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Special Edition – Apple’s Uncarrier Move

apple card examples

Apple Card launched in the U.S. in August, and we’ve been thrilled by the positive reception we’ve seen. Users can apply for Apple Card through the Wallet app on iPhone in minutes and start using it right away in stores, in apps and on websites. They’ve told us they love Apple Card’s simplicity, privacy, security, and transparency, which has helped them make healthier financial choices. Apple Card has absolutely no fees, and major apps and retailers like Uber, Uber EATS, Walgreens, Duane Reade, and T-Mobile have already joined to offer 3% daily cashback on Apple Card transactions.

And I’m very pleased to announce today that later this year we’re adding another great feature to Apple Card. Customers will be able to purchase their new iPhone and pay for it over 24 months with zero interest. And they will continue to enjoy all the benefits of Apple Card, including 3% cashback on the total cost of their new iPhone with absolutely no fees and the ability to simply manage their payments right in the Apple Wallet app on iPhone. We think these features appeal broadly to all iPhone customers, and we believe this has been the most successful launch of a credit card in the United States ever.

 

The above quote Is from Tim Cook on the October 30, 2019 Apple earnings conference call.  As many of you know, we sensed something was up when the Apple Card launched and then wrote about it in an article on August 18 titled “A Wolf in (Titanium) Sheep’s Clothing?

Many have asked how this could impact the carriers.  This depends on where the greatest loyalty is (Apple is likely a more attractive brand than Verizon or AT&T), and the extent Apple advertises this promotion.  There were few who thought that the Apple Card would be attractive enough to be the most successful US credit card launch ever.  It could represent 5 million less carrier sales over the next 12 months, or it could be 20 million.

A phone purchased with the Apple Card (even if purchased at a Verizon store) is not subject to unlocking or payment restrictions that currently exist with the carriers.  If the carriers continue with month-to-month plans, switching becomes a lot easier to do since the payment for the device is not going through Verizon or AT&T but through Apple.  And, just to make it richer, the 3% instant discount applies (the closest analogy I can think of is purchasing gasoline for $2.29 at the local Shell station instead of paying $2.34 at the BP across the street).  $30 per $1000 paid is not a deal maker, but, other things equal, is certainly not a deal breaker.

More importantly, Apple now sells the device protection, which Verizon cited as a profit generator in their recent earnings call.  For every $14-15 paid per month, Verizon could make as much as $6.  That’s material across a customer lifetime.

More on Sunday.  The formula still holds:

Apple Card + dual SIM (one of them eSIM) = low switching costs = higher churn/ Cost Per Gross Add

Month-to-month contracts cannot be sustained with the loss of carrier Equipment Installment Plans.  It will be very interesting to see the next moves by the carriers.  More on Sunday (if you are not a Sunday Brief subscriber, send an email to sundaybrief@gmail.com and we will sign you up).

Verizon, Comcast and Charter 3Q Earnings Review

opening pic 2Greetings from the Mile High City, the Queen City, and the City of Angels.  Attendees of the Mobile World Congress – Americas were greeted with multi-story advertisements on buildings touting original content, a reminder that investment in the TMT (telecom/ media/ technology) industry can take many forms (more on this thought when we discuss Verizon’s earnings below).

I had the chance to visit with many of you during the show, and, to a tee, no one was excited to be there.  “Where’s T-Mobile?” was a frequent question, usually accompanied by comments about slow vendor payments or delayed decisions.  Several had “I told you so” comments about Nokia (a summary of their bad week is best captured here).  And the fact that Sprint had the main entrance exhibit led some to theories that should be reserved for late night cable news.

Here’s the bottom line from the show:  Our industry is changing – a lot.  The mobile handset, and the licensed and unlicensed spectrum that it connects to, will be life-changing for nearly all who use it.  And software (largely not present at the show), not hardware, will define value.  More on this can be found from our earlier column “About This Thing Called 5G” in which we define the 5G value statement as “More software… doing more things… faster and better.”  Networks matter (we will see their importance below), but software fuels their engine.

This week, we will look at three companies who announced earnings (Verizon, Comcast, and Charter) and examine the differences in growth strategies versus their industry peers.  As a reminder, T-Mobile and AT&T announce earnings next week, with CenturyLink, Sprint and others following later in November.

 

Verizon:  Consumer Wholesale and Fiber Save the Day and Seed Long-Term Options

Verizon reported strong earnings on Friday, led by wireless service revenue growth and expense reductions (nearly 14,000 fewer employees in the last 12 months alone).  They had balanced growth in wireless net additions between consumer and business (and phone net adds in both, including public sector, which was a shot across the bow to AT&T’s FirstNet initiative).  And, while they paid down debt, they continued their significant capital spending ($12 billion year-to-date at the consolidated level, up slightly from 2018).

Rather than go deep on each statistic, let’s summarize three areas where Verizon and AT&T are pursuing markedly different strategies:

  1. Wireless wholesale revenues (found in the Wireless Historical Financial Results) are a key source of Verizon’s revenue growth. Verizon’s consumer income statement shows growth from multiple sources:

verizon q3 earnings schedule

Approximately $376 million of 3Q 2018 to 3Q 2019 growth comes from the Operating Revenues – Other line.  Excluding equipment, operating revenues grew $808 million.  Around half of the operating revenue growth is coming from wholesale, which has no CPGA and carries ~65% EBITDA margins.

Interestingly, segment EBITDA grew a paltry $77 million driven largely by an increase in equipment subsidies ($136 million in 3Q 2018 vs. $341 million in 3Q 2019).  Excluding the equipment subsidy, the $77 million EBITDA growth becomes $282 million (a good proxy for wireless service margin growth).  So, while revenues grew by $808 million year-over-year, only 35% translated into cash.

Verizon’s CFO Matt Ellis addressed the equipment subsidy in the earnings call, saying:

So on the wireless cost of service side, I mentioned that the phone net adds split was fairly even between Consumer and Business. Business had a more than 10% increase in phone gross adds. … a lot of our Business customers are still on a subsidy model rather than device payment model, so I think you see the impact of that.

Adjusting for subsidies, and assuming a very conservative 65% EBITDA margin on wholesale revenues, it’s highly likely that 85% or more of the 3Q 2018 to 3Q 2019 EBITDA improvement came from wholesale ($376 million * 65% = $244 million EBITDA/ $282 million = 87% of EBITDA growth comes from Other revenues).

On a 2Q to 3Q 2019 sequential basis, the impact of wholesale is even more dramatic, with the unit accounting for $312 million of the $466 million non-equipment revenue growth (67%) and, assuming EBITDA margins of 65% on the $312 million, more than 120% of the subsidy-adjusted sequential EBITDA growth ($119 million + $42 million of increased subsidy = $161 million).

What this says is that the negative margin impact from consumer retail growth (and write-downs thanks to new unlimited pricing plans) is being covered by consumer wholesale.  Without cable and Tracfone, the story line would have been very different.

The other major item that escaped the headlines is the continued fiber build in 60+ metropolitan areas outside of the Verizon franchise territory.  At the end of the earnings conference call, Matt Ellis called out the fiber impact:

… we’re rolling out more fiber as you know in our One Fiber initiative that is going to give us more opportunities to sell into those customers as they move off of legacy products and our fiber build has continued to gain momentum, increased at a little bit in the third quarter of over 1500 route miles a month on average in the quarter. So we’re getting to a good momentum there and that will open up additional opportunities for us as we go forward to replace those legacy volumes

An additional 20-40K route miles of fiber hitting the market starting early next year will not go unnoticed and marks a very different strategy from AT&T out of region, particularly for enterprise customers.  As that number accumulates (1,000 route miles means a lot in a city like Birmingham, AL or Albuquerque, NM).  And, as others have correctly noted, that fiber is largely being connected to wireless telecom infrastructure and not commercial real estate (an entirely different build/ approval process).  But it’s different because it’s a highly leverageable asset (this is a “Fiber Always Wins” case to quote a previous TSB article).  We have previously talked about the impact of the CenturyLink build (4.7 million fiber miles), but not as much about Verizon’s One Fiber initiative.

Lastly, the Disney+ announcement stands in stark contrast to what we will likely hear from Time Warner/ AT&T executives on Tuesday (free HBO for AT&T customers started to leak last Friday – see CNBC article here).  Content production with telco cash balances is unknown territory.  At a minimum, it dilutes management focus from strategic items like infrastructure buildout and fiber competitiveness.  More likely, it locks in AT&T to HBO and other Time Warner content at the expense of other options (as opposed to Verizon’s “playing the field” strategy of Apple Music last year, Disney+ this year and next, and maybe something entirely different in 2021).  We will have more to say on Disney+ vs. HBO Max in next week’s TSB (and why we think Apple Music lessons learned over the last 12 months prepares Verizon for a very successful Disney partnership), but it’s worth thinking about the value of the content selection option.

Bottom line:  Verizon’s earnings message was focused on wireless service revenue and content deals.  Their profit growth is increasingly being driven by non-retail sources, however.  One Fiber could translate into Enterprise market share gains if management quickly re-builds their local out of region wireline capabilities.  Verizon looks less and less like AT&T each day.

 

 

Comcast:  Residential Broadband Dominates – Now What About Wireless?

Comcast had a record quarter on broadband growth, with 359K residential and 20K business net additions.  The 359K figure is the highest net additions for any quarter since Q1 2017 (first quarters tend to be promotion-driven and Comcast was in the middle of DOCSIS 3.1 adoption at that point – no such tailwinds existed in 3Q 2019), and according to Brian Roberts, the most for any third quarter in ten years.  Penetration of homes and business passed grew to 48.2%.  Not only did subscribers grow, but total revenue grew as well, as existing customers upgraded their service and promotions expired.

The talk track for Comcast residential broadband is this:  New homes/ dwellings are being built, and Comcast is grabbing disproportionate market share from AT&T U-Verse (Chicago/ Houston), Century Link (Seattle/ Utah) and Verizon FiOS (Boston/ Philadelphia/ Washington DC).   In turn, existing customers are increasingly satisfied with their products and services, which keeps non-mover churn in check and increases bundling and upgrades.  We are ready for all broadband challengers.

comcast q3 earnings schedule

To put the 359K net additions in context, Verizon’s FiOS unit grew 30K net new additions from Q2 to Q3 2019 yielding a 12:1 advantage.  Including DSL, Verizon lost 5K residential customers in 3Q 2019, a figure 10K worse than 3Q 2018.

Over the last nine months, Verizon broadband has gained 9K residential broadband customers (106K net FiOS less 97K DSL losses).  This compares to total residential broadband gains at Comcast of 893K – a 99:1 advantage (!).

One would think that Brian Roberts and Michael Cavanagh could drop the microphone and walk away.  And, had Altice not deployed a very aggressively priced MVNO on Long Island using Sprint’s network, most analysts would have changed their questions to deal with softball topics like theme parks, debt and buybacks.  The Altice deployment drove many questions, including (TSB paraphrases of the questions based on the conference call transcript):

  1. Doug Mitchelson at Credit Suisse: How are you leveraging your base to get better pricing, and can Comcast implement strand mounts (a la Altice) to improve their cost/ GB and improve Verizon’s coverage?
  2. Brett Feldman at Goldman Sachs: Is the MVNO unit driving up technical and product support costs in the quarter and how will continued growth impact the fourth quarter?
  3. Jennifer Fritzsche at Wells Fargo: How does Comcast view the upcoming CBRS (Preferred Access License), C-Band and Millimeter Wave spectrum auctions?  Will spectrum ownership be a part of Comcast’s strategy going forward?
  4. Craig Moffett at MoffettNathanson: How will Comcast use eSIM (specifically dual SIM/ dual standby) to improve their wireless cost structure?
  5. Michael Rollins at Citi: How are you changing your bundling message to reflect your wireless offering?  Is Comcast experiencing difficulties in retailing wireless?  Could a media + wireless bundle drive more subscriber growth?

Of the ten questions in the Q&A, five (at least partially) dealt with the MVNO business.  Putting this into perspective, wireless represents slightly more than 2% of the 3Q 2019 Cable segment revenues and just over 1% of total 3Q 2019 corporate revenues.  Even on a growth basis, wireless was $90 million out of $561 million growth from 3Q 2018 to 3Q 2019 (16%) and would be an even smaller number if we excluded the advertising revenue drop.  Why so much interest in wireless?

Part of the answer could be the natural inclination to focus on those areas of the business that are dragging down EBITDA.  Xfinity Wireless lost $94 million in EBITDA in the quarter or about $18.50/ month/ average subscriber.  This figure is substantially better than the $178 million lost in Q3 2018 ($66.29/ month/ average subscriber) but largely unchanged from the $88 million lost the previous quarter ($19.60/ month/ average subscriber).  Upticks are hard to stomach even if they are explainable, and it’s likely that the iPhone 11 launch impacted 3Q EBITDA.

updated mobile net additions by quarterAnother answer is to look at wireless growth in light of the large High Speed Internet base.  Comcast had 1.689 million average wireless subscribers in Q3 against 25.811 million average High Speed Internet subscribers.  Assuming 1.8 Xfinity wireless lines per household (a figure below 2.0 assumes that By the Gig is more popular with individual/ single line users than other family-focused plans), 1.689 million subscribers would translate into roughly 940,000 households or below 3.7% penetration of current Xfinity household accounts (note that as the 1.8 lines per household grows, the penetration level shrinks).  That’s an underwhelming figure given the 2.5 years Comcast has been actively marketing retail wireless services.

Nearby is the updated net additions growth chart for both Comcast and Charter.  It’s very interesting to note that since 4Q 2017, net additions have been running in a very tight range.  In fact, the four quarter net additions rolling average ranges from a low of 196 to a high of 214 – a close-fitting cluster.  It appears that Comcast is being more deliberate in their growth strategy (in effect placing a 200K quarterly growth governor) in anticipation of additional events.

We have no doubts that Comcast has a long-term wireless strategy, and that it involves increased licensed and unlicensed spectrum ownership and operation at some point.  But we also understand that every piece of content added to the package hurts gross margin and keeping up with AT&T/ HBO and Verizon/ Disney is going to be difficult without offload.

Bottom line:  Comcast blew away High Speed Internet performance expectations which changed analyst focus to wireless, specifically unlimited plan profitability.  Absent the collapse of the Sprint/ T-Mobile merger, there’s a lot of planning ahead.

 

Charter:  Like Comcast, But with Less Content and no Europe Exposure

Charter also posted very strong growth with 351,000 net High Speed Internet additions and 276,000 wireless subscriber net additions.  This translated into $4.1 billion in EBITDA which included $145 million in total mobile EBITDA losses (across 656,000 average monthly subscribers, this equates to a loss of $74/ average customer/ month which is better than where Comcast was after their first five quarters of service).  Charter has grown slightly faster in their first five quarters of wireless service than Comcast did, and CEO Tom Rutledge believes that their sales productivity is just getting started.

charter adjusted EBITDA 3Q 2019

In the Question and Answer section of their earnings call, Charter reiterated their increased growth trajectory on both wireless and broadband, and also reiterated that they are looking at CBRS across a wide variety of fronts (rural wireless expansion, highly congested areas, etc.).  Charter did not mention any changes in their wireless strategy with respect to business, but it’s likely that small business expansion (< 20 lines) will continue to grow in 2020.

Bottom line:  The tone of the Charter call was completely different than Comcast, reflecting the differences between the companies.  Content discussions focused on retransmission agreement progress (with an acknowledgement that customers will see some increased costs), and there were absolutely no international discussions.  It’s clear that Charter wants to a) hit the 1 million subscriber milestone by the end of the year, and 2) continue to realize scale efficiencies in wireless.

Next week, we will incorporate AT&T’s Time Warner Cable analyst day, AT&T quarterly earnings, and T-Mobile earnings into the discussion.  Until then, if you have friends who would like to be on the email distribution, please have them send an email to sundaybrief@gmail.com and we will include them on the list.

 

Have a terrific week… and GO CHIEFS!

 

 

 

 

 

 

 

Four Earnings Questions

** Note – I will be at MWC-Americas on Wednesday (all day) and Thursday morning.  Please send a note to sundaybrief@gmail.com if you would like to catch up.  Thx, Jim **

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Greetings from Lake Norman, NC (picture of a recent sunrise is shown).  This week, we will discuss four questions that should be asked during earnings calls (which start this Thursday with Comcast, followed by Verizon and Charter on Friday and AT&T and Google the following Monday, Apple and Sprint (likely) on Oct 30 and CenturyLink on Nov 6).  Please note that these questions are not in priority order.  Here’s four questions we’d like to see answered in upcoming earnings calls:

 

1. To Apple: If Goldman Sachs is correct, and the Apple Card truly is “the most successful credit card launch… ever” how will Apple use these new relationships to increase the iPhone renewal rate?

To AT&T and Verizon:  Do you anticipate that Apple’s new credit card will disintermediate the store purchase and financing experience?  If that occurs, and customers finance their new device through Apple directly, how will that impact revenues, margins, and churn?

We received a strong indication of Apple Card’s success from Goldman Sachs this week when CEO David Solomon revealed on his earnings call that “we believe [the Apple Card] is the most successful credit card launch ever.”  Solomon went on to disclose:

…we have seen a pretty spectacular reception to the card as a product. The approval rates early on have been lower, and I say that that’s a decision, obviously, Goldman Sachs is making as the bank, but we’re doing that in concert with Apple. And it is because we’re quite vigilant from a risk point of view, of not being negatively selected out of the box. Meaning, over time, we’ll start to see better credits appear and the approval rates will go up, where we’ve seen an enormous inbound, we’ve issued a considerable amount of cards. We’ve just been through our first bill cycle, which went smoothly, and so from an operational point of view, it’s gone well

Apple announces earnings on October 30th.  It’s likely that they will not actively promote anything until after the Holidays (if demand is good, and they are throttling activations through selective credit scoring, probably not best to get promotionally aggressive).  However, if Apple attracts 10 million US card holders in the first year (we would not be surprised if this happens), you have to think that the ability to finance select transactions at 0% a.p.r is inevitable.

 

2.To AT&T: Do the list of divestitures you are working on with Elliott Management include unprofitable local phone exchanges?

 To each of the other local exchange providers (particularly rural):  How will you more effectively compete against a clustered (and therefore operationally efficient) cable industry?  Was your concern over valuation when you considered clustering in the past unfounded given the deep losses that have occurred in broadband acquisition over the past decade?

 

We briefly discussed this in the TSB focused on the Elliott Memo.  In our note, we described the diseconomies of scale arising from island or isolated exchanges in North Carolina.  To prove that the Tar Heel state was not a fluke, we show below the local telephone provider exchange map of South Carolina (link here):

sctba pic

In contrast with this menagerie of local exchange properties, cable broadband providers in South Carolina consist of the following (from the South Carolina Cable TV website and company websites):

  1. Spectrum/ Time Warner Communications: 72 million population covered
  2. Comcast Communications: 600,800 population covered
  3. Comporium Communications: 305,000 population covered
  4. Horry Broadband Cooperative: 205,000 population covered
  5. Northland Communications: 164,000 population covered
  6. Atlantic Broadband: 133,000 population covered
  7. Hargray Communications: 106,000 population covered

With a total population of about 5 million, to have more than 3.6 million (72%) covered by just three providers and more than 4.3 million (86%) by seven providers shows why cable broadband has an advantage:  they have clusters which produce economies of scale.

What is the critical importance of owning and operating the telephone exchange in Florence, SC (population just under 38,000) for AT&T?  Why not pursue a structure with other phone companies in Northeast South Carolina that mirrors the one proposed by Apollo Management for combining Dish and DirecTV assets?  What efficiencies (and increased business opportunities) could be realized from greater exchange consolidation?

How bad is it (likely) for AT&T?  Look at the May 29 Frontier sale announcement of their Northwestern exchanges, where they disclosed that the sold properties passed 1.7 million locations yet Frontier only had 350,000 consumer and business customers (20% relationship penetration).  Does AT&T (U-Verse/ Internet) have a relationship with 30% of the homes passed in Florence?  What are the value prospects, and how do they fit into all of the other things that AT&T is managing?

As for the other local exchanges, how long can they compete with the new T-Mobile, who, like we discussed in last week’s TSB, is promising 100 Mbps fixed wireless service to the vast majority of the United States (including Florence) in a few years?  Is it too late to change?

 

3.To T-Mobile: How do you continue to drive increased postpaid retail gross additions?  How much of it is driven by new device launch promotions (iPhone 11/ 11 Pro/ 11 Pro Max) versus increased 600 MHz footprint?

 

We have reported for the last several weeks on the lack of availability of both the iPhone 11 and the iPhone 11 Pro Max at T-Mobile (note: in last weeks report, most of the iPhone 11 issues were driven by specific colors).  Here’s the data for this week:

iphone 11 availability as of Oct 20

T-Mobile has really been selling a lot of iPhone 11 devices.  Their shortages on the 256GB storage level have been ongoing for three weeks, leading us to believe that this may be a supply chain miss (and perhaps a sign of economic good times).  Not surprisingly for Apple, the iPhone 11 in green (and, to a lesser extent, purple) is harder to come by than more standard red, white, and black.  Now the chart for the iPhone 11 Pro:

iPhone 11 Pro availability as of Oct 20

This is also an interesting chart for T-Mobile.  As we have pointed out several times, Magenta does not have a $0 option for either the iPhone 11 Pro or the iPhone 11 Pro Max.  Our guess is that the T-Mobile shortage is continuing for all but the 512GB memory model for two reasons:  a) greater upgrades within the T-Mobile base (presumably to get the 600 MHz coverage and all of the other iPhone features), and b) some movement from other carriers (Sprint?) to Magenta.  These are educated guesses (not stabs in the dark) and should not take away from any 600 MHz progress as a factor.

AT&T’s shortages (basically out of everything that is not gold colored) are likely much more weighted to upgrades.  A lot of changes have happened in AT&T’s network since the iPhone 7 (along with the 6S, most likely phone upgraded to the 11), and the business upgrade cycle is also in full swing (spending any available budget to improve corporate liable handsets).  There may also be a small amount attributable to the FirstNet initiative as their LTE band was not included until last year’s models (XR, XS, XS Max were the first models with LTE Band 14).

Similar trends are seen with the iPhone 11 Pro Max:

iPhone 11 Pro Max availability as of Oct 20

The backlog seems to be much more manageable here than for T-Mobile.  It’s likely that T-Mobile’s iPhone 11 Max shortages are attributable to supply chain/ forecasting, and nothing more.

 

4.To all carriers (especially CenturyLink): If low latency applications are critical to the value creation of 5G (basically keeping 5G more than a special access open expense reduction), what is your edge data center strategy?

This is a particularly important question for the large wireless carriers (including T-Mobile) and enterprise focused companies such as CenturyLink (who now owns Level3 Communications).  It’s hard to remember, but there was a time when both AT&T and Verizon (and Sprint and T-Mobile) owned several data centers apiece for internal use – both AT&T (Brookfield Infrastructure partners – $1.1 billion – 2018) and Verizon (Equinix – $3.6 billion in late 2016) sold their data center assets.  Investing in dozens (hundreds?) more could be necessary, however, if no closer solutions exist.

Also of interest with respect to edge is the entrance of Pensando Systems, who announced last week that they raised an additional $145 from Hewlett Packard Enterprise and Lightspeed Partners  to fund their edge computing interests.   Pensando has now raised a total of $278 million dollars (3 rounds in 3 years) with a high degree of interest from a wide variety of potential partners.  More on the startup (certainly a candidate for our next “Companies to Watch”) in this CNBC article (John Chambers of Cisco fame is their Chairman).

Also of interest are companies such as Qwilt, an edge video server company that has raised over $65 million from various partners including Cisco, Accel Ventures, and Bessemer.  Verizon has deployed Qwilt as their application edge delivery platform.

Understanding edge strategies is critical with the increase in over the top solutions (such as last week’s Hulu 4K device announcement which broadens their base to include Amazon Fire Stick, Microsoft’s Xbox One, and the LG WebOS TV platforms).  More capabilities will lead to higher expectations and even higher consumption.

 

TSB Follow Up

Several of you issued lengthy replies to last week’s TSB.  There is no doubt that strong feelings exist supporting maintaining equal outcomes of data packets.  There’s equal certainty that others see S.B. 822 (California Net Neutrality bill) as a stepping stone to more activist state proceedings with respect to cable unbundling (which would clearly deter new incumbent investments in the Golden State).  We decided not to go there in last week’s TSB (our focus was on how wireless companies would treat throttling) but see how and why the ghost of Brand X is more than a mirage to many of you.

One item that I think is undebatable – Congressional action would clearly eliminate the newfound love of Federalism that is breaking out in many state legislatures.  We will write more on this in the future, but we at TSB offer up the following bill parameters for consideration:

  1. Establishment of a minimum residential achieved average upload and download speed (wireless and wired) above which regulations would be loosened if not eliminated (we would propose 200 Mbps for 2020 (200 Mbps for stand-alone Hotspot; 100 Mbps per smartphone or tablet) and 500 Mbps for 2025 (500 for stand-alone Hotspot; 250 Mbps per smartphone or tablet) with agreement to establish the 2030 speed at no less than 700 Mbps). Residential averages would be evaluated by no less than two independent 3rd parties at a zip code level.

 

The rationale behind this is twofold:  a) Regardless of bit prioritization practices, the presence of 200 Mbps for 4-5 simultaneous users clearly provides a healthy broadband baseline.  This would be based on achieved as opposed to advertised speeds.

 

This also provides the ability to have lower speeds but uses market mechanisms to drive the mix.  If AT&T wants to offer Gbps speeds for $90/ month, then they will have a smaller fraction achieving this higher speed than if they offered the same product at $50.  The market will reach an equilibrium.

 

This would also greatly encourage the adoption of 5G services across wireless carriers.  If 50% of the base is wireless and achieving LTE speeds of 100 Mbps, they would need to be offset by 50% of the base experiencing average speeds of more than 300 Mbps.

 

It would also create a competitive mechanism assuming either telco or cable did not achieve the figure in the first measurement.  Some incremental capital expenditure would also occur (and this can be done prior to having a larger infrastructure spending bill if that is desired).

 

  1. Tighter enforcement of Type II provisions and regulations. Unbundling provisions in the 1996 Telecom Act have been watered down to a large extent, with telcos (and, to some extent, the business arms of the cable companies) replacing the harmful operational effects of unbundling with 60-month term discounts on traditional special access services.

 

If Type II were properly enforced (penalties properly monitored and assessed), there would be more impetus to be classified as an information service.  This is a fault of all regulators – state and federal – and should be addressed.

 

  1. Adding core control to Type II provisions for wireless providers. If national or regional wireless providers do not step up their game and have market-leading data infrastructure, they should allow others to disintermediate them (core control allows a rural-focused MVNO to set up infrastructure in the slower market and use the faster speeds in more metro areas).  This “nuclear option” would certainly spur innovation among the wireless carrier community and perhaps spawn a previously unthinkable concept – spectrum/ network sharing.

These are very measurable, practical legislative remedies which refocus objectives to weighted average usage (including testing price elasticities to a greater extent) and increased competition.  We clearly believe that the current approach will create a patchwork of network procedures as well as full employment for telecom attorneys.

 

Next week, we’ll look for clues from Comcast, Charter, and Verizon’s announcements, as well as some previews for AT&T’s earnings and the Time Warner analyst day (Oct 29).  Until then, if you have friends who would like to be on the email distribution, please have them send an email to sundaybrief@gmail.com and we will include them on the list.

 

Have a terrific week… and GO CHIEFS!

 

Updates on iPhone Availability (through Friday, October 11)

The charts are attached as pictures and a link to a PDF download is also new this week:

Headlines:

iPhone 11 availability improved wk/wk for T-Mobile and unchanged for the other carriers (with the exception of green, which is largely out of stock across the system).

iPhone 11 Pro is selling very well across the board (re: T-Mobile does not have $0 down on Pro or Pro Max).  AT&T lack of availability is particularly notable.  This should show up in better 4Q upgrade rates (not sure if they have compelling enough switching offers right now – likely that upgrades are driving the shortages).

iPhone 11 Pro Max.  Two surprises here – T-Mobile is still largely out of the Pro Max, as is AT&T.  Also, if someone is going to buy the Pro Max, they are going to buy the 512GB version (why buy Silver gasoline when you can afford Supreme?).

iPhone 11 Oct 11 availability

iPhone Pro Oct 11 availability

iPhone 11 Pro Max Oct 11 availability

iPhone availability as of Oct 11

 

 

What the D.C. Circuit Court of Appeals Ruling Means for (California) Consumers

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Greetings from New York City (aerial shot of Manhattan pictured), Philadelphia and Davidson/ Charlotte.  This week’s Sunday Brief is kind of lengthy but worth careful reading as we have entered a new phase of state-based regulation (many current and former local telephone employees are quietly thinking “History does repeat itself”).

This week, we briefly examine the impact of the D.C. Circuit Court of Appeals ruling on October 1 and look ahead to the provisions of California Bill SB 822.  As you will see, there’s a lot of interpretation required (telecom attorneys will be fully employed), but this will hopefully get folks thinking about the ultimate impacts of regulation to the consumer.  We also have several TSB follow ups.

We had a substantial positive reaction to last week’s TSB on three start-ups.  One note:  we had mistakenly reported that Starry had raised $130 million from three rounds; we were reminded that they closed their fourth round in September having raised $300 million from four rounds.  Also, a typo on Starry – they are using the lower part of the 37 GHz spectrum, not the 38 GHz spectrum.  Despite these corrections, we were very encouraged by the sharing and dialogue (for those of you who were thinking about sending in wireless financing arm Affirm as a suggestion, please hold your fire as we received several dozen “What about Affirm?” inquiries.  We promise to cover in our next round).

 

 

Internet Policy:  Our Communications “Light switch”

When I was a young child growing up in Manchester, CT (and later in Mohnton, PA), one of my favorite things to do was to play

switch pic

with the light switch. There’s something magical about creating light with a simple motion.  And, as the youngest of three (many of you are thinking “that explains everything about Patterson – he was the youngest”), I would frequently flicker the lights to annoy family members.  This would be accompanied by a sibling or, more likely, parental admonishment of “Stop it… You’ll break the switch.”

The Internet policy of the United States is our communications light switch.  Since 1998, we have applied erudite terms like “Title II” and “Information Services Provider” to make the flickering policy seem more mature.  But the switch position keeps changing, and, as discussed below, we are in danger of breaking the Internet through investment uncertainty.  Here’re some high-level definitions and chronology:

  1. Telecommunications Services Providers are subject to Title II regulation, which prohibits providers from engaging in “unjust or unreasonable practices.” This is not a stationary target. Today’s “just” practice (e.g., T-Mobile’s Binge On! Wireless service plan introduced in 2014, or Verizon’s Start Unlimited plan, which we discussed in a previous TSB) was initially viewed as “unjust or unreasonable” (more on the Electronic Frontier Foundation spat with John Legere in his blog post here and in this article here), but has changed with the passage of time.
  2. Commercial Mobile Services are subject to Title II regulations, while Private Mobile Services are not.

 

1996 (Clinton):  Telecommunications Act Passed by Congress

1998-2002 (Clinton/ George W. Bush):  Broadband is considered a Telecommunications Service subject to Title II.  DSL deployments continue; cable begins to trial High Speed Internet services using a common standard called DOCSIS (Data Over Cable Service Interface Specification)

2001:  CableLabs introduces DOCSIS 1.1 standard which incorporates Voice over IP capabilities.  Cable companies launch HSI services more aggressively starting in 2002/2003 (see why below).

2002-2015 (George W. Bush/ Obama):  Broadband is now considered an Information Service and subject to less regulation (The Supreme Court upholds this designation in the Brand X decision).

2015-2018 (Obama/ Trump)Broadband is re-recategorized as a Telecommunications Service (again subject to Title II) and, more importantly, mobile broadband is categorized as a Commercial Mobile Service and subject to “unjust or unreasonable practices” determinations.

2018 (Trump): Broadband is re-re-recategorized as an Information Service and mobile broadband as a Private Mobile Service.  This re-re-recategorization triggered the lawsuit from Mozilla which was heard in the DC Circuit Court of Appeals.

 

Four changes in 20 years may not seem like a lot compared to the news cycle swirl we see today.  And, as Craig Moffett pointed out in a note this week, each administration party change is likely to reverse the previous one.  That’s not good commercial policy, but rather light flickering, and eventually the switch will break.  In the process, the ability to create meaningful competition and superior customer experiences is sidelined by politics.  More on possible solutions below.

 

What the DC Circuit Court Ruled

The DC circuit ruled as follows:

We uphold the 2018 Order, with two exceptions. First, the Court concludes that the Commission has not shown legal authority to issue its Preemption Directive, which would have barred states from imposing any rule or requirement that the Commission “repealed or decided to refrain from imposing” in the Order or that is “more stringent” than the Order. 2018 Order ¶ 195. The Court accordingly vacates that portion of the Order. Second, we remand the Order to the agency on three discrete issues: (1) The Order failed to examine the implications of its decisions for public safety; (2) the Order does not sufficiently explain what reclassification will mean for regulation of pole attachments; and (3) the agency did not adequately address Petitioners’ concerns about the effects of broadband reclassification on the Lifeline Program.

Simply put, a blanket FCC preemption on what the states can (or cannot) do is ruled out.  But, as Roger Entner points out in this Fierce Wireless piece and Craig Moffett points out in his note, the FCC can challenge any rules after they are approved by the state (state-by-state preemption not ruled out).

jessica r tweet threadThe reaction to the ruling is best summarized by FCC Commissioner Jessica Rosenworcel in a series of Tweets shown nearby.  She also issued a short press release (here) saying, “When the FCC rolled back net neutrality it was on the wrong side of the American people and the wrong side of history.  Today’s court decision shows that the agency also got it wrong on the law.  The agency made a mess when it gave broadband providers the power to block websites, throttle services, and censor online content.”

Former FCC Chairman Tom Wheeler (a subject of many TSBs from 2013-2016) wrote a tersely worded editorial in The New York Times stating:

The (D.C. Circuit Court) decision opens the doors for states to fill the regulatory void. Internet service providers should be quaking in their boots: As of today, they run the serious risk that they’ll have to follow a patchwork of different state requirements. The companies may not have liked the previous administration’s decision to classify them as common carriers, but that at least provided them with a uniform national policy. That is now gone.

As of this writing, five states have enacted net neutrality legislation:  California, Washington, Oregon, Vermont, and New Jersey, and another 29 states have some form of legislation pending.  The self-proclaimed “gold standard” of state legislation, however, is California.  The California Internet Consumer Protection and Net Neutrality Act of 2018 does the following (full legislation here):

This act would prohibit fixed and mobile Internet service providers, as defined, that provide broadband Internet access service, as defined, from engaging in specified actions concerning the treatment of Internet traffic. The act would prohibit, among other things, blocking lawful content, applications, services, or nonharmful devices, impairing or degrading lawful Internet traffic on the basis of Internet content, application, or service, or use of a nonharmful device, and specified practices relating to zero-rating, as defined. It would also prohibit fixed and mobile Internet service providers from offering or providing services other than broadband Internet access service that are delivered over the same last-mile connection as the broadband Internet access service, if those services have the purpose or effect of evading the above-described prohibitions or negatively affect the performance of broadband Internet access service.

The California legislation is very broad.  Of particular interest is their definition of Reasonable Network Management (emphasis added):

“Reasonable network management” means a network management practice that is reasonable. A network management practice is a practice that has a primarily technical network management justification but does not include other business practices. A network management practice is reasonable if it is primarily used for, and tailored to, achieving a legitimate network management purpose, taking into account the particular network architecture and technology of the broadband Internet access service, and is as application-agnostic as possible

This definition appears to obviate two common practices:  a) bit prioritization, which is the practice of slowing down unlimited plan users after certain thresholds are reached (as there is no technical network management justification for this practice at 5 a.m. on a non-congested highway), and b) throttling, which slows down speeds as a result of a business service plan parameter as opposed to a network parameter (this is especially important to service providers like Xfinity Mobile who would rather not offer Hotspot service than to have their current throttled service rendered illegal).

The impact of this bill (unless overturned by the ISP lawsuit immediately filed after the bill was signed into law) will be as follows:

  1. California wireless subscribers who are being throttled will have to select new plans provided by the carriers (we presume the new plans will be capped and include overage charges)
  2. It is unclear if per device proof that throttled traffic is not going to degrade service is an acceptable network management practice. Regardless, as we have discussed in many TSBs, devices are increasingly becoming 1080p (or higher) resolution.  Prohibiting a lower resolution in exchange for a lower price would be the law of the Golden State.  (As reference, 480p video uses 3-4x less data then 720p video and 10x less data than 1080p video.  Ironically, preventing video resolution throttling could create a significant network management event which would likely require prioritization as an acceptable network practice!)
  3. Hotspot services will either be dropped entirely from plans (this would likely include all hotspot plans that contain video throttles) or significantly modified. With no overall throttle or bit prioritization for exceeding thresholds, it’s likely that there will need to be hard caps and overage charges for all hotspot plans
  4. The impact on the MVNO community is unknown (which is one reason why Comcast and Charter are a part of the ISP lawsuit). For providers like California-based Mint Mobile, who have throttles after certain high speed allocations are met, they could either impose overages or (presumably) gain throttling consent from the consumer if there’s a day or two left prior to the commencement of a new billing cycle (note: it does not appear that the California bill allows consumers to choose lower-cost plans where their data is prioritized and video traffic is throttled – any prioritization that is not network management related is prohibited)
  5. This would make “by the Gig” plans the network standard and likely lead to a higher-priced unlimited service (our guess is ~$20 more per line, likely assessed via a California-based surcharge). It would make Comcast, Spectrum, and other MVNO providers less effective in their marketing efforts ($65/ line is less attractive).  Ironically, as California ramps up efforts to prevent the T-Mobile/ Sprint merger, this bill would halt the expansion of MVNOs in the Golden State.
  6. All California plans would need to be converted to “by the Gig” with hard stops on usage. Unlimited plans, if they exist, would likely be very expensive, and wireless service dependency would shrink.

The above analysis is from a several hour scouring of the California bill and interpretations like the one seen here from the National Law Review.  I am sure that the ramifications have been thought through, but, if it results in no throttling after certain caps are reached, no throttling based on the business service plan (e.g., non-network management) and no throttling of any sort for Hotspot services, the California consumer is in for a big surcharge.  That’s what the D.C. Circuit Court ruling means for consumers.

TSB Follow-Ups

state of Mississippi coverage rootmetrics

  1. Magenta Loves Magnolias – Mississippi AG negotiates a coverage deal in exchange for merger support. In an unsurprising move (32nd least dense state in the US), the Magnolia State changed their tone on the T-Mobile/ Sprint merger.  In exchange for average speed commitments (100 Mbps or higher) to 62% of the population within three years, and 92% within six years, Mississippi signed on to the DOJ consent decree.

 

Both T-Mobile’s and Sprint’s coverage in the state follows interstate highways and the state capital (see RootMetrics coverage for Jackson here and for the state here and in the nearby pic – there is a very big difference between the two for Magenta).  However, T-Mobile has strong 600 MHz spectrum holdings that cover the state (Spectrum Omega map here).

 

  1. Seven economists say the DOJ was wrong. On Thursday, the NET Institute, a not-for-profit institution that counts Google, Microsoft, and AT&T as donors, submitted a white paper in which they state “the Proposed Final Judgment cannot and will not address the anticompetitive harms identified in the Complaint, or restore the ex ante competitive conditions in the affected antitrust product markets.”

 

Having just written on the topic, we read their comments in great detail, and found many of the same arguments that opponents of the merger have been making.  We hashed through the reasons why we think the state AG case is weak in a previous TSB here, but one point is particularly worth examining.  The paper goes down an unusual rabbit hole where it seems to imply that the scale produced by the merger of T-Mobile and Sprint would not result in unit cost reductions.  From the paper:

 

Having reviewed the record evidence presented by the merging parties in the FCC proceeding, we… conclude that there is no compelling evidence that the merger would reduce the marginal costs of New T-Mobile.

 

The economists then go on to explain in a footnote what marginal costs represent (the cost of the last minute or megabyte produced).  This is very disturbing to those who have worked in the industry.  Wireless economics are particularly dependent on equipment purchasing economics (the infamous “discount to MSRP rate” which any telecom expert can attest is a lot easier to negotiate if you are a large vs small carrier), tower-to switch connectivity (usually fiber access – more MB using the same fiber strand would lower per MB costs.  In the event of a traditional circuit, the next bandwidth size usually comes at a per unit discount of 30-50%), router/ port size (same as the bandwidth levels), and data center connectivity costs (more MB using the same or slightly larger number of servers/ racks lowers the total unit costs).

 

This excludes the fact that scale brings entirely new aggregation options.  For example, if Sprint did not have a presence at the Spectrum Center Distributed Antenna System (this is the Charlotte Hornets arena) and, as a result of the merger, they now were able to use this efficient infrastructure at a lower cost, the unit cost would be lower.

 

Perhaps the argument could be that the regional or allocated costs would be lowered with the scale attributable to the merger, but the next unit would cost the same.  That is only true if no aggregation opportunities and no purchasing power exist as a result of the increased scale.

 

Well-articulated arguments can be crafted on poor assumptions.  That appears to be the case with this paper.  Dish execution arguments aside, it’s weak because it fails to incorporate real world experience designing and engineering data and broadband networks.

 

  1. AT&T Announces that they will be deploying stand-alone 5G networks in 2020. In this Light Reading article, AT&T announces that they will complete their standalone 5G core network in the 2020-2021 timeframe.  The biggest impact from this announcement is not its effect on AT&T per se, but its impact on Dish as they seek to solely deploy a 5G standalone network.  With AT&T on target to deploy in the next 24 months, a Dish initial rollout by the end of 2021 is entirely possible.

 

  1. AT&T also announced the widely anticipated sale of its Puerto Rican/ Virgin Islands properties to Liberty Global, a broadband provider in Puerto Rico (news release here). The purchase price of $1.96 billion in cash was also in line (although on the low end) with estimates.  The sale to Liberty will create a strong bundled service provider in the region just as T-Mobile launches its new fixed wireless product.

 

  1. Another premium smartphone with CBRS launches next Friday. The OnePlus 7T, a $599 device with a Qualcomm 855 Plus (up to 2.96 GHz) processor, 8 GB of internal memory, and a 48 Megapixel triple lens camera now has the latest network – CBRS (LTE Band 48).  Interestingly, the device does not have 802.11ax, also known as Wi-Fi 6.  The next generation of Google Pixel is expected to be launched this week and, if reports are true, will likely have CBRS and 5G capabilities as well.

Because of space issues, we will be attaching the latest Apple device availability charts and posting on the TSB website with commentary.  We will continue to update next week and promise more commentary then.

That’s it for this week.  Next week, we will provide ten questions we want to see answered in the analyst calls.  Until then, if you have friends who would like to be on the email distribution, please have them send an email to sundaybrief@gmail.com and we will include them on the list.

 

Have a terrific week… and GO CHIEFS!

Update on Apple iPhone 11 Availability

We ran out of time and space to fully cover changes in iPhone 11 availability in this week’s TSB, so we are taking some space normally reserved for the “Deeper” section to cover the changes.

Please note that availability changes from day to day and certain color/ size combinations can become scarce and/or abundant within a week.  However, as we will discuss below, there are some real trends to follow here.

First, let’s look at the iPhone 11 availability for T-Mobile, AT&T and Verizon (their online website is the source):

Here’s the Sept 27 chart:

iPhone availability Sept 27

Here’s the Oct 4 chart (note that axis has changed to reflect the week that has passed):

iPhone 11 availability Oct 4

Easy takeaways:

  1.  T-Mobile inventory is challenged, even with unpopular Red and Black colors.
  2.  New colors (Green, Purple) are more popular across the board as expected
  3.  Black and Red are in abundant supply
  4.  The $50 lower price for the iPhone 11 is bringing in a few more upgrades

It’s not surprising that T-Mobile is pushing the iPhone 11 over devices such as the iPhone 8 (which does not have 600 MHz/ LTE Band 71).

Now the iPhone 11 Pro:

iPhone 11 Pro availability Sept 27

iPhone Pro 11 availability Oct 4

Discerning trends here is a bit tougher.  Midnight Green is a popular color (no surprise here) – Gold less so.  Wait lists are generally slipping with time (this is likely what drove Apple to increase their orders by 10%).

It’s important to remember that T-Mobile does not offer 0% down on either the iPhone Pro or the iPhone Pro Max (0% is available for the qualifying customers of unlocked iPhone 11 devices in Apple Stores).  Despite that, Magenta appears to be very strong sellers of the iPhone 11 Pro and iPhone 11 Pro Max

iPhone Pro Max availability Sept 27

iPhone Pro Max availability Oct 4

The popularity of the iPhone 11 Pro Max at T-Mobile is very apparent from this last set of slides.  Interestingly, the only carrier with any inventory of the iPhone 11 Pro Max is Verizon (in silver and gold only).

What does this tell us about gross/ net additions?  Not much.  Shortages could exist because of conservative product/ supply chain assumptions as much as they could exist due to strong demand.  But there’s far more demand broadly than most anticipated, and, with the exception of a few color/ storage combinations, availability appears to be slipping day for day.

Next update will be next Sunday.  If you would like the full file, please email sundaybrief@gmail.com and we’ll gladly send.

Thanks again for your readership.