Home » 2015 » October

Monthly Archives: October 2015

Third Quarter Earnings Review- Are AT&T and Verizon Really that Different?

pic 1 (2)pic 2Greetings from Paris, Tampa (pictured with Robert Faber from Ballast Point Ventures), and waterlogged Dallas (Jesuit vs. W. T. White pictured – JCP won 43-0 and has scored 140 unanswered points over the past 3+ games).   This is the first time we have used a dual lead pictures in The Sunday Brief – an indication as to how active the past week has been.  As for content, we will discuss AT&T’s and Verizon’s earnings in detail, providing a few areas of contrasting growth strategies from common core businesses.

 

Verizon and AT&T:  Same Core, Different Branches

Many casual observers lump AT&T and Verizon in the same category of “behemoth global telecommunications providers.”  Without a doubt, their earnings show common roots, but their growth strategies are quickly diverging.

 

Here’s a quick summary of five common elements:

  1. Verizon has 105 million postpaid retail subscribers. AT&T has 77 million (excluding connected devices).  Maintaining a strong retail wireless presence in the US is a top priority for both companies.
  2. Both AT&T and Verizon use similar radio frequencies (although not all are used for LTE data): 700 MHz, 850 MHz, AWS (1700/ 2100 MHz), and PCS (1900 MHz).  AT&T also is beginning to deploy the WCS spectrum band (2300 MHz) which Verizon does not own, and for traditional voice, AT&T uses the GSM standard while Verizon operates over CDMA.
  3. Verizon and AT&T had heavy Digital Subsciber Line (DSL) footprints, and both lost significant market share to cable in these territories as they transitioned from copper-based to fiber-based technologies. Because of cable triple play bundle offers, both AT&T and Verizon also lost millions of very lucrative residential and small business phone customers.
  4. at7t vs verizon stockBoth companies have meaningful presence with enterprises and maintain large global footprints. Due to the rise of cloud services and continued transiitons to packet-based voice, both companies have seen secular pressures on revenues and profits.
  5. Paying increasing dividends is also important to the shareholders of each company (as of October 23, Verizon’s dividend yielded 4.9% on a trailing basis, while AT&T yielded 5.6%). Based on current trends, Verizon should pay out about $8.5 billion in dividends this year (compared to capital spending of about $17 billion) and AT&T should pay out around $9.8 billion (compared to capital spending of $20 billion).

 

The bottom line is that Verizon and AT&T are big and broad.  They got there through a combination of disciplined consolidations of both the wireless and wireline industries and through consistent marketing messages (AT&T:  iPhone exclusivity; Verizon: Network performance and consistency).  The result of their efforts are tens of billions of capital being spent to grow and maintain wireless and fiber networks each year (on top of spectrum expenditures) and billions of dollars in free cash flow to pay shareholders and bondholders.

 

AT&T and Verizon are Branching Out in Different Ways

Those who only focus on changes in AT&T’s and Verizon’s core businesses (using the tree analogy, their respective trunks) will miss the sources of new growth.  These new branches are very different for both companies and were articulated in their third quarter earnings releases.  Here are three new branches to consider:

 

  1. verizon go90 screen shotVerizon’s mobile-first, social entertainment platform – Go90. Announced in February, and reinforced with the acquisition of AOL and Millennial Media, Go90 is a video distribution platform offered to all mobile users with the promise of exclusive content (g., NFL) for Verizon subscribers.  Its business model is two-fold:  1) Deliver high quality shows that result in viewership volumes that drive high advertising revenues, and 2) Drive data usage for existing Verizon customers in the process (or, as one Verizon employee explained to me “Get to the next data bucket faster”).

 

While I am not the target audience, I have watched several episodes during my travels and have to admit that the video quality is exceptional (even on Southwest Airlines Wi-Fi which, as many of you know, is a challenge).  Admittedly, the platform is probably underutilized today, but the content distribution quality is par excellence (even if I have nothing in common with Hayes Grier from Dancing with the Stars).

 

That said, content discovery within the app is painful.  The search results are incomplete (I searched for Hayes Grier and received “No Results Found” for shows with Hayes Grier in them), and social media links (which would be a great way to expand Go90’s presence) are nonexistent.   Its early innings on the product, but right now Go90’s UI is minor league.

 

Fran Shammo addressed these concerns on the third quarter conference call:

 

As far as go90, look, go90 is a very, very different product set. It is a mobile-first, social entertainment platform. Let me just talk a little bit about where we are here, but this really is just a totally different perspective than linear TV and content deals. We know how to do that and we have been doing that for 10 years with fios. But this is a very, very different platform. Keep in mind we are 20 days into this. We actually haven’t done any advertising or promotion activity around this product. So for early stages, we’re seeing very good platform stability. We are seeing very encouraging feedback and of course, we are looking at some very specific metrics here of what’s the viewership? How many times do people revisit the site?  What do the new shows capture?

 

It’s important to remember that Go90 is a platform, not a channel.  There’s a lot of UI work remaining (something as simple as “Pick up where you left off” when a user activates the app; a recommendation engine that rivals YouTube), but the framework appears to be there.

directv app google playAT&T has the DirecTV app with over 5 million Android downloads.  They also have Sunday Ticket.  Could they extend the DirecTV app with some additional millennial-focused content (free for everyone), and potentially use this “hook” to grow DirecTV’s subscriber base through a “free DirecTV weekend” promotion?  Yes they could (AT&T recently used this “takeover” strategy in their content sponsorship of the MLB broadcasting app during the last weekend of the season even though T-Mobile is the official wireless sponsor of MLB).  They are one notification away from driving millions of eyeballs to content.  So is Verizon.

 

What makes Verizon different is that they are becoming a wireless-focused broadcaster (as opposed to content provider/producer).  They will use their base to drive viewership and as a result drive revenues.  How much difference this will drive between whether millennials click on YouTube versus Go90 for their content remains to be seen.  But it’s a different branch, and one that Verizon is heavily cultivating.

 

  1. AT&T’s Fiber-Based Strategy. We have written a lot about this in many previous Sunday Briefs (see here for one example), but AT&T has and will continue to spend a lot of money on fiber.  It will connect cell towers to content for wireless customers, enterprise desktops and WiFi access points to the cloud, and residences to the Internet.  While AT&T’s events cannot be classified as “hog wild,” they have made fiber deployment a critical part of their long-term strategy.

 

The fruit of this strategy is beginning to show.  Here’s come commentary on small business growth from AT&T’s third quarter conference call by CFO John Stephens:

 

We also have improving year-over-year wireline small business trends the last few quarters, and that continued in the third quarter. Plus, when you include Mobility Solutions, we actually grew small business revenues. This gives you a better idea of how our Business Solutions team is competing and winning.

 

Later on in the Q&A, Stephens elaborated on his earlier statement:

 

Our Business Solutions team is really doing well in a tough economy, particularly in the enterprise and the public sector space, but really, really well in the small business space. And that gives us optimism. As we mentioned with wireless, we’re seeing growth in that area. But we are seeing the acceptance of our Network on Demand, our NetBond, our software-defined networks all moving customers in a positive direction.

 

This small business growth is not a result of some newfound agent.  It’s not directly a result of economic growth in AT&T’s franchise territories (although having California, Florida, and Texas as major local areas is important).  It’s neither a result of the Mexico wireless acquisitions nor DirecTV.  Small business growth emanates from Project VIP and the $1 billion commitment to connect 950,000 business locations with fiber, just as the economy picks up in the states mentioned above.

 

Contrast this with Verizon’s nuanced FiOS strategy.  Small business revenues are a drag on overall wireline earnings (While AT&T did not announce 3Q small business wireline revenue growth, the 2Q figure was a decline of 3.7% compared to a 4.5% decline at Verizon).  The most profitable FiOS properties are being divested to Frontier, placing further pressure on Verizon’s corporate cost structure (or, as Verizon CFO Fran Shammo described it on the third quarter conference call, the “allocations”).  It makes we wonder what Verizon’s wireline future would have been had they pursued Massachusetts and Maryland fiber builds with more vigor.

 

Fiber is a long-lived asset with no immediate replacement.  Investing in fiber is not fail proof, but it’s a lot closer then investing in segments more dependent on the innovation cycle like the Internet of Things and broadcast/ content platform development.  AT&T’s fiber branch may prove to be the healthiest bough of all.

 

  1. I cannot imagine what the discussions surrounding “keeping Cricket alive” must have been after AT&T announced their acquisition of the company in July 2013 but no one expected the results the team has delivered.  To a tee, the analyst community looked at it as a spectrum purchase (and on its own it was a terrific value).

 

However, AT&T ditched All in One Wireless for Cricket.  They launched an extended footprint to current Cricket customers to get them to move, and they used the Cricket brand to appeal to single line voice and data users.

 

Here’s some Cricket commentary from John Stephens included while discussing AT&T’s overall churn decline (it actually is worth listening to the podcast of the earnings call to capture his excitement):

cricket characterWe are adding premium prepaid subscribers whose ARPU is higher and subsidy costs are lower than postpaid feature phone subscribers who have the highest postpaid churn. And our success in the prepaid market is resulting in improvement in total churn. Cricket gives us a quality prepaid offering for the more value-conscious customer, same great network, quality customer service, and the flexibility prepaid delivers with subscriber acquisition costs that are much lower than our postpaid voice.

 

Verizon does not have a Cricket.  AT&T has grown 962,000 net new prepaid subscribers over the last 12 months, while Verizon has lost 316,000 prepaid subscribers over the same period.  Could some of those new customers serve as a breeding ground for future postpaid customers?  Maybe, but AT&T appears to have found a formula that is not dependent on that occurring – they would be equally comfortable keeping them in the Cricket family.

 

Neither company has a robust wholesale/ MVNO program for voice and data customers (outside of their aging Tracfone relationship), which is truly lamentable.  But AT&T’s Cricket growth is budding, and, if they keep churn low, they will reap a bumper crop of cash fruit.

 

There are a few additional areas of difference (e.g., Venezuela currency risk is not in Verizon’s earnings release; AT&T’s 1 million connected car additions per quarter), and it’s way too early to declare one strategy or company victorious over the other.  But those who lump AT&T and Verizon together simply because of their past behaviors miss the importance of their 2014 and 2015 activities.  Future cash sources for these two companies will be different if they are successful.

 

Next week, we’ll continue with earnings coverage with T-Mobile and Level3 Communications announcements/ conference calls on Tuesday.  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 Go Royals!

 

600 MHz Auction is Coming Up- Who Cares?

opening pic (10)Greetings from Dallas and Paris (one of the Louvre courtyards is shown in a panoramic picture taken with my Samsung Galaxy S6 Edge).  As this week’s Sunday Brief will be sent from Paris (and more like a Monday edition to most readers), we’ll keep it more brief than normal and make up for it next week when we analyze Verizon’s (announcement Oct 20) and AT&T’s (Oct 22) earnings.

 

This week, we’ll touch on the FCC’s special access investigation announcement, comment on AT&T’s public relations blunder with a quadruple-play customer (and equally embarassing confession to the Los Angeles Times), and look at the beginning of the 600 MHz auction activities.

 

The FCC Investigates Large Volume/Term Discounting Practices with Potential Competitors

On Friday, the FCC opened up an investigation into the tariffing processes of AT&T, Verizon, CenturyLink, and Frontier (full FCC Order here and Multichannel News article here).  These tariffs are between the incumbent telecommunications providers and competitive LECs (which include XO, Birch, tw telecom, Level3, and even out-of-territory divisions of the incumbents themselves).  Here’s a brief summary of the allegations (from the FCC document):

 

… competitive LECs assert that, in order to compete for customers with any demand for relatively low bandwidth services beyond large downtown areas, they must purchase as wholesale inputs significant amounts of business data services from the local incumbent LEC. They assert further that in practice their only option in making such purchases is to be entangled in a web of terms and conditions that limit significantly their ability to respond to marketplace opportunities to deploy their own infrastructure, which would introduce additional choices for customers. If true, the consequences could well be that, despite competitive entry for a segment of the demand for business data services, incumbent LEC dominance over facility-based provision of such services is preserved in many areas and costs for entry or expansion for competitive LECs is increased with the direct result of that dominance being that end-users are deprived of the benefits of both competition and innovation.

 

What this paragraph states is that for competitive LECs to have a chance, they need to sign up for large volume discounts which commit them to purchase nearly all last mile connections from the incumbent.  This commitment prevents them from purchasing more from cable (most cable companies have wholesale divisions) or from building into multi-tenant facilities for their customers.

 

To put this into context from an incumbent perspective, total transport revenues for AT&T (both wholesale and retail) were $6.8 billion for the trailing four quarters ending June 30 (total wireline revenues were $57.5 billion).  However, as this column has noted several times, transport revenues generate a lot of EBITDA [cash flow] because the build process is very capital intensive (and maintenance costs have risen on a per circuit basis as the incumbents lose market share to cable providers).

 

It will be very interesting to see where this investigation leads.  While there is nothing inherently wrong about having a large volume commitment (which could translate into a large percentage of circuits ordered – that depends on the competitive LECs product offerings, pricing strategy, etc.), if there are no intermediate volume purchasing tiers (e.g., order this package or revert to much higher rates), the FCC might find a way to play a role.  Applying 1-2 volume discount “rungs” on a revised laddered schedule is a more balanced way to address this issue than shortening terms or modifying/ eliminating termination liabilities for violating agreements.

 

Regardless, the Wholesale arms of the cable commercial services units are the big winners here.  With relations between the competitive LEC community and their incumbent peers at an all-time low, cable could gain meaningful scale to justify additional line extensions at a time when residential services growth (and corresponding capital requirements) are beginning to slow.  This would put a serious dent in the profitability outlook for each of the incumbents.

 

More to come on this topic.  Kudos to COMPTEL for leading the charge.

 

AT&T’s Monumental Misfire (and Quick Confession)

In September, an AT&T quadruple play customer from El Sereno, California, emailed CEO Randall Stephenson with a few suggestions for how they could improve their service.  First, where AT&T only had DSL services (no U-Verse speeds), Alfred Valrie wrote the following, according to The Los Angeles Times:

 

“Hi. I have two suggestions. Please do not contact me in regards to these. These are suggestions. Allow unlimited data for DSL customers, particularly those in neighborhoods not serviced by U-verse. Bring back text messaging plans like 1,000 Messages for $10 or create a new plan like 500 Messages for $7.

 

Your lifelong customer, Alfred Valrie.”

 

Clearly, Valrie has established that these are suggestions only, and that he’s not looking to be contacted.  He calls himself a lifelong customer.  Asking for improved volumes to compensate for relatively slower DSL services is not a hairbrained idea.  And, since Valrie is likely spending $200 or more for quadruple-play services, trimming voice/ data by a few dollars per month is not a big stretch for AT&T.

 

ride of the Valkyrs croppedRather than sending a quick “Thanks for your suggestion.  We’ll look into it” note and pop it into a virtual file never to be read again (I’ll admit to having done that a few times while I was at Sprint), they sent the Valkyries (a.k.a., the Intellectual Property division of AT&T’s Legal Department, led by Thomas Restaino) after him (nearby picture is of John Charles Dollman’s 1909 work, The Ride of the Valkyrs).  According to the Times (see hyperlink above), the response to Valrie read in part:

 

“AT&T has a policy of not entertaining unsolicited offers to adopt, analyze, develop, license or purchase third-party intellectual property … from members of the general public,” Restaino said.  “Therefore, we respectfully decline to consider your suggestion.”

 

Gulp.  What’s most amazing about this communication is that at least three people at AT&T probably approved the response, and it appears that none of them actually read Valrie’s note (which clearly contains nothing innovative or groundbreaking, but strongly hints at the frustration that there’re data speed inequities occurring in AT&T’s network in Southern California, and that customers who balance wireless and wireline services might deserve more of a discount than wireless-only customers).

 

Before AT&T CEO Randall Stephenson delivered the mea culpa of the week to the Times, however, an AT&T spokesperson (Georgia Taylor) actually explained to the reporter that AT&T’s action was deliberate:

 

“In the past, we’ve had customers send us unsolicited ideas and then later threaten to take legal action, claiming we stole their ideas,” she explained. “That’s why our responses have been a bit formal and legalistic. It’s so we can protect ourselves.”

 

Again, Randall Stephenson has apologized for their response and indicated that they have taken appropriate measures to prevent this from happening again, but it makes me wonder how many other customers have received a bullying note from AT&T in 2015?  I received one in the summer of 2010 for using the words “Rethink Possible” in a Sunday Brief column (we modified it slightly) but that letter was not threatening by any means and I had an excellent dialogue with the external counsel who was probably paid by the hour to read my column.

 

In all seriousness, executives need to read these notes as fellow customers and apply rational thinking and appropriate action.  Listen less to the legal department, and more to quadruple-play customers.

 

The 600 MHz Auction Pre-Party Begins – Who Cares?

FCC reverse auction picture

The FCC was also busy this week releasing the initial markets pricing for the Broadcast (600 MHz) Auction.  There are two parts to the bidding process, as outlined in the nearby diagram provided in a recent FCC/ Greenhill presentation:

 

  1. Maximum “ask” pricing for each broadcaster in each market. As in any forward (or reverse) auction, an initial asking price has to be established.  In the case of the 600 MHz auction, the FCC established three prices:  1) one whereby the broadcaster receives funds and shuts down; 2) one where the broadcaster receives lesser funds, but agrees to share a new channel with another broadcaster; and 3) one where the broadcaster receives an even lesser amount, but has more flexibility to locate their new broadcast channel.  The full listing of opening bid pricing is here courtesy of FierceMarkets.  In nearly all publicly available information, it’s most likely that options 2 and 3 will be the most common choices for broadcasters.

 

This is a reverse auction, which means pricing will not go up.  The FCC has a spectrum “supply” that it is looking to fill in each market, and their intent is to fill this at a rate that yields the largest possible take for the US government (and taxpayers).

 

  1. Minimum “bid” pricing from would-be bidders (most likely current wireless carriers, with the exception of Sprint). The FCC table is here.  Of particular note are the FCC’s new 415 Partial Economic Areas (PEA) which is appropriate given their smallish nature.  For example, in addition to Kansas City, St. Louis, and Springfield, the towns of Cape Girardeau, West Plains, Moberly, Farmington, Kirksville, Rolla, Hannibal, Maryville, Macon, Columbia, and St. Joseph Missouri all have their own PEAs.  This structure should enable competitive bidding from rural wireless providers in markets where prices may have previously been prohibitively high.

 

The broadcasters will look at the first schedule and notify the FCC of their intention to participate in the reverse auction by mid-December.  Based on the pricing already established, it’s likely that many if not most will choose to play and remain in operation.  Look for more on this topic over the next six months.

 

Next week, well cover Verizon and AT&T’s earnings commentary and look for other insights from Alphabet [Google].  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 Go Royals!

 

It’s an Android World (October 2015 Edition)

 

 

** EDITOR’S NOTE:  It is best to print out the first couple of pages of the attachment prior to reading this week’s Sunday Brief. **

 

lead picture (4)Columbus Day greetings from Chicago, Charlotte, and Dallas (picture is with John Braun, Chairman of TIP Solutions). This week, we’ll turn our attention to the world of smart devices and the companies that make and distribute them.   Prior to that, a quick note on the FCC’s first Net Neutrality test.

 

CNS Denied Peering Status by the FCC

At the end of June, we covered in detail the first net neutrality complaint brought by Commercial Network Services (CNS) – more here.  This week, the FCC sent a note to CNS informing them that “In this instance we regret that you were not satisfied with attempts by FCC staff to facilitate a more satisfactory resolution of the underlying issue. At this point, you might want to contact the company directly to see if you and the company can arrive at a resolution that is more acceptable to you.”

 

While many interconnection disputes will be resolved because of the threat of FCC intervention (see Cogent CEO’s comments made at a recent investor conference here), the fact that the FCC has to get involved in the first place is ludicrous.  Hopefully the Peering Department clarifies some rules and spends their budget on more pressing matters (like a successful 600 MHz auction).

 

It’s Still an Android World

android_vectorHow consumers purchase smartphones has changed dramatically over the past couple of years.  Gone are the traditional carrier-subsidized views of $299/ $199/ $99/ free in exchange for a two year contract. They have been replaced by phone payment commitments (either leases or installment loans).  To add a twist, these plans are beginning to be distributed by the two dominant smartphone suppliers, Apple and Samsung.

 

To ease the pain of these commitments, each wireless carrier has implemented some sort of swapping program.  With JUMP! On Demand, T-Mobile allows customers to upgrade up to three times per year with replacement trade-in (in good condition).  In August, Sprint announced their iPhone for life program which allows customers to upgrade to the latest Apple model with replacement trade-in (in good condition).  Even Verizon recently announced a trade-in program that allows customers to upgrade if half of the device’s purchase price has been paid off (which should happen around month 13) and with replacement trade-in (in good condition).

 

The “condition” refrain in the previous paragraph is intentional.  If the device has any sort of damage, it’s likely that subscribers will be liable for additional upgrade payments.  Good news for OtterBox, and a “buyer beware” notice as wireless carriers are highly dependent on a high quality device return.

 

Devices are becoming increasingly detached from the networks and technologies that support them.  Consider the fact that Apple has three iPhone 6S/ 6S Plus models that cover the entire world, and one of these models is exclusively for China (more here).  In the US, the same phone model family supports Sprint, T-Mobile and Verizon (although T-Mobile would use a GSM version of the device while Sprint and Verizon would use the CDMA model).  Gone are the days of carrier-specific devices.  They have been replaced by an expectation that devices should be carrier neutral.  This expectation is going to be reinforced by retailers (specifically Apple) who want to deliver the best network experience for the customer.

 

This development places extra pressure on wireless carriers’ network quality and plan value.  As networks continue to grow and change, additional requirements are made of the smartphone manufacturers.  New (and likely faster) networks are not compatible with older device types, and this places increasing pressure on the value of returned devices. We are in the middle of a network-device-plan tornado, and those who claim that they can accurately predict this storm’s aftermath are sorely mistaken.

 

Who Has the Advantage?  Some Observations from the October 2015 Snapshot

As long-time Sunday Brief readers know, twice a year (before summer, and before the Holiday selling season) we take a look at how the carriers are positioning their handset lineups.  Here are a few observations from October’s snapshot:

 

  1. Samsung has a Stock Keeping Unit (SKU) for every high end smartphone need. Samsung is packing 6-8 devices into the over $20/ month segment for every carrier but Sprint.  Have a look at the T-Mobile column to see the method to their madness:

 

Device Name                             Monthly Cost

Samsung Galaxy S6 Edge +           $32.50

Samsung Galaxy S6 Edge              $28.34 ($4.16 cheaper than the S6 Edge +)

Samsung Galaxy S6                         $24.17 ($4.17)

Samsung Galaxy S5                         $20.00 ($4.17)

 

Samsung Galaxy Note 5                                $29.17

Samsung Galaxy Note 4                                $22.92 ($6.25 cheaper than the Galaxy Note 5)

 

Interestingly, the difference between the iPhone 6S and the iPhone 6S Plus is also $4.16, as is the difference between the iPhone 6 and iPhone 6 Plus. In the end, Samsung needs to make a simple decision:  Will curved or flat edges become the high-end smartphone standard?  Having both is too much for most users and likely to take away from selling time versus other Android manufacturers.  This abundance of variety is most apparent with the AT&T column – eight devices above $20/ month – definitely an overkill that could impact overall market share.

 

  1. No Apple device below $10/ month. In the subsidy world, each wireless carrier had a “go to” offer at the Holidays – upgrade your contract, and get a free iPhone.  That option is no longer available with new Apple devices (although iPhone 5c refurb devices are available at or below $10/ month at most of the carriers we surveyed).

 

Given this is the first full Holiday selling season without subsidized devices, it will be interesting to see how the lack of a price leader impacts iPhone 5s sales.  With all of the carriers aggressively marketing the iPhone 6S, the short-term impact could be negligible, but with many Android and Windows devices coming in at price points less than the Apple 5s or 5c, their entry level value is in question.

  1. Blackberry PrivBlackberry and Microsoft/ Lumia continue to be crowded out of the Big 4. As of the date of this snapshot, Microsoft’s devices carried a low end focus, with five of the six devices offered on carrier websites coming in at $10.50/ month or less.  This also marks the second straight report where Microsoft devices are not being sold through T-Mobile.

 

Last Tuesday, Microsoft announced three new devices (950, 950 XL, and 550) in an effort to shake up their position in the industry (good summary from Ars Technica here).  Rather than introducing a version of the HTC M9 or Samsung (Ativ), Microsoft has chosen to distribute these devices – unlocked – directly to customers through their own stores (according to Wikipedia, there are 116 Microsoft stores globally with 106 in the USA).  CNET also is reporting that AT&T will begin distributing the 950 and 950 XL exclusively in November.

 

Hopefully Microsoft can gain traction in the marketplace – relying on AT&T might have worked a decade ago, but the Nokia 1020 launch on Easter weekend in 2012 should have taught them something (what’s amazing about this is that the Microsoft and T-Mobile offices that could strike an agreement are less than six miles apart).  As John Legere indicated in his tweets on the topic, Microsoft and T-Mobile would make a terrific pair in the enterprise market and lend credibility to Microsoft in consumer markets.

 

Then we have the soon to be launched Blackberry Priv (which stands for Private), an Android device (Lollipop version) which runs Blackberry’s legendary email client.  There’s been no big unveiling of the device, yet rumor has it that a launch is expected later this month.  It will have a slide out keyboard (bringing back horrible memories of the Torch, which is what I wanted to do to the device while testing apps on it), and be flush with security features.  A leaked picture from Blackberry is nearby (from the picture, it appears to have a lot of Nokia Lumia features), but it is unclear if or how carriers will distribute the device.  Selling Blackberry in AT&T and Verizon retail stores has been hard; selling a Blackberry that runs on Android, even for the most talented retail sales associates, will be even harder.

 

  1. Sprint’s Limited Time Leasing Offers. When the leasing program was announced at Sprint last fall, there were only a few devices covered.  This number grew to thirteen devices in May, led by Sprint’s iPhone 6 and 6 Plus models but including others such as the LG Flex 2 and LG G3.  While dropping the number of leased models from 13 to 10 is not significant in and of itself (total devices offered by Sprint dropped by six to 27), the removal of leasing options for the Samsung Galaxy S5, Galaxy S5 Sport, LG G Flex 2, LG G3, and iPhone 5s models is telling. Remember – in a leasing option, Sprint takes the resale risk, and, as [non-Apple] devices age, the resale risk is too great.  Sprint’s lease discipline is showing.

 

google 5x 6p pictureThere’s a lot more we could talk about.  Google released the details of their new Nexus flagship phones, the 5X (built by LG) and the 6P (built by Huawei), and it appears that they will be distributed exclusively through the Google Play store (at an attractive $379 and $499 respectively).  More on the devices here and on Google Play distribution here.  These devices can be activated on Google Fi, their MVNO with T-Mobile and Sprint.

 

In addition, we have not touched on how Verizon’s simplicity focus has impacted handset pricing, and how their growth of devices (from 28 in May to 31 in October) has really been at the < $10/ month level (presumably to migrate feature phone subscribers to smartphones).

 

The smartphone world continues to change.  Carrier neutrality is in, and subsidies are out.  Faster devices should lead to increased data consumption, and trade-up programs should lead to higher levels of refurbished inventories.  Market consolidation continues, although cash-rich Microsoft and Google would like to rebalance the equation.  While the carriers used to control the fate of smartphone manufacturers, the tables appear to be turning.  More headlines will be made after the 2015 Holiday season.

 

Next week, well cover some remaining events and ideas to think of prior to Verizon’s earnings announcement on October 20.  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 Go Royals!

Top Events of the Third Quarter (Part 2)

lead pic (8)October greetings from Seattle, Atlanta, Charlotte, and Dallas.  While this was a very heavy travel week, airline schedules were friendly and I was able to make it home to see Jesuit College Prep (where my son is a senior and varsity offensive lineman) end the 49 conference-game-winning stranglehold of Dallas Skyline.  The Dallas Morning News sports section headline in the lead picture says it all.  While the team thought that this might be the year, it took a come-from-behind touchdown with 1:06 left in the game to convert excited hopes into stunning reality.  Friday Night Lights in the Lone Star State – there’s nothing quite like it.

 

This week, we will cover the other five top events of the quarter.  Thanks as always for your comments and suggestions.

 

A Special Invitation

On Monday (tomorrow, for most of you reading this), there will be an 11 a.m. ET call featuring Roger Entner (Recon Analytics), Jan Dawson (Jackdaw Research), Charles Golvin (Abelian Research), and myself. We are going to touch on a variety of topics (Title II, handset selection strategies, overall industry dynamics) and there should be some time at the end for Q&A.  The call is free.  Please register here to get all of the details.

A Special Tribute

EOY-LindquistWe lost a wireless industry titan in September.  Roger Linquist, founder of MetroPCS and a friend to many Dallas entrepreneurs, passed away mid-month at the age of 77.  His obituary says it all – odds beater, hard worker, risk taker, pioneer, family man.  Nearly all of the former Metro PCS employees I talked to over the past two weeks loved working with Roger, and everyone had a story to tell.  He will be missed in the Dallas business community and throughout the wireless industry.

 

The Remaining Top 10 Events of the Third Quarter

Last week, we covered five events/ trends that will impact third quarter, total year, and 2016 results (these are in no particular order):

 

  1. The announcement and launch of the iPhone 6S and iPhone 6S Plus, which included significant network radio improvements for T-Mobile (700 MHz band 12) and Sprint (specifically carrier aggregation). On Monday, Apple announced that sales surpassed 13 million units at launch, and a big reason for this (besides including China as an initial launch country) was the increased phone upgrade activity at T-Mobile and Sprint.  Update:  With the exception of T-Mobile (now with iPhone 6S delivery dates as long as eight weeks), wait times for new iPhone 6S Plus devices have stabalized.
  2. FCC approval of Frontier’s acquisition of Verizon’s California, Texas, and Florida properties.
  3. FCC starts shot clock on the Charter/ Time Warner Cable/ Bright House Networks merger.
  4. Altice announces its intention to acquire Cablevision for $17.7 billion including debt. Update:  Despite the volatile market, Altice was able to quickly raise funds to finance the Cablevision acquisision.  More details here.
  5. Samsung announces the Gear VR (Virtual Reality) for $99 starting in November.

 

Five Additional Industry Shaping Events

  1. The end of subsidized wireless phone pricing (for all devices – sort of). In mid-August, Verizon announced that they were scrapping their current pricing plans for newer, simpler ones (total plans were reduced from 22 to 5 – see nearby picture of current device plans).  In the process, they also ended two–year contracts and subsidized phone plans.  Verizon’s emphasis on keeping their pricing process consistent across distribution channels seemed like a tip of the hat to T-Mobile and a dig at AT&T, the last of the big 4 wireless providers to actively offer device subsidies.

verizon sizes chart

For those of you who have been regular Sunday Brief subscribers, the end of handset subsidies is not a surprise.  Market trends were already pointing towards a non-subsidy world:

 

  • Higher end smartphones were becoming more expensive than a $199/ $99/ $1 structure would allow. The iPhone 6 Plus, introduced last year, seemed to test a price point that was a bit more than the mass market could pay, especially for a family of four or more devices.  $25-30/ month per device seemed to be a better alternative, and an additional $3.34/ month for 30 months is a lot easier sell than $100 upfront for the 16 to 64 to 128 GB upgrade.

 

  • The cost to produce lower-end smartphones (as well as the availability of reconditioned mid-range smartphones) began to reduce the value of a free phone when paired with certain wireless plan types. For example, the HTC Desire 626 is an LTE-capable device with an 8 Megapixel camera, 2000 mAh battery, and up to 1.5 GB of RAM – a good phone for browsing and low data-intensive tasks like email, Angry Birds, and Pandora.  Its current list price at AT&T is $184.99 – two years ago, that price would have been $329 or higher.  As the costs between the highest-end phones began to rise ($700-900) and the lowest-end phones began to fall (from $300-350 to below $200), one plan could not fit both types of subsidies.  It made perfect sense for the industry to detach device from service payments.

 

  • It didn’t hurt that the wireless carrier with the most success in 2014 and through the first two quarters of 2015 had been solely promoting subsidy-free plans. Verizon was not pioneering, but merely following T-Mobile’s freshly plowed ground.

 

Subsidies have died, and it’s going to hurt Best Buy and others who depended on them to drive sales.  Couple this with the continued rollout of Amazon’s Prime Free Same-Day Delivery and Sprint’s Direct 2 U plans, and the real losers from this change are wireless retail distributors.

 

  1. Increased marketing and differentiation of borderless plans. In mid-August, AT&T revamped their Mobile Share Value plans and began to include unlimited talk and text to Canada and Mexico in their $100 (15GB) and up plan types.  This came on the heels of T-Mobile’s July 9 announcement of “Mobile Without Borders” plan that includes free calling, texting, and 2G data to Mexico and Canada for all Simple Choice customers.

 

If you are not a frequent cross-border traveler, these changes are not going to change your decision to use one carrier over another.  For the 30 million US wireless customers who routinely use their device in a country different from the United States, the changes initiated by T-Mobile (global reductions in roaming voice rates, and inclusion of free messaging) and accelerated by AT&T (unlimited borderless calling to Canada and Mexico for $100 and up data buckets) could not come at a better time.  Perhaps the airport SIM card dispensers will go the way of airport payphones.

 

  1. google fiber citiesThe slow but steady expansion of Google Fiber. In August, Google announced that San Antonio would join the ranks of Google fiber cities starting in 2016.  In September, Google announced that three additional cities – Irvine (CA), San Diego (CA), and Louisville (KY) would join the ranks of potential markets for Google Fiber.  Nearby is a full map of all of the markets Google has either deployed, is in the process of deploying, or has entered active discussions (interestingly, none of Google’s announced areas overlap with the post Frontier-sale Verizon FiOS footprint).

 

Google learned a lot from their first deployment in Kansas City (MO and KS).  As this Fast Company article points out, having fast Internet speeds is not as important to many low income neighborhoods as it is in wealthier locales.  Google’s 75% penetration in higher-end fiberhoods is great, but 30% in poorer sections of the Kansas City metro represents a real challenge.

 

Their cable and telco competitors are catching up.  Comcast is already offering 2 Gigabit per second speeds (symmetrical) in a few neighborhoods in Atlanta (and growing), and Time Warner Cable is ramping up its Maxx efforts in Charlotte and Raleigh-Durham.  AT&T is now obligated (thanks to the FCC’s “concession” extracted during the DirecTV merger discussions) to offer Gigapower services to 12.5 million locations.  It will be interesting to see the reaction to these offers when these cities are actually deployed.

 

  1. Comcast Goes National. One of the least widely reported stories of the quarter was Comcast’s announcement of the creation of a national services division to serve the needs of Fortune 1000 enterprises.  While cable companies have had commercial services divisions (and have had networking interfaces to serve regional needs), the creation of a nationwide organization with the focus of managing in and out-of-territory needs is new and groundbreaking.

 

Couple this with Comcast’s acquisition of Contingent Network Services, a very reputable managed services provider based out of Cincinnati, OH (a Time Warner Cable territory), and everything is shaping up for a fiber-based competitor to AT&T and Verizon for domestic opportunities IF their smaller cable colleagues (including Charter + TWC + Bright House) agree to provide connectivity at competitive rates.  It will also be very interesting to see how Comcast will tackle international connectivity.

 

  1. Sprint’s announcement that they will sit out the 600 MHz auction and cut $2-2.5 billion in expenses. After last week’s Sunday Brief went to press, a report emerged in the Wall Street Journal online that Sprint would be sitting out the 600 MHz auction.  This has obvious implications to the Reserve Spectrum bidding dynamics (re: reserve spectrum was set aside for smaller carriers).  Removing Sprint might also impact the level of interest from broadcasters who equate fewer bidders to lower auction yields.  This is more a story about Sprint’s steadfast belief that deploying their current spectrum is a better option for shareholders than buying new, but the effects of Sprint’s decision to bypass the auction have not yet been felt.

 

On top of this, Sprint announced plans to cut up to $2.5 billion in additional costs out of the business.  This comes on the heels of an 11% workforce reduction in the first year of Marcelo Claure’s tenure and complicates the “improve network to #1 or #2” goal (and, from the most recent RootMetrics results in Harrisburg and Scranton (PA), as well as Baton Rouge and New Orleans (LA), Sprint’s speeds are not keeping up with competitors (see more here). The $2.5 billion figure also does not include any positive effects Sprint will receive from increased leasing (less subsidies, less Equipment Installment Plan long-term accounting effects).

 

If the reductions are headcount-focused, the majority will likely come from one of three sources:  Front line employees working in retail stores (a tough decision), network (a really tough decision), and customer service (which has already seen several reductions thanks to simplified pricing plans put in place by Dan Hesse).  Sprint’s details concerning how they will reduce costs will likely impact their ability to refinance $2.0 billion of debt which is due in 2016.  Details will likely come throughout the rest of this year, but the CFO’s note has certainly raised anxiety levels across the company.

 

This certainly provides plenty of content for third quarter earnings reports.  Next week, it’s time for the “It’s an Android World” semi-annual report as we head into the Holiday shopping season.  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 Go Royals!

 

 

Jim Patterson

Patterson Advisory Group

www.pattersonadvice.com

jim@pattersonadvice.com

(816) 210-0296 mobile

Blog:  www.mysundaybrief.com

Twitter: @pattersonadvice