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Earnings Drivers for the Second Quarter

D7AQ-Mh-a9X6nZf1PAgNfJv5-A_nuGFcFJEsvub_LWoGreetings from Kansas City and Dallas.  When I was in Kansas City this week, I had the opportunity to tour the Kansas City Startup Village and the Google Fiber storefront.  Both were brimming with activity.  I penned some thoughts to www.mysundaybrief.com that are aimed primarily to the Kansas City-based business community (basically saying “Don’t blow your first mover advantage to Omaha or St. Louis”).   The City of Fountains needs a Ron Conway or a Fred Wilson in the worst way to organize the “Angel-hood.”

If you are in Kansas City next Friday (June 28), take a look at the entrepreneurial community first-hand with the second “Startup Crawl.”  More details here.  I wish I could be there.

gogoBefore diving into earnings preview, let’s celebrate a couple of Sunday Brief reader accomplishments.  First, GoGo rang the bell on Friday and successfully completed a nearly $200 million IPO that values the company at $1.4 billion (NASDAQ = GOGO).  Kudos to Ron LeMay (non-executive Chairman) and the rest of the GoGo team for achieving an important milestone.  GoGo’s CEO Michael Small did a terrific overview of the company for Bloomberg here.   For those who want to learn more about GoGo Wireless you can find their latest S-1 filing here.  To read about the Federal Aviation Administration’s relaxation of rules requiring powering down of electronic devices upon landing, read this post from the Wall Street Journal here.

rapidscalelogo

In addition, one of the Patterson Advisory Group clients, RapidScale, completed their first external round of funding this past week.  Led by eight super-angel investors (including myself), the Irvine-based leader in cloud-based Desktop as a Service (which would allow you to work from your PC through your iPad at 30,000 feet through GoGo) raised $750,000 in convertible notes with the opportunity to tap additional funding if certain milestones are met.  RapidScale also has deep knowledge of indirect selling channels and has helped many master agents and managed services providers make the jump to the cloud with minimal hiccups.  Congratulations to Randy Jeter (CEO) and William Hiatt (CTO) for their tireless efforts.

We are getting very close to the end of the quarter in the telecommunications industry.  This quarter has been marked by many significant events, including:

  1. T-Mobile’s launch of new pricing plan structures
  2. T-Mobile’s launch of the iPhone (specifically the iPhone 5 at a $99 “down payment” price point)
  3. T-Mobile’s completion of the MetroPCS acquisition
  4. AT&T’s launch of an unbranded (yet wholly-owned) MVNO called All-In-One (AIO) Wireless
  5. AT&T’s aggressive use of phone “trade-ins” to drive lower post-paid entry points
  6. Sprint’s significant progress in completing their LTE rollout (called Network Vision)
  7. Sprint’s completion of the US Cellular spectrum purchase
  8. Sprint’s turndown of the iDEN network (which officially goes “lights off” next weekend)
  9. Sprint’s resolution of their (but not necessarily Clearwire’s) ownership structure
  10. The launch of the Samsung Galaxy S4 (and the HTC One X)
  11. All of the “Big 4” pursuits of voice-less connections (M2M, tablets, Kindles, etc.) and the branded pre-paid/ no contract segment to bolster net additions.

This is by no means an exhaustive list, but indicative of the many moving pieces that will be seen as each of these carriers announce their earnings in late July.  A few highlights and themes to follow would be:

  • John Legere’s imprint on T-Mobile.  One of the most read Sunday Briefs in its nearly 4-year history is called “Dear John” (September 30; copy available on request) and outlines the things that I/ we thought should occur prior to enable T-Mobile’s survival.  One of the critical elements of this plan is the restoration of T-Mobile as the undisputed value leader in wireless data.   T-Mobile has done precisely this with their wireless smartphone “payment plans.”

 

Take the relatively simple Hot Spot change that T-Mobile made with their smartphone plans.  Yes, even with their 500MB plan, Hot Spot usage is included in the 500MB allocation (AT&T requires you to purchase a 5GB plan before including HotSpot on the smartphone, and Sprint’s unlimited data plans by nature include HotSpot usage for an additional fee).

Super smart phones that improve the customer experience (including the iPhone5) that substitute high up-front pricing with affordable monthly payments.  Fixing the annoying things like tethering and “add a line” pricing that drove up costs (and consequently drove down adoption, especially for the occasional user).  Internally, it is rumored that T-Mobile has taken out free soft drinks in the corporate offices and also significantly curtailed many free phone plans extended to long-time employees.

On top of all of this, T-Mobile USA now has their own currency.  It’s done fairly well since its May 1 debut:

Investments in Sprint or AT&T on May 1 would have netted little change in value over the past two months (Sprint is up 16% over the past three months thanks to the Dish Networks bid).  T-Mobile USA, on the other hand has risen nearly 40% in less than eight weeks – approximately $900 million in market value created.

t-mobile vs sprint and att

Look for cost reductions and signs of a quick MetroPCS integration.  I think many will be surprised at T-Mobile’s and Metro PCS’ growth (e.g., that one did not come at the expense of the other).  Also, while there will be a definite handset subsidy impact, I think many will be surprised at the effect of the new pricing plans on overall churn.

Note:  The changes described above have a disproportionate effect on residential and family plan gross additions.  John’s background is in small business.  There is another shoe to drop, one that leverages his Global Crossing experience.

  • AT&T’s rebound – is it for real?  Maybe.   It seems counterintuitive to be positive on both AT&T and T-Mobile in the same quarter.  T-Mobile is aggressively attaching Ma Bell with every new TV ad (see some examples here and here), and their “Bring Your Own Phone” plans is clearly aimed at AT&T iPhone users.  How is AT&T surviving the onslaught?  Well, according to a recent investor relations briefing, they are doing just fine.  According to the release (click here for the disclosure), AT&T expects approximately 500,000 net postpaid additions in the quarter.

 

What is driving this growth?  It’s a combination of several things.  First, according to recent LTE tests, AT&T’s fast network is consistently faster than their peers.  In a recent study by PC Magazine of 4G speeds, AT&T clearly demonstrated consistently fast throughput, although Verizon Wireless “typically triumphed” with their reliability gauges.  Verizon also continues to dominate with suburban and rural networks.

On top of very fast networks, AT&T is also benefitting from the shutdown of Sprint’s iDEN network.  My guess is that’s at least 60% (300,000) of the net postpaid additions this quarter (see math in the Sprint section below).  Add to this AT&T’s recent Push to Talk iPhone app (which takes advantage of the super-fast network described earlier) and you can see why the second quarter is going to be very good for the Blue Network.

One final item to remember with AT&T (and Verizon):  As the economy improves, and as business spending picks up (resulting in more tablet connections for enterprise customers), AT&T continues to have a short-term advantage with HSPA/ LTE chipset costs.  This is very important.

 net additions table

AT&T’s second quarter will likely result in the best postpaid second half performance since 2010 (that also happens to be the last year AT&T had iPhone exclusivity).  As we have discussed many times in this column, the story only gets better for AT&T as project Velocity IP takes full effect.

  • Sprint – Closure, finally.  One word can be used to describe the second quarter earnings for Sprint: closure.  The iDEN network is closed, and there are many operating costs that go away.  The US Cellular spectrum and customer acquisition is now closed, and Vision, while not closed, is a heck of a lot closer to closure than it was entering the year.

 

Oh yeah, Sprint (and likely Clearwire) will be under new ownership after a battle for control of the company with Dish.  Many uncertainties have been removed from Sprint’s future.

To retain bullishness on Sprint, investors will need to continue to have “High Hopes” because it’s a bit too early to sing “Happy Days are Here Again.”  First of all, as Sprint confirmed in their Q1 2013 earnings call, it’s going to be a very bleak post-paid picture, at least temporarily, as AT&T and Verizon scoop up the last of the iDEN subscribers.  Per Sprint’s disclosure, there were approximately 1 million postpaid iDEN subscribers at the end of the first quarter, and Sprint estimated that only 30-40% of these subscribers would be retained.  That leaves 650,000 for AT&T and Verizon.  Assuming Verizon receives a slightly higher share (350,000), and that T-Mobile receives none (due to the enterprise nature of the accounts), that leaves 300,000 for AT&T.  It’s the last of a six-year post-paid gift-giving spree from Sprint to their two largest competitors.  RIP iDEN.

But that’s not all.  Sprint will finally shed 1.4 million (retail) Assurance Wireless (a.k.a. Obama Phone) accounts thanks to a vigorous one-time recertification process.  This will pull Sprint’s prepaid base down to levels not seen since the beginning of 2012 – six quarters of prepaid subscriber gains will be wiped out.

Admittedly, there is no revenue associated with these accounts, but, when they were active, they were enormously profitable (80+% margins).  Replacing this margin will require a lot of changes to the structure of the prepaid business.

One of the most aggressive actions in the second quarter was Virgin Mobile’s new iPhone pricing (r = reconditioned; iPhone 4 model is 8 GB; iPhone 4S and 5 models are 16 GB):

iphone pricing table

This will certainly help Virgin Mobile’s prepaid net additions, but at what cost?  By selling a new iPhone 4 at $140-150 less than their competitors (and $50 less than a reconditioned model from AIO), Virgin Mobile has certainly left money on the table.  There is a point where disruption crosses the line into foolishness, and a $140-170 difference for Virgin Mobile versus the competition may have actually crossed that mark.

We have only briefly discussed the largest wireless carrier (Verizon) as well as the handset providers.  That will be left to next week’s Sunday Brief.  Until then, if you have friends who would like to be added to this email blog, please have them drop a quick note to sundaybrief@gmail.com and we’ll add them to the following week’s issue.  Have a terrific week!

“The best place to raise angel funding for a Kansas City start-up is in Omaha.”

2013-06-18 12.08.57

Everything about yesterday’s trip to the KCSV was idyllic.  Eager (and yet tired) entrepreneurs, full of vision but excited to be a part of something special.  Ready to be a part of something big.  Something Google big.  Ready to be wired.  I was excited for them.  It felt good, and different, and right.

After getting the grand tour (5 homes, 6 businesses, all excellent and a few potentially disruptive ideas), we sat down for some Oklahoma Joe’s and talked.  With the exception of one individual, everyone there knew me as one of the Trellie Kickstarter contributors who came up from Texas to see what this Google Fiber thing was all about.  We talked a lot about the support entrepreneurs are receiving, about the mentorship process, about the status of angel tax credits on both sides of the state line, and then I posed the question “So, with all of this attention, how’s the fundraising going?”

I received the response above with head nods from every entrepreneur in the room.  Even with Google and a recovering economy, the response is largely the same as it was in 2009 and 2010 when I was passing the hat for angel funding for Mobile Symmetry (which ended up being funded mostly by out of state super-angels).  We (and I include myself because I just cannot get the Brookside out of me) are playing “practice hands” with pretend money, training tomorrow’s disruptors how to bootstrap, prototype, innovate, collaborate and partner to what end?  So the next Carlos Beltran, Zack Greinke, or Johnny Damon of the disruptor world can go play elsewhere?  Are we merely hosting Google, or are we creating a disruptive, revolutionary foundation to produce their successor?

How likely is it that a) many will receive their angel funding, but only on the condition they move to Seattle or Waltham or New York City or Dallas or Chicago or Detroit or San Jose, or b) many aspirants will abandon their entrepreneurial dreams altogether and move to Provo or Austin because of “all hat, no cattle” approach to angel funding that continues to plague the City of Fountains?

Now that I have seen the hyperactivity that permeates the Dallas and Austin entrepreneurial communities, I can assure you that it won’t be long before out of state firms latch on to the bright minds and sweep them away.  While Google Fiber was pioneered in Kansas City, their network locations are spreading and any first-mover advantage is fleeting.

To be successful, Kansas City must develop a culture steeped in a) a disruptive and revolutionary (and non-traditional) approach to risk, one that works to mitigate but not eliminate every possible negative outcome, b) an active business “discipleship” program which is more than the occasional mentoring but is built on the foundation of mutual accountability between investors and disruptive entrepreneurs, c) active recruitment of experienced entrepreneurs from other states to serve as role models (using the Stowers Institute as a model), and d) a milestone-oriented (or “if, then”) approach to funding stages which encourages collaboration between the investor and the entrepreneur, and that helps them think about the criteria for a successful follow-up funding round.

Kansas City is on the cusp.  Judging from the comments above, I’m not sure where this is leading, except that today many start-ups seem to “want to investigate” other parts of the Midwest rather than swim in the dried up river bed of angel funding that has become KC’s legacy.  How can we change this?  Let’s come together and make a plan.

Video Is the Next Frontier, and Everyone Knows It

brian robertsGreetings from Washington, D.C. and Dallas where the Cable Show wowed and amazed more than 12,000 attendees.  If I had to describe this year’s show with one phrase, it would be executive engagement.  You could go on the show floor (or one of the many meeting points) at nearly any time and see a host of cable executives, from John Schanz/ David Cohen/ Neil Smit/ Tony Werner/ Brian Roberts from Comcast, to Glenn Britt/ Rob Marcus/ Phil Meeks at Time Warner Cable, to Pat Esser and Len Barlik at Cox.

It was not merely executive presence or executive parade, but there was engagement.  This is what makes the cable show so interesting to attend.  Each attendee feels like a participant, not a bystander.

I have been to seven Cable Shows in the past nine years.  I’ve lived through TV Everywhere, Canoe, Digital Phone, Commercial Services, and Mobile (the original Pivot) rollouts.  This was a very different show than last year’s Boston sleeper.  In 2013, the Cable Show became attractive and interesting to technology followers, not simply a display of the extravagant love fest between content and transmission.

Nowhere was this more present than at the Comcast booth.  Following Brian Roberts’ demonstration of the X2 platform on Tuesday morning (which, by his own admission, has undergone 1,200 changes to get to this point), the Comcast booth was flooded, creating a traffic jam of sorts between other booths.  Comcast has designed a Comcast-specific cable box.  They have redesigned the remote control, adding functionality to the “C” button to enable visually impaired cable customers to navigate Xfinity more easily.  They have added voice search to the programming guide.  While in its infancy, Comcast is attempting to incorporate a recommendation engine into their next generation of Xfinity.

xfinity x2

As we discussed last week, there are three themes shaping the cable industry:  Recommendation, Disintermediation, and Differentiation.  DOCSIS 3.1 will be expensive, but will make 1Gbps of bandwidth available to homes starting in 2014.  While it will never overtake my One-Click experience with Amazon, Comcast’s Xfinity X2 recommendation experience could rival the Internet’s benchmark.  Interoperability with other hardware, even taken to the full extent of eliminating the cable box as we know it and providing linear channels through third-party boxes, will likely not be a core strategy (even for Time Warner Cable), but could flatten cord-cutting’s line slope.

While the cable industry began to show signs of innovation this week (and the Xfinity 2 programming guide design is extremely impressive), all eyes in technology were on San Francisco, not Washington DC as the annual Apple Worldwide Developer Conference (WWDC) convened.  This was more than the expected overhaul of Apple’s latest mobile operating system (iOS7).  Apple also introduced an entirely new line-up of 11 and 13 inch Mac Air tablets and a new cylindrical Mac Pro.

Last year, Apple’s OS X and iOS updates focused on integration.  More Siri integration, in-car (also known as “Eyes Free” integration), Facebook integration, and language integration seem like they have been around forever, but they were all features in iOS6.  Processes worked seamlessly across devices thanks to iCloud.  Connecting to Apple’s AirPlay was easier.

WWDC-2013-iOS-7This year, Apple’s focus is on presentation and performance.  iOS7 (available this fall) is full of brightness and clarity that predecessor versions lacked (green felt and wood backgrounds are replaced with light backgrounds).  iOS7 also includes increased multi-tasking capabilities, which do not drain battery life, presumably through a background “check” algorithm that senses how often applications require updates.  For example, if the (messaging or email) application frequently pushes notifications, iOS will sense this and make sure that apps are updated while messages are being activated.  While this seems intuitive, previous versions of iOS (and Android) treated alerts and content differently.  To the application user, the instant coordination of message and content, while a small nuance within some apps, will be very important for others.

Apple’s Safari browser, while a default, was not the browser of choice for many iOS users.  They might change their minds after trying out the new version.  Photos, which were already wonderfully presented, not only take have a new icon, but have entirely new editing and organization capabilities.

Siri also got a facelift with a male voice option and better female voices.  Notably, however, there is no improved version of Siri for Apple’s Maps application.  Also, there does not appear to be any integration of Siri into the new Apple Radio app, a big missed differentiator vs. Pandora (and one that would instantly improve in-car adoption).

Other improved performance features include inclusion of call/ message/ FaceTime blocking (for that former friend who just isn’t ready to let go of the relationship) and the ability to conduct a FaceTime session in Audio Mode (only).  I know, this really does not make it “Face” time, but the change is welcome if you have ever experienced FT in a volatile bandwidth environment.

Apple’s announcement was an impressive and greatly needed refresh.  Comcast’s Xfinity X2 announcement was also impressive and pioneering.   Both companies are highly dependent on third parties to create their future – Rotten Tomatoes for movie reviews (featured in both Comcast and Apple presentations), Yelp and OpenTable for restaurant reviews (Apple), Twitter and Facebook for sharing (Apple).  This stands in contrast to Google, who is bravely moving to integrate the entire experience (Fiber to Arris/ Motorola Mobility to Chrome and Apps like Maps/ Waze/ Zagat/ Hangout/ Gmail).

These two announcements, while different, convey one consistent message:  The pace of change is going to accelerate, particularly for video-based applications.  Brian Roberts’ 2012 comment that “Television will change more in the next 5 years than in the previous 50” appears to be more than hype.  Apple, Google, Sony (PS4), Samsung, Roku and Microsoft’s X-Box are doing everything possible to ensure that this occurs.

Video is the next frontier, and everyone knows it.  Who will stake (and hold) the claim is anyone’s guess.  But with deeper integration from Apple and Comcast, it’s going to become more difficult for “software only” solutions to keep pace.

Next week, we turn back to the numbers to see who is dropping price to prop up 2Q wireless net additions.  We’ll also provide several “watch for” items related to wireless and wireline earnings.  Finally, the Patterson Advisory Group will have a very special announcement concerning one of our clients (RapidScale, an Irvine-based cloud computing company specializing in Desktop as a Service).

If you have friends who would like to be added to this email blog, please have them drop a quick note to sundaybrief@gmail.com and we’ll add them to the following week’s issue.  Happy Fathers’ Day, and have a terrific week!

The State of Cable in 2013 (Cable Show Preview)

opening picGreetings from Charlotte and Dallas, where kids are finally out of school and local (in our case, backyard) pools are beginning their seasonal rituals.  This week also marks the Cable Show, sponsored by the National Cable & Telecommunications Association (NCTA), an opportunity for 10,000 industry members to descend on Washington, D.C. to shape the future of broadband.  Last year’s show in Boston (despite the rain) was a raging success, and, with many regulatory issues facing the cable industry (and with Michael Powell, former FCC Commissioner, as the CEO & President of the NCTA), having this year’s Cable Show in the nation’s capital could not be a better selection.

The cable industry will be discussing three key themes (and a few more) at this year’s show:  Recommendation, Disintermediation, and Differentiation.  They will debate these themes from a position of expanding strength, with broadband/ High Speed Internet Revenue Generating Units (RGUs) rising, commercial services expanding, and video cord cutting a continued threat.

cmcsa vs. nflx

While cable companies have had a good run, their value creation in 2013 pales in comparison to Amazon and Netflix.  Comcast and Charter are the publicly traded “belles of the ball” with equity market value added of about $14 billion year-to-date (Time Warner, which had an excellent three-year run, is flat YTD and Cablevision, the subject of a previous Sunday Brief, is also slightly down).  While a volatile stock, Netflix has created nearly $7 billion in equity market value in 2013 YTD, recovering from a rocky 2011 and 2012.  Amazon, who is quickly becoming one of the largest distributors of digital media in the world, has added $12 billion in market cap YTD (in 2012, they added $33 billion vs. Comcast’s $35 billion).

DRC800_Remote_Control_MD_US-ENOne of the reasons why Netflix, Amazon, Hulu, and others receive such high valuations is because their consumer interfaces make it easy to purchase content.  In cable parlance, this term is called the Electronic Programming Guide or EPG.  None of the companies mentioned above have a custom-designed remote control (I like to refer to today’s remote control as the opposite of what Apple is thinking.  Seriously, if Apple introduced a remote control with 61 buttons, they would get laughed off the stage.  How can Motorola/ Arris get away with that?).  To improve the customer experience, they had to have a one or two click process (Amazon patented this long before they plunged headlong into digital goods).

After mastering content presentation and purchase, these providers advanced to content recommendation.  This has been a Holy Grail of sorts for cable, who has exabytes of information on what I viewed in the past, yet doesn’t have a clue how to use that data to derive what I might want to watch tonight.  As a cable consumer, I have to do all of the thinking (and programming).  What if my cable provider could take only my previous viewing habits (adjusted for time of day/ day of week) and from that recommend three current or previous shows of interest to me, complete with commercials?  What if my cable provider went one step further and made a recommendation to watch a show related to an upcoming family vacation, current school topic (Western Civilization, American literature), or current sports activity?  Can cable translate into the benchmark interface for digital distribution?

Comcast will be debuting some of the features of their upcoming Xfinity X2 interface at this week’s show.  While dismissed by some in the industry as a science experiment, Comcast is one of the (only?) cable companies who can spend the billions necessary to reinvent content recommendation.  Fortunately, they do not have to start from scratch – every customer using the Xfinity platform will instantly compare its ease of use to Amazon Prime, Hulu Plus, and Netflix.  Xfinity has struggled over the past year, and Comcast’s management understands that they need to catch up, faster.  Building a world-class recommendation engine that leverages current information (or, as we learned about this week with the PRISM scandal, metadata) is a start.   It will need to be followed by an aggressive customer education and marketing effort.

roku-xs

Coupled with the concept of content recommendation is hardware disintermediation.  While many cite Time Warner’s Roku partnership announcement as revolutionary, the cable industry has actually been deeply debating the concept of disintermediation for some time.  Ten years ago, when many households had VCRs and not cable-provided DVRs, the debate was “How aggressively should we connect into TVs?”  With the cost savings (equipment, service, etc.) readily apparent, there was little debate that cable-ready TVs were not only good for the cable brand, they were also good for the bottom line.

360xconsoleToday, however, the concept of an in-home “cable box” is more prevalent, thanks to the rise of DVR services over the past decade.  In fact, many cable providers view these monoliths as being an essential “tool” for future revenue generation.  However, as many analysts have pointed out, the key components in the upcoming X-Box are actually much more advanced than anything available in the DVR space today.  Microsoft (not usually associated with hardware) is now the in-home hardware/ processing engine leader.  In fact, wouldn’t it be terrific if there were a joint Microsoft/ Time Warner Cable announcement at both E3 and the Cable Show?  (The Electronic Entertainment Expo is the annual gaming convention in Los Angeles that happens to coincide with this year’s cable event).

The cable industry is smart to engage console makers.  Gamers love their cable speeds but generally hate their cable company.  Removing DVRs and replacing those lost revenues with a “gaming tier” of bandwidth would be warmly received.  One less device to store, power, reboot, and otherwise troubleshoot, and, combined with a better recommendation engine, means a better customer experience for all.  If they don’t do it, the Microsoft-powered U-Verse set top box will likely morph into a viable competitor.  One can always dream.

This leads to the concept of differentiation.  Again, this is not an area foreign to cable.  The “triple play” did not originate with Verizon or AT&T or CenturyLink, but it marginalized residential voice services and accelerated line losses at each of these companies.  Many cable companies did not need to complete a DOCSIS 3.0 upgrade.  They did, however, to clearly differentiate their High Speed Data service from DSL.

Enter DOCSIS 3.1, a frequently discussed Sunday Brief topic.  With targeted speeds of 1 Gigabit per second, tomorrow’s DOCSIS will enable a completely new set of applications from today’s and delay the need to deploy fiber to the home.  DOCSIS 3.1 improves latency as well as speed, and it’s going to require some scale to get cost structures in line.

There seems to be a natural fit among the rollout of DOCSIS 3.1, improvements in gaming consoles, and males aged 18-35’s propensity to spend $60-80/ month on High Speed Internet.  Satellite will be hard pressed to match the offer, and X-Box, Roku and Playstation strength keeps Apple (and Google) in check.  While many in the industry will earn their paychecks asking “Why”, someone in the industry needs to lead with “Why not?”

To make DOCSIS 3.1 most effective (and to drive the next $100 billion in market value creation), the cable industry needs to drive low-latency broadband applications development.  Today’s Skype did not come from Arris, and tomorrow’s will not come from Cisco or Ubee.  Where could the cable industry take this?  Could the 3.1 Applications store rival iTunes?  This degree of thinking is not widely present in cable Board rooms today, but that could change very quickly.  It’s the next brass ring, and makes cable’s advances with Triple Play look puny in comparison.

Next week, we’ll prep for second quarter earnings by examining recent executive comments.  If you have friends who would like to be added to this email blog, please have them drop a quick note to sundaybrief@gmail.com and we’ll add them to the following week’s issue.  See you at the Show!

The Semi-Annual Device Issue: It’s an Android LTE World

** Editor’s note:  It may be beneficial to have the first two pages of the attached document open or printed while reading this week’s column. **

2013-05-29 13.49.39

Greetings from Philadelphia, Baltimore (where the crab season is just beginning), Washington D.C. and Dallas.  This has been a fun week in the tech and telecommunications industries, with the main headline being Dish’s increased offer for Clearwire to $4.40.  Kind of makes Google’s and Time Warner Cable’s sales of their respective Clearwire stakes look premature – to be exact, about $225 million dollars premature.  It also makes Comcast and Intel’s December decision to sell their Clearwire stake to Sprint (provided Sprint completes the Softbank or alternate transaction) also look premature as Sprint will be buying their stakes at a 33% discount to Dish’s current offer.

Continuing with the Sprint theme (and reinforcing Sprint’s $2.97 Clearwire purchase price from Comcast and Intel), on Friday the advisory firm Institutional Shareholder Services recommended that Sprint shareholders accept Softbank’s offer of $4.03/ share.  According to Reuters’ reporting, while the cash difference of nearly $0.70 per share exists, “shareholders cannot ignore the question of execution risk, upon which all assumptions about future value creation must ultimately rest.”  Looks like someone has been forwarding The Sunday Brief to ISS.

On the AWS front, Verizon Wireless announced that two existing phones, the Galaxy S4 and the Nokia Lumia 928, are already equipped for their upcoming 1.7/ 2.1 GHz AWS rollouts.  Verizon also announced that two Samsung tablets, two mobile hotspots, and a USB antenna will also be available for these urban networks.  AWS compatibility is something to keep in mind if you are on the fence about your next smartphone purchase, especially if you work in a dense urban area.

In the continuing battle between cable companies and programmers, Time Warner Cable and LIN Broadcasting came to agreement late Friday afternoon, averting a shutdown of 24 local channels across 14 markets.  LIN is no stranger to retransmission disputes with cable companies, including Time Warner (in 2008 LIN went dark on TWC for 25 days).

clover-trailFinally, some big news for Intel this week as it was disclosed that Samsung’s new tablet will be running on the latest version of the Intel Atom chipset, the Clover Trail+ line.  Interestingly, Intel will be replacing Samsung’s own line of chipsets (Exynos).  The CNET article here covers the reason for the chipset change in detail, with one analyst outlining that Samsung should be able to use the same chipset for both Windows and Android tablets.   Additional details to come when Samsung announces new devices, including the long-awaited S4 mini, on June 20.

This week we take our semi-annual view of the smartphone lineups for the four largest US carriers.  We have been tracing the progression of devices for nearly four years, and have emphasized the following changes during that time:

1)      The effect of AT&T’s iPhone exclusivity (which still impacts iPhone sales at AT&T)

2)      The proliferation of Android devices, especially at entry level prices

3)      The corresponding demise of Palm, Symbian, Blackberry and Windows operating systems due to the “rule of two” (Android and Apple operating systems)

4)      The formation of Operating System (e.g., Android) but not necessarily Original Device Manufacturer (ODM) habits

5)      The rise of LTE-capable devices which correspond to a similar rise in shared/ family data plans

6)      Cross-platform (contract, no contract) availability of branded premium smartphones

7)      The rise of cross-carrier branding (Apple and Samsung Galaxy branding similarities across all four carriers)

8)      (NEW) The increased affordability of super-premium devices, led by T-Mobile’s Simple Choice plans

9)      (NEW) The collapse of iPhone’s disciplined carrier pricing

Attached is the latest smartphone grid.  A couple of notes before we get into the analysis:  1) in order to have a consistent comparison point, we have used the carrier websites and pricing with a two year contract as the baseline (except for T-Mobile); 2) refurbished phones have not been included except to note which models are actively offered in a refurbished mode on the carrier websites; 3) we choose June and October as review points because of the “back to school” and “holiday launch” seasonal selling periods.

The last time we visited smartphone choices among carriers, the iPhone 5 had launched, and, predictably, their iPhone 4S and 4 predecessors reverted to $99 and free pricing.  As they had done in the past, carriers moved in lock step with each iPhone release.  That is, until T-Mobile got the iPhone.

knife fight

With T-Mobile’s pricing, we have entered into a “phone fight” phase in the US telecommunications industry.  An iPhone5 for $99 (now $149) with LTE speeds (in some T-Mobile markets) and reasonable rate plans, all for an additional $20/ month?  Really?  What’s surprising is that T-Mobile did not sell out of the iPhone5 (IMO, that’s what drove the $50 increase, and also what is driving supply shortages in the Samsung Galaxy III lineup today).   T-Mobile broke ranks, and customers returned.

In the attached chart, we show the monthly charge ($5-20, depending on the model) for each T-Mobile device on their website.  This pricing continues for 24 months.  Since all new T-Mobile customers sign up for a no contract plan, if a T-Mobile customer decides to move to AT&T, they would still be subject to a “true up” payment of the difference in months times the monthly device payment.  In most cases, this is less than the termination payments of T-Mobile’s counterparts.

With Sprint responding to T-Mobile’s new $149 price point, high-end smartphone pricing discipline (referred to as anchor pricing in previous columns) has largely gone out the window.  In fact, it’s forced Sprint to drop the iPhone4 entirely from its retail lineup (the iPhone 4S is now Sprint’s free phone).  Ironically, the refurbished version of the iPhone4S actually costs more than the brand new version on Sprint’s website.

Pricing structure is not the only change occurring at T-Mobile.  Phone availability has also increased.  On top of the iPhone, they have the Blackberry Z10 (which is relevant for enterprise customers), and the Samsung Note II (which is both LTE and 42Mbps capable).  T-Mobile is still very Samsung heavy when it comes to Android, but they are not as Android-focused as they were in the past.  This makes switching easier for previous customers

The availability of devices, combined with the Simple Choice momentum leads me to believe that T-Mobile is going to post a very strong 2Q, largely at the expense of Sprint but perhaps also denting AT&T (re: prior to launching the iPhone5, T-Mobile reported that they were converting 100,000 existing AT&T iPhones per month to their network).   It will also be interesting to see how/ if the Nokia Lumia 521 plays at T-Mobile (a good test of price sensitivity versus the Samsung Galaxy SIII).

The other major change that has occurred since October is the proliferation of LTE devices, particularly at the low end.  For example, AT&T had ten devices that were not LTE capable in October – today that figure is down to six with two of these ancient legacy Blackberry devices.  Verizon only has four non-LTE devices, most notably the iPhone 4 and 4S.  Sprint had 6 LTE-capable devices last October, and only one at the low end  – that’s now up to fourteen (including ten below $99).  T-Mobile had no LTE-capable devices last October – now they have five with another five capable of accessing their HSPA+ 42 Mbps network.

Every Gigabyte carried over LTE costs at least 50% less to carry than 3G (and about 80% less than 2G).  Each LTE device sold to a consumer through Verizon results in a Share Everything (metered data plan) conversion, which rids the carrier of unlimited data risks.  If you want to preserve your 3G plan status on Verizon, and you are an Android fan, you have two choices – the HTC Rhyme or the Casio G’z One Commando.  Phone and plan selection have been inextricably linked at both Verizon and Sprint (who carries a $10/ mo. surcharge for moving to a network which costs 50% less for them to operate).

Previously, we have summarized our analysis by declaring it an “Android world.”  Now we modify this to state “it’s an Android LTE world.”  Long relegated to the “cheap phone” status, it’s the Apple 4S and 4 that are beginning to show their 3G age.  57 of the 69 Android models in the attached charts offer LTE or HSPA+ 42Mbps speeds.

While this trend has not been followed as quickly across the globe, it’s a good sign of what’s to come – faster network adoption, continued applications modification to reflect faster networks, more monetization of speed, and newer/ faster networks.   Both Apple and Android have the ecosystem to drive changes, but Apple’s decision to leave the 4S on 3G speeds will cripple sales of the device in the latter half of 2013.

There’s a lot more to say on device evolution – NFC adoption, Wi-Fi HotSpots as temporary (?) in-car solutions, and form factors (specifically screen sizes) are all going to undergo massive changes in the next year.  We’ll continue to cover these in the upcoming weeks.

Next week, we’ll prep for the Cable Show which starts June 10 in Washington DC.  There’s a lot of value being created in the cable industry, and we’ll highlight a few trends that you will not want to miss.  If you have friends who would like to be added to this email blog, please have them drop a quick note to sundaybrief@gmail.com and we’ll add them to the following week’s issue.  Have a terrific week!