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The Long, Long Run

opening picGreetings from Chicago, Illinois (where the pre-winter winds were tame), and Davidson, NC (where it really feels like winter even though it’s mid-November).  This week’s TSB is less about the week’s events and more about strategy fundamentals.  Next week’s edition will focus on several “What if?” questions posed by this week’s article, and we will follow it up with a Thanksgiving edition retrospective review of Dr. Tim Wu’s The Master Switch.

 

 

The Long, Long Run

We have been doing a lot of reading and thinking recently about how telecommunications and technology have evolved, the role of the government in protecting free and fair commerce, and disintermediation of traditional communications functions primarily through applications.

 

Through our research, we have established several foundations of long-term success in the telecommunications industry, which include:

 

  1. Purchase, deployment, and maintenance/upgrade of long-lived assets. These include but are not limited to items such as fiber, spectrum, land/building (including sale/leasebacks of such), and other long-term leases.  Regardless of the type of communications service offered, the greatest potential long-run incremental costs begin with assets like these.

 

When Verizon discusses their out-of-region 5G-based fiber deployments (4,500 in-metro route miles per quarter for multiple quarters) as well as their willingness to lease/ rent to others, that’s a current example of the deployment of long-lived assets.  (When Verizon paid $1.8 billion for the fiber and spectrum of XO Communications in 2016, it was a bet on the long-term value of the asset and not XO’s previous annual or quarterly earnings).

 

All long-lived assets rely at least partly on location.  Fiber, land, building and similar assets cannot easily be moved.  Building or buying assets in the right places matters – a lot.  Local exchange end offices that were in the right places when they were built in the 1950s, 1960s, and 1970s may not be in the right places today.  The same could be said of fiber networks and Points of Presence (PoPs) deployed by MCI and Sprint in the 1980s and 1990s (AT&T’s fiber upgrades came 10-20 years later).  The location of these assets (e.g., locating a PoP at a major point in the city versus a village bus stop) is critical to product competitiveness.  The less moveable the asset, the higher importance to get the initial investment decision, including location, correct.

 

It’s important to note that things like voice switching and eNodeB (tower switching) are not long-term assets.  They are important investment decisions but can be moved (somewhat) more easily than fiber PoPs and tower lease locations.

 

Spectrum is more fungible but is still local (Just ask T-Mobile as they are in the middle of negotiating a lease for Dish’s AWS spectrum in New York City).  And spectrum bands have different values at different times: just ask Teligent (24 GHz spectrum), Nextlink (28 GHz) and Winstar (28 and 39 GHz).

 

Bottom line:  With few exceptions, sustainable telecommunications strategies begin with long-lived assets.  Get these selections right, and subsequent decisions are easier.  Cut corners on long-term assets, and future determinations become a lot harder.  Match the deliberation level to the expected life of the asset.

 

 

  1. Business and technology strategy which drives network equipment (and service) performance. This super-critical element is often ignored under the Michael Armstrong and John Malonepressure of a quarterly earning focus.  For example, AT&T purchased cable giant TCI in 1998 for $55 billion.  AT&T ended up spending over $105 billion on its cable assets, only to sell them to Comcast a few years later for $47.5 billion (news release here – that was a mere 17 years ago almost to the day).  This acquisition was not simply driven by scale (although it was an important consideration), but because AT&T saw value from TCI’s cable plant.

 

After AT&T decided to break itself up into four pieces in 2000 (Broadband, Wireless, Consumer, and Business), they had the opportunity to cover both DOCSIS and DSL technologies (see more in this detailed New York Times article here).  Even then, as shown in the slide below from a 2002 SEC filing, it was contemplated that AT&T would have Digital Subscriber Line (DSL) for some types of data transmission as well as DOCSIS for broadband (not to mention Time Division Multiplexed or TDM, SONET, and eventually Ethernet technologies for enterprise customers).  For a few years, AT&T provided both DOCSIS and DSL services to customers – one can only wonder what the outcome would have been had AT&T Consumer and Broadband remained as one unit.

AT&T architecture slide 2002

Meanwhile, in 2004, Verizon Communications announced their Fiber Optic Service (FiOS) to battle the perceived bundle advantage of cable’s triple play.   It’s important to note that this strategy change came less than 24 months after the sale of AT&T Broadband to Comcast.  Many of the initial FiOS markets will celebrate their 15th birthdays next year.  However, Verizon miscalculated the speed with which the cable industry would respond with their bundles as well as their upgrades of DOCSIS 2.1 (standard released in 2001 with commercial deployments starting in 2003) and DOCSIS 3.0 (standard released in 2006 with commercial deployments by 2008).  The result of cable’s deployment speed was significant – local phone market share shifted to the cable industry by 20-35% over the 2004-2009 time period, quickly depleting the prospects of both DSL (specifically ADSL) and switched access cash flows.

 

Then, in 2016, Long Island cable provider Cablevision (now a part of Altice USA) announced plans to deploy fiber to 1 million homes (and eventually 3-4 million homes) in their territory, removing FiOS’s underlying competitive advantage for those locations.  Per their most recent earnings announcement, Altice is quickly deploying the latest version of DOCSIS (3.1) and fiber to minimize Verizon’s competitive advantage and blunt any impact of 5G/CBRS as Wi-Fi replacement technologies.

LTE logo slideA more remarkable change has occurred in the wireless industry, who collectively rallied around a single common technology standard called Long Term Evolution (LTE) by 2009.  This service was eventually deployed first by Verizon in March 2011 then by AT&T starting later that year (Sprint launched LTE in 2012, and T-Mobile in 2013).  Standardization (versus an alternative of up to three standards – LTE, UMTS, and Wi-Max) streamlined the device ecosystem, strengthening brands like Apple and Samsung, and resulting in the accelerated demise of brands such as Motorola (forced to Droid exclusivity and then low-end), Palm, HTC (who reached its pinnacle with the Sprint HTC Evo which was Wi-Max dependent), and Nokia (Microsoft/ Windows Mobile dependent).

 

Bottom line:  The greater the reliance on DSL advancements (as opposed to fiber overbuilds), the faster value degradation occurred in the telco local exchanges.  Slow data became the competitor-defined brand of the local exchanges, and, with diminishing share of decisions, diseconomies of scale followed.  Wireless carrier adoption of a single, global technology strategy cemented the supply chain for the segment and allowed disintermediation of wireline voice services to occur at a more rapid pace (56.7% of adults are wireless-only as of the end of 2018, according to the Centers for Disease Control).  Technology strategies that run cross-grain end up on the Asynchronous Transfer Mode/ HSPA/ iDEN/ ADSL graveyard.

 

  1. Operational excellence/ marketing and product competitiveness. Once assets have been deployed and the technology strategy has been selected, the customer’s value proposition needs to be defined.  While the underlying evidence of a successful technology strategy is less identifiable in one earnings call, changes in value propositions are clearly evident sooner through lower churn, higher revenues per user, and third-party recognition.

 

For example, Verizon announced this week that they will be the exclusive provider of the new Moto RZRMotorola RAZR, a foldable $1,500 smartphone (more details here).  Strategically, Verizon went this route to remove the prospect of AT&T exclusivity (the original RAZR exclusive 15+ years ago), not because they believed this was a transformational device (read the review in the above link for more details).  Verizon’s Droid strategy (through Moto) and their Google Pixel 3 exclusivity enabled the company to have brand name devices that made Big Red’s network shine.

 

Another good example of a successful strategy is Time Warner Cable’s 1-hour service installation and delivery window across the Carolinas announced in 2012 (announcement here).  This was accompanied by an app that reminded customers that the technician was headed to their home.  They staked a claim on service against AT&T, Verizon/GTE/Frontier, CenturyLink and Windstream and forced each of them to respond.

 

Many case studies have been and will be written on the pricing and product strategy shifts (dubbed “Uncarrier moves”) that T-Mobile has employed over the past seven years.  Three strike us as being supremely critical to their growth trajectory:  a) Simple Choice plan rollout in early 2013 (announcement here); b) Binge On Implementation in 2015 (announcement here), and c) their changes in service strategy called Team of Experts introduced in 2018 (announcement here).

 

Earlier, we discussed the role of co-branding/ exclusivity as a part of a successful marketing strategy.  Many Sunday Briefs have highlighted the puts and takes of bundling wireless with Spotify (Sprint, then AT&T) or Hulu (Sprint) or Tidal (Sprint) or Netflix (T-Mobile) or Apple Music (Verizon) or YouTube TV (Verizon) or Amazon Prime (Sprint, Metro by T-Mobile) or HBO (AT&T).  A few weeks ago, we started to tackle a more fundamental question: “What’s the advantage of owning premium content (AT&T, Comcast, Altice, Canadian wireless and cable conglomerates) versus playing the field (Verizon, T-Mobile, Dish)?”

 

There are many more examples (good and bad) to discuss here (Verizon’s network quality marketing, AT&T’s iPhone exclusivity, AT&T’s multiple attempts to bundle wireless and wireline over the past decade, cable’s coordinated Triple Play strategy, Comcast’s Xfinity development, etc.) but the point is that no operations, marketing, or product strategy can be effective over the long, long run without the effective implementation of long-lived asset and well-conceived technology strategies.  While this sounds elementary to most of you, it’s worth thinking about the abundance of ill-conceived strategies that have destroyed tens of billions of dollars of shareholder value over the past two decades.  As we will discuss in part two of this strategic primer next week (called “What if?”), the blunders were both due to commission and omission.

 

TSB Follow Ups

M Claure and J Legere pic

I attended a private equity conference this week and walked into the cocktail reception to the question “Did you hear that John Legere might go to WeWork?”  I had no response other than to describe the conjecture using my best Legere language, categorizing the report as total BS and stating that it would be more likely for John to lead a challenger technology company like Tesla than WeWork.

 

By the end of Thursday, T-Mobile had lost ~$4/ share over three days (~$3.5 billion in market capitalization) as investors fretted.  Fortunately, by Friday evening news reports emerged that Legere was not going to leave T-Mobile for WeWork… at least yet.  We are not sure whether this is a market hungry for any Adam Neumann follow-up, any out-of-Washington news headlines, or if it’s just jittery in general.

 

T-Mobile’s Latest Olive Branch:  A Nassau County Customer Service Center

T-Mobile raised the stakes this week in their continuing public negotiation with the state Attorneys General, unveiling plans to build a new customer service center in the heart of the New York metro area (and, ironically, smack dab in the middle of the service area of one of their largest MVNOs – Altice).  This is the fourth of five new service center announcements (current ones include two in New York, one in California, and one near Sprint’s current headquarters in Overland Park, KS).  That leaves us speculating about the fifth location – could it be in the Lone Star State or the Windy City?

 

We should expect a steady stream of offerings up to the December 9 trial start.  Local jobs matter even in a full employment economy, and the Nassau County announcement received a lot of local press.

 

Disney+ Success:  10 Million Customers Day One

After some initial reports of activation and streaming hiccups, Disney announced on November 13 that they had signed up more than 10 million customers on the first day of service.  They also announced a new bundling plan (anyone watching college football yesterday couldn’t miss it) which includes Hulu Basic, ESPN+ and Disney+ for $12.99/ month (presumably to blunt the potential impact of AT&T’s HBO Max announcement).  The company also indicated that they would not announce any additional subscriber figures until their next quarterly earnings call.

 

Will this translate into further net additions for Verizon?  The unequivocal answer is yes, but how much remains to be seen.  Disney+ has front page billing on the Verizon website, and they began to run ads this week touting their association with the latest streaming craze.  One of the “What if?” questions in next week’s column deals with Verizon and content ownership so we’ll be discussing their “multiple choice” strategy then.

 

CBA Breakthrough?  We Should Know Very Soon

Last Friday, the C-Band Alliance (CBA), which now consists of all of the major holders of this spectrum (3.7 – 4.2 GHz downlink; 5-9 – 6.4 GHz uplink) frequency except Eutelsat, sent a letter proposing economic terms for a CBA-Led auction.  The anticipated proceeds to the US Treasury are as follows (note that these are incremental amounts to the Treasury based on overall proceeds):

 

Cents per MHz PoP bid                % to Treasury                   % to C-Band Alliance

$0.01-$0.35                             30%                                     70%

$0.36-$0.70                             50%                                     50%

Over $0.70                               70%                                    30%

 

This also comes with a pledge to conduct the auction in a timely manner (within 90 days) after FCC approval which would put it ahead of the Priority Access License for the CBRS spectrum currently scheduled for the end of June.  The letter also includes a vague, good faith effort to build an open access network with a portion of the auction proceeds to improve rural coverage.

The FCC has been asked to speak with Senator Kennedy’s committee later this week, and, to make it on to the FCC December calendar, any proposal will need to be added by next Thursday (November 21). The odds of approval of any proposal by December are diminishing each day, and it’s likely that the C-Band auction will occur after the CBRS PAL auction, likely August or September.  Analysts’ estimates of C-Band auction proceeds range from $10 to $60 billion.  Meanwhile, CBA member stocks are trading at nearly half of their summer levels due to the uncertainty (Intelsat 5-day stock price chart nearby).

 

That’s it for this week.  Next week, we will continue this strategy theme with several “What if?” questions (please submit yours with a quick email to sundaybrief@gmail.com) unless there is other breaking news (perhaps related to the T-Mobile/ Sprint merger or the C-Band auctions).  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!

iPhone Availability Update (Nov 10)

As we indicated in yesterday’s TSB, here’s the last iPhone availability update we will be publishing.  All data is taken from the carrier websites as of Nov 10.  If there is a range given for a ship date, we chose the latest date.  Here are the takeaways from the latest data:

Apple iPhone 11 availability as of Nov 10

All iPhone issues have cleared up for Verizon.  In a handful of  instances, Verizon has better availability than Apple’s online site.  As you can see from the above slide, it’s generally a good inventory situation for AT&T as well unless you really want the color yellow.

Apple iPhone 11 Pro availablity as of Nov 10 The iPhone Pro availability is a little bit better for T-Mobile and worse overall for AT&T.  Silver seems to be the color issue this week (it was previously midnight green).

Apple iPhone 11 Pro Max availability as of Nov 10

The iPhone 11 Pro Max continues to be an issue for T-Mobile, except for the 64GB model (which is likely the least ordered model under the logic of “If you are going to buy the iPhone 11 Pro Max, get 256 or 512GB”).  Again, Midnight Green colors have been solved, but to have half of the colors out of stock until (as late as) December 10 is pretty severe.   In each of the availability cases described above, customers could go to the local Apple store and activate service on T-Mobile in lieu of waiting a month (the Apple site is showing no backorder of any iPhone 11 Pro Max model).

The bottom line here is that both AT&T and T-Mobile are seeing strong demand for the iPhone 11 and most of this is coming from upgrades and promotional offers.  Verizon’s availability likely has something to do with their 5G messaging (the iPhone 11 lineup is not compatible with Verizon’s latest network).

Hope that this information is useful.  You can download the information here:  iPhone availability as of Nov 10

T-Mobile’s Triple Offer – Is Anything Good Enough for the Attorneys General?

opening logoVeterans Day greetings from Mooresville, NC, where the community came together to remember all who serve and run an obstacle-based 5K race.  Pictured is the race logo.  Great seeing such a large turnout!

This week, we will look at earnings announcements from Sprint, Altice, CenturyLink, Frontier, and Cincinnati Bell.  There are also several TSB follow-ups from the previous two weeks that we will briefly mention.  As they come available the Apple inventory slides will continue to be posted directly to www.sundaybrief.comHere is a link to last week’s analysis.

 

T-Mobile’s Triple Offer – Is Anything Good Enough for the Attorneys General?

 

On Thursday, T-Mobile hosted a call to publicly offer solutions to their private conversations with many of the attorneys general who are suing to block the merger with Sprint.  Their solution focused on three components:

  1. Relieving the financial stress that municipalities are experiencing by providing free 5G services to first responders (note that these municipalities would still need to purchase 5G devices which remain > $1000). This is an obvious shot across the bow to AT&T’s FirstNet initiative and a strong PR move.
  2. Providing 100 GB annually (although it would likely be 8.5 GB/ month) and a free hotspot to 10 million underserved families. It is not known how T-Mobile would actually administrate the program (likely through Kajeet’s SmartSpot program or something similar), and the call participants were light on plan details.  This is a very big move for T-Mobile and the education community.
  3. The announcement of lower-priced plans to address the communications-needy (but not mobile video-needy) population. Plans would start at $15 (unlimited talk/text + 2 Gigabytes of data) and $25 (5 Gigabytes) and the data allotment would grow by 500 Megabytes every year for the next five years.  We believe that this plan clearly communicates that T-Mobile will remain “in the game” for the foreseeable future.  While it was shared that data in these plans could either be 5G or LTE, it was not disclosed whether this data would be deprioritized by design versus Magenta data (if so, one would wonder whether this is a backdoor paid prioritization plan and illegal per new California net neutrality legislation).

As an aside, one of T-Mobile’s largest MVNOs, Mint Mobile, is running a $15 special right now which includes unlimited talk/ text and 12GB/ month of data.  Customers need to pay for 3 months in advance.  All Gigabytes are Hotspot eligible, data is not deprioritized and video is not optimized, although users can activate optimization through the self-care portal.  The standard price for this service for customers who pay for an entire year up front is $25/ month.

mint-mobile-special.png

The bottom line here is that T-Mobile’s lower prices are currently being offered by larger carriers in the market and bolster the argument that opportunities for data capped plans to affordably serve a large portion of the population exist.  The irony of this offer is that it will likely increase the market share of the new T-Mobile in the metropolitan areas highlighted in the AG Complaint (New York and Los Angeles) and bolster the extremely weak argument that T-Mobile would be too dominant in Verizon and AT&T’s two largest broadband territories.

 

The question posed in this section’s title is the most relevant for the telecom community.  Free service to first responders for ten years, 200 Gigabytes of service to eradicate the Homework Gap, and $9.99 unlimited talk and text + 2 GB offerings would likely not suffice.  Bottom line:  T-Mobile needed to demonstrate good faith, and they have.  A judge will clearly see this.  The Attorneys General, however, have higher priorities that pertain to competitive structural changes.  They are using Europe as their blueprint and want to enable solutions that will force would-be MVNOs beyond Dish networks to use T-Mobile as a “network of many.”  While everything proposed benefits the Magenta brand, the AGs are looking for competitive solutions that enable new brands.  That’s why we are at a stalemate, and why this case will likely go to trial on December 9 (for more reading on one white paper that’s likely driving the AG decisions, click here).

 

The T-Mobile/ Sprint Deal Has Expired – Now What?

During the conference call that occurred after the 5G For All announcement, David Sheperdson of Reuters asked the following (see minute 44/45 here): “Your merger agreement [with Sprint] expired on Friday night.  Is there any consideration by T-Mobile to renegotiate the terms of the deal or seek a lower price for Sprint?”

 

T-Mobile CEO John Legere’s response was very telling (emphasis added):

There’s been a lot of misunderstanding about that, and I’ll clarify a few points…  So the Business Combination Arrangement (BCA) had something in it called the Long Stop Date, and it was a point which was 18 months in, November 1st.  It didn’t stop the partnership or the moving forward of the Business Combination Arrangement… That was the date after which either party had a unilateral right to walk away from the deal.  Now it’s sort of like going month-to-month on your rent – there’s no more lease – you continue to move forward as we do with great partners, but if you are going to extend it to another date, you need to take action and amend the BCA… We are having discussions as partners about whether and how long we move forward the date, and I would say that in a period where we are full together moving forward to get this deal approved, and what if any items, should be agreed between the parties in exchange for agreeing to those terms.  So yes, we are having conversations and discussions, but to be clear, the Business Combination Arrangement is moving forward 100% and how to set a new Long Stop Date and what those terms would be.

 

Mr. Sheperdson had a follow-up: “Would that include renegotiating the price.. the valuation?”

 

Mr. Legere responded:

I’m not going to get into the actual terms but the question is ‘OK, Nov 1st came and went, and if we need a certain amount of time to lock each other into a date, what are the things that are important to each of us?’ They can be value, they can be how do you handle things that have happened that possibly need to be indemnified, how do you agree on future things that you will share in order to settle the deal, etc.  So it’s a broad array of things, very partnership oriented, and as soon as we have the light of day on that, it shouldn’t be too far out in the future, but it’s a positive conversation and it could include any of the things that you’re talking about.”

One need only look at Sprint’s recent earnings results to discover where T-Mobile could head beyond the share exchange ratio (which, per the original announcement is 0.10256 T-Mobile shares for each Sprint share – note, if the merger were to have closed last Friday, that ratio would have yielded a value $8.32 or about 38% higher than current market price).

sprint wireless service revenues #1

Sprint’s earnings results were impacted by a Lifeline wireless revenue impact (which was not quantified in the earnings release, other than a comment that revenue would have been “relatively stable” on a sequential and year-over-year basis without the item).  Given the drop in wireless service revenues of over $300 million, there’s probably more to the equation than just the 885,000 customers the FCC accuses Sprint of erroneously billing.  Rather, it appears to be some sort of true-up (likely in the $150-250 million range).

Telecom analyst Craig Moffett calculated that if the FCC fined Sprint the maximum amount ($5,000/ customer) for each of the 885,000 incorrectly requested reimbursements, the amount of total liability would approach $4.5 billion.  Bottom line:  It is very likely that T-Mobile and Sprint will be setting up an escrow for some or all of the estimated balance.  With Softbank owning nearly 85% of the total shares, the only question becomes whether the Japanese communications giant will bear the entirety of the escrow or if all Sprint shareholders will be subject to the provision.

sprint-postpaid-upgrades-2.png

Secondly, Sprint saw a seasonally driven sequential increase in the number of customers upgrading their devices in the recent quarter (see nearby chart).  This likely has more to do with 5G device availability and promotion and potentially Apple upgrades (although other analysts have indicated that Apple iPhone 11 availability was no better/worse at Sprint than what we documented at T-Mobile, Verizon or AT&T).   Sprint enjoys a higher postpaid upgrade % than their merger partner (25% upgraded over the last four quarter versus 21% for T-Mobile).

With an abundance of non-5G leased devices (the Apple iPhone 11 product line being the recent promotion), how should Sprint be accounting for the residual value?  Sprint indicated that more expensive devices are being leased versus the same period in 2018 (makes sense given 5G phone interest), but they also assume lower equipment depreciation based on “evaluation of device residual values.”  What this says is that first generation 5G devices will hold their value more than initially estimated (Samsung Note10 and S10 5G) and that the glut of iPhone 11 devices that will be created by the upcoming 5G version of the iPhone will not place a material downward pressure on residual values (e.g., a home will be found for these devices at the estimated market prices).  This is an area worth further scrutiny, not for Sprint alone, but in comparison to T-Mobile’s conservative (JUMP! On Demand) assumptions.  Bottom line:  there could be another escrow created for leased device residual value in light of increased 5G device proliferation.

sprint-depreciation-and-amortization-3.png

Overall, unless T-Mobile was assuming that Sprint would create free cash flow (versus break-even levels) as merger approval dragged on, there’s probably little opportunity to reset the share exchange level.  After all, T-Mobile is getting the benefit of increased roaming expenses from their merger partner which was cited as one of the reasons for Sprint’s increased Cost of Revenue (CoR).  But there could be escrows created to ensure that the revenue quality translates into expected customer lifetime values, which are challenged by Sprint’s high (and expected to be higher) postpaid churn rate.

 

Wireline Stability Ahead:  CenturyLink, Cincinnati Bell, Frontier, Windstream Results Analysis

There’s a metamorphosis occurring with smaller regional local exchange providers, and the thesis goes as follows:

  1. Maximize the value of every fiber connection. Corollary:  The best way to maximize this connection may be to lease it to a competitor.  CenturyLink’s acquisition of Level3 brought a new philosophy around infrastructure development and they are aggressively adding buildings (4,500 this quarter including some Chick-Fil-A restaurant locations per the conference call) as a result.  Cincinnati Bell continues to deploy fiber and is slowly reaping the rewards (DSL also losing customers as well).  Interestingly, their Hawaii property provides fiber connectivity to 90% of the cell towers and 80% of the total cell tower + small cell installations (all high margin Wholesale revenue).  Windstream is experimenting with fiber to the pole which is used to transmit CBRS or high-band frequency spectrum to customers (or within their network).  Frontier is struggling, even with fiber.

 

  1. Pick a segment and do it really, really well. CenturyLink has enterprise and global infrastructure reach that few (including Verizon and AT&T) can match.  Cincinnati Bell understands how to attract and retain suburban homes and small/medium businesses with fiber.  They also have a solid IT services unit which could easily exist on its own (or be merged with another ILEC unit – see next sentence).  Windstream continues to tout that they are the largest SD-WAN provider in the country and are growing their strategic enterprise revenue stream by 41% annually.  They are creating differentiation through their OfficeSuite software, which was recently launched to small/medium business customers in their ILEC footprint.  Frontier is doing better in their commercial business than others, but really does not have a shining star to point to at this time.

 

  1. Manage the remainder of the business as frugally as possible. Windstream took some time in their earnings presentation to talk about their continued focus on access expenses (~40-45% of their total cost of revenue) and to relate that to continued competitiveness.  CenturyLink lost revenues year-over-year ($212 million) but reduced a similar amount in cost of goods (down $82 million) and SG&A (down $136 million).  Cincinnati Bell is focusing on connections and reevaluating their interest in providing traditional video services.

 

This is not to say that the ILEC is back, but it does indicate that they (with perhaps firstlight-network-fiber-pic.pngFrontier as the exception) are not going to go down without a fight.  It also highlights how company size can impact strategic priorities.  When was the last time Verizon spoke glowingly about the prospects for their upstate New York properties (and, how could Firstlight accomplish a 15,000 route mile fiber buildout, on a far lesser budget, than Verizon)?  See nearby map and here for more details.

 

The ILECs face many financial challenges – one is currently in bankruptcy while another one is being urged to file for protection.  All of them have eliminated or significantly cut their dividends and experienced the associated reduction in stock price.  None of the four seem to have a plan to defeat cable, particularly in the SMB segment.  All of them are focused, however, and that’s the critical first step to recovery.  Reclustering of the local exchange properties, as we have written about previously, is the key to success.  And that reclustering includes AT&T.

 

TSB Follow-ups

Dish announced two senior leaders for their MVNO this week.  Both Stephen Bye (Chief Commercial Officer) and Marc Rouanne (Chief Network Officer) will have their hands full over the next several months.  Stephen brings a unique set of experiences, having been a part of both the Sprint/cable JV called Pivot, as well as the leader of the Cox MVNO that used Sprint.  Bye was also the Chief Technology Officer at Sprint and at C-Spire.  Rouanne has equally robust experience especially with Open RAN environments.  This is an encouraging sign on many fronts, and we look forward to seeing tangible evidence that Dish is committed to a nationwide operation.

 

A recent article here outlines the total credit limit allocated by Goldman Sachs for the Apple Card ($10 billion through September 30).  This would imply approximately 2 million customers (at an average of $5,000 credit per customer).  Apple has not publicly commented on subscribers or the average credit limit but we believe that our 2 million number is accurate and that they will double this base to 4 million customers by the end of the year.

 

Lastly, in a previous TSB, we highlighted the work of Helium, a Silicon Valley-based startup that is using the 900 MHz spectrum band to track all sorts of low-bandwidth devices.  They recently tweeted that they had 1,000 active Helium devices across the country – not bad for the first couple of months.  More on the company can be found here.

 

That’s it for this week.  As mentioned earlier, we will be posting the latest Apple inventory charts to www.sundaybrief.com in the next day or so.  Next week, we will discuss the latest developments in Open RAN unless there is other breaking news (perhaps related to the T-Mobile/ Sprint merger).  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!

Republishing RCR Wireless Article “When Z Location Doesn’t Matter”

RCR Wireless article referred to in this post is here.

I usually do not repost other articles, but Charley Simon’s article is spot on.  Location, particularly altitude (also called Z location) is difficult to obtain from wireless devices.  In the 5th R&O, the FCC basically says “Wireless carriers, you need to get it right in the lab environment, but we aren’t going to hold you accountable for actual Z-location accuracy.”  Read more in Section 45 here.   The FCC says in this section:

Although our vertical location requirements do not include live call compliance metrics, reporting on the use of z-axis technologies in live calls will provide important real-world data on how frequently z-axis location is provided, the types of technologies being used, and trends in such usage over time. We emphasize, however, that live call z-axis data reported by CMRS providers will be used solely for informational purposes, not compliance purposes

We know that there are several dozen FCC staffers who are regular subscribers to TSB.  Please reconsider the approach here.  Serviceable address can be implemented soon per Precision Broadband’s filings, and should go first, not second.  Real world example:

Today:  Address would be 215 N. Pine Street, Charlotte, NC.  This is the address for The VUE apartment complex in downtown Charlotte.  Additional information would be communicated by the caller.  No Z-location information passed.

With Precision Broadband:  Address would be 215 N. Pine Street, Apartment #3303, Charlotte NC.  This would occur because the cable modem (which is tied to the billing address and already validated in the ALI database) would transmit this information to the PSAP provider.  No software changes for the PSAP provider – no latitude/ longitude translations – just more accurate information.

With Precision Broadband and Z-Location:  Address would be 215 N. Pine Street, Apartment #3303, rear bedroom, Charlotte, NC.  This additional information is very important in the cases of a burglary/ break-in,  Thinking about this in purely practical terms, however, a responder needs to enter the apartment so the unit number is needed now.

Precision Broadband’s solution can be implemented quickly and is a practical “first dip” for public safety.  There is no new software needed for the PSAPs.  Let’s start there, and then add Z-Location.  That’s how we can save more lives – tomorrow.

Welcome your thoughts and comments.

 

 

iPhone Availability Update (Nov 3)

We continue to monitor iPhone availability (backorder by model, memory size, and color) in conjunction with our partnership with Wave7 Research.   A link to the PDF can be found at the end of the document

As most of you will recall, we had significant shortages of most models in the first weeks of sales (late Sept/ early October).  These shortages have continued with T-Mobile for the iPhone 11 and some of the larger memory sizes of the iPhone 11 Pro and iPhone 11 Pro Max.  Given T-Mobile’s marketplace attraction, this is not too surprising, although continued shortages of the higher-end models (T-Mobile requires an up front payment on all sizes of the iPhone 11 Pro and iPhone 11 Pro Max) are a bit surprising.  We would attribute some of this to supply chain conservativeness, although that should have been alleviated by now.  In reality, it’s probably a combination of great sales, a robust economy, and supply chain conservatism.

What is very interesting is the higher likelihood of backorders at AT&T versus Verizon.  Both have long histories with Apple (especially AT&T) and neither tends to run a backorder deficit after 6+ weeks of sales (due to sheer size).  AT&T seems to be experiencing a larger number of upgrades (and, due to a higher mix of Apple devices vs Verizon, a small change in upgrade rate can impact total device volumes).

Bottom line:  T-Mobile’s backlog is primarily iPhone 11 and should be corrected by Thanksgiving.  No backlog at Verizon (no surprise given no 5G).  AT&T should continue to be watched very closely.

Apple iPhone 11 availability nov 3

Apple iPhone 11 Pro availability as of Nov 3

Apple iPhone 11 Pro Max availability as of Nov 3

iPhone availability as of Nov 3

Link to PDF listing all three models is above.

 

AT&T’s Big Week

opening pic

Greetings from our nation’s capital (now home to the World Series champion Washington Nationals) and Lake Norman, NC.  This was a very busy week for earnings with Apple, AT&T and T-Mobile all announcing earnings.  We are going to start with AT&T given their 3-year guidance but will also devote time to both Apple and T-Mobile earnings.

Given the level of earnings-related news, we will not have a TSB Follow-Ups section this week but will resume this section in an upcoming Brief.  First up – AT&T.

 

AT&T’s Multiple Headlines:  Legacy Bottom Within Sight, New Wireless Pricing Plans, Fiber Penetration Coming, and Renewed Reseller Focus

 

AT&T led this week’s earnings with a detailed assessment and lengthy earnings call hosted by CEO Randall Stephenson and CFO John Stevens.  At the end of the earnings presentation, they showed the following waterfall chart outlining how they would improve earnings per share:

at&t waterfall chart

There are many important things to note in this slide.  First, the 2.0% (200 basis point) improvement in overall margins.  AT&T’s reported 3Q EBITDA was ~ $15.4 billion when you exclude Puerto Rico operations (entire PR and US Virgin Islands P&L is held in Corporate & Other) on a base of $44.6 billion in 3Q operating revenues (34.5% EBITDA margin).

 

To improve 200 basis points, AT&T will need to remove ~$890 million in quarterly costs or about 5.5-6.0% of their total expense base across the corporation AND replace each lost dollar of EBITDA (e.g., from premium video or DSL or legacy business voice) with a dollar of EBITDA from new sources (higher value-added fiber subscribers, mobility ARPU increases from service upgrades, higher revenues from smartphone insurance).

 

On top of this, AT&T will need to cut an additional $350 million in quarterly costs ($1.4 billion annually) to cover the HBO Max investment (which will not significantly impact revenues and EBITDA until early 2Q 2020).  Roughly speaking, the operating expense net improvement will need to be ~$1.24 billion per quarter or about $5 billion per year (again, some of this improvement may come from the differential between higher new product and lower legacy product margin differentials, as we will explain below with fiber).

 

Highlighted throughout the earnings call was the need to penetrate more households with fiber.  On the residential side (small business and enterprise were not reported), AT&T ended 3Q with 3.7 million fiber customers on a total base of 20 million fiber homes and businesses passed.  This equates to a 19% penetration.  Assuming 10% of the 20 million represent business locations passed, the residential penetration rate comes out at 21%, within the 20-25% range mentioned by Randall Stephenson on the earnings call.

 

Assuming the fiber penetration in the chart above is achievable, AT&T is targeting growing the 3.7 million base to ~ 9 million (on an 18 million homes passed with fiber base) over the 2020-2022 period.  An incremental 5.3 million broadband customers (at a $55 ARPU – 10% higher than current) represents 440,000 net additions every quarter for the next 12 quarters and would generate $3.5 billion in incremental annual revenues and $1.8-2.0 billion in annual incremental EBITDA by the end of 2022.  Bottom line: Increased fiber penetration to homes is a big part of AT&T’s profitability improvement plan.

 

To put this in context, Comcast’s rolling four quarter High Speed Internet additions quarterly average is 304,000 and Charter’s metric is around 350,000.  Assuming that Comcast and Charter are ~100% share of decisions (including DSL migrations), the 440,000 net additions figure assumes that AT&T reverses that trend nearly overnight AND take some legacy share from cable (!).  All this in light of the DOCSIS 4.0 rollout of cable to multi-Gigabit speeds at very low incremental capex costs.

 

To reemphasize, AT&T’s average growth in the fiber base (much of it from fiber-fed DSL, also called IP broadband) over the last several quarters has been between 300,000-320,000.  Assuming growth comes from net new growth (not DSL conversions), the operation will need to grow 30-40% overnight.

 

More to come here, as we have assumed a 10% premium and cable is either matching or 10% lower than AT&T pricing, and we have not begun to talk about T-Mobile’s plan to acquire wireless high speed data customers using their combined spectrum holdings.  Bottom line:  There’s little reason to believe that AT&T will be able to materially move the share of decisions needle and grow 20-30% market share points in Los Angeles (Charter), Dallas (Charter), Chicago (Comcast), Atlanta (Comcast), or Miami (Comcast) at a market premium in light of T-Mobile’s (and others) market entry.  As a duopoly, it’s a stretch – with three or four players, it’s a pipe dream.

 

Another source of growth mentioned on the call was Reseller.  As we noted in other blog posts, Reseller losses were almost perfectly offset by Cricket (Prepaid) gains.  As AT&T explained on the call, this was largely by design due to spectrum capacity constraints.  Asked in the earnings call Q&A whether AT&T would consider an MVNO relationship with cable, Randall Stephenson replied:

Yes. We would actually be open to that. So you should assume that, that’s something we’d be open to. And not just cable guys, but there are a number of people in the reseller space that are reaching out. And it’s just as John said, we got a lot of capacity now in this network, and we’re at the point of evolution in this industry where we ask, how do you monetize most efficiently, capacity? And so we’re going to look at all those channels.

As we discussed in last week’s TSB, the cable operators want more call control.  Would AT&T really offer that?  At what cost?  At what margin?  Could Altice convert their new T-Mobile core + AT&T roaming relationship into a true wireless least cost route mechanism which would only use AT&T in areas where their own (CBRS, C-Band, other) network and new T-Mobile could not reach?

 

This was a surprising comment to say the least.  AT&T has not courted large wholesale customers since Tracfone in 2009.   A simple glance of the Wikipedia AT&T MVNO list includes a number of smaller players as well as AT&T-primary providers such as  Consumer Cellular, PureTalk USA, and h2o.  It’s very hard to imagine a major MVNO play that would not harm Cricket (which grew 700,000 net additions over the last four quarters) or the core business.

 

Lastly, the mobility business, even in the “golden era” of relative price stability, video compression, and low device upgrades, did not improve adjusted earnings much in Q3.  Here’s their income statement:

AT&T Mobility Results 3Q 2019

 

Unlike Verizon, who still has a large base of traditional subsidy-oriented plans (for every dollar of equipment revenue, Verizon has $1.06 in equipment costs) AT&T has minor if any equipment subsidies.  The implication is that for every dollar in reduced equipment revenues, operations and support costs should decrease a dollar.  This did not happen on a sequential basis (equipment costs +$303 million, operations costs +$426 million) and the 3Q to 3Q reduction is negligible (equipment revenues down $136 million, costs down $156 million).  If incremental scale is driving incremental profitability, it’s being offset by other spending.

 

Embedded in these numbers is FirstNet, now with close to 900,000 connections across 9,800 agencies per the most recent Investor Handbook.  In the second quarter, the same figures were “over 700,000” connections.  Given our understanding of the public space, let’s assume this translates into 175,000 net additions from FirstNet in 3Q with 125,000 (70%) of these coming from phones.  Bottom Line: AT&T reported 101,000 postpaid phone net adds in the quarter, and without FirstNet, it’s very likely they would have been negative.

 

Bottom line:  AT&T continues to integrate into an end-to-end premium content and network communications provider.  They made a big three-year earnings promise that depends on new and different execution (particularly broadband growth and reseller market penetration) that has not been seen from AT&T in decades.  We are confident that AT&T can cut costs but equally skeptical that they can grow share.

 

Apple Card Launches, and 0% a.p.r Financing is Announced.  The First Impact is Device Financing. 

 

On Wednesday, the Cupertino hardware (and now services) giant announced strong, Apple Card picbroad, and expectations-beating earnings.  iPhone sales, while down 9% from last year’s quarter, were still strong and Apple CEO Tim Cook gave very bullish guidance on this quarter’s device sales.  In this light, Apple announced that trade-in volumes were more than 5x greater than they were a year ago (recall that Apple highlighted lower monthly payments and device values with trade-in starting with last September’s announcement.  The 5x figure is therefore based on a few weeks – this figure could be much higher after a full quarter is measured).

 

The big announcement came through Tim Cook’s discussion of Apple Card performance:

… I am very pleased to announce today that later this year, we are adding another great feature to Apple Card. Customers will be able to purchase their new iPhone and pay for it over it over 24 months with zero interest. And they will continue to enjoy all the benefits of Apple Card, including 3% cash back on the total cost of their 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 United States ever.

A customer purchasing an iPhone 11 (64 GB) with their Apple Card would pay $21 less using this plan than purchasing through Verizon or AT&T (T-Mobile offers the 3% cash back Apple Card feature) or $28.25 per month prior to trade-in.  This represents a $71 reduction ($2.96/ month) from what a customer would have paid for the iPhone XR (64 GB) in 2018 and produces an optically significant sub-$30/ month price point.

 

On top of this, Apple is offering slightly better than average trade-ins per our comments with analysts who follow store activity (hence the 5x increase described earlier).  If customers believe that using Apple directly delivers a better financial outcome, they will go direct.

 

The 0% a.p.r, 24-month term mirrors the offer Best Buy currently gives to their My Best Buy Visa Credit Card customers (more on that offer here).  While unlocked Android devices are currently covered (including the Samsung Galaxy S10 and Note 10), it remains to be seen if/ how the interest-free offer might be extended to Best Buy.

 

As we have discussed in previous Sunday Briefs, Best Buy and Apple recently extended their service relationship (more on that here), and Apple announced that their Authorized Service Provider locations had grown to over 5,000 globally.  Extending this relationship into financing is not a slam dunk, especially given the current success Apple experienced last quarter without Best Buy, but the option exists to tie Apple Card promotions to Best Buy distribution.  If this were to happen, the wireless carriers would need to demonstrate more value (financial, bundling, services) than both Apple and Best Buy.

 

As Apple disclosed on the call, this was the best quarter for Apple Care revenues on record.  As was also disclosed on the AT&T and Verizon calls, device protection was a driver for their wireless service ARPUs in the quarter.  This business is profitable to the carriers ($5-7/ mo. in incremental EBITDA for every device protection plan is material to customer lifetime values), and the consequence of the loss of this profit stream should not be ignored.  There’s more to this than the loss of revenues – service margins will be impacted by any move to Apple Card.

 

In the August 25 Sunday Brief, we suggested an enhancement that would significantly accelerate Apple Card usage and iPhone upgrades:  Multiply the Daily Cash savings (we suggest 2x) when it’s applied to your iPhone 0% a.p.r plan.  This would shift marginal purchases (especially for multi-line accounts) to the Apple Card (driving up transaction fees and potentially interest charges) while providing the benefit of potentially paying off the device faster.  Fully paid devices could encourage additional upgrades and improve customer satisfaction.  This would also be more difficult for the wireless carriers (or Samsung) to duplicate.

 

Five-fold increases in trade-ins with only a partial quarter of measurement… best-ever Apple Care revenues… now Apple Card 0% a.p.r financing and 3% daily cash for 24-months.  That would be a lot to digest even if iPhone sales were missing expectations.  But, as we will show in a TSB online post in a few days, the iPhone 11/ Pro/ Pro Max inventory levels are still tight heading into the Holiday season.  This may not be the time to push the idea of Daily Cash sweeteners. The opportunity, however, is almost too good to pass up.

 

T-Mobile’s Stellar Quarter – Only Treats from BellevueJohn Legere Halloween pic from Earnings Call

Caught between AT&T’s earnings, the HBO Max announcement, and Apple’s surprise financing offer was the continued strong performance of T-Mobile.  They reported the following:

 

  • 754,000 branded postpaid phone net additions (versus 101,000 for AT&T – see above – and 239,000 for Verizon). Most importantly, T-Mobile’s net additions beat Comcast + Charter’s combined figure of 453,000.
  • Branded postpaid monthly phone churn of 0.89% (versus 0.95% at AT&T and 0.79% at Verizon)
  • Service revenue growth of 6% (versus 0.7% total mobility services growth at AT&T and 1.83% at Verizon)

 

We were very close to our early September estimates of 205 million POPs covered by 600 MHz (200 million actual) and 235 million POPs cleared (231 million actual).  T-Mobile also updated their estimate of POPs cleared by the end of 2019 to 275 million, slightly down from previous guidance of 280 million.

 

We think that the addition of 100-110 million new POPs in the second half of 2019 provides plenty of room to grow even without Sprint.  Also, T-Mobile’s total debt (including debt to Deutsche Telekom) is down to $25.5 billion from $27.5 billion at the end of 2019, and the resulting debt to EBITDA ratio stands at 2.0x, down from 2.3x in 3Q 2019.

 

We will have a full readout of T-Mobile’s earnings in next week’s TSB (which should be viewed against Sprint’s earnings due Monday and T-Mobile’s special Uncarrier announcement this Thursday).

 

Bottom line:  T-Mobile had a spectacular quarter, outpacing AT&T and Verizon in nearly all consumer metrics and is well prepared to thrive in a post-merger environment.  We still anticipate a settlement of the AG lawsuit in the next month or so, but believe that a trial outcome is likely to be found in T-Mobile’s favor for reasons stated in previous TSBs.

 

That’s it for this week.  As mentioned earlier, we will be posting the latest Apple inventory charts to www.sundaybrief.com in the next day or so.  Next week, we have Sprint and CenturyLink earnings as well as the T-Mobile Uncarrier announcement to cover.  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!