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Verizon’s “Highest Common Denominator” Problem

David r and JimGreetings from Louisville and Dallas.  Pictured with me is David Richardson, Chairman of Louisville-based Learning House and a Darden (UVA B-School) classmate.  What David and his team did to transform and grow Learning House is nothing short of amazing, and the company is extremely well positioned to serve the bipartisan desires of expanded community college opportunities.  More on the company, including the lessons learned from their founder, Denzil Edge, can be found here.


This week, we will cover Verizon earnings and summarize the continuing value shifts occurring in the telecommunications and Internet worlds.


Verizon’s “Highest Common Denominator” Problem

Verizon reported earnings this week (the full index of earnings information can be found here).  Without going through every detail of their 1.99 million retail postpaid net additions (1.4 million of which were tablets), let’s focus on two of the most important figures:  postpaid churn and broadband (FiOS + DSL) net additions.  Next week, we’ll talk about Verizon’s cost of service approach versus their peers (AT&T will make a nice comparison).


Postpaid monthly churn was 1.14% on an average quarterly postpaid retail customer base of 101.09 million customers, vs. 0.96% on an average of 95.97 million customers in 4Q 2013.  This results in monthly customer churn levels of 1.152 million in 4Q 2014 vs. 960 thousand in 4Q 2013 (and 993 thousand in 3Q 2014).


The 231 thousand increase in monthly churn over 4Q 2013 translates into a 700 thousand customer increase in takeaway opportunities across the quarter for AT&T, T-Mobile, and Sprint.  While all 700 thousand did not go to T-Mobile, many did, as customers looking to trade in their old iPhone 5 and Samsung Galaxy S4 models did so while changing carriers.  Despite the increase in churn, however, Verizon still posted 600 thousand postpaid phone net additions and grew total accounts by 181 thousand.


Those who analyze the industry can become obsessed with small deviations from expectations.  Frankly, a 0.1% change in Verizon’s churn versus expectations results in 300 thousand more takeaway opportunities for their competitors.  As we discussed last week, higher churn will continue to persist in 2015 as customers who are less happy with their Apple iPhone 5 and Samsung Galaxy S4 smartphones look to upgrade to the latest versions.


Verizon’s approach in the coming year was summarized on the earnings conference call by CFO Fran Shammo:


… At a 1.14% churn rate, you should take that as we did not go to places where we did not financially want to go to save a customer. And there’s going to be certain customers who leave us for price and we are just not going to compete with that because it doesn’t make financial sense for us to do that….with the competition and some of the pricing that’s out there, you should think that we are going to have a higher churn rate because some customers we are just not going to financially keep.


As we said in the preview last week, Verizon did everything they could to serve the highest value customers, and the rest – well, good luck.


What are customers leaving for?  Below are measures of the (heart of Verizon) Boston network performance from our friends at RootMetrics:

RootMetrics 2012 data performanceRootMetrics 2014 data performance








The chart on the left outlines the data performance in Boston in the fall of 2012, while the right shows the performance in the second half of 2014.  While many will take issue with the preciseness of each measure, there should be no question about the direction:  By the end of 2014, in the eyes of some consumers, the striking difference between Verizon, AT&T, and T-Mobile is not apparent.  Data-seeking individual smartphone customers who want 3GB per month for $60 on T-Mobile might not see the value of paying $85 for a similar service.  Have a look at the RootMetrics data performance in Boston, then Massachusetts, then nationally.  The trend is undeniable – data performance differences are minimal in many major US markets.


As I discussed with several of you this week, Verizon has a “highest common denominator” problem.  They need to design the overall network to be able to a) accommodate the consistency expectations of a legacy base of balanced voice+text+data smartphone users with b) the emerging expectations of a data-only, speed-focused, buffered smartphone+ tablet world.


This is why the upcoming launch of (live) broadcast data represents an enormous opportunity to demonstrate Verizon’s competitive advantage – being able to have a clearer voice call over an LTE network is not enough – watching the NFL (or NHL or MLB) must be different.


This is not to take away from a good 4Q (and no one can scoff at 2 million net additions), but there are chinks in the armor and the iPhone 5 and Galaxy S4 upgrade cycles do not bode well for Verizon.  Product differentiation (both breadth as well as quality) can make a huge difference.


Verizon Broadband – Have We Reached the Top? 

Little attention is paid to Verizon’s broadband performance – with data penetration of homes passed now exceeding 40%, and nearly 60% of FiOS Internet customers on services in excess of 50 Mbps, many analysts think that Verizon’s market opportunity has peaked.


FiOS quantum gateway picNot so fast (pun intended) is Verizon’s response.  In December, the company introduced the Quantum Gateway, a router that brings FiOS services into the modern era for $9.99/ month (or $199 for a one-time purchase).  It’s good to see Verizon leading with faster Wi-Fi speeds (the Quantum Gateway has dual band capabilities with 800 Mbps maximum download speeds), and setting up guest access is a “nice to have” for homes where gaming friends might need some restrictions.  But routers come and go, and a similar cable modem package (see here for a comparable Zoom modem offering from WalMart.com on cable’s DOCSIS 3.0 standard) costs 12% less.


Having a modem that satisfies the needs of the majority of FiOS users is table stakes and is not a differentiator.  However, Verizon hinted at something else in their earnings conference call:


We have a strong commitment to customer service and have implemented several new frontline tools that are improving efficiency and increasing customer satisfaction. While we benchmark well against the competition, we have more work to do in 2015 to take our performance to the next level.


A strong modem offering, 50 Mbps speeds, and a superior customer service experience (which comes not only with fiber-based technology but also the merging of wireless and wireline service organizations)…. OK, now things get interesting.  Verizon is going after the heart of the problem – predicting when things could go wrong and being preemptive with solutions to improve the customer experience.


The mere thought that Verizon could make customer service a FiOS differentiator is a stretch.  However, the ACSI Benchmark for Internet Service Providers (see here) has them ranked at the top for the past two years (see here for full rankings), and the “Good, Bad, Ugly” reviews from dslreports.com currently has FiOS rated highest among their peers (see here for latest report).


Bottom line:  Verizon had a great, but not a record-breaking quarter.  They are moving into product and service as differentiators, but, as we will see next week, are doing so with market-leading low cost leadership.   Competitive network architectures pose the greatest threat as data-centric networks meet emerging customer needs for less overall capital than Verizon’s current structure.   Continued high incremental churn will be offset by growing ARPUs within their large and growing tablet base.

Value Tracker Results for 2014

value tracker final 2014Many of you have inquired over the past weeks about 2014’s Value Tracker.  Usually, we release these results the first full week of the New Year, but several hot topics (namely the upcoming Open Internet/ Net Neutrality rulings) prevented the complete release of the findings.  The attached table shows the final value creation results from 2014.


Not surprisingly, the Four Horsemen came out on top again, creating slightly more than $201 billion in increased market value than their telecom and internet service provider peers.  This is in addition to the $219 billion advantage in 2014 and $58 billion in 2013 (more on the value creation gap in last year’s June strategic planning brief).  The value created over the past three years exceeds the total equity market capitalization of AT&T and Verizon (gulp!).  If current trend continues, the four-year gap will equal all of the equity value of AT&T, Verizon, Sprint, T-Mobile, and the combined Comcast/ Time Warner Cable.  And the figures we have been tracking exclude Facebook and Netflix.


Some other interesting statistics to note:

  • Last year, the equity market value of Sprint decreased by $26 billion, more than AT&T, Verizon, and T-Mobile combined;
  • None of the wireless carriers enjoyed equity market capitalization gains in 2014;
  • Level3 was the big winner on a percentage basis (up 50% annually), even with the inclusion of their stock-mostly merger with tw telecom;
  • Despite the mid-year enthusiasm for Windstream’s REIT structure, their equity market gain was a mere 4%. In contrast, Frontier and CenturyLink were up 43% and 24%;
  • Microsoft’s equity rose 24% in 2014, a sharp contrast to single digit gains/ losses of the past decade (see our end of year write-up on Satya Nadella’s influence);
  • Missing from the Four Horsemen is Facebook, who added $65.2 billion in market capitalization in 2014.


The combined equity market value of Verizon+AT&T+Sprint+T-Mobile is approximately $407 million (even with debt, they would be hard-pressed to break $650 billion).   Compare this to the combined equity market value of Google+Apple+Amazon+Microsoft, which is over $1.5 trillion (and with Facebook, $1.7 trillion).  Five years ago, they were nearly equally sized.  Something to think about as we discuss who should benefit from the Open Internet and increased government regulation.


Next week, we will look at cost of service in the wireless industry and put AT&T’s earnings under the microscope.  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 readership, and have a terrific week!

Verizon is Not Worried (Fourth Quarter and Full Year Earnings Review)

cowfish blackened tuna nachosGreetings from Charlotte and Dallas (blackened tuna nachos from The Cowfish Sushi Burger Bar in Charlotte pictured).  It’s been a week full of news, with AWS auctions almost ending, AT&T’s acquisition of Iusacell closing, rumors that the Verizon/ AT&T/ T-Mobile mobile wallet venture (called ISIS Softcard) will be sold to Google emerging, and Sprint bucking the trend with mild but real support of limited implementation of Title II regulations on the wireless industry (a real head scratcher, IMO.  More on their FCC filing in a future Sunday Brief).  This week, we will focus on Verizon and AT&T’s pending quarter and year-end earnings announcements.  Verizon kicks off the telco earnings parade with their announcement Thursday morning, with AT&T and other providers following the next week.


Verizon:  We Are Not Worried

lowell mcadamCoincident with the Consumer Electronics Show was Citi’s beginning of the year Global Internet, Media, and Telecommunications Conference.  Kicking off this year’s agenda was a “fireside chat” with Verizon CEO Lowell McAdam.  While the early headlines were about profitability concerns (which had been communicated as early as the third quarter conference call) and AOL acquisition rumors (a likely partnership, but no acquisition in the offing), this interview succinctly provides a glimpse into the operations and strategies of the largest telecommunications provider in the United States.  The link to the full interview is here.


One of the first (and perhaps most interesting) statements of McAdam’s interview was “Competition in the market has always been strong, in my view.  Some of the names have changed.”  This is a shot at AT&T, not at Sprint (see net additions trend below).  Verizon has changed their focus from AT&T to T-Mobile.  Why?  Here’s the rolling postpaid net addition trends for the four largest carriers (note that T-Mobile’s M2M count is not included in these net add figures):


big 4 net add comparisonVerizon has enjoyed very strong year-to-date net additions, but many of these have come through connected tablets which typically yield less ARPU than smartphone gross additions.  As we discussed last week, the vast majority of net additions for T-Mobile (82% for 2014) came from smartphones, not tablets.  For AT&T to keep up with T-Mobile’s 2014 net additions they will need to post a whopping 2.5 million in the fourth quarter (extremely unlikely).  For Verizon to keep up with T-Mobile, they will need to add 1.4 million in the fourth quarter, a much more likely possibility.


McAdam did not stop there in talking about T-Mobile (and Sprint).  Here’s hit take on T-Mobile’s participation in the AWS auction and the likely effect it would have on their future pricing flexibility:


“… I know T-Mobile has been in the auction so they will have some debt load associated with that… you have to generate cash and the only way you do that is by profitable growth.” 


Simply put, McAdam says that to play to the high rollers table, you need to be ready to ante up a lot.  If McAdam’s intuition is correct, and T-Mobile ends up capturing a good portion of the auction proceeds, they will have more debt, and, even with [Deutsche Telekom] parent backing, they will not be able to borrow at the same rate as Verizon.


As we talked about last week, T-Mobile posted their amazing results without the $100 for 10GB of data offer in the market.  They did it entirely off of iPhone 6/ 6 Plus launch momentum, and my guess is that their share of the iPhone pie in the fourth quarter surprised Verizon (and Sprint).


Verizon’s response has been surgical preemption.  More from McAdam:


We divide our base in actual basis points, so for every 1% of the base we’ve got a profile on how we go in and give them the offers that keep them – keep the high-value ones especially – with us.  So while churn is up a bit and upgrades are probably in the fourth quarter approaching 10%, but those are very positive upgrades for us.  And as I said, the churn is resulting in a higher quality customer that joins the base of Verizon, so as I said we are very happy with the fourth quarter. 


Verizon could not be more clear – they did everything they could to keep the highest value customers, and the rest – well, good luck.


Take a second look at the chart above – in 4Q 2012, Verizon posted 2.1 million postpaid net adds (a record that still stands to this day).  According to the earnings transcript from that quarter, there were 1.9 million net new smartphone additions (many of those Samsung Galaxy SIII and the Apple iPhone 5).  Even when divided into smaller segments, that’s a large base to segment and maintain.  It’s not hard to see why the upgrade ratio will be approaching 10% in the fourth quarter.


With tablet sales slowing (although connected tablets should become a higher percentage of what tablet additions remain), T-Mobile’s LTE footprint growing to 300 million POPs, and spectrum positions starting to overlap, Verizon must fight a two-pronged attack in 2015.  Their response to T-Mobile’s competitive advances will need to be closely watched.


AT&T’s Broad Strategy

AT&T will announce earnings the week after Verizon.  Unlike Verizon, AT&T is in horizontal acquisition mode with FCC approval of their $68 billion DirecTV purchase right around the corner and their Iusacell acquisition completed last week.


As we have discussed for the past several years of The Sunday Brief (dating back to the initial Project VIP announcement in November 2012), AT&T approaches wireless differently from their peers.  To sum it up, AT&T views wireless as a critical and important component to the overall communications needs of consumers and businesses.  This is a very big and broad strategic difference from Verizon, T-Mobile, and Sprint.

Ralph de la Vega, president and CEO of AT&T Mobility and Consumer Markets, speaks at the Reuters Global Technology Summit New YorkHave a look at Ralph De La Vega’s CNBC interview from the CES show here and his video from the AT&T Developer Summit here.   His focus is not on postpaid vs. prepaid, or even business vs. consumer.  It’s on the secure global interface that connects businesses to their customers.


Here’s what’ on AT&T’s plate at the moment:


  1. AT&T’s $49 billion acquisition of DirecTV, which increases the role of content distribution and management to millions of consumers throughout the Americas;
  2. AT&T’s connected car efforts, which will likely be embedded in 50% of the new cars sold over the next five years (notably, the other 50% will be spread across Sprint and Verizon) – see more in this analysis. As seen in their third quarter results, connected device net additions will consistently be greater with AT&T than their postpaid adds throughout 2015;
  3. AT&T’s content development efforts, through their $500 million Otter Media JV with The Chernin Group. See September’s announcement of the Fullscreen acquisition here and the announcement of two new executive appointments here.
  4. AT&T’s $2.5 billion expansion into Mexico through their acquisition of Iusacell, and their promotion of Thaddeus Arroyo to lead the new division;
  5. Generating returns on the non-LTE portions of Project VIP (approximately $50 billion of the $120 billion spent on the soon-to-be-completed initiative). These infrastructure projects expanded AT&T’s bandwidth speeds to 45 (or 75) Mbps for a very large portion of their footprint.  Overall broadband levels have been flat, and their share of decisions for 25Mbps and up High Speed Internet connections has been frustratingly low.  Also, small businesses were to benefit from improved wireless coverage and bandwidth, and the effect of these investments has yet to be seen.
  6. AT&T announced over $10 billion in non-cash charges on Friday, primarily for pension obligations, but also for early copper retirement ($2.1 billion). While these do not have a direct impact on the current operating margins, the copper announcement signals that the effect of their current LTE trials in Alabama and Florida are probably greater than anyone expects.
  7. The AWS spectrum auction results, which no one knows the real results of. However, many analysts (including Craig Moffett of MoffettNathanson) estimate they could be on the hook for $15-20 billion in license payments in February.  That will overhang a lot of AT&T’s decisions (particularly with respect to Fiber to the Home deployments) this year.


There are many mouths to feed across multiple continents.  None of the above figures include the effect of a resurgent Sprint, continued growth at T-Mobile, and a network-focused Verizon.  Is the strategy too broad and is the company spread too thin?  How will AT&T manage multiple complex changes to their network, customer base, growth areas, and organization?  How will AT&T improve wireline, wireless and satellite product integration and customer adoption?  How will AT&T manage this expanded and growing developer and supplier ecosystem?  Most importantly to shareholders, how will AT&T pay $70 billion in debt (likely $85 billion once the AWS auction is complete) and another $85 billion in non-current liabilities (deferred taxes and pension obligations) and pay a 5-6% yielding dividend?


The differences between Verizon’s and AT&T’s strategies are striking, and the results of these diverging strategies should begin to emerge with next week’s earnings.


Next week, we will look at Verizon’s earnings and present our overall market capitalization scorecard for 2014.  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 readership, and have a terrific week!

Boom-Boom, FCC Lowers the Title II Boom, and T-Mobile’s Booming Results

Joe Clayton bass drumGreetings from Las Vegas, Atlanta, Washington DC and Dallas. 2015 started with an action-packed Consumer Electronics Show (CES), as well as some indication of fourth quarter performance.  While there was a lot of news this week, we will focus today’s column on the Sling TV announcement, Chairman Wheeler’s CES keynote, and wireless carrier fourth quarter performance.


Sling TV Supplies the Rhythm

First, the Sling TV announcement.  It would only be fitting to have Joe “Boom-Boom” Clayton appear pounding a base drum as he announced Sling TV.  Drums form the beat and tempo within a marching band.  They are loud, and they have the ability to quickly change the speed and mood of any musical piece.  That is certainly the strategy behind Dish’s announcement: change the song for the millennial demographic.


Here are the high-level features of the Dish/ Sling TV offer (full announcement here):

  • $20 for 12-channel package (including ESPN, ESPN2, TNT, TBS, CNN, HGTV, Travel Channel, Disney Channel, ABC Family, and three other channels);
  • $5 extra for “Kids Extra package” (Disney Jr, Disney X D, Boomerang, Baby TV, Duck TV) and/or a “News Extra package” (content not defined);
  • Works on Amazon Fire TV, Amazon Fire TV Stick, Google’s Nexus Player, select LG Smart TVs, Roku players, Roku TV models, select Samsung Smart TVs and Xbox One;
  • Only one video stream can be active at a time (think PandoraOne rules);
  • Ability to pause, rewind, and fast forward channels. Unlike the Hopper product, no commercial skipping with Sling TV.  Certain channels will have three days of replay content;
  • No other Dish subscription required. No credit checks or contract commitments


There are several interesting aspects of the Sling TV offer.  First, there’s a lot of content missing from Sling’s initial package:  Comedy Central, Fox News, CNBC, A&E, Discovery, MTV/ VH1 and Bloomberg to name a few.  In addition, no local broadcast stations.  But Sling has ESPN, which has high appeal to the ever important 18-34 male demographic.


sling-tv-logo-100538814-largeSecond, there’s fairly strong support at launch for a variety of devices.  Not surprisingly, the words “Apple” and “Sony” are missing from the announcement, and it’s curious that Google chose to support Sling’s efforts with the Nexus Player and not their Chromecast product (having just converted to Chromecast, I am hoping this is added soon).  But Amazon, Roku, and Xbox are all supporting, and it’s likely that at least one of these suppliers might take an active role in marketing Sling more aggressively (especially as Sony’s product remains in Beta.  Microsoft and Dish could become new allies in the battle against Sony).


Finally, the Sling TV offer is dependent on affordable stand-alone data.  Using Comcast’s current promotional rates ($39.99/ mo. for standalone Internet with 50 Mbps speeds vs. $69.99 for the same product with 140 cable channels), there isn’t a lot of room to create additional value, especially with likely charges for broadcast channel packages.  However, with Comcast raising their modem lease fees to $10/ month (and Time Warner Cable increasing theirs to $8/ month), many single-TV consumers might choose to have their Roku or Xbox One function as their set top box.


Bottom line:  Sling TV won the “Best of CES” award for a reason – they were first.  And, as this section’s title suggests, they will set the tempo for OTT live TV until one of the major cable TV providers jumps in.


Chairman Wheeler @ CES:  Get Ready For Title II (and Metered Home Internet)

The FCC Chairman took the stage at the Consumer Electronics Show in a wide-ranging conversation with Gary Shapiro, CEO of the Consumer Electronics Association (full interview here).  In the interview, Wheeler disclosed that details of the new and improved Open Internet rulemaking would be released on February 5 with a full vote on February 26.


In their conversation, Wheeler described the dilemma between providing open access to innovators while providing the basis for broader and faster network access to Internet Service Providers (ISPs).  Early last summer, he came to the conclusion that “commercially reasonable” networks could not be provided to innovators using section 706 (this is also known as the “non-Title II” path).  At that point, the Commission began to evaluate “just and reasonable” measures, a key term in Title II regulations.


Shapiro-and-WheelerWhile these seem like subtle changes, they are not.  The Chairman clearly understands that the consequences of moving toward Title II will be a combination of a) increased metered service, and b) decreased competition, particularly in rural markets.  Given no incentive to lower prices, cable companies will continue to offer faster speeds, but there will be data caps.  These levels might start at 60 GB per household (2x average DSL usage) today, but, with increased 4K video usage, a 2GB/ day average could easily be exceeded.  With more “synching” occurring with cloud-based services, monthly home data usage for a family of four could easily exceed 80 GB in 2016.


If broadband metering/ capping results, the probability of increased facilities-based competition (especially FiOS and U-Verse expansion) will decrease and the long-term success of Sling TV (and Netflix, HBO Go, and other OTT services) will also be placed in jeopardy.   Cable companies could use a combination of $29.99 promotional High Speed Internet (capped) rates with medium to high data throughput to attract customers (and $9.99 for 20 GB increments above the initial cap), but increase (or remove) those caps if the customer takes a bundled service (e.g., cable + 100 Mbps Internet).  These pricing plan changes will cement the status quo and discourage innovative OTT services.


The details of the FCC rulemaking on the wireless industry hard to determine at this point.  While Chairman Wheeler clearly indicated that the new rules would not take the wireless industry back to the days of state tariff filings and ARMIS reports, he failed to articulate how proposed rules would satisfy congestion at cell sites during peak data hours.  He also neglected to provide any details on how current plans which contain offending practices (e.g., millions of T-Mobile Simple Choice plans that throttle after certain monthly data levels have been reached) would be treated.  While he did stress that “the future of spectrum is in spectrum sharing,” the Chairman knows that the implementation of this practice is 3-to-5 years away.


The Chairman showed part of his hand: more regulation today is better than bi-partisan legislation today.  Metered solutions are more equitable than today’s unlimited usage.  Unbiased network treatment is better than wireless network forbearance.  We have to wait for the details, but it appears that the pricing of the Internet is about to change – dramatically – and affordability is about to be jettisoned for the higher cause of neutrality.


Defining Rollover

Several wireless carriers used CES (and events surrounding the show) to announce metrics.  T-Mobile led the parade with the following fourth quarter metrics (full announcement here):

  • 2.1 million total net customer additions
  • 1.3 million branded postpaid net customer additions
  • 1.0 million branded postpaid phone net customer additions
  • 266,000 branded prepaid net customer additions

For the full year, T-Mobile added 4.0 million branded postpaid phone net additions and 900,000 postpaid tablets.  Sprint, by comparison, lost 900,000 total retail postpaid subscribers in 2014 (this includes a 4Q gain of 30,000 postpaid subscribers announced on Thursday).  This leaves approximately 2.7 million postpaid customers between the #3 and #4 players and sets the stage for a 2Q 2015 change in position.


What’s most interesting about T-Mobile’s growth is that it was not driven by additional price discounts.  Their 2.5 GB promotional pricing (4 lines each with 2.5 GB cap for $100) which drove 1.4 million postpaid phone net adds in 3Q was not revived until December 9.  Their most recent promotion (a rollover data plan called Data Stash) was not announced until December 16 and did not take effect until January 2015.  T-Mobile drove 1.0 million net additions on the back of the Apple iPhone launch (which includes Wi-Fi calling capabilities unique to T-Mobile) and churn focus – no other promotions were necessary.

DataStashProving that imitation is the sincerest form of flattery, AT&T followed T-Mobile’s Data Stash with their own rollover announcement (see full text here and a cheeky article filled with T-Mobile’s CEO Twitter responses here).  While AT&T provides the rollover allotment to any members in the Mobile Share Value plan, only the unused data from the previous month is available for use (T-Mobile allows customers to carry over up to 10 GB of data for use over a twelve month period).


Given T-Mobile’s continued LTE expansion (at the end of the year, they covered 265 million POPs or about 83% of the US population), their opportunity to gain customers from AT&T and Verizon in more rural areas is the greatest.  Many of T-Mobile’s additions will come from increased footprint size (a 5% postpaid phone penetration of an incremental 35 million increase in 2015 POP coverage is 1.75 million or nearly half of their actual 2014 growth).   With conversion from AT&T being as easy as a SIM card swap, it’s easy to understand why their larger competitor is responding quickly.


2015 is the year T-Mobile moves to the postpaid “medal” platform and becomes a national LTE network.  They will do this prior to implementing any new AWS spectrum (results pending) and without a robust enterprise offering or a connected car strategy.  Their equity market capitalization is 45% higher than Sprint’s as of January 9 (according to Yahoo! Finance), and they have largely completed the transition from a subsidy-driven to a plan-driven model.  This sets up T-Mobile well for additional inorganic growth in 2016.


Next week, we will tackle cable and telco growth for the fourth quarter and 2014.  We will also present our overall market capitalization scorecard for 2014.  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 readership; let’s get started on a terrific 2015!

Am I Really Going to Wear This? (CES Preview Edition)

opening pic (6)New Year greetings from Dallas, Kansas City, and Fraser (Colorado – pictured).  Hope everyone had some time to recharge and reflect.  2014 was a terrific year, but, as the US economy begins to recover, 2015 appears to be on track to be even better.


The Consumer Electronics Show officially begins Tuesday, and 160,000 of us (including yours truly) will descend on Las Vegas to see and hear about the latest trends in the industry.  Prior to the show, many news outlets have run short pieces about what will be big this year:  Wearables (even though Apple’s Watch will not be out for several months), drones, 4K TV, connected cars.  No doubt each will be a big part of the show’s headlines, but this week’s column focuses on three items:  a) hardware’s resurrection, b) the need for a new “Internet of Things” operating system, and c) the effect of virtual reality beyond better games.  Each of these topics deserves further expansion, and we hope to dig deeper with each in future Sunday Briefs.


Hardware:  Am I Really Going to Wear This?

jawbone ERA headset picLet’s face it – most companies who are consumed with early or groundbreaking technology deployments (Apple excluded) have little sense of style or fashion.  This has been widely accepted as being “OK” by technocrats.  Smartphones do not need to be as fashionable as things like a watch or a Bluetooth headset (see Jawbone ERA pictured) or a fitness tracker.  My theory is that smartphones get a “fashion pass” because they can be easily detached – they are something we hold, and we can put away.  Not so when it comes to “wearables.”


Hence the title of this section.  “Am I really going to wear this?” – you answer the question.  Take the Pebble Watch, which will be celebrating its second birthday this month (launched 1/23/13).  I remember one of my tech-savvy friends proudly displaying this watch at a conference in the summer of 2013.  A few weeks later, we caught up but no watch on the arm.  “It’s too hard to charge – not enough benefit” was his response.  I cannot recall ever seeing a woman wear one of the original Pebble watches – that halves the TAM.  All black all the time only works for a small part of the population (perhaps a Movado or Coach wearable – but even they branch out to other colors, eventually).


Over the course of the year, I have quietly been developing a thesis on wearables:  The closer the wearable gets to your face or the less detachable it is, the higher the importance of fashionable alternatives.  Black is OK for a smartphone holster or in your purse, but might not be attractive around your neck or on your finger.  It might be chic in a ski goggle (see Google/ Luxottica reference below), but only if I can take it off at the après ski.

card key lanyardsWhat benefits could a watch provide beyond telling time (which smartphones do well in screen lock mode)?  Could it provide some means of personal authentication, like a “key” to a car or a home?  Could it replace the not-so-fashionable “security card keys” used by millions every day?  How about hotel access?  Absolutely.   Replacing current technologies is hard and takes decades – just ask the home automation industry.   And, as Apple demonstrated, good design accelerates technology adoption.


Last March, Google announced a partnership with Luxottica, the parent company of Ray-Ban and Oakley sunglasses.  Things have been very quiet since then which is uncharacteristic for both companies.  Could an announcement be forthcoming this spring?  And, if so, could the Google Bangle or the Samsung Broach be far behind?


Samsung:  Will Tizen Ever Get Traction? 

One of the great challenges Samsung faces in beating Apple is finding a way to pair a developer-friendly and attractive operating system with their hardware excellence. As sensors, networks, and communications software are built into an increasing array of devices, it would seem like an electronics conglomerate could mount a competitive threat to Apple.  More connected devices using an open source operating system creates a logical challenge to the status quo.


Samsung-Gear-S-Tizen-Experts1That’s where Samsung is with Tizen, its Linux-based operating system.  Long rumored to be first introduced in a smartphone (code named the Samsung Z) bound for Russia India, the Tizen operating system has largely been a pet project of Samsung and Intel.  That is, until their recent announcement that all new Samsung SmartTVs (Samsung is the largest producer of smart TVs with a 27% global market share) would be equipped with the Tizen operating system.  The full announcement from Samsung can be found here.


Tizen already runs most of Samsung’s latest watches (see a full comparison of Samsung’s six smartwatches here).  How TV content would have an impact on a wearable wrist experience is unknown (although, if paired with a smartphone through Wi-Fi or Bluetooth, the pay-per-view/ video on demand experience could get a boost if there’s a Wallet/ Pay system nearby).  Advertisements could also be linked to a nearby phone through an app (for coupons/ loyalty, location, or social media).  As mentioned earlier, the smartphone or wearable could also provide authentication for certain functions (e.g., access to certain streaming media).


It’s natural to be skeptical of Tizen, and any operating system trying to integrate home appliances and electronics with mobile devices and other wearables is likely to have integration challenges.  Huawei (the third largest producer of smartphones) executive Richard Yu told The Wall Street Journal last summer that “Tizen has no chance to be successful.”  Without an ecosystem that extends beyond Samsung’s electronics empire, Tizen will fall flat.


I have a sneaking suspicion that Tizen will surprise in 2015, for no other reason than to replace Google Chrome and Amazon Fire Stick devices (all of the authentication and streaming functions for Netflix could be handled through communications between the smartphone and the TV).  This, combined with LG’s introduction of the Palm OS into each of their smart TVs signals that home connectivity is the next battleground.  When there’s competition (and billions of dollars of market share at stake), innovation accelerates.  With some help from US cable and satellite providers (who would welcome a third OS with a large installed base and brand loyalty), connecting the TV would open up many opportunities.


Virtual Reality (VR) – Can it Move Beyond Gaming? 

VR had a big payday in 2014, capped by the $2 billion purchase of Oculus by Facebook.  It has spawned a host of start-ups also focused on gaming and entertainment (see article here on the Omni VR treadmill by Virtuix – it’s not what you think).  On top of this, many of us were introduced to the potential of VR at the Google I/O conference with Google Cardboard.


marriott teleporterCan virtual reality move beyond redefining the gaming industry (which it will do – ask any teenage gamer)?  Two data points seem to point to this as a possibility.  First, global hotel chain Marriott hotels launched a VR “Teleporter” in the latter part of 2014, highlighting travel locations to Hawaii and London.  To produce the content, extensive and innovative production needs to take place, and this concept may not be able to be replicated for each Residence Inn and Courtyard across the globe.  But, if you are spending $4000-6000 on a honeymoon and want it to be perfect, VR might do the trick.  Also, in The Verge article, a new virtual tourism industry is described which would allow “vacations” to Mt. Kilimanjaro without leaving your city.  More on what Marriott is up to here (their announcement) and here (from The Verge).


Second, 20th Century Fox has announced that they will use CES to debut a three minute proof of concept VR clip featuring Reese Weatherspoon to promote the upcoming film Wild.  VR was widely debated throughout the Hollywood community in 2014, and there are many skeptics who are still smarting from failed 3-D movies of the last decade.  The movie industry, however, is made for virtual reality, and if it generates more revenues (and large theater chains get on board with their own VR experiences), then it’s going to be successful.


The question for Fox and other studios is “Where to start?”  Fox has chosen Cheryl Strayed’s cathartic 1000 mile trek along the Pacific Crest Trail which is bound to be filled with exceptional nature shots.  Other studios might start with animation (Disney, Dreamworks) or even action/ adventure (although concerns about motion sickness already abound).  Is a Travel Channel, History Channel, Weather Channel or even Food Network VR series imminent?  No, but I could definitely see VR supplements as a premium after-show product for those who want to learn more about a particular topic (e.g., if you liked the show Alaska Unleashed that recently played on The Travel Channel, you could purchase the VR edition for $49.99 and get up close and personal with your favorite glacier).


From the time I first used Google Cardboard, I saw the potential for VR in the everyday community.  Driver’s Education through VR.  Art appreciation through VR.  World history through VR.  Even Shakespeare’s Macbeth might become more interesting to my 16-year-old son if he could don an Oculus as a part of his studies.  It’s a 10-15 year adoption journey (think HDTV), but there is value beyond gaming that will be clearly seen at CES this year.


What’s most important to realize is that hardware, software, and integration all matter this year – one theme does not dominate.  That’s what makes CES a special and influential event.  See you at the show!


Next week, well start to look at several fourth quarter events and prognosticate on their effects on the wireless and broadband industries.  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 readership; let’s get started on a terrific 2015!

The Sunday Brief End of Year “Not So Brief” Double Issue: Top Ten Events of 2014

2014-12-23 10.00.22More than mile-high Holiday greetings from Fraser CO, the winter office of the Patterson Advisory Group (and regular greetings from Louisville and Dallas).  As the picture shows, heavy snow is the story of the day/week and that means great ski conditions.  Here’s hoping the proverbial powder is white and the slopes are groomed wherever this Holiday finds you.


Thanks to those of you who sent links to your Holiday reading.  I’ll try to post those as an addendum to last week’s Sunday Brief online post by the end of the month.


Sixty eight Sunday Brief readers sent Top 10 nominations that form the basis for this week’s Sunday Brief.  These events (in chronological order) were determined by you as the most impactful of 2014:

  1. (January 8) At the Consumer Electronics Show (CES), T-Mobile announces Early Termination Fee (ETF) buyouts of up to $350 and phone trade-in credits of up to $300. It’s hard to remember a time when T-Mobile’s ETF promotion did not exist, but it’s only been around since January (see T-Mobile’s original announcement here).  It launched a remarkably successful year for T-Mobile (re: T-Mobile added more than 1.3 million branded postpaid customers in Q1 2014) and, because of its jarring impact on family plans, created the spark for AT&T’s launch of their pooled data plans in February (see below).


  1. john and roger(January 14) Federal Appeals Court overturns the core principles of Net Neutrality.  In an action that caught few analysts by surprise, the US Court of Appeals vacated the anti-discrimination and anti-blocking rules of the Open Internet Order.   The reason for overturning the provisions concerned the Federal Communications Commission’s (FCC) authority to impose these rules based on the 1996 Telecommunications Act (specifically section 706).  This action created regulatory uncertainty for most of 2014.  Both the FCC and the Obama administration worked on separate and, in many ways, opposing solutions to resolve the issue.  This promises to come to a head with the new Congress as they will likely enact legislation to allow the FCC to pursue alternatives that fall short of full Common Carrier (Title II) regulation.



  1. (February 1) AT&T introduces revised Mobile Share Plans.  Part of the reason why this action deserves “Top 10” status is that AT&T actually surprised the telecom community with their announcement.  Verizon was especially caught off guard and it showed in their Q1 2014 postpaid net adds (excluding tablets, this figure was negative for VZ; in contrast, AT&T added more phone net adds in Q1 2014 than all of 2013).  In addition to external net additions, AT&T allowed existing customers who were under contract to opt-in to the Mobile Share Plans with no penalties (contrast this with Sprint’s $100 for 20 GB introduced in August which was not as easily extended to their existing customer base and opened the door to increased defections).  While customers’ data rates did not change, the cost to have unlimited voice and text dropped from $40 to $25 or $15/ month depending on the amount of plan data.  AT&T paired this change with significant advertising throughout March, and, as a result, notched their lowest postpaid monthly churn in recent memory in Q2 2014 (0.86%, down 160 basis points from Q2 2013).


  1. (February 4) Microsoft announces Enterprise and Cloud Services head Satya Nadella as CEO.  Nearly everyone who submitted a Top 10 list talked about the influence of Satya across the entire software industry.  Microsoft is a different company than it was under Steve Ballmer, who once referred to (competing operating system platform) Linux as a “malignant cancer.” Nadella understands the concept of a software ecosystem.  He is happy with a smaller part of a growing pie.  One of his first actions as CEO was to offer a free version of Microsoft Office for the iPad.  Then he launched a free version of Windows.  Then Microsoft announced a strategic relationship with DropBox, making it as easy to access as Microsoft’s competing product called OneDrive.  Microsoft is finally leading – their strategy shift has driven the company’s valuation to $400 billion by the end of 2014, outperforming Oracle, Google, and Amazon.


  1. (February 13) After multiple party discussions with Charter, Liberty, and others, Comcast offers to acquire Time Warner Cable for AT&T Mobile Share plans$45.2 billion.  This accelerated the discussions between DirecTV and AT&T, eventually leading to AT&T’s offer in mid-May to buy DirecTV (see description below).  While many may see Apple’s iPhone 6 announcement as the most impactful event of the year, I think this merger “two-fer” will likely shape the industry more than Apple over the next decade.   Comcast will own nearly every major East Coast market following the completion of the transaction, and the resulting business footprint (now in association with Charter Communications, who will own or run most of the Great Lakes territory) will challenge AT&T and Verizon.  Breaking news: The FCC approval clock has been put on hold again, this time at least until January 12, 2015.  See this story outlining the reason for the delay here.


  1. (May 18) AT&T Announces It’s Acquiring DirecTV (and the fun does not stop there). After months of rumors (and against the backdrop of the FCC approving Comcast’s acquisition of Time Warner Cable), AT&T announced that it would buy DirecTV in a $67 billion transaction ($48.5 billion of equity, $18.6 billion of debt).  With this acquisition, AT&T gets NFL content (a key component of the deal), additional domestic and international scale to use in retransmission negotiations, and a strong management team.  Most importantly, the U-Verse network can now be used for data (which is what it was designed to do best).  When we ranked this one of the largest acqui-hires in business history, many of you smirked, but AT&T reorganized the company around the DirecTV acquisition, combining business and mobility units in late August.   Then they turned around in November and announced that they would be purchasing Mexican mobile provider Iusacell for $2.5 billion, building on DirecTV’s Latin American presence.  The NFL Sunday Ticket offering is a great content play, but just a sliver of the content they will need to effectively compete against a combined Comcast/ Time Warner Cable (with Charter and their NewCo cable company in full cooperation).


  1. (June 16)  Level3 Announces the Acquisition of tw telecom for $7.5 billion.  One of the great comeback stories of the past two years has been Level3.  Lots of hard work and operational focus have allowed it to grow profitability and, as a result, the stock has more than doubled over the past year (see chart for performance versus tw telecom).  It’s hard to imagine five years ago discussing Level3 making a strategic transaction like acquiring tw telecom with stock (76% of the tw telecom deal value is in LVLT stock).  However, that’s exactly what they announced in June.  More details in this presentation.   Wireline may be boring, but to enterprise and carrier customers who depend on Level3’s network for cost-competitive access, the combined company is critical.  Tw telecom brings 21,800 on-net US buildings and 500 data centers across 76 markets to the equation.  They also bring a lot of enterprise customers.  Between Level3 and Zayo, the wireline center of the United States is firmly centered in Denver, and the value creation by both companies should continue to increase throughout 2015.


  1. (June 25 and September 15)  Google announces and launches their Android One initiative.  In contrast to the iPhone announcement (bigger processor, powerful graphics, expanded storage and memory), Google used 2014 to solve the problem of smartphone affordability.  First announced at their annual I/O event, the Android One standard runs stock versions of the Android KitKat (4.4) operating system (Google promises that each Android One device will receive the Lollipop update when the carriers make it available).  Google handles security updates.  They also provide the reference architecture for Android One devices, allowing manufacturers to focus on supply chain issues.  The first devices, announced on September 15 for the India market, had very attractive price points (6399 rupees or $101 at today’s exchange rate – see here for the Micromax product on Amazon India and here for the Karbon product on SnapDeal).  Level3 stock priceThe first devices are manufactured by India-based operators Micromax, Karbonn, and Spice and feature a MediaTek quad-core chipset.  No Qualcomm, Huawei, ZTE in the first batch of Android One devices.  The expansion of Android One throughout South Asia was announced yesterday.  The associated impacts to market leader Nokia and challenger Samsung in India are not yet known, but every expansion enables greater scale for their upstart competitors.  Android One expansion is a trend definitely worth watching throughout 2015. android one logo



  1. hesse going away party(August 6) Dan Hesse resigns from Sprint and Board member and billionaire entrepreneur Marcelo Claure takes over.  Sprint was reeling from a failed merger with T-Mobile, network upgrades that were keeping the company current with competition in 1/3rd of the country (Sprint Spark markets) but behind in others, and a balance sheet that was filled with over $31 billion in gross debt.  It was the right time for Dan to step down, but could Marcelo fill his shoes?  The jury is still out after four months, but Marcelo has done a lot to stem customer defections, cut costs, and create market disruption.  Many of their key executive positions remain unfilled, however, as they head into 2015:  Chief Marketing Officer, President of Enterprise Markets and President – Hispanic and Multicultural Markets.  On top of this, Sprint has ceded the #1 position in prepaid to T-Mobile and will likely lose the #3 position in postpaid in 2015 (Sprint’s postpaid subscriber advantage over T-Mobile was 8.5 million entering 2014 and stood at 4.0 million as of the end of the third quarter).  Sprint’s competitive sustainability will be one of the most important events to watch in 2015.


  1. (September 9) iPhone 6/ 6 Plus announced (importance to Wi-Fi). Without a doubt, the iPhone 6/ 6 Plus announcement was one of the key events of 2014. There were few hardware announcements prior to that time (the iPad 4 and some small changes to the pricing of the Macbook Air).  But September more than made up for the eight month drought – two smartphones, the promise of a watch, a new Mac with a 5K Retina display, iOS 8 and Apple Pay created momentum for a blockbuster end to the year (think about it – can you name Apple’s Cyber Monday offering? That’s a good indicator).  On the network side, the iPhone 6 supports VoLTE (which will hasten its adoption), voice over Wi-Fi (which will hasten its adoption, particularly in thick-walled buildings), and payments.  Space does not permit a full evaluation of what these announcements hold for Apple, but this article by Andrew Cunningham in Ars Technica does an excellent job of predicting how Apple will succeed.


We’ll take a break for the rest of the year, but back at it again on January 4 with our CES Preview edition.  If you are headed to CES and want to walk the floor Tuesday afternoon, please send me an email and we’ll do it together.  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 readership, and have a Happy Holiday and a fantastic 2015!