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Greetings from Charlotte, North Carolina (picture is, from left, Frank Cairon, formerly of Verizon Wireless and Ryan Barker, currently with Verizon Wireless enjoying some good Mexican food on Friday in the Queen City with yours truly).
This week’s TSB examines the short-term dynamics that could impact wireless growth in the third quarter and through the end of the year. At the end of this week’s TSB we will also briefly examine the current state of litigations and investigations active and pending (T-Mobile/ Sprint, Facebook, and Google).
Follow-up to Last Week’s CBRS article
Before diving into earnings drivers, a quick shout out to Federated Wireless, who raised $51 million this week in a mammoth C Round financing (full announcement here). Existing investors American Tower, Allied Minds, and GIC (Singapore sovereign wealth fund) all participated in the round, and Pennant Investors (Tim McDonald, formerly of Eagle River (Craig McCaw), will be joining the Federated board) and SBA joined with fresh cash. Kudos to Federated CEO Iyad Tarazi for his continued leadership and perseverance. With $51 million in additional cash, spectrum sharing gets a global boost.
In addition to this news, the FCC also has placed the approval and scheduling of the Private Access License auction (this is the dedicated band that gets priority over the General Authorized Access band) on the docket for June 2020 (FCC Commissioner Pai’s blog post is here). It’s generally assumed that this means a C-Band auction will come at the end of 2020/ beginning of 2021 (although this week’s news that Eutelsat has withdrawn from the C-Band Alliance has some believing that there may be a side deal afoot). The PAL auction timeline is in line with expectations, and it’s likely participants will include some new(ish) entrants.
Third Quarter Earnings – What Could Dislodge Wireless?
Speaking of expectations, there’re not a lot of dramatic changes expected in the wireless arena. Consensus has T-Mobile leading the postpaid phone net additions race (no surprise), with Sprint struggling to keep pace, AT&T in the 0-300K range for postpaid phone thanks in large part to FirstNet gains, and Verizon, excluding cable MVNO revenues, growing their retail postpaid phone base only slightly. With the exception of FirstNet (and a few quarters of decent Verizon growth), this is a pretty consistent story dating back to early 2017. What events could change the equation and dislodge the current structure?
- More rapid AT&T postpaid phone net additions led by FirstNet. Here’s how AT&T CFO John Stephens summarized the relationship between spectrum rollout and FirstNet deployments at an investor conference in early August:
We had some AWS-3 and some WCS spectrum that we had, so to speak, in the warehouse that we hadn’t deployed. We had 700 spectrum, Band 14 from FirstNet, which the government was requiring us to deploy. And then we got a whole new set of technologies that were coming out, 256 QAM and 4-way MIMO and carrier aggregation. They were particularly important to us because of our diverse spectrum portfolio. So we got the FirstNet contract and we had to touch a tower, have to go out on the network. And we decided, with this contract, now is the time to, so to speak, do everything. Put all the spectrum in service, that’s the 60 megahertz. In some towers, it’s 50, some towers, it’s 60, but it’s 60 megahertz of new spectrum that was generally unused that we’re putting in.
This has the effect of increased costs, but also improved network performance. With 350,000 net additions already from FirstNet (Stephens disclosed this in the same conference), it’s entirely possible that they could post a 100K net add surprise due to increased coverage and deployments. In turn, improved wireless bandwidth, while driving up costs, should lower churn in areas like Detroit (RootMetrics overall winner in a tie with Verizon – first since 2012), and Boston (first RootMetrics overall win in Bean Town since 2017).
- Faster cable MVNO growth. While this week’s news was on Altice’s aggressive $20 unlimited price point for existing customers (great analysis on their strategy here), both Charter and Comcast see a lot of mover activity in the third quarter. This would seem to be a very good time to present their wireless offer. Here’s a chart of net additions by both Charter and Comcast for the past two years:
While the two largest cable providers accounted for ~390K growth in 2Q (and over 1.3 million net additions growth over the last four quarters), there’s a strong likelihood that this figure could grow even greater as the attractiveness of the wireless bundle pricing takes effect. Both Spectrum and Comcast are maturing their service assurance processes, and those efforts should lower churn.
Comcast also made a number of changes to their “By the Gig” plans which encourage this option for multi-line plans that use 2-6 Gigabytes per line per month (and therefore use a lot of Xfinity Wi-Fi services). It basically amounts to a prepayment for overage services, but could be attractive for certain segments/ demographics (full details on these offer changes are here). Charter did not follow the Comcast changes described in the link and their “By the Gig” pricing continues to be $2/ mo / gigabyte higher.
Both Comcast and Charter are running into Apple iPhone announcement headwinds if next week’s headlines meet expectations (no 5G, no CBRS, no special financing deals, better camera). If the changes do not increase willingness to upgrade/ change to an iPhone, it’s going to be very difficult to craft a cable plan (even $20/ mo.) that will buck the trend. The upgrade cycle will be extended to 4Q 2020, when both the carriers and Comcast/ Charter will have full access to 5G.
Our prediction is that Charter and Comcast will have 475-500K net additions in the third quarter thanks to a combination of lower churn and higher gross additions (led by increased moving activity). Altice’s offer will add another 70K net additions in September, with those gains coming from Sprint retail and, to a lesser extent, T-Mobile retail and wholesale (Tracfone).
- T-Mobile’s 600 MHz coverage (and gross add) improvements. As T-Mobile, Sprint, and the state Attorneys General try to find a resolution to their quagmire, T-Mobile keeps on deploying 600 MHz spectrum. Here’re their reported (through Q2 2019) and estimated (Q3/Q4) progress:
Every new device on the T-Mobile.com website (and every T-Mobile store) is 600 MHz/ LTE Band 71 capable. Many older devices are not, however, and that is preventing greater market share gains in secondary and tertiary geographies (many/ most BYOD Android devices from AT&T, for example, will have the 700 MHz but not have the 600 MHz band). The expected Apple announcement represents a slight headwind for T-Mobile as well.
There’s a natural gross add/ upgrade path that follows 145 million coverage growth over a 12-month period. Assuming T-Mobile keeps their churn rate at 0.8%/ month over 3Q (2.4% of the ending branded postpaid 2Q base would be ~1.07 million disconnections), they have grown their 600 MHz marketable base by 20 million from Q1 to Q2 and by another 50 million from Q2 to Q3. If they just grew their penetration in the 600 MHz band by 1.5% for Q1-Q3 incremental POPs (or 0.5% penetration for the entire estimated 3Q 2019 footprint), they would negate the entire estimated branded postpaid churn for the rest of the country. This ex-urban/ rural growth opportunity is unique to T-Mobile and would at the expense of AT&T and Verizon.
Offsetting the 600MHz growth is small cell progress. T-Mobile committed at the beginning of the year to deploy 20,000 incremental small cells in 2019, but that guidance was withdrawn in their Q2 Factbook with H1 growth of only 1,000. That leaves a very large backlog of in-process capital (excluding capitalized interest, total capital spending was $3.48 billion vs an estimated spending range at the high end of $5.4 – $5.7 billion). T-Mobile should spend at least $2.2 billion in capital spending in the second half of 2019 on 5G, 600 MHz, and other initiatives and will undoubtedly be left with a lot of in-process small cell deployments.
- Sprint’s prepaid and postpaid churn. There’re a lot of headwinds for Sprint in the third quarter – overall 2Q churn trends are higher than previous year’s, and no one expects the seasonal respite to last long. It’s likely that 3Q postpaid churn could exceed 1.85%, led by postpaid phone churn of a similar level (look for late September promotional activity).
Prepaid churn is a bit tougher to forecast and will also be tracked closely. If the postpaid churn comes in below 2Q levels, check the prepaid recategorizations to postpaid (they were 116K in Q2 and 129K in Q1). Both prepaid and reclassified postpaid accounts will be transferred to Dish assuming the merger goes through, but it makes the postpaid headline number more palatable.
The 30-day guarantee promotion, according to most reports, has been an ineffective switching tool. (Sprint’s 5G rollout success has been much more impactful). Expect Sprint to say very little until there is clarity on the litigation, and to post greater than expected losses in prepaid subscribers as they preserve their marketing dollars for a post-merger world.
Litigation Tracker: Why the Facebook, Google, and T-Mobile/ Sprint cases are not all the same
Speaking of litigation and investigation, we were very dismayed that media sources are choosing to lump the New York-led Facebook investigation announced Friday, the to be announced Texas-led Google investigation, and the on-going T-Mobile/ Sprint (TMUS/S) litigation into one mega-story. While there are some similarities, the upcoming Google action is broader than Facebook and more bipartisan than the TMUS/S complaint.
As most of you who are following the TMUS/S suit know, the states of Oregon and Illinois recently joined the original 14 states and the District of Columbia to block the merger. (As an aside, Fox Business is reporting that the state AG group is focusing on the inexperience and shaky financial condition of Dish Networks as opposed to what would have been an uphill market concentration battle). In fact, in the original TSB concerning the lawsuit (here), we were surprised by the absence of Illinois. The figure below shows who is involved in what (underlined states are named in the Facebook litigation):
To recap, there are 40 states + the District of Columbia named in the National Association of Attorneys General comment letter to the FTC (filing here), and at least 30 of them are joining a Texas-led lawsuit against Google to be announced early this week.
The makeup of the states in the FTC letter is very bipartisan: 14 Republican and 26 Democrat attorneys general. All of the states involved in the TMUS/S litigation are also named in the FTC comment letter. To contrast, of the 17 states in the TMUS/S litigation, only Texas (AT&T HQ) is Republican and the other 16 are Democrat.
As we stated in the TSB on the AG lawsuit, very few sparsely-populated states, regardless of political affiliation, are participating in the T-Mobile/ Sprint litigation. Fourteen of the fifteen least densely populated states in the US (data here) are named in the Google/ FTC letter. However, only two of the fourteen (Colorado, Oregon) are participating in the TMUS/S litigation. The promise of a rural solution outweighs the benefits of a fourth carrier in metropolitan and suburban areas.
The Facebook investigation is also widely bipartisan with five Democrats and four Republican states represented. Florida is involved in the Facebook investigation but none of the other two legal activities. In addition, there are nine states (including New Jersey, a Democrat stronghold) that are not currently participating in any legal activity.
Bottom Line: Concerns about Google’s anti-competitive practices are supported by a large number of state Attorneys General and are very bipartisan. A subsegment of Democrat AGs (and TX) is also a part of the T-Mobile/ Sprint lawsuit. And an even smaller subsegment plus Florida is a part of the recently announced Facebook investigation.
Next week, we will highlight some wireline trends and talk about overall profitability across the telecommunications sector. 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 we will include them on the list.
Have a terrific week… and GO CHIEFS!
Greetings from Lake Norman/ Davidson, North Carolina where everybody is working (including the neighbor kid, Caleb, pictured with the Editor and yours truly). This week, we’ll look at two studies that examine data usage, and try to deftly explain AT&T’s efforts to improve their cost structure and competitive cloud position. But first, a follow up from last week’s column.
Follow-up Idea to the Apple Card TSB
I did not anticipate the overwhelming response the Apple Card TSB would receive (Craig Moffett did a mid-week post on the concept and CNBC picked it up here). I have had about a dozen in-depth conversations on the Apple Card TSB this week with several of you and I think we have come up with the ideal suggestion for Apple: 2x Daily Cash towards your monthly phone payment. So, if you get 2% back from using Apple Pay (say $2 on a $100 grocery purchase), that would become $4 towards your monthly phone installment. There could also be an incentive to pay the phone installment first or sooner.
This promotion would reward existing Apple users with a new phone just from using Apple Pay (or buying other products from the Apple family, or just using the physical card), and would be a way for existing Android users to make the switch to Apple for a discount (or to lessen the blow of being underwater from a low trade-in value). The opportunity to “earn” your way to a free iPhone increases Apple Pay (or card) usage, which increases value, etc. And, customers would have the ability to worry less because their phone is never locked to a wireless carrier. Not that the marketing department at Apple needs any help, but if this ends up being the incentive, you heard about it first in TSB.
There’s a Deeper post on the Apple Card that might be very useful for those tracking the topic closely. Thanks for all of the ideas and please keep them coming.
Two “A Ha” Reports This Week Generate Minimal New Insights
Meanwhile, we had two “a ha” reports come out this week. The first was a supposed “scoop” from the Wall Street Journal that customers were being duped by their internet service provider (AT&T, Comcast, Time Warner Cable, others) into paying more for higher throughput speeds and receiving nothing in return. This was not a passing consumer interest story, but had substantial article placement, a video, and even a podcast to support it. (Both the video and the podcast take more time to analyze the complete array of things that could contribute to slower speeds in the home, such as interference or neighborhood congestion, and, inadvertently, make a very strong yet indirect case for paid prioritization).
At TSB, we seek first to understand, but at the end of the day, it’s very difficult for us to have as much excitement as the Wall Street Journal did about possible overpayment for the following reasons:
- The consequences of paying too much for home broadband are not substantial. Analyzing whether customers are over-insured on their home or auto insurance is likely to have 10x more impact than the $10-20/ month being paid for a premium tier. Consumers should spend their time wisely.
- Pursuing an alternative to your current speed (buying a premium tier) usually carries no contract and can be immediately evaluated. Most ISPs do not have a change fee.
- The sample size used in the article is not large enough to make a national conclusion (34 multi-streaming tests with a majority made in New York City is good to know, but not conclusive that Charlotte or Phoenix or Tampa customers will have the same experience).
Bottom line: There’s nothing wrong with 1Gbps speed even if you don’t need it. There’s also nothing wrong with buying the nearby Dodge Challenger SRT Demon (840 hp – don’t we all need one?) if you can afford that. Faster Internet speeds from your ISP could help, and so could a new Access Point or Cable Modem.
The second study that came out this week deserves more attention because of its sample size and implications to the industry. The University of Massachusetts and Northeastern University used a mobile app called Wehe to track the Internet usage patterns of 126,249 mobile users over several months (over 1 million samples). The summary (which is not surprising to most cellular users) is that average speeds for popular sites such as YouTube and Netflix are slower than expected. Here’s a summary chart of the findings for AT&T and Verizon (June 11, 2018 is the day that Net Neutrality rules were made optional) :
What this shows for Verizon is precisely what we discussed in last week’s TSB: 480p customers get consistent YouTube data throughputs at 1.9 Mbps, and 720p customers receive YouTube data throughputs at 4.0 Mbps. This is consistent with their advertised plans (why NBC Sports and Vimeo are not included in the throttle was probably the topic of several Verizon Wireless staff meetings this week). I am sure if they were to upgrade a device to 1080p throughout, they would have a third tier that shows around 8-9 Mbps. For the record, AT&T has disputed the findings and CTIA in 2018 issued a statement disputing the findings.
Bottom line: If you want video resolution that matches the maximum capabilities of your smartphone, you might have to pay more. To last week’s comment, this could be a differentiation point for one of the challenger carriers (e.g., T-Mobile resuming their un-carrier ways and making 720p or 1080p the new “basic” video viewing tier).
AT&T’s Herculean Lift
Condensing AT&T’s Network and Business strategies into one TSB is a challenge because of the breadth of problems they are attempting to solve. Unlike the AT&T of the 1990s (more focused on communications innovations like the Internet and mobile), this generation’s AT&T is much deeper and comprehensive (focusing on information delivery, relevance, timeliness, analysis, and action).
It’s important to remember that AT&T as we know it today is really a 12+ year-old company. BellSouth was formally acquired at the end of 2006 and with that came the formation of “The new at&t”, replacing Cingular Communications. That was followed by a substantial network integration project which ended in 2009. While we think about AT&T as a legacy brand, the common platform that we see today is only a decade old.
Since 2009, it’s been a wild ride for wireless:
- 4G LTE services have been introduced and run their product life cycle (with network traffic growing 40-60X over the decade)
- Smartphones and tablets have become the primary source for information retrieval and entertainment
- Many-to-many communication has become a global standard thanks to social networks
- Commerce and mobility are inextricably linked
- Wireless Machine-2-Machine (screenless) devices have produced an enormous amount of data and dramatically improved utility and productivity
As we discussed in a TSB a few weeks back, mobile growth contributed to fiber infrastructure growth. More towers and small cells spawned additional conduits, trenches, and pole attachments. All of this data needed to be stored and processed, and server farms led to cloud computing sites and eventually hyperscale data centers. The infrastructure and mobile landscapes changed dramatically with LTE network demand.
What didn’t change as quickly were the network operating systems and business processes that determined the efficiency and profitability of AT&T. Integration was the exception rather than the rule, data needed to solve customer problems was available to some departments and not to others and obtaining merger synergies by negotiating better rates with the same menagerie of vendors (often with extended terms) made breakthrough change harder to achieve. Growth was hindered by incompatible product roadmaps and the quantity of equipment required to accommodate data growth was becoming untenable. Something had to give.
In 2013, AT&T began the painstaking process of separating computer processing from separate software development/ integrations for each of its network vendors with the introduction of Domain 2.0 (see whitepaper here). The picture below from the whitepaper summarizes AT&T’s direction and provides a good roadmap for their recent Microsoft, IBM, and Dell announcements:
Routers (Cisco and Juniper being AT&T’s main providers) and optical infrastructure (Ciena and Cisco) were the first focal points of Domain 2.0, and it manifested itself in the creation of a mobile packet core. Key Domain 2.0 vendors as of the end of 2015 were Cisco (via their Tail-F Systems purchase), Ericsson, Nokia (with Alcatel/ Lucent), MetaSwitch (private UK-based company), Affirmed Networks (Evolved Packet Core or EPC), Amdocs, Juniper, Fujitsu, Brocade, and Ciena. There will be others as this new platform makes it much easier to attract new entrants.
Being able to separate operational instructions (core optical equipment and routing functions – the “do this/ do that”) from monitoring, alerting, and change management functions, and then standardizing the structure of the latter across the vendors mentioned above is no small task. All of that had to be done (or at least close enough to completion) to have the Microsoft/ IBM and Dell announcements. Here’s a brief summary of what each does:
The IBM agreement takes the AT&T Business’ internal application infrastructure and moves it to the IBM cloud (this will be a consolidation from multiple providers). As a reminder, IBM’s acquisition of Red Hat allows it to service hybrid cloud configurations. Much of the NFV Infrastructure Cloud will move to IBM. In turn, IBM runs a very large cloud business for third-party customers (top part of the diagram). This moves the network closer to IBM’s (particularly AI or Artificial Intelligence) software.
It makes a lot of sense moving internal application infrastructure to IBM given the strong network relationship the two companies have had for two decades.
The Microsoft agreement takes non-network infrastructure applications and moves them to the cloud. Microsoft is another very large cloud provider but also the developer of Windows, Bing, Office 365, Skype, and Xbox software (Microsoft’s IPTV platform, Mediaroom, was sold to Ericsson in 2013). It gives Microsoft an easy path to both Mobile Edge Computing (MEC) and low latency network APIs. Unlike the IBM agreement (which appears to have a heavy AT&T Business focus), the Microsoft agreement appears to be more open-ended. Xbox wins in a 5G world that’s also tied to AT&T Fiber homes. So does Skype on mobile, desktop, and tablet applications. More video and less latency demand a different way of thinking about network management. Microsoft will help push the product envelope in the home and in the workplace.
The Dell agreement brings the Austin-based company into Airship (an organization governed by the OpenStack Foundation), described as “a collection of loosely coupled, but interoperable, open source tools that declaratively automate cloud provisioning and life-cycle management utilizing containers as the unit of software delivery.” AT&T needs more network edge capacity flexibility and is engaging Dell to help them (via Airship) improve network server delivery. More details on the agreement can be found in this Fierce Telecom article.
Bottom Line: AT&T’s July and early August announcements show their early hand cloud and edge technology partners. They have been at the leading edge of Network Function Virtualization (NFV) and Software Defined Networking (SDN), and are finally bringing together all of their infrastructure platforms into a common architecture. This is the most efficient (really the only) way to enable rapid, profitable local growth. It will be interesting to see how other carriers (specifically Verizon) follow AT&T’s lead.
Next week, per many requests, we will be discussing the role of Citizens Band Radio Services (CBRS) in the communications landscape. Please note that next week’s TSB may not be delivered until Sunday evening due to the Labor Day holiday.
Until then, if you have friends who would like to be on the email distribution, please have them send an email to email@example.com and we will include them on the list.
Have a terrific week!
The following articles provide a good overview of the Apple Card and the possible role it could play in the disintermediation of traditional wireless carrier phone payments. Please note: This is an emerging trend and not a “done deal” and it’s likely that this thread will be updated several times in the next few months. Look for more when Apple launches their next generation of iPhones, likely in September:
- The Consumer Financial Protection Bureau’s (CFPB) report on the state of the consumer credit market is discussed in this week’s TSB. Very useful information, although it’s a bit dated (2016). Link to full report is in the article and also here.
- Link to the actual announcement of the Apple Card last March is here. Apple Pay/ Apple Card discussion starts at 23:59.
- CNBC article from August 9 describing the fact that Apple was offering the Apple Card to as many current Apple users as possible. Goldman Sachs is applying many learnings from their Marcus (consumer banking) product to make the Apple Card as broad as possible.
- Ken Segall’s blog post “The Ghost of Apple Card Past” that is referenced in TSB is here.
- Bloomberg article that explores Apple Card’s Terms and Conditions and reports that Apple may have additional financing options in mind with this product.
- Wall Street Journal review of the Apple Card (detailed and thorough). A subscription may be required.
- To get an idea of where Apple Card could go, have a look at the current My Best Buy financing options. Remember – Best Buy is not a manufacturer – Apple should be able to provide even better offers.
- Mastercard CEO Craig Vosburg CNBC interview on the Apple/ Goldman Sachs/ Mastercard relationship is here.
- CNBC article quoting yours truly as well as Craig Moffett on the impact the card could have on the carrier community is here.
The following articles provide a good overview of the role fiber plays in the telecommunications ecosystem today (there’s some good details on Google Kansas City and Louisville setbacks as well):
- An RCR Wireless article that details Verizon’s “integrated engineering process.” It also has some details on the fiber deal with Corning.
- Corning (Bob Whitman) and Verizon (Glenn Wellbrock) conversations from YouTube part 1 and part 2.
- Altice press release announcing first homes on Long Island to receive 960 Mbps symmetrical speeds for $80/ month.
- Google missing their deployment goals for Kansas City, KS and Mission Hills, KS
- Telecompetitor AT&T Fiber penetration article in which they talk about doubling market share. The map see in the article (AT&T Fiber cities) is here.
- Cincinnati Bell 2Q investor penetration showing that AT&T’s goal of achieving 50% market share is entirely possible with the right content bundles (they are at 44% without the content – see page 7).
- Blair Levin’s and Larry Downs Harvard Business Review article on Why Google Fiber failed and how it’s really a success in disguise. Rationalization gone awry. This might have been the case if their more recent deployments had not damaged their brand.
- Local (Louisville Courier-Journal) coverage of Google’s decision to pull out of the Louisville market is here.
- Google’s plans to expand their Webpass (60 GHz wireless hub and spoke) service for Multi-Dwelling Units Austin is outlined here.
- The Dallas Morning News rant on Frontier’s failures is a classic and outlined here.