Greetings from Charlotte, North Carolina, where summer is in full swing (the opening picture is yet another from our trip to Willard over the Independence Day holiday – Abby and Gus in “full throttle”). This week we will discuss the never-ending engagement that is the T-Mobile/ Sprint merger.
A quick note before we dive into this week’s topic: We are posting a Deeper section on the Website with links to key articles. I found this living, breathing bibliography to be very useful with clients and welcome your feedback (articles we should have included, format, etc.).
A Chronicle of the T-Mobile/ Sprint Courtship
For those of you who have been hiding under a rock, here’s the timeline of the T-Mobile/ Sprint courtship from the past five years (we’ll have more timeline for readers in the Deeper version of this article on the website):
June, 2014: Rumors circulate that Sprint will acquire T-Mobile for $32 billion. The two companies would carry a combined $54 billion in long-term debt (NYT Dealbook article here).
August, 2014: Sprint ends their pursuit of merging with T-Mobile after significant regulatory pushback (NYT Dealbook article here).
November, 16: Donald J. Trump elected President.
December, 2016: Masa Son visits President-elect Trump and commits to a $50 billion investment in the U.S. that would create 50,000 jobs.
February, 2017: Rumors begin to surface that Sprint and T-Mobile will merge and that Sprint is willing to cede control (Reuters article here).
November, 2017: Sprint and T-Mobile announce that they had ended merger talks (NYT Dealbook article here and joint press release here). Talks break down this time over who would control the new company’s Board of Directors (WSJ inside story here).
Three Times a Merger (???)
April, 2018: T-Mobile and Sprint agree to merge in an all-stock deal valuing Sprint at $26.5 billion. The combined company would have $55 billion in enterprise value and $60 billion in debt. T-Mobile parent Deutsche Telekom (DT) would own 42% of the new company but control 69% of the voting rights and appoint 9 of the 14 Board seats (WSJ article here; formal announcement here; investor presentation here). John Legere to serve as CEO and Mike Sievert to serve as COO of the new entity.
May, 2018: Marcelo Claure becomes Executive Chairman of Sprint. Current CFO Michel Combs (formerly of Altice) succeeds Claure as CEO.
September 2018, January 2019, and March 2019: Federal Communications Commission (FCC) stops the merger clock three times to obtain and analyze information related to the merger. As of this writing, the 180-day merger approval clock is on Day 222 (FCC timeline here).
December, 2018: Committee on Foreign Investment in the United States (CFIUS) approves the merger.
May, 2019: The Federal Communications Commission’s (FCC) Chairman throws his support behind the merger under the conditions that rural broadband coverage is increased, 5G rollout commitments are met, prices are frozen for the next three years while the buildout is underway, and that Boost is divested (see FCC statement here). The formal vote is expected in the next few weeks.
May 30, 2019: Reuters reports that Amazon is interested in buying Boost Mobile and any wireless spectrum that would need to be divested. Amazon neither confirms nor denies the report. Craig Moffett pens one of the best blog posts on the topic called “Sprint and T-Mobile: Welcome to Crazy Town” in which he dismantles the arguments that a) Amazon would want to buy, and b) that Deutsche Telekom would want to sell to Amazon.
May 31, 2019: Comcast issues a statement saying that they are not interested in buying the Boost Mobile business or wireless assets after David Faber (of Comcast-owned CNBC) reported that they might be interested.
June 11, 2019: Thirteen states and the District of Columbia sue to block the merger. A start date for the trial is set for October 7. Two additional states (Texas and Indiana) report to the FCC in June that they are investigating the merger but do not join the lawsuit. (Articles here and here). T-Mobile, in their response to the court, claims that these states are “Living in the past” (full document from Scribd here).
June 18, 2019: Bloomberg reports that Charlie Ergen, CEO of Dish, is close to striking a $6 billion deal with T-Mobile to purchase Boost and some wireless assets.
July 12, 2019: T-Mobile and Sprint delay the merger deadline past July 29. Deal terms imposed by T-Mobile and Deutsche Telekom surrounding maximum network usage percentage of the new Sprint/T-Mobile network for the interim period and third-party ownership of the new Dish are reported to be the holdups (WSJ article here). Note: per the merger agreement, the drop-dead date is October 29, 2019 – see page 33 of the Letter to Shareholders).
Are you exhausted yet? Hopefully not, because this ballgame is going to go a few more innings. The bottom line from this timeline is that Sprint/Softbank went from an acquiring position to an acquired position in a short amount of time. Because of their large debt load (driven in part by ~$13 billion in Sprint and Nextel affiliate acquisition debt incurred a decade earlier), Sprint’s competitive options are limited. Meanwhile, Verizon and AT&T continue to tap the capital markets for network buildouts and spectrum purchases to build their lead.
Is Sprint as Attractive Now as they were in April 2018?
One of the issues with long engagements is that things can change. The beauty of the merged entity vision, the promise of network and distribution synergies, the allure of attractive competitive positioning can dull after 18 months. The questions DT shareholders might be asking are “Is Sprint still worth 0.10256 T-Mobile shares?” and “Can we achieve more value by just buying Dish or pursuing another structure with Sprint?”
Nearby is a snapshot of Sprint’s postpaid phone, prepaid phone, and net debt situation. Here’s what’s going on:
- Sprint is moving prepaid customers into the postpaid base. As a result, prepaid attractiveness is likely understated as are postpaid promotional pricing pressures. In the four quarters ending March 31, 2019, Sprint migrated 388,000 net subscribers from prepaid to postpaid. Sprint’s activity in this area has increased over the past year, largely driven by increases in credit quality of their prepaid base (note: T-Mobile migrated 555,000 subscribers as well during the four quarters ending 3/31/2019 but their level of activity appears to be flat to down).
- Net debt is flat and net debt to adjusted EBITDA ratios have improved over the past year(s). This is largely driven in part by an increase in leased devices. Sprint’s leverage ratio is in the 3.9 – 4.0x range with the phone rental depreciation included in EBITDA (a more comparable metric for their peers, including T-Mobile). It’s worth noting that T-Mobile has pulled back on device leases and is moving back to traditional Equipment Installment Payment plans (with initial payments for super-premium models). More on this trend on page 12 of the Investor Factbook here.
- Subscribers are down slightly but phone churn is rising (there’re about 100 basis points difference between T-Mobile’s branded postpaid phone churn and Sprint’s). It’s unclear how the prepaid migration is included in the postpaid churn calculation, but if the 388,000 customers are treated as postpaid gross additions, it’s likely that the migrations are muting the promotional pricing pressures described earlier.
- Sprint is bleeding cash to build out their network. Over the last four quarters, their free cash flow (see page 11 in the link here for annual information and page 18 in the link here for quarterly information) has decreased by nearly $2 billion and the network build is consuming cash (a lot of this build is presumably in advance of merger completion). The good news, as shown by the recent RootMetrics and OpenSignal reports is that Sprint’s efforts are working. In many markets where they were good they have gotten better, and in many markets where they were really bad they are now a lot closer to their peers.
- Sprint has received surprisingly positive accolades for their 5G network performance relative to their larger competitors. These reviews are very early in the network upgrade process, but Tom’s Guide, CNET, TheVerge.com all come to the same conclusion: Sprint’s approach results in faster speeds than 4G across a wider coverage area, while others have substantially faster speeds than 4G across a smaller area.
Is Sprint as attractive as they were in April 2018? The short answer is yes, but they were quite homely a year ago. How Sprint can persevere while spending money on needed network upgrades given the $9.3 billion in redemptions coming due over the next two years remains to be seen (see chart from Sprint’s Investor Relations website nearby). It’s likely to be a painful financial restructuring should the merger end up being scuttled or significantly delayed.
I’ll close this week’s discussion with the last Q&A on Sprint’s May 7 Earnings Conference call:
Question (from Jeffrey Kvaal from Nomura Securities):
There is the possibility that at some point over the next weeks or months that we wake up in the morning and the likelihood of a T-Mobile merger comes down quite a bit. Given these concerns and comments that you have just expressed to us, what should we be then making of the prospects for the company looking out a few years from that?
Answer (from Michel Combs, Sprint’s CEO):
… We remain optimistic that the government will see a compelling argument in support of our merger…If the merger doesn’t go through, we expect to continue to make improvements to the business, including our Nexgen Network deployment… We will have to reposition the company, reposition the company in how we play and which battlefield will be ours. While Sprint has made a lot of progress improving network and financials, as I have just mentioned, we still lack, let’s say, we still have offsetting challenges that I’ve mentioned, which means that we will have to reduce, of course, our promotional activity in the market, we’ll have to narrow our geographic focus. So at the end of the day, that means that we will be less of a nationwide competitor to AT&T and Verizon. So that’s site based, and we’ll have to reposition the company that way.
Next week, if the merger has not been approved, we will attempt to answer the question “Should T-Mobile buy Dish instead?”
Until then, if you have friends who would like to be on the email distribution, please have them send an email to firstname.lastname@example.org and will include them on the list. We have been overwhelmed by requests this week (over 200 added since last Sunday) and greatly appreciate your continued interest and advocacy.
Have a terrific week!
As we mentioned in TSB, this section will feature 5-10 articles on Microsoft or the LECs:
- 2018 CNBC full interview with Satya Nadella
- PG Mag review of Microsoft Office 365 (referenced in the article)
- Microsoft 2017 Financial Analyst Presentation (this was the last analyst day)
- Bill Gates on Startups, Investing and Solving the World’s Hardest Problem (YouTube)
- Microsoft HoloLens 2 Announcement at Mobile World Congress (abridged – YouTube)
- Fiscal Year 3Q 2019 Webcast (most recent)
- 2019 BBC article on the future of Microsoft
- Just Because – Dancing CEOs (Gates and Ballmer – YouTube)
The Local Exchange Carriers:
- Windstream: Motion to prevent Winsdstream from paying Uniti anything (Fierce Telecom)
- Windstream: Arkansas Democrat Gazette article on Windstream bankruptcy (Feb 2019)
- Frontier: Dallas Morning News 2017 article chronicles Verizon transition to Frontier (#FrontierFail)
- CenturyLink: 1Q 2019 earnings webcast (registration required)
- Just because – Glen Post III, former CEO of CenturyLInk 2017 speech. Hard to believe he was their CEO for fifteen years.
Greetings from Willard, Missouri! It’s been a busy independence week on the farm mowing with the brush hog, clearing trees left by recent flooding (Jimmy and yours truly in the picture), and installing a Wilson WeBoost 4G amplifier to improve cell phone coverage for my in-laws.
What is 5G and Why Should I Care?
I was recently asked to help a large, global conglomerate think about the effects of 5G on their business. After studying the company for some time, I came to the unsatisfying conclusion that one of two things could occur: a) The effects of 5G would be minimal to their business (some transaction/process efficiencies), or b) The company would have to change their entire structure, purpose and meaning because of 5G. The key variable was defining 5G.
Here’s what technology advancements and activities have been associated with 5G:
- New spectrum purchases, auctions, and deployments, particularly 24GHz and 28GHz frequencies (Fierce Wireless summary of recent auction results and spectrum here)
- Technologies which improve data experiences in certain locations (beamforming, massive MiMO, full duplex, etc.)
- Mobile edge computing which places servers closer to wireless customers and enables Cloud Radio Access Networks (which obviate the need to deploy cell site base stations at the cell site in many metropolitan and suburban areas)
- New devices that access the new radio frequencies in #1 and could use the new technologies defined in #2 with better computing defined in #3 (an example is the new LG V50 spec for their Sprint device here)
- LTE private networks for enterprises (which augment and eventually replace the use of in-building Wi-Fi)
- Pricing changes which set a cap on maximum speeds, such as those introduced by the fourth-largest wireless company in the United Kingdom (Vodaphone). A 5G network with a 2 Mbps throttle – intriguing to say the least
As you read down the list, the trend becomes clear: 5G can represent anything that you (or your agency/marketing arm) want it to be. It’s the dot.com and e-whatever 20 years ago and the cloud of 10 years ago. This is not a criticism of the use of 5G as an umbrella term for all things good (and the business justification of new); nonetheless, the examples above highlight the fact that 5G is a multi-faceted, multi-dimensional marketing term as well as a series of technological innovations.
5G can be the justification for wireless carrier or device manufacturer pricing changes (see Sprint’s rule that 5G devices must take a premium plan type, and Verizon’s statements that 5G pricing freezes will only be temporary). It can be used to reignite/redefine previous business plans (e.g., smart cities, Private LTE, Narrowband Internet of Things). 5G can also be the cure for long-standing regulatory/ social ills (availability throughout rural America, or in underserved urban areas, or net neutrality considerations, etc.).
The Future of 5G Depends on…
After considerable thought, here’s a pretty good summary of what 5G will mean in five years:
Doing more things
I know that the lack of traditional telecom lingo may come as a surprise to many of you who see 5G as an industry project, but let’s explore what low-latency/ high-frequency networks create:
- Faster decisions, driven by
- Decision making structures (algorithms), powered by
- Faster microprocessors, located in
- Proximity-based data centers and transmitted through
- Concentrated wireless networks
Faster transmission of today’s content just grazes the surface. Replacing an existing at-scale coaxial broadband service with a wireless variant is not a value-adding strategic cornerstone. The network is only one component of the experience, and, while immensely valuable, is not the drum major leading the 5G parade. Software is at the front, supported by hardware which accesses the network.
For example, consider the student who is having difficulty grasping algebraic concepts. What if tomorrow’s networks and software could detect a pattern of errors (via online homework responses, (lack of) notes or page turns in an electronic notepad/textbook, or other means), match it with a different presentation of the concept, which then allows the child to overcome frustrations and master the material right away? Even the longest-tenured, best-educated human instructor cannot be trained on every possible array of learning styles.
What’s changed from today’s world? Nothing, if the student has instant access an instructor who has expert skills to quickly diagnose learning styles and associated remedies. But that’s a tiny sliver of the population. The effects of better diagnosis could create tens of thousands of new mathematicians, software developers, analysts, technicians, and scientists. It could change the global balance of knowledge.
Did a 5G network enable this breakthrough? Maybe (Wi-Fi 6 is equally fast). Without activity monitoring and diagnosis, however, that student might have just given up, or decided her strengths lie elsewhere, or … Software leads the parade, enabled by hardware which accesses the network.
Another example is this video from Upskill, a company I got to know several years ago under their previous name (Apex Labs). They have built software into devices like the Microsoft HoloLens (see last week’s TSB) to ensure a perfect build. And every rivet, fastener, and connection can be recorded to prove it was built to spec. Entirely possible with Wi-Fi 6, but impossible without the right software.
While written to reflect an earlier network generation, Mark Andreessen summarizes it best in his seminal 2011 article called “Why Software is Eating the World” when he states:
In some industries, particularly those with a heavy real-world component such as oil and gas, the software revolution is primarily an opportunity for incumbents. But in many industries, new software ideas will result in the rise of new Silicon Valley-style start-ups that invade existing industries with impunity. Over the next 10 years, the battles between incumbents and software-powered insurgents will be epic. Joseph Schumpeter, the economist who coined the term “creative destruction,” would be proud.
We are living in that innovative tornado today, and the wind speeds are about to double thanks to lower latency and proximity-based processing. The winner is not necessarily the fastest or even the broadest network, but the one that increases consistent software performance.
AT&T’s recent blogpost outlining their recent tests with Microsoft Azure cloud and an Israeli-based software company (Vorpal) shows that they get it (an excellent use case). Verizon’s drone software and advisory company, Skyward (acquired in 2017), has partnered with Unleash live to quickly identify infrastructure defects (more in this Medium blog post). A slightly different strategy, but Big Red also gets it.
More software… doing more things… faster/better. That’s the result of 5G. That’s what it’s all about.
Next week, we’ll untangle the Dish/T-Mobile/Sprint ball of yarn (assuming CNBC’s reporting is accurate). Until then, if you know of someone who would be interested in receiving TSB, have them drop a quick note to email@example.com and we will add them to the distribution (or they can go to www.mysundaybrief.com for the archive and a new feature called Deeper which will have a complete listing of all cited sources).
Thanks again for your readership, advice, and recommendations. Have a terrific week!
Greetings from Lake Norman, North Carolina, and TSB (The Sunday Brief)’s newest member, Abby! After just over three years with ACN, I have decided to go back to consulting, writing, and maybe even teaching (more on the last one below). Further info on the first two companies I’ll be working with when we announce them, but the Patterson Advisory Group is back in business and we have a lot of catching up to do!
Where We Left Off
When TSB last signed off on 6/6/2016, the Four Horsemen (Microsoft, Amazon, Google and Apple) had a combined market capitalization of ~ $1.8 trillion (see Mary Meeker’s chart below – full slide deck is here). They had ~$446 billion in cash on their books and net debt of negative $317 billion. To even it out, the telecom carriers we were following at the time had a positive $347 billion in net debt.
T-Mobile continued to disrupt the market and grow like crazy. Verizon still had metered/ bucket pricing for residential wireless (Beyond Unlimited came in February 2017), and video compression (480p) was not a tradeoff for lower pricing.
On the wireline front, Windstream and CenturyLink had a combined market cap of $25 billion. They also had $43.3 billion in debt. The separation of Alltel into Windstream and Consolidated Sales and Leasing (CSAL – now Uniti) appeared to be working, and dividend yields continued to be attractive.
Additionally, in what will be a new theme for TSB, wireless tower providers were primarily tower providers: their reach did not extend into infrastructure between locations. And SBA, American, and Crown Castle’s collective market capitalization was a cool $85 billion (now worth double that).
What’s Changed for the Better? Well…
Clearly, the last three years have shown us that industries/markets do not behave like consultants’ PowerPoint slides. June begins the annual planning cycle for many large corporations, and predicting market/ competitive dynamics has never been tougher.
Microsoft, which was in the early stages of refreshing its corporate soul in 2016 (Satya Nadella became CEO in 2014), has seen the biggest value transformation ($597 billion in market capitalization added in three years – roughly an AT&T or a Verizon per year), and it largely came from within.
Several of you have commented to me in the past that Facebook should be given more prominent status as a full-fledged Horseman in 2015 and 2016, and some of you even suggested (in 2015 and 2016) that Microsoft should be dropped.
Perhaps it’s an historical perspective (I still proudly wear my Microsoft 25th anniversary sweatshirt from 1990), but I remember the day when the Redmond giant generated lots of revenues from package software for personal computers. The journey from Windows/Explorer/Office to business package software (think Great Plains acquisition in 2001), and full-fledged corporate software (Windows NT), and hardware (Xbox in 2001 and Xbox 360 in 2005, Zune music in 2006, Danger (phone maker) acquisition in 2008, Surface laptops in 2012 and Nokia in 2013), and mobile/communications ($8.5 billion acquisition Skype in 2011), and Azure cloud, and business social media ($26+ billion LinkedIn acquisition in 2016) has not been easy for the company.
Through it all, however, has been Windows and Office. Depending on which estimates you believe (here and here), Windows has a current installed base of ~1.5 billion and Office ~1.2 billion devices. This excludes the app versions of the product which are installed on more than 500 million smartphones today (including two devices at PAG). It’s not easy to change code structure to make large programs like these more efficient, but Nadella and team began that process nearly five years ago and it’s starting to pay off.
The first challenge was to enable Office 365 to function as well as or better than its package software counterparts. The goal: use cloud storage/ computing to deliver a better Microsoft Office experience across each device. Given the array of devices and the installed base, it’s not as easy as it sounds. While I am not privy to how Microsoft‘s software architecture works, it’s safe to assume that large portions of the legacy Office software had to be rewritten and reconfigured (and rewritten and reconfigured, and …) Judging from recent reviews like this one from PCMag.com, that goal has been met.
Now comes an even tougher challenge: deliver code to drive faster decisions at the edge (on/with devices that are increasingly a HoloLens, mobile device, smartwatch, or automobile). Think of the development challenge in terms of two factors: processing capability (measured by memory + processing capabilities) and speed (measured by bandwidth and latency, which are improved by increasingly faster networks).
How do you deliver a similar/better/business-changing experience to such an array of devices? Efficient design and code that uses as little memory and storage in the peripheral/edge device as possible. This change will also increasingly move Microsoft into the business-decision process (sometimes called intelligent databases, but really, really smart).
Bottom line: Microsoft is a very different company than it was three (and especially five) years ago. They are focused on code redistribution, interaction and efficiency. It’s a unique position for their consumer and enterprise business units, and why investors are awarding them with a trillion dollar market cap.
What’s Changed for the Worse? Well…
Many value shifts have occurred in the past three years: the rise of the sharing economy, increased time spent accessing information via mobile device vs. any other hardware, rise in digital consumer and small business financing. Each of these shifts pales in comparison to the changes in the wireline telecommunications marketplace.
Frontier, CenturyLink and Windstream/ Uniti Fiber are the best proxies for the space. They were desired for steady dividend yields which were supported by legacy telephone bases. Each of these companies attempted either to scale or diversify with varying results. The carnage is shown below using Frontier Communications share price as a proxy:
Frontier communications is down a whopping 95% since June 2016. Uniti is down 61%, and CenturyLink is down 62% (the S&P 500 index is up 35% over the same period).
Each of these companies is tanking, with CenturyLink being supported by Level3 and Frontier’s head barely above water (with a Q1 2019 net debt to EBITDA leverage ratio of 4.76x, and 2% monthly customer churn, many are assuming that Frontier will be the next Local Exchange Carrier to enter Chapter 11 – more on that in this Bloomberg article).
Windstream also faces a similar struggle with its aging copper network which is now owned by Uniti Fiber and leased back to Windstream at pre-arranged terms (currently through 2030). Based on recent bankruptcy court proceedings (see full details here), it’s likely that Uniti will have to take a lower lease rate sooner than originally forecasted. This is likely good long-term news for Windstream, but does not address the headwinds that cable providers (and soon wireless companies) will generate, especially in the commercial segment.
Both Windstream and Frontier (and, to a lesser extent, CenturyLink) need to tackle their value proposition, particularly with non-rural consumer and small business customers (hint: “price for life” is not working). Fiber sales and becoming 5G infrastructure along highways and in smaller towns will replace some, but not all, of the dwindling copper value.
The nearby chart from the recently published University of Michigan’s American Customer Satisfaction Index (ACSI) shows why there is still hope for rural Internet providers.
Newer is better. Fiber infrastructure generally brings fewer issues (see the Verizon FiOS score). A complete understanding of how broadband connects throughout the home (Frontier excels in this area) is better. Riding the wave of over-the-top services and allowing Roku, Hulu, YouTubeTV, Netflix, and Amazon Video to do their jobs is better (and comes with minimal gross margin loss).
Bottom line: The playbook for rural LECs is straightforward:
- Focus on fiber (CenturyLink appears to be doing exactly this).
- Enable others’ success to gain undisputed scale throughout their footprint.
- Be no more dependent on government subsidies than your cable competitors.
- Differentiate with exceptional service, particularly with small business.
- Do all of this with half the current labor force (full-time or contracted).
It’s been a very sad three years for rural LECs. Many lives have been negatively impacted because of management hesitancy to face the long-term competitive realities and to stretch the line loss scenario range. Facing the music will be tough, and transformation may not be possible without significant pain. The plan above is a good starting point to restore investor/ bondholder credibility.
A gap of three years leaves much to cover in one article, but we continue our commitment to keeping each TSB short but sweet. Next week’s article focuses on next generation networks (low-latency, high-bandwidth, consistent) and the yin and yang between network and software progress.
Before you close this email, please send this on to a few folks who might be interested. I am trying to respect everyone’s email space/time – if any are interested, however, send a message to firstname.lastname@example.org and we will add to the next week’s distribution.
And, for a second favor, if you have one article/ book title/ YouTube lecture/ other material that might be of interest for two college-level courses I am putting together, I would greatly appreciate sending me the associated link. The course titles I am prepping are as follows:
- The History of Technology from 1950 (post-WW II) to the Present
- Strategy (for liberal arts majors)
I hope everyone has a terrific and safe Fourth of July week! Glad to be back!
June greetings from Dallas, Seattle, Birmingham, and, by the time most of you read this, Charlotte/ Concord/ Davidson (family graduation pic from Memorial Day weekend shown – Jimmy, the graduate, at center). This is the last edition of The Sunday Brief – a tough sentence for me to write, yet I am encouraged and overwhelmed by hundreds of you who have taken time to send congratulatory notes and reflect on how valuable this column has been each week.
A Few Parting Thoughts
Rather than dive into a wish list or other litany of things that need to be changed, I’ll leave you with some interesting data points:
- Cash is king. It’s a trite statement many of us learned in business school, but here’s the economic reality for some in our industry (figures are pulled from each company’s most recent earnings releases and do not include off balance sheet items. Debt also does not include post-retirement benefit obligations or deferred tax liabilities which would add tens of billions in “debt” to the lower section):
Company Cash Debt Net Debt
Apple $233 billion $72 billion -$161 billion
Google $73 billion $5 billion -$68 billion
Microsoft $103 billion $44 billion -$59 billion
Facebook $21 billion none -$21 billion
Amazon $16 billion $8 billion -$8 billion
Total $446 billion $129 billion -$317 billion
Company Cash Debt Net Debt
AT&T $10 billion $131 billion $121 billion
Verizon $6 billion $110 billion $104 billion
Comcast $6 billion $56 billion $50 billion
Sprint $4 billion $34 billion $30 billion
TWC $1 billion $24 billion $23 billion
CenturyLink $1 billion $20 billion $19 billion
Total $28 billion $375 billion $347 billion
Many of you commented that the value creation updates we did throughout the years helped keep things in perspective. The “Four Horsemen” (which became five after Facebook went public in May 2012) have created hundreds of billions of dollars of market capitalization over the past seven years. While that number is staggering, what is more telling is how, despite the efforts of investment banking and shareholder activist professionals, each of the Five Horsemen has been able to keep a strong negative net debt position.
Some of this cash is stranded overseas and would be taxed if repatriated. But, for comparative purposes, the balance sheets of non-network participants in the Internet economy clearly have more liquidity and leverage opportunities than traditional players.
- The average selling price (ASP) of a new Android device is plummeting while Apple is flat. Here are two charts released this week from the Business Intelligence folks:
Since the blossoming of the Android ecosystem in 2010, the gap between the average selling price of a new Apple and Android smartphone as ballooned to $443. This gap had been less than $200 as late as 2011. With the advent of less expensive devices in Bangladesh, China, Indonesia, India, Japan, Mexico, the Philippines, and Russia (roughly 3.6 billion total population), Android has established a “default user experience” position with smartphone users in these countries.
This is not to say that Apple faces an imminent danger. Plenty of used iPhones from other countries will make their way in to India and other places, and will still carry the cache of the Apple brand. However, this infiltration can only occur as smartphone changeover continues, and the latest earnings report from Apple shows that upgrades are slowing down. As go upgrades, so go refurbished devices. This result may be pleasing to some, but it was clearly on Apple CEO Tim Cook’s mind as he traveled throughout Asia last month (see this Forbes summary for more details on Cook’s India trip).
Could Apple institute a program in the developing world like Android One without compromising quality? Do they have any choice, especially with an alliance forming between China’s Apple wannabe Xiaomi and Microsoft (see more here)?
- T-Mobile’s Uncarrier 11: Time to Stock Up? If the rumors are to be believed, T-Mobile will launch a loyalty app on Monday that will offer free stock to customers who refer others to T-Mobile. This on top of pizza, movie rentals, and other items that likely come with any loyalty program (I have not heard that one of the loyalty items would be $100 off a smartphone, but hoping that is among the options).
Offering stock to customers is unique and different. A few will see the inherent long-term financial opportunity it represents. Last year, Gallup updated their poll on investment trends (full report here and summary chart nearby). What they found was unsurprising: Since the economic collapse of 2008-2009, fewer Americans are invested in the stock market, especially if their annual income level is less than $75,000.
Stock does not taste as good as pizza and certainly does not provide the entertainment value of The Revenant or Star Wars. A chance to earn my way to a free iPhone 7 with 10 new T-Mobile referrals? Sign me up. A free Samsung fast charging system for being a customer for 5 years? Count me in. Company stock for being a customer and signing up for an app? Too hard and too much of a hassle for many who distrust the market and whose last memory of a financial investment was a losing one.
There’s a lot more to talk about (see AT&T’s transcript from the Cowen & Company conference last week here, or Cricket’s large outage here or the full report of Apple’s outage here), but I’ll close by simply saying that I will continue to have opinions over coffee, lunch or dinner in Charlotte – come see me and let’s talk. The pen is taking a break, but I am not.
As of June 6:
VP/ GM – Flash Wireless
1000 Progress Place NE
Concord, NC 28025
(816) 210-0296 mobile
EDITOR’S NOTE: It’s best to print out the first page of the attached before reading this column.
Mid-May greetings from Charlotte and Dallas, where graduation week is beginning. As a result, there will be no Sunday Brief over the Memorial Day weekend. Our final column will be on June 5. Thanks to the hundreds of you who have sent well wishes and expressed how much this column has meant to you over the years.
In many of the well-wishing email exchanges, I have asked “What column has been the most impactful to you?” Without a doubt, it’s been the “Dear ________” letters. Right behind that, however, are the Android World chronicles. This week, we’ll take a final look at the devices being offered by each of the four largest wireless carriers, and discuss some of the Android N features that were revealed this week at Google’s annual conference. But first, a couple of shout outs.
ExteNet’s acquisition of Telecom Properties Inc. was announced on May 11 (pricing and terms not disclosed). For those of you who are not familiar with TPI, they are a Dallas-based firm that specializes in providing custom Distributed Antenna Systems. Specifically, TPI has built up a broad portfolio of sports venues (e.g., Madison Square Garden, AT&T Stadium, others) that serve multiple wireless carriers. This is a great outcome for both companies and congrats to Jimmy Chiles (picture nearby), Jeff Alexander, and the rest of the TPI team on their successful exit.
Also, AT&T announced the acquisition of Quickplay Media this week from private equity powerhouse Madison Dearborn Partners for an undisclosed amount. Kudos to Wayne Purboo (pictured), founder and CEO of Quickplay, for his steadfast leadership through a rapid growth period (according to the announcement, Quickplay has more than 350 employees and contractors). This acquisition fills in a critical piece for AT&T, and will enable seamless distribution of DirecTV content to wireless subscribers. More on Quickplay’s capabilities here.
It’s (Still) an Android World
Back when we wrote the first Android World column a few years ago (here’s a link to a June 2011 version), the thesis was that Google’s commitment to an open architecture was spawning a shakeup in the smartphone manufacturing world, and that Android represented a far greater threat to Apple’s market leadership than anyone anticipated. We also talked about the damaging effects of Android on Blackberry and Nokia (now Microsoft).
What we did not anticipate was how significant the changes would be. The HTC Dream (aka, the T-Mobile G1), announced in September 2008, seemed exactly like that – a dream, ready to be dashed by Apple as they rode iOS into consumer smartphone dominance.
Had Apple played their exclusivity hand differently with Verizon, Sprint, and T-Mobile, the outcome might have been domination. But Verizon dove in head first with Android, announcing the first DROID lineup in September 2009 (for some history, here’s the original “I Don’t” commercial). When it came time to introduce their first LTE phone (the HTC Thunderbolt) in 2011, it was not introduced on an iPhone but on Android (commercial here – For those of you who do not follow the industry closely, Verizon introduced the iPhone 4 in February 2011 and the Thunderbolt the following month).
And Verizon was not the only US wireless carrier to announce a flagship Android phone. In March 2010, Sprint announced the HTC EVO (still one of their all-time best sellers – 2011 commercial here) which featured 2.5 GHz WiMax services through their Clearwire partnership. It was launched three months after the original announcement and put Sprint on the map ahead of Verizon’s Thunderbolt launch. Sprint would not receive iPhone access until October 2011, and only then with a 30 million device commitment.
Android steadily became known as the platform for innovation, flexibility, speed… and sugary sweet operating system names. The ecosystem was developing nicely. Then came the Samsung Galaxy S III in 2012. Prior to this time, Samsung was just another player in the Android ecosystem with HTC, Motorola, LG, and Kyocera. After the release of the S III, Samsung assumed the mantle of smartphone leader, launching the Note II and Mini product versions by that fall.
The nearby chart tells the rest of the story – Android, led by Samsung, began to grow – quickly. China, and then India, emerged as the largest addressable market opportunities (in 2012/ 2013, neither was a large Apple market). Android suppliers such as Micromax, Spice and Karbonn in India (see phone comparison here) filled the nearly insatiable demand for smartphones, so much so that the Android One reference platform was announced in 2014.
Bottom Line: From nothing, Android assumed an 80% market share in about just over five years. Nokia/ Microsoft Windows OS are reduced to a few Stock Keeping Units (SKUs) in the back of the store or the bottom of the website, Palm and Symbian vanished, and Blackberry has been clinging since 2012. Google continues to be focused on Android inter-operability with VR, Chrome, Android wear, Nest, and other platforms. In response, Apple released the iPhone SE which out of the gate was categorized as “not for the US but for the developing world.”
Where does this leave us today? Here’s the latest Android World matrix:
For those of you who are not familiar with the format, a few notes. Represented are 24-month pricing from each of the major carriers’ websites (research undertaken from May 19-21). The underlying operating system is color coded. No refurbished or out of stock models are shown, and, for the purposes of comparison, we have used AT&T’s Next 18 month rates (which require 24 payments despite the name). Where needed, we have also indicated Sprint’s leased (as opposed to Equipment Installment Plan) as well as T-Mobile’s Extended LTE equipped devices.
There are several interesting developments. First, the iPhone SE is currently out of stock on most carrier websites with phones ordered today not expected to be delivered until late June/ early July (see link here and here). The extent to which this has been a deliberate move by Apple (some going so far as to call it a bait-and-switch) is debated; The Sunday Brief sides with the camp that it’s driven by supply constraints as Apple readies an even less expensive version (for a really good historical matrix of Apple pricing, see this Macworld article).
Second, Sprint isn’t leasing as many models as they have in the past. Currently, the models covered by the iPhone forever and Galaxy forever lease constructs are the Samsung Galaxy S7, S7 Edge, and Note 5 as well as the iPhone 6S and 6S Plus. Everything else is Equipment Installment Plan (EIP) based. This is half of the ten models offered for lease in October. Sprint’s crazy deals on iPhone 6S devices with trade-in ($15/19 monthly lease rates for 24 months) are now a thing of the past – you will now shell out a similar amount as for an EIP but receive the right to automatically upgrade as soon as the next generation is released.
Net-net, this is a positive for Sprint because they get out of the residual value estimation business. While the upgrade process is slowing down (implying there might be a supply-driven residual opportunity), the risk of being stuck with a large number of off-lease devices still exists. It also will help financial analysts more accurately ascertain a comparable EBITDA rate for Sprint.
It’s also interesting to note that Sprint has thrown out both Windows and Blackberry by design. No Blackberry Classic or PRIV or Passport. No Lumia anything. Keeping it simple for the customer (as well as customer service reps) – smart move.
Finally, one cannot help but notice the shrinking bottom layer (< $10/ month EIP) of this chart which will likely continue to shrink in future years. AT&T really has two offered devices below $10, and it would not be surprising to see Verizon at this level shortly. Driving this is the growth of Bring Your Own Devices, something quite common in the MVNO/ Wholesale world and now beginning to show up with each of the Big 4.
Have a look at the Motorola X for sale on Glyde (16 GB – works on AT&T – $77.25 refurb; $90 new – $6 shipping). It’s a good deal for a 4.5 star rated phone on PhoneArena: Android Lollipop compatible, 4.7 inch screen, 316 ppi, 10 MP camera with an HD camcorder, 2GB RAM, 16 or 32 GB ROM, 2200 mAh battery, 802.11 ac Wi-Fi. All for $80 with shipping. And fully compatible (except for Band 12) with the T-Mobile network if things don’t work out with AT&T.
This story is repeated hourly within the Android world (Apple iPhones tend to hold their value better). Like we saw with free phones in the subsidy days, the prospect of a gently used model with complete freedom to move between (some) carriers is enticing for bargain shoppers. And this is going to get even easier with the rise of soft SIM devices (see the latest Apple iPhone carrier compatibility chart here or the Google Nexus LTE network specifications here). For many, a device is simply going to be a means to access a network full of applications. Until the value proposition of faster networks catches up, customers are more than content than to postpone upgrades.
Bottom line: Android is big – really big. From last week’s Google I/O conference (see video summary from The Verge here), it’s about to get even bigger and more integrated into the full Google product line. Google excels at software development, but not necessarily software integration. Android’s future depends on its most complex challenge: an integrated end state.
Thanks for your readership and continued support of this column. No column next week for the Memorial Day holiday, but if something comes out on the Open Internet Order, we’ll be ready with a quick analysis on the website. As a result of the job change, we are not going to accept any new readers, but you can direct them to www.mysundaybrief.com for the full archive. Thanks again for your readership, and Go Royals!