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!