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Monthly Archives: February 2014

Winning the Gigabyte Game

charlotte skylineWarming February greetings from the Tar Heel and Lone Star states.  The earnings train kept rolling this week as Charter, Dish, and DirecTV earnings were announced.  As we will discuss in next week’s recap of the wireline industry, Charter had the greatest opportunity to grow, and they did not disappoint. 

The Week in Review:  WhatsApp

First, a recap of the week.  On the mergers and acquisitions front, Facebook scooped up WhatsApp for $16 billion ($19 billion if you include $3 billion in Restricted Stock Units used to retain WhatsApp employees).  At $35.55 / active user, that’s a rich premium (WhatsApp subscribers pay a $0.99 fee for the messaging platform), especially considering their valuation less than a year ago when they raised their C (really B) round was $1.5 billion or$3.33/ today’s user.

whatsapp growthWhy the jump?  450 million active users (growing one million every day, and likely more since the announcement as this article explains), with 72% of them using the service every day.  Those bases do not come along every day, and in the hands of someone like Apple (or Google), the potential to interrupt Facebook’s magnificent run (stock up 25%, market cap up $35.3 billion since January 1) would be great.

The big winner here is Sequoia Capital, who was the sole backer of WhatsApp ($58 million in total investment now worth approximately $3 billion, an amazing return for its limited partners).  As this New York Times article shows, this is not the only time Sequoia has had a big payout:  YouTube, Instagram, PayPal yielded billions of additional returns to their partners over the past twelve years.

GENBAND also made a major announcement this week, buying telecom software and services provider uReach Technologies for an undisclosed sum (announcement here).  Combined with their purchase of Fring, the opportunity to white label professional consumer (“prosumer”) and small business offerings to Comcast, Verizon and others is real.  It will be interesting to see how deeply they integrate the application layer with the control/operating software layers to improve fring’s and uReach performance.

Finally, the Verizon acquisition of the Vodafone stake (45% of Verizon Wireless for $130 billion) finally closed on Friday (the announcement of the completion of the deal is here).  Vodafone is going to distribute $85 billion of the proceeds to shareholders and will likely use the remainder to strengthen their global mobile operations.  The transaction is immediately accretive to Verizon shareowners.

It also creates one Verizon.  Many of us have been involved with “One [Insert Company Name Here]” initiatives in the past.  They tend to be euphemisms for headcount reductions.  While there will be reductions in Verizon’s workforce (specifically sales team alignment), this is going to be an asset leverage/ utilization exercise.

What Changes Are Ahead For Verizon FiOS and Wireless Customers? 

In the short run, Verizon will likely focus on three questions:

  1. Verizon Business Continuity Service PricingAre there enterprise customers that need mobile data solutions but have been held back by conflicting compensation or pricing structures?  The answer to this question is undoubtedly “yes” and it begins with the connection to the branch office.  Verizon’s Business Continuity Pricing starts at $0.40 per MB (not a misprint) and goes to $0.02.  Home Fusion needs a Branch Fusion counterpart with eligible and contributory per GB pricing of $20/ month and $6-7/ GB.  That would create a $125-150/ month connection to the Corporate LAN.  It’s low hanging fruit and a prime example of where integration meets coverage.
  2. Are there FiOS families (and small businesses) who would convert the entire family for an extra 10GB of Share Everything data (or provide a free FiOS speed upgrade for all new/ renewing Verizon Wireless + FiOS customers)?  Currently, Verizon wireless/ FiOS bundlers save $5-11 in monthly service charges.  $60-140 in annual savings per family is great, but 10 GB of additional data per month would be even better (and would drive up purchase of Verizon-connected tablets watching FiOS content outside of the home).  Overage concerns would be eased, and, with a Verizon Wi-Fi enabled router that could automatically switch one of more family members to the macro network because of congestion/ outage, customers would be happier.

      current Verizon capabilities 3.  How can Verizon make their current cloud offerings meaningful to every home and business user?  They started to show their hand on cloud integration (25GB included                    storage per line) in their MORE Everything pricing plan change.   Could an advanced network DVR be in the works?  The current offering is good (see features chart), but can                  wireless integration make it even better?  Could (a portion of) a DVR-recorded show be delivered to the phone for easy viewing?

There are a lot of changes ahead for Verizon in 2014, and we will hear more on these changes from Lowell McAdam on Monday.  Their trump cards are wireless data and FiOS speeds.  Wireless bundles like those described in question #2 above drive more traffic to Verizon and make it more difficult to switch.

The Common Bond:  Gigabyte Growth

The following chart shows the penetration of homes passed for Verizon FiOS as well as four large cable companies (Cox and Brighthouse are not included as they are private, but most analysts project their data penetration rate to be in the 45-55% range).

HSI Penetration chart

 

Verizon has had a terrific run over the past three years, growing customers (the numerator of the penetration ratio above) even with 15% growth of homes passed (denominator).  They have a long way to go, however, to catch Cox, Cablevision and Brighthouse.  Just as T-Mobile challenged the wireless industry in 2013 and 2014, Verizon needs to disrupt cable.

To win the Gigabyte Game, Verizon needs to focus on three primary characteristics:

  1. Extensibility of content using their wireless asset.  Use wireless to make it intuitively easy to pick up where I left off.  Lots of work to do here, but very possible.
  2. Expandability of a consistent Internet experience using Home Fusion.  Commit to broadband everywhere and drive applications that reinforce this capability (e.g., video servers that easily connect Verizon wireless and FiOS residences and businesses around the country.  See note above about GENBAND’s integration if you need other examples).  Verizon should be the home conferencing leader, not Apple.
  3. Extra savings and promotions for being loyal.  The concept of a “reward wallet” has been used successfully across many industries.  Verizon could easily extend this to FiOS Internet customers.  One month, it’s free beIN HD (for rugby and soccer/ football matches), which could be followed by HBO GO another month, and even Amazon or Netflix expenditures over a long summer vacation.  Accumulating balances allow families to save and they promote transactional choice (as opposed to capturing customers in a long-term subscription).

While regulators and advocates fight over the size and shape of a combined Comcast/ Time Warner, Verizon has the perfect opportunity to grow as an integrated company.  They will need to shed conventional telco wisdom and ask “What would T-Mobile do?” to win the Gigabyte Game.

Next week, we’ll recap Mobile World Congress (for those of you who are there, wouldn’t mind your thoughts on what surprised and disappointed you).  Thanks for the many comments on last week’s article (I think we topped 100 – too many to respond to this week, but each one was very thought-provoking).    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 (and they can go to www.mysundaybrief.com for the full archive).  Have a terrific week!

Ceteris Paribus and the Law of Unintended Consequences

Mount_Rushmore_(1)Happy Valentines Day and Presidents Day weekend from Dallas, Texas.  It’s been one of those milestone weeks in telecom that challenges our commitment to keep this column brief.  First, Sprint announced earnings that surprised analysts at first, then met expectations (more on this later in the column).  Second, in the continuing development of wireless pricing for families and groups, Verizon doubled the data allotments for their smaller Share Everything buckets (as predicted in last week’s Brief).  The new plans are appropriately called MORE Everything (see release here). 

But it was the Olympic-sized acquisition by Comcast that stole the headlines this week, sending analysts, journalists, and advocates into overdrive.  The New Republic subtitled their article “Comcast Time-Warner merger will create Orwellian monopoly.”  Twitter went bonkers with comments (click here for a sample).  If that wasn’t enough, here’s the quote from The Free Press news release opposing the merger:

“No one woke up this morning wishing their cable company was bigger or had more control over what they could watch or download. But that — along with higher bills — is the reality they’ll face tomorrow unless the Department of Justice and the FCC do their jobs and block this merger. Stopping this kind of deal is exactly why we have antitrust laws.  Americans already hate dealing with the cable guy — and both these giant companies regularly rank among the worst of the worst in consumer surveys. But this deal would be the cable guy on steroids — pumped up, unstoppable and grasping for your wallet.”

Ouch.  A fire-breathing, steriod-doped, energy-drink infused cable technician reaching for my wallet?  It’s time to tone down the rhetoric.

Rather than focus on the obvious advocacy group reactions, let’s project the wish list of another powerful force in Washington:  AT&T.  What would they want to see out of a Comcast/ Time Warner merger?

AT&T competes directly for High Speed Internet (wired) customers with Comcast/ Time Warner in many large markets:  Los Angeles, Chicago, San Francisco, Dallas, Atlanta, Houston, Miami, and much of Ohio to name a few.  AT&T, however, also competes for the low end of the video “cord cutting” segment with their wireless offerings (as we saw from last week’s column, there might soon come a day when their 20GB family plan offering is a cheaper and more mobile double-play than Comcast’s).

comcast time warner combined mapAT&T will want equal access within the home for wireless customers using Comcast’s Wi-Fi service.   Specifically, they will want to ensure that no bit priotization occurs for any packet from the content server through the end user device (e.g., an AT&T smartphone).   They will also want to establish a limit on programming fee increases that NBC Universal can assess over the first decade of the merger (enabling a competitive U-Verse offering in the cities mentioned above).

These are predictable requests, but last thing AT&T will want is big.  AT&T will likely argue that simply based on size, the new Comcast should be regulated as a common carrier (or that AT&T should receive the same “light touch” regulatory treatment as cable companies do today.  It is extremely doubtful that the “light touch” argument would receive serious consideration from the FCC).

If Comcast is declared a common carrier, they would be subject to the provisions of the 1996 Telecommunications Act, which would mean that it could be obligated to provide unbundled network elements (connections to homes and businesses) at competitive/ cost-based rates.  While this sounds good in practice, cable networks are not made for unbundling.  Hundreds of millions of dollars would need to be spent partitioning (on a physical and systems basis) customer connections.

special access terminologiesWhat would the concept of an unbundled cable network look like?  Who would have access to the cable box on the side of an apartment building?  How long would a new business connection have to be in place before the cable company would be obliged to make the loop available on an unbundled basis?  What would the cost basis be for determining a wholesale price (specifically, which components determine long run incremental cost in a DOCSIS-based network)?

While many of you are reaching back for your 1996 Telecom Act dictionaries (EELs, UNE-P, TSLRIC, IOT, POI and all of the rest of the crazy terms created), think about the benefits of this approach to AT&T.  It would force Comcast to spend a lot of money on building wholesale systems and processes (versus rolling out DOCSIS 3.1 or more fiber to buildings).  It would open up an access alternative to Verizon or CenturyLink in New York, New Jersey, Philadelphia, Washington DC, Boston, Seattle, Salt Lake City, Denver, and Phoenix.  And, for cell backhaul, Gigabit Ethernet circuits just got a lot cheaper.

While the public conversation is being directed to three million (or more) line divestitures, within the FCC they smell the opportunity to regulate without the messy process of mid-term legislation.  If the law of unintended consequenses unfolds in this manner, the ultimate winner from a Comcast/ Time Warner Merger might be AT&T, not Comcast.

On to Sprint’s earnings and the state of the wireless industry.  After listening to Sprint’s earnings call, the phrase ceteris paribus kept running through my head.   This is a latin term commonly used in economic circles when one economic concept is being analyzed:  Ceteris paribus, interest rates will rise when the Federal Reserve enacts a tightening of monetary policy.  It’s a way to say “keeping everything else constant.”

I wanted to insert that phrase many times in the Sprint earnings release this week as they were outlining their second half forecasts:

On churn levels and their relationship to Vision deployment: “While construction is underway, churn elevates above pre-Network Vision levels. As we reach approximately 70% completion of the voice and 3G modernization, churn moderates to prior levels, and as we move from 70% toward 100% completion, churn drops below the pre-construction levels.” This is a classic ceteris paribus comment.

sprint network vision churn improvementDid this assumption hold in January when several markets reached the 70% completion level and T-Mobile rocked the wireless world with aggressive Early Termination Fee and Phone Buyback offers?  Dan Hesse, Sprint’s CEO, indicated that wireless competition was already intense in 2014 (his exact quote was “There’s a very strong porting credit offer that’s very rich for our industry historically”).  January’s T-Mobile offers and February’s AT&T Family Plans were exogenous variables (see link here for definition).   They came from left field.  These are the events that will likely result in statements like “Our postpaid churn would have been reduced to 1.7% but continued historically rich porting credit offers resulted in a 1.85% rate for the third quarter.”  If everything else had stayed constant, the downward slope of the churn line would have been greater.  But it wasn’t.

This is not a criticism of Sprint, but of the analyst community that follows the company (and specifically those in the analyst community who fail to understand the sustained seismic power of T-Mobile’s ETF porting credit offer).  Right after the 70% quote was made above, Sprint made the following statement:

Absent significant changes in the competitive environment, and acknowledging the normal seasonal quarterly patterns in industry churn, we expect overall postpaid churn to remain elevated in the first half of 2014 and show gradual improvement beginning in the second half.

Because Sprint will have deployed Network Vision, a true “forklift upgrade” of both their 3G and 4G networks, and also because Sprint will have largely completed their Clearwire integration (which means purging the network of high-use data-only customers), churn should begin to improve in the second half of 2014.  That is, unless there are significant changes in the competitive environment.

Sprint’s success will be driven by their ability to generate consistent cash flow growth from increased capital investments.  They are making the right network decisions, but the thought that completion of one mid-year milestone (Network Vision covering 250 million people) would automatically result in the improvement of a fundamental operating metric ignores the weekly headlines that clearly signal significant changes in the competitive environment.

An awakened AT&T who spent $40 billion over the past two years (five times Sprint’s projected 2014 capex spending level) improving the performance of their networks could trigger a significant change in the competitive environment.  Verizon’s rollout of AWS across their territory in the first half of 2014 (basically adding capacity at a $2-3/ GB incremental cost) could trigger a significant change in the competitive environment.  And T-Mobile – what they will do in the second half of 2014 is anyone’s guess (they have not disrupted the medium and enterprise business environment – yet).

Ceteris paribus.  Two words that mean a lot to economists… and to understanding Sprint.

Next week, we’ll wrap up both the wireless and the wireline discussions with some hardcore numbers and analysis.  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!

Wireless Pricing Dynamics- What Happens Next?

paris picHappy February from Paris (France), Houston, and Dallas.  This has been a very dynamic week in the telecom industry as events unfolded on multiple fronts.  To last week’s Sunday Brief (Time Warner Cable), it is rumored that Charter will run a separate slate of directors to be nominated to Time Warner’s Board.  This should happen next week.  While Charter has not raised its offer for TWC from $132.50 , a recent The Wall Street Journal (subscription required) article suggests that the bid would need to be raised to support many TWC investors.  Another interesting dynamic to watch next week is to see if Comcast endorses any Charter Board slate announcement. 

On the spectrum front, AT&T announced that it would be purchasing AWS spectrum from Cable One.  20MHz is a healthy dose of spectrum for most of the Cable One coverage footprint (the FCC filing did not go into details on which properties were covered by the announcement, but Cable One’s cable footprint covers areas such as Winslow (AZ), Joplin (MO), Boise (ID), Sioux City (IA) and Texarkana (TX/AR).   For a complete view of Cable One’s wireline holdings, the FCC map can be found here.  Combined with AT&T’s January spectrum purchase announcement with Aloha Partners (which covered 50 million population in fourteen states), AT&T is putting together a very strong AWS spectrum position.

J D PowerThis week’s J.D. Power press release had some additional good news for AT&T, finding them slightly ahead of Verizon Wireless on wireless customer service.  This is the second time this year that AT&T has won the J.D. Power customer service award.  The chart at left also spells some troubling news for Sprint, whose full service rankings were basically identical to those of Metro PCS (now a T-Mobile brand).  The last finding in the report did not go unnoticed by one of the Patterson Advisory Group clients (StepOne).  It says that “More than one-fourth (26%) of the re-contact calls lasting more than 25 minutes are the result of a previous customer contact that was not resolved either by visiting a retail or carrier website.” The integration of web and care has a long way to go, and StepOne has an extremely innovative way to bring contextual care to customers and alleviate many of those long-duration calls.

This big news this week (which was technically announced on February 1) was AT&T’s introduction of their new family/ small business plan pricing structure.  AT&T has organized this new plan structure around 10 GB of shared data, which could be divided between ten lines (all plans include unlimited voice and text).  There is no throttling after 10GB – additional data charges of $15/ GB are applied.  There are also no individual line limits or allocations – the teens in the family could use 3GB each and not be throttled.  Their messaging is simple – bring a family (and their devices) to AT&T, get a $40 plan per line (for four lines) that will likely cover data needs for most families, and get a $100 bill credit for every line you bring.

When a customer goes to www.att.com to sign up, things get a lot more confusing.  The simplicity contained in the news release is replaced by a conucopia of options:

AT&T pick data plan

Instead of one plan bundle, the customer now needs to choose each component (I am hoping this is an easier task in-store or through the phone).  Then, the customer is presented with a new question not outlined in the news release – will your family really use 10GB of data every month?

AT&T pick smartphone vs dataThis seems like a subtle point, but charging different voice/text rates based on the amount of data families use is confusing to the customer.  Furthermore, if a customer chooses 8 GB of data (across four lines), their bill will be $30 higher ($190/ mo.) than if they had chosen 10GB with the same four lines.  In fact, a 4GB shared plan costs more ($170/ mo.)than a 10GB plan.

The complexity does not stop there.  If you are a current AT&T customer, you are not eligible for a bill credit.  But if you leave AT&T (for T-Mobile), and return to AT&T in six weeks, then a new credit will apply for every line activated.  Termination fees covered by T-Mobile, and bill credits issued by AT&T.   This is the “new world order” for wireless.

The Bottom Line:  Ignore AT&T’s confusing website – it’s all about 10GB of data and four lines of unlimited voice/text for $160/ mo.  It’s a lot of data for four lines today, but probably not a lot in a year or so.  To the average family, that will look enough like “unlimited everything” to come to a $40-unlimited-per-line conclusion.  To AT&T, the Mobile Value Plan customer looks like a “subsidized” $65 ARPU customer (see table above), which is line with their current postpaid ARPU of  $66.35.  Not much changed, yet everything seems to have changed.

How will other carriers react to AT&T’s new plans?  That question was partially answered by Sprint this week, as Boost Mobile introduced new plans at $35/ mo. which feature unlimited talk/ text and 2.5 GB of unthrottled LTE data.  That rate goes up to $50 after the six month promotion has ended.

Virgin Mobile, another Sprint prepaid brand, already offers a 2.5 GB data plan for $35 that includes 300 voice minutes.  They are responding by lowering the entry point of mobile devices (neither Virgin nor Boost offer the “zero down” T-Mobile plan), with new CDMA-capable iPhone 5s devices selling for $440, a full $210 lower than Wal-Mart’s Straight Talk phone price.

Most importantly, Verizon has not responded with any family plan changes.  Wireless Week ran a story on Friday outlining a win-back/ loyalty offer that has been cited on several Verizon Wireless service blogs this year.  It’s unclear how well known the $60 unlimited voice/text + 2GB of data offer was to current Verizon customers prior to the article, but it’s a lot better publicized thanks to their article.

verizon double data promoVerizon will have to respond to AT&T’s offer.  Network coverage and speeds are very similar for the two companies, and, while Verizon and AT&T use networks with different underlying technologies (here a SIM-card swap is not possible; it is for AT&T customers switching to T-T-Mobile).  My prediction is Verizon will resurrect their “double data” plans, creating a $240/ mo. plan for 4 unlimited smartphones and 12GB of data.  That $240 contains subsidized devices, creating a “comparable” plan for AT&T’s Mobile Value Plans of $140-160 ($20-25 of embedded subsidy per month).

Verizon could also include a pay service in their higher data usage bundles, such as Pandora One or Spotify’s Premium Package.  Or they could respond with a deeper discount for customers who bundle their FiOS and wireless services, especially for family plans (e.g., $30 combined bill discount for all family plans of four lines or more).  While this promotion would have a limited impact to their base, it would solidify a “Verizon One” message.  (So would 2GB of unrated VZW streaming per month of FiOS content to any Share Everything device).

My money is on a Verizon Wireless Double Data promotion.  The plan is already in loaded into Verizon’s systems and service reps know how to offer it in stores and over the phone.  Whether it’s as generous as described above is anyone’s guess, but Double Data would create substantially less confusion than AT&T’s Mobile Value Plan and dramatically improve usage and retention.

At the end of the day, there are three foundational battles being fought on wireless plan pricing:

  1. Whether consumers will opt for throttled individual or pooled data plans;
  2. Whether Verizon and AT&T can command a premium for their broader and deeper networks; and
  3. Whether device pricing can be fully decoupled from postpaid service plan pricing.

The first shots in this battle came from T-Mobile last March with their launch of Simple Choice plans.   AT&T has (finally) struck back, and Verizon will likely follow.  The “new normal” is $40 per line for four lines of unlimited voice/text and 10 GB of shared data (and no device subsidies).  Sprint will likely provide a Framily plan update when they announce earnings this week, and further Sprint-branded changes are likely to come soon.  We are just getting started on family plan pricing changes.

Next week, Sprint will announce earnings and round out the overall “big 4” wireless picture.  There will be a lot to discuss after that announcement.  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!

Maxxing Out- Will Faster Growth and Better Networks Preserve Time Warner Cable’s Independence?

groundhog-day-2012-1Happy Groundhog Day from New York City, Philadelphia, Washington DC and Dallas.  Spoiler Alert – there will be six more weeks of winter, and my Rocky Mountain friends are loving it (nearly three feet of new power in the past three days)! 

This week was filled with earnings news.  Apple, Amazon, AT&T, Comcast, Google and Time Warner Cable all posted fourth quarter and full year results.  There isn’t enough time to discuss each of these reports in detail, but here’re several items to think about:

1. AT&T was not kidding in November 2012 when they indicated they were going to spend a lot of money on Project VIP.  After spending $25 billion in 2013 in cap ex and spectrum, AT&T announced that 2014 and 2015 would likely bring an additional $20-21 billion in capital spending – per year.  With an increase in taxes, this results in free cash flow of $11 billion for each of the next two years.  Assuming $9 billion or so of dividend payments, that leaves about $2 billion of cash to buy spectrum, other assets, or pay down nearly $75 billion in short and long-term debt.  Project VIP is one of the biggest bets ever made in American business history.   While we have written on the required returns on this incremental investment many times (see our October column called “AT&T’s $61 billion promise” here), the new revenues and profits required to make it a winner for shareholders are daunting.

2. Apple, Microsoft and Google have amassed over $300 billion in cash and marketable securities.  Google has nearly $59 billion, Microsoft $84 billion and Apple has over $159 billion ($118 billion of this is considered “long term”).   To satisfy a 10% cost of capital (and, since each of these companies has little debt, the likely expected return is higher than 10%), over $82 million in after-tax income is required each day.  Apple is stepping up its pace of acquisitions to use some of its excess cash, according to Apple Insider, but $525 million in acquisitions in the fourth quarter represents about 2 months of interest on $159 billion at a 2% annual rate.

 

Some of the cash on the balance sheets is held overseas to avoid double taxation.  A recent bi-partisan proposal to allow these companies to repatriate a portion of overseas cash (through an infrastructure investment vehicle) is making its way through the House and Senate.  More on these discussions and initial terms of the bills are found in this Financial Times article.

comcast revenue growth3. Comcast is really hitting its growth stride, and other companies are beginning to take notice.  Comcast announced earnings last Tuesday, and, with the exception of advertising spending, they posted great revenue growth across the board.  Of particular note is the growth of Comcast Business, who posted 25% growth for the fourth quarter and 26% growth for the year.  Said differently, Comcast Business comprised 8% of total company revenues for the fouth quarter but accounted for 33% of total revenue growth.  And this is not a low margin business.

To put Comcast Business’ size into perspective, they are more than twice the size of the largest independent CLEC, tw telecom ($1.5 billion in trailing twelve month revenues).  But Comcast’s annual revenues are still less than half the size of AT&T’s small business and alternate channels business ($6.98 billion), a clear signal that they have a long growth runway.  If the news reports are true that Comcast is willing to bid for the East Coast assets of Time Warner Cable (including New York City) as a part of a Charter/ Comcast joint acquisition, then the resulting footprint would prove attractive to East Coast enterprises who currently view Verizon and AT&T as the only viable choices.  (For those of you who aren’t up to date on your cable geography, Comcast would add New York City, Raleigh/ Durham and Charlotte to Boston, Philadelphia, Baltimore, (most of) Washington DC, Richmond, Atlanta, Jacksonville and Miami).

4. Amazon raises prices on their Prime service, and no one is surprised.  When companies raise prices every year, consumers get ticked off – just ask cable and satellite subscribers.  However, when Amazon announced a likely 25-50% increase in their Prime membership cost during their earnings call on Thursday, no one really blinked.  Here’s the full text from Tom Szkutak, Amazon’s CFO about the price increase:

We launched Prime in the U.S. nine years ago with free, unlimited two-day shipping on one million items in an annual membership priced at $79. Today Prime Selection is growing to over 90 million items.  Even as fuel and transportation cost have increased, the $79 price has remained the same. We know the customers love Prime as the usage of the shipping benefit has increased dramatically since launch. On a per customer basis, Prime members are ordering more items across more categories with free two-day shipping than ever before.  With the increased cost of fuel, transportation as well as the increased usage among Prime members we’re considering increasing the price of Prime between $20 to $40 in the U.S.

What a candid and frank assessment of the marketplace and the product.  Keeping everything out in the open is critical to retaining their estimated 19 million Amazon Prime customers.  However, as these two articles point out, analysts are as confused about what Prime represents as many of Amazon’s customers.  See the two different perspectives from CBS Marketwatch (a free shipping focus) and CNET (with a Netflix comparison).

neustar chart5. Neustar’s announcement this week shows how dependent companies (and their investors) can become on government contracts.  On Thursday, Neustar issued a press release indicating that their revised proposal to the North American Portability Management group submitted last October would not be considered.  This places the future of their Number Portability Administration Center management contract (which expires in July 2015) in jeopardy.   Even though Neustar has diversified in recent years (52% of total revenues are non-NPAC), their stock took a nosedive to levels not seen since July 2012.

On top of the earnings stories, there are a host of Super Bowl-related telecom stories, including Verizon’s demonstration of their LTE multicast capabilities (which feature Sequans chipsets.  Full disclosure – I am a mamber of the Board of Directors of Sequans) and also the revelation that clean-cut, no-cussing Tim Tebow would be the start of a “no contract” T-Mobile ad to run during the Super Bowl (the longer version of the ad is here).

But the big news of the week is from Time Warner Cable.  On a 90-minute conference call, the company delivered its counter-offer to the shareholders in the form of a three-year plan led by a comlete local infrastructure makeover dubbed  “TWC Maxx.”

Maxx consists of the following:

Picture1

Like AT&T’s Project VIP, TWC Maxx is a “bet the company” strategy focused on delivering better infrastructure to homes and businesses.   But Time Warner’s new initiative goes a step further, replacing all of the critical equipment inside of the home (which will drive up consistency and drive down costs).  This will apply to digital conversions in Los Angeles as well as new HD boxes for every HD video customer.

In a follow-up announcement, TWC released the speed changes that will result from Maxx.  Most notably, Basic Internet, which is the most commonly ordered speed in the TWC Triple Play, will see download speeds increase to 10Mbps from their current 3Mbps (Comcast’s most common Internet package features 25Mbps and Charter’s tops out at 30 Mbps, although Comcast and Charter advertised Triple Play packages cost $10-20 more per month then the TWC $80 introductory offer).  However, the highest speeds will increase from 30 and 50 Mbps to 200 and 300 Mbps, presumably with no price increase.  These new speeds will make TWC’s wideband offerings much more competitive than anything Comcast or Charter have on the market.

tec improving trendsThis leads current Time Warner investors to ask “Which plan should we believe?”  Charter is promising better operational management, but the monthly figures Time Warner Cable shared (see above) clearly show a recovery.  The plan presented by senior management is aggressively growth-oriented, but may not fully consider the corresponding competitive response of a VIP-enabled AT&T.

Without a doubt, Time Warner Cable gave its current shareholders something to think about.  The plan they presented focuses on revenue growth through better networks and products, which, with the capital levels they project, will be welcome in markets such as New York City and Los Angeles.  But will a sweetened offer with a higher cash component be more attractive?  Can investors lock in a partial return on the tremendous (431%) stock price apprecition Time Warner Cable has had over the past five years?  It’s a question that will likely be answered over the next few weeks as Charter (perhaps with Comcast) is likely preparing a new slate of directors to affect a hostile takeover (see Reuters article here).

For more details and a full copy of Time Warner Cable’s presentation, click here.  The Seeking Alpha transcript of the conference call is here.

Next week, we’ll dive in a bit deeper to AT&T’s earnings and preview Sprint’s earnings announcement of February 11.  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!