End of quarter greetings from Santa Barbara (marina pictured), Austin, Dallas, and the Outer Banks of North Carolina. As a reminder, the Sunday Brief will take a brief hiatus next Sunday for the Fourth of July holiday (and my 47th birthday). This week, we will attempt to cover wireless/ mobile software developments for Amazon (Fire phone), Google (MicroMax device; Android L; Android Watch; Android TV; Android Apps on Chrome), and Apple (iOS 8). But first, a couple of newsworthy items.
Aereo – RIP
On Wednesday, the Supreme Court ruled by a 6-3 vote that Aereo, an “over the top” television services company, violated US Copyright Law. In the majority ruling, Justice Steven Breyer writes:
Viewed in terms of Congress’ regulatory objectives, these behind-the-scenes technological differences do not distinguish Aereo’s system from cable systems, which do perform publicly.
As a result of the ruling, Aereo suspended operations on Saturday. At the heart of the matter are two fundamental questions: 1) What is a “public performance” which is the basis of current copyright law, and 2) “How much content can be withheld from retransmission?”
Without going into all of the details of how Aereo works (you can find that here from CNET), it’s basically a centralized antenna combined with cloud-based DVR functionality for $8-12/ month. Broadcasters alleged (and the Court upheld) that Aereo violated the “transmit clause” of the 1976 Copyright Reform Act. This legislation clearly outlines that the retransmission of a signal is a public performance (and public performances are subject to copyright fees).
Because Aereo was found by the Court to be a “public performance” they are subject to retransmission fees for broadcast channels (and therefore subject to the Most Favored Nation clauses of the cable companies which guarantee a relative cost disadvantage for Aereo – today). However, if Aereo were to configure their architecture to be one of “private” performance (it’s hard to imagine how a unique antenna per customer could be any more private), they would now face the issue of broadcast station blackouts (in other words, while the transmission may be legal, the broadcaster cannot be compelled to show all content (and especially live content), to companies like Aereo). As an example, even though CBS shows a lot of content on their website (see here), they do not show all of the content, and what is shown is not live streamed.
For more details on the case and a good history of the the definition of “public performance,” have a look at these articles from Ars Technica here and here. Politically, it pits content developers (who have large centers in Southern California and New York City) against West Coast (and New York City) disruptors who have already upended retail (Amazon), publishing (Amazon), advertising (Google), autos (Tesla), lodging (Airbnb), and hired car services (Uber). It’s a tension that could impact political elections for decades to come as the West Coast begins to “play the game” with greater vigor.
Kindle Fire Phone. Will it Fly? Maybe.
On June 18, Amazon released their long-awaited Fire Phone (the full press event release is here). It’s a high end spectacle of a device, fully equipped with 3D sensing capabilities (which allow you to see 3D products in the Amazon website more clearly), as well as collect information about your daily life through a unique feature called Firefly (bar codes, document capture, websites, etc. – an excellent way for Amazon to have many “eyes and ears” on the world).
There are many features of the Kindle Fire phone, but none are as important as its integration into the lives of Amazon Prime users. While likely dismissed as a gimmik by their smartphone rivals (and, without a doubt, Amazon is in the smartphone business now), offering free Amazon Prime services to Fire Phone customers is not a “passing thought” promotion. Amazon has struggled with the concept of moving the allure of Prime beyond free 2-day shipping. Prime Instant Video has enjoyed limited success. Kindle Owners Lending Library and Kindle First have had equally “meh” responses. But half off a killer smartphone over AT&T’s network? That might work, especially for the AT&T base.
The key to Amazon’s success lies not only with AT&T + Amazon Prime customers, but also with the developer community. VentureBeat ran a great article this week where they interviewed many developers in the gaming community. To use a common Valley buzzword, they were “intrigued” at the prospect of existing game modification to include Amazon’s Dynamic Perspective. However, the 3D feature is currently only capable on the Fire Phone – a similar device would need to be implemented for the Kindle Fire (Tablet) to be able to maximize the revenue potential of the application.
Given the emergence of Android L (which supposedly contains 5,000 new APIs), the growing acceptance of Android 4.4 (KitKat) as the “new” Android standard, and continued upgrades seen in iOS 8, will developers take time to develop for Amazon’s latest device?
The troubling answer for the Seattle retailing giant is “maybe.” While Amazon’s developer support has been stellar (and, given their excellent support for other Fire Apps, there’s no reason to assume it will not continue), aligning exclusively to AT&T limits their addressable market. Relying on AT&T’s in-store selling abilities in light of Nokia’s recent and repeated failures is risky and potentially very expensive. Without a doubt, AT&T has a good network, but they carry an Apple smartphone legacy that will be difficult to unroot.
On top of this, the applicability to “mass market” apps such as Pandora/ Spotify (and even Amazon’s Prime Music service) and Facebook/ Vine/ Instagram is limited without 3D photography. If you watch the VentureBeat hands on demo embedded in the article, you will see what I mean when the reviewer gets to e-mail (a classic 2D app). The Kindle Fire phone cannot excite email. It may not be able to excite Pandora. And if it cannot excite picture-focused social networks, fuggetaboutit.
Here’s what will likely happen: Many developers will try once, and, with limited Kindle Fire sales, will not try again (absent Amazon throwing in aggressive payments or discounted cloud computing). Amazon will develop a more affordable device that will be free to all users (across all carriers) with a paid Amazon Prime (and postpaid wireless carrier) subscription. That’s when the fun will start and Amazon can then begin to offer “sponsored data” services (through AT&T and others).
Two and a Half Hours of Android – Three Big Developments From I/O.
Like many blogger/ analyst/ consultants, I begin each year thinking about trade shows and events: CES, CTIA, COMPTEL, the Cable Show, and the coveted Apple WWDC. This year, I was invited but could not attend Google’s I/O 2014. It looks like I missed a lot in their 2.5 hour presentation.
First, Google introduced Android One, a reference platform that allows handset manufacturers to make less expensive (and slightly less functional) Android models. This is critical for countries like India, where IDC reports that 78% of smartphones purchased in India were under $200 (see article here). This reference platform can be used by Karbonn, Micromax (see phone that was featured at IO that was written to Android One specs), Spice and others to deliver maximum functionality for cost-conscious budgets. The phone pictured has dual SIM-card slots, a 4.5 inch screen, and an FM radio for $100. (To get an idea of what mobile devices cost today, have a look at the Micromax site on FlipKart here. There are about 60 Rupees per US Dollar).
While the latest Android release (known as KitKat) is in full bloom, Google announced a new version of Android code-named “L.” While some of the improvements are iOS catch-ups (e.g., lockscreen notifications, prioritized alerts based on phone activity, etc.), others are extremely innovative (e.g., integration into Android TV and Android Wear, the use of Wear device proximity to keep Android devices unlocked (and vice versa), and the ability to interlock information between Google and non-Google apps). The new Android L appearance is both flat yet detailed – as one of you who saw an L-equipped device put it to me, a “clearer yet softer version than iOS8.”
Finally, Google surprised everyone with the Google Cardboard giveaway. This is no Oculus Rift, nor is it intended to be. But, to get the developer community thinking about how to develop a mass market Virtual reality experience (a brilliant idea in and of itself given the overall public “meh” over Google Glass), they included a free cardboard cutout, a few magnets and a rubber band along with a link to some Google software. Just slide in your Android-enabled smartphone into the cardboard contraption, and voila – you have a DIY Virtual Reality mechine.
The first reaction was an overwhelming “What the..” which has now been followed by a nearly unanimous “I get it – great idea!” chorus. Rather than regurtitate the analyst reaction to Google Cardboard, read it yourself here and here (the video in the second link is hilarious).
In two weeks, we’ll have our second quarter preview. 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).
Thanks again for your support, and have a terrific week!
** Editor’s Note: This was originally sent to SB readers on June 22, 2014 **
June greetings from Dallas, where, as the picture shows, we are enjoying needed rain. Thanks for the many comments on last week’s column. Many of you shared your experiences with Google Fiber (those of you who have it in Kansas City don’t appear to be going back to cable or U-Verse in the near future), while others accused me of oversimpifying in-building wireless efforts (admittedly, I did leave the concept of obtaining Building Authorization Agreements out of the Brief. They are hard to get and involve specialized real estate/ legal expertise). Thanks for your readership, and please keep the comments coming!
Over the past two weeks, we have written about major changes in the telecom industry, including:
- The half trillion dollar value and multi-hundred billion dollar capital shift from network to software providers
- The threat of Google as a new entrant to the residential and small business markets
- Fundamental architecture changes that will take place as content is pushed to the edge
- In-building data capacity needs will accelerate fibered metro building deployments (which drove Level3 to offer to buy tw telecom this week for 12.5x EBITDA).
The last three points are “take it to the bank” certainties that will impact some parts of the telecommunications industry more than others. Amid the hype, remember this: If one carrier can deliver consistent experiences while outside, en route, near building, and in-building, all of the other carriers will need to follow suit. The top three carriers (Verizon, AT&T, and Sprint) are driven to do this because most of their current data pricing plans are capped. Not only is third-party Wi-Fi offloading viewed as inferior and inconsistent when compared to the increasing affordability of in-building small cell solutions, in-building Wi-Fi now has become a revenue threat to the carriers.
There are many drivers of change in the wireless industry, but four deserve special mention:
- The ripples of T-Mobile’s Uncarrier strategy are beginning to be seen throughout the industry. First, it was the introduction of Equipment Installment Plans (EIP), and the separation it has driven between equipment sale and service revenue quality. As AT&T, Verizon, and Sprint transition their bases from traditional subsidy (which, at the end of the two-year term and beyond, can have attractive economics) to EIP models, the pressure on service revenues (particularly data ARPA/ ARPU growth) becomes greater. As we covered in Sunday Brief Q1 earnings reviews, the transition of T-Mobile’s base will be nearly complete by the end of 2014.
The most important thing to remember with these shifts, however, is the increased flexibility it provides the incumbent providers’ base of customers. Under the traditional $325-350 subsidy model termination penalty scheme, the perception among the base was that they were “locked” until the end of the two years. None of the new plans carry two-year contract terms, and, as Sprint and T-Mobile have shown, they are willing to pay multi-hundred dollar termination fees to drive up gross additions . A more unstable base should have AT&T and Verizon on edge.
To add fuel to the fire, T-Mobile will launch a new program to the AT&T/ Verizon base this week. For a $700 hold on your credit
card, T-Mobile will send you a new iPhone 5s for a free one week test drive (I have confirmed with T-Mobile that the one week starts upon iPhone receipt – something to consider when you sign up). This is not a plan that is aimed at the traditional T-Mobile base, but one that gets current (Sprint/AT&T/Verizon) iPhone 5s users into a T-Mobile store to have a conversation. (If the customer is a current iPhone 4s user, they will receive a double benefit due to the 64bit processing and LTE capabilities inherent in the 5s – a very clever move on the part of T-Mobile).
Will this plan have the same effect as equalizing the cost of an Android Wi-Fi only tablet? Likely not. But it could erase perceptions of poor network coverage for some. While many see this move as more “Carrier” than “Uncarrier”, I see this as Part 1 of a multi-part plan to reintroduce the T-Mobile network (voice, text, data) to millions of skeptical AT&T and Verizon customers (some of whom may have previously been T-Mobile customers). At worst, this program will provide real-time feedback on their network improvements and identify coverage gaps (and hopefully reiterate the need to begin a substantial in-building coverage initiative for T-Mobile hopefuls who are captive to multi-story living/ working environments). At best, it will propel 2-3 million gross additions through the end of 2014.
- The drive for spectrum outside of the FCC auction process will continue. There have been a lot of discussions this week about Verizon’s interest in Dish network spectrum (this article places a $17 billion value on the asset, and it’s very likely that Verizon’s interest is focused on Dish’s AWS-4 holdings as opposed to the 700MHz spectrum band), and also T-Mobile’s interest in acquiring additional 700 MHz A-Block (a.k.a., “low band”) spectrum from the likes of Paul Allen’s Vulcan Ventures (who holds the Seattle and Portland licenses) and spectrum management companies King Street LLC and Cavalier Wireless (the full list of original A-Block winners can be found here).
We have already seen AT&T actively pursuing spectrum purchases since 2012 in the 2.3 GHz/ WCS band (see here for their Sprint spectrum purchase that escaped most media headlines), and this week Sprint announced their first wave of rural partnerships which will leverage their Tri-Band capabilities.
With the frequency-sharing rules of the upcoming AWS-3 auction, and the “reserved/ unreserved” designation for the 600 MHz auction discussed in a previous Sunday Brief, is anyone surprised that unrestrained and adjacent spectrum would be interesting to larger carriers? Absolutely not. Announcements serve to entice more broadcasters to participate in the 600 MHz auction process, and hopefully keep additional regulations to a minimum.
Interestingly, if there are a wave of spectrum sale transactions prior to the end of the year, look for new categories of bidders (e.g., non-traditional wireless providers) to emerge for the licensed spectrum.
- Consolidation efforts will fail, not because of Sprint’s lackluster efforts, but because of T-Mobile’s unbelievable success. In second quarter earnings, we will see the full fruits of T-Mobile’s Early Termination Fee buyout initiative announced in January. Surprisingly to most (although not all), T-Mobile’s results will equally impact Sprint and AT&T (given the process ease of SIM-card swapping between AT&T and T-Mobile, this might be viewed as a slight victory for AT&T).
As we have shown in previous Sunday Briefs (see picture), the retail postpaid gap between T-Mobile and Sprint is shrinking (if one exists in retail prepaid after 2014 I’ll be very surprised). The eleven million subscriber gap at the beginning of 2013 could be as small as four million as we exit 2014. And, considering the composition of T-Mobile’s (smartphones) vs. Sprint’s (tablet) net additions, the revenue gap will be even smaller.
While there will be many traditional regulatory concerns (link to the Herfindahl index definition is here), the trends beg the question “Why should T-Mobile take on Sprint?” Does Sprint’s base of customers provide unique differentiation (and, given a large portion of the base is still on unlimited and unthrottled LTE data plans, can the value of the customer base increase)? Does Sprint’s base allow T-Mobile to build unique capabilities in the enterprise segment (which Sprint largely abandoned in 2013 to focus on small and medium customers)? Can Sprint out-innovate T-Mobile with a new management team (or, as one of you wrote recently, “Where is the Sprint problem – with the quality of the clay or with the potter?”).
Time is not on Sprint’s side: Service revenues are shrinking, management is leaving, and customers (particularly Corporate Liable enterprise customers) are questioning. No doubt, there is a value to scale, but T-Mobile is worth much more than $40/ share in a couple of years without Sprint. Could a cash infusion from Comcast/ Time Warner or a cable consortium be a viable alternative? Does T-Mobile even need cable as a strategic investor?
Consolidation makes good headlines, but every month that goes by without an announcement opens up better alternatives for T-Mobile than Sprint (and makes the “Why?” question more difficult to answer). Remember – at the beginning of 2006, Sprint Nextel, AT&T Wireless, and Verizon were basically the same size. One non-traditional strategic partner/ investor could reset the equation for T-Mobile and the industry.
4. The cable industry (as opposed to FiOS or U-Verse) will unveil Wi-Fi capabilities in 2015 that will be easier to use and intensify the battle for data in the home and office. The blind spot in wireless carrier strategic plans is cable. Their Wi-Fi efforts are very close to tackling the issue of in-home (and in-office) data usage. The rollout of an additional 100MHz of 5GHz Wi-Fi capacity will also fuel the bandwidth fire. More to come on this in a future Sunday Brief, but, given the arguments presented above and in previous analyses, cable would easily eliminate 10-20% of the data upside from the wireless carriers in 2015. (Editor’s note: for a view of the extra expansion from the cable industry’s point of view, check out this CableLabs blog post).
These are a few of the issues wireless service providers face, but they cover nearly every aspect of the business environment: non-traditional competitors presenting real substitutes, traditional competitors redefining the buying process, increases in supply, new regulations, and the increasing sophistication of smartphones and tablets are but a few of the dynamics that will be discussed around the strategic planning table. Who wins is anyone’s guess. But every carrier will attempt to move the needle.
In other important news this week, we do not have space to do a full analysis of the new Amazon smartphone (we will try to tackle the new Fire Phone in depth next week). In the meantime, check out two in-depth reviews here and here, and an excellent interview with Ian Freed from Amazon here.
Have a terrific week!