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Monthly Archives: May 2014

Free AT&T Broadband- What Does it Mean to 2014 Exchange?

stepone founders photo
Mid-May greetings from Chicago, Boca Grande (FL ), Austin, and Dallas.  Before revisiting Thursday’s FCC meeting, a quick shout out to my friends at StepOne (the three founders are pictured here) who announced a $4 million A Round from Austin VC firms Live Oak Venture Partners and Silverton Partners.  It was a big day for the founders, their employees, and their customers.  Their perserverence and business planning reflects the three decades that they have been tackling the issue of self-service.

 

For those of you who are unaware of what StepOne does, they have deployed the first commercially viable (and search-free) recommendation engine for customer service.  While this will be initially deployed for communications service providers, there are plenty of expansion opportunities.  Mo

 

The May 15 FCC Meeting:  Theater at Its Finest. 

Last week’s column served as a brief of this week’s May 15 FCC meeting, which lived up to the hyperbole and drama expectations.  While it would be impossible to cover the entirety of the meeting in the remaining space of this brief, suffice it to say that the tone of this meeting was more passion-filled than all of this year’s previous meetings – combined. re on what they do here (GigaOM article) and here (VentureBeat article).

 

Following the open meeting, the FCC issued news releases for three important items:

  1. The Open Internet
  2. The Upcoming Incentive Auctions
  3. Spectrum Screens

 

The full contents of the first hour of the May 15 FCC meeting (courtesy of CSPAN) which covered the Open Internet are here.  There is a lot of information covered with these three topics, and, while this blog is not focused on regulations per se, the outcomes of the FCC meeting impact the values of communications services providers, software services, and device/ equipment manufacturers.

 

From a quick (and not in-depth) read of the Fact Sheets found in the links above, two major definitions emerge that are important to understand:

 

  1.  “Commercially reasonable” conduct on the part of wireless and wireline communications service providers.  In his statement, Commissioner Wheeler outlines several prohibitions (emphasis comes from the actual statement):

· If the network operator slowed the speed below that which the consumer bought (for reasons other than reasonable network management), it would be a commercially unreasonable practice and therefore prohibited,
· If the network operator blocked access to lawful content, it would violate our no blocking rule and be commercially unreasonable and therefore doubly prohibited,
· When content provided by a firm such as Netflix reaches the consumer’s network provider it would be commercially unreasonable to charge the content provider to use the bandwidth for which the consumer had already paid and therefore prohibited,
· When a consumer buys specified capacity from a network provider he or she is buying open capacity, not capacity the network can prioritize for its own profit purposes. Prioritization that deprives the consumer of what the consumer has paid for would be commercially unreasonable and therefore prohibited.
Simply put, when a consumer buys a specified bandwidth, it is commercially unreasonable – and thus a violation of this proposal – to deny them the full connectivity and the full benefits that connection enables.

 

If you can watch one definition evolve over the next sixty days, focus on “commercially reasonable.”  As you contemplate the effects of this definition, think about how a FiOS or Xfinity attorney will revise the marketing message of each of these products to allow Verizon and FiOS to continue deliver a high-bandwidth product to the home, yet accommodate time of day congestion.  (Note:  this “throttling” already occurs in the wireless industry and is the underpinning of most of their unlimited services).

 

It is extremely difficult to derive a commercially reasonable standard  for a product with unlimited usage.  If the Commission wanted to drive the industry to metering (which they did in the case of the wireless industry), they could have done nothing better than to introduce the “commercially reasonable” concept.  More on this in a future Sunday Brief (note: I am going to recruit several of you to help me write that column).

 

  1. “Low band” spectrum.  The FCC drew the line at 1GHz and below to define low vs. high bandwidth spectrum.  This definition determines whether AT&T and Verizon can bid on all of the 600MHz spectrum or merely a portion (note: this does not apply to the AWS-3 spectrum band which would operate at 1700MHz and 2100 MHz frequencies).  The FCC Fact Sheet on the Spectrum Screen also makes a couple of fairly vague references:

 

(Spectrum holdings in general):

  • The screen can trigger a more detailed competitive analysis by the FCC. Currently, the trigger occurs when a wireless provider holds approximately 1/3 or more of the available spectrum in a given market.
    · The Commission will continue to use this 1/3 spectrum screen threshold and will evaluate transactions on a case-by-case basis.

 

(Low-band spectrum holdings):

  • The Commission will continue to use a case-by-case review for transactions involving spectrum below 1 GHz, as described above.
    · Aggregation of approximately 1/3 or more of available low-band spectrum in a market will be an “enhanced factor” in the Commission’s competitive analysis of a proposed transaction.
    · The importance of this uniquely valuable spectrum for promoting competition requires this enhanced review.

 

So the FCC is going to study any merger regardless of the quantity of spectrum holdings, but all transactions that result in 33% or more of low band spectrum will receive “enhanced” scrutiny.   So much for clarification.

 

The comments in this fact sheet presume that there is no remedy for the high-band spectrum issue – that no in-building innovations can occur that can create an equal or better experience to the low band spectrum and be economical.  As Verizon and AT&T will demonstrate over the next two years, AWS spectrum can be a very effective in-building solution (as can the 5GHz Wi-Fi band) IF wireless companies can begin to think like wireline companies.

 

There’s a lot more to write on these topics, and, overall, I commend the Chairman on his leadership on these issues (and remind Commissioners Pai and Rosenworcel that their recommended “deliberate and study” approach is what delayed the adoption of Voice over IP (VoIP) as today’s protocol of choice and resulted in billions of dollars of lost value for last decade’s innovative VoIP providers).  If the FCC’s actions prod additional legislative action, then even better.  But waiting is the worst option to take at this time.  (For my thoughts on this topic in August 2010, see my RCR Wireless column “The Internet Needs a New Roof, Not a New Set of Shingles.”).

 

Speaking of Broadband – First Quarter Observations

high speed internet penetration

 

There are many aspects of wireline operations that impacted tradtional/ incumbent telecom provider first quarter earnings:  Continued voice weakness across residential and business segments, acceleration of wholesale revenue declines driven by carrier disconnects of traditional (TDM) circuits, and the rise of cloud computing/ managed network services over carrier-provided Ethernet networks were echoed by each of the traditional/ incumbent carriers.

 

Revenue growth, however, was driven by consumer data (and, in the case of AT&T and Verizon, by their video services).  The chart above shows the penetration gains in consumer High Speed Internet services for four large cable providers (Suddenlink, while private, reported a 1.7% annual penetration gain in Q1 2014.  AT&T, CenturyLink, Cox, Mediacom, and Brighthouse do not report penetration figures).

 

The key to wireline growth is faster data.  In their quarterly earnings bulletin, Verizon disclosed that over half of their FiOS High Speed Internet base is on speeds of 50Mbps (downstream) or higher.  One of the many factors behind Charter’s penetration success is their baseline advertised speed of “up to” 30 Mbps.  The promise/ expectation of faster data, delivered in a consistent manner, will continue to drive penetration gains IF those promises are kept (see here for one exaAT&T rate card internet promomple of a Charter customer who is not receiving advertised speeds.  Wonder what Chairman Wheeler would think of that?).

Speeds (and ARPUs) in consumer High Speed Internet are expanding.  On the small business side, however, a price war is beginning to brew.  In the regions where AT&T is the local U-Verse provider, they are offering one year of free Internet for small businesses (or a $35/ month credit on higher bandwidth packages) with the purchase of an accompanying AT&T Wireless bundle.  The chart on the right shows their rates for various speeds.

 

While AT&T does not separate small business from total broadband connections, their revenues over the past several quarters have been trending 3-5% lower.  As we have discussed in several Sunday Briefs, given AT&T’s presence in Texas, California, and the Southeast, they stand to gain first from any economic recovery.  This “free Internet for a year” offer, if implemented properly, will turn AT&T’s consistent 3% annual small business wireline revenue declines into 3-4% gains.  To some extent, this also decelerates  T-Mobile’s small business wireless gains as well (bundling has a two-fold effect).  This represents an interesting wireline development that could drive gains in both divisions of AT&T (see commercial here).

 

Due to the Memorial Day holiday (yes, it’s here already), there will be no Sunday Brief next week.  The following week, we will cover wireless handset lineups for the industry (a part of our “It’s an Android World” series).  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).

 

Why May 15 Matters to Telecom

happy-mothers-dayMother’s Day greetings from Austin and Dallas, and many thanks for the myriad of comments about last week’s Sunday Brief.  RCR Wireless (I am an advisor to Arden Media, parent of RCR) picked it up (see article here) and it ended up being one of their most popular articles of the week (21 reposts on LinkedIn which I believe is a Sunday Brief record).  There are dynamic changes in the telecommunications marketplace right now, and while many of you like to focus on single company/ industry earnings, there are many intersections occurring between non-traditional competitors.

 

Before going into a discussion of the upcoming FCC meeting on May 15, many of you have asked me why we publish this column for free.  The “this could be monetized” e-mail comes every week or two from one of you.  For a more detailed description of why I write this column, click here (it was covered in a Sunday Brief about a year ago).  This column will never be a paid subscription service – period.

 

However, if you would like to help out a cause that Martha (The Sunday Brief editor, wife of 19 years, and Mom) and I care very deeply about, I would ask you to consider buying one of these baby sari quilts  the next time you have to attend a baby shower or provide a gift.  There’s a terrific story behind each quilt, and it’s highly likely that they will not be returned (and will be well used).

 

Why May 15 Matters to Telecom

There are few larger convergance points between broadcasters, wireless service providers, public safety providers, and Internet businesses than the Federal Communications Commission.  We have taked extensively in this column about the FCC’s role in determining rules about access to content and how it flows from host server to end user.

 

Another very important role of the FCC is to manage and conduct spectrum auctions.  In 2015, it is expected that the FCC, in conjunction with broadcasters, will auction off approximately 50-120 MHz of spectrum in the 600 MHz band.  This auction will likely determine whether a third mobile network can compete with network parity against Verizon Wireless and AT&T.

 

In order to have a successful auction, the FCC has to have three parties actively participate:

  1. Broadcasters who currently own the spectrum.
  2. Wireless service providers who need the spectrum to deliver bandwidth to consumers.
  3. Interested parties (like Google) who want to ensure there are opportunities for unlicensed spectrum use in the 600MHz band (note: Google is not the only constituency, but is an example of third parties that will get a seat at the decision-making table.  See their March filing with the FCC here).

 

On May 15, the Commission will hold an Open meeting.  Three of the four topics are critical to the parts of the telecommunications industry that we cover in The Sunday Brief:

  1. Protecting and Promoting the Open Internet
  2. Expanding the Economic and Innovation Opportunities of Spectrum Through Incentive Auctions
  3. Policies Regarding Mobile Spectrum Holdings

 

Just having one of these topics on Thursday’s agenda would be significant.  But all three topics makes for a landmark meeting.  Distinguishing between neutral accessibility and equal performance will have the greatest impact on the current landscape.  We have written (and there have been numerous side bar email communications) on the difference between accessibility and performance, and there is a lack of trust that any regulation established will be able to be effectively monitored and maintained.  The goal to foster innovation is clear, but whether this innovation applys both to software (the next Facebook) and network (the next Comcast) ecosystems has not achieved consensus within the communications community.  With the establishment of limited “HOV” lanes for the Internet, broader and faster developments will be possible, and the risk inherent in overbuilding today’s duopoly will go down, especially in more populus areas.

 

There continues to be a lot of skepticism that Comcast, AT&T, and others will reinvest Internet access revenues into their networks.  This skepticism drives the desire for additional suppliers, which is the point of proposed rules surrounding the 600MHz bidding process.

 

Over the past several months, the FCC has been designing the auction framework.  In mid-April, Re/Code published an article describing the latest developments in the process:

 

  1. Partial Economic Areas will be created from spectrum provided by the broadcasters.  The FCC will be in charge of packaging individual broadcaster licenses.  A listing of the proposed PEAs can be found here.
  2. Wireless service providers will bid on PEA licenses.
  3. After the bidding hits a prescribed (market price) level (precise level and metric TBD), the FCC will divide the bidding into “reserved” and “unreserved” bidding.
  4. A portion of the PEA (not to exceed 30MHz) will be reserved for smaller carriers (smaller defined as carriers who do not hold 33% or more of the low-band (< 1GHz) spectrum in the market).
  5. A wireless carrier who qualifies as “reserved” can bid on both “reserved” and “unreserved” spectrum.
  6. The auction will continue, and licenses will be awarded to both unreserved and reserved bidders.
  7. Winning bidders will be required to interoperate with other 600MHz bands.
  8. Additional buildout and transferability rules also apply (many of these rules are TBD, but, judging from Verizon’s comments on the “perverse and unjust” rules being established, it appears that the ability to sell spectrum won in the reserve auction will be limited.  See more in Verizon’s letter to the FCC here).

 

Determining the rules of any auction are critical, but this one is especially important because it will drive the quantity of broadcast spectrum to be repackaged.  For example, if 70MHz is the target auction level for Los Angeles PEAs and 30 MHz of this is to be reserved, some broadcasters might hold on participating (thinking that the reserved bidders will end up paying less for 43% of the spectrum).  If, however, only 20MHz was the target level to be reserved, the probability of reaching the target auction level would be higher.  This is one example of the clarifications that the Commission will need to provide to maximize the value of the auction.

 

Needless to say, both AT&T and Verizon are not excited about cordoning off spectrum that could create a lower cost structure for a potential competitor.  AT&T’s reaction can be found here.  They argue that, at a minimum, two 10 MHz bands are needed for an LTE deployment.  Failing to provide at least 40 MHz for two unreserved deployments would render the auction useless for either AT&T or Verizon (and, per AT&T’s understanding of the rules, they would not eligible for the reserve auction in approximately 70% of the country.  AT&T also implied that, without rules changes, they would need to reconsider their participation in the auction, but have since walked back those comments).  As discussed above, Verizon’s recent comments have been much sharper.

 

Could a darkhorse spectrum buyer emerge from the reserve process, perhaps led by John Malone, Craig McCaw, or another experienced industry pioneer?  Will the maximum limitation of the reserve spectrum (30MHz) be enough to facilitate pairing with unreserved spectrum?  Will the addition of spectrum cap rules cause broadcasters to be so discouraged that many of them decide to forego this round of auctions?  The answers to these questions should be answered at Thursday’s meeting.

 

spectrum holdings proposedFinally, the entire issue of mobile spectrum holdings (also called “spectrum caps”) is on the May 15 agenda.  This issue is clearly aimed at Sprint and their often rumored merger with T-Mobile.   As background, Sprint holds 120MHz of 2.5 GHz spectrum in 90% of the top 100 markets as a result of their Clearwire acquisition.  This holding allows Sprint to deploy their Spark network across the country.

 

The FCC has proposed changing the spectrum cap rule to include all of Sprint’s 2.5 GHz spectrum in any future market concentration considerations (note: this would not affect Sprint’s ability to participate as a reserve bidder in the 600 MHz auctions).  According to documents released by Sprint and shared with the FCC, the proposed rules would actually place Sprint under spectrum caps today for 25% of the counties in America representing 206 million people.  AT&T and Verizon, in contrast, would fall under no restrictions.  (See full document here).

 

Sprint proposed a weighted average proposal that calculates that spectrum above 2.2 GHz (the predominance of all of Sprint’s holdings) is only 1/3rd as valuable as low-band (below 1GHz) alternatives.  While it is highly likely that any 600 MHz wins would be grandfathered into any calculations, without significant changes to the Commission’s proposal, a merger with T-Mobile would be impossible.

 

The FCC’s May 15th meeting will bring a lot of certainty to Internet prioritization, the diversity and quantity of additional low-band spectrum, and the industry’s ability to create a stronger third player in the market.  It also clearly shows how important and intertwined government policy is with industry profitability and sustainability.

 

Next week (I promise), we will wrap up the earnings analysis with a recap of wireline growth and talk some more about wireless single-line competitive positioning. 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).

 

Thanks again for your support, and have a terrific week!

 

T-Mobile Wins by a Mile (and Why Sprint Must Act- Now)

tom and jim landscapeGreetings from Los Angeles, Charlotte, and Dallas.  While this was a full week for the telecommunications industry, I found some time to hang out with many Charlotte friends over the weekend, including Tom Noyes (pictured with yours truly at the Wells Fargo Championship at the Quail Hollow Country Club).  Tom forgets more in a day about mobile payments and e-commerce than I could ever remember.  If you are interested in mobile payments developments check out his blog at tomnoyes.wordpress.com.

 

 

The Great Reclustering Announcement of 2014

Before we dive into part two of first quarter earnings news, the cable world was reshaped on Monday as a multi-part transaction between Time Warner Cable, Comcast, and Charter was announced.  The highlights of the transaction are as follows (full announcement can be found here):

reclustering summary

 

 

The result of this transaction to Charter is a loss of California (Los Angeles area), New England, Tennessee, Texas, and North Carolina properties, but a terrific clustering of Great Lakes properties.  The pro forma Charter map is shown below:

Comcast picture (2)

 

Charter gets Detroit, Cleveland, Columbus, Cincinnati, Louisville, and Minneapolis.  They do not get Chicago,  Kansas City or Nashville. And they keep the former Bresnan properties in the West (which are very profitable and well engineered).  These clusterings should help Charter’s commercial business move from local to regional services, and also enable significant Ethernet backhaul opportunities for bandwidth augments.  It also enables an East/West Coast (+ Texas, Chicago, Denver) business capability for Comcast.  Many of you who know the cable industry also have pointed out this week that further regional concentration for Charter would be possible with Suddenlink (WV) or Mediacom (MO, IA) additions.  Bottom line:  It’s a multi-part good news story for Charter and the new Comcast/ TWC.

 

Chairman Wheeler:  Don’t Make Me Use Title II

This week, FCC Chairman Tom Wheeler gave an impassioned speech to a much different cable industry than the one he represented three decades ago.  It was clear from the speech that he is not interested in creating different quality networks, although he seemed to have no issues with the creation of priority lanes provided that total bandwidth continued to grow.  From his speech (full text here):

 

Let me be clear. If someone acts to divide the Internet between “haves” and “have-nots,” we will use
every power at our disposal to stop it. I consider that to include Title II. Just because it is my strong belief
that following the court’s roadmap will produce similar protections more quickly, does not mean I will
hesitate to use Title II if warranted. And, in our Notice, we are asking for input as to whether this
approach should be used.

 

wheeler_screencap_ncta14The turd in the cable punchbowl is Title II.  The mere concepts of providing service upon request at just and reasonable rates would fundamentally change the business structure of cable.  And, the concept of providing interconnection to cable’s access network (and building associated wholesale networks for residential and small business sale) would be a disastrous distraction for the industry.

 

Having heard the speech at the NCTA show, I think Chairman Wheeler used the threat of Title II very effectively.  It seems to be clear from several conversations at the show that the FCC will trade off some title II requirements (e.g., Comcast agrees to serve marginally profitable areas not covered by the Connect America Fund) in exchange for approval of the Comcast/ Time Warner Cable merger.  In addition, it seemed patently clear that any postponement of speed upgrade schedules would receive a swift response from the FCC.  Bottom Line:  Chairman Wheeler delivered a short but pointed “don’t make me pull this car over” speech.  Given his authority to regulate under Title II, as well as Google and AT&T’s equally important regulatory influence, the cable industry should be concerned.

 

T-Mobile Wins – By a Mile (and Why Sprint Must Act – Now)

While there were many other interesting events this week (including US Cellular earnings, and TDS’ acquisition announcement of Bend Broadband), the remainder of the brief will be devoted to comparing Sprint and T-Mobile’s earnings (Sprint earnings page here and T-Mobile earnings page is here).

 

Sprint is a company in parallel transitions.  The network is being completely replaced.  Unlimited plans, the hallmark of Sprint’s turnaround a few years ago, are being completely replaced.  Management is being replaced.

 

T-Mobile is also a company in transition.  Their data network is being upgraded.  Unlimited (and therefore overage-free) plans have been implemented.  Major spectrum and company acquisitions are in the various stages of implementation, but a lot of work remains to be done.  Their management has been in place less than two years (remember the wound-licking from the previous management team displayed with T-Mobile’s results in Q1 2012?).

 

Both companies have done a lot over the past two years.  In the first quarter, however, T-Mobile won by a mile.  Within postpaid retail phone customers, T-Mobile gained 1.2 million subscribers and Sprint lost 750,000.  That’s a quarterly change between the #3 and #4 players of nearly two million subscribers.  Below are two charts outlining the relative size and position between Sprint and T-Mobile on postpaid retail and prepaid retail customers (left axis on both chart is in 000s):

 

retail postpaid subscriber comparison retail prepaid subscriber comparison

 

We have talked at length in previous Sunday Briefs about T-Mobile’s relative parity with retail prepaid customers.  To be consistently within ten percent of Sprint’s size (given the brand strength of Boost and Virgin) is impressive.  In the first quarter, however, T-Mobile, thanks to MetroPCS expansion, narrowed the gap considerably, while Sprint shrank.

 

Given the uncertainty of Sprint’s prepaid mix (many of whom are subject to income verification requirements in order to receive government subsidized devices), it’s likely that T-Mobile’s retail prepaid customer base will exceed Sprint’s by the second quarter.  By the end of the year, AT&T (through their recently acquired Cricket brand) will join T-Mobile as a competitor for prepaid distribution.  And those three retail brands compete heavily against Tracfone, who is using excess voice/ text/ 3G data capacity from Verizon (and Sprint/ AT&T).

 

The greater concern for Sprint is the chart on the right.  Before Simple Choice, the iPhone, and now network-indifferent tablet pricing, making the case for a larger T-Mobile was nearly impossible.  Now, it’s a question of “When will the two lines cross?”  Can T-Mobile overtake Sprint in postpaid subscribers in 2015?   At the end of Q1 2013, the postpaid gap was 11.2 million subscribers; last quarter it was 6.9 million subscribers.  Using 2013’s progress as a trend line, T-Mobile should overtake Sprint on postpaid subscribers in 3Q 2015.  And, if the subscriber gap is narrowed first with smartphone customers, the revenue gap could be narrowed even faster (Sprint had $1.4 billion more in total wireless revenues in Q1 2014 compared to $2.1 billion more on a pro forma basis in Q1 2013).

 

Once T-Mobile overtakes Sprint on postpaid subscribers and revenues (and, in 2016, on EBITDA), will Sprint be the acquiring party?  Sprint needs to act now in three ways:

 

1)      Sprint has to make the case that the cable industry’s coordinated Wi-Fi plans (especially with the recent 5 GHz Wi-Fi spectrum and auction announcement) represent a competitive network.  The fact that every new cable modem installed by Comcast from now on includes a Cable Wi-Fi connection option should be enough of an indicator that the cable companies are competing for gigabytes within the home and public venue.

2)      Sprint needs to follow T-Mobile’s tablet pricing structure and eliminate the difference between Wi-Fi only and Wi-Fi + Carrier tablet price points.  This is a no-brainer, and Sprint’s ability to elimiinate this pricing on the iPad will significantly impact gross adds.

3)      john legere tweetSprint needs to “go negative” on T-Mobile in those cities where it has the stronger network.  Highlight in-building/ in-home differences, HD voice quality improvements, and the recently announced Spotify relationship.  I doubt we’ll see Sprint’s CEO tweet in the same manner as John Legere (see actual tweet at right), but network improvements will not speak by themselves.  Outside of a few well-placed attacks against AT&T wireless a decade ago, Sprint has not had an attack mentality.  It needs to adopt one if they want to contend for T-Mobile’s customers.

 

Both Sprint and T-Mobile have a ways to go on in-building/ in-home coverage solutions, and neither are making inroads into the enterprise marketplace, leaving an effective duopoly for AT&T and Verizon.  As devout readers of The Sunday Brief have seen, there are plenty of cooperative opportunities Sprint and T-Mobile can take today (prior to a business combination) that will increase coverage and quality.  But Sprint needs to act quickly.  The action needs to be big (e.g., acquisition of T-Mobile) and decisive (e.g., tablet pricing).  Waiting for the network will land Sprint in fourth place by the end of 2015.

 

Next week, we will wrap up the earnings analysis with a recap of wireline growth and talk some more about competitive positioning.  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).

 

Thanks again for your support, and have a terrific week!

 

 

First Quarter Earnings Drivers (Part 1)

lead pic (2)Greetings from Willard (MO), Monroe (LA), Toronto, Austin, and Dallas.  Hopefully you were able to fill last week’s Sunday Brief absence with some family and fun.  As the picture shows, we spent most of our Easter weekend with a giant treehouse construction project on the farm in Willard.  Great times, and elated nephews and niece.

 

Before diving into first quarter earnings, a quick note on an important acquisition announced last Monday.  Cbeyond, one of the last competitive local service providers in the industry, agreed to be purchased for $9.97/ share by Birch Telecom.  This is an all cash transaction which pegs the value of CBEY at about $323 million (4.1x trailing adjusted EBITDA).  CBEY has long been an innovator in the small business space, providing superior VoIP services, rock solid nationwide Ethernet services, and integrated wireline/ mobile capabiliites.  They are a terrific client, and I wish them all the best.  Full transaction details can be found here.

 

Many companies announces earnings last week.  In the last Sunday Brief, we reiterated several themes that would mark the first quarter:

 

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.

 

AT&T Earnings:  Finally… Something Worked! 

An absolutely giddy CFO usually worries me on conference calls, especially when it’s the CFO of a company the size of AT&T.  John Stephens’ ebulence showed throughout Tuesday’s earnings call and on interviews the following day.  He probably wanted to say “Finally, something worked!” but instead led off the call with “the shift to Mobile Share plans was nothing short of incredible.”  That’s giddiness for a CFO, and there were plenty of reasons for it.

 

The Mobile Share plan changes announced in February were in response to T-Mobile’s aggressive ETF buyout plan.  As John hinted on the AT&T earnings call, January’s churn and net porting numbers must have been worrisome, not only for T-Mobile but for Sprint (who introduced Framily) and Verizon.  But the new Mobile Share plan introduction had an even greater impact:  AT&T beat Verizon in the first quarter.

 

February’s Mobile Share for Families announcement drove the number of Mobile Share plans up by more than 50% (really in the last two thirds of the quarter).  This, combined with the announcement that AT&T will allow any customer who has been a postpaid customer for more than six months to switch to a Mobile Share plan free of charge (see here for analysis) resulted in 40% of all smartphone gross adds and upgrades to be on Next (compared to 15% in 4Q 2013).

 

The end result was nothing short of incredible for AT&T as the following table shows (note – Verizon started selling the iPhone in Q1 2011):

AT&T table comparison

 

For years, the best AT&T could hope to achieve against their larger rival was a 60/40 net add split.  This occurred, in part, because AT&T lagged Verizon in LTE deployment (Verizon now has 304 million POPs covered; AT&T just under 280 million), but also because AT&T lacked a first-mover advantage.  In an extremely ironic twist, it’s the “noisy competitive environment” (John Stephens’ term used throughout the earnings conference call) that caused AT&T to move into a leadership position.

iPad comparisonAT&T can maintain this leadership position by taking a play out of the T-Mobile playbook and following them into the “no additional upcharge” for tablets that are equipped for the AT&T network (these charges currently run $100-130 more – see picture on right for exact differences for the iPad lineup).  This would drive an entirely new growth curve for AT&T and the entire industry.  Verizon and the rest of the industry would likely follow suit, at least with LTE-only iPads and Kindles.

 

There are plenty of things at AT&T that are not working:  Transport (down 12.2% year-over-year) and non-strategic IP services (down 9.7% y-o-y) continue to collapse, and voice compression continues in both business and consumer (down 10.4% year-over-year which represents an improvement).  AT&T’s wireless reseller division has lost more than 1 million subscribers over the past year (a lot of this very high margin 2G machine-to-machine traffic).  And wireless SMS and voice traffic growth is non-existent and in secular decline.

 

But for now, AT&T is the leader of the pack, thanks to More Everything for Families and their Next pricing plan.

 

Verizon:  Rational and Disciplined, But Also Responsive

Verizon announced earnings on Thursday morning, after AT&T earnings had a full day to sink in.  Verizon CFO Fran Shammo was very matter of fact in his description of the quarter and of Verizon’s strategy in general:

The ingredients for success are unchanged:  solid operational execution and a disciplined focus on meeting our financial objectives and creating value for our shareholders. With an eventful first quarter behind us, I would say we are off to a strong start.

 

Verizon reported very strong EBITDA margins (with or without the effect of incremental Edge sales) on service revenue growth of 7.5%.  But their ability to keep the basic phone and 3G smartphone customers weakened in the quarter, and it likely came as a benefit to T-Mobile (and, at a smaller level, to Sprint).  Verizon lost visibility to the “edge cases” (pun intended), and some of the core base also went along with these customers for the ride.

 

As a result, as the following table shows, Verizon lost accounts in the first quarter:

verizon operating statistics

 

Twenty-two thousand retail postpaid accounts is a small number, but with Verizon reporting the first phone net loss in the company’s recent history (539K total retail postpaid net additions less 639K net tablet additions = 100K net phone loss), it’s worth remembering. Contrasted with the 114K account loss in the first quarter 2013 (which was termed an “account clean-up effort” to improve overall credit quality, it shows the increasing dependency on data-only devices to support growth.

 

On top of this, Verizon had bad weather which impacted FiOS installations.  They posted 98K net additions in FiOS Internet (down 48% from Q1 2013) and a mere 16K total broadband increase when DSL losses are considered, compared to 269K High Speed Internet additions for Time Warner Cable (New York City, Maine, Ohio, Kentucky, Wisconsin, upstate New York), and 383K for Comcast (Chicago, Vermont, New Hampshire, Atlanta, Boston, Philadelphia, Washington DC). Fran responded to a question on the weak FiOS numbers in the following manner:

 

First off, we did a price increase in the fourth quarter and every time we do a price increase we always see some pressure in the churn in the following quarter.  But also we had probably one of the worst winters on record here and people did not want us in their houses to install FiOS…  Competitive pressure did increase in the first quarter.  We did not respond immediately because of the environment that we are dealing in with the weather.  So we waited.  We became more aggressive in March.  And I would tell you that exiting the quarter our pipeline has grown and I have a viewpoint that the second quarter will be back on track from a net add perspective.

 

The winter was bad, but was it really that different from Comcast’s (where High Speed Internet net additions were down 12%) and Time Warner Cable’s (who had their best High Speed Internet net additions since 4Q 2012)?  There is more going on here than meets the eye on the FiOS vs. Xfinity/ Optimum/ Roadrunner matchups.  FiOS is losing on price/ value below the 50Mbps speed tier, and cable knows it.

 

There’s a lot more to say about Verizon’s wireline earnings (they continue to be sick, and not in a good way).  We’ll get to that in next week’s column.  For now, Verizon must consider two very important decisions:  1) How to prepare for a resurgent AT&T and a disruptive T-Mobile, and b) How to regain price/ value consideration versus Comcast and other cable competition below 50Mbps.

 

Next week, we will have a lot more on cable earnings (I am out at the cable show in Los Angeles Monday through Wednesday) and get additional insights into the wireless industry when Sprint announces earnings.  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).

 

Thanks again for your support, and have a terrific week!