Greetings from Kansas City, Austin, Atlanta and Dallas. The picture to the left is of the bone-in ribeye at Bones in Atlanta. It’s the best steak outside of Kansas City. Great ambiance, terrific food, and a fabulous conversation with several of you. I needed a few extra hours at the gym after eating it, however.
Before we analyze Verizon’s earnings, a couple of comments on last week’s article. Net neutrality is an emotionally charged topic, and it’s clear that both sides of the issue make strong arguments (I have listened to both sides for the past eight years).
As an entrepreneur with a particular interest in getting a “fast lane” through wireless networks (delivering caller information as fast as possible to the mobile device was the heart of the Mobile Symmetry value proposition), there were many roadblocks erected to success. Nonetheless, even with no fast lane available, we were able to consistently deliver detailed caller information (relationship to calendar, shared groups, internal customer databases, even in-app short messages) by or during the second ring. Short, direct calls to a small number of databases made this possible. Congested 2G and 3G networks increased the array of delivery times.
While Mobile Symmetry was ahead of its time, the need for greater access to operating systems and networks is increasing rapidly (as of today, Mobile Symmetry and other real-time caller ID apps will not work on iOS as it is the only operating system without an open call control interface). The decision-making process is very complex, as all of the major smartphone operating systems work on a global basis. However, the “weak link” principle applies to applications, and in many cases, consistently fast network access is the weakest link.
Is regulatory oversight needed? Definitely. Should equal regulatory oversight be applied to Apple’s and Google’s Android operating system decisions in the future? Absolutely. However, if customers (and application providers) want priority, there’s no reason why operators should not have the opportunity to further monetize their networks, provided that bandwidth to the home continues to grow.
This is a perfect segue to Verizon’s earnings. Fran Shammo, Verizon’s CFO, led the fourth quarter conference call which was heavy on fourth quarter information but expectedly light on 2014 and 2015 projections given the pending shareholder votes.
“Impervious” was the word that came to mind as Fran recited improved metrics and earnings. Verizon’s monthly postpaid churn (0.96%) was impervious to the Bring Your Own Device offerings that T-Mobile/ Metro PCS accelerated in the fourth quarter. Verizon’s stringent upgrade rules appeared to be impervious to the frequently advertised plans from competitors to upgrade devices at discounted rates. With all of the Machine-2-Machine activity, Verizon managed to continue strong growth outside of smartphones.
All of these changes translated into consistent profitability, with wireless service EBITDA margins hovering around 50%. Capital spending was $16.6 billion for 2013, consistent with the guidance provided by Verizon at the beginning of the year. Free cash flow for the year exceeded $22 billion, more than Sprint and T-Mobile combined for the past five years.
Fran was unable to share specifics about how Verizon would accelerate shareholder value after the Vodafone transaction closed. However, there were plenty of hints dropped in the conference call. Here are three areas where Verizon will seek to capitalize on the combined asset capabilities:
- In-home Verizon Wireless/ Verizon FiOS integration. Verizon will likely come up with a fancier name than this, but I would not be surprised to see Verizon Wireless use proprietary hardware or software to significantly improve the wireless experience in FiOS households (and potentially all Verizon-connected businesses). Fran seemed to indicate this when he said on the call “We are working on a new router that is going to give better in-home performance with all the extra Wireless devices that are going on.”
What does this mean? First of all, when Verizon Wireless devices connect to a Verizon FiOS router, they will receive a significantly improved experience. To the extent that the Verizon network is the bottleneck (and not the content’s server), customers will see a faster connection.
Verizon Wireless devices will seamlessly connect to the router. Interfaces on the device will periodically remind the customer how much they are saving on overages because they are connected to FiOS (Quantum). And the connectivity ease of over the top content to the TV will be apparent.
Verizon may also try to apply these same rights to FiOS locations outside of the subscriber’s home (small office, friend’s FiOS home, etc.), just as the cable industry is trying to do with their Cable Wi-Fi SSID initiative.
If you are an AT&T, Sprint or T-Mobile customer connecting to Verizon’s in-home router, you will receive “best effort” performance which is what exists today (or they could negotiate a premium Wi-Fi access agreement with Verizon). Verizon Wireless customers will receive differentiated service.
I would not be surprised to see Verizon take even bolder steps than these (e.g., the ability to access highlights/ full shows over mobile devices of things you watched over FiOS last night).
Because of the corporate structure that previously existed, this degree of integration was not possible. Verizon Wireless did not care about FiOS TV/ Internet market share and Quantum (premium Internet tier) adoption. Now it matters a lot, and Verizon is going to improve their wireline consumer growth as a result.
- Enterprise Sales Force Integration and Service Level Agreement adoption. As much as Verizon Wireless tried to be interested in Terremark, Hughes Telematics, and IP MPLS, it was all about selling devices (and especially tablets) in 2013. I cannot imagine the pricing gymnastics that the Global Services organization had to go through, although I can imagine there were competing priorities.
Now, under one service level (which should extend to the cloud server), Verizon offers a business-grade product with unique discounts based on total spending. Need a secure backup file sharing service with that tablet? There will be several to choose from, and some might even include 1GB of free “synching” data per device per month.
Also, in the enterprise space, Verizon could make a very bold move into time-shifting of data delivery. Some data (e.g., point of sale transactions) would be synchronized immediately, while others would be delivered during lower load hours (1-4 a.m.). This process is widely underway in the wired world, but adoption of this for wireless integration has been lower.
For the small branches of enterprise accounts (e.g., every Burger King or Exxon gas station location), the business equivalent of Home Fusion would be a welcome addition, especially outside of franchise territory. When combined with enhanced security and service level agreements, a wireless broadband alternative would pose a real threat to CenturyLink, Windstream and Frontier.
Product innovation is not the only area where Verizon will benefit from a single organization. Applying the Six Sigma Lean principles will remove a lot of duplicative sales and support resources. Aligning incentives and compensation as early as possible in 2014 will be critical.
- Balance sheet control. Verizon has been hindered from fully optimizing its balance sheet for the past decade (I could sense some humor as the question was asked and answered about Verizon Wireless’ $1.7 billion in net debt). It’s ability to increase or reduce the number of shares has been shackeled. While they enter with considerably more debt, the coupon rate on that debt is extremely attractive. Look for Verizon to creatively find ways to maximize shareholder value.
The mere thought that wireless and wireline technologies live in parallel universes is laughable. Eventually every wireless radio connects to fiber, whether it’s a FiOS router or a Gigabit Ethernet connection to the tower. Verizon knows the power of integrated connections, and, while they are not quite impervious to competitive pressures, they now begin a multi-year process of making the wireline and wireless worlds indistinguishable.
Next week, we’ll compare and contrast Verizon’s and AT&T’s earnings (due this Tuesday). For a quick primer on AT&T’s 3Q, their previous release is here. Verizon’s fourth quarter and full year financial results are here. Until then, if you have friends who would like to be added to The Sunday Brief, please have them drop a quick note to email@example.com and we’ll subscribe them as soon as we can. Have a terrific week!
Greetings from Dallas, St. Louis, and Monroe (Louisiana). Besides being the home of CenturyLink, Monroe was also the home of Delta Airlines for several years. It is home to one of the most famous entrepreneurs in the South, Joseph Biedenharn, who not only invented the bottling process for Coca Cola but also was one of the founders of Delta Airlines (until the late 1990s, Delta had a Biedenharn family member on its Board of Directors).
However, to tens of millions of Americans, West Monroe is home to the Robertson family of Duck Dynasty fame. While my traveling companion (Dave Stevanovski) and I did not get to see Willie, Phil, or Uncle Si (it’s still duck season, after all), we did stop by the Duck/ Buck Commander building to pick up a souvenir or two. We also hit Haskell’s Donut Shop (featured in a few Duck Dynasty episodes) for breakfast.
Speaking of donuts, this was a pretty sweet week for Verizon, AT&T, and other broadband providers. On Monday, a federal appeals court ruled that the FCC could not apply the same set of rules to information service providers (ISPs) as they did to common carriers. From the ruling:
Given that the Commission has chosen to classify broadband providers in a manner that exempts them from treatment as common carriers, the Communications Act expressly prohibits the Commission from nonetheless regulating them as such. Because the Commission has failed to establish that the anti-discrimination and anti-blocking rules do not impose per se common carrier obligations, we vacate those portions of the Open Internet Order.
After the ruling, Chairman Wheeler issued a blog post in which he reiterated the FCC’s right to regulate broadband providers:
… the FCC also is not going to abandon its responsibility to oversee that broadband networks operate in the public interest. It is not going to ignore the historic reality that when a new network transitions to become an economic force that economic incentives begin to affect the public interest. This means that we will not disregard the possibility that exercises of economic power or of ideological preference by dominant network firms will diminish the value of the Internet to some or all segments of our society.
Both the NCTA (Michael Powell) and CTIA (Steve Largent) issued statements supporting anti-blocking measures, but both were silent on “two-sided” arrangements (customers pay, but their subscription fees are offset by content delivery “network access” payments). What confuses many net neutrality followers is how the statement above by Chairman Wheeler reconciles with his statements in December where he stated that he would like to only regulate two-sided arrangements if they get “out of line.” See more of Wheeler’s comments on two-sided arrangements here.
Is this “found money” for broadband service providers? Is this going to dent the fortunes of cat videos on YouTube? The answer to both questions is likely “no,” at least not right away. If the FCC decides not to appeal the ruling, and the Republican-led House does not take up a separate piece of legislation to reclassity Internet Service Providers as common carriers, the ability to prioritize network traffic would be left to the business arrangements Verizon, AT&T and others implement. It might also leave Comcast and others who agreed to provisions as a condition of merger approval at a short-term competitive disadvantage (Comcast indicated in a blog post that they had an additional four years left in their NBC Universal merger agreement). More on Comcast’s thinking from this Philadelphia Magazine article.
What is likely, however, is that when one broadband service provider acts, others will follow (except, perhaps, Google Fiber). These arrangements will likely “chain” several products together, including hosting, transmission, and access. For example, Verizon would be more than willing to reduce FiOS access fees if ESPN installs servers at Terremark, their cloud computing subsidiary (or you could substitute Time Warner Cable and its Navisite data center subsidiary, or CenturyLink and its Savvis subsidiary).
The concept of chaining has positive implications for carriers who would rather manage incoming broadband content within owned (as opposed to remote third-party) facilities. It clearly places smaller carriers who have less robust broadband and data center infrastructure at a disadvantage.
Prioritization of content would bring market dynamics to an industry that historically has not experienced this freedom. New business arrangements would be further enhanced by data product features such as AT&T’s recently announced Sponsored Data (which could be coupled with content prioritization to deliver improved applications performance with no additional costs to the end user).
Will prioritization prevent free and unfettered access to content? Will it pit enterprises against consumers in mixed use communities? Will it drive a renewed focus on data caps (utilizing throttling that is common in some wireless plans)? Will it inhibit the development of the next three competitors to Netflix? Will consumers care that their smartphone (Yahoo, Facebook) notifications are delivered seconds later than they were last year? With most consumers using less than 50% of the total peak bandwidth in their cable modem plans, when will prioritization become an issue to “average” users? These are a few of the questions that need to be monitored as the rules develop.
The net neutrality ruling would certainly be a factor in two projected transactions: Charter + Time Warner Cable (discussed today), and Sprint + T-Mobile (to be discussed in February). For those of you who missed it, Charter announced that they were taking their $132.50/ share offer for Time Warner Cable public (see Charter’s full presentation here). Time Warner Cable responded that they would be open to a merger that would value TWC at $160, or about 20% higher than the current offer. CNBC polled many current Time Warner Cable shareholders and found most of them to be looking for $145 to $150 per share, about $3-4 billion more than the current $37.3 billion offer.
The “bid/ ask” gap here puts Charter in a bit of a conundrum. Do they take on more debt and, as a result, drive up synergy expectations? Or do they offer up more shares of stock and potentially place current Time Warner Cable shareholders in control of the new company? The number seems small, but, with a combined pre-synergy debt to EBITDA ratio of 5.0 – 5.3, every billion matters.
We have discussed the possibility of a Charter/ Time Warner Cable merger throughout 2013, and the prospects appear to be good. However, the regulatory requirements surrounding approval of the merger by state and federal authorities appear to have been raised with the latest court ruling.
For example, the FCC could require all (or 99.7%) homes and businesses in the combined territory to be connected to a minimum of 30Mbps broadband download speeds by the end of 2016. This would drive up costs to provide service to all users and place the combined company at a competitive disadvantage in metropolitan areas.
State and municipal governments could also require additional connectivity options for third party servers (e.g., Netflix) that would force the combined company into a newly defined “equal carriage” definition. Some areas might even ask for a moratorium on bandwidth caps or two-sided arrangements for the next decade. Each additional regulation removes business flexibility and reduces the pace of innovation.
The relationship between government and the telecommunications industry has been a healthy one for the past eighteen years. With Chairman Wheeler at the helm of the FCC (and former Chairman Powell at the NCTA), that relationship should be stable. Faced with a large merger approval process, however, many regulators cannot help themselves. Tuesday’s decision just upped the ante.
Next week, we’ll dissect Verizon’s earnings (scheduled to announce Tuesday a.m.) and try to determine the health of the industry. For a quick primer on VZ’s 3Q, their previous release is here. Until then, if you have friends who would like to be added to The Sunday Brief, please have them drop a quick note to firstname.lastname@example.org and we’ll subscribe them as soon as we can. Have a terrific week!
Greetings from the Consumer Electronics Show in Las Vegas. Each year, when I head to CES, I think about the dreaded show floor. Those of you who have been to repeat CES shows know exactly what I mean: iPhone cases, stereo speakers, and (more recently) headphones as far as the eye can see.
There were a lot of accessories at this year’s CES. But there were also many connected cars on display which turned a portion of the floor into a spectacular car show. Chevrolet (John Braun, CEO of TIP Solutions, pictured in a Corvette Stingray), Lamborghini (with a 750 Watt Monster stereo system), Audi, Mercedes, Lexus and others were touting their ability to connect the driver and passengers to their car and the outside world.
Cars take up a lot of space. They also are not a “quick look” especially if you are a car guy like me. That creates a crowd, and the CES show floor has needed more “crowd” for the last several shows (which means a lot when you think about half of the 150,000 attendees are on the floor at the same time).
Health care also had a more prominent role at this year’s show, sharing the South hall with the home automation and security displays. While many folks I talked to thought there was a heavy emphasis on personal fitness (and the effect of friendly competition on meeting or exceeding personal fitness plans), I found many of the booths (including the Reebok CHECKLIGHT concussion indicator and the dog health care monitoring system called Voyce) to be very interesting and timely.
In last week’s Sunday Brief, we batted around the fact that there does not seem to be a coordinated effort to consolidate the dozens of messages that smart home appliances generate. Several of you indicated an interest in exploring how to bring this concept to market, but I found a company at CES who is well down this path. The Arrayent Connected Platform hosts Whirlpool, LiftMaster, Chamberlain, Maytag and other brand name applications in the cloud, allowing manufacturers of connected devices to focus on hardware and connectivity, not the latest iOS or Android release. While the company is still new, this was the first attempt to deliver customer-focused messaging for the connected home. We agreed to stay in touch through the spring and perhaps feature their company in an upcoming Sunday Brief.
There were a lot of other very interesting developments: The introduction of 13 Steam Machines using the recently developed Steam OS software (Steam has 75 million customers worldwide and is the leading distributor of online games through PCs – I especially liked the Gigabyte Steam Machine (pictured), the launch of the Sony Xperia Z1 Compact (many comments like “I could go back to small with this device”), and the launch of the LG Flex, a curved phablet with a six-inch screen (good video of the Flex is here).
Connected cars, wristbands, even beds – what next? At this point, we stumbled on to the Corning booth and the best kept secret of the show: Corning’s new Antimicrobial Gorilla Glass. Yes, healthy glass, as the product person put it to me, “our claims are EPA validated.” Using a patented ionic silver coating, Corning’s new product inhibits the growth of algae, bacteria, fungi, mildew and mold. I never really thought about mold growing on my device, but I did think about germ spreading when I loaned one of my tablets to my four year-old nephew (who was just getting over a cold) over the Holidays.
While I am sure the antimicrobial glass will carry a steep premium, imagine the opportunities to use this at the ticket kiosk for a busy Metro station in Washington, DC, or in a busy hospital (or Walgreen’s pharmacy where all registrations are done through a touch screen). Touch screens have long been germ carrying agents, and Corning is at the forefront of healthier communications.
The show was a good one for me, and I would be interested in getting your take if you attended. For more details, have a look at reviews from the RCR Wireless, the Verge, CNET, and Engadget. I also liked the ever cheeky “Worst of CES” post from ZD Net (the iPad periscope does look like a torture device).
Product features and functionality are only part of CES. There’s also the presentation and presence associated with CES. Take, for example, the highly reported presentation of Michael Bay of Transformers fame. Stymied by the failure of his teleprompter, he simply said he was sorry and walked off the Samsung stage to stunned silence. According to this report from The Guardian newspaper (which includes a video of his bizarre exit), many in the Twitter world responded with their dislike of Mr. Bay’s movies:
“Haven’t cringed like that since Transformers 2,” said one commentator. “I’ve often wanted to walk out of a Michael Bay [in] embarrassment too. Can’t blame him for seizing the opportunity,” said another.
Oh to have been a fly on the wall at Samsung World Headquarters in Korea during that botched presentation. There was likely stunned silence, then lots of shouting.
But that was not the only appearance garnering headlines at CES on Monday night. In a true Uncarrier move, John Legere crashed the AT&T Developer Summit after-party which featured Seattle-born Macklemore. He is pictured with Roger Cheng of CNET, who writes about how his Tweet likely got John and Braxton Carter (yes, T-Mobile’s CFO was also in on the action) kicked out of the party. And, as the article goes on to describe, they got the passes from Macklemore’s agent! John’s response: “I want to to be free, I just want to live” which is a line from one of Macklemore’s more popular songs.
The party crash was one of the boldest moves I have seen by a public company CEO in years. As many of you shared, the only thing that would have been more bizarre would be to see John and Sprint CEO Dan Hesse crashing the party together! However, judging from T-Mobile’s preliminary fourth quarter earnings announcement, Dan is probably not on a first Tweet basis with T-Mobile right now. For those of you who missed it, T-Mobile announced the following preliminary results:
There is a lot in this table, and we will have more dialogue on this after AT&T’s earnings announcement on January 28, but T-Mobile has staged the most remarkable one-year turnaround in telecom history. They will have gained close to four million branded postpaid subscribers on their next largest competitor (Sprint) in one year, even as both are furiously building out LTE networks (and as Sprint decommissioned the Nextel network). And, while Sprint will likely have eight million more total subscribers (one million more prepaid and about eight million more postpaid subscribers) than T-Mobile when year-end totals are announced, T-Mobile will likely generate more EBITDA than their third place rival.
For most wireless companies, CES would be the perfect time to take the 2013 victory lap. For John Legere and Mike Sievert, CES was the perfect time to launch their 2014 gross addition initiative. While the plan lacks a formal name (unless they can negotiate a magenta “Get Out of Jail Free” card with Mattel), every current postpaid wireless customer knows that it’s an Early Termination Fee promotion (up to $350 per line). It also includes an instant credit for up to $300 for every phone that is traded in (and a trade-in is required).
Whether this promotion spawns the wireless equivalent of “switch to [Long Distance Carrier] and cash this check”, which many of us remember as a common acquisition staple 15 years ago, remains to be seen. Without a doubt, it’s going to drive up churn, particularly family churn for those who cannot afford or see incremental value in metered data plans. That number is a lot larger than many in the industry realize – T-Mobile cited a Nielsen study which indicated 40% of postpaid customers feel inhibited because of high switching costs. Regardless, it will drive more comparisons and more store traffic to T-Mobile. How Sprint and Verizon will respond remains to be seen.
Next week, we’ll cover another important announcement from AT&T that occurred last Monday (Sponsored Data) and start to look at the fourth quarter earnings drivers. Until then, if you have friends who would like to be added to The Sunday Brief, please have them drop a quick note to email@example.com and we’ll subscribe them as soon as we can. Have a terrific week!
Happy New Year from Dallas, Texas! Hopefully each of you found some time to relax and recharge over the past few weeks. 2014 is going to be a year of change in the telecommunications sector, and focus is going to be even more critical than ever. The economic recovery, which started in the second half of 2013, will continue, but will be very unevenly distributed by state/ region. The coverage drumbeat that has dominated wireless carrier investor presentations over the past four years will be replaced by talk about competitive response. And the prospect of additional consolidation will be concentrated to a few transactions which will be heavily influenced by skeptical and unfriendly regulators.
Before moving into a short preview of next week’s Consumer Electronics Show, let’s see how telecom stocks fared against their software-focused bretheren. As many long-time readers to The Sunday Brief know, we have been tracking the annual progress of The Four Horsemen (Apple, Google, Amazon, and Microsoft) versus a large selection of telecom and cable stocks. Please note: These numbers are not intended to provide a point estimate of the performance of any particular stock, but to give a general idea of where value is being created in the industry.
Earlier in the year, it appeared as if the Four Horsemen would lose the 2014 value creation edition. Apple was on the ropes, and Microsoft and Google were rising slowly. After second quarter earnings were announced, that changed, as investors realized that advertising revenues and acquisition costs were likely to show favorable trends through the rest of 2013.
Meanwhile, the telecom and cable sector had a terrific year, largely driven by profitability growth and consolidation (or, in the case of the cable industry, consolidation speculation). With dividends, the telecom and cable sector added $120 billion in value to shareholders in 2013, up from $95 billion in 2012.
The surprise for telecom and cable is that of the $215 billion that has been added to the industry in 2012 and 2013, over one third of it ($77 billion including dividends) has come from one company – Comcast. That is slightly less than the value added by AT&T and Verizon over the past two years (also including dividends).
The rise in Comcast’s share price is not only a reflection of the share of decisions growth that cable has enjoyed with High Speed Internet (a topic frequently discussed in seven Sunday Briefs in 2013), but also an indication of how programming and transmission can work together to achieve greater profitability . NBCU was in the ditch, and Comcast had one heck of a tow truck. While there is a lot of concern about having content and pipes under one roof, it’s clear that Steve Burke and the entire management team at Comcast transformed NBC Universal. This is an even greater feat when you consider the vastly different perspectives and decision making processes for a (short-lived asset) programming company versus the fiber mentality at Comcast’s cable division.
Comcast’s $70+ billion shareholder reward is big news, as is Sprint’s $25 billion in shareholder value added over the past two years. But nothing compares to the $400+ billion comeback made in 2013 by the Four Horsemen. As of April 19, 2013 (the last day before the first quarter earnings releases began), the Four Horsemen had lost over $90 billion in shareholder value. Apple was in freefall at $392 per share (it started 2013 at $532 per share and 2012 at $405 per share). Retail concerns were beginning to emerge about Amazon, keeping share gains to a minimum. And several analysts were beginning to fret about the upcoming Xbox One launch and the overall profitability of the Xbox business for Microsoft.
As the Indianapolis Colts showed on Saturday, the game is not over until all four quarters have been played. Apple demonstrated continued global demand for its products and services (including one of the most underreported stories of the Holiday – the finalization of their agreement with China Mobile which will cement TD LTE into all future iPhone designs). The Xbox One launch in November was constrained by supply, not demand. Holiday shoppers flocked to Amazon, especially in the days immediately prior to Christmas Day. And Google continued to develop and acquire software companies that complemented their core business.
As a result, The Four Horsemen did it again, creating $200 billion more in market value in 2013 than their telecom and cable peers. This is up sharply from $58 billion in 2012 and $88 billion in 2011. All told, nearly $350 billion in value has been generated over the past three years by the software-oriented companies who depend on the cable and telecom pipes for their livelihoods. Something to ponder as “experts” debate net neutrality in upcoming months.
Looking ahead, many of you will be attending the Consumer Electronics Show (CES) next week. While most of you are veterans of the “World’s Fair of Technology” (I saw this title in one preview article this week and it stuck), some of you may be heading out for the first time (my advice: wear comfortable shoes). This will be my fifth show and third straight year. I have seen the introduction of webOS, e-readers, 4K HDTV, next generation headphones and Ultrabooks. There will undoubtedly be a new product launch next week that will capture the hearts of many attendees.
Beyond the hardware launches, T-Mobile announcement, and what promises to be a rousing speech about the Internet of Everything from Cisco CEO John Chambers, there are three bigger themes to think about as you walk the floor or finish your second breakfast meeting:
- Mainstreaming. Were you wait-listed for a 4G HDTV this year? Hardly (see nearby picture – Amazon and Best Buy cannot give them away). Or have you been unable to start the new year without your new Ultrabook computer (i5-equipped Ultrabooks are less than $600 on Amazon.com). Rather than being mesmerized by the functionality of technology (as I was at the Samsung and LG booths in 2013), ask “How does this technology enter the mainstream?”
Those of you who are long-time readers probably remember an early column (2009) where I wrote about widespread adoption of HDTV as a result of Walmart’s electronics push. If the latest equipment cannot survive the “compared to current” test that Walmart buyers will undoubtedly make, how can volumes materialize?
Can a Samsung (or any other) smart watch really make an impact beyond the earliest of adopters for $300? Can Google Glass sell at 4x the price of Ray-Ban Vagabond sunglasses and achieve any volumes? Without Neflix 4K streaming (which is supposedly coming in 2014), will 4K TV sales be limited to a small addressable market?
Think about examples where products crossed the adoption chasm. When new Kindle versions arrived in 2010 at $139 (wi-fi only) / $189 (wi-fi and AT&T connectivity), they immediately became a staple for tens of millions of devoted readers. In 2012 and 2013, the cost of over the ear headphones dropped below $200 and as a result became more attractive to millions of Millennials. The iPhone migration story (with the exception of the plastic iPhone 5c) has been one of disciplined mainstreaming supported by strong wireless carrier support.
When you are walking the CES floor this week and are amazed by a product’s technical functionality, ask yourself “Could this product survive a side-by-side WalMart test?”
- Modifications. Hundreds of consumer electronics products undergo feature modifications every year, and many of those changes will be on display in Las Vegas. One of the transformations that is occurring is the tablet computer. Originally envisioned as a larger, higher-resolution display for stand-alone applications (as one of you called the original iPad “a 12 inch iPod”), the tablet has become the mini-computer that Microsoft hoped it would be.
When Samsung shows off its ATIV Tab computer, it usually shows the keyboard with the tablet (see picture above). This display would have been unthinkable two years ago – this was a tablet after all, not a glorified netbook. Combine this with the fact that Intel is aggressively pushing for both Windows 8 and Android on the same chipset (thanks to their investment in Bluestacks – see article here), and one can see the struggles that can and will occur as the phablet/ tablet/ laptop metamorphasis occurs.
One of the questions I will be asking as I walk the floor is “How have/ will the inputs into each device be modified as a result of centralized/ cloud computing? Can we get to one or two inputs per device?” Each input (included or excluded) has a discrete economic value.
- Messaging. This section has nothing to do with branding, but rather the confluence of messages that is starting to take place with the advent of the Internet of Everything (IoE). Has a garage light bulb been on consecutively for more than 48 hours? Send a message. Backup batteries on your home alarm system running low? Send a message. Every connected device will have a messaging system, and we will hear all about these at CES.
For each system, a few messages might seem innocent. But combine 30 systems generating 3-4 messages per month, and messaging loses its effectiveness. One of the ideas I have been contemplating is how to consolidate and prioritize messages across applications, creating a message portal and allowing users to filter the most important messages to a specific device. (If any of you would like to assist, I am willing to share in the responsibilities and rewards).
As I am walking the floor, I will be thinking “What type of messages will this device generate? Can these messages be combined with other information (e.g., troubleshooting information) to alert and possibly resolve electronics issues? How can and should messages be grouped across systems to produce a superior customer experience?”
I have already violated my brevity charter, but there’s a lot to think about as we enter 2014. Electronics manufacturers rarely get it right the first time. Many electronics products fail to consider the mainstreaming process in their initial design and distribution. And the IoE creates a lot of messaging noise which threatens its relevance and sustainability. That’s the lesson of CES – there’s always a problem to solve.
Next week, we’ll recap the show and begin the discussion of first quarter earnings drivers. Until then, if you have friends who would like to be added to The Sunday Brief, please have them drop a quick note to firstname.lastname@example.org and we’ll subscribe them as soon as we can. Happy New Year!
Happy Holidays from Raleigh, Charlotte, Greensboro, Dallas, and Fraser (CO). The snow is terrific this year, and, as a result of three consecutive powder days, this week’s Sunday Brief is being published on Tuesday. This will also serve as the last Sunday Brief of 2013.
Before diving into our last big trend, it’s worth mentioning the sale of AT&T’s Connecticut operations (a.k.a., the Southern New England Telephone or SNET transaction) for $2 billion to Frontier Communications, which was announced on Thursday. For those of you who do not remember the predecessor company, SBC Communications bought SNET for $4.4 billion in 1998.
There has been a lot of speculation about whether the former SNET properties would be sold, and what would happen to the 2,700 employees that will come with the sale. By my calculation (and validated with a reliable Sunday Brief reader), AT&T Connecticut’s $1.2 billion in revenues were generating slightly more than $400 million in EBITDA. Using this figure, Frontier paid a 4.9x multiple of current year expected earnings. While an “island” property (see picture), the Connecticut sale will slightly erode AT&T’s remaining wireline picture (AT&T had a total wireline EBITDA of 29% in 3Q 2013).
The question is “How does Frontier grow and eventually revive CT?” Given continued earnings pressure for all wireline providers, does this purchase look more like an 6-7x earnings acquisition? The cable compeitive environment is fractured (Cox, Cablevision, and Charter all have franchises in CT). Time will tell, but it seems as if AT&T received a decent valuation. It will be up to Frontier now to beat cable.
Over the last four weeks, we have explored several trends that will have meaningful impact on the telecommunications landscape in 2014 and beyond:
- The rise of third party paid data, which may include carrier-engineered bit prioritization
- The expansion of data “packing” and other compression techniques, in some cases driven by applications companies such as Facebook
- The transformation/ metamorphasis of the set-top box as cloud-stored content commands more value and as gaming systems gain in popularity
- The continued disproportionate value creation from live or real-time broadcasts
- (This week) Increased adoption of cloud-optimized software
Our last trend is broadly called “cloud revised software.” This is based on the premise that client or mainframe-based applications will continue to move to the cloud and be used by many different types of devices.
I get asked a lot by VCs and entrepreneurs “What’s the biggest problem no one has solved?” I stumbled on my answer for many months, but now I respond concisely: “Applications software is not efficient. Virtualization of inefficient code does not help the case for cloud, and in fact could weaken it. We need more efficient code.”
That’s right – most of the code written for consumption on desktops or laptops is useless in a virtualized world. The “apps on tap” concept sounded so good a decade ago, and many were persuaded to believe that if we could just have 10, 20, 50Mbps to the home or office desktop, the problem would be solved. Bandwidth improved (and in the case of many small and medium businesses, 100Mbps could easily be available), but code still remained large and unwieldy.
Let’s put things into perspective – a full download of the latest edition of Microsoft Office 2013 requires 3 gigabytes (GB) of your hard drive. This is up from 2 GB in 2008. Most users consume 10% or less of the total features of Microsoft Office (e.g., the Trace Dependents function in Microsoft Excel is an advanced feature for active spreadsheet editors, not your everyday spreadsheet reader).
Microsoft Office is not the only software company guilty of super-sized software. Adobe Acrobat reader (280MB), QuickBooks Pro (428MB), and even iTunes on the Mac OSX (221MB) are way too heavy for the cloud. Package software needs to go on a diet – fast.
For applications to make the transition to the cloud, they are going to have to be personalized for each individual user. How the CEO/ CFO uses Microsoft Access or Excel is different than a senior marketing analyst or a data scientist. If applications virtualization could be customized so that the executive office used certain functions and analysts used others, performance and customer experience levels would increase dramatically.
There are several companies, including Microsoft and Citrix, modifying their current software to make it more efficient. In fact the entire premise of Microsoft 365 is to eliminate the need for applications on devices that need to temporarily access a Microsoft application. While their movements have been good, one smaller company has attracted a lot of attention over the past several quarters.
Numecent was hatched out of a 1999 DARPA project run out of the University of California – Irvine (noted computer scientist Arthur Hitomi led the research). At that time, it’s primary purpose was to develop an applications delivery support system for connected computers (and you thought cloud computing was a brand new development). After several forays into the gaming market, the predecessor company went into receivership in 2008 and was purchased by Osman Kent, the mastermind behind 3DLabs.
What makes Numecent interesting is that through their study of thousands of software applications (and hundreds of thousands of users), they can predict which parts (they call these “pages”) you will use and which ones you won’t. When you want to use an application that would typically run 600MB of disk storage, Numecent will “right size” this application to 50-60 MB. If you happen to need a particular function not included in the basic package (e.g., the Trace Dependents Excel function described earlier), this will be delivered separately.
The best part of this is that Numecent performs their “cloud paging” process with the full support of the applications providers. In fact, Numecent has “cloudified” more than 10,000 applications. To see two terrific use cases for their technology see their university use case here and their CAD application use case here.
This is not a pitch for Numecent, but simply highlights the massive effort required to transition from premise-based to cloud-based services. OnLive, Citrix, Microsoft and a few other companies are jumping into the fray (OnLive has made terrific strides recently in gaming). Contrary to popular belief, virtualizing applications preserves the traditional license model and does not put it at risk.
Bottom line: Software libraries full of crap code. Inefficient interface languages cost processing seconds and ruin the customer experience. Poorly written database sequences cost tablet memory and time and stifle adoption of next-generation hardware. The cloud needs better code – now.
We will take a Holiday break next Sunday and kick off 2014 with a CES preview (I will be at CES on Tuesday (1/7) and Wednesday (1/8) but will not be speaking at CES this year). Until then, if you have friends who would like to be added to The Sunday Brief, please have them drop a quick note to email@example.com and we’ll subscribe them as soon as we can. Have a Happy Holiday!
A wintery hello from Atlanta and Dallas. The DFW metroplex is digging out from a substantial power outage that impacted over 270,000 homes (including ours). Nearly 80,000 homes are still without power after more than two days of outages. That may actually drive more people to the malls, and help to stimulate the economy (I’ll also attest that it’s driving a lot more neighborhood interaction as folks look out for each other). And, as the picture shows, tree services will thrive, along with sales of chain saws, and a spike in ice melt purchases.
Weather aside, I received many comments from folks on last week’s column (for those of you who are behind, we highlighted data prioritization and packet efficiency as two emerging trends in the telecommunications space). I erroneously stated that “none of the wireless carriers had made investments in data compression technology” and was reminded by my friends (and former University of Virginia Darden classmate Mark Davis) that Citrix’s Bytemobile product has been implemented by one of the large carriers (name not disclosed) as well as several other smaller North American carriers. Bytemobile was purchased by Citrix in 2012. More on the ByteMobile architecture here.
Before diving into in-home hubs, many of you sent me a note asking for my thoughts on AT&T’s Mobile Share Value plans annoucnement this week. For those of you who missed it, AT&T announced a discounted data rate plan structure for customers who do not want a traditional 2-yr contract (AT&T Next, smartphones off plan, etc.). More on the announcement here.
It’s important to note that the account changes occur at the device level, which means that we can add the “teen” smartphone (e.g., Mom’s 2-yr old iPhone 4) to the family’s ever-growing bucket of data, plus unlimited talk and text, for $25. Previous reporting and analysis has focused on the overall pricing effect, but not the mechanism – the important thing to note is that AT&T did not change their standard retail pricing for shared data services. They only changed the unlimited voice and data pricing for off-contract and/other compatible devices that connect to the AT&T network. Here’s the rate plan for all Mobile Share plans:
This is not the beginning of a pricing Armageddon as many imply. If AT&T wanted to create an Armageddon to attract gross additions, they would pull different levers (such as reducing prices on the data rate card above). What this indicates is poor performance of AT&T Next, as well as the realization that the iPhone 4S (with cover) is lasting a lot longer and meeting the basic Internet browsing needs of a part of their customer base. The concept of “no money down” is as American as apple pie. AT&T’s Next product allowed faster upgrades but offered no additional incentive, creating an out of pocket cash increase for a deferred benefit.
The new Mobile Shared Value plans soften that blow. They really do nothing other than that. Because the additional phone can be added at the account level (as opposed to having to establish a new account), the Mobile Shared Value plans improve AT&T’s retention capabilities (which, as we saw from 3Q results, might be needed).
It is very unusual to introduce a new pricing plan in stores, through customer service, and on-line in December. Transaction processing is the focus of an already shortened Holiday season. T-Mobile’s Simple Choice pressure is not going away. But AT&T is responding to this pressure with a targeted strike, not an atomic bomb.
Verizon is not responding at this time because switching from Verizon to T-Mobile involves a device change – it is not as easy as a SIM-card swap. Here are Verizon’s current Share Everything data plan options:
Verizon could respond to this with a “double data” promotion starting in 2014 for all rate plans over 4GB. They used this promotion to accelerate movement to LTE plans (and away from unlimtied plans) a few years ago (analysis here). This would have a plan consolidation effect (multiple-device families or small businesses with multiple carriers could consolidate to Verizon) with minimal impact on overall economics (here’s GigaOM’s story on Verizon’s recent deployments of AWS spectrum to better meet LTE demand. With unit costs of $5-6/ GB for LTE (before spectrum cost allocation), there’s plenty of room for a yield/ volume commitment trade).
Bottom line on Mobile Shared Value: It makes perfect sense for AT&T to respond with Mobile Share Value plans. And it makes perfect sense for Verizon to respond with increased AWS deployments and no pricing plan changes at this time. Verizon’s next move will tap into the elasticity of demand and consolidation of small business and family plans, and, as a result, will have a structural (not tactical) industry impact.
On to this week’s emerging trend, in-home Hubs (or “Who Needs a Set-Top Box?”). Of the trends we will cover this year, this one has by far the most compexity and potential. The triggers for including this trend were: 1) Xbox One was introduced in November, and Microsoft sold more than 1 million of these devices in the first 24 hours; 2) In August, Time Warner Cable announced that they would offer the TWC TV app over the X-Box 360 (and Roku and Samsung Smart TV devices) in 2014.
While this has been described by some industry analysts as a “cute way” to get into the hearts and minds of teens (who are already shelling out $60/ year for an Xbox Gold membership), I see this as one intermediate step to a much bigger trend – the end of cable hardware.
Entertainment center real estate space has been shrinking over the past decade, allowing more room for HDTV displays. We have already eliminated the component stereo system, thanks to iHeart Radio, Pandora, iTunes, and Google music. That rendered CD and cassette tape racks obsolete, not to mention stereo component shelving. We are short strokes away from removing the next component – the set-top box.
There are two main reasons for having at least one set-top box in the home: authentication and storage. Determining access to certain channels is accomplished through software stored within the set top box hardware, and, thanks to archane rules about network DVR capabilities and lots of legal wrangling (see history here), recording of cable programs is accomplished locally as well.
Enter the Xbox and Sony’s PS4 home electronics with 8GB of RAM, 500GB of storage, and 8-core AMD or x86 processors. Without considering the need for game storage, 500GB allows for approximately 70 hours of HD content.
For $70 additional dollars per home (or about $2/ mo. over the useful life of the server), Time Warner Cable or Comcast could provide storage capacity in the local market that would accommodate more than 700 hours of HD content (and a lot of Xbox games). Local terabytes can be securely stored, and content providers have no legal rights to block access (see preceding link). It would produce a competitive advantage for cable companies over satellite.
The death blow to satellite comes with the next generation of TVs. As Ethernet jacks become more prevalent across HD TVs, and as IP Gateways decrease in cost, the IP Gateway could easily become the sole device in the home with everything else (programming guide, DVR functionality, etc.) becoming a stored or cloud-based application.
Bottom line: The original reasons for the cable set-top box/ DVR have been replaced by advanced gaming solutions and the rise ofsecure high speed Internet connections. With the strategic focus shifting from video to Internet, cable companies will gladly jettison another piece of equipment to manage for higher profitability and customer satisfaction.
Cable DVR, you are about to become as relevant as my AM/ FM tuner (which hasn’t made it out of the box since our move to Dallas). It’s only a matter of time.
Next week, we’ll continue our analysis of key trends. Until then, if you have friends who would like to be added to The Sunday Brief, please have them drop a quick note to firstname.lastname@example.org and we’ll subscribe them as soon as we can. Have a terrific week!