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What’s on Sprint’s, AT&T’s, and Time Warner Cable’s “To Do” Lists?

lead picture (5)Metro Connect greetings from Miami Beach, and late January greetings from Dallas and Paris.  Pictured are several Sunday Brief regulars who took part in a panel on “Reinventing the role of the cable company: Making an impact in the fiber space” – from left to right are Jennifer Fritzsche of Wells Fargo, Don Detampel of Charter Communications, Thane Storck of Time Warner Cable, Jeremy Bye of Cox Communications, and Steven Cochran of WOW! Business.  Terrific panel and show.

 

This week, we will attempt to condense several earnings reports into “To Do” lists.  This is a new format, and feedback is welcome.  While we will list up to 10 items on the company’s lists, we’ll try to keep with the theme of brevity and only focus on one or two of them.

 

Sprint’s “To Do” List

  1. Increase operating profits to pay down debt
  2. Maintain customer service levels with 2,000 fewer Sprint-employed agents
  3. Demonstrate the value of the Sprint LTE Plus network (gross adds, churn)
  4. Densify the network at a more profitable cost structure than competitors
  5. Introduce a foundational price plan that replaces “Half Off”
  6. Drive churn down to T-Mobile or AT&T levels (prepaid and postpaid)
  7. Figure out a way to merge with T-Mobile
  8. Fix retail prepaid
  9. Strengthen business/ enterprise
  10. Long-haul, long-term fiber strategy

 

Sprint’s list is long, yet at the same time short.  They announced earnings this week that clearly showed prime postpaid retail subscriber growth (+501K total postpaid net additions, +366K postpaid phone net additions, 1.62% monthly retail postpaid churn).  But they did so with an offer that was more comprehensive than the 2014 Half Off promotion, and which goes against the rationale offered in 2014 that “When you have a great network, you don’t have to compete on price.  [But] when your network is behind, unfortunately you need to compete on value and price.”  Either the network improved (which it did broadly for voice and text, and in a few cities for data) and Sprint should be able to compete without broad 50% off promotions, or it didn’t.

 

sprin yield to maturity chart morningstarNearby is a chart of Sprint debt by amount, yield to maturity, and due date according to Morningstar (full details here).  As the chart shows, approximately $4.3 billion of debt will come due in the next eighteen months.  While it should not be difficult to roll a small portion of that amount, it has been very clear from recent Sprint presentations that their intent is to pay off as much of this as possible (One thing that is rarely discussed in Sprint earnings is the drag that $2.1 billion in annual interest payments place on the other cash needs of the company).

 

To put into perspective, AT&T pays about 9% of their annual EBITDA (cash flow) in interest expense.  Verizon’s figure is slightly higher at 10%.  Sprint’s is a whopping 30% for calendar year 2015.  Sprint has to get their debt costs under control, and rolling the debt that is due soon is not an option.

 

Many operating items (specifically having to do with their LTE Plus network expansion) are also on the list.  After their earnings call, I am also becoming convinced that 50% off is going to lose its luster in the first quarter and added the need to have another foundational plan take its place.  Finally, Sprint needs to build a more balanced wireless business as their traditionally strong presence with enterprise customers has become diminished over the past several years.  There’s still room for a strong third place contender (20+% market share), and T-Mobile’s efforts to date have been on smaller businesses.

 

AT&T’s “To Do” List

  1. Translate the promise of TV Everywhere (specifically in home, on smartphone, and in car) into higher satellite/ wireless gross adds and lower satellite/ wireless churn
  2. Continue to expand basic bundles between satellite, wireless, and broadband (better productivity, installation processes, etc.)
  3. Realize more cost synergies from the DirecTV acquisition
  4. Exceed LTE buildout promises made for Mexico and drive higher EBITDA
  5. Deploy AWS spectrum acquired in early 2015 (for $18 billion) to support growth
  6. Position 60 million broadband-enabled homes to better compete with cable in 2016
  7. Continue to expand GigaPower (56 markets)
  8. Grow profitability of Business Services through expansion of NetBond products and services
  9. Expand leadership in connected car and Internet of Things
  10. Win the FirstNet deal and implement as quickly as possible

 

AT&T announced earnings Tuesday afternoon, and their earnings call can be summarized in one word: transitions.  Taken in total, they represent a transformation, but AT&T is going through a series of transitions right now that open them up opportunities.

 

First, the company has made a disciplined decision to deselect single and double-line customers who want less data (call it 1 GB or less with minimal or any video viewing).  AT&T provided some information on these customers in their earnings supplement and they are leaving in droves.  In 2015, over 3.2 million feature phones have either moved to smartphones (1.4 million or 44%) or have left for other providers including AT&T’s own Cricket Wireless brand (up 1.6 million in the past year).

 

at&T wireless net add pictureThere is some merit to this strategy from an acquisition perspective.  Store reps and the best inbound call center salespeople need to spend their time on acquiring larger bundles, not haggling over charges for a $50-75/ month voice-centric customer bundle.  With 75% of Cricket’s gross additions coming on $50 or higher ARPUs (disclosed on the call), and the ease of transition from an AT&T branded smartphone to Cricket (a SIM card swap), netting the prepaid and postpaid growth figures makes sense (213K retail wireless phone customer nets in 4Q; 165K for total 2015).  in the It does not justify, however, the fact that AT&T continues to lose postpaid branded customers.

 

The unlimited plan introduction for existing DirecTV customers (which is a precursor to a TV Everywhere offer) is an excellent start.  Unlimited is easy to sell (and they now have a counter to Sprint’s and T-Mobile’s unlimited products) and service.  The current AT&T product is a very good value (four lines with unlimited everything for $180/ mo.), especially for the fourth family member (who is free).  While AT&T CEO Randall Stephenson was not going to make product introduction headlines on the call, it was pretty clear that the offering would involve cross-device viewing of premium content (e.g., HBO or Cinemax or Showtime or all of the above) for one low monthly fee.

 

There’s a lot more to talk about with AT&T, including their surprise profitability improvement in business wireline (we’ll try to talk about this in conjunction with CenturyLink’s and Level3’s earnings).  AT&T has a lot on their plate, and their performance in IP Broadband was downright dismal (it’s not clear that the new network can attract new customers).  If 2014 was a transition year for U-Verse broadband, 2015 should have shown some strength.  Starting in the second quarter, IP broadband net additions began to come in at 33-50% of 2014 levels.  45 Mbps might be enough bandwidth for many customers, but if the competition is offering 100 Mbps for a similar price, AT&T’s offer will not be as attractive.

 

If broadband takes a back seat to Mexico and DirecTV throughout 2016, AT&T’s current market share will slip from 25% (15 million customers on a base of 60 million deployed as discussed on the call), to 20% or worse.  Can AT&T have a competitively advantaged home strategy against cable providers without a broadband presence?  That’s a really tough question for AT&T to answer.

 

Time Warner Cable’s “To Do” List

  1. Complete the three-way merger with Charter and Bright House networks
  2. Continue to take home broadband share from AT&T and Verizon
  3. Manage post-promotional churn (especially for phone and video)
  4. Grow commercial services revenues faster in 2016 than 2015
  5. Improve competitiveness in enterprise services through a cable consortium
  6. Raise awareness and usage on metropolitan Wi-Fi deployments, particularly in major metropolitan areas (New York City, Los Angeles, and Dallas)
  7. Match or exceed 2015 customer care improvements by reinventing self-care
  8. Manage total capital spending to 16-17% of revenues
  9. Translate learnings from the New York City “no set top box” video offering into a meaningful product in 2017
  10. Complete the three-way merger with Charter and Bright House networks

 

Time Warner Cable hosted what is likely to be their next to last earnings call as a separate company, and they are finishing strong (full details here).  Most important on their “To Do” list is the completion of the merger with Charter and Bright House networks.  Their initiative list begins and ends with that, not only because they have been in “merger mode” for over two years (which creates employee strain), but also because they need the combined benefit to improve their programming costs (which rose a whopping 9.7% year-over-year in the fourth quarter).  For more on the approval process, see this article on their hearing last week in California.

combined charter twc bh mapA lot of TWC’s unit growth is coming from promotions (particularly Digital Phone).  As these promotions expire, it will be interesting to see how TWC keeps these customers from cancelling service or leaving.  Commentary on their retention strategies was light on their earnings call.

 

The second focus area worth mentioning is capital spending and the relationship to commercial services growth.  TWC over-indexed on capital, particularly when measured as a percent of revenue, in 2015 ($4.4 billion on a revenue base of $23.7 billion).  If the company tries to keep capital at a low level in Q1 and Q2 (13% or lower), the Maxx initiative will lose momentum.  While TWC has been taking market share in Los Angeles and Dallas (and stemming losses to FiOS in New York City), they have a potentially even greater opportunity in Rochester (Frontier), North Carolina (AT&T), Louisville (AT&T), Ohio (AT&T) and San Antonio (AT&T) where ILEC plant is not broadly strong and where loop length matters.

 

More importantly, however, these markets are important for business growth.  Line extensions and in-building agreements are not cheap, but TWC should strive to add at least 70,000 additional sites that add an existing $1 billion in revenue potential in 2016.  That upside could completely eliminate the downside from expiring promotions with exploding rates.

 

Bottom line:  Every company has a “To Do” list entering 2016.  Each is different, and not every company will (or can) complete their full list.  Execution of their most important items is important, but does not guarantee competitive success.

 

rugby picNext week, we’ll add the Comcast (earnings our Wed), Charter (Thursday) and Level3 (also Thursday) results into the mix.  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 Jesuit Rugby!

Can the (Start-In) Tree Grow in Brooklyn?

miami weather Late January greetings from Charlotte and Dallas.  Hopefully those of you who are snowbound are using the time to catch up on things (we tried hard to get this week’s edition out as early as possible on Sunday).  With any luck those of you who are headed to the Metro Connect conference in Miami will not be delayed (see weather picture nearby), and we look forward to catching up with many of you there.

 

This week, we’ll peer into Verizon’s earnings and look at three of their emerging businesses.  We’ll also visit on the latest developments surrounding CableCARD standards.

 

CableCARD Recent Developments and Implications

CableCARD development has inspired a lot of letter writing and public relations activity this January.  Specifically, a group led by Common Cause, Free Press, Public Knowledge and others are lobbying the FCC to update the current set-top box standards and make them more open (see their letter here).  This would allow consumers’ Electronic Programming Guides (EPGs) to display Hulu, Netflix, Crackle, HBO Go, and other third-party programming services.  Combined with products like Verizon’s Custom TV (see more below), the video experience could move beyond selecting “favorites” from your remote control into a truly personalized experience.

EPG exampleFor those of you who are not video programming experts, the EPG is the closest representation of the video brand that exists.  Companies like Comcast have spent hundreds of millions of dollars building user-friendly interfaces (which have dramatically improved over the last five years).  This has included redesigning set-top box hardware that is rented to millions of customers per month (a recent study shows that $232 is spent per subscriber per year on set-top box rentals, although cable companies have been increasingly accepting of Roku, PlayStation, and other third party equipment as substitutes).  Changing the EPG user interface is a new horizon and a very big deal.

 

A full history of the recent developments in the CableCARD saga can be found in this Ars Technica report.  The next step is likely an FCC Notice of proposed Rulemaking on the topic.  This could be an interesting “parting shot” for Chairman Wheeler.

Verizon:  Can the (Start-In) Tree Grow in Brookyln?

verizon photoThere’s a lot to like about Verizon’s earnings this week, and at the same time a lot to fear.  Overall, things came in pretty much in line with expectations – 449K postpaid phone net additions, 0.96% postpaid retail monthly churn, and strong cost discipline across the board helped Verizon beat most estimates.  Analysts will argue over the accounting treatment for Equipment Installment Plans (which inflate revenue growth in early years), but of all the carriers, Verizon is the most likely to be able to sustain yields due to their network quality.  Here’s the link to the full earnings announcement, tables, presentation, and transcript.

 

Verizon is big and growth is steady, at least in wireless.  The 0.96% monthly churn experienced in the fourth quarter equates to just over 1 million subscribers who leave Verizon monthly.  $39 billion in company-wide operating cash flow in 2015 funded a lot of capital and spectrum expenditures (and reinforced their network quality message with $11-12 billion in additional wireless spending).

go90 logoAround the core, however, are a series of initiatives.  On the consumer side, Go90 continues to build awareness and increase downloads – Go90 is currently in the “Top 20” Entertainment apps on iTunes (top 400 overall).  It is faring even better as the #2 Entertainment app on Google Play.  Content keeps getting better with NFL playoff previews drawing a lot of interest.  It’s clear Go90 is beginning to build a viewership thanks to content and AOL.

 

The Go90 comment community (which, admittedly, can be negatively biased) is particularly sour on the app, however.  Most of the recent comments are not about the content (in most cases the customer has a specific show in mind), but rather accessing it.  There are many comments about phone restarts, buffering and jitter – generally things that would be associated with the network provider.  When we looked at Go90 a few months back, network quality and the overall product were great.  Are these random complaints, or could they be indicating a scaling issue?  While Verizon has indicated that Go90 is still very early in the lifecycle, it may be in major makeover mode by summer if customer feedback does not improve.

hum google playSecondly, there’s Hum, Verizon’s under the dash OBD product that they picked up with the Hughes acquisition (and the closest in product features to GM’s OnStar service).  Another product seemingly full of promise, until you look at the number of Google Play downloads (10,000-50,000; see nearby picture).  Hardly a number to be proud of given Hum has been on the market for nearly six months, and Verizon has a very strong Android user base.

 

Verizon is currently competing against three other products (Zubie, Automatic, and Vinli) who do not charge a monthly fee for an OBD service (Vinli offers in-car LTE as a premium service, however).  While one trip to the mechanic could consume an entire year’s worth of $14.99 monthly service fees, there’s the perception that Verizon is a more expensive (and less valuable) service.  On top of product concerns, Verizon stated on this week’s conference call that they had distribution issues (lack of in-store stock) in the fourth quarter which may have stunted sales.

 

Hum is a bundle-ready product capable of being distributed to Verizon’s 100 million+ retail postpaid customers.  Why is Verizon making the first few months of their launch so difficult?

 

Finally, Verizon has done more to market skinny bundles to their Internet base than any other provider.  This “everyday low pricing” strategy is working, perhaps a little too well.  Verizon disclosed on the conference call that one third of their video sales are coming from their Custom TV packages.

 

For those of you unfamiliar with Verizon’s Custom TV, it carries a $55/ month price tag (with no contract) which includes a baseline of local and other channels plus two channel packages (pick from Lifestyle, Entertainment, News and Info, Pop Culture, Kids, Sports and Sports Premium).  Custom TV, when combined with Netflix or HBO Go builds a different sort of entertainment package than Verizon’s Preferred HD tier and costs the same.  This means one could have a cable package without ESPN (or CNBC, or We TV).  No wonder ESPN is suing Verizon over their offer.

 

Leading with Custom TV makes sense.  While Verizon has added over 700K net new FiOS video subscribers over the past year, their penetration has fallen.  Customers are very willing to take FiOS Internet (at 50 Mbps and higher speeds), but not as willing to step up to a $75-100/ month video package (FiOS Internet penetration is now at 41.8% of homes passed vs. 35.3% for video, and this gap has doubled in just over two years).   With Amazon, HBO, Netflix and others actively competing for the next $20 in ARPU, Verizon should be making it easier to create custom bundles and integrate into wireless.  Currently, the bundle offer and package interoperability are disjointed if they exist at all.

 

Can a start-up grow within Verizon (or any other similarly sized company) without being suffocated by the core?  The simple answer is yes, but it will require daily executive support from Verizon’s senior team (even when times get tough).  Leave the management of the business to Go90, Hum, and Custom TV.  Give the teams system and process interfaces to make high growth targets attainable (but understand that $40-50 million in growth might be the best Hum can do in 2016).  Focus on how to use these products to grow market share against AT&T, Google, and cable.

 

The “start-in” world is new for Verizon, and the odds are against all three succeeding.  The products need to stay competitively fresh, and there needs to be some patience for a quarter or two of pivoting (all common things if they were stand-alone start-ups).  Most importantly, fighting the internal inertia of “core priorities” is the job of executive management – they ultimately determine whether these saplings grow into trees or get cut down for kindling.

 

Next week, we’ll bring Sprint and AT&T results into the mix (see Randall Stephenson’s CNBC interview from Davos here).  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 Davidson Wildcats!

 

FirstNet- Deal of the Decade, or Dead-End?

lead pic (11)Greetings from Austin, Cleveland, Kansas City (Union Station decorated in Chiefs red pictured), and Dallas.  Lots of news this week, and we will cover two pieces (AT&T’s unlimited pricing plans, and Sprint’s rumored network architecture changes) prior to analyzing the opportunity presented by FirstNet.

 

Sprint’s Re-Vision

Friday afternoon, Re/code broke some news that surprised many in the wireless community (full report here).  The story stated that Sprint had finalized plans for a “radical overhaul” of their network architecture which would save the company $1 billion annually.  This plan would combine three elements to reduce costs:  1) (re)locating towers from traditional sites to ones that leverage less expensive government rights of way, 2) for these tower sites (and others currently served by AT&T and Verizon), using microwave cell site backhaul as opposed to fiber-based solutions, and 3) shuttering some “fringe” cell sites (and presumably entering into a roaming agreement) with marginal economics.

 

verizon vs sprint coverageTo save $1 billion in annual expenses, Sprint would need to lower high cost sites by approximately $30-40K per site per year.  Based on some discussions with cell site tower colleagues (many of whom are active Sunday Brief readers), higher cost towers generally cost between $55-95K on average and make up approximately 35% of the total base for a company like Sprint (highly reliant on 1900 MHz and 2500 MHz solutions).

 

If we assume that’s about 14K total sites of opportunity (there are about 40K total Network Vision sites according to Sprint’s quarterly reports and some assumed growth), that represents about $770 million – $1.3 billion in annual total rent.  Add in another $48,000 per site annually for 7K of the 14K sites (the rest are provided by cable or Zayo) for Verizon/ AT&T bandwidth and the total cost opportunity is about $1.2 – $1.7 billion (Note – this would represent a 37% reduction in backhaul spending with Verizon and AT&T using the $1 billion figure in the Re/code article).

 

Bottom line:  To save $1 billion in costs, Sprint will need to cut 59-83% of their total budget for high cost sites.  Note: these are estimates provided by sources who are not close to the situation, but it’s probably safe to say that Sprint needs a 15K site solution for leases, and a 7-10K site solution for backhaul.  As to shuttering marginal sites, there’s a direct customer impact at this point to shrinking network coverage which is difficult to determine without more details.

 

Sprint learned a lot about disrupting customer service through their Network Vision project – they clearly underestimated the effects of over a decade of radio tuning that had previously taken place.  The risks grow as this seems to be a “relocate” not a “cap and grow” tower strategy (at least that is what would be needed to achieve the $1 billion figure).  With termination liability payments and one-time equipment costs, it’s unlikely that net cash savings of $1 billion would be achieved in the first year.  But it is possible that this figure could be attained in 24-36 months when growth site savings are included.  And you can expect each of their competitors to ratchet up the rhetoric and local marketing efforts once the plan details are released and to join Sprint on these new towers if they prove to be a cost effective alternative.

 

On a positive note, using microwave backhaul puts Sprint in control of the end-to-end service equation.  Assuming they use Mobilitie as their architecture partner, there’s a good chance that they could produce the strongest data network in parts of a city.  But translating this into a sustainable service advantage without 600 MHz and 700 MHz spectrum is going to take some targeted marketing and sales skills.  And, if the reports that Sprint is going to abandon fringe cell sites it true, Sprint is probably better off forming an “edge coverage” affiliate with cable companies or Zayo than going down a roaming/ no coverage path.

 

AT&T’s Unlimited Bundle – Compelling for Data Hungry Families

Last Monday, AT&T announced an unlimited wireless product only available when bundled with an eligible DirecTV or U-Verse video service (a broad set of video products are eligible).  Here’s a brief summary of the offer (provided by AT&T):

AT&T unlimited plan offer

For a family of four (or even beyond two lines with unlimited data), the AT&T plan looks attractive.  Currently, four lines with unlimited data at rival T-Mobile carries a price tag of $280/ month, a full $100 above AT&T (both carry a throttle clause above 22 GB of individual line usage; T-Mobile’s plan includes Binge On which elongates the time to reach the 22 GB threshold).  Sprint is similarly priced to T-Mobile, with a cost of $250 for four lines with unlimited usage.

 

This is a big shift in AT&T’s strategy.  Reintroducing unlimited data (at a slightly higher price per line for the first three lines than they had in 2010) after repeated efforts to shift subscribers to shared data plans is welcome to most, but will be confusing to some.  Adding the tablet plan with 1GB of data for $10 will be enticing, and AT&T could make the offer even better if they capped the total tablet overage charges at $55 (3GB overage).

 

But AT&T is also creating a bundled offer.  This (along with Mexico) is the source of AT&T’s differentiation, even if Verizon decides to match the plan structure in the Northeast (which they would be very wise to do).  Many in the analyst community have panned the bundle requirement, but many believe it’s extremely innovative and impactful, not only to the current base (who can move to these new plans) but also for movers (especially moving families).

 

What’s missing (and what would be most impactful to their cable competitors) is U-Verse data.  Understandably, AT&T wants the national message, and they already offer good (but not great) U-Verse and DirecTV bundles today (see here), but with speeds capping out at 24 Mbps in many areas (compared to 50-75 Mbps or higher for most bundled offers with Time Warner Cable and Comcast), the value is diminished.  What would be most attractive is to offer anyone who takes the double play described above the opportunity to buy 45 Mbps or 75 Mbps service (as available) for the 24 Mbps price for as long as they keep the bundle.  Given the low marginal costs of a speed increase, that type of offer would drive the cable companies to T-Mobile or Sprint.

 

Most analysts expect AT&T to have an OK fourth quarter.  As in 2014, when they introduced Mobile Share Value plans, their upcoming quarterly report will have more of a forward looking focus.  It’s deserved because their latest offer is very attractive for a small but extremely profitable wireless segment.

 

FirstNet:  Deal of the Decade, or Dead End? 

final logo colorsOne of the most intriguing ideas in telecom got more detailed this week when the FirstNet agency released their Request for Proposal (download it here).  For those of you who are not familiar with the organization, they were founded as an independent authority through the National Telecommunications and Information Administration (NTIA) as a result of the Middle Class Tax Relief and Job Creation Act of 2012.

 

FirstNet received $7 billion of funding as a result of last year’s successful AWS spectrum auction to build

out band 14 in the 700 MHz spectrum block.  This is prime real estate, as the previous AWS auction results (and the upcoming 600 MHz auction interest) have shown.  T-Mobile, AT&T, and Verizon all use 700 MHz capacity for hundreds of millions of wireless subscribers today.

 

Responses to the RFP must address sixteen guiding principles.  They include:

 

  • Building, Deployment, Operation and Maintenance of the National Public Safety Broadband Network (NPSBN). Payments to the winner are dependent on achieving certain milestones.  The winning bidder cannot be assured, however, that every state will participate in the NPSBN – each state has the right to opt out of the national model, and the winning bidder is responsible for integrating any states that opt-out into the core national model.

 

  • Service Capacity, User Service Availability, and Accelerated Speed to Market. These are critical functions for first responders and the need goes without saying.  Additional backhaul redundancy may be needed compared to today’s model.  Uptime, especially during crisis periods, will be a critical differentiator.

 

  • First Responder User Adoption. The winning bidder is required to submit a core set of metrics (e.g., total percentage of targeted public safety devices using the new network).  Failure to meet these metrics could result in hundreds of millions of dollars in penalties per year.  It is unclear if all of the devices (e.g., handsets, tablets, other IoT devices) would be included in the performance metric or not.

 

  • Development and maintenance of a device and applications ecosystem. While getting handset manufacturers to include Band 14 in their devices should not be difficult, there is no guarantee.  Providing applications access is also not a difficult task.

 

  • Priority Services. This is where things get interesting.  While public service users and applications have priority, this spectrum also is open to commercial users.  How these commercial users can consume data appears to be left wide open – meaning that the winning bidder could bypass Net Neutrality rules and create a premium lane using the Band 14 spectrum.

 

There are many more aspects that will be considered, such as the bidder’s experience in deploying wireless networks, their financial stability and resources to complete what is likely to be a $10-15 billion network build (of which $6.5 billion will be paid for by FirstNet), and the bidder’s history working with rural first responders (note: the rules around this spectrum allow customers to access at higher power rates which will improve coverage in less populated areas).

 

Given that this spectrum has already been cleared and is ready for full deployment today in most parts of the country, the opportunity to gain a 10×10 block of spectrum that will be open to commercial and prioritized use when the 4-12 million public safety users are idle seems to be a large value block.  For those of us who have worked with large government projects, however (e.g., the FTS 2000 project), the winning bidder is going to need to have to persevere through delays, obstacles, and politics.  On the face of it, Verizon would be the most likely winner given their ownership and operation of the adjacent 700 MHz property (band 13), but AT&T has also shown interest.  Until the announcement discussed earlier in this column, Sprint would also have seemed like a likely bidder given their lack of low band spectrum.

 

Bottom Line:  Based on what we have seen so far from a glance through most of the RFP, the long-term benefits of deploying this spectrum seem to outweigh the adoption uncertainties and likelihood of unforeseen costs.  The opportunity arrow tilts toward “deal of the decade” and away from “dead-end.”

 

Next week, we’ll look at Verizon’s earnings announcement (due Thursday) for indications on overall industry profitability and outlook.  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 Davidson Wildcats!

Industry Preannouncements and CES Observations

jim at ces 2016Greetings from Las Vegas, home of the Consumer Electronics Show or CES.  As we mentioned in last week’s column, CES is best when you plan out what to learn, then execute the plan.  That’s not to say there can be no time to discover the latest in eye-massaging hardware (pictured), or to have your picture taken in the Qualcomm booth wearing the original Star Trek Captain’s jersey (pictures available upon request), but one cannot “go with the flow” at CES and achieve any result other than being washed away.  The current of humanity is too strong – everywhere.

 

There was a Citi Investor Conference occurring in parallel with the show, and while I only attended a couple of sessions there, we’ll touch base on both T-Mobile’s and Time Warner Cable’s pre-announcements.  Then we’ll dive into our CES observations (which includes a compilation of thoughts from about 20 Sunday Brief readers who took the time to send in a page).

 

T-Mobile and Time Warner Cable Preannounce Strong Earnings

Last Wednesday morning, T-Mobile announced very strong results for the fourth quarter which included:

 

  • 917K branded postpaid net phone additions (ending number = 4 million)
  • 3 million branded postpaid net additions (ending number = 31.7 million)
  • 46% monthly postpaid churn (flat sequentially but down 27 basis points from 4Q 2014)
  • 469K branded prepaid net phone additions (ending number = 17.6 million)

 

T-Mobile also indicated in the conference that EBITDA would come in at the high end of previous expectations ($2.1 billion for the quarter and $7.2 billion for the full year).  It was a strong quarter, although T-Mobile acknowldeged that Sprint probably had a good one as well.  Both Sprint and T-Mobile stood to gain the most with the launch of the iPhone6S (Sprint gained Carrier Aggregation which will allow for faster data speeds and T-Mobile gained the 700 MHz A Band), and it appears that each took advantage of the opportunity.

 

At the conference, T-Mobile briefly talked about their operational plans for 2016.  Having a strong showing at the 600 MHz auction is definitely a priority, and they appear to be willing to use up to $10 billion to achieve that purpose.  Expanding their selling/ marketing/ retail presence in their recently deployed 700 MHz markets is also a priority.  T-Mobile further suggested that network spending will be higher in 2016.

 

While these figures are not delineated in wireless earnings (except AT&T), my hunch is that Verizon and AT&T’s gains are coming disproportionately in business and government (lower churn, highly relationship and contract driven, multi-product discounts, etc.), and are offset by (very) small business and mass market loses.  As we get through this earnings season, we will also try to derive a “mass market” vs “enterprise” churn figure – a 1.46% level is a lot closer to AT&T and Verizon’s “mass market” figure  than most people think.

 

Bottom Line:  Right now, T-Mobile has their hands full with mass market gains from territory expansion (family plan growth in Decatur, IL, is likely a more profitable initiative than trying to unseat AT&T at Archer Daniels Midland).  By the end of 2016, however, the difference between the market opportunitiies is going to be indistinguishable.  T-Mobile’s ability to penetrate enterprise will directly depend on the quality of their broadband partner (which logically should include cable and/or Level3).  For more on T-Mobile’s past forward, see last August’s Sunday Brief on the topic here.

 

Speaking of cable, Time Warner Cable (TWC) surprised everyone with their early January preannouncement (they also received approval for their merger from the New York Public Service Commission – it was truly a good week).   The good news included over 1 million net additions in 2015 for both Digital Phone (1.032 million) and High Speed Internet (1 million).  Time Warner also indicated that they grew video connections by 32,000.  This implies 4Q net additions of 50K for video (38K net loss in 4Q 2014), 280K for High Speed Internet (168K in 4Q 2014), and 223K for Digital Phone (295K in 4Q 2014).

 

While cable companies do not announce their monthly churn, it’s likely that TWC’s figure is continuing to decline.  With the housing market beginning to pick up and moving on the rise, states like North Carolina, Texas, and Southern California stand to disproportionately benefit (for an interesting study released on moving trends and reasons, click here).  It also means that AT&T’s focus on the national offer of $200 for wireless and TV services probably cost them some broadband net additions.

RobMarcus-ShirtTieThe other interesting trend for TWC is their growth in home (Digital) phone services (Rob Marcus, TWC’s CEO is pictured).  With the rise of unlimited voice and data plans (and technical options such as Voice over WiFi), many, including all of us at The Sunday Brief, gave up phone for dead – at best, it served as a churn reduction tool.  The gains shown at the end of last year and beginning of 2015 were dismissed as window dressing for the Comcast (or Charter) merger.  The pundits (including us) were dead wrong here:  TWC is up to 6.3 million phone lines (21% penetration) at the end of 2015 after languishing at the 5 million level for most of 2013 and 2014.  Phone has become an even more important lynchpin to the Triple Play (especially against Dish and DirecTV out of region).

 

Bottom Line:  If Digital Phone has become the “breadsticks” of TWC’s (and the cable industry’s) offering, that’s OK.  Revenues and profitability continue to rise, and the incremental monthly costs of adding phone subscribers to existing customer relationships is fairly minimal.  Phone is supporting video growth and keeping High Speed Internet churn low.  This is an effective bridge strategy until the merger is completed and the new Charter/ TWC/ Bright House wireless plans are articulated.

 

CES Observations

 

Here are the collective observations from CES:

 

  1. Amazon was embedded throughout the show and is boldly staking its claim to be the home hub. Samsung Smart TV be damned, Amazon is steadily striking partnerships and designing as much interoperability into their product as possible.  Vivint announced the integration of Amazon Echo into Vivint’s Sky platform and prominantly demonstrated their technology at the show (more on the technolocy with a c|net demo here).  A nice marriage of Vivint’s monthly recurring with Amazon’s equipment revenue models.  For more on this theme, see this excellent article from TheVerge.

 

  1. Chevy_Vlot_2016_2Electric car technology is in the early innings. At the show, Chevrolet announced the mass availability of the Chevrolet Bolt (pictured), a $30K car (after rebates and tax incentives) that can go 200 miles on one charge.  The battery system enables quick charging (up to 80%) in 30 minutes with a full charge in less than one hour.  Also at the show, scandel-plagued Volkswagen introduced their BUDD-e concept vehicle which claims to be able to go 373 miles on one charge.  What was unveiled in Las Vegas is likely a vision of what will actually be rolling off production lines, but  breaking the 300 mile barrier woud be significant (six 50-mile round trips might be enough for many commuters for an entire week).  For more on these two vehicles and a few more, check out this article from ExtremeTech.

 

  1. Wi-Fi is about to get a sizeable upgrade that extends its data reach. While the focus of CES is on devices that use technologies, the Wi-Fi Alliance made a very big announcement on Monday with the finalization of the HaLow standard.  Instead of using the traditional 2.4GHz or 5 GHz bands, HaLow uses the unlicensed portion set aside in the 900 MHz band.  As we have discussed many times with respect to carrier licensed spectrum, lower MHz frequencies carry signals farther and require less power than higher ones.  The interoperability of the HaLow standard with existing 2.4 and 5.0 GHz standards allows new devices (especially wearables) to work out of the box.  It will be interesting to see how wireless carriers, and particularly T-Mobile, work with this new standard to improve in-home and in-office coverage.  A good article on the topic from BGR is here.

 

tp-link-talon-7200ad-router-640x461However, if you need shorter ranges and higher speeds, the introduction of the TP-Link 802.11 and WiGig router (pictured) is the bleeding edge of new spectrum use (60 GHz).  This is an early model of what is sure to evolve into a new and different way to cut the cord (perhaps even from cable modem to the TV or computer depending on the distance between devices), but the promise of up to 4.6 Gbps (not a misprint) has some early adopters taking a serious look at the technology.  A good overview of the router and its capabilities is here and the announcement from TP-Link is here.

 

There’s a lot more to dive into:  Bluetooth embedded everywhere, Baby Tech (kudos to Starling for their award), in-car wireless technology (see Vinli/ Uber announcement here – hopefullly the beginning of a longer term relationship), and AT&T’s Smart Cities and Houston Foundry announcements are just the tip of the iceberg.

 

Next week, we’ll move beyond the preannouncements to determine who grew profitable market share at the end of 2015.  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 Chiefs!

The Sunday Brief: Why CES is Important (CES Preview Edition)

opening pic2016 greetings from Kansas City, Springfield (MO), and Dallas (volunteer crews from Alabama serving BBQ to victims of the Rowlett, Texas  EF4 tornadoes, pictured.  Thanks to Tom Osvold for volunteering and sending the photo). Our hearts and prayers go out to the victims of the flooding and storms throughout Missouri, Oklahoma, Arkansas and Texas.

As most of you will agree, 2015 was a mixed year at best for the telecom industry.  Wireless subscriber growth (especially for higher ARPU smartphones) slowed, but housing showed signs of recovery which increased homes passed and High Speed Internet connection opportunities.  The scope of regulatory reach was much smaller than most anticipated, yet uncertainty remains for businesses and carriers alike.  The stock market was flat but so was the cost of borrowing.  Mixed just seems like the right word.

This week’s Sunday Brief will touch on two topics – public company equity value creation, and the upcoming Consumer Electronics Show.  In other words, a look back and also a (long) look forward.

Who Created Value in 2016 (and Why)? 

Below is the chart we have been using for some time to track who is creating value.  While the purpose of this chart is not to precisely identify the exact amounts of value created, it does provide some indication about who is headed in which direction.  Here’s the latest snapshot:

value creation 2015

Of biggest note is Apple’s decline in overall market value in 2015.  This loss is somewhat offset by Apple’s dividend ($12 billion), but also could have been worse had Apple not repurchased ~ $13 billion (120 million shares) in stock.  Investors need not worry about Apple’s liquidity, however, as they still have ~$150 billion in negative net debt (total debt less cash and marketable securities).

While Apple was marking time, Amazon, Microsoft and Google Alphabet were racing to grow their presence in cloud services.  Amazon appeared to have been the big winner in 2015, with total equity value up 118% and an ending market capitalization of $317 billion (Amazon’s equity market cap is now $120 billion more than Walmart and $180 billion more than IBM).  While many will argue that Amazon’s logistical improvements are driving increased value in the stock, this year’s gain was more than likely due to the gains made from Amazon Web Services (AWS).  For a good article on the history of AWS, read on here.

With dividends, the Four Horsemen added just under $400 billion in value this year (as a reminder, the Dow Industrial Average and S&P 500 were both down in 2015).  Including the Fifth Horseman (Facebook was not public in 2010 when we started tracking value creation), they are closer to $460 billion… in one year.

Meanwhile, the telecom industry had a flat to down year for equity values.  Most of AT&T’s value creation came from issuing new shares to acquire DirecTV in August (~ $34 billion).  Without this share issuance, and T-Mobile’s gain which came as a result of organic growth and outstanding management, the industry as a whole would have been close to negative ($44 billion of the $46 billion in equity market value increase was due to these two events).

Interestingly, Time Warner Cable, who is in the process of being acquired by Comcast Charter, continued to increase in value, rising another 22% or $9.5 billion in value.  While many of us scratched our heads when John Malone’s Liberty Media Group took a 27% stake in Charter Communications at $95.50/ share in March 2013, it has turned out to be one of the best investments of this decade, having produced a paper gain of over $2.6 billion for Liberty in less than three years.

Meanwhile, CenturyLink and Sprint combined for close to $10 billion in equity losses in 2015 and $32 billion over the past two years.  While most expect Sprint to operationally recover in 2016, financial (balance sheet) recovery may take considerably longer as the company works through some hefty debt repayments (see last week’s Sunday Brief for more on the topic).

The traditional telecom industry (and their partners such as IBM and Accenture) is losing to new entrants at a rapid rate – first in applications, then in voice-over-IP and managed hosting, and now in cloud services.  This is not a one-time event, but a multi-year run as many long-time Sunday Brief readers can attest.  Wireless services have produced tens of billions in value, but that pales in comparison to the value created over the last decade by Facebook, WhatsApp, Skype, YouTube, Chrome, Android, iOS and iTunes.  Verizon is trying to stem the flow through Go90 (see milestone achievement here), but there need to be many more innovations to reverse the current trend.

CES logoWhy CES is (Still) Important

I have talked to many of you about attending CES this year, and to my surprise have found some regular attendees choosing to stay home and monitor the event through social media.  While it’s a logistical challenge, CES is still very relevant to those in the telecom and Internet industries.  Here’s why:

  1. The best conversations (both on and off the floor) happen at CES. I have had more meaningful conversations about the future of the telecom industry at CES than at the Cable Show or CTIA –    Cost/ scale points, product feasibility, and customer demand all come together at CES.  The topic could be e-readers (is there room for more than one Kindle provider?), or adoption of 3D TV technology (with or without glasses), or app-enabling automobiles (can the OBD port be used to power an in-car Wi-Fi system?), or even extending battery lives in all electronics (multiple radios, application optimization, lower power chipset timelines, etc.).  All of these conversations have taken place at CES.
  1. You will always learn something new at CES, if you plan. I spend a lot of time reading up on who will be speaking and exhibiting at CES.  Last year, I learned a lot about drone technology.  This year, I want to learn more about speech recognition and its effect on robotic movements.  If I had the time and energy, I could probably learn a lot about the buying habits of expectant mothers as “baby _______” meets the Internet of Things (see my friends at VersaMe for a good example of where that’s headed).  But you have to plan – the show is too big to count on a  sponteaneous epiphany.
  1. CES provides a glimpse into the intersection of networks and devices like no other show. If you go to mysundaybrief.com (the full archive of Sunday Brief articles), the masthead reads “Connecting technology, communications, and the Internet.”  Understanding how things interface with each other is critical.  Two quick points to think about:
  1. Attendees will learn a lot more about a derivative 4K broadcast transmission standard called Ultra HD (UHD). It took a long time for UHD to establish itself as the standard, but this is the year.  Combine UHD with the display of High Dynamic Range (HDR) content, and picture quality and richness improves with the same reactions as when HD was first introduced.  More on the standards in an easy to understand format from Techradar here, and good video explaining the benefits of HDR is found at the bottom of this article.
  2. Interconnection within the home is still searching for a standard. Bluetooth Low Energy, Wi-Fi, Bluetooth_Smart_Logo.svgZWave, Zigbee are all competing to be the transmission standard from appliances and other Internet of Home (IoH) devices.  One of the drawbacks of Bluetooth was its low range (any of us with fitness bands and smartphones in nearby rooms can attest to that).  The standards group over at Bluetooth is seeking to remedy this in their upcoming Bluetooth 4.0+ standard (a.k.a., Bluetooth Smart or Bluetooth Low Energy)  with over four times the reach of the current version.  More reach and a bit more intelligence could also enable mesh networking, allowing some IoH devices the ability to serve as access points for compatible Bluetooth 4.0 transmissions.  More hubs = greater reach = greater competitiveness against WiFi.  More on Bluetooth technology developments from this Techhive article here.

 

For those of us who like to look and touch what’s new, but don’t necessarily have the money (or space) to buy, CES provides the ultimate playground.  Beyond the sizzle and flair, however, there are big bets being placed on companies and standards that exhibit at CES.  Because this first-of-the-year trade show draws broad audiences, which in turn stimulate broader conversations, it should not be missed.

That said, here’s five questions I am hoping to see answered at the show:

  1. What is GoPro going to do with drones? See GoPro Dronecopter footage here.
  2. Will Netflix CEO Reed Hastings tip his hat on 4K transmission plans in his keynote address?
  3. Electric cars are now cool. Can China make them even cooler (and cheaper)?  More here.
  4. Can more real-time information help infant development (and can it be drool proof)? Expect to see a lot of Baby Tech at this year’s show (here’s a link to one of the many panels on the topic).
  5. Who will win the smart home controller market – Samsung (through the TV – more here), Google (through their Wi-Fi router called OnHub – more here), LG (new controller here), or Apple? Does this matter?

That’s it for the CES preview.  Next week, we’ll recap what we (and you) thought were the most (and least) attractive parts of CES and look for hints of earnings news from an investor conference occurring in parallel with the show.  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 Chiefs!