank, and likewise Clearwire shareholders to approve Sprint’s purchase offer.
“To sweeten or not to sweeten?” was the question this week as analysts and reporters focused on comments made by Deutsche Telekom (DT) management last Thursday regarding the proposed T-Mobile USA merger. In this case, the sweetening value would likely come from debt and/or interest rate reductions with respect to $15 billion of notes the parent is going to fund for the combined company.
As is carefully outlined in the proposed merger agreement filing (see around pages 83-85 in the link), DT’s commitment to backstop a large portion of the debt was an important negotiation point. Many proposals outlining third-party debt financing were exchanged during the months leading up to the October 3 merger announcement. Any reduction in debt and interest rate is likely to be accompanied by changes to the equity structure (likely more equity, which means more dilution of the MetroPCS shareholder). Given the multiple, complex facets of this deal, it’s likely that DT settles for mere tweaks rather than a fundamental restructure.
Operationally, this merger cannot come soon enough. Those who are opposed the current merger structure ignore the dire straits of Metro PCS (see first quarter 2012 earnings here) as well as the competitive intensity that will be unleashed by others in the marketplace during the remainder of 2013 (see the column entitled “Verizon’s Transition Advantage” here).
Absent a counteroffer, why wouldn’t MetroPCS descend to $6-7/ share (see chart)? Has the no-contract market magically turned into a profit machine (see Leap’s and Sprint’s earnings for the answer)? Has the ability to obtain LTE roaming agreements from Verizon Wireless emerged, changing out-of-region economics and potentially opening up new addressable markets? Has subscriber growth ceased to become an objective for any of the other wireless players in MetroPCS markets?
All of this strategizing culminates in a shareholder vote next Friday. The only certainty is that the drumbeat for some changes will crescendo through April 12. In case you forgot, April 12 is also the day T-Mobile releases the iPhone in stores (pre-orders started on April 5).
The strategic implications of the combined T-Mobile/ MetroPCS deal are enormous, not only to Sprint, but to the rest of the wireless industry. Value-conscious buyers (and families) will have similar choices to those offered by AT&T, Verizon Wireless, and Sprint across a network that, while not quite as large and robust, will be worth the price difference. This value proposition will extend not only into the family, but into small businesses as well. Here is the visual of the T-Mobile current family offer:
For $100/ month, two lines with 2.5 GB each is a bargain, especially if you are bringing your own devices and you anticipate equal usage between phones (more than 500MB from the parents, and less than 2.5 GB from the teenagers on the plan). That number is comparable to $150-160/ month on Verizon although sharing is less restricted by device.
Adding in the smartphone “pay by the month” option is what narrows the gap. An iPhone5 at T-Mobile runs $99 (16GB) + $20/ month per device. Adding in $40/ month for two lines and the gap narrows considerably ($140/ month vs. $150-160/ month at Verizon). Every dollar of savings matters in this economy, and in the T-Mobile plan customers need to shell out $200 less up front for the iPhone5, but to lure entire families away from Verizon (or AT&T), the gap needs to be more meaningful. Once duplicated by one or more of their peers, the value of customers in their second year diminishes rapidly.
This is exactly the effect that T-Mobile hopes to create. Weakening the value proposition for an AT&T or Verizon family plan (as the marketers put it, increasing the “most want to investigate” level) opens up an entirely new addressable market, or at least enough to add an additional 500K to 1 million customers per quarter. The no-contract nature of T-Mobile’s plan structure allows new members of a family to be added without the burden to the entire family of an extended service term.
Increased subscriber growth resulting from plan attractiveness will result in continued network speed improvements. Improving in-home and in-building coverage will be paramount over the next two years, and T-Mobile lacks a robust enterprise/ in-building strategy. Frustrated by the inability to get an emergency call from their child’s school while in the office, I can see many Moms saying “It’s just not worth it.” Coverage matters, and T-Mobile will need to invest in this coverage for the Bring Your Own Data (BYOD) users. Sprint, Verizon, and AT&T have been in this game for nearly a decade, and are formidable competitors. It’s the key to a sustaining a pricing plan change in metropolitan areas.
Given T-Mobile’s pricing plan innovations, what’s Sprint to do? First, start with a simpler explanation of pricing plans. Here are Sprint’s current family plan options:
Comparing to T-Mobile’s plan structure above, which pricing plan will be easier for a Best Buy or a Wal-Mart employee to explain? An $80 two person plan with 500MB of included data per line, or the nuanced 1500 vs. 3000 minute bucket option explanation? Provided that network coverage is (nearly) equal, it’s going to be a tough day for Sprint absent price plan simplicity. Sprint’s Simply Everything plan, which was revolutionary in 2008, is showing its age.
Let’s look at a 2-line conversion, both iPhone5 models, between Sprint and T-Mobile. T-Mobile would cost $200 less at purchase ($100 difference per phone). Let’s assume each device ordered the 2 GB option and that neither user did a lot of talking (1500 minute plan). That would leave Sprint at $150/ month and T-Mobile at $140.
Today, a customer would receive $200 more in their pocket and $10 more in savings per month for new iPhone5 service. This savings would only go up with additional members on the same plan ($10 per added member per month, provided that the family member did not use more than 2GB in T-Mobile data).
If T-Mobile’s pricing changes go answered in 2Q and 3Q, Sprint will begin their new Softbank life with a smaller customer base. Early indications are that these changes are having a significant effect on T-Mobile subscriber losses (see T-Mobile’s Q1 announcement here). Sprint needs to respond to T-Mobile firmly and decisively, not only with a network that is rock-solid, but also with pricing plans that make switching easier. Simply put, Sprint’s Simply Everything plan needs a makeover for the new generation of smartphone users (and Wal Mart/ Best Buy salespeople).
Next week, we’ll recap the MetroPCS shareholder vote, and will comb through senior management presentations for hints of change at VZ and AT&T (both wireless and wireline). As always, you can catch daily updates as well as the complete Sunday Brief archives at www.mysundaybrief.com.
Thanks again for the many Sunday Brief referrals. We added nearly 50 new readers in the past two weeks. If you have friends who would like to be added to this email blog, please have them drop a quick note to email@example.com and we’ll add them to the following week’s issue. Have a terrific week!
We’ll talk more about it in the week’s Sunday Brief, but the first quarter was very good to the wireless and cable providers. Not as good to the remaining wireline telcos, thanks to the dividend cut and corresponding stock price hit that CenturyLink took in February.
The comments are on the slide so I will not repeat them. But, when we announced in August 2012 that we were entering the “golden era” of value creation for wireless, we weren’t kidding. They have a lot of ground to make up (2009-2011 were very good to Google, Amazon, Microsoft, and Apple) but the wireless and cable sector seems to be on their way to creating more value in 2013 and perhaps erasing all of 2012’s losses.