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Where is Value Being Created?


opening pic (9)Late August greetings from Denver, Louisville, Charlotte, and Dallas, where Texas high schools opened their football seasons (and I tested my Samsung Galaxy S5 panoramic camera setting in the opening picture).  JCP pulled an upset of sorts over perennial state contenders Arlington Bowie with a 35-0 victory.  Next week will be another test when they play Plano East in an away game.


As we exit the month and roll in to the Labor Day weekend, we thought it was a good time to look at who is driving down the field of value creation and to also briefly discuss the latest status of the Connect America Fund (CAF).  Next week we will take a short break from our analytical labors to enjoy a long weekend.


Where is Value Being Created? 

A lot of journalistic ink was spilled this week as media pundits tried to explain the mood of investors.  “Don’t panic” was the most common theme through all of the gyrations (which included a brief period on Monday where Apple stock dipped below $93 per share – it closed Friday above $113).  Most investors agreed, and markets began to stabalize (at least temporarily) by the end of the week.


Traditionally, the effect on the US telecom market (and particularly the local exchange carriers) is muted.  On Monday, no company was immune, with Consolidated Communications (ticker = CNSL), Telephone & Data Systems (TDS), and Fairpoint Communications (FRP) selling off at the market open.  Each of these dividend-rich stocks closed at least 6% higher than Monday’s intra-day lows by the end of the week.  Given the fact that these companies are probably are least the impacted by a slowing Chinese economy of any in the telecom space, it was good to see them close higher for the week.


Twice a year, we look at the larger telecom players and gauge where value shifts are occurring between emerging models (Microsoft, Amazon, Google, Apple, and occasionally we add in Facebook) and the bandwidth/ services models (Comcast, Verizon, AT&T, Time Warner Cable, T-Mobile, Sprint, others). For many of you, these periodic looks (as well as the twice-yearly Android World issues) are the favorite issues of the year.


It’s important to keep in mind that this blog (and specifically the value creation issues) should never be used as a stock picking guide.  The purpose of this issue is to see whether bandwidth providers (commonly known as the wireless, telco, and cable industries) are adding value compared to the 4-5 largest business model challengers.  We have no idea what long-term terminal value growth rate should be applied to any of these stocks, and gladly leave that up to others to determine.


A brief summary of how calculations are determined:

  • All stock information is sourced from Yahoo! Finance and double-checked through Bloomberg.
  • For share quantities, we assume that market capitalization from Yahoo and Bloomberg are correct and include the appropriate share classes.
  • Rather than use an average number of shares during the period, we use an ending number and adjust as necessary (which you will see we had to do with AT&T for the DirecTV merger).
  • We adjusted the Windstream stock price for comarison purposes to include 1/5th of a share of their leasing company (that was what the WIN shareholder received on or about April 20, 2015). CSAL closed at $20.50 so $4.12 was added to the WIN closing share price to determine an equivalent amount).
  • AT&T added 960 million shares for the DirecTV acquisition since our last look. That’s about $32 billion in market value (or 1.5 Sprint equivalents) added from DirecTV.
  • Level3 figures now include the value created from their tw telecom acquisition in June 2014
  • Dividends have been accumulated for the first and second quarters and will reflect the entire year in our January issue.


With those caveats, let’s look at where shifts are occurring in the telecom and Internet sectors:

value creation totals Aug 30

The bottom line is that the Four Horsemen have created $165 billion in increased market capitalization since the beginning of the year and $176 billion in overall value including Apple and Microsoft dividends.  The telco industry has created value since the beginning of the year predominantly through the effect of one acquisition of one provider (the $32 billion DirecTV effect described above, which, if we had included the satellite providers in our original analysis, would have had a net minimal impact).  Bottom line:  Bandwidth providers are less valuable today than their Internet software/ product/ services counterparts, and that gap is continuing to widen (see here for our January discussion on the multi-year effect of this shift).


For the purpose of looking slightly longer than an eight month period (and to attempt to even out dips and gains that can happen between years), we also included the market capitalization increase from the beginning of 2014.  The numbers for the Four Horsemen are remarkably consistent – each (including Facebook) has produced $50 billion or more in market value since the beginning of 2014.  And, while nervousness has continued to increase around long-term growth prospects for Apple, they have added more than 1.25 Comcasts in total value since the beginning of 2014 (and, with their cash and marketable securities on hand, they could buy Comcast and T-Mobile).  This is a very different world than what existed ten years ago, and the hundreds of billions in market value shifts are driving everything from neutrality policies (the demonization of cable companies by Google and others is laughable given the value shifts that are occurring) to merger approvals (Sprint+T-Mobile, AT&T+DirecTV, Comcast+TWC).  Apple + Google + Facebook + Microsoft + Amazon have a combined market capitalization of just under $2 trillion (all created within the last 30 years).  While each is a remarkable story of entrepreneurial zeal, it’s important that their newfound power is properly balanced with that of the wireless, fiber, and copper transport that enables their success.

Connect America Funding:  Who’s In, and Who’s Out   

fcc_map_7jan2015One of the important goals of the presidential administrations past and present is to provide all Americans with a baseline level of communications.  Originally oriented for landline voice services, recent focus has shifted to include broadband (10 Mbps down/ 1 Mbps up) speeds.  The FCC recently announced a new phase to their Connect America Fund, called Phase II or CAF II, which provides incumbent carriers annual subsidies in exchange for construction commitments.


AT&T (2.2 million homes) CenturyLink (1.2 million homes), Hawaiian Telecom (11K homes), Windstream (105K homes) and Frontier Communications (650K homes) have all committed to plans to accept CAF II for a cumulative annual payment of $1.168 billion for the next six years ($300/ connected home per year).  Even when inlcuding those built out under Phase 1 CAF, only 30% of the 14 million homes originally identified in the National Broadband Plan as lacking broadband speeds will have been connected.


What’s missing?  Verizon’s plans.  While they have accepted $48 million for states where they are in the process of selling their local operations (California and Texas, which likely become Frontier’s responsibility in early 2016), they have decided not to accept any additional funds in their predominantly Northeastern and Mid-Atlantic service territories.


This opens up a competitive bidding process for approximately $175 million in annual payments for ten years (a $2 billion commitment).  Could this be the trigger for fixed wireless solutions to emerge, provided they can meet/ exceed the 10 Mbps requirement?  Will rural cable companies (Mediacom, Suddenlink, Northland, Cable One, Charter and others) step up to challenge incumbent providers?  Will the FCC relax speed restrictions if satellite is the only remaining technology alternative?


There are a number of questions remaining around the process, but $2 billion is not a small number and is likely to draw both scrutiny and innovation.  For more details on the competitive bidding process and CAF history, this Davis Wright Tremaine brief on the subject is excellent.


Next week, we’ll take a break from our labors, but will be back on September 13 with an Apple-centric edition.  Until then, please invite one of your colleagues to become a regular Sunday Brief reader by having them drop a quick note to sundaybrief@gmail.com. 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 enjoy the remainder of your summer!


Let’s Get Fibered Up

lead picture (3)Beginning of high school football greetings from Alanta and Dallas (Jesuit College Prep v. Wylie pictured.  Jesuit won the scrmmage match 21-14).  This week, we’ll go in depth with the gameplan presented by AT&T during their recent (August 12th) analyst day.  Prior to that, we’ll see if Samsung’s latest marketing and product moves resulted in an early lead or generated a pass interference penalty.


Samsung – Well Rounded (and Well Noted)

Ten days ago, Samsung held an Unpacked event in New York City to reveal their latest large devices – the Galaxy S6 Edge+ and Galaxy Note 5.  If ever there were two smartphones that were meant to hold sideways (in landscape form), these are it.  4K recording capability, exceptional display, wireless charging, a wireless keyboard attachment (read Ars Technica’s take on that feature here) and the S Pen make the Note an iconic device for both large smartphone screen fanatics and phablet fans.

galaxy note 5This is also the first high-priced device to only be offered (except for AT&T) with a monthly fee (T-Mobile = $29.17/ mo., AT&T = $30.84, Verizon = $29.00, and Sprint at $30.00 for 24 months; AT&T offers the traditional subsidy pricing for $350 with a two-year contract).


While the phone launched on-line and in stores last Friday, Samsung went a step further to attract Apple fence sitters (apparently there are many):  Try the Galaxy 6 Edge+ or the Galaxy Note 5 for one month for $1 using your existing carrier. As many of you will remember, T-Mobile tried a 7-day promotion about a year ago with the Apple iPhone 5s, and demand was good but not great.  Note:  Samsung’s promotional efforts with these devices is a separte effort from T-Mobile’s and Sprint’s efforts to attract converts.  T-Mobile’s free Netflix for a year offer (which expired last Thursday) is here and Sprint’s free tablet/ free upgrade in a year/ $200 minimum trade in for any smartphone offer is here.


In a few hours, Samsung sold out of the devices they had allocated for this promotion (see picture nearby).  The demand from Apple users (you had to sign up for the promotion from your iPhone browser) to see if the grass is truly greener was a lot more than anyone expected.

samsung sold outThe Samsung Galaxy Note 3 was a terrific device – we had one with AT&T as the underlying carrier and used it daily for Evernote and also for an occasional conference call.  It was a workhorse and hard to give up (we switched from AT&T  to T-Mobile and also switched to the Galaxy S6 Edge, which delivers stunning 90 Mbps download speeds to our location in Dallas – the Note 4 had a different radio configuration).  With an Otterbox case, however, the Note can be a bit bulky and definitely not for everyone.


Our guess is that Samsung was banking on a fairly high upgrade rate from the Note 3 base (if they had not already upgraded to the Note 4), and that no one estimated interest from current iPhone users.  If you need to upgrade, expect to see a waiting line develop by September.  Just as Samsung missed the popularity of the Galaxy S6 Edge, it’s likely demand for the Note will exceed expectations.


For two really good, balanced reviews of the device, check out this one by Mashable and this one by The Verge.  If you recently upgraded to one of these two devices, we’re interested in hearing how you use them and your initial reactions.


AT&T – Let’s Get Fibered Up

AT&T held an Analyst Day the week before last to present a revised view of the company as a result of the DirecTV purchase (full deck and link to individual presentations can be found here).  They said a lot in a short amount of time, and, as this column has previously indicated, maintain the broadest objectives of any telecom company in North America.  Here’re some observations from a couple of views of the conference:


  • Outside of fiber deployments (which were carefully outlined by John Stankey), the Mexico LTE buildout (detailed by both Stankey and CFO John Stephens), and the upcoming 600 MHz auction (which was not discussed at all during the analyst day) there are few new capital intensive initiatives on the horizon. AT&T appeared fully committed to fulfilling their merger obligations (we have written before that AT&T probably welcomed this condition), and went on to emphasize that in the process of bringing fiber to 14 million residences, they would also be connecting an additional 1.5 million new small and medium businesses.


The 14 million Giga Power homes passed includes Multi-Dwelling Units, many of which are served by DirecTV today (either through a landlord/ building owner agreement or through focused marketing efforts).  One of the metrics that will be interesting to track is to see how AT&T presents offers to MDUs going forward.  It would be entirely feasible to see the economics of High Speed Internet (Gigabit speeds), Wireless and in-building Wi-Fi services, and rich content (e.g., free HBO for Sesame Street fans) to be a part of any new deal.  How far AT&T goes in their deal making (e.g., setting up the entire building as a data-free hotspot for residents) remains to be seen, but John Stankey did not seen willing to rule anything out.


Because of their fiber expertise as a local exchange provider, no one sees AT&T’s new fiber initiative as an unachievable hurdle.  Given the lessons learned/ relationships developed from the recently completed Project VIP, however, this execution risk gets ratcheted down even more.  Absent borrowing constraints, AT&T’s fiber commitment carries low risk and cements their ability to compete with cable across a large swath of their territory.


  • The revenue synergies from their merger with DirecTV are more than numbers on a page. Here’s what AT&T presented as the revenue synergy opportunity:

cross sell opportunity picture

AT&T has already begun their targeting efforts for the 15 million existing DirecTV customers who are not already AT&T subscribers by offering $500 in incentives ($300 in bill credits and $200 in smartphone credits) for each smartphone ported (more details here).  AT&T has also introduced a compelling 2-way bundle (3-way if you live in an AT&T High Speed Internet territory) that starts at $200/mo. for four wireless and four HD DVRs and $230-250 if you add in AT&T U-Verse.  AT&T is automatically offering a $10/ month discount when customers bundle two products on one bill.


A 5,000 store network will help AT&T achieve these objectives in the short term, and it is clear that they have additional content and bundling promotions in development (John Stankey eluded to the fact that certain content viewed over AT&T devices may end up being included in the wireless service price to the end customer.  He did not elaborate any further).


  • Once the new home broadband platform has been established, AT&T appears to be willing to open it up to third party content providers on a wholesale basis.  While a lengthy quote, here’s John Stankey on the wholesale opportunity from the Q&A session (John’s response starts at ~18:00 in this video):


“[We will] also have unmanaged capabilities for distribution. That allows the platfom to do things like wholesale capacity out to other folks who want to put video and entertainment on the platform.  Why would you be interested in doing that?  Well, the more consumption you get on video, the more bits it drives, the more dynamics that you get out into the mobile environment that helps customers engage with our mobile services, and on a usage sensitive basis that’s a good thing.”


One example of a content partner could be the adult entertainment industry, which used to generate a lot of cash flow for the cable industry and was an early adopter of Internet technology.  Another example could be unique sports content, such as live cricket matches from India or rugby matches from New Zealand delivered with 4K quality (or even an overlay Texas Friday Night Football network for zealous alumni).   AT&T’s commitment to deliver a programming “channel” to the masses with high resolution quality erases a large adoption barrier.  This is only possible with an integrated platform.


AT&T central and south americaDuring the Q&A, John Stankey had an interesting unscripted moment when he established the definition of bundling success as “I want Comcast to regret the fact that they do not own a wireless asset and maybe have to do something about it (28:53 of the previous video link).”


  • Latin America is the new frontier. John Stankey included the nearby map of Central and South America for a reason.  With wireless, broadband, and content delivering increasing cash flow, AT&T is going to use the insights they gain from Mexico to expand southward.


One final observation that dawned on us after viewing the presentation a couple of times is that John Donovan’s strategic network and IT capital needs are going to be disproportionately coming from John Stankey and less from Ralph de la Vega.  The Mobile & Business Solutions unit is increasingly being looked to for returns on the existing (VIP-led) invested capital (monetize LTE, deploy AWS, make Cricket more successful, etc.) while the Entertainment and Internet Services unit is being scored on realizing value and making new investments.  This is not a blanket statement (and associating value generation between units in a bundle can be very difficult to delineate), but after few hours of watching the video we came away with a much better understanding of AT&T’s new structure.  It will be interesting to see how this structure impacts their ability to execute.


Next week, we’ll true up the Investor Scorecard and see how the Four Horsemen (Apple, Amazon, Google, and Microsoft) are doing compared to their cable and telco competitors.  Until then, please invite one of your colleagues to become a regular Sunday Brief reader by having them drop a quick note to sundaybrief@gmail.com. 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 enjoy the remainder of your summer!

Happy Anniversary, Marcelo Claure

mom and dad at royals angels game croppedGreetings from Kansas City, home to some of the greatest sports fans (including my folks who are pictured at Thursday’s Royals/ Angels game) and Dallas, currently the home of some of the warmest sports fans in America.  This week’s column will be devoted to a review of Sprint’s performance over the past year and includes some suggestions for the next.  Unfortunately, the Samsung product announcements (which will have a larger impact than many expect), AT&T analyst day observations, and a host of “you might have missed” stories that many of you forward each week will have to wait.  But please keep forwarding your thoughts and observations (including to my Twitter account @pattersonadvice).

The Claure Report Card:  Turnaround?

Last August, Sprint was in turmoil.  The T-Mobile merger continued to elicit a “No means no”  response by the FCC.  Framily results, while initially strong, were being impacted by a resurgent T-Mobile.

claureSomething had to change, and on August 6,  and on August 6, Dan Hesse stepped down as Sprint’s CEO and Marcelo Claure, a Board member, took over.  A billionaire telecom executive with a passion for soccer and a love of celebrity was moving to Kansas City (and forcing his entire executive team to do the same)!

Could this be the desired turnaround?  Could Marcelo restore the lustre last seen when Candice Bergen was the “Dime Lady?” and Free Fridays were the rage for business customers? There was hope for a stronger Sprint.

In that light, we penned one of the most read Sunday Brief articles called “Dear Marcelo” where we offered some unsolicited advice:

  1. Wireless success is highly dependent on wireline success (and specifically 2.5 GHz deployment success is highly dependent on an in-building strategy).
  2. Make peace with cable (before T-Mobile does).
  3. Measure your team through the customer experience, not an arbitrary budget metric.
  4. Build a culture of innovation that goes beyond the limits of current mega-suppliers.

Overall, Sprint has done an excellent job in reducing subscriber loss and reducing churn, thanks to an eye-popping 20 GB family plan that depended on high breakage (average data usage with industry growth rates) to be profitable.  They have also leveraged Brightstar and other Softbank relationships to improve their overall costs.  The 800 MHz and 2.5 GHz network upgrades have helped out a lot in major cities (including Dallas), and overall LTE coverage is broader than many expected.

Sprint also gets the innovation and leadership award for their All-In phone leasing plans (although adjusted EBITDA now has to be readjusted if one is performing competitive comparisons).  They have made it easy for prime credit customers to get a new Apple iPhone 6/ 6 Plus or the new Samsung Galaxy Note 5 for an attractive monthly payment.  While the “Cut Your Bill in Half”, “Direct 2 You” and Radio Shack store expansions are still unfolding (Radio Shack being a real head scratcher), the core family and All-In offers continue to resonate a year later.  That’s the sign of a powerful first 90 days as CEO.

The Reality:  Sprint Cannot Define Victory

Given all of these changes, Sprint’s stock should be soaring (as most stocks do when analysts realize that the worst financial results are in the past and earnings growth is just around the corner).  Why then, has the stock price fallen 29% (and as much as 47%) since last August?   Why has T-Mobile’s stock risen by 38% since the day Claure took over as CEO (see Yahoo! Finance chart nearby) while Sprint has fallen 29%?  Why is T-Mobile’s equity value now twice that of Sprint?

Sprint tmob aug 6 through aug 14The simple answer can be summarized in one word:  horizon.  Not Verizon, although T-Mobile’s #neversettle campaign was directly aimed at their larger counterpart, but horizon.

Sprint is doing a lot of things – cutting costs, deploying networks, improving the customer experience – but to what end?  Is merely a positive postpaid phone net additions number an acceptable “finish line” when T-Mobile has just posted 1 million branded postpaid retail net additions for the fourth consecutive quarter (driven by a 1.3% monthly churn rate)?  To Sprint’s credit, getting to positive is an achievement, but T-Mobile is getting stronger – a lot stronger.  And Verizon and AT&T are beginning to use their size and industry clout to create meaningful differentiation in content delivery.

Sprint’s current horizon is “above water.”  No doubt there is a 300-year plan tucked away in a secure safe in Japan, and there are myriads of 3-year plans being modified to reflect $15 billion in spending on mini-macro architectures with large employee reductions, but there is no rank and file elevator pitch for how Sprint will lead the wireless industry.  Here’s the best  elevator pitch the Sunday Brief has heard from a Sprint employee/ officer recently:

  1. Sprint’s upcoming network changes will attract disproportionately new customers. Sprint will win with speed across most metro areas.
  2. Sprint’s existing All-In and 20GB family plans will maintain and improve their relative attractiveness.
  3. Sprint will leverage the global reach and scale of Softbank to maintain a free cash flow generating cost structure that will more than pay for network growth.

Some of you are probably reading this thinking that most employees could not begin to communicate this with as much clarity as is outlined above.  To Marcelo’s credit, however, I have heard renditions of this pitch from several current employees over the past three months.  To many of them, it’s Network Vision (Sprint’s LTE deployment and 3G upgrade) done right plus a couple of sizeable layoffs (cue the nervous laughter) and a side shot of empowerment.  The current employee base are skeptical yet believers – not blind to “I’ve got a secret” promises over the past 15 years (Sprint ION being the costliest technology promise of the past two decades), but willing to take the next step.

The harsh reality is that the rank and file Sprint employee does not understand the concept of victory.  This is not achieving a budget goal or being retail postpaid phone net add positive or receiving an RootMetrics award, but an acknowledged defeat of the incumbents.  Without a doubt, few if any of the legacy Sprint employees have ever existed in an environment where victory was defined.  The concept of beating an opponent is completely foreign and not “Sprint nice.”

To be victorious, someone needs to surrender.  Who is going to surrender tens of millions of customers to Sprint?  In fact, what should the victory horizon look like?  Here are some thoughts:

  1. Sprint’s victory horizon needs to be one that is relevant and achievable. On June 30, 2015 Sprint had 45.4 million combined postpaid and prepaid customers.  Growing that number to 68 million by the end of 2019 (22-23 million connections in four years) with an average service ARPU of $45 is not a pipe dream.  And adding $1 billion in monthly revenues by the end of 2019 is audacious but achievable with the right network architecture.  Someone wil definitely feel the impact of Sprint’s victory.
  1. A Big Hairy Audacious Goal (BHAG) like the one described above resets the assumption about how the network is designed and how the (local wireless) network is architected. The same network engineers who forecasted five-year growth of a few T-1s at an average cell site in 2009 and who missed the symmetrical nature of wireless growth thanks to picture uploads in 2011 need not apply for these positions.  20 million net new connections implies data growth of 2-4x per year for four years.  Transitional goals like “FCF positive” and “net port positive” are nice to mention, but designing a network that works better yet is 10-20x larger within the depreciable life of the network asset is going to require a new breed of thinking.
  1. hopewell vaGrowth may not be directly connected to a handset – it might be connected directly to a router (or an antenna that is connected to a router). Nearby is a map of Hopewell, Virginia, a small but quickly growing suburb of Richmond and Petersburg (for those of you not familiar with the area, it’s shorter from Richmond to Hopewell than it is from Arrowhead Stadium to the Kansas City airport).

Residential broadband customers have two choices according to www.broadbandnow.com (enter zip code 23860):  Verizon DSL (no FiOS) – 3 Mbps for $29.99/ mo. (regular rate is $35) and Comcast with 25 Mbps for $39.99/ mo. (regular rate is $67).  The same monthly circuit cost for a small business customer is $48-53 (VZ) and $100 (Comcast).  Guess who is winning?  To make matters worse, see below for Sprint’s wireless coverage in Hopewell as of August 16 – a bad mosaic for sure (and to think of the data experience cliff that customers go through moving from Spark yellow to Verizon 1xRTT purple roaming speeds – the net promoter score in Hopewell must be outrageously negative).

sprint coverage in Hopewell VAWith the new BHAG described earlier, Sprint needs to stop thinking  solely about handsets and start thinking about connections (and these need not be wholesale connections exclusively).  Turn the nearby map solid yellow and offer small business customers a $70/ month “fast as possible” circuit with a minimum of 10 Mbps and a 35GB cap.  Or, better yet, pull a Google Fi on data access and charge a one time fee of $500 to connect, and annual fee of $500 and have business customers pay only for the data that they use!

As you can see, there are plenty of opportunities to add connections.  Handsets are going to continue to be important, but enterprise branch connectivity can move the needle without breaking the bank.  Many of the former Clearwire employees realize this and have specifications already written for a premiere business data backup product.

  1. Create local operational partnerships that deliver as much value as the financing partnerships being established for handset leasing. Turning any geographic area solid yellow is going to take a lot of work and require a lot of money.  Growing 20-25 million net new customers over the next four years is also going to cost a lot of money (more than $15 billion).

For the largest metropolitan areas, Sprint needs to control and manage its metamorphises.  For the suburbs and the byways, that’s a different story.  Why not bring the Alamosa, US Unwired, Ubiquitel, iPCS, and other affiliate bands back together to lend a hand?  This is more than network management – give them the rights to “fight local” against Verizon and AT&T.  Protect the entity from any parent bankruptcies (just as has been done with the Special Pupose Entities described in your most recent 10-Q), and reunion is possible.

This “re-affiliation” accomplishes two important objectives:  a) it spreads the financial and deployment risk of the new mini-macro architecture beyond Sprint, and b) it allows historically weaker market share areas to regrow without the fetters of Sprint’s dwindling advertising budgets.

Transformational change is hard.  Creating competitive advantage against AT&T and Verizon is even harder.  Sprint needs to define a victory horizon and engage external parties to help secure success.  Time is running out.

Next week, we’ll hit the AT&T and Samsung announcements.  Until then, please invite one of your colleagues to become a regular Sunday Brief reader by having them drop a quick note to sundaybrief@gmail.com. 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 enjoy the remainder of your summer!

The Telco Mentality

opening pic (8)Summer Texas tax-free weekend greetings from triple-digit Austin, San Antonio and Dallas.  While the lead picture has very little to do with telecom, it’s an indicator of what one might see on any summer weekend in the Lone Star State.  Yes, that’s Chester the Cheetah strutting his stuff with the local mariachi band at the Midway Road Walmart grand opening.  While it made it difficult to pick up any dairy product, the patrons did not seem to care one bit.


This week, we’ll assess the future of broadband and discuss the crippled state of most of the incumbent telcos as they face the dividend music.  Prior to that, we’ll briefly discuss Sprint’s earnings.


T-Mobile Column Erratum

I rarely miss on research items (as opposed to opinions and prognostications), but last week I was quickly reminded by T-Mobie employees that I had made a mistake when I stated that T-Mobile faced a reset headwind on their 10 GB (four lines) for $100 offer.  In mid-March, T-Mobile extended that promotion for current customers indefinitely (more here).  The rest of the issues described in last week’s Sunday Brief still hold.  Thanks for the instant feedback, and apologies for the error.


I actually had several requests asking what I meant by my statement about T-Mobile’s driving force (that the benefits of a data first strategy drive the company as opposed to “fixing” downline proceses such as calls to care and churn).  I don’t know how to say this more clearly, but when you start by removing the pain points from the customer experience (elimination of contracts, bill shocks, slow networks, etc.) and you replace that with features that the customer values (larger data allotments, promotional rates for life, Pandora/ Spotify/ Apple Music included for nearly all plans), those customers are going to be loyal.


Stimulating smartphone loyalty is critical to establishing and growing a wireless customer base.  T-Mobile has moved to #3 because it started solving upstream problems.  They are a good case study for the entire industry.


Sprint:  A Better Network For Half of the CapEx

In next week’s column, we’ll discuss Sprint’s earnings in greater detail, but I cannot let this week’s conference call go without mention.  On Monday evening, Sprint named Tarek Robbaiti (FlexiGroup, Telstra, CSL, Orange) as Chief Financial Officer and Gunther Ottendorfer (Telekom Austria, Optus SingTel) as Chief Operating Officer, Technology.  John Saw, who was promoted to Chief Technology Officer (the title held by Stephen Bye, who left Sprint in July), will report to Gunther.


On Tuesday morning, Sprint announced mixed earnings.  Sprint’s Chairman, Masayoshi Son, tried to reassure investors on the conference call that his plan was lock tight with the following assessment of the US wireless industry (this quote is from Seeking Alpha and verified from the audio transcript on Sprint’s Investor Relations website):


As you may know, Japan has the best network in the world. To me, every time I come to the States, I said this network in this country is not something that you should be proud of. It is actually very bad. It’s not just Sprint, even Verizon, AT&T and T-Mo, all network is pretty bad. I’m want to say U.S. invented Internet, U.S. invented telephony but network is not something that you should be proud of.

masa-son-speechSo I would say the network that we created in Japan is much, much more superior. That’s a fact: coverage, the speed and all the integration. However, within Japan, SoftBank spent almost half in CapEx compared to our competitor, but the result of our network coverage, the speed is number one. So what we’re good at is spending less in CapEx and create a number one network. Of course, it’s easy to spend money and get the result, but if you have less money and then still want to achieve the number one network, you have to use brain instead of money and muscle.

So we have used brain a lot, and came up with all kinds of unique solutions that other companies do not have. We created by ourselves. So we discussed with Sprint engineers and SoftBank engineers and initially the reaction was the U.S. environment is different. However, after all these studies, most of the key fundamentals are exactly identical.

So SoftBank has 2.5 gigahertz spectrum, Sprint has 2.5 gigahertz spectrum. Both of us are using TD-LTE on top of FDD-LTE. So the common practice, common know-how, common technologies could actually apply. So I am now very, very confident that Sprint will be able to create equal or better. In my view, it will be a lot better network very soon with much lower CapEx.

This is a more powerful statement after a few reads.  The way I interpret this is that SoftBank’s extensive experience with 2.5 GHz (specifically the issues of working with high band spectrum inside of buildings and in hard-to-reach metro locations) can be ported/ leveraged by Sprint to create a better network for a fraction of the cost of their competitors ($15 billion over the next three years).


The Telco Mentality

This was the week where we rounded out telco and cable earnings.  To no one’s surprise, cable is trouncing their competitors and are quickly turning into the favored high speed data provider for both small business and residential markets.  Here are some selected extracts regarding cable versus telco performance (I have excluded AT&T and Verizon from this analysis as much of their market value is dependent on their wireless business):

table 1The news flash from this table is that investors are not picking cable for their high dividend (Comcast and Time Warner Cable are below 2% and Charter does not pay one), but that they have ceased to have confidence in the ability of traditional telephony providers to pay the current dividend rate into perpetuity (which provides the basis for the stock value).  This has caused yield-oriented investors to look elsewhere for dividend stability.


In an effort to  reassure investors that they can sustain the dividend, the incumbents reduce headcount (CenturyLink announced an additional 1,000 employee reduction this week) and cut capital (CenturyLink reduced 2015 capital estimates by $200 million this week).  This results in underinvestment in fiber/ speed upgrades which allows cable to increase their relative market share which impacts profitability expectations.  And the cycle begins again.


This is of course a broad generalization – each company has responded to this cycle in different ways.  But there is a “telco mentality” which permeates CenturyLink, Frontier, and Windstream that is underpinned by several principles:


  1. We cannot grow market share on legacy products and services – the only thing we can manage is their rate of decline.
  2. We must hit our current year budgets, regardless of market opportunities.
  3. We will always be the provider of last resort.
  4. We will never sell more speed than what we think customers need.
  5. Businesses will always pay more than residences for the same service.
  6. Cable will never be competitive in cross-territory bids (medium and large business).
  7. Beyond all else, we must preserve revenues in order to preserve cash flows, and, ultimately, the dividend.


Like many of you, I started my Sprint career in the Local Telecommunications Division (LTD) Engineering & Operations (E&O) division.  At that time, the LTD still had a Revenues department which was made up of top notch regulatory, finance, and sales professionals.  Relative to their industry peers, this was a fairly progressive bunch.  As 800 services (more access revenues), dial-up (more interconnection expenses), and eventually DSL proliferated, the LTD was there with additional offerings.  As long as access lines and special access services to business customers grew, things were good.


In 2001, things started to change.  Access line growth began to slow, driven by a mild recession and competition from a newfangled device called a cable modem.  From 1998-2000, North American cable modem penetration increased from 550,000 to over five million (more here).  From 2001-2005 that figure grew fo over 17 million.


While access line growth slowed (or was slightly negative – 1 to 3% declines per year was not uncommon), the lines lost took less revenues away from incumbent telcos than traditional primary voice lines.  While any access line represented revenue loss and potential stranded investment, there were not enough points to paint a straight (downward) line.  And, for many incumbents, long distance revenues (a familiar market to many telcos) were masking voice losses.


Then came cable’s triple play, starting with Cablevision Systems in 2004 and Insight Communications in 2005.  Originally offered to counter the increasing threat from satellite, both companies hit access lines hard, with Cablevision scoring more than 200,000 phone line acquisitions in their first six months of service (detailed article here).  As soon as the long distance opportunity began it had vanished (see this vintage 2010 Sunday Brief for a good view of the access line loss AT&T experienced after it purchased Bell South).


The incumbent telecommunications providers were still generating increasing earnings thanks to consolidation synergies, and DSL line growth continued to be reasonably strong through 2006.  Then came the mass deployment of DOCSIS 3.0 and the decision by Comcast and others to “stuff the stocking” – offer more bandwidth for the same price rather than participate in the death spiral of DSL (“for life” offers that would barely accommodate web downloads in 2007, let alone Netflix today).  Cable took the “Faster. Better” approach.


Since the end of 2007, DSL has struggled mightily against cable.  AT&T U-Verse and Verizon FiOS (a.k.a, “fiber for the rich”) became the strategic initiatives, while the rest of the planet was put on autopilot.  In the process, cable’s share of decisions turned from 55-60% to 80-90% over a three year period even with the growth of fiber-based alternatives (chart courtesy of Moffett Nathanson):

cable share of net adds

The traditional telecommunications providers are in real trouble.  They are underinvesting in their local franchise, and, as a result, could cede market leadership to cable in entire states or regions by 2017 (some metropolitan areas, such as Omaha, ceded voice line leadership years ago).  Cable is increasing commercial and residential bandwidth investment, upgrating to higher speeds and connecting shopping centers across the country.  A broad-based change is needed to the telco infrastructure and a new mentality is needed.  We at the Sunday Brief propose one that looks like this:


  1. Dividends are an important representation of cash flow success. We cannot give away cash at a time when our core franchises are under assault.  Therefore, the dividend will be suspended until we can command a share of decision advantage vs cable.
  2. We will not assume that the consumer (or business) cannot consume more bandwidth until further notice.
  3. We will align our cost structure to generate a profit yet have a similar value proposition to Google Fiber ($70/ month for 1 Gbps speeds and no caps).
  4. We will charge consumers and business the same rate for equivalent services.
  5. We will align our long-term interests with short-term realities but, in the absence of a tie, will choose to manage the business for the long term.
  6. Other strategic businesses (global hosting and associated services) are also important, and we will win on multiple fronts.
  7. We will not get caught flat footed again.


The traditional telecommunications providers can restore their luster, but it’s going to involve a change in thinking.  If John Legere can be cloned, there’s a job for him.


Recall a year ago, Marcelo Claure took the helm at Sprint. Next week, we’ll take a look at how he’s doing.  Until then, please invite one of your colleagues to become a regular Sunday Brief reader by having them drop a quick note to sundaybrief@gmail.com. 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 enjoy the remainder of your summer!


2015 Halftime Report- T-Mobile’s “To Do” List

Basic RGBSummer greetings from triple-digit Dallas.  It’s been a full week of earnings news, with Time Warner Cable, Level 3 Communications and T-Mobile continuing the parade last week.  Given Charter, Frontier, and CenturyLink announcements this week, it makes sense to postpone a discussion on the state of broadband until next Sunday (Sprint also reports on Tuesday and we are quickly approaching Marcelo Claure’s one year anniversary as CEO).  As a result, we’ll focus on T-Mobile’s earnings success this week, and proffer a “To Do” list for the #3 wireless carrier.


OnStar: We are Not Immune

In response to the Fiat/ Chrysler hacking fiasco (and their relationship to Sprint), many of you sent me articles indicating that OnStar (AT&T) could suffer a different security breach.  At the DefCon convention this week, Samy Kamkar is scheduled to show how a small $100 device comprised of a Raspberry Pi computer and three radios could be used to intercept the car owners’ credentials.  Says Kamkar in this WIRED article:  “If I can intercept that communication, I can take full control and behave as the user indefinitely.  From then on I can geolocate your car, go up to it and unlock it, and use all the functionalities that the RemoteLink software offers.”


onstar picThe issue with OnStar is different from the one Chrysler faced.  In Chrysler’s case, the car could be controlled while in motion (read about Andy Greenburg’s harrowing experience here).  The Chrysler zero-day exploit directly allowed the hacker to control all aspects of the car and did not involve placing a supplemental device near the car’s console.  The GM man-in-the middle vulnerability, while serious, allowed the car to self-start and self-unlock but not drive away (car keys are still required for this function).  In both cases, the auto companies (in Chrysler’s case, with Sprint’s help) were able to quickly fix the issue but it highlights how hundreds of millions of dollars of industry investment to turn cars into smartphones means little if Cadillacs, Camaros and Cherokees are vulnerable.


T-Mobile’s “To Do” List

t-mobile pre call pictureOn Thursday, the new #3 carrier, T-Mobile, held their quarterly earnings session (it’s hard to classify it as a call since there are as many Tweets and email questions from avid followers as there are Wall Street analysts in attendance).  Unlike the Verizon and AT&T calls, most of the questions in the Q&A are not fielded by their CFO (Braxton Carter- second from right in picture) but by their Chief Network Officer (Neville Ray – far right in picture) and relatively new Chief Operating Officer (Mike Sievert – left in picture).  The call sounded more like a public Operations Review and less like an Investor Relations-led quarterly earnings conference call.  The full packet of quarterly earnings information can be accessed here.


Importantly, there were no negative surprises in this quarter (M2M flatness was the closest thing, but T-Mobie explained it prefectly on the call).  A lot of times, revenue growth in one area masks defects in others. This did not seem to be the case with T-Mobile this quarter.


Last week, we talked about AT&T’s and Verizon’s progress through the “subsidy to equipment installment plan” knothole.  T-Mobile is now 93% through that transformation.  That’s a remarkable statistic which turns the focus to service ARPU (which was up 1% when adjusted for Data Stash accounting accruals).


Many of you have asked me “How can T-Mobile do [the latest Uncarrier initiative]?”  This question was loudest when Music Freedom was announced a little over a year ago.  I think one of the reasons is because T-Mobile does not look at Uncarrier initiatives as departmental obectives (will this reduce calls to care, or will this reduce churn), but rather as subscriber benefits that support a data-first strategy that improves the comparative attractiveness of T-Mobile.  If you have worked for a large wireless carrier, you will understand the magnitude of the last statement.  If not, email me and I’ll explain in greater detail.


Has T-Mobile gone crazy and created “Social Freedom” with unlimtied/uncounted Facebook access?  No.  Has T-Mobile changed course and offered buckets of free LTE data to customers who travel to Europe?  No, free data is available at a lower speed, but for higher bands, there is a weekly charge.  Has T-Mobile changed their focus to tablets?  No, because they have a new iPhone coming out (presumably with Band 12 included) and have the lowest base penetration of the Big Four.  As shown by their sequential flatness in Cost of Services and a $325 million sequential increase in revenues, they are exercising financial discipline – but it’s a result of an acquisition-led strategy that is logical for a challenger.


Going forward, T-Mobile has a “To Do” list that extends far beyond strategic partnership discussions.  Here’s a few ideas that we at the Sunday Brief think should be included:

  1. t-mobile 700 MHz spectrum deploymentComplete the 700 MHz network build as soon as possible. Neville Ray stated on the call that T-Mobile would like to have a Band 12 device in 50% of the base by the end of 2015.  That’s a very ambitious goal considering that no previous iPhone model has Band 12 included.  More Band 12 devices drive more data usage which drives up ARPU.  Nearby is the T-Mobile 700 MHz spectrum map, including where they face issues related to channel (51) interference.  More details at the Spectrum Gateway site found here.


  1. Manage the transition from today’s “Four for $100” plan to tomorrow’s “Four for $120” plan. One of the large acquisition engines from 2014 was the “Four for $100” which allowed each member of the family the opportunity to enjoy 2.5 GB of data before being slowed down to much lower speeds (Band 12 deployment exacerbates this speed cliff).  While T-Mobile has not disclosed the exact figure, let’s assume that there were 1.5 million families on this plan with ~3.25 lines per plan (4.9 million lines in total) prior to the introduction of their new “Four for $120” plan.  All of these customers need to be transitioned in the next five months because on January 1, 2016 the 2.5 GB allocation drops by 60% to 1 GB before the data cliff kicks in.  The new plan is very attractive, but it needs to be repurposed for retention.  And, at $120/ mo. it helps out ARPU (4x the data for 20% more).  If T-Mobile does not manage this transition, Q1 and Q2 2016 churn will spike as more customers trip the 1 GB threshold.


  1. Build retail presence in a disciplined manner. Mike Sievert did not release any actual store information on the call, but it’s pretty clear that T-Mobile’s retail presence is lagging their LTE expansion.  Some of this effect is buffeted by a solid on-line experience, but there’s value to retail expansion.  One surprise would be to see an announcement between T-Mobile and Amazon to leverage the retail giant’s Same Day Delivery  A well executed “home team partnership” strategy would make Sprint’s Direct 2 U and Radio Shack efforts look outdated and expensive.


  1. Develop cable partnerships. Begin with the question “When AT&T and DirecTV offer four line wireless family plans, 45 (75?) Mbps High Speed Internet, and Premium TV for $199…” and work your way back.  AT&T has been setting the table for this moment, and needed DirecTV to do it.  Folks in Dallas are downright giddy, and they should be because they pulled off the regulatory approvals that Comcast and Time Warner Cable could not.  Now the fun begins.


With more bandwidth freed up for faster data speeds (see Bob Bickerstaff’s June blog post here), Dallas can offer a new kind of triple play with owners’ economics.  They can stuff the DirecTV offering with channels that appeal to certain demographics (e.g., Kansas City Royals fans who want MLB Extra Innings for the rest of the season), and they have a seamless Wi-Fi offload solution.  Best of all, they can make money at a $199 monthly price point without sacrificing stand-alone pricing (which is “free”?  45 Mbps High Speed Internet or premium DirecTV video?).


T-Mobile may well end up responding to AT&T’s triple play move.  Or they could talk to their friends in the cable industry (in the midst of the Charter/ TWC/ Bright House Networks merger) and make something happen quickly.  With the cable industry’s affinity to Wi-Fi technologies, T-Mobile could have a better in-home voice solution than any other carrier as well as a ready-built offload strategy.  And, as we will discuss next week with our Cable Roundup issue, home voice connections will shrink more slowly than many people expect.


T-Mobile’s bandwidth upgrade offering could be as simple as “Switch to T-Mobile’s Family Plan.  If you are an existing cable High Speed Internet subscriber, we’ll pay for your speed upgrade for the rest of the year in the form of a gift card/ credit.  If you are new to cable, we’ll double the benefit.”  Keep it simple, focus on bandwidth (which aligns everyone’s strategies), and get a T-Mobile Personal Cell Spot in every home that lacks adequate coverage.


  1. Develop small business partnerships. I look forward to the next T-Mobile call where Mike Sievert refers to deal close as opposed to deal flow ratios (and 200,000 net additions from their small business initiatives).  Like the previous paragraph which described the framework for a home-based cable partnership, T-Mobile should actively explore a small business selling network which combines their wireless offerings with cable and/or DSL providers.  Cable should be the natural partner, but business DSL providers (CenturyLink, Frontier, and Windstream being large regional players, and Birch, Earthlink, Granite, XO and others on the national level) also need a strategic solution to grow revenues and retain customers.


Next week, we’ll discuss the state of broadband and evaluate any insights Sprint has to contribute to the wireless landscape.  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 enjoy the remaining weeks of summer!