Greetings from Philadelphia and Dallas. For those of you who share a strong interest in the outcome of the Masters golf tournament, all eyes will be on 20-year old sensation Jordan Spieth today as he goes for his first green jacket. Jordan is a graduate of Jesuit College Prep here in Dallas where my son, Jimmy, currently attends. We’ll be cheering extra hard for you, Jordan!
As a quick reminder, we will take a one week hiatus from The Sunday Brief on April 20 and return with a full analysis of first quarter earnings on April 27. If something notable in Google’s April 16 earnings call occurs, we’ll post our analysis on www.mysundaybrief.com and cover in the April 27 earnings release. I will also be posting some thoughts on smartwatches on the website as well (the events of the past two weeks do not allow enough space to cover the topic in 500-word chunks). Based on a quick glance at the earnings calendar (April 22 = AT&T and Comcast; April 23 = Apple; April 24 = Amazon, Microsoft, Time Warner Cable, Verizon), there will be plenty to talk about in two weeks.
To recap a couple of themes that we have discussed since the beginning of the year, first quarter earnings are going to highlight a) the disruptor role of T-Mobile in the wireless marketplace (leading to healthy gross and net additions for them, as well as for AT&T, but weaker additions for Verizon and Sprint); b) improvements in the economy, but particularly in the housing sector (and particularly in the Southeast and Midwest) driving additional broadband speeds and penetration; and c) continued low interest rates fostering additional consolidation/ acquisition from companies who are generating cash.
T-Mobile Levels the Playing Field on Tablets
I remember when T-Mobile released their Simple Choice pricing plans last March. My first thought was “brilliant” – they were going to separate the smartphone subsidy from rate plan pricing. “Zero down” made sense and was a terrific acquistion tool for T-Mobile (re: the iPhone launched on T-Mobile one year ago this weekend). Within a year, every other carrier followed T-Mobile’s pricing model. In fact, when I was upgrading to a Sprint Spark-enabled Samsung Galaxy S5 on Friday, the in-store displays only showed the monthly payment price (no subsidized prices are shown).
This week, T-Mobile introduced two new initiatives. The first should come as no surprise if you have followed The Sunday Brief over the past two months: the Simple Starter plan offers unlimited voice, text, and unlimited data for $40/ month. The first 500MB are on T-Mobile’s LTE network, and the remainder on T-Mobile’s 2G network or consumers can purchase a day ($5) or week ($10) pass until their month expires. It’s a welcome change to overage charges, but T-Mobile would benefit from an even simpler change: a 5GB “overage protection bank” that users can draw from that would cover the occasional overages customers face.
While Simple Starter is a good change, the real news was on tablet pricing and plans. On Friday, T-Mobile launched Operation Tablet Freedom, which entitles current postpaid customers to purchase a T-Mobile network-enabled tablet for the same price as the Wi-Fi capable version. To prove it, T-Mobile posted the pricing of the two versions in their press release. In addition to this, T-Mobile also included 1GB of additional data (200MB is the standard package) in all plans through the end of the year. See more here in their press release.
The “Qualcomm tax” effect (Qualcomm 3G chipset pricing drove the first Wi-Fi to carrier-radio pricing) has plagued the telecom industry since the rollout of the iPad. Carriers struggled with subsidizing the $100-130 difference for years. Like international minute pricing and global roaming, tablet pricing differentials were simply a “that’s just the way it is” phenomenon. T-Mobile’s removal of the difference and tying it to a bundled offer to current postpaid customers is a master stroke. I clealry expect Verizon and AT&T to follow suit by summer.
This is unbelievably good news for tablet makers such as Samsung, Microsoft, and Apple. Because the tablet now “works everywhere” it blends the functionality of a smartphone into the bigger screen of an iPad or a Galaxy Tab. To consumers, the question now becomes “If I am going to own a tablet, why not have the capability to use the tablet at faster speeds in more places?” This will (eventually) flip the ratio of carrier radio-equipped to Wi-Fi only tablets sold from the current 15%/85% to 90%/10%. Ironically, the Qualcomm tax will result in more Qualcomm radios being put into tablets and ultimately more Qualcomm profits.
On top of this, T-Mobile will be able to use their data network as a means to attract Verizon and AT&T customers to their network (presumably, the previous tablet plan did that, but with limited success). With recent strong Rootmetrics finishes for speed (but no strong finishes for reliability), a combined Wi-Fi (indoor) and T-Mobile (outdoor) offering might tip enough people to ask “Why not?” and give Magenta a try.
More on T-Mobile when they announce earnings. Operation Tablet Freedom means a lot more to T-Mobile gross additions than analysts originally estimated. With AT&T (and Amazon) likely following suit, it could have significant ramifications to data growth. If only Day 3 (scheduled for April 14) could involve something with the Cable Wi-Fi initiative…
Comcast’s David Cohen Testifies Before Congress
Speaking of cable, earlier this week there was a Senate Judiciary Committee hearing on the proposed Comcast/ Time Warner Cable merger. Featured in the testimony was David Cohen, Comcast’s EVP who also is well known for his fundraising ties to the Obama administration (not to mention his early political experience as Chief of Staff for Philadelphia mayor and later Governor Ed Rendell). The full testimony from Comcast and Time Warner Cable can be found here and the CSPAN video of the testimony can be found here.
Cohen reiterated the scale and innovation benefits of the merger. Senator Leahy then asked him to clarify his previous statements that “cable rates will not go down.” In an apparent swipe to politicians’ ability to tell the truth, Cohen responsed “I have a nasty little habit of telling the truth, and when I was asked ‘Are people’s cable bills going to go down?’ I said I can’t make that commitment. But between the synergies in this deal, and whatever marginal additional leverage we might have in programming and equipment supply purchasing… will ultimately inure to the benefit of the consumers. And, let’s face it, consumers today are in the driver’s seat.” Cohen 1, Leahy 0.
Comcast then went on to frame this merger in light of the revenue and market capitalization of Internet giants such as Apple, AT&T, Verizon, Google, Amazon, and Facebook. They argued the following:
New digital platform providers, with their roots in software and hardware, are using the robust Internet connectivity provided by Comcast, TWC, and our competitors to grow into global powerhouses. These companies are increasingly pursuing new businesses that compete with ours. As one industry expert has observed, “broadband connectivity is the glue that permits multiple firms, once walled off from one another in distinct product-market categories, to compete, cooperate, buy, and supply products and services from one another in order to satisfy customers that are able to buy from any one of them.”
Senators, however, stuck to more traditional definitions of the cable industry, questioning the rate of cable (video and Internet) bills as well as their poor quality of service. Cohen called the continued reminder of their poor service a “kick in the butt” for which Senator Al Franken responded “you’re welcome.”
Bottom line: There was a lot of hype leading up to the testimony, but nothing new came out of the hearing. As we have stated previously, there is no current body of regulation that would cause either the DOJ or the FCC to reject the merger, especially given Comcast’s willlingness to divest three million lines (or about 27% of the lines they are acquiring). This does not eliminate the chances, however, of the DOJ or FCC creating a “too big to merge” precedent, and/or requiring that the combined entity take new steps to unbundle access from content.
If the DOJ and FCC tread lightly, expect continued consolidation and/or cooperation in the broadband industry, perhaps combining FiOS and U-Verse into a single entity (or FiOS in an out of region play with Google Fiber). The precedent will have been established, and, with low costs of capital, the opportunity to establish new levels of scale will be achievable with minimal regulatory scrutiny.
As noted above, we’ll take a break next week, but 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 (and they can go to www.mysundaybrief.com for the full archive).
Thanks again for your support, and have a terrific week!
Bracket-busting Final Four greetings from Austin and Dallas, Texas. To call it anything other than madness would certainly be an understatement. 2014 will certainly be knows as the year of the underdogs. While the tourney (and the opening of the baseball season) grabbed a lot of sports headlines this week, there are plenty of great things to highlight in the telecommunications and Internet worlds.
April Fools – Really
You cannot go too far into the headlines this week without covering some of the most creative April Fool’s Day pranks ever played. First, there’s Google with their emoji translation feature, complete with the “I am laughing so hard I’m crying, and I’m a cat” emoji (pictured). There’s also a hilarious “You Tube Viral Video Trends 2014” video which introduces many new memes including “clocking” and “bun-nutting.” Tech humor, for sure.
Next, the folks from Airbnb formed a new product called Airbrb (“be right back”) that allows folks to rent out their office/ cube/ desk for a few hours (there is a bosses’ office for rent in the video – wonder what mine could have gone for at Sprint?). I have a feeling there’s a bona fide idea here waiting to break through, but first I need to get my home office cleaned.
Finally, in the subtle and therefore most effective category, there’s the folks at Toshiba (not to be confused with the folks at Fujitsu who got a lot of headlines at this year’s Consumer Electronics Show for their sensor-equipped gloves prototype). They came out with their new DiGiT product line. It even begins with a quote from famous philosopher Unknown, who said “He who has technology at his fingertips holds the world in his hands.” Toshiba, you get my vote for content. (More here from the DiGiT website). I wonder how many people clicked on the “Sign Me Up” button…
Verizon Joins the Family Party
On a more serious note, we have been tracking the pricing changes occurring in the wireless industry, and this week, Verizon joined the “4 lines for $160” party, matching AT&T’s offer to the penny (see full details from Verizon Wireless’ webpage here). Some analysts (The Sunday Brief included) read this more as a “Why fight it?” gross addition play versus a “Must respond” net addition maneuver.
It’s important to note that Verizon’s 4Q 2013 Average Revenue Per Account (ARPA) is $157.21 with 2.76 retail postpaid connections per account (roughly $57/ subscription). This compares to $64 at Sprint and $66 at AT&T. Each of these figures largely reflects the traditional model of large subsidies offset by higher monthly charges (the subsidization effect on ARPU is $15-19 monthly on a 2-yr contract). If Verizon can attract families at an $160 ARPA before subsidies (to get this rate, customers need to be on the Verizon Edge plan), their overall metrics will actually improve, not deteriorate.
That’s not all Verizon did this week to mirror AT&T’s offers. For lighter data users, Verizon now has 250MB and 500MB shared products (see full chart below). Interestingly, the 250MB and 500MB straddle AT&T’s 300MB offer ($20 for data and $25 for unlimited voice and text = $45 total cost). For $45, Verizon offers 200MB more data. At the 1GB tier, however, AT&T’s pricing is better ($50 vs $55 for Verizon). These are subtle changes aimed at voice and text-centric subscribers who have not formed a wireless habit yet (and neither download any files included with their emails nor have DropBox).
On a slightly different course, Verizon rolled out a BOGO (Buy One, Get One free) offer on the upcoming Samsung Galaxy S5, the HTC One (M8) that we profiled in last week’s Sunday Brief, and the Samsung ATIV (Windows 8). Interestingly, none of the DROID devices, and specifically the Maxx gets the BOGO offer. Don’t know if we can read anything into this yet, but the omission of DROID has not gone unnoticed.
To get the BOGO offer, customers need to stay on a traditional Verizon MORE everything plan (up to $25/ month more). It’s a slightly better proposition to forego the BOGO offer using two Samsung Galaxy S5s as an example ($21 savings per month in handset subsidy vs. $25 in MRC savings from using Verizon Edge for two lines), but it’s a bold move to put a pre-order phone on sale with a BOGO promotion.
Bottom line: Verizon has shored up their low-end and family plan pricing to match AT&T. In the process, they have bested Sprint’s Framily plan for two lines ($100 for 2 lines with 2GB of data and no sharing). Expect the collateral damage to be at Sprint, not AT&T.
Cortana Becomes the Voice of Microsoft
One of the key gaps in Microsoft’s Windows mobile product portfolio is digital organization. Apple led with Siri, and Google has their ever-improving Google Now platform. Voice recognition is an essential element of all smartphone operating systems.
This week, Microsoft took a character from Halo, a video game exclusive to the Xbox gaming platform, and named their digital assistant Cortana. Doing this is not just clever, it’s downright brilliant.
First, unlike Siri and Google Now, Cortana can be visualized. She is sexy and attractive. She has a shared history (if you are a Halo player), and her reputation is to inform and protect. To many gamers, she is almost human.
Why would Microsoft choose Cortana? Instant recognition to tens of millions of Halo players across the globe. If you have a Windows 8.1 phone, and you use Cortana, that makes you the Master Chief (John-117). Just the allure of mixing virtual and physical communications worlds is extremely intriguing to many who do not see smartphone advances as particularly exciting.
On top of the direct association with tens of millions of Halo users, however, Cortana will appeal to smartphone users who want to put a face with a name. Microsoft is going to use Jen Taylor as the voice of Cortana whenever possible, and use Jen in various promotional venues.
One of the key features of Cortana is choice and privacy. Several reviews of the service mention the same thing – the ability to guide Cortana, remove or add items, and ignore – makes it a far better experience than Siri or Google Now. While the ability to learn over time has not been fully tested, the user interface and the directed choices available make Cortana a reason to consider switching. From the review of Cortana in The Verge comes the best bottom line opportunity summary:
Microsoft has seen what Apple and Google have done, wrapping some of the best ideas from Siri and Google Now into one attractive, easy-to-use interface — but now, the real trick will be to leverage Xbox, Windows, and Microsoft’s other products to get Cortana everywhere. The Bing home page will be updated in the coming weeks with notifications and information displayed in Live Tiles, personalized for each user, perhaps a small sign of things to come. The company has an always-on microphone in millions of houses through Kinect, hundreds of millions of computers running Windows, and a healthy new attitude toward iOS. For now, Cortana lives in your pocket, but her voice might soon be everywhere.
Few things could change Microsoft’s mobile prospects. Cortana is a good start.
Well, we ran out of time to do a good Wearables analysis justice. Barring any major headlines next week, we’ll take a look at the evolution of smart attachables and talk about the role of Samsung, Google, Microsoft and Apple in the developing ecosphere.
Also, thanks for the many visitors to the www.mysundaybrief.com. We set a record for number of unique visitors last month (still in the hundreds, but we had visitors from 10 countries), and had our second highest number of page views (in the thousands). As always, 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 (and they can go to www.mysundaybrief.com for the full archive).