Greetings from the Queen City, where the IT scene is red hot even though cooler fall temperatures have finally arrived. I was pleased to be the guest of San Mateo-based Aryaka Networks at the 2019 Orbie (CIO of the Year) awards on Friday. It was great to catch up with many folks in attendance including Karen Freitag (pictured), a Sprint Wholesale alum and the Chief Revenue Officer at Aryaka.
This week, we will dive into drivers of wireline earnings. At the end of this week’s TSB, we will comment on several previous briefs (including the AT&T Elliott Memo fallout) in a new standing section called “TSB Follow Ups.” We close this week’s TSB with a special opportunity for reader participation.
Wireline Earnings: Enterprise, Expense Management, and Extinction
One of my favorite things to write about in the TSB is wireline – that forgotten side of telecom and infrastructure that serves as the foundation for nearly all wireless services. Wireline is a case study in competition, regulation, cannibalization, innovation, and a few other “-tions” that you can fill in as we explore the following dynamics:
Residential broadband market share (measured by net additions). Before the Sunday Brief went off the air in June 2016, cable was taking more than 100% share of net additions. This means that customers were leaving incumbent telco DSL (and possibly FiOS) faster than new customers were signing up. At the end of 2018, cable continued its dominance with 2.9 million net adds compared to 400 thousand net losses for telcos (see nearby chart. Source is Leichtman Research – their news release is here). If this trend holds through the end of the month, it will mark 18 straight quarters where cable has accounted for more than 95% of net additions (Source: MoffettNathanson research).
To be fair to the telcos, all of 2018’s losses can be attributed to two carriers: CenturyLink and Frontier. We have been through the Frontier debacle twice in the last three months and will not retrace our steps in this week’s TSB (read up on it here).
But CenturyLink is a different story, with losses coming in areas like Phoenix (where Cox is lower priced), Las Vegas (Cox lower priced except for 1Gbps tier), and legacy US West areas like Denver/ Minneapolis/ Seattle/ Portland (Comcast has lower promotional pricing). Even as new movers are considering traditional SVOD alternatives like Roku and AppleTV in droves, there’s a perception that the new CenturyLink fiber product is not worth the extra cost.
A good example of the perception vs reality dichotomy comes from the latest J.D. Power rankings for the South Region:
While these ratings reflect overall satisfaction with the Internet service, it’s very hard for new products to overcome old product overhang (and DSL experiences can create long memories).
But superior customer satisfaction (749 is a decent score for telecom or wireless providers regardless of product) does not guarantee market share gains. AT&T (Bell South) has continued to improve its fiber footprint, invested heavily in retail presence, and improved the (self-install) service delivery experience. Even with that, it’s highly likely that AT&T’s South region lost market share to Comcast (2nd place) and Spectrum (4th place). Why is a three-circle product outperforming a five-circle product?
The answer lies in several factors: Value (see comments above about promotional pricing and go to www.broadband.now for additional information), Bundled products (which links back to value – bundle cost may be significantly cheaper), and Legacy perceptions (DSL overhang mentioned above, tech support overhang, install overhang).
For more details, let’s look at two very fast-growing areas: Dallas, TX and Hollywood (Miami), FL. Nearby is a chart showing online promotional pricing for AT&T, Spectrum (Charter) and Comcast. There are some differences on contract term (AT&T has contracts in Dallas; Spectrum does not. Comcast has a 2-yr term with early termination fees to get the $80/ mo. rate for their triple play in Miami). Both zip codes selected above have over 50% served by AT&T fiber. AT&T is more competitively priced than Spectrum in Dallas, and extremely competitive with Comcast especially at the mid-tier Internet only level (promotional rate gigabit speeds are $70/ month with no data caps).
With superior overall customer satisfaction and competitive pricing, why does AT&T continue to tread water on broadband and lose TV customers? Are cable companies out-marketing Ma Bell? Is there a previous AT&T experience overhang? Are AT&T retail stores creating differentiation for AT&T Fiber (compared to minimal showcase store presence for Spectrum or Comcast)?
Bottom line: Cable will still win a majority of net adds despite lower customer satisfaction and higher prices. Why AT&T cannot beat cable especially in new home (AT&T fiber) construction areas is a function of marketing, operations and brand mismanagement.
Enterprise spending – Did it return to cable instead of AT&T/ Verizon/CenturyLink? We commented last week on AT&T’s expected gains in wireless enterprise spending thanks to the FirstNet deal. How that translates into wireline gains is an entirely different story. Here’s the AT&T Business Wireline picture through 2Q 2019:
While these trends are not as robust as wireless and operating income includes a $150 million intellectual property settlement, AT&T management described Business Wireline operating metrics as “the best they have seen in years.” What this likely indicates is that AT&T’s legacy voice and data service revenue losses (high margin) are beginning to decelerate (at 14.6% annual decline, that’s saying a lot – Q1 2019 decline was 19.2% and the 2Q 2017 to 2Q 2018 decline was 22.0%!).
Meanwhile, Comcast Business grew 2Q 2019 revenues by 9.8% year over year and is now running an $8 billion run rate (still a fraction of AT&T Business Wireline’s $26.5 billion run rate but a significant change from Comcast’s run rate in 2Q 2016 of $5.4 billion). Spectrum Business is also seeing good annualized growth of 4.7% and achieved a $6.5 billion annualized revenue run rate. Altice Business grew 6.5% and is now over a $1.4 billion annualized revenue run rate. Including Cox, Mediacom, CableOne and others, it’s safe to say that cable’s small and medium business run rate is close to $13 billion (assuming 33% of total business revenues come from enterprise or wholesale). That leaves a consolidated enterprise and wholesale revenue stream of ~ $5.5 billion which is more than twice Zayo’s current ARR.
The business services divisions of cable companies are repeating the success of their residential brethren. They are aggressively pricing business services, using their programming scale to grab triple play products in selected segments such as food and beverage establishments and retail/ professional offices. And, as Tom Rutledge indicated in last week’s Bank of America Communacopia conference, they are starting to sign up small business customers for wireless as well. I would not want to be selling for Frontier, CenturyLink or Windstream in an environment where cable had favorable wireless pricing and the ability to use growing cash flows to build a competitive overlay network.
Enterprise and wholesale gains are important for several reasons. In major metropolitan areas, segment expansion gets cable out of the first floor (think in-building deli or coffee shop) and on to the 21st floor. To be able to get there, cable needed to have a more robust offering. Comcast bought Cincinnati-based Contingent services in 2015, and Spectrum also improved its large business offerings. They are not fully ready to go toe-to-toe with Verizon and AT&T yet, but with some help from the new T-Mobile (all kidding and previous John Legere lambasting aside, a new T-Mobile + cable business JV would make perfect sense), things could get very difficult for the incumbents.
Moving up in the building is important, but there’s another reason to expand from the coffee shop: CBRS (if you are new to TSB, the link to the “Share and Share Alike” column is here). Given that 2-3 Gigabytes/ subscriber of licensed spectrum (non-Wi-Fi) capacity are consumed within commercial offices per month, there’s a ready case for MVNO cost savings as Comcast, Altice, and Spectrum Mobile continue to grow their wireless subscriber bases.
Further, since many enterprises are going to be introduced to LTE Private Networks soon, there’s a threat that Verizon and AT&T (and Sprint if the T-Mobile merger closes) stop provisioning cable last mile access out of their regions and only provision wireless access. As we have discussed in this column previously, the single greatest benefit of 5G LTE networks is the ability to control the service equation on an end-to-end basis for branch/franchise locations. It represents a compelling reason to move to SD-WAN, and allows cable to deepen its fiber reach and build more CBRS (and future spectrum) coverage.
Bottom line: Cable continues to grab share in small, medium, and enterprise business segments as they move from connecting to the building to wirelessly enabling each building. CBRS presents a very good opportunity to do that. Even with cable’s entre into the enterprise segment, it will still be dominated by AT&T (with Microsoft and IBM as partners) and Verizon for years to come.
Expense Management and Productivity Improvement. Flat to slowly declining operating costs in an environment where revenues are declining more precipitously is a recipe for increased losses. Even with some of the capital and operating expense being shared with 5G/ One Fiber initiatives, the reality is that lower market share is leading to diseconomies of scale and both are going up a cost curve right now.
That’s why reducing operating expenses is not a spreadsheet exercise – operating in a territory originally engineered for 80-90% market share that is now at 30-40% share requires increased efficiency. Connecting to neighborhoods is hard and connecting through neighborhoods to individual homes is even harder. Combine this with a change in technology (fiber vs twisted copper) ratchets the degree of difficulty ever higher.
One of the great opportunities for all communications providers is using increased computing (big data) capabilities to quickly troubleshoot issues and recommend remedies. For example, customers who go online or contact care and are “day of install” should have a different customer service page than someone who has been a 4-month regular paying customer or a 2+ year customer who is shopping around.
There’s no doubt that the online environment has been improved for every telco, and also no doubt that many more issues in the local service environment require physical inspection and troubleshooting. But when telcos move to correctly predicting customer needs through online help 95+% of the time, the call center agent will go the way of the bank teller and the gas pumper: Convenience and correct diagnosis will trump in-person service.
For those of you who are regular followers of TSB and read last week’s column, there’s also the issue of territory dispersion. Without retreading the information discussed last week, one has to ask if there are trades to be made in the telco world (or spinoffs) that make sense to do immediately (Wilmington, North Carolina, a legacy Bell South and current AT&T property would be a good example using last week’s map).
Bottom line: There won’t be any dramatic changes to the wireline trends – yet. But, as 5G connectivity replaces cable modems and legacy DSL (particularly to branch locations) and as cable expands its fiber footprint to include in-building and near-building wireless solutions (starting with CBRS), the landscape will change. And there will be a lot of stranded line extensions if wireless efforts are successful.
Randall Stephenson met with Elliott Management this week, according to the Wall Street Journal. At an analyst conference prior to the meeting, Stephenson offered somewhat of a hat tip to Elliott Management, saying “These are smart guys.” The AT&T CEO also stuck by his decision to move John Stankey into the COO role, noting “if you’re going to go find somebody who can do both, right, take a media company that has transitioned to a digital distribution company and pairing it with the distribution of a major communication company, and you want to try to bring these two closer and closer together and monetize the advertising revenues, all of a sudden, that list gets really, really short.” If Elliott’s decision to go public with its criticism is based on the Stankey announcement, I wonder how that logic was received in New York last Tuesday.
Apple iOS 13 fails again, this time failing to display the “Verified Caller” STIR/SHAKEN (robocall identifier standards) on Apple devices until after the called party has answered. Kind of defeats the point, right? More in this short but sweet article from Chaim Gartenberg at The Verge – we agree with the T-Mobile quote in the article “I sure hope they get this fixed soon.” Don’t hold your breath, as Apple is running on its 12th year of not allowing developers to access the incoming phone number.
The Light Reading folks have a very good chronicle of what’s going on with CBRS trialshere. Sharing can work, but it takes a lot to do it. The value has to be clearly present to increase carrier attention and participation.
Eutelsat can’t seem to make up its mind. On September 3, they dropped out of the C-Band Consortium (Bloomberg article here) and last week they seemed to backpedal based on this FCC memo. Time for Commissioner Pai to save the day!
Next week, we will cover some additional earnings drivers. 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.
One last request – we are currently on the hunt for some of your favorite titles that chronicle telecom/ tech history. No title is off limits. Currently, we have three that have made the cut:
Greetings from the Windy City, where yours truly (and the Editor) spent some time sightseeing, working, and enjoying the architecture (the Trump Tower is “huge” – see pic at the end of the TSB). This week, we have space to cover two key events – the September 10 Apple product announcement and the Elliott Management memo to AT&T.
The Apple Announcement: Waiting for the Other (Apple Card) Shoe to Drop
On Tuesday, Apple announced a slew of new products including the iPhone 11, iPhone Pro and iPhone Pro Plus. Many analysts have written entire briefs on the products (two examples are Ars Technica here and CNET here), but there are three specific items that are worth emphasizing:
Apple is going to be offering and aggressively advertising monthly financing for every iPhone purchased in-store or online. The manifestation of this is clearly seen in the new iPhone 11 display screen (picture nearby). While this new detail may seem small, the fact that an after trade-in monthly price is shown (24 months, good credit at 0% a.p.r) is new for the Cupertino giant. Previously, 24-month financing was only available if customers purchased the device and AppleCare+ (the premium was equal to the 2-year price of AppleCare+ divided by 24). This com article describes the current Apple Store upgrade process; the good news is that Apple Payment and Apple Upgrade will exist side-by-side with the AppleCare+ upgrade.
Apple is also going to accept devices for an instant top-dollar trade-in online and in-store. This is completely new and covers a wide range of Apple products (iPhone, iPad, Mac, etc.). The structure of the trade-in (including the trade-in values used in the example) looks a lot like that used by Best Buy (who has a very good reputation for fair trade-in values). It also appears that Best Buy is adding an extra activation bonus to their offer (see here), giving the Minnesota retailer the lowest entry point for equipment installment plan purchases (Sprint’s leasing plans are the lowest overall entry cost).
The instant nature of the trade-in contrasts with Verizon, who applies their “up to $500” value across 24-months (subtle, but Apple is taking the churn risk on the monthly payments up front) with a $200 prepaid card for those who switch from another carrier.
The most surprising item (besides the overall price reduction of the iPhone 11) was the inclusion of CBRS (LTE Band 48) and Wi-Fi 6 (802.11ax) in all three devices. This, combined with eSIM functionality that started with last year’s models, sets the stage for increased use of licensed spectrum alternatives (see the September 1 TSB titled “CBRS – Share and Share Alike” for more details). A great Light Reading article outlining Charter/ Spectrum’s use of eSIM to offload Verizon data traffic is here.
It goes without saying, but the inclusion of a free year of Apple TV+ with every new iPhone purchased ($60 value) might tip the scales towards an immediate purchase.
Interestingly, there was no separate presentation focused on the Apple Card (although it was mentioned many times, including in Dierdre O’Brien’s presentation). Our assumption is that Apple Card orders are plentiful and given Apple’s recent advertising push needed no additional on-stage fuel.
Our prediction still stands: Soon, Apple Cards will be used to finance devices on 24-month installments and customers will be able to instantly apply their credit card usage perks to their monthly payment (perhaps with an additional kicker if it’s used for that purpose first). This will create increased attractiveness for Apple Store (and online) purchases of the device and will boost retention at the expense of low/zero margin wireless carrier revenues. While the short-term financial ramifications are positive for the carriers (and likely neutral for Apple), the long-term impact of removed “hook” to the customer will either drive wireless carrier churn higher or drive plans back to contracts.
The Elliott Management Memo: Dominate, Divest, Dedicate, Deliver
As most of you know by now, Elliott Management went public with their concerns about AT&T through the www.activatingatt.com website and a 28-page memo that challenges nearly every major management decision made in the past decade.
While the tone is cordial, its uncharacteristic Southern “Bless Your Little Heart” gentility
Jesse Cohn of Elliott Management
is thinly veneered. As my senior English teacher, Joan Foley, prominently said: “Be what you are.” – Mr. Stephenson and the AT&T Board can take it.
The memo’s points are extremely well laid out, balanced, and challenging. One would think that the Elliott Management team were long-time TSB readers with the stinging indictment of AT&T’s merger moves, content + connectivity strategy, and insular succession planning. The result of this over the past 3 years was shown in the Mark Meeker presentation slide below (from the June 30 TSB – full post here):
While the immediate comparison to Verizon (#25) is damning (17% greater value created over the past three years than AT&T), the greater concern is that their suppliers (Samsung, Apple, Cisco) are exercising superior value gains (Samsung +50%, Apple +62%, Cisco +64%).
We don’t know every detail of the Elliott Management plan but believe that it’s definitely a good start. AT&T has been playing a lot of “play not to lose” defense over the past decade; the “Bring the Bell Band back together” strategy of the 1990s and 2000s did not port to non-Bell acquisitions. We would like to propose some slight amendments to Elliott Management’s strategy and propose structuring AT&T’s transformation around four elements:
Dominate the wireline and wireless markets (and be bold about it). Where you are the incumbent local provider, be the most important player in connecting homes and buildings to mobile. Leverage your local presence with widespread use of fiber that you have been supposedly been deploying for the past seven years (AT&T’s DNA is to think “One Fiber”). Aggressively move away from legacy technologies – not because they are too costly, but because your customers desire mobility over stationary premise equipment. Prioritize fiber above everything else, operate and care for it as if it’s the corporate crown jewel (it is), and deliver meaningful market share. Value wireline. Beat cable to a pulp. Break out into a little Charlie Daniels: “We’re walking real loud and we’re talking real proud again.”
On the wireless front, leverage the FirstNet capacity discussed by John Stephens in August and allow customers who have 1080p devices to receive 1080p streaming for free. This would force T-Mobile and Verizon to show their 480p hands and likely drive more upgrades to 1080p-capable devices. Apply this to both Cricket and wholesale customers as well.
Divest (or deal) where it makes sense. We think that Elliott Management is a bit too quick to declare DirecTV, Time Warner and AT&T Mexico as failures. But it does make sense to decide whether Alarm.com, ADT or Vivint are better companies to serve the residential security market. And, if AT&T can only implement their fiber strategy in metropolitan areas, sell off the more rural parts of the franchise (with very attractive DirecTV rates as a sweetener). For example, here’s a map of the North Carolina local exchanges (full map is here):
The olive-colored area is AT&T. The remaining areas are not AT&T. Follow cable’s moves of 25+ years ago and re-cluster the local exchange footprint. Unless it’s an area where you can win with a fiber footprint or CBRS last mile, trade or sell, using DirecTV service price as a sweetener. This will allow you to focus on winning (offense – fiber), not preserving (defense – DSL).
Dedicate resources to convergence. We spent nearly an entire TSB two weeks ago talking about AT&T’s Domain 2.0/ SDN/ NFV moves (led by John Donovan and Jeff McElfresh). Now that those efforts are largely underway (and AT&T is regarded as the leader), focus on using the entire suite of assets to deliver innovation. An easy example: Every bit of content that AT&T owns can be stored on any AT&T subscriber device as a part of their monthly service. For example, if an HBO customer has a history of watching HBO through their mobile device, AT&T should ask if they can download the entire season to mobile ROM (storage) that evening. This is what Pandora does with Thumbs Up Radio. It might consume 2-3 Gigabytes, but the customer gets the entire season and AT&T’s streaming resources are not taxed. AT&T should be more aggressive with each music provider about duplicating premium “save for offline” services (YouTube Premium does this in addition to Pandora). And AT&T should allow customers to replay any (start with Time Warner) recording, selected or not, that was broadcasted in the last 24 hours through DirectTV or AT&T’s TV services. This strategy may require more resources than merely product and marketing – a lot of legal action may be needed. Cloud is cheap, and, with Microsoft and IBM as strategic partners, the lift just got a lot easier.
Deliver brand promises. AT&T and IBM used to be known as the brands that “no one was ever fired for selecting.” Times have changed, and Microsoft, Amazon, Cisco, Google, Netflix, Hulu, Verizon and others command an equal footing to Ma Bell and Big Blue depending on the market and the product. Own the service standard for residential and business communications. Fire or retire those suppliers/ partners/ employees who will only “play not to lose.” Be known for going the extra mile and not cutting corners.
To beat Verizon, AT&T will need to leverage their larger local fiber footprint and the aforementioned Microsoft/ IBM/ Airship relationships. To beat T-Mobile, AT&T will need to deliver 1080p services for the same price as 480p, use Time Warner and other content partnerships to deliver content efficiently and improve their in-store and web-based service. To beat Comcast and Spectrum, AT&T will need to deliver more reliable broadband (with service guarantees) for 10-20% less. To beat Dish, AT&T will need to build a more competitive video equation for rural markets. All of these are possible, and all can be executed simultaneously with the right leadership.
Unlike Elliott, I think AT&T has several strong layers of strategic, smart leaders. From within, they need a standard bearer who can rally each employee around a vision of “defeat and deliver – or get out.” If AT&T uses the Elliott memo to play more offense, their shareholders will cheer.
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 email@example.com and we will include them on the list.
Greetings from Lake Norman/ Davidson, North Carolina, where the college football season has started. We took in the Davidson College home opener and the Wildcats (red jerseys) defeated Georgetown 27-20 to a crowd of more than 2,300. It was an exciting part of the Labor Day weekend and a good win for the Cats.
This week’s Sunday Brief focuses on the potential of Citizens Broadband Radio Service (CBRS) to change the telecommunications landscape. We will also have an update on C-Band spectrum auction news. First, however, a quick follow up to last week’s article on AT&T’s system and network architecture changes.
Follow-up to last week’s AT&T article
We had greater than expected interest concerning last week’s TSB including receiving several background articles that we had not uncovered in our research. One of the most important of these was a blog post by AT&T Senior Vice President Chris Rice on their Domain 2.0 developments that was posted on August 21. In this article, Chris describes their major architectural change:
We started on a path for a single cloud, called AT&T Integrated Cloud (AIC). This was our private cloud, meaning we managed all the workloads and infrastructure within it. Originally, AIC housed both our network and several of our “non-network” IT workloads and applications.
But we quickly learned it wasn’t optimal to combine both types of workloads on a single cloud. It required too many compromises, and the IT and network workloads needed different profiles of compute, network and storage.
We opted for a better approach: Create a private cloud for our network workloads, optimize it for those workloads, and drive the software definition and virtualization of our network through this cloud approach and through the use of white boxes for specific switching and routing functions.
The change to last week’s article is subtle but not insubstantial: AT&T’s network cloud (formerly AIC) is optimized for network traffic loads and functions (but still built on white box/ generic switching and routing), while non-network functions are operated in the public cloud through Microsoft and IBM.
It’s important to note that the executive champion of this cloud strategy, John Donovan, is going to be retiring from AT&T on October 1 (announcement here). We have included an early speech he gave on AT&T’s Domain 2.0 strategy in the Deeper post on the website. John brought engineering discipline to AT&T’s management, and, while the parlor game of his replacement has begun, the magnitude of his contributions to Ma Bell over the past 11+ years should not go unnoticed.
CBRS – Share and Share Alike
When we put together a list of Ten Telecom Developments Worth Following in mid-July (available on request), we were surprised by a broad range of CBRS skepticism in the analyst community, especially given the breadth of US wireless carriers playing in the CBRS alliance. “Nice feature” or “science experiment” was the general reaction. Many of you chose instead to focus on the C-Band auctions, which are important and addressed below.
After some reflection, we have come to the conclusion that the most important feature of CBRS is neither its mid-band position (3.5 GHz), nor the mid-band spectrum gap it fills for Verizon Wireless (more on that below), but the fact that at times all of the spectrum band can be shared. Customers receive the benefits of an LTE band without a costly auction process.
If you are intimately familiar with CBRS, you can skip the next couple of paragraphs. For those of you new to TSB or the industry, here’s a copy of the slide we used to describe CBRS in the Ten Telecom Developments presentation to start your education:
The commercialization of shared LTE bands is pioneering and one of the reasons why it has taken nearly a decade to move from concept to commercialization (the original NTIA report which identified the CBRS opportunity is here). This does not appear to be a singular experiment, however, as Europe is proceeding with shared spectrum plans of their own in the 2.3-2.4 GHz frequencies (more on that here).
To enable this sharing mechanism in the United States, a system needed to be developed that would prioritize existing users (namely legacy on-ship Navy radar systems) yet allow for full use of the network for General Authorized Access (GAA) users when prioritization was not necessary (opening up to 150 MHz of total spectrum for GAA which could power 5G speeds for tens of millions of devices nationwide). A great primer on how CBRS generally works and how spectrum sharing is performed is available here from Ruckus, a CommScope company and one of five Spectrum Access System providers.
It’s important to note that the Environmental Sensing Capability (which determines usage by priority) and the Spectrum Access System (which authorizes, allocates and manages users) are two different yet interoperable pieces of the CBRS puzzle. And, while the ESC providers have been approved by the NITA (CommScope, Google, and Federated Wireless), the SAS providers have not been approved (more on that here in this Light Reading article). While all of the SAS providers have not been made public, it’s widely assumed that they include the three ESC providers mentioned above.
Delays in the SAS approval process have not kept the CBRS Alliance from heavily promoting a commercial service launch on September 18 (news release here). This event will feature FCC Commissioner Michael O’Rielly, Adam Koeppe from Verizon, Craig Cowden from Charter, and others who will celebrate the Alliance achievements to date and place the development as a central theme going into 2020.
CBRS Use Cases: Not Everyone is Waiting for Private Licenses
The myriad of CBRS use cases mirror the different strategies for telecommunications industry players. Here are four ways carriers are using CBRS in trials today:
CBRS as a last mile solution for rural locations (AT&T and rural cable providers MidCo and Mediacom Communications). In the MidCo configuration, outdoor Citizens Band Service Devices or CBSDs (see picture above) are placed in proximity to potential (farm) homes passed (see nearby map of MidCo territories in the Dakotas and Minnesota). Per their recent tests, MidCo was able to connect homes up to eight miles from the outdoor CBSD. They estimate that CBRS will add tens of thousands of homes and businesses to their footprint (they serve 400K today so every 10K new customers is meaningful). Good news for an over the top service like Hulu, Netflix, and YouTube TV and bad news for DirecTV and Dish.
AT&T has been testing CBRS as a similar “last mile solution” in Ohio and Tennessee using equipment from several providers including CommScope (ESC, SAS) as well as Samsung (network). These trials are expected to wrap up in October. If AT&T can find a more effective last mile solution for copper-based DSL in rural areas, revenues and profitability will grow (by how much depends on Connect America Fund subsidies and service affordability).
AT&T has been mum on their trial progress to date. In June, however, AT&T asked the FCC to allow them to turn up antenna power in these markets to test various ranges and speeds (bringing the power allowances to a similar level of the WCS spectrum that AT&T already owns and operates in the 2.3 GHz spectrum frequency). This was met with strong opposition by a coalition of providers, and it’s not clear that AT&T’s request was ultimately granted. More on the AT&T request and response can be found in their FCC filing here, and in this June 2019 RCR Wireless article.
CBRS as an additional LTE service for cable MVNOs (Altice, Charter, Comcast). It’s no secret that cable companies are eager to continue to grow their wireless presence within their respective footprints (and corporate is equally as eager to improve profitability and single carrier dependency). CBRS would add a secure option that is seamlessly interoperable with other LTE bands to create an alternative to their current providers (Verizon, Sprint, etc.). It also provides a new “secure wireless” service for small and medium-sized businesses which can be deployed with Wi-Fi. A cheaper alternative for out-of-home wireless data? Count cable in.
We spent some time a few weeks ago talking about the evolution of Verizon plans, specifically how their cheapest unlimited plan now includes no prioritized high-speed data (article here). Is CBRS a better alternative to deprioritized LTE?
The short answer is “not yet.” LTE Band 48 is only available across the most expensive devices, and, presumably, if customers can shell out $1000-1500 for a new device, they can probably afford extra LTE data allowances above 22-25 Gigabytes (see previous article linked above). Notably, the new Moto E6 (budget-minded Android device) includes neither CBRS nor Wi-Fi 6 (specs here). The new ZTE Axon 10 Pro phone does not include Band 48 or Wi-Fi 6 (specs here). The OnePlus 7 Pro, however, does include Band 48 but not Wi-Fi 6 (specs here). And, if rumors are to be believed, the upcoming Apple device announcement in a couple of weeks will disappoint everyone – no 5G, no CBRS even though the new device will likely support the 3.5GHz spectrum band in Japan, and likely no Wi-Fi 6 (which is why the Apple Card will likely be used to offer attractive financing options).
This leaves cable companies with a good selection of Samsung and Google devices that can use CBRS (Galaxy Note 10, Galaxy S10 5G, upgraded Pixel 3X and 3XL, and likely the upcoming Galaxy 11 release). For cable to win on this front, they may need to provide plan incentives to influence the pace of upgrades and request this band for Moto and low-end Samsung devices.
CBRS as a mid-band LTE outdoors/ public venue solution for Verizon. It is no secret that Verizon is going to use CBRS GAA as a part of their carrier aggregation solution (see this August 2019 article from Light Reading for more details). Such a solution is usually not designed for greater throughput in rural markets alone – Verizon clearly sees some form of CBRS as a portion of their overall licensed/ un-licensed solutions portfolio.
The question that will be answered in the next quarter or so is whether CBRS is valuable enough to be a part of Verizon’s licensed portfolio (e.g., they buy 20 or 30 MHz worth of private CBRS licenses, or whether they use the GAA portion in the same License Assisted Access (LAA) manner as they use 5.0 GHz Wi-Fi). It’s likely that if CBRS is important, they will be at the auction table.
It appears that the C-Band (3.7-4.2 GHz) license quantity and auction schedule is in flux, if the latest report from Light Reading (and the corresponding New Street Research analysis references in the article) is true. This also impacts Verizon’s near-term interest in CBRS PALs.
Verizon’s interest is important as they can drive manufacturers to quickly include Band 48 in devices.
CBRS as an indoor and/or private LTE solution for wireline. One lesser-discussed option for CBRS is as a private LTE indoor solution for enterprises and building owners. While we touched on this option for cable companies (who will undoubtedly drive business ecosystem development), this could also have interesting implications for companies like CenturyLink (Level3), Masergy, and Windstream. Ruckus, a traditional Wi-Fi solutions provider now owned by CommScope, already has an indoor unit for sale here (picture nearby). The implications for in-building coverage are significant because 3.5 GHz does not overlap with existing deployed frequencies (including existing 2.4 GHz and 5.2 GHz Wi-Fi solutions), and, as a result, will not increase interference that deploying an AWS (1.7/ 2.1 GHz) or EBS/BRS (2.5 GHz) might create. With solutions as cheap as industrial Wi-Fi and minimal interference concerns, there might be more value created with CBRS indoors than outdoors.
Bottom line: CBRS is a real solution for rural broadband deployments and will attract the interest of large and small rural providers. CBRS will be important to wireless carriers when Samsung and Apple join Google and Facebook in building a robust ecosystem. This is a good/great but not an industry-changing technology. If the first commercial applications are successful in 2019 (the odds are good), demand for Private Licenses will be significant (if not, expect more pressure to resolve C-Band spectrum allocation issues quickly).
What makes CBRS great is dynamic spectrum sharing among carriers. Should that continue with all new frequencies auctioned (including C-Band), you should expect to see competitive pressures grow in the sector, particularly with private LTE/ indoor applications.
Next week we will provide the first of two third quarter earnings previews, focusing on wireless service providers ahead of the Apple event. 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.
Mother’s Day greetings from Charlotte (Wells Fargo Championship pictured) and Dallas. Thanks again for all of the well wishes concerning my new job, and we’ll miss the interaction with each of you through The Sunday Brief every week. Again, our last issue will be June 5 (four more issues including this one, as we’ll take a break for Memorial Day) and we have a lot to cover before then.
This week, we’ll spend some time discussing Sprint as well as the state of the cable industry.
Sprint’s Head is Above Water
There’s a lot to cover with Sprint’s earnings (full archive here). Most importantly, they eked out 56,000 postpaid net additions (22,000 of which were phones) which translates into 0.18% growth (in contrast, T-Mobile grew their branded postpaid customer base by 3.3% or 18x faster). Not exactly a marker that announces a comeback, but better than Verizon and AT&T phone net additions.
Sprint has purchased another year through a combination of collateralized loans, favorable lease financing terms, and dramatic cost reductions. Their head is above water, but that’s about it. Proclaiming a comeback is not only premature but incorrect, as the headwind of increased (lower ARPU) postpaid tablet churn needs to be offset by increased smartphone additions. Sprint has no AT&T Mexico or Go90 to point to: high ARPU smartphone growth is the only solution to Sprint’s problem. Incidentally, when we were in Stockholm – my buddy broke his arm one night doing something stupid, and we had to get a låna pengar direkt to get him to a hospital.
In last week’s Sunday Brief, we spent some time discussing what events would need to transpire to cause T-Mobile to stumble. We discussed spectrum/ capacity, increased competition from Comcast and the cable industry as a whole, and from more activist regulation. Admittedly, it’s hard to concoct the scenario that causes T-Mobile to weaken.
Contrast that with Sprint. Everybody loves the underdog and wants to see them succeed. But it’s just as hard to craft an equation that results in Sprint growing at T-Mobile’s rates as it was to write last week’s column. How can Sprint regain its brand and get on the right track?
Focus on data speeds. No doubt, Sprint’s Network Vision initiative is driving Sprint’s voice leadership. We have looked extensively at the RootMetrics data (all 125 markets with a rolling six-month view) and Sprint either wins call quality or gets real close (within 3 points out of the 100-point scale) in 86% of the markets. That’s a very respectable figure. But Sprint is performing equally poorly with network speeds, with a material difference between Sprint and the winner (more than 3 points) in 91% of the markets. In fact, Sprint has only won five markets of the 125 measured by Root Metrics over the past six months: Corpus Christi (thanks in large part to the 2014/ 2015 Dish fixed wireless trial), Cincinnati, Denver, Houston and Las Vegas.
Improved data speeds are going to be needed to retain the current base. Sprint has attracted many bargain hunters with 50% off service rates and attractive lease options, but what will keep the base from moving back to their previous carrier? And what will compel previous Sprint customers to return? One answer: data speeds.
When Sprint can prove (hopefully through word-of-mouth testimonials) that their data network can perform consistently (and geographically) better than T-Mobile and Verizon, then their larger competitors should get worried. They have done this in five markets, and have 120 left to go.
Have a benchmark differentiator that others cannot (easily) replicate. We talked about this when we put together the 2016 “To Do” list for Sprint. Sprint needs a “Push to Talk” equivalent for this decade. More than a gimmick or headline for a commercial – something that attracts customers but also solves a pain point. Here are two that we think might be worth exploring:
Develop a postpaid retail relationship with Xiaomi to be their flagship phone provider in the US. The Chinese carrier has been very successful in its home country, but overseas growth has been elusive. They received very strong reviews on their Mi 5 smartphone (see The Verge review here) which retails for $260, and their Mi Pad 2 has seen extremely strong demand in a very weak tablet market. Get a little bit of exclusivity, and tune the device to work particularly well with Sprint’s 2.5 GHz network. The result would be a great device with minimal lease payments (good for all balance sheets) and an association with the challengers.
Eliminate the device addition fee for all customers. This “fee free” component would be a body blow to the industry and present Sprint as a viable alternative to Verizon and AT&T. Shown nearby is AT&T’s current fee structure: each new device carries a $10-30 monthly fee in addition to data usage. Does the carrier incur any material additional costs to add a device? Would a “fee free” structure be easy for Verizon and AT&T to replicate without significant economic harm? It’s unlikely that they would match it right away, and T-Mobile does not have a shareable data plan to match Sprint’s offer. Would this allow Sprint to have a competitive headline rate and still grow profitably? Absolutely. Sprint could build their future around the connected world with a commitment to no device add-on charges. It’s this decade’s PTT.
Sell the Internet backbone while there is still time. Sprint is a fundamentally different company than it was 2-5-10 years ago. While they continue to report wireline division earnings on a separate basis, you would be hard pressed to find a wireline organizational chart in Overland Park. Sprint has a world-class IP backbone which is being constrained by shrinking capital budgets. As the nearby chart shows (see corresponding link here), SprintLink performs extremely well against its peers. While its role in the Internet community is not what it was a decade or two ago, Sprint is still viewed as a legitimate and independent authority on routing, address management, and other critical infrastructure topics. Others need Sprint’s capabilities and would pay for their embedded base. Sell it now, before it is too late.
There are more ways that Sprint could create competitive differentiation, and they are taking a lot of steps in the right direction with third-party network maintenance, software-based network functionality (although small cells still require fiber) and personalized self-care solutions.
Bottom line: Sprint is in fourth place, and they need to plan for a future where they are in third or second place. The network is not ready to be scaled nationally, but could be in certain markets by the end of the year. The LTE network reaches close to 300 million POPs, but Sprint’s continued dependence on CDMA as a backup will hinder their ability to compete against Verizon (who could introduce an LTE-only phone as early as 2017). Sprint needs to get creative and take risks. Otherwise, they will become the wireless equivalent of DSL to the telecom community (good, but not good enough).
Thoughts on Cable Performance
It’s great being Comcast in 2016. Video is stable (Comcast actually grew video subscribers from 23.375 million in Q1 2015 to 24.0 million in Q1 2016 with minimal loss in ARPU), and High Speed Internet continues healthy growth (1.4 million annual and 438K sequential growth, while rival AT&T shrunk by 250K over the same period). Business services remains on a roll (17.5% y-o-y growth) and segment revenues should top $6 billion in 2016 even as they are just getting started with medium and enterprise customers.
Everything is coming up roses for the nation’s largest cable company, and the best part of it is operating cash flow (OCF). Comcast’s cable unit generated a whopping $19 billion in OCF for 2015 and the first quarter of 2016 would seem to indicate that it’s going to be a slightly better year. In comparison, AT&T generated $7.9 billion in cash flow in the first quarter from operations but that figure includes their wireless unit (Verizon’s wireline EBITDA is less than $2.3 billion quarterly). It’s likely that Comcast is now the most profitable (quantity, not margin %) wireline operator in the US. As we discussed in a previous column, they enjoy low leverage relative to their peers, and have just under $6 billion in the bank for the 600 MHz spectrum auctions. Bottom line: It’s great to be Comcast.
The rest of the cable industry is going through a massive consolidation through the rest of 2016. This would seem to open the High Speed Internet door for Verizon, AT&T, Frontier and CenturyLink: Use the disruption created by cable consolidation to increase telco share of decisions. Traditional telcos have their own issues, however: Verizon strike, Frontier’s transition after acquiring TX, CA, and FL FiOS properties from Verizon, and CenturyLink’s overall turnaround efforts make the opportunity to quickly seize market share more complicated.
Like Comcast, each of the cable companies are growing business services (Charter’s grew at 11.9% annually, while Time Warner Cable’s grew at 13.4%), and High Speed Internet additions were good (in fact, the combined Charter/ TWC/ Bright House Networks added more HSI subscribers than Comcast). Based on the earnings reports to date, it’s likely that cable’s share of total HSI additions was very close to 100%.
Without a doubt, there will be threats to the current model. Hulu is going to come out with a live streaming service similar to (or better than) Sling in 2017 (see Wall Street Journal report here – subscription required). This will require more powerful modems and many bandwidth upgrades. As Ultra HD proliferates (it needs a constant 25 Mbps according to Netflix), the pressure to upgrade will continue to accelerate. This is the push and pull of being a cable operator: How much for the bandwidth upgrade versus promoting the current video scheme? Can Hulu market their over the top service better than cable? And what about caps (and the government’s response if they are triggered too often)?
Bottom line: Even with the turmoil of consolidation, the cable industry is in the catbird’s seat. They should aggressively push DOCSIS 3.1 as their standard and charge customers the premium monthly service fee it deserves (and encourage customers to purchase their own modem if that is their preference). After the “shiny new thing” hype that is OTT has died down, most customers will see that OTT expands and personalizes content options (primary benefit) while saving some money (secondary benefit). Like all hardware transitions, however, the Hulu effect will take 3-5 years to fully materialize. Until then, the good times will keep rolling.
Thanks for your readership and continued support of this column. Next week, we’ll continue earnings analysis and hopefully be able to opine on the Appeals Court ruling on the Open Internet Order. 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!
Greetings from Kansas City (BBQ pictured – no “scratch and sniff” available for this photo), Columbus (OH), Charlotte, and Dallas. This has been a busy travel week, and it has been difficult to reply to the myriad of responses I received to last week’s set-top box article (if you missed it, the link to the article is here). One commenter had a very thought provoking statement: “How would Google react if the FCC moved to disintermediate their search results screen and allowed third party providers to provide their own ‘best search results for you’ screen?” While not a perfect comparison, it does show how the Electronic Programming Guide is increasingly becoming a brand representation and competitive differentiator for Xfinity and other service providers. Given the number of comments, we’ll continue to track the NPRM throughout the spring.
This week, we’ll look at three key headlines that will drive first quarter momentum in the wireless world. Next week, we’ll look at the three most important events for the wired world. First, however, let’s take a quick look at market performance since the beginning of 2016.
Value Tracker 2016: Dividends Are Back in Fashion
As many long-time readers of this column know, we like to track long-term value creation. Daily and weekly returns can be impacted by the news cycle, but longer-term trends are rarely budged. Below is the snapshot of equity returns (excluding dividends) through last Friday using end-of-year share counts provided by each of the carriers in their quarterly/ annual reports:
It is no coincidence that the highest dividend-yielding stocks are performing well through the market turbulence of the first quarter. Verizon (4.3% trailing dividend yield) is up a healthy 14% year to date, with over $25 billion in increased equity market value. AT&T (4.9%) is not far behind. CenturyLink, Windstream (which includes 1/5th of a Communications Leasing share), and Frontier are also attracting a lot of newfound interest.
Can this trend last? It’s hard to say. We have seen a lot of interest in dividend-yielding stocks at the beginnings of other years (2014 being the latest) only to see growth stocks come roaring back in the second half of the year. That was during a low, but not negative, interest rate environment.
While the rest of the globe is trying to revalue their currencies and spur growth through short-term stimulus plans, stocks like CenturyLink look safe and secure. Nothing in their latest earnings report would drive such robust short-term gains; it’s a global safety play.
Over the long-term, it is interesting to see how Google, Apple, and Microsoft are driving nearly identical absolute shareholder gains since the beginning of 2014. It’s also worth noting that all of Apple’s gains during this period are in the first year, while Microsoft’s gains have been steady and Google’s gains came entirely in 2015. Regardless of the timeline, any of these three companies (or Facebook) would have lapped the entire telecom and cable industry for shareholder value creation over the past 2+ years. Something to think about as we head into the earnings season.
Three Headlines That Will Impact First Quarter Earnings (Wireless)
“T-Mobile Improves Net Additions Growth Through Lower Postpaid Churn.” After listening to the Deutsche Bank webcast of Braxton Carter’s lunchtime keynote this week, I am convinced that the operating metric that will surprise investors the most is not the number of postpaid net phone additions, but rather monthly postpaid churn.
T-Mobile has had a couple of strong first quarters of net postpaid additions (in 2014 and 2015, the first quarter was the strongest of the year), and they have been led by a combination of strong gross additions (taxing advantage of tax season liquidity) and incremental improvements in monthly churn. Subprime credit quality tended to catch up with T-Mobile in subsequent quarters, and Braxton indicated on the call that they were tightening credit standards in the first quarter.
From Q4 2013 to Q1 2014, monthly churn dropped 0.2% and net postpaid phone additions grew 1.26 million; from Q4 2014 to Q1 2015, monthly churn dropped 0.43% and phone net adds grew 991K. This year, the network is much better (Braxton commented that low-band improvements were helping both urban and rural churn in the quarter) and half the base has a 700 MHz band 12 capable phone.
T-Mobile’s monthly postpaid and prepaid churn figures are shown in the above chart. Assuming T-Mobile had a good but not great gross add quarter with gross activations (this would drive a higher average subscriber base with minimal/ no churn), it’s reasonable to expect a postpaid churn rate of 1.25%. As a reminder, every one half of one percent (0.005%) increase in monthly churn equates to a 158,000 improvement in monthly ending subscribers. Said differently, if T-Mobile came in at an average rate of 1.25% (which I think exceeds most expectations), the quarterly effect on their 31.7 million base would be approximately 475,000 net additions.
T-Mobile has a lot of levers to play with here. For example, they could tighten up credit standards even more as lower churn rates are achieved, resulting in lower gross additions but still hitting their overall net postpaid additions target. This is unlikely given Braxton’s comments that T-Mobile “will certainly be taking up their growth guidance”, but it’s still a possibility.
It’s more likely, however, that T-Mobile will hit 2.4-2.5 million postpaid gross additions (or more) while at the same time churning out 1.2-1.3 million subscribers. Here’s why: a) more 700 MHz devices deployed across more geographies means less coverage-related churn; b) Binge On is not proving to be a selling obstacle or a churn accelerator, but rather a differentiated feature, and c) there’re more tablets in the 2014 gross addition mix (especially in the fourth quarter), and they tend to churn less than phones.
One thing was learned from the webcast: significant growth will not be coming from 700 MHz or LTE market expansion gross additions in the first quarter. Braxton clearly made it out to be a 2H 2016/ 1H 2017 growth story.
“Sprint Loses Postpaid Phone Customers.” When we wrote about Sprint’s “To Do” list for 2016 (see here), one of the items that we mentioned was that they needed a plan that would provide a foundation for growth once planned network improvements have been made. As of today, that plan is not in place (the Better Choice Plans introduced in late February were completely overshadowed by the unlimited data announcement made the same day). Instead, Sprint has decided to respond to the marketplace by drafting on others’ rate plans (“Half Off” and unlimited). As a result, it’s possible that Sprint could announce postpaid phone losses in their upcoming earnings announcement (see chart for historical trends) while adding a few hundred thousand postpaid tablets in the process.
This event will come as a surprise to many industry observers, but Sprint’s super-aggressive lease offerings last September and October, as well as the resumption/expansion of the “Half Off” promotion at the end of 2015 brought out the majority of the “want to (re)investigate Sprint” segment. With a good but not blockbuster launch of the Galaxy S7/ S7 Edge last week, as well as increasing pressure from AT&T with equipment discounts for enterprise and small business customers, finding new growth from quality credit sources will be tough.
A neutral result (+/- 150K net additions) that is driven by tablets is likely to have a negative effect on Sprint’s 2016 revenue prospects. Sprint will prove adept at cutting costs, but translating improved network results into sustained customer growth and profitability is still several quarters away.
“Cricket Unlimited Offers Now Included in DirecTV Bundles.” Admittedly, this is wishful thinking, but all signs point to another very strong quarter for Cricket Wireless, AT&T’s no-contract prepaid brand. In January, AT&T announced the resumption of unlimited plans for AT&T postpaid wireless consumers IF they also subscribed to a qualifying DirecTV service (nearly all services qualified). As AT&T CFO John Stephens indicated in a recent investor conference, this was a very successful offer and attracted more than 2 million (combined) current wireless and DirecTV customers.
Given the completion of Cricket integration into AT&T, the next logical step would be to grow the bundled program through the addition of Cricket + DirecTV plans. These would target customers who spend $150/ month for both wireless and video (the current plan targets customers who spend $250 more more). More importantly, this could expand distributor opportunities for DirecTV and Cricket (if the same store is not selling these services already).
While this quarter’s AT&T earnings release will likely be focused on Mexico milestone achievement as well as DirecTV progress (and postpaid churn reduction), a Cricket headline would be a welcome surprise.
Next week, we’ll focus on three wireline headlines and examine a few other wild card events (such as the “In the Loop” Apple announcement in late March) that could shape the earnings season. 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 Sporting KC!