Home » General » Handsets, Networks, and Verizon’s Game Plan

Handsets, Networks, and Verizon’s Game Plan

fishGreetings from Miami, Port Arthur (TX), Philadelphia and Dallas.  It’s been a full two weeks and I am beginning to wonder if taking a long Columbus Day weekend was a good idea.  However, as the picture on the left shows, sometimes you just need to put the smartphone/ phablet/ tablet/ laptop down and go fishing.  No application can duplicate the thrill of having a five pound redfish snatch the bait.

This week, we are covering a lot of ground, and, as a result, I will forego a review of this week’s events with one exception.  As most of you saw, on October 7 Time Warner Cable announced the purchase of DukeNet Communications (50/50 owned by Duke Energy and Alinda Partners) for $600 million cash, including the repayment of debt.  The official announcement can be seen here.  (Full disclosure: DukeNet is a previous Patterson Advisory Group client).

With their acquisition of DukeNet, TWC Business Class gets 3,500 fiber fed towers spanning more than 8,700 route miles across five states.  With Time Warner’s existing network, they become the densest fiber network for wireless carriers in Charlotte, Greensboro, Raleigh/ Durham, and Columbia (SC).

DukeNet-Communications-Logo-4cWhile most analysts saw this acquisition as a challenger move against AT&T, it also shows the difficulty TWC and other large cable providers will face with their cable brethren.  For example, TWC will now become a very large FTTT provider in Nashville (Comcast territory), and have a footprint that practically surrounds Atlanta (another Comcast territory).  Because TWC will need to maximize their return on assets, it is inevitable that these two territories will grow and that the competition for carrier business will increase.  It’s definitely a trend worth watching now that the gauntlet has been thrown.

This week marked the beginning of the third quarter earnings season for the telecommunications providers.  Leading the parade was Verizon, who posted good revenue growth and exceptional margins.

Prior to covering Verizon earnings release, let’s take a quick look at handset offerings across the industry (please reference the first page of attached PowerPoint document).  For those of you who are new to The Sunday Brief, we look at trends in handset offerings and pricing models on a semi-annual basis, usually in June and September.  Because of the iPhone 5s announcement, we decided to wait a few weeks longer to publish the Holiday season list.

A few disclaimers before analyzing the results:

  1. Pricing is determined from the website for 2-yr postpaid contracts for AT&T, Sprint, and Verizon.  For T-Mobile, Simple Choice rate plan options are used.
  2. Sprint is currently offering an instant rebate of $100 towards any phone for customers who switch to Sprint from another carrier (landline or wireless).  For current Sprint customers looking to upgrade their device, you should add $100 to the price of the devices listed (e.g., the iPhone 5s is $199 for current Sprint customers who want to upgrade their device).
  3. These prices are determined from a detailed examination of each carrier’s website, as well as conversations with carrier corporate and in-store personnel.
  4. No reconditioned device pricing is shown on the October 20, 2013 version.  Overall, it should be noted that there are fewer reconditioned choices in October than we found in June.  This is likely seasonal in nature.
  5. Previously, we had shown which devices were LTE capable.  In this edition, we are switching to show the devices which are NOT LTE capable.  On AT&T, Verizon and Sprint, we have indicated them with the term “3G” and for T-Mobile, we have shown “near LTE” or HSPA 42Mbps devices using a (42) designation.
  6. Smartphone operating systems are shown in their respective colors.  handset overview sb oct 20

For many years, we have seen brand standardization across the industry.  In June, we noted that this was the first time Apple products were offered across all four major wireless carriers.  In September, we saw the first concurrent launch of an Apple product across each of the four major carriers.

Standardization is happening with other carriers as well.  The Samsung Galaxy S4 and Note 3, HTC One, and LG G2 brands were launched across the US Wireless industry.  Exclusivity is out – simultaneous launches are in for the top selling handsets.

Fighting this trend is the four year-old Verizon Droid franchise.  Thanks to Motorola and HTC, the Droid lineup continues to make its mark across all price ranges.  Another interesting counter trend is the bevy of LG and Kyocera devices being carried by Sprint – nine of which are less than $99.  It’s going to be interesting to see how store representatives explain the intricate differences between the LTE-equipped Mach, Viper, Optimus G, and Optimus F3 to would-be new-to-Sprint customers (all four models are free if you bring a new line to Sprint).

verizon_logoWith this backdrop, handset plans and pricing and consistent network performance become important.  Those are the core values of Verizon, who reported earnings this week.  Most of you have seen their top line performance metrics, which were extremely strong:  927,000 retail postpaid additions; 0.97% monthly churn; 8.0% retail service growth; 51.1% EBITDA margin.  Here are few additional items that are worth attention:

  1. Verizon LTE statisticsVerizon’s post-paid upgrades and gross additions would have been higher in the second quarter if there had been greater iPhone quantities available.  Verizon had 2.2 million smartphone gross additions and another 5.4 million upgrades.  Of the 5.4 million upgrades, 3.6 million came from existing smartphone customers and 1.8 million were first time smartphone users.  Revenue from equipment sales was actually down one percent on a quarterly basis ($1.924 billion in 3Q vs. $1.953 billion in 2Q).   Against these figures, Fran Shammo indicated that Verizon “did encounter iPhone supply constraints that created a backlog at the end of September which resulted in some carryover to the fourth quarter.”  Higher iPhone 5s availability would have depressed margins and had little effect on current quarter revenues.
  2. Verizon had a blockbuster quarter with tablets.  One of the greatest differences between the top two providers (Verizon, AT&T) and the bottom two providers (Sprint, T-Mobile) is the growth of connected (non-dialer) devices.  Verizon had one million non-phone (tablet, HotSpot, M2M) gross adds in the quarter.  I would not be surprised if AT&T surpassed this number when they announce earnings.  Over one quarter of Verizon retail gross additions were non-phone devices.  Most of these devices do not carry heavy subsidies, and nearly all of the one million were LTE-equipped.  Before the advent of shared pricing plans, adding tablets would have been difficult.  With pooled data, it’s easier to justify incremental expenses, and with LTE profit margins, it’s easier for Verizon to promote and subsidize.
  3. No excess 3G capacity is going to waste.  Verizon’s 3Q results clearly show that they are back in the wholesale game.  After Shammo’s first quarter comments (where they all but announced they were the network behind Walmart’s iPhone launch), and the disclosure that 64% of the total data traffic is carried on the LTE network, it should be no surprise that Verizon is aggressively pursuing wholesale deals.  However, of the $423 million in quarterly revenue growth, $84 million or 20% came from the wholesale organization (my estimate is that it was at least $70 million of the $435 million quarterly EBITDA growth).  These are small numbers in the bigger scheme of things, but give an indication of Verizon’s disciplined asset utilization.  In full bloom, the wholesale network could easily provide $400 million in EBITDA growth in 2014.

There’s more to cover on Verizon (specifically their comments on capital expenditures), especially in comparison to AT&T.  Growing account usage and revenues (especially through non-phone products), managing inventory and working capital levels, augmenting network indoors and outside, and managing the utilization of invested capital is Verizon’s game plan.  It’s clearly working.

Next Wednesday, AT&T announces earnings and we will see how much of a dent T-Mobile had on their gross and net additions.  Until then, if you have friends who would like to be added to The Sunday Brief, please have them drop a quick note to sundaybrief@gmail.com and we’ll subscribe them as soon as we can.  Have a terrific week!


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