Memorial Day weekend greetings from Chicago, Orlando, Tampa, Austin, and rainy Dallas. As of this morning (May 24), our year-to-date rainfall has surpassed all of 2014. No one is complaining, however – at least not yet. And water restrictions appear to be yesterday’s news.
Before diving into the presentation, a quick shout out to Suddenlink Communications on their $9.1 billion sale to Altice (d.b.a, Numericable-SFR). This marks the culmination of a nearly 15-year vision to create value from under-served and under-populated areas. From their start with the 2003 acquisition of then bankrupt Classic Communications, to sizeable acquisitions from Cox (West Texas) and Charter (a variety of areas), Suddenlink was cloud-focused before that was cool, especially in the cable industry. Sprint and Suddenlink worked closely together for several years rolling out telephony services, and they were never afraid to take market risks provided they had a handle on the overall economics. Best wishes on a successful close to the transaction, and for a smooth transition of services to new ownership.
The GENBAND Speech: How to Stand Out in Your Company’s Strategic Planning Session
As promised, this week we draw some conclusions from the results of our mobile first poll, resulting in three ways that you can be an innovative leader as your company is planning for 2016 and beyond. Often, strategic planning sessions can be pretty dry and boring events – at least until someone asks “the question.” We look at three questions that are begging to be asked at each of your companies, and our hope is that these questions will stimulate others. They are:
- How does your company look on a five inch screen?
- How can an asset-turn focus change how your company conducts business?
- If big data is Hot Stuff, then why can’t it answer your customers’ questions before they ask them?
Embrace Mobile First
And if mobile is so important, why do most telecom companies treat it like a second class citizen? As Ben Evans of Adreessen Horowitz stated in a recent blog post, “It’s the smartphone that has full functionality – a camera, location, social integration, and so on. The PC and the laptop do not.”
If the traditional web format were to disappear tomorrow, and all that was left was a mobile version of your company, would you be ready?
First of all, this strategy forces simplicity. Think about when your favorite website came out with their first mobile version. It was too busy. Why? The mobile version was designed to be a replica of the web version – everything that was good for the 11 inch screen was good for the four inch screen. Thankfully, content was curated and in future versions only the most important information was retained. Go to American Airlines website and their newly designed Android or Apple app and you will see what I mean.
Secondly, embracing mobile first approach demands efficiency. What if music streaming services decided to provide the same throughput over smartphones that they do to devices connected through an Ethernet connection? We’ve all experienced the effects of inefficient apps – frequent crashes – endless spinning wheels – frozen smartphone browsers. Those who depend on their smartphones are a very unforgiving bunch. Efficiency is the standard, and highly efficient apps are rewarded.
Third, if the app is good, we’re a very loyal bunch. Take Google Maps, with over 1 billion installs. The app has over 4 million ratings of 4 or 5 stars. What’s the probability that a satisfied Google Maps user is going to switch to MapQuest or Verizon Navigator or, if on an iPhone, Apple Maps? It’s an unlikely switch so long as the app is good and that good stays fresh. We are creatures of habit and do not like to make changes just for the sake of change (moving from an Apple to an Android device is an entirely different matter), but we expect apps to get better. “Good and always getting better” needs to be the drumbeat.
Fourth, we’re a feedback rich bunch. Just read the reviews on Google Play or iTunes. Yes, if your app sucks, you’d better get ready for some feedback. And it’s going to be a lot more direct than what you received when you hyperlinked “Feedback” at the bottom of your website.
The result of these four factors is brand change. Your brand can be more impactful even when the screen size has shrunk (just ask The Weather Channel).
It takes a lot of work to make your company look good on a smartphone. Don’t underestimate the effort.
The Secret to Success in the Telecommunications Industry: An Asset Turn Focus
The second question that will get a conversation started is “How are we turning our assets?” This question lets you in the decomposition of a formula that is little known outside of the Finance department. Most of us know the terms Return on Invested Capital (ROIC) or Return on Net Assets (RONA). But I put up the decomposition of the formula for you that the Finance group uses. It’s Profit margin (with or without taxes removed – take your pick) times something called Asset Turns or Net Revenue divided by Net Assets.
When was the last time your company set a budget target around profit margins? Everyone watches EBITDA or Operating Margin like a hawk.
But when was the last time your company set a budget target around asset turns? Aligning sales compensation to less asset intensive businesses? Rewarding those who “gave back” or postponed some investments so others could be made in new innovations (commonly called the investment dividend)? These instances are rare.
Companies who lead have a plan about both sides of the equation: Margins still matter, and scale still matters, but, in asset intensive industries like telecom, asset utilization and asset intensity matter even more.
Companies who place a focus on assets tend to show greater operational command, they understand why things like NFV (Network Function Virtualization) and SDN (Software Defined Networking) are critical, and they use their understanding to drive market share gains. Said another way, if you understand where the asset intensity puck is headed, you will win. If you don’t, someone else will win. Few companies have emerged as leaders without a keen understanding and command over their assets.
Throw your CFO for a loop by tossing out the question “How could we drive higher asset turns?” Bet you get a smile.
Big Data, Meet Self-Service
The chart shown is a well-known representation of the customer life cycle developed by McKinsey. Buy, Get, Use, Love/ Hate, Decide, Need, and Find. Many of us can recite this or a similar chart from memory.
Here’s the facts: Assuming the trend holds in 2015, there will be just under 3,000 big data firms attacking the marketing equation today. According to the Chief Martec folks, and they are the ones who keep the numbers, the number of companies focused on building the right profile and placing the right ad so customers “buy buy buy” grew from 947 at the beginning of 2014 to 1,876 at the beginning of 2015. We’re on our way to 2,700 companies this year, thanks to venture capital and low barriers to entry. All to drive the left hand side of this chart.
How many are on the right hand side? Those who want to drive better use and tip the scale from hate to love? Sad to say, but the number is less than 20. There are approximately 150 companies driving customers through the doors for every company shepherding them through the use and loyalty within the product! That’s crazy.
The main reason for that is that the shepherding process is hard. Tech ops touches the customer on a service call and they use one vocabulary to update the customer record. Then customer service touches the same record with a hard to understand “reason code” for every call. Then the customer goes to a service center to get a totally different experience. And, if they are lucky, they can go on-line and seek help through self-help videos. No wonder the customer is confused! How do we create sense out of all of this?
One of the start-ups I have been working with over the past couple of years is really making headway. They are a bunch of workflow software engineers turned mobile/ big data specialists based in Austin Texas called StepOne. Rather than having me tell you what they do, I thought I would let their first customer, Telstra, do the talking. Cue the video (watch it here).
I love the sentence Troy uses “If we don’t get it right the first time, the system will learn.” Too many times, companies try to answer today’s top 10 questions as opposed to building a learning system that provides the answer to today’s and tomorrow’s needs. There’s a few brave souls like StepOne trying to solve the right side of the customer experience, and that’s where the questions get harder to solve yet yield clearly identifiable results.
Summing It Up
- How does our company look on a five inch screen?
- How are we turning our assets?
- If Big Data is Hot Stuff, why can’t it answer customer questions before they ask them?
These are three excellent conversation starters as you plan for 2016. Thanks again for your time, and happy planning!
Many thanks again to GENBAND who were extremely accommodating and helpful throughout the process.
Next week, it’s our twice-yearly look at the handset marketplace, where we will answer the question “Is it Still an Android World?” Until then, if you have friends who would like to be added to The Sunday Brief, please have them drop a quick note to firstname.lastname@example.org and we’ll subscribe them as soon as we can (and they can go to www.mysundaybrief.com for the full archive).
Thanks again for your readership, and have a Happy Memorial Day!
Additional note: Ben Evans has a great blog post on the Mobile-first topic here that I read last night. It expands on the themes below. Read more about it here.
Spring greetings from Charlotte, Philadelphia (Art Museum shown), and Dallas. This was a very active week in telecom, with AT&T extending their termination date on their DirecTV merger to the end of June (article here), Charlie Ergen making headlines defending the Designated Entity (DE) structure for the latest wireless auction (CNBC interview here), Google releasing their self-driving car on California roads this summer (scary thought – RCR Wireless article here), and the nomination of Sequans Communications (where I am a Board member) for a Leading Lights nomination as the most innovative IoT vendor for their Cat-1 chip solution.
Verizon Bought AOL. It’s Just a Warm-up.
The big headline came on Monday, however, when Verizon announced their $4.4 billion offer for AOL (Verizon announcement here). It’s very clear that they did not buy AOL for their Membership Services business (see AOL’s Q1 2015 news release here – yes, there are still ~ 2 million dial-up customers on AOL paying $15-20 per month to access the Internet), but for the multi-platform ad services business. As we discussed in our analysis of Verizon’s Q1 earnings, they are setting themselves up to be a mobile-first broadcaster.
Rather than dive into the intricacies of each of AOL’s platform businesses (which, with the exception of Member Services, are growing very nicely per the Q1 2015 report), let’s talk about how Verizon will make the most out of AOL. First, they will sell the news properties and reclaim at least $1 billion for the Huffington Post and TechCrunch brands. Second, they will extend LTEInternet – Installed (formerly known as HomeFusion, Verizon’s rural/ hard to reach residential offering) to all of the AOL members and increase their wireless base by a few hundred thousand customers (which will come in handy during the historically weak 3Q earnings season). Conservatively, this could generate another $300 million in service revenue growth (roughly $150-170 million in EBITDA) for Verizon.
Excluding the ad platform business, at least $2 billion of the $4.4 billion purchase price can be justified. To be a successful wireless broadcaster, Verizon needs to better understand the profiles of their wireless user base (not who they call or text, but where they go on the web and, most importantly, how they consume video). AOL has a terrific analytics/ tracking platform for that.
Next, Verizon needs a way to associate ad inventory with user profiles (think car-related advertisements for folks who watch the Mecum Auto Auctions). And, once the ad has been placed in front of the Verizon Wireless subscriber (not only who clicked, but who watched and for how long), Verizon can now provide information on how to make advertisements more effective for their user base. All of these elements are critical to being an effective broadcaster (and, if Verizon moves more aggressively into attracting original content, determining the value of a show series or episode).
There are a lot of skeptics in the telecom world who think Verizon will stumble and fall against Google and Facebook. Neither Google nor Facebook have networks like Verizon, however, which means that their success hinges on others’ ability to broadcast information on their behalf. In contrast, I think that Verizon is on the right path and just getting started. AOL is a warm-up act for something much larger, and this acquisition is a relatively low-risk way to figure out the next step.
Mobile First – What Does it Mean? Why Does it Matter?
About a month ago, I asked you to describe the situations where you reach for your mobile phone first to get information. After reading ~55 responses, the trend is unmistakable – we are turning to our mobile devices for more information each day.
Specifically, several areas came up as critical (I clarified with several of you the importance of having these functions on a mobile device and was told to a tee “I can’t live without these”):
1. Maps and navigation. According to the Census Bureau, about 35-40 million of us move every year. As a result, we need to find our bearings – learn about our new neighborhood, community, and region. Maps matter, and it’s why Google spends a lot of money getting Maps right. With new features in Google Maps (such as alternate routes), it’s one of if not the most taxing application (memory, power) on most smartphones. To many, the smartphone app has replaced Garmin, Tom-Tom, and in-car navigation. To others, it’s a source of quick directions (or a clarification). Without a doubt, we cannot live without a map app, and its high dependence on location makes it a perfect application for smartphones. (Note: Verizon picked up MapQuest with the AOL acquisition – wonder what they will do with that company?)
2. Travel. The app array grew a lot larger for travel as many well-known brands have built out their own applications. Airlines, rental cars, hotels, and the buying aggregators (Expedia, others) dominated the feedback. Many of you appreciated (?) airline notifications and mobile boarding passes. Interestingly, several travelers noticed that support/ help is strangely missing from many of these traveler provider sites (like a direct link to @SouthwestAir and @AmericanAir). Reaching customer support is very hard when you are pressed for time and need to use a mobile device to do the work of a computer. It’s time for the travel industry to step up to this challenge and figure out a better, more coordinated solution.
3. Weather. I am a big weather app person because I travel a lot (as most of you remind me of every time we meet). I never make a trip to Chicago, Denver, New York or Boston without checking first – especially in the spring. I thought I was a weather “power user” – you proved me wrong. I clarified with several of you who reported weather as an app you could not live without on your mobile: For most of you, it’s the first information you receive before you start your day. For (sports) families, it’s a big deal (especially during this spring in Dallas). For Bostonians, instant access to weather apps was as means of survival during last winter’s snowstorms. There’s also a high correlation between weather and travel (airline app) usage. Interestingly, most of you said that you love your weather app more than the Internet version because the latter is so bad! Probably not what WeatherBug or Weather.com intended when they created their apps, but they should take the design considerations they used for mobile and transfer them to new and improved web versions.
4. (Kindle) Reading/ Audio books. I have to admit, it’s not at the top of my list, but at least half of you would prefer to use your mobile device to read books than to access them over a computer. For about half of that group, the smartphone is the sole source of accessing Kindle information (Note – before you quote this, we should get a larger sample size than 12 – I struggle to believe that even an iPhone 6 Plus is good enough for reading but we did have more than a few 18-35 yr olds in the sample size). I was not able to get enough responses to confirm whether the Kindle is used as a complement to smartphone “passage snacks” – perhaps some of you can fill me in on your Kindle consumption habits. I am not surprised to see audio book usage high given the ability to pair Bluetooth so easily with most cars. Amazon did a fantastic job on the Audible app – with more than 20 million downloads and over 100,000 4 or 5 star ratings on Google Play, it’s no surprise to see this part of Amazon’s business doing so well (in fact it begs the question “Where would Audible be without mobile?” A good ice breaker for the wee hours of your Memorial Day party).
5. (Financial) News. As far as categories go, news was a distant fifth. Financial news is a time sensitive matter, however, and many of you cited your favorite stock quote site as the place where you get your news (and many of you also contrasted that with a cluttered and ad-laden website alternative). News organizations have slowly embraced the web (the Drudge Report still does not have a mobile friendly version), but times are changing. Notifications are getting better, and Yahoo has stepped up their use of excellent screen designs to report breaking news. Video-based news reporting is another matter, and one that several of you cited as an area for improvement.
Bottom line: Our society is increasingly becoming dependent on gathering information, receiving notifications, and staying in touch through mobile devices. This is driving changes in how businesses look at mobile – not as an alternative or secondary design, but as the primary interface for getting information. If your business cannot fathom functioning through a 4 or 6 inch smartphone screen, it needs to start thinking.
A “Mobile First” focus drives a lot of changes about how we look at the world. 1) It demands simplicity; 2) It forces efficiency; 3) It builds loyalty; 4) It solicits feedback, and 5) It can create or destroy brands quickly. For those of you who are at this week’s GENBAND Perspectives 2015 conference, you’ll get a bit more detail on this, and I’ll likely publish my speech in lieu of a Memorial Day Sunday Brief.
Thank you for your detailed comments that helped us develop the Mobile First thesis. As we head into June, it’s the semi-annual handset/ “It’s an Android World” issue. Until then, if you have friends who would like to be added to The Sunday Brief, please have them drop a quick note to email@example.com and we’ll subscribe them as soon as we can (and they can go to www.mysundaybrief.com for the full archive).
Thanks again for your readership, and hope to see you at Perspectives 2015!
Greetings from Chicago (INTX show), Philadelphia, and Albany (the back of the NY State Capitol shown). This has been a busy earnings week, with Comcast, Cablevision, CenturyLink, Frontier, Windstream and Sprint all reporting earnings. While our focus will be on Sprint’s earnings this week, we’ll also take some time to discuss the state of cable and broadband.
Cable’s Show of Shows – Plenty to Smile About in Chicago
There were many moments of levity at this year’s Internet and Television Expo (still known to most as the Cable Show). Brian Roberts debuted Comcast’s voice activated X1 remote during his Day 1 keynote. In his demo, he included three interesting clips (amateur video here):
- He searched on a quote from the movie Forest Gump: “My momma always said life was like a box of chocolates – you never know what you’re going to get.” Perhaps a bit of reflection on Comcast’s recent experiences with the FCC.
- He searched on a running scene from Forest Gump – “Running on Empty” by Jackson Browne. Perhaps a reflection of how they feel about their former merger partner Time Warner Cable, or how they feel about the FCC as a whole.
- Brian Roberts prefaced the last part of the demo “the folks in the lab have been doing some amazing stuff” and asks the X1 remote “Show me the Comcast/ Time Warner Cable merger.” One of the many explosion and fireball scenes from “Furious 7” shows up (see picture to the right). Roberts quips “That pretty much sums it up. We really are moving on.”
It’s easy for Comcast to display some humor after posting exceptional first quarter results (full results here): 9% year-over-year growth in cash flow from operations, $3.2 billion in consolidated free cash flow, 6.3% growth in cable revenues (including 10.7% growth in High Speed Internet and 199,000 growth in total customer relationships), and 21.4% annual growth in business services. NBC Universal had a 4.0% revenue decline against the success of the Sochi Olympics in 2014 (excluding Sochi and this year’s Super Bowl, consolidated revenues increased slightly more than 7% for NBCU), but operating cash flow was very strong for NBCU and for Comcast as a whole (second quarter will include revenues from the aforementioned “Furious 7” which currently stand at $335 million).
Comcast had a strong quarter with High Speed Internet, growing 407K net new connections in the quarter. To put their growth into perspective Comcast + Time Warner Cable grew 722K new High Speed Internet subscribers in Q1. AT&T’s broadband subscriber base grew 69K (440K U-Verse less 371K DSL losses), and Verizon’s broadband base grew 41K (133K FiOS growth less 92K DSL losses). That’s 6.6 new Comcast/ TWC additions for every AT&T/ VZ broadband net addition. Given these figures, it’s likely that cable enjoyed another quarter of 90+% share of decisions. That’s the main reason so many were smiling in Chicago this week.
Sprint’s Long, Long Road to Recovery
Sprint announced earnings on Tuesday (full details here) and managed to retain their third place crown (at least as measured by postpaid subscribers and overall service revenues). A table describing quarterly measures versus T-Mobile is nearby. Sprint is hanging on to third place with declining postpaid services revenues, trailing in prepaid service revenues (re: approximately 195,000 customers or $11 million in revenues moved from prepaid to postpaid at T-Mobile thanks to their Smartphone Equality initiative), and dead even on total (including equipment) revenues in the quarter (although T-Mobile’s figure includes a $112 million one-time hit from the Data Stash initiative).
Few doubt that T-Mobile will be able to clearly claim the 3rd place spot for service revenues (T-Mobile grew $482 million year-over-year while Sprint decreased by $627 million over the same period) by the end of the year. Given T-Mobile’s increased subscriber guidance (+550,000 using the midpoint of the ranges provided), a figure that we think is low due to T-Mobile’s entry into the business market as well as continued LTE expansion, it’s likely that they could end up with 1-1.5 million more postpaid subscribers at the end of 2015. If Sprint turns on the tablet sales spigot, this number could be much smaller, but the churn and gross add trends are currently not Sprint’s friend.
The questions on Sprint’s quarterly conference call focused on Sprint’s anticipated “massive” densification of its network to improve data speeds and coverage. Sprint announced that they expect to have accrued capital expenditures of $5 billion in 2015, a figure that implies lower capital expenditures for the remainder of 2015. T-Mobile expects to spend $4.4 – $4.7 billion in cash capital expenditures over calendar year 2015, a figure that implies much higher capital expenditures throughout the rest of the year.
In responding to the question about capital spending on increased densification, CEO Marcelo Claure stated that the $5 billion figure “mainly contemplated what we are doing right now with our 2.5 GHz deployment… you really don’t see it [the next generation network which includes massive densification] coming to much effort [in fiscal 2015], only towards spending in 2016.”
While plans could change, it appears that Sprint’s capital intentions are “steady as she goes” for the next nine months. The remainder of 2015 is going to be difficult on the company. Capital budgets will be constrained as network demand increases (driven not only by industry growth, but by the large 20 GB buckets Sprint currently advertises). In the post-Vision (Sprint’s previous network initiative) era, trailing four quarter accrued capital spending has been averaging between $5.2 and $5.6 billion. How the company accommodates network coverage (from 280 million LTE POPs) and data augments (Verizon cited 54% annualized data growth) and minimal in-building coverage remains to be seen.
In a question on postpaid phone losses, Claure stated that Sprint’s “consumer business was mainly positive.” Without trying to read too much into this comment, I think it says that Sprint’s Business net adds are dragging down overall postpaid phone growth. While in most cases business revenues have lower revenue per connection, losing share within an account (or losing an account entirely) can be very costly (to the extent that employee discount plans were tied to the business customer, and the account was lost in total, there could be collateral losses over time).
Finally, Sprint announced this week that they would be offloading in-airport data traffic to Wi-Fi provider Boingo in 35 airports. This relationship will leverage Boingo’s HotSpot 2.0 initiative (additional information in the news release here). While this will improve the customer experience in many airports where Sprint has historically suffered with relatively low data speeds, it will also free up more carrier spectrum to be able to be used for improved voice coverage. To get an idea of the “before” picture, check out the latest RootMetrics ratings at New York’s LaGuardia and Chicago’s Midway airports.
Bottom line: Sprint has a very long road to recovery. Here’s the current situation:
- Postpaid retail phone net adds continue to be negative, led by persistent losses in business accounts. Tablets allow for positive overall retail postpaid net adds, but at a $30-40 lower average revenue per connection.
- Network coverage, while growing, will be fed by a smaller capital budget of $5 billion. This will be a challenge considering LTE coverage objectives and customer data growth. The long-term remedy will not be seen by most customers until 2016.
- Prepaid retail net additions are going to be under pressure given recertification results from the Assurance Wireless product line (in second quarter 2014, this was the primary reason cited for their 542,000 prepaid customer loss). This will not impact EBITDA significantly, but will widen the retail prepaid gap between Sprint and T-Mobile despite strength from the Boost brand.
- Churn is improving, calls to care are down, and employee morale is up.
- The company burned more than $900 million in cash in the quarter.
Next week, we’ll focus on your feedback about which applications rank as “mobile first.” Until then, if you have friends who would like to be added to The Sunday Brief, please have them drop a quick note to firstname.lastname@example.org and we’ll subscribe them as soon as we can (and they can go to www.mysundaybrief.com for the full archive).
Thanks again for your readership, and Happy Mothers’ Day!
Greetings from St. Louis, Austin and Dallas. This week, on top of earnings news, we had a number of announcements across the industry. In Chattanooga, Comcast announced that they would be launching 2 Gbps service to 200,000 homes in Chattanooga, TN. This news item would have minimal impact except for the fact that Chattanooga has been the subject of the FCC’s intervention as the agency seeks to spawn increased municipal network competition. It is widely expected that EPB (the Chattanooga utility) will match Comcast’s offer once pricing is announced. As we have previously discussed, Comcast will be launching 1 Gbps service to 18 million homes by the end of 2015.
On the fiber backhaul front, we had two major M&A activities this week. Rochester-based Fibertech agreed to merge with Lightower for $1.9 billion in cash (see announcement here). Fibertech has an excellent reputation for broad (tower, end office, in-building) coverage throughout the Northeast and will help Lightower expand throughout the Northeast. Their pro forma network map is shown nearby.
In a more surprising announcement, Crown Castle announced the acquisition of Quanta Fiber (a.k.a. Sunesys) for $1 billion. Sunesys has a very dense fiber network in Mid-Atlantic region, with additional network capabilities in Chicago, Atlanta, California, and Florida. This will boost Crown Castle’s ability to address small cell needs for carriers in these markets. More on this assessment from Fierce Telecom.
On the wireless side, there is a very major issue brewing that, not surprisingly, is not making it to the top of Google’s search list. In a nutshell, Android’s latest release (Lollipop) has something called a memory leak (more details here). This is impacting the availability of internal memory to run applications on newer devices, including the Samsung Galaxy S6/ Edge. On top of this, it has resulted in more “stars” (an easy way for any individual user to affirm that the issue exists) than any other Android release in Google’s history. Forbes had the guts to move this out of Android-specific blogs into the mainstream with their article that quickly made it to Yahoo! Headlines this week. More to come on the fix, but those of us who were upgraded to Lollipop on our Galaxy S5s are not happy!
T-Mobile First Quarter Results: Can They Grow Beyond Smartphones?
T-Mobile announced earnings this week, and, as expected, they had terrific smartphone metrics (1.1 million postpaid retail net additions), record low monthly postpaid retail churn (1.3%) and 11% year-over-year service growth when the effects of their Data Stash accrual are removed. On their 90-minute earnings call, they provided a broad view of the industry and convergence (full call details can be found here).
As shown by the nearby graph (Sprint postpaid subscribers estimated to be slightly lower on a quarterly basis – more details when Sprint releases earnings this week), T-Mobile has substantially erased the postpaid retail subscriber gap between themselves and Sprint (9.8 of the 11.2 million or 88% of the gap has already been eliminated). Assuming Sprint does not incur a substantial amount of tablet net additions in the first half of this year, T-Mobile should overtake Sprint as the #3 provider this summer.
Without a doubt, T-Mobile has executed well on a strategy based on simple and straightforward pricing. They are now at handset parity (and, in the case of Wi-Fi integration, at a competitive advantage). And they have reduced churn to levels unthinkable even by T-Mobile’s current management team two years ago.
Not everything at T-Mobile has turned to gold, however. As John Legere, T-Mobile’s CEO, indicated on their conference call, the cumulative nature of the Un-carrier Strategy is being lost on most customers (he cited the fact that most customers had forgotten that T-Mobile offered free international roaming to many countries). The 7-day free trial of the Apple 5s was a flop. While Un-carrier 9.0 (Un-carrier for Business) has been launched, there’s no indication that it will have traction above small businesses (T-Mobile’s commercial Wi-Fi strategy is also MIA).
The biggest concern, however, is T-Mobile’s the lack of innovation and growth on the retail level with non-phone additions. Despite fantastic growth, T-Mobile’s average revenue per account is $108, slightly down from Q1 2014. Verizon is also slightly down, but to $156. Not all of that difference is coming from excessively high pricing. Verizon averages 17% more connections per postpaid account. Even with additional wearables, tablets, and other items attached to Verizon accounts (which one would think would lower ARPC), the average revenue per connection (ARPC) is still 20% higher than T-Mobile’s ($54.03 for VZ vs. $45.21 for T-Mobile). Reaching a more connected world is going to become more difficult under T-Mobile’s current strategy.
Without a doubt, T-Mobile should be commended for their continued smartphone progress. They have all of the momentum, and this should continue throughout 2015 with more spectrum coverage and a 300 million POP LTE footprint. It’s not clear that they can grow beyond smartphones, however, and with data connectivity across a myriad of household devices in queue for 2016, they need a strategy refresh if they are going to penetrate Verizon’s and AT&T’s family and business customer bases.
Time Warner Cable: The Transformation Has Already Begun
It’s a bit premature to declare Time Warner Cable to be the T-Mobile of the cable industry. Less than a two months ago, it was conventional wisdom that they were going to be absorbed by Comcast and that Big Cable would just get bigger.
During the fourth quarter, however, things started to change for TWC. Capital investments started in 2014 were beginning to yield real results. Video losses were low, high speed data connections were solid, and phone additions were strong. Many of you called into question our comments that this could be a part of a sustainable strategy and called TWC’s end-of-year efforts “window dressing for Philly.”
TWC’s first quarter results clearly show that this is more than a temporal trend. The growth of 205,000 net additions for customer relationships is the metric that is most striking. The last time TWC had 14.716 million residential customer relationships was nearly three years ago (3rd quarter 2012). And 31% of these relationships carry all three services, a record high.
This is not an asset utilization exercise, either. TWC has spent $4.4 billion in capital expenditures over the past four quarters (comparable to Charter’s $2.0 billion spending given TWC’s relative size). While TWC did not provide capital guidance for the rest of the year (likely because they have to revisit their operating plans in light of the failed merger), CFO Artie Minson had this to say about spending:
We continue to be really pleased with the returns we’re seeing on our CapEx spend. The proof is obviously in our operating performance, our customer metrics, where we sat last year, there were things we really wanted to accomplish when we made the investments, which was, improve our product reliability, improve our network reliability, make sure our customers had the best equipment in their homes for new customers, go into existing customers’ homes and take out equipment that we thought was not optimizing the experience. And I think the proof is in the subscriber results today. So to the extent we continue to see those results which we expect to, I think that obviously requires capital, but there’s a great return on that capital.
Sounds like TWC will be continuing to expand their capital plan throughout the year.
On top of this, TWC executed well with commercial services in the second quarter, growing by 17% year-over-year and generating $3.1 billion in annualized revenues (Charter grew by 14% and generated just under $1.1 billion in annualized revenues).
We talked a lot in last week’s column about what Comcast should do. TWC’s choices are broader, but it’s clear that one of them could be to build on the current momentum that they have started over the past four quarters and be the acquiring platform. What a difference a few weeks can make in the cable landscape.
Next week, we’ll recap net additions once Comcast and Cablevision have announced earnings. We’ll also take some space next week to talk about your feedback on which applications rank as “mobile first.” Until then, if you have friends who would like to be added to The Sunday Brief, please have them drop a quick note to email@example.com and we’ll subscribe them as soon as we can (and they can go to www.mysundaybrief.com for the full archive).
Thanks again for your readership, and see you at INTX (also known as the Cable Show)!