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Monthly Archives: June 2015

Let the FCC Complaints Begin!

Jim Patterson stadium picEnd of quarter greetings from Louisville (home of Jim Patterson stadium, pictured), Tyler (TX), and Dallas.  This week we will spend a little bit of time covering European anti-trust activities with Google.  We’ll also touch base on several interesting news events which support the themes developed over the past month.

 

As a reminder, the Sunday Brief crew will be taking a well-deserved vacation for the next two Sundays and will return with our July 19 edition (from Paris). This week’s edition has several links with longer content.  If you are current with your reading (and most of you are from the dozens of notes I received on last week’s write-up), try one of the in-depth links.  There’s a lot more going on than a 1500 word weekly can cover.  Or, if you are particularly ambitious and need that Kindle (or Hardcopy) content for your vacation, I recommend “The Intel Trinity: How Robert Noyce, Gordon Moore, and Andy Grove Built the World’s Most Important Company” by Michael Malone (Amazon link here).  It was not a quick read (573 pages), but very informative and thorough.

 

AT&T’s Mexico Commitment

rls_mexicoAT&T CEO Randall Stephenson met with Mexican President Enrique Pena Nieto on Thursday and announced that the company would be investing approximately $3 billion to bring the new AT&T network up to global standards (full announcement here). Contained in the announcement are some specific milestones that AT&T will achieve:

 

  1. While the investment will cover 100 million people (roughly 5/6th of the country) by the end of 2018, 75 million (62% of the country) will have LTE by the end of 2016. As we have seen with US network development, the metros are relatively easy – it’s the highways and more remote towns that can take a lot of time.
  2. In a page out of the early days of US mobile development, AT&T will offer its Mexico customers attractive US roaming packages and also allow customers to use their community minutes to call from the US to Mexico (my understanding is that unlimited SMS will be included in new plan structures. This would place them on a more competitive front with Latino-focused MVNOs).
  3. AT&T is making a strong commitment to revamp customer service and diversity programs to improve the lives of each employee and make AT&T Mexico one of the most desired places to work.

 

Bottom line: AT&T has created a different coverage map which will make them more competitive.  Entering as the number two provider, they will create a calling community of nearly 120 million people.  This is consistent with AT&T’s strategy to be an integrated communications provider with both wireline and wireless products and services.

 

Let the FCC Complaints Begin!

Those of you who are long-time readers of this column know that the recent Open Internet regulations represent an open door for redefinitions of peering and government oversight of network engineering practices.  This process received its first trial this week with the informal complaint of Commercial Network Services (CNS), a Nevada-based corporation operating data centers in Los Angeles, London, and New York City, against Time Warner Cable (TWC), one of several Broadband Internet Access Service providers in the region.

 

To be brief, the complaint requests that the FCC mandate that TWC change where they peer and the size of their peering port with CNS.  One of the websites in question (see picture nearby) is called www.sundiegolive.com which features live webcam views of various parts of San Diego. Note: The popular web statistics gathering website Alexa currently estimates that sundiegolive is the 373,978th most popular website in the United States (Commercial Network Services was recently ranked  220,585th in the US).  This site likely gets a few hundred unique visitors per day.  According to Alexa, the average time a user stays on the site is just under 2 minutes.

 

CNS believes that Time Warner Cable is violating the Open Internet rules for the following reason (this from their informal complaint letter to the FCC dated June 22, 2015):

 

By refusing to accept the freely available direct route to the edge-provider of the consumers’ choosing, TWC is unnecessarily increasing latency and congestion between the consumer and the edge provider by instead sending traffic through higher latency and routinely congested transit routes. This is a default on their promise to the BIAS consumer to deliver to the edge and make arrangements as necessary to do that.

 

Clearly, this is not an issue of site access (some traffic is getting through), but speeds that are delivered to Time Warner Cable customers, particularly for sundiegolive’s newly launched High Definition (2 Mbps per screen) / Multi-screen views (12 Mbps per screen) of San Diego.  CNS would like TWC to connect at three common peering sites for free – Time Warner points to their peering policy (see here) which has certain rules and regulations.

 

While peering policies are sometimes accused of being shrouded in a cloak of complexity, in fact, as we have explained in this column several times, they are anything but.  The Internet was established on the premise that networks would avoid the costly and dispute-ridden construct of voice networks, which charge intermediate backbones for originating and terminating traffic.  The common rule/guideline is that networks of similar size and scope, regardless of when they were established, should exchange traffic at mutually agreed to points for free.  There are exceptions made (Cox Communications, another SoCal cable company, appears to have made one for sundiegolive), but TWC has chosen to stick to their policy (despite the threats made by CNS’ CEO, who says in an email attached to the complaint, “I filled something like this out before for TWC. Clearly, our network is more than capable of peering with yours and I intend to prove to the FCC that anything to the contrary from TWC is only a ploy to unreasonably demand paid peering. I know they are itching to get into TWC business so I’m sure it will be good enough for them”).

 

It is interesting that CNS has not chosen to use an intermediary (called a transit network) to connect to TWC, but instead only used public peering points.  If CNS had used Level3 or Cogent, for instance, they would have been able to clearly show the speed differences between TWC’s public and private connections (and would have make a much stronger case than showing the same video stream over Cox).  Both Cogent and Level3 do not participate in the Any 2 facility in Los Angeles for a reason (Any 2 is one of the three facilities CNS requests TWC interconnect – a full listin of the Any 2 participants is here).  The complaint says as about Level3 and Cogent’s transit rates and policies as it is about Time Warner Cable’s peering policy.

 

In another FCC administration, this informal complaint would be tossed in the circular file (even Karl Bode of dslreports.com, hardly a friend of TWC, has called the complaint “silly”).  However, this FCC and White House are looking for precedent and legacy, and they may have found the key to rewriting 20+ years of established commercial agreements.  More to come as the complaint progresses.

 

Regulating Google’s Search Algorithms (at least for shopping)

One of the stories that has had scant coverage in the United States but could impact the way Google’s search engines operate is unfolding in Europe.  This is one of the “penultimate” trends for which the implications to one of America’s darling start-ups could be severe.

 

Google-ShoppingWithout going into significant detail, the European Union’s anti-trust chief filed charges against Google in mid-April which alleged that the company favored their own Google Shopping site even though the search query should have returned a rival’s site because it was a better match (more here in this New York Times article).  Google has to respond to these claims by next Friday.

 

A few weeks ago, the 100-page charge sheet was released to several complainants, including the Wall Street Journal (not surprisingly, News Corp is one of them – full article here).  In the charge sheet, it is recommended that Google use the “same underlying processes and methods” when presenting rival shopping-comparison services on its search page.  This apparently goes beyond Google’s own suggestion that they allocate a specific amount of search result real estate to rival sites.

 

The charge sheet also alleges that these uncompetitive practices have been going on for at least six years across 12 European countries.  Their recommendation carries with it hefty fines which could exceed 6 billion Euros ($6.6 billion).  And, the EU anti-trust division has yet to complete their investigation into Google’s Android phone practices (specifically rules governing the search results for apps in the Google Store and also Google Maps functionality).

 

Google has tried to quickly respond to these charges by making some organizational changes.  They named a new head of European operations in February (Matt Brittin), who recently issued a mea cupla through the Politico publication (full interview here):

 

“We don’t always get it right,” Brittin said. “As far as Europe is concerned: we get it. We understand that people here are not the same in their attitudes to everything as people in America. We just didn’t have the people on the ground to be able to have some of those conversations as we grew.”

 

Brittin goes on to say in the same interview that there is no evidence that any of the claimants have been harmed by Google’s practices and that many of them are US-based companies.

 

Changing how a search engine works, whether on google.com, or maps.google.com, or in the Google Play store, is a big deal.  Each change can impact the profitability of Google’s sites and their competitiveness against well-heeled rivals such as Apple and Facebook.  And US regulators will be hard pressed to justify returning more Google-friendly results (anti search neutrality) in light of their recently enacted network rules (there’s a lot here, but if you are interested in the US Dept of Justice and FCC investigations into Google’s network practices that were subsequently dropped in early 2013, more is available here from the Wall Street Journal).

 

As mentioned above, we are going to take a vacation for two weeks and return on July 19 with our pre-earnings report (from Europe).  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 great Fourth of July holiday!

 

The Sunday Brief: Top Trends, Part 2: T-Mobile – in the Driver’s Seat

ralph brian robertsFathers’ Day greetings from Austin and Dallas.  Today will be dimmer in Philadelphia with the passing of Ralph Roberts, the father of Comcast.  A Naval veteran with the ability to sell practically everything (eggs, golf putters, men’s clothing, and then cable television), Ralph defined the term pioneer.  During the period from 1963 to 1990 (when his 30-year old son Brian took the reins as President), Ralph Roberts led Comcast.  By 1990, it had become the country’s largest cable provider while investing in both wireless networks (Comcast Cellular) and content (QVC, The Golf Channel).  Comcast took an even bigger risk in 2001/2002 when they bought and successfully integrated the assets of AT&T Broadband into their current operation (further details of that transaction can be found in the 2001 press release here).  Ralph’s entrepreneurial energy and persistent optimism will be greatly missed, and his legacy will continue in the Philadelphia area as a result of decades of community support.

 

Defining Unlimited

This week, the Federal Communications Commission voted 3-2 to fine AT&T $100 million for allegedly misleading customers about unlimited data plans.  Despite many news outlets calling this the first of many “Net Neutrality fines,” the largest fine ever imposed by the FCC deals with one of the only surviving portions of the 2010 Open Internet Order called the Transparency Rule (section 8.3).

 

In this section, wireless carriers are required to “publicly disclose accurate information about their network management practices, performance, and commercial terms of its broadband Internet access services sufficient for consumers to make informed choices regarding use of such services.”

 

The specific item in question is whether AT&T fully disclosed what the resulting reduced speeds would be when Unlimited customers exceeded the 5 GB (4G speed) or 3 GB (3G speed) cap (according to an article found here the speeds went from 5-12 Mbps to 512 Kbps for 4G customers and from 1.7-6 Mbps to 256Kbps for everyone else).  While AT&T did notify customers that their speeds would be reduced (including a nationwide press release, a front-page bill notice for all unlimited customers in 2011, text messages describing the policy to unlimited customers prior to being throttled, and detailed information in several areas of AT&T’s website such as that found here), they did not notify customers of the resulting throttling level.  The Transparency Rule clearly allows throttling, but requires disclosure of the new level.

 

AT&T is sure to appeal the fine and has already ended the practice of offering unlimited plans. One interesting side argument that is sure to be made by AT&T is whether information on the website acts as a disclosure mechanism (especially for those video-hungry customers who made up the top 3-5 percent of all data users during the 2011-2014 time period).  Those who experienced throttling were not shy to write about it in 2011, as this Android Central article describes.  In fact, Ars Technica did a full piece on specific carrier policies here in 2014, concluding that throttling “isn’t automatically a bad thing if it’s necessitated by limited bandwidth and done only when cell sites are so congested that heavy users would prevent lighter users from connecting at all.”  For a broader legal synopsis of the case, have a look at this commonlawblog.com article here.

 

This week, Sprint disclosed that it had changed its network policy (something we highlighted at the time it went into effect).  Previously, only customers who were defined as the “top 5% of all data users” would see their Internet speeds slowed, and that would only occur if there was congestion at the specific cell site in question.  Now, the policy is as follows (from Sprint’s website):

 

Allocating Resources During Times of Congestion: Despite its best efforts to prevent congestion through managing tonnage and directing customers to the best available network resources, the demand on a particular network sector sometimes temporarily exceeds the ability of that sector to meet the demand. During these times, Sprint relies on the radio scheduling software provided by Sprint’s hardware vendors to allocate resources to users. This radio scheduling software includes a set of generic fairness algorithms that allocate resources based on signal quality, number of users, and other metrics. These algorithms are active at all times, whether or not the cell is congested; however, during times of congestion, the algorithms operate with the goal of ensuring that no single user is deprived of access to the network.

 

Remember the term “generic fairness algorithm.”  As the Ars Technica article points out, this has not prevented Sprint from limiting video speeds on their network to 600 Kbps, although Sprint indicated that this policy is also undergoing changes.

 

sprint speed pictureHow this change to the network affects Sprint’s market share standing is not clear.  Judging from recent speed tests, however (see chart nearby for the latest RootMetrics assessment of Sprint’s data performance – more information for each carrier here), the role of algorithms (which presumes that there is enough provisioned spectrum and cell site backhaul for faster data speeds) may not play into the calculus in second and third tier markets (or the “in between” spaces along highways).  Sprint’s network capacity, and not a specific network policy, is constraining their ability to deliver competitive speeds and video experiences.

 

This is just the beginning of the FCC’s role in determining what is (or, in the case of AT&T, should have been considered in 2011 and 2012 to be) “fair and reasonable” network management.  Government scrutiny will do little to advance solutions to the complex issues surrounding the delivery of video services to mobile devices.  Increased regulation will, however, force wireless and wireline carriers to clarify the meaning of unlimited (specifically that a higher speed experience may not continue forever).

 

Trend 3:  T-Mobile – in the Driver’s Seat

Last week, we discussed AT&T’s Southern shift into Mexico and cable/telco/satellite consolidation as a mechanism to increase bargaining strength when renegotiating content and retransmission agreements.  These trends are ones that will undoubtedly remain throughout the rest of 2015 and into 2016.

 

The next important trend is the continued momentum that T-Mobile has experienced in 2015.  It’s hard to believe that there was a time when T-Mobile was a distant fourth place wireless provider, but that statement could have been made as late as 2012 when John Legere took the helm of their US operation (one of my favorite articles of all time is this rant by a T-Mobile employee which appeared in Phone Arena in March 2012.  If that employee is still at T-Mobile, I think they would have to agree that three years has produced a lot of changes at the company).

 

As we have described over several Sunday Briefs, T-Mobile has a lot of things going for it:

 

  1. They are spending their marketing dollars on attracting the most valuable smartphone customers. In a perfect world with unlimited capital, they would be raking in even more tablet customers, but have chosen to focus on smartphone customer acquisition.
  2. They have begun to address the business market space. This will be the first full quarter of results for the Simple Choice for Business plans.  T-Mobile took a slightly different stance from their competitors, choosing to focus on competitive rates for traditional wireless services as opposed to offering software and communications services bundles.  It will be interesting to see how successful the initial plans have been (including the extension of business lines to count as the first line in any individual family plan), and what adoption they have seen to date in local markets where T-Mobile’s data coverage is strong.
  3. They have broadened their LTE coverage (275 million POPs as of Q1 2015) and distribution over the past several quarters. Increased coverage has a two-fold effect.  First, it opens up new retail distribution opportunities to markets that have not seen T-Mobile’s new LTE network.  Second, it opens up WalMart/ Tracfone as a distributor for Straight Talk branded products and services.
  4. t-mobile wholesale net add trendThey have stuck to an aggressive Wholesale strategy. T-Mobile’s continued cultivation of a strong Wholesale environment stands in contrast to both of their larger competitive providers (see nearby trend from their most recent earnings release).  As T-Mobile brings churn under control on the retail side, Wholesale data volumes will continue to provide cash flow to underserved segments.

 

If current trends hold, there’s no doubt that T-Mobile will be widely considered the third largest wireless provider after second quarter results are posted.  They are the belle of the ball, have 700 MHz capacity deployments remaining that will drive further market share gains, and are well positioned in segments and locations where local data performance and service reliability will be critical to market share gains.  It’s also very likely that T-Mobile will show increased profitability as a result of where they are in their customer lifecycle (most customers have converted to Simple Choice plans).

 

What T-Mobile’s German parent decides to do with their US subsidiary has generated recent press.  It’s important to note that their current balance sheet could accommodate several billion dollars of additional debt without significantly compromising its integrity.  This “grow alone” course needs to be weighed against potential alternatives.  Regardless, T-Mobile’s value is considerably stronger than anyone would have anticipated three years ago.  They are clearly in the driver’s seat.

 

Next week, we’ll touch on a couple more industry trends before taking a break for the Fourth of July holiday.  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 great week!

 

Hablamos su lengua

flag_dayFlag Day greetings from Denver, Charlotte, and Dallas.  This week, we will examine in depth some of the trends that we think will shape the second quarter and the remainder of 2015.  We’ll cover two large trends this week, and conclude our analysis over the next two weeks.

 

Prior to this discussion, a few shout outs.  This week, the Light Reading Leading Lights presentation occurred in Chicago (to coincide with the second annual Big Telecom Event).  Sequans Communications (where I am a Board member) bested Nokia for the “Most Innovative IoT/ M2M Strategy (Vendor)” award.  Kudos to Georges Karam and the entire Sequans team for this achievement.  Many of you have read about the developments going on in low-power (CAT 1 and CAT 0) chipset development, where Sequans is leading the way (if you need more reading on the topic, click here).

VinliComplete-gray-frontSecond, congratulations to Dallas-based Vinli, a start-up focused on making your car’s OBD (On Board Diagnostic) system more fun and exciting.  Having come off of a strong showing at last fall’s Tech Crunch Disrupt conference, they managed to raise $6.5 million to get their product off the ground.  Interestingly, this includes several strategic partners such as Samsung Ventures (who led the round) and Cox Automotive (autotrader.com; Kelly Blue Book).  This is what happens when you put really good apps developers (Vinli is a spinout of Dialexa, one of the leading enterprise app developers in the US) together with car enthusiasts.

 

As I was watching the Apple WWDC Keynote address this week, the potential of Vinli really hit me.  Or rather, the fact that most hardware developers (including Apple in 2007) could not envision the array of application possibilities that would emerge from increases in centralized/ cloud computing, Location Based Services (LBS), and social networks. To see the potential of this for cars with Vinli, have a look at their current applications store here (14 apps is impressive in light of the fact that they do not have a launched product yet – I am told that there will be hundreds launched later this summer).  FoodCast, which locates the nearest food truck.  Parkhub, which locates available parking options surrounding major sporting and entertainment events.  MileIQ, which makes expense reporting easier.  Small today, but each application begins to intensify the local experience (I’m still waiting for Vinli and Gas Buddy, which has over 10 million Android downloads, to do something big yet local together).  More to come on how an OS-agnostic app store for cars will reshape the driving experience after I get my first Vinli in August.

 

Top Trends of the Second Quarter

Deciphering the top trends of any quarter is difficult, and the second quarter of 2015 is no exception.  There’s a lot of “reading between the lines” to figure out what’s really going to move the needle.  This week’s trends are based on several conversations over the past month with analysts and industry executives.  For the next two weeks, we would like to hear from you.  What’s moving the needle with your company/ industry?  What are the ripple effects of these decisions, and when will they be felt?  Here’s your chance to (anonymously) make your thoughts known.

 

Trend 1:  AT&T to Mexico – “Hablamos su lengua”.  When AT&T CEO Randall Stephenson is not talking about DirecTV synergies (the deal was announced on May 18, 2014 and is still awaiting final approvals), he is talking about Mexico.  For those of you who missed it, AT&T purchased two carriers in the past nine months, Iusacell (~6 million subscribers; 20-25 MHz of 800 MHz spectrum; 39 MHz of 1900 MHz spectrum) and business-focused Nextel Mexico (2.8 million subscribers; 20 MHz of 800 MHz spectrum; 30 MHz of AWS spectrum).  Both transactions have closed, and new AT&T Mexico CEO Thaddeus Arroyo is moving quickly to transform their acquired spectrum and customers into an AT&T compatible network.

 

AT&T has a strong understanding of the network capabilities that they have acquired (both current capabilities and the promise of LTE).  However, they will have a lot to learn about buying habits (data plans, smartphone demand, disposable incomes) and municipal licensing (we take this for granted in the US – Department of Transportation Rights of Way are not as easily granted).  To start, AT&T is allowing corporate customers in Mexico to roam in the US when they are traveling north.  This is a far easier move than having AT&T’s massive enterprise base crush the Nextel and Iusacell networks by allowing them to roam for free when they travel south.  But that benefit is coming – soon.  It will impact the strength of AT&T’s corporate offerings for the 4-5 million cross-border business travelers.

 

Next, AT&T will need to develop a coordinated retail presence in Mexico.  Copying their success in the US, it’s likely they will have a mix of company-owned and dealer stores.  AT&T will be uniquely advantaged with purchasing power across new devices (for corporate customers and high-income individuals), but their real advantage will be in enabling an entirely new market for refurbished/ off contract smartphones.  Given the 3G orientation of Iusacell’s network (and the limited budgets of many consumers), an Apple iPhone 4s might be a popular starting solution.  And there are lot of iPhones coming available thanks to AT&T’s Next plan adoption.

 

puerto rico island coverageAT&T has expanded their distribution and market understanding through the acquisition of Cricket, which recently passed 5 million subscribers according to this Fierce Wireless article.  With 3,000 stores in the US, and the fact that Cricket is the same word whether in English or Spanish, we might even see a brand expansion.  On top of the Cricket experience, AT&T also did a stellar job of integrating the Centennial Wireless assets into their Puerto Rico holdings and currently control 38% of the total wireless market on the island (where they happen to compete against America Movil and their Claro brand).  While it will take several years to materialize, it would not surprise me to see coverage throughout Mexico’s population centers that looks like that of Puerto Rico (LTE coverage pictured).

 

Where does AT&T’s strategy leave T-Mobile (and specifically, how should they respond to AT&T’s inclusion of unlimited calling/ messaging to Mexico for selected Cricket/ GoPhone plans)?  Would Carlos Slim be a better boss for John Legere than Charlie Ergen?  To what extent will AT&T use America Movil’s towers (more on that opportunity here)?  How far will AT&T’s enterprise play extend, and will we see capital spending include an inter-city fiber network?  Most importantly, how will AT&T’s US-based capital spending be impacted by additional requirements from DirecTV and Mexico (see here for a fairly damning article on AT&T’s residential capital shortfall and its impact on DSL availability here).  There are many questions to discuss over the next several quarters, but it appears that Mexico is going to be a top priority for the company for years to come.

 

Trend 2 – Cable consolidation and the role of programming.  In case any of you forgot, in the second quarter the Federal Communications Commission blocked the merger of the two largest US cable companies, Comcast and Time Warner Cable.  This allowed TWC to be included in the existing merger plan between Charter and Bright House Networks which was originally announced on March 31, 2015.  This three-way merger was announced on May 26, 2015 (full presentation here).

 

new charter video scaleThere are several reasons why these three companies are merging, but none is as big as programming leverage.  In the synergy section of their combined presentation, cost synergies are promised based on “combined purchasing and elimination of duplicate costs.”  While combined marketing and product organizations will save some money, this is primarily a case for increased programming savings due to scale.  As the nearby chart shows, Charter will be slightly smaller than Comcast yet slightly larger than Dish.   That puts Charter into a different league than they were as a separate company with 4.3 million subscribers.  TWC’s programming costs of $1.4 billion in Q1 2015 made up 57% of total video revenues (and grew 8.5% vs. total revenue declines of 1%).  Something’s got to give here, and more scale delivers Charter a stronger hand when it comes to negotiations.

 

Outside of management decisions (which appear to be more of a “best person for the job” than is seen in a traditional M&A transaction), there’s a lot of equipment purchasing power that can result in additional cost efficiencies.  More scale may also drive more enterprise (and wireless carrier) decisions to cable, although all three companies are already working in tandem on nationwide enterprise opportunities today.

 

As we discussed in last week’s column, there’s value to scale in asset intensive industries.  The new Charter will definitely enjoy a lower cost structure than either TWC, Bright House, or Charter experienced previously.  But the merger will be considered a flop if they cannot squeeze 10-20% out of existing programming costs (or achieve other changes to the contracts that allow them to offer the “skinny TV” package options that Verizon announced in mid-April).

 

While AT&T and DirecTV share the same objective as the new Charter, the new AT&T entity will be applying their scale across North America.  I would not be surprised to see additional consolidation opportunities emerge with Canadian operators (Shaw, Videotron, Cogeco, and perhaps even Rogers).  On top of this, it’s highly likely that this merger will accelerate the Wi-Fi footprint for the combined entity (re: Charter is not a current member of the Cable Wi-Fi consortium).

 

We’ll write more about the state of cable next week, but the bottom line for the new Charter is this:  Lower programming costs and grow existing opportunities faster (especially in commercial services).  That will be a well-watched talking point for several quarters to come.

 

Next week, we’ll continue the trend discussion and talk more about Sprint’s and T-Mobile’s trajectories (hint:  one is not moving as quickly as the other).  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 great week!

The Urge to Merge

lead off photoGreetings from Chicago, Philadelphia (pictured – Bill Gravette from StepOne outside of Pat’s Steaks), New York City, St. Louis, Louisville, and Dallas.  Many thanks for everyone’s comments on last week’s Android World column.  In keeping with the theme (we moved exclusively to an Equipment Installment Plan methodology last week), both Verizon and AT&T announced this week that they will not sell subsidized phones in their (or Apple) stores any longer.  If you want an iPhone, you need to move to AT&T Next or Verizon EDGE.  It seemed inevitable and, while I would like to believe that this change is occurring because of the awesome functionality (and unsubsidized price) of the September version of the iPhone, I think it has more to do with keeping the sales process simple (Verizon’s EDGE and AT&T’s Next plans already add enough complexity).  More on the change from this DSL Reports article.

In addition to the news of the loss of subsidized phones, it has also been reported this week that Apple is going to change the revenue split with the app developer community for certain types of applications (see article from the Financial Times here).  This change will positively affect the amount of revenues that music and video applications receive from Apple.  More on the changes will be revealed at Apple’s Worldwide Developer Conference (WWDC) on Monday.

Driving the revenue split change above is the anticipated launch of Apple’s revamped streaming music service.  A lot has been written on what the service will include (free vs. paid, DJ-assisted vs. unassisted, etc.) but the story here is a lot simpler than the articles imply:  To be successful, Apple needs to do three things:  1) Develop the best music listening algorithms (historically the domain of Google/ Spotify/ Pandora), 2) Leverage the existing global iPhone base of over 200 million users (and the corresponding local ad machine that Apple has improved since their 2010 Quattro acquisition), and 3) Concurrently release a version of whatever streaming service they develop on the Android platform.

There are only a few examples where Apple has fallen flat on a product release in the past decade (see one of their failures of omission below), but two of them have been in the apps arena:  iTunes Radio (released in 2013) and Apple Maps (released in 2012 and promptly declared one of the “Tech Fails” of the year by CNN).  Based on your feedback, both of these applications would be classified as “highly mobile” meaning that more than 85% of the time, users will reach for their iPhones to use the application (probably more than that for Apple Maps).  The product, therefore, needs to be designed for mobile usage first, with any additional functions and features adopted for larger screens second.

Product is going to play an important role in any streaming music launch.  It will be very interesting to see how much of a rules-based versus machine-learning (Mississippi Queen by Mountain costs less to play than Ramblin’ Man, so select that one next) approach Apple takes here.  A rules-based appproach is more hard-coded and driven by the things like Pandora “thumbs up/ down” logic.  It might look like this:

              If Listener is playing Freebird by Lynrd Skynrd,

                           And Listener has indicated “thumbs up” on Ramblin’ Man by the Allman Brothers,

              Then play Ramblin’ Man next.

A  machine-learning approach looks at the total inventory available and uses that to select the next play:

              If Listener is playing Freebird by Lynrd Skynrd,

                            Play the Live version of Mississippi Queen by Mountain because it’s lower cost. 

To those of you who are long-time Pandora listeners, this logic makes complete sense.  My wife’s Blondie channel plays 80s tunes with regularity – no long ballads by Meatloaf or Green Eyed ladies by Sugarloaf.  B-52’s, Go-Go’s, Joan Jett, and others are the standard.  For Pandora, this is based on nearly a decade of curation.  The requirement to be continuously better, especially for a paid subscription, is going to be critical.

Without going into the other two points (we will cover these after the announcement), it’s very clear that Apple has a major opportunity to develop a deeper engagement with their customers (and to use it to entice Android users to the Apple family).  Apple has the music legacy and relationships – now it’s time to develop predictive playlists.

Before moving on to our main topic, I would be remiss if I didn’t ask for one thing out of iOS9:  an Incoming Call Control API.  Unlike Android (and Blackberry and Microsoft and Tizen), iOS has decided not to allow developers to access incoming call detail information, specifically the 10-digit phone number.  This prevents iPhone users from identifying the caller or texter (if not in your contact list) and their context (for all calls whether in contact list or not – think “last exchange” on Google Android that you see for each incoming call).  This issue existed six years ago when Apple was still exclusive to AT&T, and their failure to release an API that enables applications that let you know that your summer swim coach is calling you to tell you your daughter injured herself at the pool is a failure of omission.  It’s a big miss that is symbolic of Apple’s misunderstanding of the importance of contextual identification in a real-time communications world.

The Urge to Merge

As we discussed in last week’s column, the telecommunications space is rife with merger discussion.  When will the AT&T/ DirecTV merger get approved?  Why does the Charter + Time Warner Cable + Bright House merger make sense, and where does this leave Cox, Cablevision, and Mediacom?  Can French telecommunications provider Altice (who recently announced that they would purchase Suddenlink Communications) execute a rollup of the US industry?  What are the implications of Frontier’s announcement that they would issue stock as opposed to debt to finance their most recent Verizon properties acquisition?  Is T-Mobile + Dish the next Pugs Bunny?

Having witnessed the crippling effects of the Sprint/ Nextel merger (one of the worst in telecom history), and the Sprint/ Centel merger (one of the best in telecom history), here’re some thoughts on what changes should drive increased merger activity in a relatively low cost-of-capital environment:

1.       Cost synergies.  Perhaps the most despised words in corporate America.  This is, however, the reason why most mergers succeed.  One operator who is extremely operationally efficient and has the margins to prove it (Bright House Networks) buys a weaker provider (Charter Communications) and improves the operations of the acquired business.  Except, in this case, Charter is buying Bright House (and Time Warner Cable), thanks to the leadership of John Malone and Liberty Global. 

 

In the cable industry (and in the case of AT&T/ DirecTV), cost synergies drive lower programming and equipment costs.  They also drive efficiencies in handset procurement in the wireless industry (ask ALLTEL, who was acquired by Verizon).  Cost synergies provide the foundation for all other value creation.  That’s why scale-driven mergers are better received by the acquiring parties’ shareholders than any other type.  They are the easiest to track. 

2.       Revenue synergies.  Simply put, more sales resulting from more salesmakers and better products.  This could be driven by expanded geographies (e.g., AT&T can expand their presence in South and Latin America because of DirecTV’s presence in the region; Comcast and Time Warner Cable would have generated more commercial services revenue because of their expanded market presence) or by the presence of two separate embedded bases (e.g., AT&T will sell more in rural markets because of DirecTV’s relatively strong rural market presence). 

 

Revenue synergies are harder to identify and harder to track over time due to changes in market conditions.  It’s also harder to distinguish between lower costs to acquire customers (a cost synergy) versus merger-driven revenue synergies.  When evaluating a potential merger, many analysts ask “What does the combination of these drive above and beyond that of a commercial agreement or partnership?”  If it’s hard to clearly answer this question, the synergies are likely soft.

3.       Asset scarcity.  This is a ambiguous term as any scarcity argument should form the basis for higher level of sales or profitability.  However, as has been the case with spectrum-related merger argements in the wireless industry (with the exception of Metro PCS – see below), some have argued that the mere perception of scarce assets (in the case of T-Mobile being purchased by Dish Networks, that would be mid-band or AWS spectrum) drives value.

Quite frankly, with spectrum or any other kind of asset (exceptions being natural resources like diamonds or gold or oil, or office space on a densely populated and growing island – in short, items for which there is a finite known quantity), there is no such thing as long-term asset scarcity.  No telecom asset should not be valued in the same manner as gold or diamonds.  For example, the right to operate a cable franchise has a finite life.  The probability that any franchise will be renewed is high, but there’s the persistent threat of Over the Top (OTT) providers.  Can Charter predict, for example, that their $6 billion in Franchises assets will hold its value over the life of the asset?  Probably, but to the extent those licenses are driven by video growth, there is risk in their overall value because of changes in the marketplace.

The story is even more confusing when valuing spectrum. As we have discussed many times in the column (see Verizon-focused Sunday Brief from earlier in the year here), it’s not the quantity of spectrum that matters, but the quality and the deployability of that spectrum. Medium spectrum capacity coupled with best-in-class local deployemnt capabilities is more valuable to shareholders than mass quantities of spectrum without local expertise. 

One example where asset synergies worked is in T-Mobile’s acquisition of MetroPCS.  The acquired company had solid 1900 MHz spectrum holdings which were perfect for T-Mobile’s growth needs.  After extensive farming, Metro’s asset drove higher revenue and profitability for T-Mobile.  The presence of compatible spectrum drove the purchase price for the assets.  This example is the exception, not the rule, however, for most asset scarcity arguments. 

When capital is cheap (and the threat of capital costs increasing appears imminent), M&A activity tends to spike.  Valuations become more dependent on things that far exceed the useful life of known assets (also known as the perpetual value of the acquired company), and peer/recent multiples become the measuring stick for determining prices.  Mania sets in.  We are living in such a time, and, without meaningful cost synergies, most M&A arguments are strained and should be carefully scrutinized.

Next week, we’ll start the discussion of the Top Ten events of the second quarter.  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 great week!

It’s an Android World (May 2015 edition)

** Editor’s note:  Please print the first two pages of the attached document prior to reading.  **

 

dallas floodingGreetings from rainy Dallas and Chicago.  Pictured is Saturday evening’s view of the Trinity River which flows through Dallas. While we are thankful for reservoirs that are full, we are equally hopeful that the weather forecast for a rain-free week is achieved.

 

There has been no shortage of news affecting the telecom and wireless industries.  First, as many expected, a three-way merger between Charter, Time Warner Cable, and Bright House communications was announced on Tuesday.  Many if not most of you are versed on the details of the transaction ($78.7 billion value for Time Warner Cable and an additional $10.4 billion for Bright House Networks; 48 million homes passed and 23.9 million customers across 41 states; TWC shareholders will end up with 40-44% of the value of the new Charter), but if you need additional details, the news release is here.

 

The release is big win for Time Warner Cable shareholders who found themselves without FCC approval after a year of waiting.  This transaction looks like it will be approved by the FCC and the states that the new Charter serves.  As the map of the combined company shows below, there will continue to be a substantial presence in the upper Midwest, Southeast, and Texas.  The combined presence will bolster business presence and allow the new company to serve a larger footprint.

combined charter time warner bright house pictureThe map shows just how dispersed Charter’s footprint was prior to the announcement.  Outside of St. Louis, there were few MSAs were Charter set the rules.  Now, they will be the largest broadband provider in North and South Carolina, Kentucky, Ohio, Texas, Maine New York, Hawaii, MIssouri and Wisconsin.  They will have a substantial presence in California, Colorado, Michigan, Tennessee, Alabama, and Florida.  That’s 15 more states with substantial presence than Charter had prior to the transaction.  For advertisers, this is very welcome news.  It also sets the stage for further territory swaps that could broaden/ tighten their territory clusters even further.  Overall, it’s an opportunity for broadband growth to flourish and for content delivery concentrations to improve.

 

Beyond the Charter/ BHN/ TWC news, last week was one of chipset maker consolidation with Broadcom agreeing to be acquired last Thursday by Singapore chipset producer Avago for $37 billion or about 4.5x 2014 revenues (more details here).  Many of us remember Freescale Semiconductor’s acquisition by NXP Semiconductors for $12 billion last March. This transaction improves Avago’s relationship with Apple (Broadcom is a major chipset supplier).

 

On top of these two announcements, it is rumored that June will begin with Intel’s largest acquisition in their history – buying Altera for $54/ share or $17 billion (more details from the Wall Street Journal report here).  This would allow Intel to more tightly integrate future chipsets with Altera’s Field Programmable Gate Arrays (FPGAs), something that would strengthen Intel’s near lock on chipsets for the server industry.  More to come on Monday or Tuesday or whenever the deal is announced.

 

Finally, there’s the acquisition of Liquid Web by the folks at Madison Dearborn (full release here).  Best wishes to Jim Geiger and the rest of the management team as they continue to strengthen Liquid Web’s value proposition and distribution partnerships.  More on Liquid Web’s offerings here.

 

It’s (Still) and Android World – May 2015 Edition

This week’s Sunday Brief is a favorite for many, and is definitely one of our favorite ones to produce.  Since 2009, we have been tracking changing handset offers from each of the major wireless carriers.  We have moved from handset exclusivity to homogeneity, from basic phones to smart phones (and wearable devices such as watches), from 3G to LTE networks, and from heavy carrier subsidies to Equipment Installment Plans (EIP).

 

These changes have come quickly and have created an expectation of change among the smartphone population.  Many of you have asked me “What will happen when the pace of smartphone feature/ network change slows down?”  It’s impossible to tell, but if printers and personal computers are any indicator, the end game is not pretty.

 

Before diving into the most recent snapshot, a few notes about our methodology as it has changed from November’s assessment.  We have changed our AT&T view to show the 24-month pricing for all handsets (AT&T’s most commonly advertised rate is a 30-month purchase plan).  This allows a better comparison between AT&T, Verizon, and T-Mobile.

 

We have also changed our tiers to correspond to the EIP monthly payment levels:  1) $20+, 2) $10-20, and 3) Less than $10.  All handsets have been obtained through an examination of each carriers’ websites and do not include refurbishments or specials (or the new Nokia 620 device).

 

Sprint’s comparison is a little trickier as well due to their leasing plans.  As a reminder, with leasing, there is no residual value for the consumer after the lease term expires (the difference in the monthly rate roughly equates to an acceptable residual value).  Sprint also bundles their plans with their Unlimited offerings which may or may not be the same as traditional EIP plans.  All devices where the lease is promoted have been designated with an (L).  As you can see, the list has grown significantly from last November’s look.

 

With those caveats, here’s the snapshot:

android world recent pic

 

The first observation most will have over this chart is the “sameness” for Apple products.  With the exception of Sprint’s leasing option, they are equal to the penny.  In the subsidy-driven world, the carriers began to promote Apple devices more heavily, especially during the Holidays and Back to School seasons.  This will be a tougher in a world where $1-2 month in savings does not move the needle as much as a weekend special with $100 off any device.

 

The carriers are making up for new phone sameness with reconditioned iPhone “while they last” promotions.  T-Mobile and Verizon have become more aggressive in their selection of reconditioned iPhones on their websites, and the savings is usually $6-12/ month (30-45% off new).  While they are not included in the chart above, the rise of reconditioned devices is a real trend that leads to the “when the music stops” question described earlier.

 

On the topic of sameness, look at the pricing for higher end smartphones between T-Mobile and Verizon.  Same devices (with the exception of Verizon’s Droid line), and very similar prices (note that there are some circumstances where Verizon’s EIP rate is lower than T-Mobile, likely a reflection of purchasing power than anything else).  With T-Mobile aiming their “Never Settle” guns at Verizon, it should not be a surprise that this is the case, but the similarities are nonetheless striking.

 

What is interesting is that AT&T is able to command pricing premiums to Verizon for popular Android handsets.  As a reminder, we are looking at the AT&T Next 24-month pricing which requires that customers pay at least 18 months at the advertised rate before upgrading.  The corresponding rate plan is for 24 months.   AT&T advertises a 30 month plan which requires 24 months of payments prior to upgrades.   Look at the Samsung Galaxy S6 Edge – Verizon’s pricing is $4.86/ month lower than AT&T.  The same holds for the Samsung Galaxy Note Edge – nearly $7 lower.

 

For comparison, look at the Nov 2015 listing (page 2) which shows AT&T’s 30-month Next pricing vs. Verizon’s 24-month Edge pricing.  That should give you some idea that this is not a fluke – AT&T is commanding a small EIP premium.

 

While we have highlighted this in previous Android World columns, it’s worth noting that inventory obsolescence is heightened with EIPs. Have a look at the pricing differences between three generations of the LG flagship line (LG 2, 3, and now 4).  At Sprint, there’s $3 in monthly costs between three generations.  At AT&T, it’s about $7.50, and Verizon does not carry the LG G2 any longer (interestingly, the LG G3 is sold out at T-Mobile).  It used to be easier to clear the shelves of older generation devices with limited-time “free” promotions.  Now it’s not so easy, and, while the Android World assessment reflects on-line as opposed to in-store offerings, generational inventory is a big issue for the carriers in a monthly payment plan environment.

 

With the announcement of Google’s “M” operating system at their I/O conference last week (which we will cover in detail during June), the world was reminded of how important the Android ecosystem has become.  Thinking about how the chart above translates into the retail store environment, it’s easy to see how operating systems are driving layouts.  On one side, the Apple allure.  On the other side, the Samsung brand, with LG/ HTC/ Droid/ others fighting for recognition.  In the back, it’s Blackberry and Microsoft/ Nokia.  We have settled in to a duopoly, at least for now, with applications integration, network performance, and plan promotion driving carrier differentiation.

 

Wait six months, and it’ll all change again.  It’s still an Android world, but other forces are about to change buying decisions.  More on that in next week’s column.

 

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).  Also, if you decide to use the findings of the Android World column, if you could link back to the www.mysundaybrief.com web address that would be greatly appreciated.  Thanks again for your readership, and have a great week!