Summer 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.”
The 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
On 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:
- Complete 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.
- 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.
- 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.
- 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.
- 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 firstname.lastname@example.org and we’ll subscribe them as soon as we can (and they can go to www.mysundaybrief.com for the full archive). Thanks again for your readership, and enjoy the remaining weeks of summer!