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The Future of Telecom Part 2- Sprint on Sale (SoS)

*** Editor’s Note:  In last week’s note on capital spending, there was a slight to the table shown due to a spreadsheet error.  This change raised the cap ex/ average retail customer for T-Mobile in earliest quarters shown.  Apologies for the change – story stays the same.  A link to the corrected spreadsheet can be found here.  ****

opening pic (2)Triple digit greetings from Dallas, where high school football is getting into full swing. We started and ended this week with some very big news from Sprint.  At the beginning of the week, Sprint’s new CEO, Marcelo Claure, pulled the pricing lever, offering 20 GB of pooled data for the same price that others are offering 10GB.  At the end of the week, Sprint introduced a $60 unlimited plan that T-Mobile matched with a referral promotion offering unlimited data.


With the Sprint Family Share Pack offer, Sprint’s cost per line rate table looks like this (note: excludes 2GB and free voice/ text promotional offers):


sprint rate table.emfThe new plans represent a fundamental difference from both Framily and Unlimited plans of past years.  First, they pool data.  This seems small, but allows a more immediate comparison to AT&T and Verizon plans and positions T-Mobile negatively as the remaining “unpooled uncarrier.”  When we looked at AT&T’s pricing structure in 2014, we saw a lot of value to pooling because of the widely varying (video viewing) habits of different family members.  It’s very encouraging to see that Sprint has finally seen this light.


Second, for fewer than four lines, Sprint’s plans became more competitive.  One of the many problems with Framily was getting to the $25/ mo. promised land.  The $55/$50/$45/$40 laddering was very hard to explain, and, for a family of four, competitively unjustifiable.  To put it into perspective, Framily cost $52.50 per line for 2 lines and 2GB of data and $50 per line for 3 lines and 3 GB of data (new rates are about 30% less).


However, as many analysts have pointed out this week, the new plans (excluding promotions) are not materially better or worse than T-Mobile for two or three lines (also excluding promotions).  A 3GB/ user Simple Choice plan for T-Mobile (which includes free streaming music) costs $120 for three lines ($40/ line).  Sprint’s pooled data plan does not make sense for most of the scenarios (3 lines, 8 GB pool would cost 20% more than T-Mobile).


Even at the benchmark four line scenario, the situation is not materially better with T-Mobile with a four line plan at $140 including 3GB/ line (again, streaming music not included).  While a lot of the attention this week has been focused on the “merger partners now archrivals” theme, it’s clear that Sprint’s current plans are not aimed at T-Mobile, but at AT&T and Verizon.  Current promotions (including Early Termination Fee buyouts) could stall the T-Mobile train, but Sprint’s latest family plan volley will not stop T-Mobile’s multi-quarter advances.


How Sprint Could Stop T-Mobile:  Better Marketing and Retention

Sprint’s pricing plans need to be accompanied with marketing efforts that reinforce a value image.  Throughout the Framily plan launch, I was confused about how Framily reinforced the Sprint brand.  Most consumers know what T-Mobile stands for:  wireless services that allow me to have more fun and to do more with my life.  In the consumer market, what does Sprint stand for?  How will Sprint create an association (e.g., the Hyundai of wireless) before their competitors create that association for them (e.g., the Yugo of wireless)?

rooscore repors 1h 2014 resulsThere are several areas that Sprint cannot legitimately claim, if the latest RootMetrics reports are accurate:  largest footprint, fastest (Now) network, and call performance are all areas where Sprint lags behind their competitors (the full RootMetrics report is here).  Most improved in customer service reminds many former Sprint customers of previous issues.  There are secondary considerations, like corporate stewardship and environmental consciousness, that will impact decisions, but Sprint has few options but to claim the “low price of the Big Four” segment.


How large this segment is, and how willing AT&T and Verizon customers are to switch to Sprint is debateable.  This is where marketing comes in.  First, many who are looking at their current Verizon and AT&T bills are wondering “When will our family exceed10 GB of data?”  Assuming the family is made up of two adult and two child phone users, it’s very likely that data usage rates are different – one uses 3-4GB routinely while the rest of the family uses 4-5 GB in total.  When the primary account owner receives “you are near your limit” messages for two consecutive months in a row, Sprint needs to be there with a compelling and relevant offer.


At this point, the primary concern to many families is nework and device comparability.  Is Sprint’s Spark service in Orlando really better than AT&T?  Can Sprint deliver data to the device as quickly as AT&T can?  How much will it cost to change over four GSM (AT&T Network) devices to CDMA (Sprint Network)?  Should our family wait until the new iPhone is released in September?  These are all relevant questions.  And asking current Sprint customers may not generate the answers that Sprint wants to hear (unlike similar conversations with extremely happy T-Mobile customers).


screen-shot-2009-12-22-at-5-43-13-pm-2As mentioned earlier, Sprint must control their own rebranding message.  One of the best ad campaigns of the decade thus far was Comcast’s “Slowsky” turtle campaign which started in 2011 (nice roll of Slowsky ads here).  In spot after spot, Comcast used humor to create differences between cable and DSL.  And, as we showed in the 2Q results analysis, Comcast has been winning – growing their consumer broadband base by 3.4 million subscribers over the past three years (3Q 2011 to 2Q 2014) compared to 250,000 for AT&T.  Is a T-Mobile version of the Slowsky campaign far off?


Sprint’s marketing message also has to convince current customers to stay.  Sprint’s Spark network would be a terrific thing to stick in the hands of their most loyal customers.  Or, something as simple as including the $5/ month early upgrade option for former Sprint Premier (rewards program) customers (see the Sprint Community thread on the topic here).   While Sprint plans do allow customers to move to Family Share plans (see criteria here) there has been no promotion to existing customers (cf. one of the reasons for AT&T’s extremely low postpaid churn in 2Q was their decision to allow current customers to upgrade to their pooled data plan).


Having a “black label” or premium mentality for the current customers is going to be critical.  During the worst of the customer service transition, Sprint sent customers a coupon for 50% off of an accessory.  It drove store traffic, but, more importantly, it started an in-store conversation about what things the customer liked about Sprint.  With the network transition in full swing, that conversation needs to be restarted.


Associations and partnerships will also be critical.  Here are a few that Sprint could implement tomorrow that would drive additional customer loyalty:


  • boingo plansA Boingo relationship. Without a doubt, this would improve the customer experience with minimal network involvement. For those of you with short memories, Sprint actually sold seven airport Wi-Fi networks to Boingo in 2007.  The relationship exists and the opportunity to grow the network is significant.  Make it seamless and powerful, and existing as well as new customers will thank you.
  • A stronger Samsung relationship. Sprint and Samsung have a good relationship today, but it could get stronger with a few focused products and services.  This relationship is not limited to devices but could include network/ small cell elements.  This could be done without limiting Sprint’s initiative to enable lower cost handset providers in the US (perhaps in conunction with Google).  While sales at Samsung are not at the Galaxy III stratospheric levels, Samsung continues to carry strong brand recognition.
  • A start-up relationship. Within the Supply Chain and Network organizations, setting a “business diversity” goal of 10-15-20 percent of new purchases from start-ups is bold and ambitious.  It would help re-create a culture of “always better” that permeated Sprint in its beginning two decades.
  • A stronger and resonating music relationship. One of the “small print” items in the new Family Share Pack announcement was that all customers receive six months free of Spotify Premium services (see full terms of the offer here).  However, the fee spikes to $8-10/ month after that period has ended.  Sprint needs to think more deeply about music and the effects that it can have on acquisition and retention.


There are many more brand building opportunities than these on the horizon.  Sprint needs to understand that their next marketing move can have meaningful and long-lasting (positive and negative) brand implications.  More sales will cure a lot of the quarter’s problems, but brand definition and reinforcement determine the long-term future of the company.


We will take a hiatus next week for the Labor Day holiday, but will resume on September 7 with discussion of the Apple effect and third quarter earnings drivers.  Until then, if you have friends who would like to be added to The Sunday Brief, please have them drop a quick note to 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!


The Future of Telecom Part 1- Defining the Minimally Viable Network

*** Editor’s Note:  There has been a slight change to the capital table below due to a spreadsheet error.  This change raised the cap ex/ average retail customer for earliest quarters shown.  A link to the corrected spreadsheet can be found here.  ****


patterson pictureGreetings from New York, Bethpage, Charlotte, Greensboro, and Dallas.  This has been a monumental week for The Sunday Brief, with hundreds of email responses (still reading them), thousands of www.mysundaybrief.com website views (from over 1,000 unique visitors), a wonderful reprint in RCR Wireless (thanks, Jeff Mucci, for your friendship over the past fourteen years), a terrific Bloomberg interview here, and even a few phone calls and text messages.  I am thankful for each response.


Several newcomers to The Sunday Brief have pointedly asked me over the past week “What’s your angle?  Why are you out to get [insert company or business leader name here]?”  There is a thin line drawn at times between strong, fact-based opinion and vendetta.  To some readers, last week’s note seemed to cross the line.


Those who express that opinion are short-sighted.  I was equally harsh in my criticism of AT&T’s Nokia Lumia launch on Easter Sunday when most of the retail stores were closed (April 2012).  Or of Verizon’s decimation of cloud pioneer Teremark.  Or Google’s shortsighted “cut and run” policy with respect to China.  Or of the FCC policymakers confusion between the concepts of equal access and equal outcome with respect to the Internet.


For five years (225 total columns), we touched every rail and sacrificed every sacred cow.  No one company is singled out – everyone gets his turn under the microscope.  Enough said.


The Minimally Viable Network

We are heading into a telecom storm driven by scalability requirements, not excess capacity.  Sprint has done everything but fire the first missle in what could be a long and protracted price war.  As we have discussed previously, while AT&T’s four line/ 10 GB pooled data/ unlimited everything else offer is aggressive, it is not a long-term margin-compressing move but rather a means to an ultimate end: to acquire scale and ubiquity that stems the tide of SIM-card swaps to T-Mobile, and to enable widescale deployment of VoLTE.  T-Mobile ended up raising prices on unlimited data plans in March and is now cracking down on selected Unlimited plan customer activities.  These are all signs of a rational industry.


Sprint’s action this week could be very different.  My guess is it will have surface impact only, and will not measure up to T-Mobile’s ETF buyout announcement in January and AT&T’s Mobile Share pricing change in February.  Why?  The answer is found in the first rule:


To set national market price, you have to have a Minimally Viable Network (MVN).  To have an MVN, you have to have a legacy of national network spending.    


verizon vs sprint tmobile othersThis is not to say that Sprint does not have an MVN (I used all of my 2GB allotment of HotSpot data in four days without watching Netflix or YouTube thanks to superior Sprint Spark coverage on Long Island and Charlotte).  It does… in places.  As Marcelo Claure said this week (according to this Light Reading article) “When you have a great network, you don’t have to compete on price.  When your network is behind, unfortunately you have to compete on value and price.”


Using an extreme example, let’s assume Cincinnati Bell Wireless woke up tomorrow and decided to compete on price by offering a $39.95 plan that included unlimited voice, text, and 5 GB of data nationwide (as well as similar family plans).  That would certainly be a headline grabber, but would Verizon and AT&T customers outside of Cincinnati really care?


That’s the issue Sprint (and T-Mobile face).  The next 10-20 million smartphone gross adds are evenly split between metro and secondary markets.   That’s the population that makes up the interval between the 200th million population and the 300th million (re: Sprint is around 245 million POPs in LTE coverage; T-Mobile at 235 million).


Let’s look at capital spending per average retail subscriber for the past sixteen quarters to see who has legacy status.  The following chart simply looks at the preceding four quarters of capital spending divided by the average retail subscribers (note: T-Mobile M2M included in the retail count for comparability purposes.  Full figures and analysis will be available on the www.mysundaybrief.com website on Monday).  Also, to ensure consistency, we have included MetroPCS capital spending and MetroPCS average subscribers in the T-Mobile figures).

annual capex per avg retail sub REVISED



There’s a lot to be gleaned from this table, and this will quantifiably validate for many of you many hypotheses you have had over the past several years.


First, to no one’s surprise, Sprint went through a six-quarter capital spending trough.  From 2010 through most of 2012, network spending was held flat.  Due to slow (or even declining) customer growth, this equated to an annualized capital spend per average retail sub of $40-80.   This number becomes even lower when you consider that Sprint’s spending is divided between their iDEN (Nextel) and CDMA (Sprint) networks.


When determining what level of capital spending needs to occur to be minimally viable, I kept coming back to $80/ average sub.  Prolonged periods below $80 put national viability in question.  Sprint had that period and each paid mightly for it.  (Note:  in the future, as more data-only devices are activated, an $80 figure might be perfectly rational.  Given the massive conversion from feature to smartphones for the period analyzed, however, a $65 or $75 figure is below the acceptable limit).


On the flip side, AT&T experienced some of their greatest growth challenges in 2011, when iPhone exclusivity was lost to Verizon (Feb) and then Sprint (Oct).  Not only was AT&T spending capital to keep current iPhone subscribers happy, they also had to accommodate converting iPhone customers.


Then, in 2012, AT&T made the decision to aggressively launch LTE (they began their first deployments in mid to late 2011, but acceleration did not come until Velocity IP was announced in November 2012).   Specifically, AT&T’s VIP announcement cites their change to deploy LTE to 300 million POPs as opposed to their previous announcement of 250 million POPs (and additionally cites that VIP investment will lead to ubiquitous coverage across their 22-state local territory).


While high, the spending consistency for AT&T is remarkable.  Even with iPhone launches at each of their competitors, growth of data consumption, and deployment into less dense markets, AT&T has largely kept within $15 of annualized capital spending per average subscriber from 2Q 2010 to 2Q 2014 (spending $43.7 billion over the past sixteen quarters on capital but also growing 23.3 million connections over the same period).


AT&T’s growth figures seem very robust on the surface, but 10.5 million of the 23.3 million retail connections came from “connected devices.”  Over 95% of connected devices (industry-wide) generate less than $20 in retail ARPU (and over 70% use less than 200 MB of monthly data).  It would seem logical that as the percentage of connected devices increases as a percentage of the total base, total capital spending will fall.


It’s also important to note that the capital spending metric in the table does not include spectrum purchases or any acquistions (which would have their own ongoing capital needs).  Every carrier, but especially Verizon (AWS acquisition from cable companies) and AT&T (numerous private spectrum purchases) have had additional capital needs above the $81 billion they have spent on their respective wireless networks over the past four years (and their 700 MHz spectrum purchases in 2008).


Verizon has been more capital efficient than AT&T over the last four years ($37.3 billion in capital spending and an 18.5 million increase in connections since 2Q 2010).  Part of this stems from Verizon’s head start on LTE (spending started in 2009), inheriting a strong and operationally robust network from ALLTEL (acquired in early 2009), spectrum density (see earlier note that spectrum purchases are excluded from the total capital figure), and from Verizon’s market share in dense metro areas.  It’s doubtful that the gap would be reduced significantly, but there’s some 2009 LTE spending for Verizon that is not reflected in the above table.


A history of capital spending is the primary defense against Sprint’s price war.  While Sprint has spent more than $12 billion over the past eight quarters in a substantial “rip and replace” initiative, that may not be enough to put a dent in the fortresses Verizon and AT&T have created.  The same argument can be made for T-Mobile, who will likely need $6-8 billion or more in spending in 2015 just to keep up with demand (again, this excludes participation in the AWS or 600 MHz spectrum auctions).


Next week, we’ll tackle the question “How important is marketing to the wireless industry over the next four years?”  Bottom line:  The next telecom CEO might be better off having a Brand Management pedigree than a Network/ Technology background.   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).


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


Bloomberg interview – In the Loop with Betty Liu (August 11)

patterson picture


This morning’s interview with Betty Liu on Bloomberg’s “In the Loop with Betty Liu” is here.  Many of the same points emphasized in the Sunday Brief are in the interview.  Marcelo, you have your work cut out for you.  Best of luck!

Also, don’t post here, but if you have tips on how I could have a better interview presence, I’m all ears.



Dear Marcelo:

sprint vs tmobile may 2013 to currentGreetings from Dallas.  As many long-time Sunday Brief readers will remember, in October 2012 the Sunday Brief had a column called “Dear John (Legere)” which talked about the bold radical moves that would be necessary to change fourth-place mentality into innovative market leader (this also started a terrific relationship with John and many of his team).  In that spirit, here’s a letter to Marcelo Claure, the new CEO of Sprint.



Dear Marcelo,


Congratulations on your new position!  As one who spent fifteen years at Sprint, first as a manager in Sprint’s local division (now a part of CenturyLink) and leaving as President of Sprint’s Wholesale Services unit five years ago, I have seen the company you now lead from many perspectives.  I witnessed the Sprint PCS buildout, the formation of GlobalOne, the blocked WorldCom merger, the telecom bubble collapse (I was running Access Management while Scott Sullivan at WorldCom was making those access-related accounting entries), Sprint ION, Pivot, Nextel, Cable VoIP, Kindle launch, and Clearwire.  I dutifully served Bill Esrey, Gary Forsee, and Dan Hesse.  I still bleed yellow.


Like you, I co-founded a business to serve the telecom industry.  It was nowhere as successful as Brightstar, but, like you, I sold it to a global telecommunications powerhouse.  I had to meet payroll, pay developers/ lawyers/ advisors, acquire and maintain customers, and raise money during very tough times.  I learned through the process how to make better decisions with less information.  I learned to ask for help, most times for free.  I learned how to cherish time.  Most importantly, I learned how to manage risk rather than eliminate it.  I understand your perspective.


market share end of 2006This is a tough time for Sprint.  By all counts (including Friday’s $1.8 billion market capitalization differential), Sprint is a fourth place finisher.  There’s no ribbon for fourth place.


It wasn’t always this way.  At the end of 2006, Sprint Nextel was nearly the same size as AT&T Wireless and Verizon (see Chetan Sharma’s link here – page 12 is most telling).  I am sure you remember those days when you called on Sprint.  They had a first class CDMA data network powered by EVDO-Rev A technology and connected to a Tier 1 IP backbone (AS1239).  The iDEN network, while aging, was practically indispensible to certain business verticals.  The wireline IP network was growing at double digits (42% growth in 2007) and commanding equal headlines with wireless.  Sprint was known for network quality and pioneered innovations in M2M (DriveCam/ Lytx, CardioNet, Kindle).  The world was their oyster.  What happened?


Understanding the legacy of Sprint is critical to understanding its cure.  Here’s my perspective on where things went wrong and how you can right the ship – quickly.


First, it’s important to see the success of wireless as coexistent with wireline networks.  Many at Sprint, including your predecessor, saw wireline as a competitive network and not as an enabler.  This was right for voice (and wireless substitution figures prove this out), but it’s wrong for data, especially business applications such as M2M.


Sprint needs strong wireline partnerships to be successful.  They have not owned local connectivity (direct into buildings) since the spinoff of Sprint’s Local Division (Embarq).  As a result, a lot of expertise related to connecting to buildings (specifically authorization agreements), riser rights, and the like are missing.  Sprint is still conflicted between “offload it to Wi-Fi” (which supplesses incremental revenue opportunities) and “power up” existing macro and other sites.  Neither is a competitive solution for the 80,000-90,000 buildings that make up 12-15 billion square feet of 2.5 GHz unfriendly office space.


Sprint needs to get inside the building (and the good news is you have access agreements to get inside of them today).  Sprint needs to determine who will manage the floor devices to ensure “better than Verizon” coverage (Level3/ tw telecom seems like a good solution to me).  And Sprint needs to communicate this to customers and have them acknowledge that your coverage is superior.


The initiative pays for itself with rejuveated wireless business revenues.  Stop going after the small business customer segment on a national basis  – cover the 80-90K buildings in metro areas that matter and use that as the first proof point of a superior network.


Second (and related), make peace with cable (before T-Mobile does).  It’s not OK to have the relationship in its current tattered state.  Current Verizon FiOS offers (see here) and AT&T’s Project VIP (especially with DirecTV) are going to quickly eat into cable’s High Speed Internet gains.  They need a wireless partner.  And the third time in the past decade might be the charm.


2014-08-09 11.18.27Here’s a picture of the back of my ETMA (cable modem + phone service).  It’s powered, has battery backup, and generates 30GB of data on average per month (its an older modem with average speeds of 50 Mbps).  As you can see, it happeneds to have a USB port at the back.  What could Sprint do to with cable to generate improved coverage from that USB port?  I bet engineering teams could figure something out that enables whole home coverage pretty quickly.   As you probably saw from last week’s Sunday Brief, cable continues to grow their relative share vs. telco incumbents.  Both are growing, but cable is growing faster – a lot faster.


There’s a lot of emotion around the cable issue as a result of Clearwire and the loss of hundreds of millions of cable VoIP revenues (there’s a good story about the Time Warner Cable negotiaiton process we should discuss).  As a new CEO, you have the ability to reset the agenda.  Make cable an integral part of Sprint’s partnership strategy.  If you don’t do it, and T-Mobile does, it’s unlikely you will ever to get back to “ribbon status.”


Third, measure your team through the customer experience, not some arbitrary and capricious budget metric.  Vision was an important project, but covering 245 million with LTE means nothing if customers cannot get adequate coverage in the St. Louis/ Denver/ LaGuardia / DFW or Dallas Love Field airports (measure the difference between Sprint’s and AT&T’s data performance in these airports – it’s in multiples, not percents, and outright astounding).  Stop focusing on average, and start focusing on the 95th percentile.  Specifically, be able to make the statement “Ninety-five percent of our customers receive a text message within one second from the time we receive it” or “Ninety-five percent of our customers receive 10 Mbps (or greater) downstream speeds throughout the day.”  These measures exist for voice (dropped/ blocked calls), but not for SMS or data.


These are promises that focus Sprint on end-to-end experiences.  How robust are Sprint’s connections to Pandora (or Spotify or Rhapsody or LastFM)?  What if Sprint stored the most frequently needed Rhapsody + Spotify + Pandora music catalogs at major cell sites (it would probably require storage the size of the previously pictured EMTA for each of them)?  What about other commonly cached content, like YouTube/ Vimeo/ Netflix?  What about Content Delivery Network servers for Akamai, Limelight, Level3 and others?


Sprint’s nework delivery is falling behind the competition.   Measure it and fix it.  Then watch churn improve and ARPUs rise.


Finally, institutionalize the assumption throughout Sprint that the innovative solutions needed to produce sustainable competitive advantage will not come from Cisco, Microsoft, Ericsson, Alcatel-Lucent, or Nokia Siemens Networks.  Too many times, large carriers actively discourage trying new companies.  That has largely been Sprint’s practice, but not Sprint’s historical tradition.  For example, when Sprint was pioneering network advances in the 1990s (and carrying as much as two-thirds of the global Internet backbone), Sprint enabled companies like Fore Systems (sold to Marconi in 1999), Cerent (sold to Cisco in 1999), and Ciena.  I could not imagine asking Sprint’s network organization to be the first purchaser from three VC-backed startups today.  (Note:  US Robotics, 3Com example).

zayo-logoWhen access solutions were sparse for growing cell site connectivity, Sprint enabled or kept afloat providers like AboveNet (f.k.a. Metromefia Fiber Networks), Adelphia Business Solutions, Xpedius, ACSI (now FiberLight), Lightower, Towercloud, and Zayo.  T-Mobile was not the carrier Cox Business, SuddenLink, Mediacom or Cablevision Lightpath cut their teeth on.  Their first knock was on Sprint’s door.


Devote 10-20% of incremental 2015 spending to companies that have been in business less than five years.  Create a culture where the “play it safe” mantra results in lower evaluations and fewer promotions.  You might be able to regain third place by playing it safe, but a second or first place finish involves a reputation for technical innovation not seen from Sprint in over a decade.


Localize everything except the culture of innovation.  Partner with cable partners who are natural enemies of AT&T and Verizon to secure long-lasting competitive advantage (and hobble T-Mobile in the process).  Measure the customer experience and honestly assess the inconsistencies of Sprint’s current data network.  Be known as the first company innovators should turn to for sponsorship, validation and feedback.  These are the foundations on which to build a broad-based recovery and set the standard for which all other companies are measured.


Best of luck to you, Marcelo.


Your friends at The Sunday Brief



More insights to follow Monday morning on Bloomberg television (approximately 9:10 ET).  For those of you who will be unable to watch, a copy of the segment will be posted to www.mysundaybrief.com on Monday afternoon.


Next week, The Sunday Brief turns five years old.  This will be a very special edition on the future of telecommunications.  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!

The Sunday Brief:  What Isn’t Being Discussed On 2Q Earnings Conference Calls (Part 1)

2014-08-01 11.20.26August greetings from chilly Fraser, Colorado where there’s still snow at 11,200 feet in early August!  This is a panoramic shot from a short but steep trail near the Berthoud Pass near Winter Park, Colorado.  A fun time with family and it wasn’t Dallas hot.


My apologies for the production miss on last week’s Sunday Brief.  The travel schedule for the past two weeks was brutal (Austin, France, Atlanta, Denver) and we ended last Sunday with only a partial report.  It’s the first time in nearly five years that we have had a publication miss, and it makes writing this week’s brief even harder.  Thanks to the 60+ of you who emailed, texted, and called looking for your weekly fix.  We simply ran out of time.


Many if not most of you have seen earnings for AT&T, Verizon, Comcast, TWC, Sprint, and T-Mobile over the past two weeks.  While many of the headlines focused on what was discussed on conference calls, this week’s Brief will focus on what wasn’t said.  Many times, omissions can ferret out poor or struggling investments.  They nearly always highlight portions of the business where competitiveness is waning.


Headline #1:  Sprint Loses the Prepaid Pole Position to T-Mobile.  Is Postpaid Next?

We have discussed this narrowing gap in previous Sunday Briefs (see here for the most recent analysis) and in 2Q 2014, T-Mobile passed Sprint as the market leader in branded prepaid subscribers (T-Mobile passed Sprint in total prepaid revenues in late 2013 due to an $8-9 ARPU advantage).  Sprint’s retail prepaid customer base is now at 4Q 2011 levels.

sprint vs t-mobile chartJust as recently as 4Q 2013, the prepaid gap with T-Mobile was over one million subscribers.  Sprint experienced losses in the recertification of government-subsidized services (called Assurance Wireless).  T-Mobile also cited some pressure in growing pre-paid branded subscribers because many of them were qualifying for (and electing to move to) T-Mobile’s postpaid services.


The prepaid leadership change is significant because retail prepaid performance influences third-party dealer attention and focus.  They smell success and want to play on the winning wireless team.  With T-Mobile and Sprint neck-and neck on LTE coverage (T-Mobile at 233 million POPs, Sprint at 254 million), it comes down to pricing, handsets, promotions – and momentum.



sprint tmo prepaid tableT-Mobile may also have an advantage as a GSM carrier.  Given turnover in T-Mobile and AT&T upgraded units, there could be more SIM-capable supplies of Apple iPhone 5, 5c, and 5s models available in the second half of 2014 (new iPhone, new network compatibilities).  Configuring a previously owned Verizon iPhone for Sprint’s LTE network is more difficult than a SIM card swap.


Sprint is certainly doing everything they can to regain their leadership position in retail prepaid, including this week’s announcement of Virgin Mobile Custom, a new product to be distributed through Walmart (and not through Virgin Mobile USA).  More details will be available on this voice and text-centric plan prior to its launch next Saturday (August 9).  Sprint also recently announced some important changes with their Boost pricing (including an entry point of unlimited voice/ text + 500MB of data for $40) which they indicated helped 2Q subscriber growth.


T-Mobile is also closing the postpaid subscriber gap as the table below shows (note – table is in 000s):

sprint tmo postpaid table


If the current trajectories hold, Sprint will lose its postpaid advantage by the end of 2015.  What is truly amazing is that T-Mobile has erased 4.1 million of the subscriber gap in the past four quarters primarily through smartphone net additions (as opposed to tablets).  This is definitely the harder path.  As a result, T-Mobile lags Sprint by about $320 million in quarterly EBITDA.  However, if T-Mobile’s monthly postpaid churn remains at 1.5% (and Sprint’s fails to fall to 1.8-1.9% in the second half of 2014), the EBITDA gap may be quickly a thing of the past.


Losing their prepaid leadership position is the last thing Sprint needs as it faces continued resistance to a combination with T-Mobile (and now a competing bid as described here by the WSJ).  With Sprint Vision moving from deployment to augment/ optimization, the opportunity is ripe to restore their prepaid legacy.


Headline #2:  AT&T Is Not Gaining on Cable in Broadband – Yet. 

This headline was perhaps the most surprising to me, as AT&T has made a big deal about their U-Verse Internet growth (1.5 million subscribers over the past eight quarters).  Comparing AT&T to Comcast (we have discussed in two similar Sunday Briefs that this is a fair comparison), however, shows that AT&T is merely treading water as Comcast solidifies their High Speed Internet incumbency:

AT&T comcast broadband subs table


As the chart shows, AT&T’s overall consumer broadband connections (U-Verse + DSL) have been relatively flat for the past ten quarters.  U-Verse growth of anywhere from 150-250K per quarter has been roughly offset by an equal loss in consumer DSL connections.  Meanwhile, cable continues to grow in more of a seasonal pattern than U-Verse, with second quarter net additions for Comcast of 156K, 187K, and 203K in 2012, 2013, and 2014.  Like U-Verse, Comcast also tends to see faster growth in the second half of each year and we continue to have a growing economy in many Comcast locations (Atlanta, Houston, San Francisco, Seattle, and South Florida are growing very rapidly).  Comcast’s High Speed Internet ARPU experienced 3.1% annual growth in the second quarter, which follows ARPU trends being demonstrated by Verizon’s FiOS product.


U-Verse has come a long way over the past five years.  It seemed to be turning the corner at the end of 2013, but the first half of this year has not met expectations.  While 1.5 million U-Verse growth is good, Comcast has grown roughly 50% more (2.25 million over the same period).  Given the level of upgrades that have been completed as a part of project VIP (about $5-7 billion of incremental investment), the second half will be critical to the future of U-Verse.  The bandwidth freed up with a DirecTV merger would also be welcomed.


This is not a verdict on telco fiber as a product.  No one doubts Verizon’s (FiOS) ability to attract customers, and, while video profitability continues to be challenging, few doubt the ability of FiOS to generate incremental cash flow for years to come (overall penetration should top 45% in 2015).  However, the lack of growth in U-Verse compared to its cable counterparts is noticeable.  AT&T’s relative disadvantage versus cable is growing despite billions of dollars of additional investment.  Something’s gotta give.


Headline #3:  Double-Digit Revenue Declines in Transport Mean Big Trouble for the ILECs

When I ran sales for the Wholesale division of Sprint’s ILEC (now a part of CenturyLink), we watched transport yields and terms with great diligence.  As mobile data boomed from 2007-2012, so did the quantity of access and transport circuits to wireless cell towers.  Many of these circuits were purchased on long-term agreements (five years or more).  They are now up for renewal, and incumbent carriers face a threat from both cable providers (Brighthouse, Cablevision, Cox, Charter, Comcast, and Time Warner Cable) and independent access providers (Zayo, Fiberlight, FPL Networks, Fibertech, Towercloud, Lightower, and many others).


While cell site and building access is capital intensive, the resulting EBITDA margins tend to be very healthy, especially in the last years of a contract.  If the renewal process is orderly, no one notices, but, if it isn’t, the consequences can be significant.


The best proxy for what is occurring in the access and transport world can be seen in AT&T’s earnings where they show revenues from this product.  Here’s the twelve quarter trend:

wireline transport table


Using a rolling four-quarter view of transport revenues, what was a $9.2 billion revenue stream as of 2Q 2012 is now $7.7 billion.  That’s a 16% decline which will likely grow throughout 2015.


Billion dollar revenue declines happen in telecom (look at the “mass markets” line for Verizon), but it’s rare that a) they are high margin, and b) that they are not accompanied by a greater revenue increase in another area.  AT&T has a strategic services unit which captures products like Ethernet and VPN (and this category has grown $710 million over the same 12-quarter period), but these are not five year “install it and forget it” long-term deals with other telecom carriers.  Over the past four quarters, the decline in transport has actually been slightly greater then revenue gains in strategic services.  This is one of the drivers behind the Project VIP business connectivity initiative, and the initial results are not encouraging.


Beneath the surface, there are a lot of troubling signs.  Incumbency is less important than it was in the past.  Legacy is more likely a liability than an asset.  The milking schedule for cash cows is now quarters, not years.  Out of these shifts, however, emerges a tremendous period of innovation and value creation for those companies who demonstrate focus and resolve.  We’ll be sure to highlight these companies over the rest of the year.


Next week, we’ll look at Winsdtream’s proposal to split itself into multiple parts and also explore other items from second quarter 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!


The Sunday Brief – Apple + IBM: A Hand in Glove Fit?

2014-07-18 12.29.12July greetings from unseasonably cool and rainy Austin and Dallas, Texas.  This week the weather people in Texas introduced a new term:  a new “low high.”  We set two of them this week in Big D on Thursday and Friday, after posting the first 100 degree days of the summer on Sunday and Monday (this week’s Dallas weather mirrors the volatility within the telecom industry).


This week, we’ll touch on changes going on at Microsoft and Google, as well as the big Apple + IBM announcement.


Hurricane Nadella Hits Redmond (and other sites around the globe)

One of the Top Ten events of the first quarter was the naming of Satya Nadella as Microsoft’s CEO.  With the precision that belies his engineering background, he laid out three specific objectives for the mobile-first and cloud-first world in a memo to employees on July 10:


We will create more natural human-computing interfaces that empower all individuals. We will develop and deploy secure platforms and infrastructure that enable all industries. And we will strike the right balance between using data to create intelligent, personal experiences, while maintaining security and privacy. By doing all of this, we will have the broadest impact.


The full strategy memo can be found here.  It’s an inspiring yet daunting task ahead for Microsoft, and on Thursday thay made an additional announcement:  18,000 layoffs including 12,500 from the recently acquired Nokia unit (per their news release outlining the close of the transaction, this would represent 50% of the transferred employees).  The changes include consolidating feature and smartphone units, and closing or significantly ramping down facilities in Beijing, San Diego, Komaron (Hungary) and Oulu (Finland).


The layoffs are not severe for the core business unit.  Microsoft had 99,000+ employees prior to adding the Nokia unit, so 5,500 is only slightly higher than Microsoft’s natural churn.  But the expectations for the core unit are great, and the cultural changes outlined in Nadella’s strategy memo will take months to implement.  On Tuesday, look for Microsoft earnings to tell two different stories – one of transformational growth (cloud, enterprise units) and the other of quick change required (handsets, mobile).


Google Announces Earnings – and No Real Clues About the Future of Google Fiber

On Thursday, Google announced earnings that generally exceeded expectations as global growth continued its rapid ascent.  On the call, they received a question on Google Fiber progress.  Patrick Pichette, Google’s CFO, answered the question as follows (see SeekingAlpha for full transcript):


The economics of a fiber network today are clearly much cheaper than they were say a decade ago. There have been a lot of improvements in cost reductions and technology components all through the fiber network, but also in the way we build it… I just want to remind everyone that, an important part of our strategy is actually to build the demand. So, unlike the typical overbuilder, actually we have a very different kind of business model and thesis for that. And we do work closely with each city to streamline the process that keeps again the cost of construction way down…we are working with 34 cities, separate cities with a kind of completed checklist of items to help us prepare for the next kind of wave of our construction project. And we’re going to be basically, they are in the last rows of finishing these checklists and its coming back with us. Over the coming months we’ll actually be going through all of the details with them, whether it would be right of way or permitting or otherwise, and that’s what we’re going to use to make decisions as to how broad a program will have. We expect that to kind of give an update between now and the end of the year as the information comes along.


A deliberate, demand-driven strategy that will likely make AT&T’s GigaPower deployments look like the real jackrabbit.  From these comments, one has to wonder if Google is now seeing the reality of being a local facilities-based provider.  Running trucks to homes is a different business than running servers in a data center or developing software.  While both involve direct customer interaction, there’s a different response required (today) when ESPN is unavailable on a 70 inch television screen vs Google Play availability on a tablet or smartphone.


google fiber provoOne also has to ask if the brand and reputation hit to Google is too severe to pull back at this point.  For example, in Provo, Utah, Google has just extended the signup period to September 20 (more details here – yes, for a $30 one time fee customers can get free (5Mbps down/ 1 Mbps up) Internet for seven years!).  What if 90% of the targeted demand emerges?  Or 70%?  Can Google pull out?


Apple + IBM:  A Hand In Glove Fit for Corporations?

Many times when partnerships are announced between two companies at the end of a quarter, I think it’s a diversion – a Megacorporate Jedi mind trick.  My first reaction to the announcement (see press release here) was skeptical.   But as I dug into the details, this may turn out to be one of those unlikely “We need each other moments” in the tech world that makes perfect sense.


The relationship has four specific components (directly from the announcement):

  • a new class of more than 100 industry-specific enterprise solutions including native apps, developed exclusively from the ground up, for iPhone and iPad;
  • unique IBM cloud services optimized for iOS, including device management, security, analytics and mobile integration;
  • new AppleCare® service and support offering tailored to the needs of the enterprise;  and
  • new packaged offerings from IBM for device activation, supply and management.


cook ginni picFrom Apple’s perspective, it vaults them from providing market-leading devices and software into providing market-leading solutions.  Apple really did not need a reputation boost in corporate Board Rooms, but they needed a server/ mainframe/ services partner to bridge the transition from premise to centralized computing solutions.  Apple also needed greater core analytical capabilities (although they already have a start  with the 2010 acquisition of AdMob Quattro.  See a good evaluation of Apple’s ad capabilities and development needs here).


Without a doubt, an enterprise partner like IBM will help sell more iPads and iPhones.  Having IBM as an application developer for specific opportunities will have a direct effect on the direction of iOS (their security capabilities will be second to none).  But the key product of this relationship for Apple is a better understanding of how all Apple users (not just businesses) consume information.  Combined with the Beats acquisition earlier in the summer, a free streaming model with precise/ pinpoint ads could be rendered.


ibm hp spx comparison 2 yrIBM gets to hang out with the popular kids.  Face it, Big Blue has had a lot of troubles recently retaining their reputation for invention and innovation.  They did not invent SoftLayer – they had to buy them in 2013 for $2 billion (see here for the verdict on the acquisition one year later from Information Week).  Silicon Valley start-ups are more concerned about IBM’s patent attorneys than they are interested in their analytical engine (appropriately called Watson).  Their current grip on corporate services is loosening with the transition to the cloud.  (More on IBM’s troubles in this lengthy BusinessWeek article, and the nearby 2-yr stock performance chart illustrates their shareholder woes).  IBM needed the best innovation partner possible, and Apple was a “hand in glove” fit.


Large corporate customers frequently came to IBM asking for “end-to-end mobility” solutions that provided security and scalability across the globe.  With wireless bandwidth increasing at a precipitous rate, solutions need to work wherever data could be accessed.  IBM now has the ability to embed its security applications within iOS which could produce a competitive advantage against Windows and Android.  On top of IBM’s experience with data management, Apple brings acquisitions like AlgoTrim to the table who can help improve end-to-end data/ video to corporate customers.


Finally, IBM has a corporate-focused services unit.  As Daniel Dilger describes in his assessment of the partnership, “IBM is providing all the things Apple hasn’t ever been very good at or shown much interest in doing itself, from selling consultation and support services, to building and maintaining server infrastructure and custom apps for clients. That includes enhancing AppleCare for enterprise users with “on-site service delivered by IBM.”  Compatibility with minimal overlap is a recipe for a successful partnership.  Making it all seem coordinated to corporate customers is the challenge.


Interestingly, the agreement is exclusive.  Since no other descriptions were given, it’s likely a mutually exclusive partnership, meaning that IBM cannot have a similar relationship with Microsoft and Apple cannot have the same relationship with Hewlett Packard.  If this is the case, who would HP likely work with?  Could an HP/ Verizon (Terremark)/ Google (and maybe Samsung) alliance be far behind?  Where does this leave AT&T, and, more importantly, where could this leave Sprint and its shrinking Corporate Liable revenues – with or without T-Mobile?


The results of an Apple + IBM partnership should start to be seen this year.  With cloud applications at the forefront, expect to see Google, HP, Accenture, Blackberry, Microsoft and perhaps Cisco respond quickly with alliances of their own.  As to Amazon’s next move, expect it to continue to challenge IBM at every turn.


On Tuesday Verizon kicks off the earnings parade, with AT&T following on Wednesday.  There will be lots to report next week.  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!