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April greetings from Louisville (pictured is the view of the Muhammed Ali Center and the Ohio River from my room at the Galt House Hotel) and Dallas. This week, we begin the earnings watch list with some questions for AT&T, Verizon, Sprint, and T-Mobile.
Before diving into the questions, I wanted to let you know that Roger Entner, Jan Dawson, and I will be hosting a conference call a few days after the Appeals Court Open Internet Ruling comes out. Please check my LinkedIn feed or check www.mysundaybrief.com for the details. If the ruling comes out next Friday, I’ll provide the details on the conference call on Monday.
Also, for those of you who will be at the INCOMPAS (f.k.a. COMPTEL) show this week, I’ll be leading a panel discussion Monday morning on trends in wireless with representatives from Microsoft, T-Mobile, and Lumos networks. Please join if you are at the show and ask a probing question or two.
Four (or more) Earnings Questions We’d Like to Ask
- At what point should AT&T be viewed as a global communications network provider and not as a traditional wireless service company? It was reported by Telecompaper this week that AT&T will post net additions of ~1 million in Mexico. For those of you who are familiar with this market, that equates to about 350-400K US post-paid wireless net additions from a revenue perspective, and likely less from an EBITDA view. All of this has happened without really turning up most of Mexico City on the new platform. How should investors look at AT&T Mexico?
As of the end of last year, AT&T Mexico had 8.7 million wireless subscribers, while Telefonica and Telcel (America Movil) had 23.4 and 73 million wireless subscribers. That equates to just over 8% market share for a brand that’s worth at least 15% market share just for showing up. Adding a million customers in a quarter is newsworthy, but, considering the capital investment AT&T is making ($3 billion) as well as the brand, it’s not an unexpected number.
While AT&T has not disclosed a long-term target number, it’s hard to imagine that 20% market share by the end of 2020 is a moonshot given their fiber and LTE funding levels. Assuming the market in 2020 is at least 120 million subscribers (~2.7% wireless subscriber annualized growth rate), that would equate to 32 million subscribers by the end of 2020 or roughly a $10 billion unit (it entered 2016 at a $2.5 billion annualized revenue run rate). Said another way, AT&T has completed 1.6 million net adds or 7% of their (minimum) 23 million net addition five-year goal.
With $7.5 billion in growth over the next five years in Mexico alone, AT&T deserves a global communications provider designation. The follow up question is “What’s the halo effect of the Mexico investment on US (likely Cricket) wireless growth?” We commented a few weeks ago that Cricket is poised to have a very strong quarter (~400K net additions which will be their fourth consecutive quarter at this level), and, while a lot of this is attributed to solid execution, some of their growth has to be tied to a stronger Mexican operation. Note: the Sunday Brief post mentioned above focused on the possibility of bundling Cricket with DirecTV. There’s a growing sentiment that more Mexico success will spill over into retail prepaid net additions.
Bottom line: AT&T’s broad and global strategy needs a corresponding scorecard if they are to receive the credit due for their execution in the financial markets. If they fail to steer the conversation, they will fall into the same retail postpaid wireless comparisons that will mask the full extent of their efforts. Communicating the full impact of Mexico is a good starting point.
- Can Verizon become a content and applications company? There was lots of speculation this week that Verizon is going to proceed with a bid for Yahoo (see Bloomberg article here). As was the case with the AOL acquisition, Yahoo brings with it some ad platform assets (enhanced through 2014’s acquisition of Brightroll) and also a legacy brand associated with web portals, news, and email. There is no doubt that Yahoo’s acquisition would bolster Verizon’s content/ media position.
To answer the question above, let’s look at the performance of AOL since Verizon acquired the company:
- Verizon has kept key talent, including CEO Tim Armstrong, through the past year (the one-year anniversary of the closing is late June, and we might see some activity then, but the transition has been smooth). This is a good sign for integration with Yahoo assets.
AOL/ Verizon’s first acquisition, Millennial Media (closed October 2015), has gone extremely well. Recently, AOL promoted Mark Connon, a top Millennial exec, into a key role in the company. Given Millennial Media’s previous operating relationship with Verizon, it’s not a real surprise that the integration went smoothly, but it provides evidence that integrating most Yahoo ad platform operations should not be a challenge.
- Both aol.com and Verizonwireless.com websites have been performing better since the acquisition (see Alexa measurement results for Verizon wireless and aol.com nearby). In comparison, AT&T has had a slight rise over the same period (and is US ranked #70), T-Mobile’s ranking is #200, and Sprint’s is #302.
The old thesis that “Verizon will screw it up” just isn’t holding up. Go90 is doing well (top 5 in the Entertainment category in both the iTunes and Google Play stores and Top 100 in free apps overall), and signing up new content (see latest signings here).
Verizon’s potential acquisition of Yahoo would add $8 billion to the bet (using the figures from the Bloomberg article). That would bring the total media investment to $13 billion and make Verizon one of the top online/ app content producers in the world. It’s a long way from DSL, Private Lines, collocation and wireless voice, but there’s a growing body of evidence that they could pull it off.
- Can Sprint use their current network collateral and lease financing vehicles to transform the company? This week, Sprint announced that they will be selling network equipment assets for $3 billion and receiving proceeds from these assets of $2.2 billion. This will provide immediate liquidity to pay down debt maturities of approximately $4 billion due in the next 12 months. With this transaction, Sprint has emerged as the pioneer with customer handset leases and company equipment leases.
We have shown this chart from Morningstar several times (link is here), but it is worth providing one more time:
Sprint has approximately $34 billion in debt with $5.3 billion due in the next 18 months. They have been cutting costs with vigor and constantly looking for ways to improve their network performance (we reported in a previous column that cost cutting will likely take precedent over growth in the first quarter results and result in negative postpaid phone additions). A sale leaseback of network assets solves the December maturity but March is a different story.
Bottom line: If the repayment of the December note restores bond market confidence, Sprint’s leasing transaction could trigger a refinancing of some of the March 2017 maturities. However, if Sprint has to collateralize additional assets, including spectrum, the cash committed to repaying bankruptcy remote lenders could exceed the projected discounted cash flows of the company. More to come with their April earnings announcement.
- Will T-Mobile preannounce first quarter operating results this week? In 2015, T-Mobile waited until the actual news release to disclose earnings (they were terrific – see here). Right now T-Mobile is in the middle of the 600 MHz auction and has not scheduled any events prior to May that would serve as a pre-announcement venue. Most analysts expect that they will have a strong quarter driven by increased advertising (albeit they are competing with more political ads as a result of a competitive primary season) and lower churn (Binge On has been a “churn stopper” according to the company).
The biggest questions raised by many of you are “Does Binge On help or hurt growth?” and “What are the long-term effects of Binge On?” We’ll devote an entire Sunday Brief to the overall network pressure that their latest program brings, but the long and short of it is that Binge On helped the network in 2015 and will further help the network in 2016, and will hurt network performance in 2017 and beyond (when T-Mobile has network densification completed and more 600 MHz spectrum to deploy). Overall, Binge On will put to rest the argument that consumers would gladly trade off paying more for higher resolution. In fact, the results will likely show the exact opposite.
To support the “it has not hurt network performance so far” let’s examine the RootScore results since the beginning of the year. As of last Friday (April 8), RootMetrics released 59 market results (out of 125 they review semi-annually). Of these 59 that have been released, T-Mobile has won (including ties) 13 markets and finished second (including ties) 15 times. Of these 28 first or second place finishes, they have beaten AT&T 10 times and tied with them 15 times (the other 3 times AT&T finished first and T-Mobile finished second). These figures represent a big improvement over 2013 and 2014 and continue their LTE expansion and densification started in 2015.
There are no signs of a weakening network from these recent reports. In fact, it’s very likely that T-Mobile’s quality metrics are improving because of the immediate network benefit Binge On provided. SD quality is OK for consumers while they are out and about, but at home or in the office, WiFi speeds take over.
Bottom line: While the long-term prospects of zero-rated data are uncertain, the short-term benefits are clear – Binge On will be shown to attract and (more importantly) retain customers. We will know more when earnings are (pre)announced.
Thanks for your readership and continued support of this column. Next week, we’ll dive into the implications of the Appeals Court ruling on the Open Internet Order (due out this week). Until then, please invite one of your colleagues to become a regular Sunday Brief reader by having them drop a quick note to firstname.lastname@example.org. We’ll subscribe them as soon as we can (and they can go to www.mysundaybrief.com for the full archive). Thanks again for your readership, and Go Royals and Sporting KC!
April greetings from Dallas, Charlotte, and Effingham, South Carolina (home of Margaret Holmes’ Peanut Patch Hot Boiled Peanuts – sign pictured). The past two weeks have been busy; rather than diving too deep into one event, we’ll cover several important items instead. But first, a quick roundup of the April Fools jokes from the telecom and Internet industries.
April Fool’s Day: Some of These Ideas Are Good!
We could do an entire article on the creativity of April Fools pranksters. In the interest of discussing more substantive matters, however, we’ll limit ourselves to five that we thought were particularly innovative:
- Samsung’s Internet of Trousers (IoT) features Wi-Fly (which sends you an alert that you need to XYZ), Get Up alert (which provides mild shocks to your posterior If you have not moved in three hours), and the ever popular Fridge Lock mode. More here.
- Google’s Parallel Universe (of Cats) Discovered. One of the best Nat and Lo episodes ever on the latest advances in String Theory. Make sure you watch to the end. More here.
- T-Mobile Binge on Up! Leave it the folks in Seattle to come up with a way to have a good April Fool’s joke and also poke fun at the competition. I especially enjoyed the “Real Reality” mode. Full video here.
- MarkForH&M. The all new clothing lineup designed by Facebook founder Mark Zuckerberg consists of seven identical grey t-shirts and one pair of jeans. And many 20-something guys are saying “When can I get it?”
- Google’s “Send + Mic Drop” feature (see here). We need this back. However, it’s understandable that a few unsuspecting folks might have inadvertently sent messages to potential employers or bosses without knowledge that “Mic Drop” meant “you cannot reply to this message.” For those of you who did, chill out and make the most of it.
Some Questions for Netflix (and the FCC)
The Wall Street Journal reported last Thursday (not on April Fool’s Day) that Netflix has been throttling their video content to 600 Kbps when it is destined for AT&T and Verizon (and most other wireless carriers across the globe), but not when it is headed to Sprint or T-Mobile.
Netflix has been muted in their responses since the report has been issued, with only the Director of Corporate Communications commenting through a carefully scripted blog post that basically says “We’re working on it” (see here).
Here’re some questions that Netflix should answer:
- How did/ does this disclosure change current the customer service responses (FAQ, on-line help, one of two 800 numbers, etc.) to mobile connectivity issues (note: no changes to the FAQs have been made since the original disclosure)? Did customer service reps know that Netflix was throttling wireless traffic to some carriers and not others?
- How often were the plans to throttle AT&T and Verizon revisited? What criteria were used? For example, when Cricket was purchased by AT&T (which likely would have involved a change in Internet backbone providers), were all Cricket customers throttled as well? Or, when AT&T re-introduced unlimited wireless data plans for DirecTV customers, did Netflix contemplate removing (or actually remove) the speed caps?
- Will Netflix now begin to post a wireless bandwidth index? Can customers clearly see the speed options available to them on an un-throttled basis so they can make an intelligent choice?
Of biggest concern is the customer service aspect. If Netflix service agents were not given the information or tools to accurately describe their wireless throttling policies, then there were likely thousands of calls per month made to AT&T and Verizon wireless agents trying to solve issues that originated with Netflix. Verizon and AT&T could have had (and likely did have) network issues that prevented a good viewing experience, but Netflix made the troubleshooting issue more difficult by withholding their network practice.
On top of this, Verizon and AT&T missed out on the opportunity to upsell customers to higher data plans because of the Netflix practice. The two largest wireless carriers received a double whammy: higher customer service costs based on the assumption that the ISP must be at fault, and the missed opportunity to upsell customers to higher data plans faster because of the Netflix throttling policy.
Netflix is not the only one who is at fault here, however. How the Open Internet Order was ultimately determined at the end of 2014/ beginning of 2015 should also be scrutinized. The FCC faced a choice to increase their potential regulatory reach to edge providers such as Google, Netflix, Hulu, and Amazon Prime. Here’re a few questions for each of the commissioners and Chairman Wheeler:
- When did the FCC engineers determine that Netflix was throttling wireless data (I’m willing to bet they were not surprised by the WSJ article)? When this data was received, what was done with it? Who decided that this piece of information was not important or relevant?
- Did the FCC explicitly ask if Netflix had ever throttled data as a part of normal commercial operations? Did Netflix respond truthfully and completely?
- Has the FCC learned since this disclosure that other edge providers throttle data to selected wireless providers? Will the FCC require edge providers to publish their throttling policies and disclose them in their FAQs and advertising?
Given the unprecedented editorial influence over the final Open Internet Order draft that edge providers were rumored to have had, there should be a full reconciliation and publication of the “voted on” version and the final publication of the Order. A simple redline could shed a lot of light on the process.
Bottom line: Netflix has a lot of explaining to do. The FCC also has a lot of explaining to do. The foundational assumption that content streaming companies will be indiscriminate in their network streaming policies has been shattered by this disclosure. Netflix should be held to a standard that is commensurate with a large and growing (~40% of US homes) market share.
AT&T is Becoming an Unlimited Company
“Bundle and Benefit.” With these three words, AT&T has taken a page out of the cable playbook and used it against them. It’s hard to believe, but there was a time when we paid for voice by the minute. Voice customers had to know where the other person lived and whether that would result in additional charges. Because of the uncertainty, customers held back, called at different times during the day, or made sure that they were “Friends” or “Family.”
Those were the early days of wireless voice, a similar model to what existed in the archane world of fixed/ landline service. Longer distance calling meant higher charges, potential international settlements, and the like.
Cable’s Triple Play (and the introduction of unlimited wireless services from now forgotten MVNOs like Helio) made unlimited products an easy to understand and essential part of the telecom vocabulary. Cable TV has always been unlimited (much to the chagrin of many parents). High Speed Internet started as unlimited, although to a select few some caps may kick in for certain speeds. When voice was introduced, it followed the unlimited pattern (and was priced at a slight premium to most fully featured local phone services).
It was the easiest sell on the planet: Unlimited usage of home entertainment and communications essentials for $99 (then $89 and now in some promotions even $79). Service was correspondingly easy – calls continued for standard network issues, but for the first year, the price remained constant.
AT&T watched what remained of the wireline voice market migrate to cable. They also saw the unlimited message begin to penetrate the wireless carrier community as well (ironic as AT&T wireless pioneered single rate pricing a few years earlier). Sprint began to offer truly unlimited wireless service for $99 (later $109) per line in 2008. T-Mobile followed, as did other smaller providers. All of this happened just as 3G networks were being replaced by 4G/ LTE speeds. At this time, AT&T had the exclusive distribution rights to the bandwidth-intensive iPhone, so following their competition would have had significant network consequences.
AT&T ended unlimited data plans for wireless customers in June 2010. This hiatus continued for over five years until the DirecTV merger was completed. In January 2016, AT&T resumed offering unlimited LTE data (no throttling until 22GB per line threshold is reached) but there was a catch: Customers needed to subscribe to DirecTV and AT&T Wireless. The Double Play (Video + Wireless) was born.
The two-fer has enjoyed some success with over 2 million new or existing customers signing up for service. Analysts predict that an additional 5-6 million will sign up for the service in 2016. While this is a mere 10% of AT&T’s postpaid smartphone base, it’s not crazy to assume that 30-40% of the base could move to unlimited if the plan structure is right (this includes reasonable costs for DirecTV). Four lines of unlimited wireless voice/ text/ data service for $180 is a very attractive rate.
This week, AT&T sweetened the pot even more as they announced new High Speed Internet pricing structures. If a customer wants truly unlimited data, they will have to pay an additional $30 or have a qualifying DirecTV or U-Verse TV service (AT&T’s full announcement is here). This means that a stand-alone customer in Dallas selecting 18 Mbps service (only) would pay $75 ($45 + $30 unlimited premium) per month for their service (Time Warner Cable charges $45 for 5x the speed with no caps). That’s $30 more for 20% of the total throughput with Charter committing to keep the “no caps” policy provided that their merger with TWC and Bright House Networks is approved.
High Speed Internet pricing is not rocket science. There are high gross margins and low product costs. Also, AT&T is not remotely close to winning their share of decisions versus cable (AT&T lost 248K broadband customers in the past year – Comcast gained 1.4 million). More AT&T penetration would have downstream effects on wireless network consumption as well (more Wi-Fi = less carrier spectrum radio capacity consumed and more Voice over Wi-Fi calling opportunities).
Bottom line: AT&T got it right when they reintroduced unlimited wireless with DirecTV. They started to get it right with unlimited U-Verse Internet with DirecTV (or U-Verse TV) but forgot to give consumers what they wanted most – more speed. They need to introduce a free speed upgrades, and not the threat of capped surcharges, as a part of the bundle to compete against cable.
Thanks for your readership and continued support of this column. You will not want to miss next week’s “First Quarter Earnings Watchlist” issue. Until then, please invite one of your colleagues to become a regular Sunday Brief reader by having them drop a quick note to email@example.com. We’ll subscribe them as soon as we can (and they can go to www.mysundaybrief.com for the full archive). Thanks again for your readership, and Go Royals!
This morning’s interview with Betty Liu on Bloomberg’s “In the Loop with Betty Liu” is here. Many of the same points emphasized in the Sunday Brief are in the interview. Marcelo, you have your work cut out for you. Best of luck!
Also, don’t post here, but if you have tips on how I could have a better interview presence, I’m all ears.
End of quarter greetings from Santa Barbara (marina pictured), Austin, Dallas, and the Outer Banks of North Carolina. As a reminder, the Sunday Brief will take a brief hiatus next Sunday for the Fourth of July holiday (and my 47th birthday). This week, we will attempt to cover wireless/ mobile software developments for Amazon (Fire phone), Google (MicroMax device; Android L; Android Watch; Android TV; Android Apps on Chrome), and Apple (iOS 8). But first, a couple of newsworthy items.
Aereo – RIP
On Wednesday, the Supreme Court ruled by a 6-3 vote that Aereo, an “over the top” television services company, violated US Copyright Law. In the majority ruling, Justice Steven Breyer writes:
Viewed in terms of Congress’ regulatory objectives, these behind-the-scenes technological differences do not distinguish Aereo’s system from cable systems, which do perform publicly.
As a result of the ruling, Aereo suspended operations on Saturday. At the heart of the matter are two fundamental questions: 1) What is a “public performance” which is the basis of current copyright law, and 2) “How much content can be withheld from retransmission?”
Without going into all of the details of how Aereo works (you can find that here from CNET), it’s basically a centralized antenna combined with cloud-based DVR functionality for $8-12/ month. Broadcasters alleged (and the Court upheld) that Aereo violated the “transmit clause” of the 1976 Copyright Reform Act. This legislation clearly outlines that the retransmission of a signal is a public performance (and public performances are subject to copyright fees).
Because Aereo was found by the Court to be a “public performance” they are subject to retransmission fees for broadcast channels (and therefore subject to the Most Favored Nation clauses of the cable companies which guarantee a relative cost disadvantage for Aereo – today). However, if Aereo were to configure their architecture to be one of “private” performance (it’s hard to imagine how a unique antenna per customer could be any more private), they would now face the issue of broadcast station blackouts (in other words, while the transmission may be legal, the broadcaster cannot be compelled to show all content (and especially live content), to companies like Aereo). As an example, even though CBS shows a lot of content on their website (see here), they do not show all of the content, and what is shown is not live streamed.
For more details on the case and a good history of the the definition of “public performance,” have a look at these articles from Ars Technica here and here. Politically, it pits content developers (who have large centers in Southern California and New York City) against West Coast (and New York City) disruptors who have already upended retail (Amazon), publishing (Amazon), advertising (Google), autos (Tesla), lodging (Airbnb), and hired car services (Uber). It’s a tension that could impact political elections for decades to come as the West Coast begins to “play the game” with greater vigor.
Kindle Fire Phone. Will it Fly? Maybe.
On June 18, Amazon released their long-awaited Fire Phone (the full press event release is here). It’s a high end spectacle of a device, fully equipped with 3D sensing capabilities (which allow you to see 3D products in the Amazon website more clearly), as well as collect information about your daily life through a unique feature called Firefly (bar codes, document capture, websites, etc. – an excellent way for Amazon to have many “eyes and ears” on the world).
There are many features of the Kindle Fire phone, but none are as important as its integration into the lives of Amazon Prime users. While likely dismissed as a gimmik by their smartphone rivals (and, without a doubt, Amazon is in the smartphone business now), offering free Amazon Prime services to Fire Phone customers is not a “passing thought” promotion. Amazon has struggled with the concept of moving the allure of Prime beyond free 2-day shipping. Prime Instant Video has enjoyed limited success. Kindle Owners Lending Library and Kindle First have had equally “meh” responses. But half off a killer smartphone over AT&T’s network? That might work, especially for the AT&T base.
The key to Amazon’s success lies not only with AT&T + Amazon Prime customers, but also with the developer community. VentureBeat ran a great article this week where they interviewed many developers in the gaming community. To use a common Valley buzzword, they were “intrigued” at the prospect of existing game modification to include Amazon’s Dynamic Perspective. However, the 3D feature is currently only capable on the Fire Phone – a similar device would need to be implemented for the Kindle Fire (Tablet) to be able to maximize the revenue potential of the application.
Given the emergence of Android L (which supposedly contains 5,000 new APIs), the growing acceptance of Android 4.4 (KitKat) as the “new” Android standard, and continued upgrades seen in iOS 8, will developers take time to develop for Amazon’s latest device?
The troubling answer for the Seattle retailing giant is “maybe.” While Amazon’s developer support has been stellar (and, given their excellent support for other Fire Apps, there’s no reason to assume it will not continue), aligning exclusively to AT&T limits their addressable market. Relying on AT&T’s in-store selling abilities in light of Nokia’s recent and repeated failures is risky and potentially very expensive. Without a doubt, AT&T has a good network, but they carry an Apple smartphone legacy that will be difficult to unroot.
On top of this, the applicability to “mass market” apps such as Pandora/ Spotify (and even Amazon’s Prime Music service) and Facebook/ Vine/ Instagram is limited without 3D photography. If you watch the VentureBeat hands on demo embedded in the article, you will see what I mean when the reviewer gets to e-mail (a classic 2D app). The Kindle Fire phone cannot excite email. It may not be able to excite Pandora. And if it cannot excite picture-focused social networks, fuggetaboutit.
Here’s what will likely happen: Many developers will try once, and, with limited Kindle Fire sales, will not try again (absent Amazon throwing in aggressive payments or discounted cloud computing). Amazon will develop a more affordable device that will be free to all users (across all carriers) with a paid Amazon Prime (and postpaid wireless carrier) subscription. That’s when the fun will start and Amazon can then begin to offer “sponsored data” services (through AT&T and others).
Two and a Half Hours of Android – Three Big Developments From I/O.
Like many blogger/ analyst/ consultants, I begin each year thinking about trade shows and events: CES, CTIA, COMPTEL, the Cable Show, and the coveted Apple WWDC. This year, I was invited but could not attend Google’s I/O 2014. It looks like I missed a lot in their 2.5 hour presentation.
First, Google introduced Android One, a reference platform that allows handset manufacturers to make less expensive (and slightly less functional) Android models. This is critical for countries like India, where IDC reports that 78% of smartphones purchased in India were under $200 (see article here). This reference platform can be used by Karbonn, Micromax (see phone that was featured at IO that was written to Android One specs), Spice and others to deliver maximum functionality for cost-conscious budgets. The phone pictured has dual SIM-card slots, a 4.5 inch screen, and an FM radio for $100. (To get an idea of what mobile devices cost today, have a look at the Micromax site on FlipKart here. There are about 60 Rupees per US Dollar).
While the latest Android release (known as KitKat) is in full bloom, Google announced a new version of Android code-named “L.” While some of the improvements are iOS catch-ups (e.g., lockscreen notifications, prioritized alerts based on phone activity, etc.), others are extremely innovative (e.g., integration into Android TV and Android Wear, the use of Wear device proximity to keep Android devices unlocked (and vice versa), and the ability to interlock information between Google and non-Google apps). The new Android L appearance is both flat yet detailed – as one of you who saw an L-equipped device put it to me, a “clearer yet softer version than iOS8.”
Finally, Google surprised everyone with the Google Cardboard giveaway. This is no Oculus Rift, nor is it intended to be. But, to get the developer community thinking about how to develop a mass market Virtual reality experience (a brilliant idea in and of itself given the overall public “meh” over Google Glass), they included a free cardboard cutout, a few magnets and a rubber band along with a link to some Google software. Just slide in your Android-enabled smartphone into the cardboard contraption, and voila – you have a DIY Virtual Reality mechine.
The first reaction was an overwhelming “What the..” which has now been followed by a nearly unanimous “I get it – great idea!” chorus. Rather than regurtitate the analyst reaction to Google Cardboard, read it yourself here and here (the video in the second link is hilarious).
In two weeks, we’ll have our second quarter preview. If you have friends who would like to be added to The Sunday Brief, please have them drop a quick note to firstname.lastname@example.org and we’ll subscribe them as soon as we can (and they can go to www.mysundaybrief.com for the full archive).
Thanks again for your support, and have a terrific week!
** Editor’s Note: This was originally sent to SB readers on June 22, 2014 **
June greetings from Dallas, where, as the picture shows, we are enjoying needed rain. Thanks for the many comments on last week’s column. Many of you shared your experiences with Google Fiber (those of you who have it in Kansas City don’t appear to be going back to cable or U-Verse in the near future), while others accused me of oversimpifying in-building wireless efforts (admittedly, I did leave the concept of obtaining Building Authorization Agreements out of the Brief. They are hard to get and involve specialized real estate/ legal expertise). Thanks for your readership, and please keep the comments coming!
Over the past two weeks, we have written about major changes in the telecom industry, including:
- The half trillion dollar value and multi-hundred billion dollar capital shift from network to software providers
- The threat of Google as a new entrant to the residential and small business markets
- Fundamental architecture changes that will take place as content is pushed to the edge
- In-building data capacity needs will accelerate fibered metro building deployments (which drove Level3 to offer to buy tw telecom this week for 12.5x EBITDA).
The last three points are “take it to the bank” certainties that will impact some parts of the telecommunications industry more than others. Amid the hype, remember this: If one carrier can deliver consistent experiences while outside, en route, near building, and in-building, all of the other carriers will need to follow suit. The top three carriers (Verizon, AT&T, and Sprint) are driven to do this because most of their current data pricing plans are capped. Not only is third-party Wi-Fi offloading viewed as inferior and inconsistent when compared to the increasing affordability of in-building small cell solutions, in-building Wi-Fi now has become a revenue threat to the carriers.
There are many drivers of change in the wireless industry, but four deserve special mention:
- The ripples of T-Mobile’s Uncarrier strategy are beginning to be seen throughout the industry. First, it was the introduction of Equipment Installment Plans (EIP), and the separation it has driven between equipment sale and service revenue quality. As AT&T, Verizon, and Sprint transition their bases from traditional subsidy (which, at the end of the two-year term and beyond, can have attractive economics) to EIP models, the pressure on service revenues (particularly data ARPA/ ARPU growth) becomes greater. As we covered in Sunday Brief Q1 earnings reviews, the transition of T-Mobile’s base will be nearly complete by the end of 2014.
The most important thing to remember with these shifts, however, is the increased flexibility it provides the incumbent providers’ base of customers. Under the traditional $325-350 subsidy model termination penalty scheme, the perception among the base was that they were “locked” until the end of the two years. None of the new plans carry two-year contract terms, and, as Sprint and T-Mobile have shown, they are willing to pay multi-hundred dollar termination fees to drive up gross additions . A more unstable base should have AT&T and Verizon on edge.
To add fuel to the fire, T-Mobile will launch a new program to the AT&T/ Verizon base this week. For a $700 hold on your credit
card, T-Mobile will send you a new iPhone 5s for a free one week test drive (I have confirmed with T-Mobile that the one week starts upon iPhone receipt – something to consider when you sign up). This is not a plan that is aimed at the traditional T-Mobile base, but one that gets current (Sprint/AT&T/Verizon) iPhone 5s users into a T-Mobile store to have a conversation. (If the customer is a current iPhone 4s user, they will receive a double benefit due to the 64bit processing and LTE capabilities inherent in the 5s – a very clever move on the part of T-Mobile).
Will this plan have the same effect as equalizing the cost of an Android Wi-Fi only tablet? Likely not. But it could erase perceptions of poor network coverage for some. While many see this move as more “Carrier” than “Uncarrier”, I see this as Part 1 of a multi-part plan to reintroduce the T-Mobile network (voice, text, data) to millions of skeptical AT&T and Verizon customers (some of whom may have previously been T-Mobile customers). At worst, this program will provide real-time feedback on their network improvements and identify coverage gaps (and hopefully reiterate the need to begin a substantial in-building coverage initiative for T-Mobile hopefuls who are captive to multi-story living/ working environments). At best, it will propel 2-3 million gross additions through the end of 2014.
- The drive for spectrum outside of the FCC auction process will continue. There have been a lot of discussions this week about Verizon’s interest in Dish network spectrum (this article places a $17 billion value on the asset, and it’s very likely that Verizon’s interest is focused on Dish’s AWS-4 holdings as opposed to the 700MHz spectrum band), and also T-Mobile’s interest in acquiring additional 700 MHz A-Block (a.k.a., “low band”) spectrum from the likes of Paul Allen’s Vulcan Ventures (who holds the Seattle and Portland licenses) and spectrum management companies King Street LLC and Cavalier Wireless (the full list of original A-Block winners can be found here).
We have already seen AT&T actively pursuing spectrum purchases since 2012 in the 2.3 GHz/ WCS band (see here for their Sprint spectrum purchase that escaped most media headlines), and this week Sprint announced their first wave of rural partnerships which will leverage their Tri-Band capabilities.
With the frequency-sharing rules of the upcoming AWS-3 auction, and the “reserved/ unreserved” designation for the 600 MHz auction discussed in a previous Sunday Brief, is anyone surprised that unrestrained and adjacent spectrum would be interesting to larger carriers? Absolutely not. Announcements serve to entice more broadcasters to participate in the 600 MHz auction process, and hopefully keep additional regulations to a minimum.
Interestingly, if there are a wave of spectrum sale transactions prior to the end of the year, look for new categories of bidders (e.g., non-traditional wireless providers) to emerge for the licensed spectrum.
- Consolidation efforts will fail, not because of Sprint’s lackluster efforts, but because of T-Mobile’s unbelievable success. In second quarter earnings, we will see the full fruits of T-Mobile’s Early Termination Fee buyout initiative announced in January. Surprisingly to most (although not all), T-Mobile’s results will equally impact Sprint and AT&T (given the process ease of SIM-card swapping between AT&T and T-Mobile, this might be viewed as a slight victory for AT&T).
As we have shown in previous Sunday Briefs (see picture), the retail postpaid gap between T-Mobile and Sprint is shrinking (if one exists in retail prepaid after 2014 I’ll be very surprised). The eleven million subscriber gap at the beginning of 2013 could be as small as four million as we exit 2014. And, considering the composition of T-Mobile’s (smartphones) vs. Sprint’s (tablet) net additions, the revenue gap will be even smaller.
While there will be many traditional regulatory concerns (link to the Herfindahl index definition is here), the trends beg the question “Why should T-Mobile take on Sprint?” Does Sprint’s base of customers provide unique differentiation (and, given a large portion of the base is still on unlimited and unthrottled LTE data plans, can the value of the customer base increase)? Does Sprint’s base allow T-Mobile to build unique capabilities in the enterprise segment (which Sprint largely abandoned in 2013 to focus on small and medium customers)? Can Sprint out-innovate T-Mobile with a new management team (or, as one of you wrote recently, “Where is the Sprint problem – with the quality of the clay or with the potter?”).
Time is not on Sprint’s side: Service revenues are shrinking, management is leaving, and customers (particularly Corporate Liable enterprise customers) are questioning. No doubt, there is a value to scale, but T-Mobile is worth much more than $40/ share in a couple of years without Sprint. Could a cash infusion from Comcast/ Time Warner or a cable consortium be a viable alternative? Does T-Mobile even need cable as a strategic investor?
Consolidation makes good headlines, but every month that goes by without an announcement opens up better alternatives for T-Mobile than Sprint (and makes the “Why?” question more difficult to answer). Remember – at the beginning of 2006, Sprint Nextel, AT&T Wireless, and Verizon were basically the same size. One non-traditional strategic partner/ investor could reset the equation for T-Mobile and the industry.
4. The cable industry (as opposed to FiOS or U-Verse) will unveil Wi-Fi capabilities in 2015 that will be easier to use and intensify the battle for data in the home and office. The blind spot in wireless carrier strategic plans is cable. Their Wi-Fi efforts are very close to tackling the issue of in-home (and in-office) data usage. The rollout of an additional 100MHz of 5GHz Wi-Fi capacity will also fuel the bandwidth fire. More to come on this in a future Sunday Brief, but, given the arguments presented above and in previous analyses, cable would easily eliminate 10-20% of the data upside from the wireless carriers in 2015. (Editor’s note: for a view of the extra expansion from the cable industry’s point of view, check out this CableLabs blog post).
These are a few of the issues wireless service providers face, but they cover nearly every aspect of the business environment: non-traditional competitors presenting real substitutes, traditional competitors redefining the buying process, increases in supply, new regulations, and the increasing sophistication of smartphones and tablets are but a few of the dynamics that will be discussed around the strategic planning table. Who wins is anyone’s guess. But every carrier will attempt to move the needle.
In other important news this week, we do not have space to do a full analysis of the new Amazon smartphone (we will try to tackle the new Fire Phone in depth next week). In the meantime, check out two in-depth reviews here and here, and an excellent interview with Ian Freed from Amazon here.
Have a terrific week!