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Looking for Meaning in Verizon’s Quarterly Earnings

thunder over louisvilleApril greetings from Louisville (last night’s Thunder Over Louisville pictured), Dallas, and, by the time most of you read this, Paris.  There has been no verdict yet from the Appeals Court on the Open Internet Order (kind of surprising), so this week’s column will focus on Verizon’s earnings.  However, to get started, we’ll talk about the latest foray from Comcast in the set top box kerfuffle.

 

Comcast’s Xfinity Partner Program Announcement and the FCC’s Reaction

This week, Comcast announced an alternative to the FCC’s set top box mandate: the development of the Xfinity TV Partner Program (and App).  This enables Comcast subscribers to access their programming from Roku boxes, Samsung Smart TVs, and other devices that enable access (Comcast even committed to customizing their app for devices that do not support HTML5).

 

In the aforementioned blog post, Comcast has an interesting reference to its search feature:

 

As part of the Xfinity TV Partner Program, Comcast is prepared to provide consumers with a capability to search through Comcast’s video assets from a device’s user interface with playback of a selected asset via the Xfinity TV Partner app.  However, in order to provide a cohesive customer experience, such integrated search needs to include more than just this app; it must also include similar data from other video apps as well.

 

Comcast appears from this paragraph to not only be providing an alternative to the $230/ yr annual expense many pay for set top boxes, but also appears very open to allowing other video content to be shown alongside their app.

roku-4_colorcorrectedIn a related announcement, Comcast and Roku (see nearby picture) have joined forces to bring the Xfinity TV app to the Roku player and Roku TV.  As we discussed in our first column on the topic, Roku has a meaningful market share in the streaming device market alongside Amazon, Apple, and Google (see nearby chart).  Enabling each of their devices with Comcast’s app will reduce the number of Xfinity set-top box rentals that are needed.  This also might allow expansion of existing video services to rooms where set-top boxes do not exist (Time Warner Cable used this tactic when launching their Roku partnership in 2013 and has a very unique trial going on with Roku in the NYC area described here).

 

Comcast enabling Xfinity without a cable box; Time Warner trialing plans that include free Roku equipment instead of a traditional cable box; Suddenlink actively offering TiVo in lieu of their cable boxes.  All of these innovations should make the FCC happy, right?  Their regulatory initiative forced Comcast’s hand and now consumers will have a choice between a cable box and more innovative solutions.  Here was the FCC’c comment on the Comcast announcement to electronics publisher CNET:

 

While we do not know all of the details of this announcement, it appears to offer only a proprietary, Comcast-controlled user interface and seems to allow only Comcast content on different devices, rather than allowing those devices to integrate or search across Comcast content as well as other content consumers subscribe to.

 

moving goalpostsThis seems to indicate a “goal post move” by the FCC.  President Obama clearly stated that the FCC was trying to solve the $230/ yr set top box rental problem in last week’s weekly radio address (device competition is the basis of section 629 of the 1996 Communications Act which gives the FCC the authority to issue the NPRM).  Now that Comcast has announced their willingness to allow Xfinity content in a manner that is not tied to owning/renting a Comcast box, but the FCC has redefined the problem to be unintegrated content and the lack of comingled choices.  Simply put, the FCC does not believe that Comcast, Time Warner Cable, Charter, or their partners Tivo or Roku solve the content organization problem, which has replaced the set top box affordability problem.

 

Bottom line:  Comcast’s actions are a step in the right direction.  The FCC is wrong to move the goalposts, and it’s highly unlikely that they have the authority to define how Electronic Programming Guide content is organized.  They should let the market determine how channels are presented (if you do not have a Roku or Tivo box, I would urge you to find a friend who does, look at their experience and imagine a Comcast TV channel alongside the current pay and free choices).

 

Looking for Meaning in Verizon’s Quarterly Earnings

verizon_2015_logo_detailVerizon reported earnings (link here) that generally met expectations on Thursday.  They have already completed several items on their 2016 “To Do” list.  Here’re some takeaways on their earnings release:

 

  1. The Frontier transaction is closed. As a result, debt is being reduced, and cost structure rationalization is continuing for the remaining wireline unit (Verizon reported that the EBITDA margin for the wireline unit without the divested properties is 19% – see nearby chart).  Realizing a lower cost structure has been a long-time initiative for Verizon, but the divestiture of a more profitable unit clearly brings the labor cost challenge into focus.  Less debt, but more sales required in a geography that is growing more slowly than in the South and West.  Reducing the cost structure is going to be a big challenge, and the cost attribution to wireless/ 5G is likely how they will achieve it (see point #2 below).
  2. The XO acquisition is going to provide Verizon with a lot of intra-city fiber. In discussing the Boston FiOS buildout, CFO Fran Shammo stated that $300 million of incremental capital expenditures would be needed over the next 5-6 years to complete the footprint expansion.  That’s a rounding error to Verizon’s overall annual expenditures, likely attributable to both 5G and FiOS, which should help Verizon’s ability to competitively price services in Boston (building out Baltimore and Virginia will likely require more new capital due to XO’s lack of fiber in these markets).
  3. Wireless customers are holding on to their smart devices longer than they did during previous years. Verizon’s postpaid upgrade rate was 5.8%, down from 6.5% in Q1 2015 and lower than most analysts expected.  This had a mixed benefit:  Fewer upgrades helps churn (0.96%, a strong figure), but fewer Equipment Installment Plan upgrades lowers in-quarter revenue.  Verizon also commented that more wireless subscribers renewed their devices on traditional subsidy-based plans than they expected.
  4. “The Tracfone brand is our prepaid product.” That’s a huge admission from Verizon and perhaps the first time they have been that bold and clear.  Here’s the full quote from Fran Shammo in response to a question about AT&T and T-Mobile’s prepaid gains:

 

Our retail prepaid is above market. We’re really not competitive in that environment for a whole host of reasons and it’s because we have to make sure that we don’t migrate our high-quality postpaid base over to a prepaid product.  If you look at the competitive nature, they are doing it with sub brands. They are not really doing it with their brands. And quite honestly, we use the Tracfone brand as our prepaid product.  Tracfone has been extremely successful for us. It’s not something that we disclose any more on reseller, but it continues to increase on the high-quality base of Tracfone, so that’s really where we use and go after the prepaid market. More to come on this during the year, but currently that’s how we operate under the prepaid model.

 

This alliance makes a lot of sense.  AT&T is likely to bundle Cricket with DirecTV in the (near) future, and T-Mobile is using MetroPCS to take share from Boost/ Virgin (Sprint) and Tracfone, so the opportunity to have a strong relationship with any particular carrier is limited.  While not surprising to those who follow the wholesale wireless industry, it was a pretty big statement from Verizon.  It will be interesting to see if America Movil, the parent company of Tracfone (and a direct competitor to AT&T Mexico), views the relationship in the same manner.

 

  1. Verizon is aggressively pursuing new content acquisition. Their strategy, which involves investing in content creation companies with well-known media outlets such as Hearst (see announcement here), is in its infancy.  But Verizon is not playing for second place.  On the conference call, they announced that they were focusing on leading mobile-first content that did not originate in the home.  Awesomeness TV (Verizon now a 25% owner) is the #1 digital brand for females ages 12-24 with 160 million views and 53% growth, and Complex TV (acquired with Hearst – see announcement link above) is the #1 digital brand for males aged 18-24 with monthly unique viewers of 54 million and 300 million total views per month.

 

Since many teens do not watch content in the den or family room, this is a different but wise strategy nonetheless.  For most in this demographic, the screen in their pocket is their TV.

 

Here’s the rub:  While available to all wireless subscribers, Go90 isn’t zero-rated unless you are a Verizon postpaid wireless customer.  Perhaps the announcement to which Verizon was alluding in the quote above with Tracfone was a deal that zero-rates Go90 content.  That would be a game changer.

verizon lead slideVerizon is changing.  They led off their investor presentation with the chart to the right.  While this may seem like déjà vu for those of us who remember the AOL/ Time Warner merger, it is different.  Mobile advertising and targeting did not exist, and Time Warner Cable did not have a national wireless footprint capable of distributing zero-rated content to 100 million existing customers.  Verizon has the unique opportunity to create a vertically integrated entertainment company, and, unlike AT&T, will emerge as a focused challenger.

 

History is not kind to transformations like the one Verizon is pursuing.  Regulations change (although Title II freedom from the anticipated Court ruling would be a plus to this strategy), organizational catharsis sets in, and cost challenges tend to take these ambitious efforts off track.  As soon as Verizon shows signs that their content strategy is impacting their wireless gross additions, we at the Sunday Brief will become believers.  There are many risks to this strategy, however, and we remain skeptical.

 

Thanks for your readership and continued support of this column.  Next week, we’ll compare AT&T and Verizon’s wireless and broadband results as well as examine the implications of the Open Internet Order ruling if it is released.  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 and Sporting KC!

President Obama and the Set Top Box

lead pic (16)Tax Day greetings from Washington DC (where I chaired a terrific discussion at INCOMPAS), Chicago, Charlotte, and Dallas.  Thanks to everyone who showed up at the panel and participated – all of the speakers on Monday were great, including Chairman Tom Wheeler (pictured).

 

This week, we continue to chronicle the developments of the Set Top Box saga as the Obama administration weighed in through the NTIA with comments.  We’ll also weigh in on the controversial “Ghettogate” ad.  First, however, we’ll look at a study of balance sheets across the telecom industry which was released last week by Craig Moffett.

 

Redefining Leverage Ratios

With continued densification (smaller cell sites in more places), spectrum acquisition, and competition, many investors turn to leverage ratios to benchmark long-term financial health and viability.  These ratios are not the first thing that companies highlight in their press releases, but many calculate and discuss their net debt to EBITDA metric.  Here’s that definition according to Investopedia:

 

The net debt to EBITDA ratio is a measurement of leverage, calculated as a company’s interest-bearing liabilities minus cash or cash equivalents, divided by its EBITDA. The net debt to EBITDA ratio is a debt ratio that shows how many years it would take for a company to pay back its debt if net debt and EBITDA are held constant. If a company has more cash than debt, the ratio can be negative.

 

Using that standard definition, communications company metrics would look like this:

leverage ratio beforeFrom a first glance, this looks as expected to most who follow the telecom industry.  Verizon and AT&T maintain low leverage ratios and as a result are afforded low interest rates.  Cablevision, Dish, Sprint, and Charter have historically been able to use high-yield debt markets to finance operations, spectrum purchases, stock buybacks, and other investments.  T-Mobile and Time Warner Cable lie somewhere in between.

 

Telecom is not a typical industry, however.  With Equipment Installment Plans (which entails moving away from subsidy and into subscriber-paid devices) and phone leasing proliferating, more “debt” is being created and sold to third parties at growing rates.  Operating leases create pressure on EBITDA but also frequently mean long and non-cancelable commitments for telecommunications carriers.  And pension obligations represent a promise to employees that rarely enters into leverage discussion dialogue.

revised ratiosMoffettNathanson’s adjusted leverage ratio schedule is shown to the right.  In this view, the relative health of each carrier is different than what was previously reported.  Verizon and AT&T look more like Cablevision and Charter thanks to large pension liabilities, even when the undiscounted size of the pension contribution tax credit is considered.  Comcast appears to be the healthiest of the industry with Time Warner a distant second.  Sprint’s revised ratio is a whopping 7.9x driven in large part by the reversing of the leasing construct.  While it should be emphasized that nothing is truly “real” in the accounting world, this analysis provides some insights into the high-yield market’s reluctance to lend the company money at reasonable rates.

 

Craig Moffett did a Bloomberg interview on the topic (see here) and his detailed analysis is only available to MoffettNathanson clients.  However, if you can get a copy of their work, it’s worth digesting and is on par with the seminal analysis on telecom affordability Craig did in his Bernstein days.

 

President Obama and the Set Top Box Kerfuffle

Since our article analyzing the Notice of Proposed Rulemaking was written (see here), there has been a lot of discussion across many constituencies as to who would benefit and suffer the most.  In the Sunday Brief devoted to the topic, we mentioned how this is pitting entrepreneurs against established programmers.  It’s also pitting Democrat Congresswoman Anna Eshoo (California), the ranking member of the House Energy and Commerce Subcommittee on Communications and Technology against Democrat Senator Bill Nelson (Florida), the ranking member of the Senate Commerce Committee.  Representative Eshoo is a supporter of the FCC’s initiative while Senator Nelson wants to study the implications of opening up the Set Top Box market in greater detail (Nelson is supported by the National Urban League, the National Action Network, and the Rainbow/ PUSH Coalition).

 

To make matters more complex for policymakers, President Obama decided to weigh in on Friday, devoting his weekly radio address to the set top box issue.  Here’s the situation assessment according to the White House (full blog address here):

 

… the set-top box is the mascot for a new initiative we’re launching today. That box is a stand-in for what happens when you don’t have the choice to go elsewhere—for all the parts of our economy where competition could do more.

 

Across our economy, too many consumers are dealing with inferior or overpriced products, too many workers aren’t getting the wage increases they deserve, too many entrepreneurs and small businesses are getting squeezed out unfairly by their bigger competitors, and overall we are not seeing the level of innovative growth we would like to see. And a big piece of why that happens is anti-competitive behavior—companies stacking the deck against their competitors and their workers. We’ve got to fix that, by doing everything we can to make sure that consumers, middle-class and working families, and entrepreneurs are getting a fair deal.

 

If that weren’t enough, the President’s National Telecommunications and Information Administration (NTIA) filed supportive comments with the FCC (read more about them here).  For those of you who are new to the process, the NTIA is managed under the Department of Commerce and the administrator of the Broadband Technology Opportunities Program (BTOP), one of the biggest boondoggles of the past decade (see New York Times article on BTOP titled “Waste is Seen in Program to Give Internet Access to Rural U.S.” here).

 

As we saw with the President’s actions on Net Neutrality (his YouTube message following the 2014 election is here), this administration is not afraid to use the power of the bully pulpit to influence the FCC.  Without rehashing the previous article, and to continue in the spirit of problem-solving, here’s a few questions I would suggest the FCC carefully consider:

 

  1. Will the ruling require Google to open up the Google TV Box? In other words, could the Xbox connect to a Google Fiber coax cable and allow customers to launch a Bing or Cortana query to pull up the latest in Google TV programming?  If not, why not? (Note:  while it is substantially less, Google TV charges a $5/ mo. lease for every TV after the first box).

 

  1. Will the new Electronic Programming Guide (EPG) providers be required to show consumers what information they are collecting on customers? How will consumers access this information as well as any other sources that are being used to drive channel selection.  For example, if I am shown the Kansas City Royals game as my first option and I have a Google EPG, will Google be required to show me that they recommended this because I have the MLB At Bat application on my Google Android phone?

 

  1. Can each customer of the new EPG service opt out of data collection? Will this selection process be easy for customers to access and install?  See the previous Sunday Brief here for more detail.

 

  1. With the replacement of a relatively simple, channel-driven search process (using up and down arrow keys on a specially designed remote control) with a more sophisticated algorithm-driven process as the likely decision, how can the Commission state that the process will not alter advertising rates (see Wired article here)? Won’t customers bid (and Google profit) from paying for higher page rankings on EPG search results?  If so, then what will prevent Black Entertainment Television (BET) from outbidding their apparent competition?  As Roza Mendoza, the Executive Director of the Hispanic Technology & Telecommunications Partnership stated in the aforementioned Wired article “They’re asking us to trust Google?  All of us know about their diversity record. The only people that are going to benefit from this are Silicon Valley companies.”

 

lease vs buy option from twc

Let’s keep the recommendation very simple:

  • Require all Multichannel Video Programming Distributors (MVPD) to provide the same set top box on-line and through distribution channels such as WalMart, just as they do with cable modems (see Time Warner Cable disclosure above).
  • Require all MVPDs publish a list of boxes that they support (according to the Tivo Bolt FAQ page, all of their devices are compatible with every major cable provider in the US as well as FiOS. Chairman Wheeler carefully omits Tivo’s competitive offer in this Washington Post interview when he says “Today there is no competition in set-top boxes, and therefore the incentive to innovate and come up with all kinds of new alternatives is somewhat limited”).
  • If the set-top box order is enacted, require opt-in consent and on-demand publication of how search results are being determined. Allow opt-out capabilities at any time and for any reason with no corresponding financial penalty (including termination penalties on the equipment).
  • If the set-top box order is enacted, allow cable companies five years to comply with the decision.

 

No one can defend the current state of the Electronic Programming Guide (with the exception of the Xfinity X1/X2 and the Tivo Bolt).  But to state that there is no set-top box competition when Tivo clearly positions itself as an alternative for digital cable providers is deceptive.  And to fail to acknowledge that Google will financially benefit from search result rankings, and that entrepreneurs will have to pay up to achieve a top page ranking, is equally deceptive.  The transition of value from cable companies to Google, Apple and Microsoft is apparent to anyone who digs deeper, and should receive the same bright spotlight that communications service providers have received throughout the entire Open Internet process.

 

Sprint’s Controversial (?) Ad

More than a few heads turned when Sprint released (and subsequently retracted) the following ad:

 

**

Lead statement:  Real questions.  Honest answers.  Actual Sprint, T-Mobile, Verizon and AT&T customers.  No actors.

 

Sprint CEO Marcelo Claure, talking to focus group but specifically addressing woman sitting to his right: “I’m going to tell you the carrier name, and I want you to basically tell me what comes to your mind.  T-Mobile.  When I say T-Mobile to you, just a couple of words.”

 

sprint ad pictureWoman sitting to Claure’s right: “Oh my God, the first word that came into my head was ghetto (laughter, Claure nods and smiles in approval).  That sounds like terrible.  Oh my God, I don’t know.  Like, I just felt like that there’s always like three carriers.  It’s AT&T, Sprint and Verizon.  And people who have T-Mobile, it’s like “Why do you have T-Mobile?” I don’t know.

 

Claure taps her shoulder in approval.   Sprint logo appears.  End of ad.

**

 

For those of you who are struggling with the definition of ghetto, here’s the version from dictionary.com:  a section of a city, especially a thickly populated slum area, inhabited predominantly by members of an ethnic or other minority group, often as a result of social or economic restrictions, pressures, or hardships.

legere twitter commentSprint had the sense to pull the ad, and Claure apologized, but his Twitter posts triggered intense reaction from many of Claure’s followers.  Interestingly, John Legere, T-Mobile’s CEO, declined to comment other than the exchange nearby.

 

This is probably an innocent mistake, a miss due to personnel changes occurring within Sprint’s marketing department.  Or perhaps Claure did not understand the racial undertones of the word ghetto.  Regardless, it provided some unneeded attention this week for the struggling carrier, and Sprint (and Boost) customers can rest assured that it will not occur again.

 

Thanks for your readership and continued support of this column.  Next week, we’ll dive into Verizon’s earnings as well as the Open Internet Order ruling if it is released.  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 and Sporting KC!

 

Four (or more) Earnings Questions We’d Like to Ask

lead pic (15)April greetings from Louisville (pictured is the view of the Muhammed Ali Center and the Ohio River from my room at the Galt House Hotel) and Dallas.   This week, we begin the earnings watch list with some questions for AT&T, Verizon, Sprint, and T-Mobile.

 

Before diving into the questions, I wanted to let you know that Roger Entner, Jan Dawson, and I will be hosting a conference call a few days after the Appeals Court Open Internet Ruling comes out.  Please check my LinkedIn feed or check www.mysundaybrief.com for the details.  If the ruling comes out next Friday, I’ll provide the details on the conference call on Monday.

 

Also, for those of you who will be at the INCOMPAS (f.k.a. COMPTEL) show this week, I’ll be leading a panel discussion Monday morning on trends in wireless with representatives from Microsoft, T-Mobile, and Lumos networks.  Please join if you are at the show and ask a probing question or two.

 

Four (or more) Earnings Questions We’d Like to Ask 

 

  1. At what point should AT&T be viewed as a global communications network provider and not as a traditional wireless service company? It was reported by Telecompaper this week that AT&T will post net additions of ~1 million in Mexico.  For those of you who are familiar with this market, that equates to about 350-400K US post-paid wireless net additions from a revenue perspective, and likely less from an EBITDA view.  All of this has happened without really turning up most of Mexico City on the new platform.  How should investors look at AT&T Mexico?

 

As of the end of last year, AT&T Mexico had 8.7 million wireless subscribers, while Telefonica and Telcel (America Movil) had 23.4 and 73 million wireless subscribers. That equates to just over 8% market share for a brand that’s worth at least 15% market share just for showing up.  Adding a million customers in a quarter is newsworthy, but, considering the capital investment AT&T is making ($3 billion) as well as the brand, it’s not an unexpected number.

 

While AT&T has not disclosed a long-term target number, it’s hard to imagine that 20% market share by the end of 2020 is a moonshot given their fiber and LTE funding levels.  Assuming the market in 2020 is at least 120 million subscribers (~2.7% wireless subscriber annualized growth rate), that would equate to 32 million subscribers by the end of 2020 or roughly a $10 billion unit (it entered 2016 at a $2.5 billion annualized revenue run rate).  Said another way, AT&T has completed 1.6 million net adds or 7% of their (minimum) 23 million net addition five-year goal.

 

With $7.5 billion in growth over the next five years in Mexico alone, AT&T deserves a global communications provider designation.  The follow up question is “What’s the halo effect of the Mexico investment on US (likely Cricket) wireless growth?”  We commented a few weeks ago that Cricket is poised to have a very strong quarter (~400K net additions which will be their fourth consecutive quarter at this level), and, while a lot of this is attributed to solid execution, some of their growth has to be tied to a stronger Mexican operation.  Note:  the Sunday Brief post mentioned above focused on the possibility of bundling Cricket with DirecTV. There’s a growing sentiment that more Mexico success will spill over into retail prepaid net additions.

 

Bottom line:  AT&T’s broad and global strategy needs a corresponding scorecard if they are to receive the credit due for their execution in the financial markets.  If they fail to steer the conversation, they will fall into the same retail postpaid wireless comparisons that will mask the full extent of their efforts.  Communicating the full impact of Mexico is a good starting point.

 

  1. Can Verizon become a content and applications company? There was lots of speculation this week that Verizon is going to proceed with a bid for Yahoo (see Bloomberg article here). As was the case with the AOL acquisition, Yahoo brings with it some ad platform assets (enhanced through 2014’s acquisition of Brightroll) and also a legacy brand associated with web portals, news, and email.   There is no doubt that Yahoo’s acquisition would bolster Verizon’s content/ media position.

To answer the question above, let’s look at the performance of AOL since Verizon acquired the company:

 

  1. Verizon has kept key talent, including CEO Tim Armstrong, through the past year (the one-year anniversary of the closing is late June, and we might see some activity then, but the transition has been smooth). This is a good sign for integration with Yahoo assets.
  2. alexa verizon wireless rank (top)
    AOL/ Verizon’s first acquisition, Millennial Media (closed October 2015), has gone extremely well. Recently, AOL promoted Mark Connon, a top Millennial exec, into a key role in the company.  Given Millennial Media’s previous operating relationship with Verizon, it’s not a real surprise that the integration went smoothly, but it provides evidence that integrating most Yahoo ad platform operations should not be a challenge. alexa aol rankings (bottom)
  3. Both aol.com and Verizonwireless.com websites have been performing better since the acquisition (see Alexa measurement results for Verizon wireless and aol.com nearby). In comparison, AT&T has had a slight rise over the same period (and is US ranked #70), T-Mobile’s ranking is #200, and Sprint’s is #302.

 

The old thesis that “Verizon will screw it up” just isn’t holding up.  Go90 is doing well (top 5 in the Entertainment category in both the iTunes and Google Play stores and Top 100 in free apps overall), and signing up new content (see latest signings here).

 

Verizon’s potential acquisition of Yahoo would add $8 billion to the bet (using the figures from the Bloomberg article).  That would bring the total media investment to $13 billion and make Verizon one of the top online/ app content producers in the world.  It’s a long way from DSL, Private Lines, collocation and wireless voice, but there’s a growing body of evidence that they could pull it off.

  1. Can Sprint use their current network collateral and lease financing vehicles to transform the company? This week, Sprint announced that they will be selling network equipment assets for $3 billion and receiving proceeds from these assets of $2.2 billion.   This will provide immediate liquidity to pay down debt maturities of approximately $4 billion due in the next 12 months.  With this transaction, Sprint has emerged as the pioneer with customer handset leases and company equipment leases.

 

We have shown this chart from Morningstar several times (link is here), but it is worth providing one more time:

sprint morningstar debt maturity picture

Sprint has approximately $34 billion in debt with $5.3 billion due in the next 18 months.  They have been cutting costs with vigor and constantly looking for ways to improve their network performance (we reported in a previous column that cost cutting will likely take precedent over growth in the first quarter results and result in negative postpaid phone additions).  A sale leaseback of network assets solves the December maturity but March is a different story.

 

Bottom line:  If the repayment of the December note restores bond market confidence, Sprint’s leasing transaction could trigger a refinancing of some of the March 2017 maturities.  However, if Sprint has to collateralize additional assets, including spectrum, the cash committed to repaying bankruptcy remote lenders could exceed the projected discounted cash flows of the company.  More to come with their April earnings announcement.

 

  1. Will T-Mobile preannounce first quarter operating results this week? In 2015, T-Mobile waited until the actual news release to disclose earnings (they were terrific – see here).  Right now T-Mobile is in the middle of the 600 MHz auction and has not scheduled any events prior to May that would serve as a pre-announcement venue.  Most analysts expect that they will have a strong quarter driven by increased advertising (albeit they are competing with more political ads as a result of a competitive primary season) and lower churn (Binge On has been a “churn stopper” according to the company).

 

The biggest questions raised by many of you are “Does Binge On help or hurt growth?”  and “What are the long-term effects of Binge On?”  We’ll devote an entire Sunday Brief to the overall network pressure that their latest program brings, but the long and short of it is that Binge On helped the network in 2015 and will further help the network in 2016, and will hurt network performance in 2017 and beyond (when T-Mobile has network densification completed and more 600 MHz spectrum to deploy).  Overall, Binge On will put to rest the argument that consumers would gladly trade off paying more for higher resolution.  In fact, the results will likely show the exact opposite.

 

To support the “it has not hurt network performance so far” let’s examine the RootScore results since the beginning of the year.  As of last Friday (April 8), RootMetrics released 59 market results (out of 125 they review semi-annually).  Of these 59 that have been released, T-Mobile has won (including ties) 13 markets and finished second (including ties) 15 times.  Of these 28 first or second place finishes, they have beaten AT&T 10 times and tied with them 15 times (the other 3 times AT&T finished first and T-Mobile finished second).  These figures represent a big improvement over 2013 and 2014 and continue their LTE expansion and densification started in 2015.

 

There are no signs of a weakening network from these recent reports.  In fact, it’s very likely that T-Mobile’s quality metrics are improving because of the immediate network benefit Binge On provided.  SD quality is OK for consumers while they are out and about, but at home or in the office, WiFi speeds take over.

 

Bottom line:  While the long-term prospects of zero-rated data are uncertain, the short-term    benefits are clear – Binge On will be shown to attract and (more importantly) retain customers.  We will know more when earnings are (pre)announced.

 

Thanks for your readership and continued support of this column.  Next week, we’ll dive into the implications of the Appeals Court ruling on the Open Internet Order (due out this week).  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 and Sporting KC!

Some Questions for Netflix (and the FCC)

opening pic (14)April greetings from Dallas, Charlotte, and Effingham, South Carolina (home of Margaret Holmes’ Peanut Patch Hot Boiled Peanuts – sign pictured).  The past two weeks have been busy; rather than diving too deep into one event, we’ll cover several important items instead.  But first, a quick roundup of the April Fools jokes from the telecom and Internet industries.

 

April Fool’s Day:  Some of These Ideas Are Good! 

We could do an entire article on the creativity of April Fools pranksters.  In the interest of discussing more substantive matters, however, we’ll limit ourselves to five that we thought were particularly innovative:

 

  1. samsung internet of trousersSamsung’s Internet of Trousers (IoT) features Wi-Fly (which sends you an alert that you need to XYZ), Get Up alert (which provides mild shocks to your posterior If you have not moved in three hours), and the ever popular Fridge Lock mode. More here.
  2. Google’s Parallel Universe (of Cats) Discovered. One of the best Nat and Lo episodes ever on the latest advances in String Theory.  Make sure you watch to the end.  More here.
  3. T-Mobile Binge on Up! Leave it the folks in Seattle to come up with a way to have a good April Fool’s joke and also poke fun at the competition.  I especially enjoyed the “Real Reality” mode.  Full video here.
  4. MarkForH&M. The all new clothing lineup designed by Facebook founder Mark Zuckerberg consists of seven identical grey t-shirts and one pair of jeans.  And many 20-something guys are saying “When can I get it?”
  5. Google’s “Send + Mic Drop” feature (see here). We need this back.    However, it’s understandable that a few unsuspecting folks might have inadvertently sent messages to potential employers or bosses without knowledge that “Mic Drop” meant “you cannot reply to this message.”  For those of you who did, chill out and make the most of it.

 

Honorable mentions:  Esurance Election Insurance, Lyft prank mode, Snoopavision, and Google Cardboard Plastic.

 

Some Questions for Netflix (and the FCC)

The Wall Street Journal reported last Thursday (not on April Fool’s Day) that Netflix has been throttling their video content to 600 Kbps when it is destined for AT&T and Verizon (and most other wireless carriers across the globe), but not when it is headed to Sprint or T-Mobile.

 

Netflix has been muted in their responses since the report has been issued, with only the Director of Corporate Communications commenting through a carefully scripted blog post that basically says “We’re working on it” (see here).

 

Here’re some questions that Netflix should answer:

  1. netflix logoHow did/ does this disclosure change current the customer service responses (FAQ, on-line help, one of two 800 numbers, etc.) to mobile connectivity issues (note: no changes to the FAQs have been made since the original disclosure)? Did customer service reps know that Netflix was throttling wireless traffic to some carriers and not others?
  2. How often were the plans to throttle AT&T and Verizon revisited? What criteria were used? For example, when Cricket was purchased by AT&T (which likely would have involved a change in Internet backbone providers), were all Cricket customers throttled as well? Or, when AT&T re-introduced unlimited wireless data plans for DirecTV customers, did Netflix contemplate removing (or actually remove) the speed caps?
  3. Will Netflix now begin to post a wireless bandwidth index? Can customers clearly see the speed options available to them on an un-throttled basis so they can make an intelligent choice?

 

Of biggest concern is the customer service aspect.  If Netflix service agents were not given the information or tools to accurately describe their wireless throttling policies, then there were likely thousands of calls per month made to AT&T and Verizon wireless agents trying to solve issues that originated with Netflix.  Verizon and AT&T could have had (and likely did have) network issues that prevented a good viewing experience, but Netflix made the troubleshooting issue more difficult by withholding their network practice.

 

On top of this, Verizon and AT&T missed out on the opportunity to upsell customers to higher data plans because of the Netflix practice.  The two largest wireless carriers received a double whammy:  higher customer service costs based on the assumption that the ISP must be at fault, and the missed opportunity to upsell customers to higher data plans faster because of the Netflix throttling policy.

 

Netflix is not the only one who is at fault here, however.  How the Open Internet Order was ultimately determined at the end of 2014/ beginning of 2015 should also be scrutinized.  The FCC faced a choice to increase their potential regulatory reach to edge providers such as Google, Netflix, Hulu, and Amazon Prime.  Here’re a few questions for each of the commissioners and Chairman Wheeler:

 

  1. When did the FCC engineers determine that Netflix was throttling wireless data (I’m willing to bet they were not surprised by the WSJ article)? When this data was received, what was done with it?  Who decided that this piece of information was not important or relevant?
  2. Did the FCC explicitly ask if Netflix had ever throttled data as a part of normal commercial operations? Did Netflix respond truthfully and completely?
  3. Has the FCC learned since this disclosure that other edge providers throttle data to selected wireless providers? Will the FCC require edge providers to publish their throttling policies and disclose them in their FAQs and advertising?

 

Given the unprecedented editorial influence over the final Open Internet Order draft that edge providers were rumored to have had, there should be a full reconciliation and publication of the “voted on” version and the final publication of the Order.  A simple redline could shed a lot of light on the process.

 

Bottom line:  Netflix has a lot of explaining to do.  The FCC also has a lot of explaining to do.  The foundational assumption that content streaming companies will be indiscriminate in their network streaming policies has been shattered by this disclosure.  Netflix should be held to a standard that is commensurate with a large and growing (~40% of US homes) market share.

 

AT&T is Becoming an Unlimited Company

“Bundle and Benefit.”  With these three words, AT&T has taken a page out of the cable playbook and used it against them.  It’s hard to believe, but there was a time when we paid for voice by the minute.  Voice customers had to know where the other person lived and whether that would result in additional charges.  Because of the uncertainty, customers held back, called at different times during the day, or made sure that they were “Friends” or “Family.”

 

Those were the early days of wireless voice, a similar model to what existed in the archane world of fixed/ landline service.  Longer distance calling meant higher charges, potential international settlements, and the like.

 

Cable’s Triple Play (and the introduction of unlimited wireless services from now forgotten MVNOs like Helio) made unlimited products an easy to understand and essential part of the telecom vocabulary.  Cable TV has always been unlimited (much to the chagrin of many parents).  High Speed Internet started as unlimited, although to a select few some caps may kick in for certain speeds.  When voice was introduced, it followed the unlimited pattern (and was priced at a slight premium to most fully featured local phone services).

 

att home internet pricingIt was the easiest sell on the planet:  Unlimited usage of home entertainment and communications essentials for $99 (then $89 and now in some promotions even $79).  Service was correspondingly easy – calls continued for standard network issues, but for the first year, the price remained constant.

 

AT&T watched what remained of the wireline voice market migrate to cable.  They also saw the unlimited message begin to penetrate the wireless carrier community as well (ironic as AT&T wireless pioneered single rate pricing a few years earlier).  Sprint began to offer truly unlimited wireless service for $99 (later $109) per line in 2008.  T-Mobile followed, as did other smaller providers.  All of this happened just as 3G networks were being replaced by 4G/ LTE speeds.  At this time, AT&T had the exclusive distribution rights to the bandwidth-intensive iPhone, so following their competition would have had significant network consequences.

 

AT&T ended unlimited data plans for wireless customers in June 2010.  This hiatus continued for over five years until the DirecTV merger was completed.  In January 2016, AT&T resumed offering unlimited LTE data (no throttling until 22GB per line threshold is reached) but there was a catch:  Customers needed to subscribe to DirecTV and AT&T Wireless.  The Double Play (Video + Wireless) was born.

 

The two-fer has enjoyed some success with over 2 million new or existing customers signing up for service.  Analysts predict that an additional 5-6 million will sign up for the service in 2016.  While this is a mere 10% of AT&T’s postpaid smartphone base, it’s not crazy to assume that 30-40% of the base could move to unlimited if the plan structure is right (this includes reasonable costs for DirecTV).  Four lines of unlimited wireless voice/ text/ data service for $180 is a very attractive rate.

 

This week, AT&T sweetened the pot even more as they announced new High Speed Internet pricing structures.  If a customer wants truly unlimited data, they will have to pay an additional $30 or have a qualifying DirecTV or U-Verse TV service (AT&T’s full announcement is here).  This means that a stand-alone customer in Dallas selecting 18 Mbps service (only) would pay $75 ($45 + $30 unlimited premium) per month for their service (Time Warner Cable charges $45 for 5x the speed with no caps).  That’s $30 more for 20% of the total throughput with Charter committing to keep the “no caps” policy provided that their merger with TWC and Bright House Networks is approved.

 

High Speed Internet pricing is not rocket science.  There are high gross margins and low product costs.  Also, AT&T is not remotely close to winning their share of decisions versus cable (AT&T lost 248K broadband customers in the past year – Comcast gained 1.4 million).  More AT&T penetration would have downstream effects on wireless network consumption as well (more Wi-Fi = less carrier spectrum radio capacity consumed and more Voice over Wi-Fi calling opportunities).

 

Bottom line:  AT&T got it right when they reintroduced unlimited wireless with DirecTV.  They started to get it right with unlimited U-Verse Internet with DirecTV (or U-Verse TV) but forgot to give consumers what they wanted most – more speed.  They need to introduce a free speed upgrades, and not the threat of capped surcharges, as a part of the bundle to compete against cable.

 

Thanks for your readership and continued support of this column.  You will not want to miss next week’s “First Quarter Earnings Watchlist” issue.  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!