Greetings from Charlotte and Dallas, where summer is beginning its sunset, and the never-ending parade of Facebook back to school pictures reminds me of how quickly our children grow up. Given the relative lack of events this week in the telecom world (including Steve Ballmer’s retirement announcement, which is meaningless compared to the one that names his successor), I thought I would take some time to answer fan mail (we get a lot of it here at The Sunday Brief), and to request reader participation next week while The Sunday Brief takes a brief hiatus for the Labor Day holiday.
Many of you (about 100) are very recent readers to The Sunday Brief, and several of you have recently asked “What prompted you to start The Sunday Brief?” The purpose of this column is to analyze the gaps that exist between segments, operating systems, companies, and industries. Our industry scope is broad – anything which affects the creation and distribution of Internet content. When I was running Wholesale Services for Sprint (I left four years ago this month), I gathered a reputation for lengthy, detailed memos. All of them contained an executive summary and a call to action, but they were grounded in an analytical understanding of the marketplace and focused on incremental value creation.
Many of my colleagues relegated them to the “Read” file, but several senior Sprint leaders digested every one. Just the other day, I had one forwarded to me from a senior leader who is no longer at Sprint citing the fact that my 2008/09 bandwidth forecast for cell site backhaul growth missed actuals by 2x (this same forecast was viewed as “crazy” and “out there” by many of my colleagues in 2008/09 as we were courting cable backhaul providers).
Those who read my tomes in 2008 and 2009 (which were bi-weekly then) asked that I consider writing an external version for the masses after I left Sprint. We started with seventeen readers in late August 2009 (the topic was the dispute between Google Voice, iTunes, and AT&T) and have never looked back. The first published column in RCR Wireless came about a month later. The rest is history.
We have published over 175 Sunday Briefs over the past four years, and some have been more memorable than others (comparing leadership in the corporate world to coaching under-10 boys soccer teams was one of the not so memorable columns. The Internet has permanently immortalized these B-side columns, however. Click here for that article on RCR Wireless).
One of the common questions I receive is “What has been the most popular Sunday Brief column?” Of the 175 or so, the most popular column was one I wrote in March 2010 contrasting Google’s exit from China to Hudson Taylor’s (he was a 19/20th century British missionary) decision to stay. The article was titled “Google’s Boxer Rebellion: What Would Hudson Taylor Do?” and I am told by several of you who work for Google that it made it to the top of the Mountain View company. Prior to selling www.thesundaybrief.com to a British soccer team blog site, the Hudson Taylor article had been viewed at least 9,000 times and had been linked by 50 other blog sites. I still have the original Sunday Brief email and am glad to forward it upon request.
Another common question is “How many people read The Sunday Brief each week?” I have no idea. Judging from the emails and conversations on the topic, my unscientific guess is that several hundred of you forward this email on to colleagues (our email list is about 1,000) which allows me to comfortably say that the email is likely read by thousands each week. We get several hundred unique visitors to the website each month, and probably 100-200 emails each month with questions/ comments/ thoughts etc. Since we adopted our new publishing format last April, we have added over 700 net new readers (consisting of 721 requests to add and 3 requests to unsubscribe).
One of the most frequent questions I get is “What do you read every week?” or “How do you stay on top of the industry?” As you see from the columns, I read a lot of financial reporting data. The secret to identifying gaps or understanding where companies or industries are headed is to understand their management. This includes what they say and do not say in public forums.
Financial data is most relevant when it is paired with management’s statements about strategy and results. One of the reasons why many readers like The Sunday Brief so much is because we expose the hypocrisy of management, many of whom do not have a clue about the disruptive powers about to engulf them.
I do not read a lot of other financial bloggers (Seeking Alpha commentary is a time waster, IMO), but do read the thoughts of a few financial analysts, including Craig Moffett (now at Moffett Research) and John Hodulik (UBS). Over ten percent of the subscribers to The Sunday Brief have Wall Street email address suffixes (e.g., jpmorgan.com, ubs.com, ml.com) so it’s important to have a good grounding in Wall Street news. I am also an avid reader of The Economist.
Within the telecom/ tech industries, I also spend a lot of time on RCR Wireless and the Fierce properties (Fierce Wireless, Fierce Cable). My favorite read each week is Ars Technica. I usually go “deep” with one or more articles (click here for a terrific article published this month on Android 4.3 changes). I also enjoy the user candor of www.dslreports.com. Unvarnished is the best way to summarize this site led by Karl Bode.
Every former entrepreneur or venture capitalist seems to have a blog site. Over 95% of them are…. not worth following (I have tried). They are inconsistent, untimely, self-serving and they provide inconsistent and conflicting advice to eager and naïve entrepreneurs. However, there are three that you should bookmark. The first is Feld Thoughts (www.feld.com), Brad Feld’s blog. I started to read this in 2009 and have never looked back. Many of Brad’s advice to entrepreneurs can be found in his book “Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist” available on Amazon here. While no blog can fully cover the breadth of topics one needs to start a business, Brad’s would be a good start.
I also occasionally read Fred Wilson’s blog (www.avc.com) from Union Square Ventures and also Mark Suster’s terrific blog called Both Sides of the Table (www.bothsidesofthetable.com). These blogs tend to focus on the mechanics of running a business which is why I like them so much. I think I have been reading Mark’s blog for four years and have not found one post that did not challenge me personally or professionally.
As far as books go, there are four that will never leave my home library:
- Smart Choices: A Practical Guide to Making Better Life Decisions by John Hammond
- Business Model Generation by Alexander Osterwalder and Yves Pigneur
- Design Rules: The Power of Modularity by Carliss Baldwin and Kim Clark
- Disciplined Entrepreneurship by Bill Aulet (just released this week)
These four books can take young, technology-focused entrepreneurs a long way in their business plans. I plan on devoting some time in future Sunday Briefs to the nuggets in Bill Aulet’s recently released book. I have read it cover to cover twice and it’s absolutely superb.
One of the most thought-provoking pieces I have read this summer is “The Blip” by Benjamin Wallace-Wells, a columnist for New York magazine. It was forwarded to me in July by a NYC resident who asked for my thoughts on the article. Rather than opine on the article, I’d like to ask each of you to read it and send me your thoughts (just as your kids are getting their first homework assignments, we are trying something new at The Sunday Brief and actively soliciting feedback from our readers). Please send your feedback to email@example.com and indicate whether your comments are anonymous or can be public (we will default to the former).
If we get enough feedback this week, we’ll publish a Labor Day special edition. Otherwise, try out the website (www.mysundaybrief.com) and read up on an old issue that is in your “Read” or “Sunday Brief” or “Patterson” folder.
Speaking of mojo, we had 19 referrals last week to receive the email edition of Sunday Brief. Thanks for passing it on. If you have friends who would like to be added, please have them drop a quick note to firstname.lastname@example.org and we’ll subscribe them as soon as practicable. Have a terrific week!
Greetings from Seattle and Dallas. This week, T-Mobile announced second quarter earnings, which will be the entire focus of this week’s column. Let’s face it, T-Mobile had plenty of excuses for a dismal quarter: Smaller network footprint that is in transition, merger integration activity, competitive pressures, and a fragile economy. Had they come close to consensus numbers, they would probably have been given a hall pass, and analysts would begin to pontificate about “What if they had ______’s margins?” or “What if they had ________’s share of gross additions?” The number four player would have received a community head pat, and we would be back to focusing on Project VIP, CBS vs. Time Warner Cable, cable consolidation in general, and Blackberry’s privatization rumors.
However, there was no whining about the slow growth economy on the T-Mobile earnings call (given the similar importance of low-income wireless plan assistance to other carriers, this could have been a factor). No mention of the words “pardon” and “dust” in the same sentence (or “recapture” for that matter). No use of lagging LTE network deployments as a reason for customer hesitancy or gross add weakness. And, most importantly, there was no mention of “synergy initiatives” as an excuse for missed profitability expectations. It was an unbelievable quarter as T-Mobile bested the rest of the industry in net postpaid phone additions.
In the Sunday Brief second quarter earnings preview (read full text here), we closed out the section on T-Mobile by stating:
“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.”
In my wildest dreams, I would never have expected 1.1 million customer additions, with 688K of these being postpaid subscribers. And 1.6% postpaid churn is truly an unbelievable number. Braxton Carter, T-Mobile’s CFO, cited the dramatically lower churn as a significant driver of profitability in the quarter (meaning that cash flow from existing customers helped to buffet the impact of significant gross additions).
Without a doubt, there is some channel overlap between Metro PCS and T-Mobile, just as there is between Virgin Mobile USA and Sprint, and Straight Talk and Verizon Wireless (especially as Verizon Wireless increases their wholesale business with Walmart). T-Mobile laid out a compelling case that explains why this is “frictional” or “edge” churn even as MetroPCS expands markets in 2013. It’s still a source of long-term friction, but it’s a sideshow to the story of postpaid market share additions.
T-Mobile added 688K postpaid customers in 2Q 2013. This barely gets them back to the level they were at one year ago (see chart below). As many in the industry and analyst communities have argued, this represents a “return” to T-Mobile from AT&T and Sprint (two years ago, the fate of the T-Mobile network was uncertain and customers were leaving to go to the “surviving” AT&T network or to try the Wi-Max experience at Sprint). T-Mobile’s voice and text capacity was originally designed for 26-28 million postpaid customers. Sure, there are a many more wholesale/ MVNO users, but there is still room to grow several hundred thousand more per quarter.
The amount of recovery required for T-Mobile in postpaid is immense. At the end of 2008, when the iPhone was still exclusive to AT&T, Google Android did not exist, and the Sidekick was the rage, T-Mobile had 26.806 million branded postpaid customers (and was generating $1.4-1.6 billion in EBITDA per quarter). T-Mobile would have to have nine consecutive quarters like 2Q 2013 to get back to end of 2008 levels. It’s possible, but that’s how much the postpaid asset has atrophied. Muscle tone does not appear overnight.
T-Mobile’s road to recovery is a lot easier to achieve, however, than Sprint’s. As cited on three previous earnings conference calls, there are many AT&T iPhone users who are switching to T-Mobile because similar GSM technologies make it an easier proposition. The process, called a SIM card swap, enables customers to switch from AT&T to T-Mobile for $10 or less. T-Mobile is continuing to upgrade their network so that iPhone network switchers will be able to use T-Mobile’s HSPA 21, HSPA 42, or LTE networks. Ease of use and resulting positive customer experience is not available everywhere, but for about half of the population, it’s an alternative. More on SIM card availability from T-Mobile’s site. SIM card swaps are only one competitive weapon against AT&T today; with the rise of LTE as a primary technology over the next several years, the conversion universe will grow.
However, SIM card swaps are only part of the competitive equation. T-Mobile and MetroPCS have strong control over their retail operations and dealers, which makes device launches much easier. This is great news for Samsung, Apple, LG, Blackberry, and other device manufacturers. With the anticipated announcement of the next iPhone expected on September 10 (see article here), having a solid in-store customer experience is critical to T-Mobile’s success.
T-Mobile went to great lengths to emphasize the importance of a balanced handset lineup. The “zero down” promotion T-Mobile is running this summer has been very helpful to Samsung and other Android device manufacturers, but, as I learned from my T-Mobile store visit this week, “zero down” does not apply to iPhone4S ($70 down, $20/ mo.) and iPhone5 ($143 down, $21/ mo.) models. Absent brand loyalty, Samsung will win this battle all summer ($0 down, $25/ mo. for Galaxy S4; $0 down, $26/ mo. for Galaxy Note II).
It’s important to remember (and I saw from this week’s experience) that T-Mobile brought Blackberry to the masses through their company-owned stores. When AT&T was the exclusive iPhone provider in the US, T-Mobile (and, for that matter, MetroPCS) went out of their way to feature and promote Android. Their allegiance to multi-brand, while not quite as vivid as AT&T’s (as they market the heck out of the 41 MexaPixel Nokia Lumia 1020), is much more apparent than Verizon’s or Sprint’s. Their store reps are excited to have the iPhone for competitive parity, but I found the rep I worked with this week to be very knowledgeable on Blackberry, HTC and Samsung. (Granted, I was in Seattle when I performed my test, but it was a ways from the T-Mobile HQ in Bellevue).
Strong direct distribution control, multi-brand experience, and SIM Card swaps. What could make the picture even brighter? The answer lies with network and engineering efficiency. Excluding roaming, T-Mobile operates at the 1900 Megahertz (a.k.a. the PCS band) and the 1700 MHz (a.k.a., the AWS band) frequencies. They are currently in the process of moving HSPA+ (42 Mbps) to the 1900 MHz band so they can firmly establish the 1700 MHz band for LTE services (T-Mobile purchased a large amount of the 1700 MHz band from Verizon Wireless through an auction process, and is completing the purchase of 1700 MHz spectrum from US Cellular for the Mississippi Valley region). Recently, T-Mobile announced that they will deploy 10×10 MHz of spectrum in 90 percent of the top 25 markets by the end of 2013.
This sounds great for three reasons. First, customers are going to expect current networks when they purchase the latest smartphones from T-Mobile. Second, it will undoubtedly drive up ARPU for some T-Mobile users. Finally, availability of more efficient networks drives up profitability. If half of all current smartphone users on the T-Mobile network were using HSPA42 or LTE as their primary network with the same volumes, T-Mobile’s overall gross margin would increase by at least 300 basis points (3%; calculation available upon request). Like Sprint, T-Mobile’s fortune’s rise and fall by the depth (and, by 2015, the breadth) of their network. While Sprint has the advantage of deploying some additional service over the newly available (800 MHz) iDEN spectrum, it’s a smaller 5×5 MHz block.
Are there headwinds? Sure. T-Mobile needs an in-building strategy, one that is cognizant of the fact that every floor in every building in the US (likely) has a T-Mobile Bring Your Own Data (BYOD) customer. If Verizon, AT&T, and Sprint meet the in-building needs of these customers, and T-Mobile does not, they become sitting ducks.
Frankly, T-Mobile needs an entire business strategy, one that brings radical change in offerings and services to the CIO suite (and, frankly, one that fuses IP backbones with M2M endpoints). They can only do this by reaching back to the Ethernet and fiber communities that desperately want to join the Seattle revolution.
When T-Mobile starts to think about their wireless network as the medium and enterprise business primary means of communication (and information retrieval), they will understand the tens of billions of value they can create. Start with the 70,000 buildings that are already on-net and served by someone other than Sprint, Verizon Enterprise Solutions, and AT&T. There’re several million T-Mobile customers wishing for better service there today. Use that building footprint to launch an even more creative solution.
That’s all we have time for this week. There’s a lot to cover in next week’s SB as we have not delved into wireline earnings results. Until then, please vote for eTrak in the WalMart “Get On The Shelf” contest (you need to be logged into Facebook to register your vote), and have your friends join you as well.
Speaking of your friends, many of you have been busy. Last week we added 59 new SB followers and several more decided to receive updates through WordPress. Thanks for passing it on. 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 Lawrence (KS) – pictured, Kansas City, and Dallas. It’s been a busy week in the telecom world, with continued speculation about potential cable marriages (the latest on Friday was a combination of privately-held Cox Communications and Charter), robust cable earnings from Comcast, an entire network shut down as CBS and Time Warner continue their dispute, and the Obama administration’s intervention to overturn an International Trade Commission ban on certain older (3G) Apple products that was the subject of a lengthy lawsuit with Samsung. Our industry is dynamic and multi-faceted, driven by speed to market. We wouldn’t have it any other way.
Against this backdrop, Sprint announced earnings on Tuesday and, after a day or two of absorbing the earnings picture, Sprint’s stock rose 10%. Since issuing post-Softbank shares (July 11 was the first full trading day – Sprint closed at $6.28), Sprint has performed better than T-Mobile USA, who will announce earnings this week.
What is motivating the resurgence in Sprint interest? Here are several thoughts from discussions with many of you as well as a quick scan of recent earnings analysis:
- Nextel, the “gift that keeps on giving” according to Sprint CEO Dan Hesse, is largely behind Sprint. Admittedly, there remain several quarters of T-1 removals and Sprint warned, particularly in the third quarter, of continued losses in enterprise subscribers as a result of re-bid processes related to the iDEN shutdown. (Note: This buys a few hundred thousand more enterprise postpaid retail subscribers in 3Q for AT&T and Verizon).
- Sprint has a plan for Clearwire’s 2.5 GHz spectrum and it is aggressive. New handsets that utilize the 2.5 GHz spectrum will be launched throughout 2014, and large-scale deployment in urban areas to deliver “comparable speeds” to others in those markets are underway. I was very surprised at how little Sprint talked about Clearwire’s current operations as they are a $1.3 billion revenue-generating entity, with ~1.5 million retail customers (Q1 figure) and $800 million in retail annualized revenue (also Q1). More on this in a future column, but Clearwire’s retail base might not be as easy to disconnect as one might think.
- Sprint has a strong understanding of the dynamics affecting the prepaid retail market and will recover by the third quarter. As we discussed, in the second quarter (and particularly in the latter half of the quarter) Virgin Mobile offered significant discounts on iPhone devices to drive up gross additions. In fact, we noted that in some cases, Virgin Mobile’s new phone pricing was better then AT&T’s All In One (AIO) refurbished device pricing (this anomaly continues today with VM offering a new 8GB iPhone4 for $297.49 and AT&T offering a refurbished iPhone4 for $349.99). Virgin Mobile is also offering the iPhone5 16GB model for $549.99.
- As a result of good financial management and the Nextel network shutdown, margins will recover. It’s hard to make the case that margins have recovered, as they are still in the 17-18% level (compare to T-Mobile’s Q1 adjusted EBITDA level of 29%). But, even a recovery to 23% would mean $600-650 million in additional bottom line return, while a recovery to T-Mobile’s level would mean $1.2–1.3 billion in additional annual profitability. These changes do not happen overnight, but some analysts have argued that the shutdown of the Nextel network will yield additional incremental savings of $400 million within the next two years. I don’t see that much, but do see at least $120 million in annual access savings (20,000 iDEN towers; 2 T-1 circuits per tower, $250 per T-1 per month).
The allure of Sprint’s recovery story, especially against the backdrop of Verizon and AT&T, is music to the ears of many Sprint shareholders who remember a double-digit share price just a few years ago. However, as Sprint noted on the call, competition continues to be intense. Here’s a short list of the headwinds Sprint faces:
- Post iDEN retention efforts are just the tip of Sprint’s Business problem. Sprint cannot afford to lose additional business revenues, yet they are behind on LTE POPs covered, in-building coverage, and data center/ cloud solutions. As business environments move away from corporate-owned to employee-owned/ corporate-reimbursed devices, the size of their in-building coverage need grows. Like their larger peers, Sprint has moved to a metered plan for business customers, and, as such, has an interest in growing (as opposed to offloading) revenues in these buildings.
Solving building/ floor level issues is Sprint’s Achilles heel. It also happens to be an area of expertise for Verizon and AT&T, particularly where they are the incumbent wireline provider. Relieving the pressure on the macro data network through in-building solutions is critical to spectrum optimization, customer satisfaction, and cost management. It is not an optional strategy if Sprint wants to maintain their disproportionately high enterprise market share.
On top of this, cloud-based solutions (such as Desktop as a Service) are driving greater integration between office sites, remote servers, and wireless tablets/ phones. Both Verizon and AT&T have the strategic pieces to assemble robust end-to-end service level agreements (Mean Time to Repair/ Fix, granular network reporting, applications monitoring and management).
Without computing and connectivity partners, Sprint will struggle to gain market share leadership in the enterprise space. They will continue to struggle with connected device net additions (which were down 16,000 for the second quarter). They will see more cable, Verizon, and AT&T in-region competition in the small business space. They may even lose a partner because T-Mobile beats them to the punch. Restoring the enterprise luster takes a lot of elbow grease and a lot of time – Sprint needs to apply the “enterprise polish” very liberally to remain relevant.
2. After Sprint completes 200 million LTE POPs, how do they get to 250/ 275/ 300 million? When Sprint’s two larger competitors have completed or are near completion of 275-300 million LTE POPs covered, and T-Mobile has already announced a 200 million year-end POP coverage goal, how does Sprint respond? Answering this question reveals how dependent Sprint is on Verizon (ALLTEL) for much of its non-metro/ non-highway coverage. Here’s a good example of the difference in coverage between Sprint and Verizon:
From this picture, Sprint’s coverage is strong in the greater Atlanta metroplex (call it a 20-40 mile radius around metro Atlanta).
It isn’t hard to see the effect of different capital spending levels (over many years) when you look at these charts. Verizon Wireless has spent $16.7 billion over the past eight quarters building out their LTE network and maintaining their legacy networks. Sprint has spent $6.6 billion over the same period. That’s $2.53 in Verizon spending for every dollar Sprint spent. This ratio has largely held at a 2.5 level since 2008, resulting in a $24 billion difference in capital spending between Verizon Wireless and Sprint (I included all of Sprint’s capital spending in the above calculation. The gap would be even wider if Sprint’s wireline capital expenditures were removed, but we would need to include some Clearwire capital expenditures as an offset).
Sprint (and T-Mobile) cannot compete without filling in the “white spaces.” The Clearwire spectrum will be very valuable in metro areas, but Sprint could start today with their existing 1900MHz and 800MHz spectrum in these regions. The best way Sprint could win against AT&T and Verizon is to partner with T-Mobile on attacking the “breadth issue.” A cooperative effort might allow both companies to reach an additional 50-60 million POPs.
3. Sprint has new owners, but more debt than before. Previously, this was defined as a payment issue for Sprint, and quarter after quarter Sprint had to reassure jittery bond holders that they would not default on their debt. Sprint is far from these levels, and, as noted on the conference call, has seen their debt rating raised since the Softbank transaction closed.
However, prior to Clearwire, Sprint has done very well managing their balance sheet. Here’s a snapshot from the quarterly presentation deck:
At the end of the second quarter, Sprint had $17.8 billion in net debt. Per the chart above, Sprint used $1.3 billion of cash since June 30 and added $0.8 billion in debt. Sprint’s $20 billion in net debt compares to $9.7 billion in net debt announced by Verizon Wireless on their earnings call.
More debt reduces flexibility. Verizon has options to expand in Canada – Sprint will likely pass on bidding for assets or spectrum. Verizon has the opportunity to expand globally, perhaps through an acquisition of Vodaphone. Sprint has to clean up Clearwire’s money-losing retail operation and decommission the Wi-Max network — a drag on earnings for several quarters. Verizon can focus on investments such as Home Fusion to bring LTE to less populated areas at economical scale.
Sprint needs to invest if they want to gain market share. Their position is the best it has been in seven years, but Verizon and AT&T have also dramatically improved their balance sheets. To win, Sprint will need to think differently – find the formula to restore the luster to their enterprise jewel, find the right partnerships to match Verizon and AT&T capabilities especially in well-populated but not urban areas, and execute flawlessly with their current capital resources.
There is a lot of blocking and tackling ahead for Sprint. Moving from survival to leadership mode is not an easy thing to do. But Sprint has surprised many before, and, thanks to Softbank, has the opportunity to prove them wrong again. There’s a lot of buffing needed to remove layers of tarnish and restore the luster of 2005.
Next week, we’ll focus on wireline and cable earnings. Until then, if you have friends who would like to be added to this email blog (over 100 in the past two months have been added), 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!