Greetings from Chicago, Illinois (where the pre-winter winds were tame), and Davidson, NC (where it really feels like winter even though it’s mid-November). This week’s TSB is less about the week’s events and more about strategy fundamentals. Next week’s edition will focus on several “What if?” questions posed by this week’s article, and we will follow it up with a Thanksgiving edition retrospective review of Dr. Tim Wu’s The Master Switch.
The Long, Long Run
We have been doing a lot of reading and thinking recently about how telecommunications and technology have evolved, the role of the government in protecting free and fair commerce, and disintermediation of traditional communications functions primarily through applications.
Through our research, we have established several foundations of long-term success in the telecommunications industry, which include:
Purchase, deployment, and maintenance/upgrade of long-lived assets. These include but are not limited to items such as fiber, spectrum, land/building (including sale/leasebacks of such), and other long-term leases. Regardless of the type of communications service offered, the greatest potential long-run incremental costs begin with assets like these.
When Verizon discusses their out-of-region 5G-based fiber deployments (4,500 in-metro route miles per quarter for multiple quarters) as well as their willingness to lease/ rent to others, that’s a current example of the deployment of long-lived assets. (When Verizon paid $1.8 billion for the fiber and spectrum of XO Communications in 2016, it was a bet on the long-term value of the asset and not XO’s previous annual or quarterly earnings).
All long-lived assets rely at least partly on location. Fiber, land, building and similar assets cannot easily be moved. Building or buying assets in the right places matters – a lot. Local exchange end offices that were in the right places when they were built in the 1950s, 1960s, and 1970s may not be in the right places today. The same could be said of fiber networks and Points of Presence (PoPs) deployed by MCI and Sprint in the 1980s and 1990s (AT&T’s fiber upgrades came 10-20 years later). The location of these assets (e.g., locating a PoP at a major point in the city versus a village bus stop) is critical to product competitiveness. The less moveable the asset, the higher importance to get the initial investment decision, including location, correct.
It’s important to note that things like voice switching and eNodeB (tower switching) are not long-term assets. They are important investment decisions but can be moved (somewhat) more easily than fiber PoPs and tower lease locations.
Spectrum is more fungible but is still local (Just ask T-Mobile as they are in the middle of negotiating a lease for Dish’s AWS spectrum in New York City). And spectrum bands have different values at different times: just ask Teligent (24 GHz spectrum), Nextlink (28 GHz) and Winstar (28 and 39 GHz).
Bottom line: With few exceptions, sustainable telecommunications strategies begin with long-lived assets. Get these selections right, and subsequent decisions are easier. Cut corners on long-term assets, and future determinations become a lot harder. Match the deliberation level to the expected life of the asset.
Business and technology strategy which drives network equipment (and service) performance. This super-critical element is often ignored under the pressure of a quarterly earning focus. For example, AT&T purchased cable giant TCI in 1998 for $55 billion. AT&T ended up spending over $105 billion on its cable assets, only to sell them to Comcast a few years later for $47.5 billion (news release here – that was a mere 17 years ago almost to the day). This acquisition was not simply driven by scale (although it was an important consideration), but because AT&T saw value from TCI’s cable plant.
After AT&T decided to break itself up into four pieces in 2000 (Broadband, Wireless, Consumer, and Business), they had the opportunity to cover both DOCSIS and DSL technologies (see more in this detailed New York Times article here). Even then, as shown in the slide below from a 2002 SEC filing, it was contemplated that AT&T would have Digital Subscriber Line (DSL) for some types of data transmission as well as DOCSIS for broadband (not to mention Time Division Multiplexed or TDM, SONET, and eventually Ethernet technologies for enterprise customers). For a few years, AT&T provided both DOCSIS and DSL services to customers – one can only wonder what the outcome would have been had AT&T Consumer and Broadband remained as one unit.
Meanwhile, in 2004, Verizon Communications announced their Fiber Optic Service (FiOS) to battle the perceived bundle advantage of cable’s triple play. It’s important to note that this strategy change came less than 24 months after the sale of AT&T Broadband to Comcast. Many of the initial FiOS markets will celebrate their 15th birthdays next year. However, Verizon miscalculated the speed with which the cable industry would respond with their bundles as well as their upgrades of DOCSIS 2.1 (standard released in 2001 with commercial deployments starting in 2003) and DOCSIS 3.0 (standard released in 2006 with commercial deployments by 2008). The result of cable’s deployment speed was significant – local phone market share shifted to the cable industry by 20-35% over the 2004-2009 time period, quickly depleting the prospects of both DSL (specifically ADSL) and switched access cash flows.
Then, in 2016, Long Island cable provider Cablevision (now a part of Altice USA) announced plans to deploy fiber to 1 million homes (and eventually 3-4 million homes) in their territory, removing FiOS’s underlying competitive advantage for those locations. Per their most recent earnings announcement, Altice is quickly deploying the latest version of DOCSIS (3.1) and fiber to minimize Verizon’s competitive advantage and blunt any impact of 5G/CBRS as Wi-Fi replacement technologies.
A more remarkable change has occurred in the wireless industry, who collectively rallied around a single common technology standard called Long Term Evolution (LTE) by 2009. This service was eventually deployed first by Verizon in March 2011 then by AT&T starting later that year (Sprint launched LTE in 2012, and T-Mobile in 2013). Standardization (versus an alternative of up to three standards – LTE, UMTS, and Wi-Max) streamlined the device ecosystem, strengthening brands like Apple and Samsung, and resulting in the accelerated demise of brands such as Motorola (forced to Droid exclusivity and then low-end), Palm, HTC (who reached its pinnacle with the Sprint HTC Evo which was Wi-Max dependent), and Nokia (Microsoft/ Windows Mobile dependent).
Bottom line: The greater the reliance on DSL advancements (as opposed to fiber overbuilds), the faster value degradation occurred in the telco local exchanges. Slow data became the competitor-defined brand of the local exchanges, and, with diminishing share of decisions, diseconomies of scale followed. Wireless carrier adoption of a single, global technology strategy cemented the supply chain for the segment and allowed disintermediation of wireline voice services to occur at a more rapid pace (56.7% of adults are wireless-only as of the end of 2018, according to the Centers for Disease Control). Technology strategies that run cross-grain end up on the Asynchronous Transfer Mode/ HSPA/ iDEN/ ADSL graveyard.
Operational excellence/ marketing and product competitiveness. Once assets have been deployed and the technology strategy has been selected, the customer’s value proposition needs to be defined. While the underlying evidence of a successful technology strategy is less identifiable in one earnings call, changes in value propositions are clearly evident sooner through lower churn, higher revenues per user, and third-party recognition.
For example, Verizon announced this week that they will be the exclusive provider of the Motorola RAZR, a foldable $1,500 smartphone (more details here). Strategically, Verizon went this route to remove the prospect of AT&T exclusivity (the original RAZR exclusive 15+ years ago), not because they believed this was a transformational device (read the review in the above link for more details). Verizon’s Droid strategy (through Moto) and their Google Pixel 3 exclusivity enabled the company to have brand name devices that made Big Red’s network shine.
Another good example of a successful strategy is Time Warner Cable’s 1-hour service installation and delivery window across the Carolinas announced in 2012 (announcement here). This was accompanied by an app that reminded customers that the technician was headed to their home. They staked a claim on service against AT&T, Verizon/GTE/Frontier, CenturyLink and Windstream and forced each of them to respond.
Many case studies have been and will be written on the pricing and product strategy shifts (dubbed “Uncarrier moves”) that T-Mobile has employed over the past seven years. Three strike us as being supremely critical to their growth trajectory: a) Simple Choice plan rollout in early 2013 (announcement here); b) Binge On Implementation in 2015 (announcement here), and c) their changes in service strategy called Team of Experts introduced in 2018 (announcement here).
Earlier, we discussed the role of co-branding/ exclusivity as a part of a successful marketing strategy. Many Sunday Briefs have highlighted the puts and takes of bundling wireless with Spotify (Sprint, then AT&T) or Hulu (Sprint) or Tidal (Sprint) or Netflix (T-Mobile) or Apple Music (Verizon) or YouTube TV (Verizon) or Amazon Prime (Sprint, Metro by T-Mobile) or HBO (AT&T). A few weeks ago, we started to tackle a more fundamental question: “What’s the advantage of owning premium content (AT&T, Comcast, Altice, Canadian wireless and cable conglomerates) versus playing the field (Verizon, T-Mobile, Dish)?”
There are many more examples (good and bad) to discuss here (Verizon’s network quality marketing, AT&T’s iPhone exclusivity, AT&T’s multiple attempts to bundle wireless and wireline over the past decade, cable’s coordinated Triple Play strategy, Comcast’s Xfinity development, etc.) but the point is that no operations, marketing, or product strategy can be effective over the long, long run without the effective implementation of long-lived asset and well-conceived technology strategies. While this sounds elementary to most of you, it’s worth thinking about the abundance of ill-conceived strategies that have destroyed tens of billions of dollars of shareholder value over the past two decades. As we will discuss in part two of this strategic primer next week (called “What if?”), the blunders were both due to commission and omission.
TSB Follow Ups
I attended a private equity conference this week and walked into the cocktail reception to the question “Did you hear that John Legere might go to WeWork?” I had no response other than to describe the conjecture using my best Legere language, categorizing the report as total BS and stating that it would be more likely for John to lead a challenger technology company like Tesla than WeWork.
By the end of Thursday, T-Mobile had lost ~$4/ share over three days (~$3.5 billion in market capitalization) as investors fretted. Fortunately, by Friday evening news reports emerged that Legere was not going to leave T-Mobile for WeWork… at least yet. We are not sure whether this is a market hungry for any Adam Neumann follow-up, any out-of-Washington news headlines, or if it’s just jittery in general.
T-Mobile’s Latest Olive Branch: A Nassau County Customer Service Center
T-Mobile raised the stakes this week in their continuing public negotiation with the state Attorneys General, unveiling plans to build a new customer service center in the heart of the New York metro area (and, ironically, smack dab in the middle of the service area of one of their largest MVNOs – Altice). This is the fourth of five new service center announcements (current ones include two in New York, one in California, and one near Sprint’s current headquarters in Overland Park, KS). That leaves us speculating about the fifth location – could it be in the Lone Star State or the Windy City?
We should expect a steady stream of offerings up to the December 9 trial start. Local jobs matter even in a full employment economy, and the Nassau County announcement received a lot of local press.
Disney+ Success: 10 Million Customers Day One
After some initial reports of activation and streaming hiccups, Disney announced on November 13 that they had signed up more than 10 million customers on the first day of service. They also announced a new bundling plan (anyone watching college football yesterday couldn’t miss it) which includes Hulu Basic, ESPN+ and Disney+ for $12.99/ month (presumably to blunt the potential impact of AT&T’s HBO Max announcement). The company also indicated that they would not announce any additional subscriber figures until their next quarterly earnings call.
Will this translate into further net additions for Verizon? The unequivocal answer is yes, but how much remains to be seen. Disney+ has front page billing on the Verizon website, and they began to run ads this week touting their association with the latest streaming craze. One of the “What if?” questions in next week’s column deals with Verizon and content ownership so we’ll be discussing their “multiple choice” strategy then.
CBA Breakthrough? We Should Know Very Soon
Last Friday, the C-Band Alliance (CBA), which now consists of all of the major holders of this spectrum (3.7 – 4.2 GHz downlink; 5-9 – 6.4 GHz uplink) frequency except Eutelsat, sent a letter proposing economic terms for a CBA-Led auction. The anticipated proceeds to the US Treasury are as follows (note that these are incremental amounts to the Treasury based on overall proceeds):
Cents per MHz PoP bid % to Treasury % to C-Band Alliance
$0.01-$0.35 30% 70%
$0.36-$0.70 50% 50%
Over $0.70 70% 30%
This also comes with a pledge to conduct the auction in a timely manner (within 90 days) after FCC approval which would put it ahead of the Priority Access License for the CBRS spectrum currently scheduled for the end of June. The letter also includes a vague, good faith effort to build an open access network with a portion of the auction proceeds to improve rural coverage.
The FCC has been asked to speak with Senator Kennedy’s committee later this week, and, to make it on to the FCC December calendar, any proposal will need to be added by next Thursday (November 21). The odds of approval of any proposal by December are diminishing each day, and it’s likely that the C-Band auction will occur after the CBRS PAL auction, likely August or September. Analysts’ estimates of C-Band auction proceeds range from $10 to $60 billion. Meanwhile, CBA member stocks are trading at nearly half of their summer levels due to the uncertainty (Intelsat 5-day stock price chart nearby).
That’s it for this week. Next week, we will continue this strategy theme with several “What if?” questions (please submit yours with a quick email to email@example.com) unless there is other breaking news (perhaps related to the T-Mobile/ Sprint merger or the C-Band auctions). Until then, if you have friends who would like to be on the email distribution, please have them send an email to firstname.lastname@example.org and we will include them on the list.
Greetings from the Mile High City, the Queen City, and the City of Angels. Attendees of the Mobile World Congress – Americas were greeted with multi-story advertisements on buildings touting original content, a reminder that investment in the TMT (telecom/ media/ technology) industry can take many forms (more on this thought when we discuss Verizon’s earnings below).
I had the chance to visit with many of you during the show, and, to a tee, no one was excited to be there. “Where’s T-Mobile?” was a frequent question, usually accompanied by comments about slow vendor payments or delayed decisions. Several had “I told you so” comments about Nokia (a summary of their bad week is best captured here). And the fact that Sprint had the main entrance exhibit led some to theories that should be reserved for late night cable news.
Here’s the bottom line from the show: Our industry is changing – a lot. The mobile handset, and the licensed and unlicensed spectrum that it connects to, will be life-changing for nearly all who use it. And software (largely not present at the show), not hardware, will define value. More on this can be found from our earlier column “About This Thing Called 5G” in which we define the 5G value statement as “More software… doing more things… faster and better.” Networks matter (we will see their importance below), but software fuels their engine.
This week, we will look at three companies who announced earnings (Verizon, Comcast, and Charter) and examine the differences in growth strategies versus their industry peers. As a reminder, T-Mobile and AT&T announce earnings next week, with CenturyLink, Sprint and others following later in November.
Verizon: Consumer Wholesale and Fiber Save the Day and Seed Long-Term Options
Verizon reported strong earnings on Friday, led by wireless service revenue growth and expense reductions (nearly 14,000 fewer employees in the last 12 months alone). They had balanced growth in wireless net additions between consumer and business (and phone net adds in both, including public sector, which was a shot across the bow to AT&T’s FirstNet initiative). And, while they paid down debt, they continued their significant capital spending ($12 billion year-to-date at the consolidated level, up slightly from 2018).
Rather than go deep on each statistic, let’s summarize three areas where Verizon and AT&T are pursuing markedly different strategies:
Wireless wholesale revenues (found in the Wireless Historical Financial Results) are a key source of Verizon’s revenue growth. Verizon’s consumer income statement shows growth from multiple sources:
Approximately $376 million of 3Q 2018 to 3Q 2019 growth comes from the Operating Revenues – Other line. Excluding equipment, operating revenues grew $808 million. Around half of the operating revenue growth is coming from wholesale, which has no CPGA and carries ~65% EBITDA margins.
Interestingly, segment EBITDA grew a paltry $77 million driven largely by an increase in equipment subsidies ($136 million in 3Q 2018 vs. $341 million in 3Q 2019). Excluding the equipment subsidy, the $77 million EBITDA growth becomes $282 million (a good proxy for wireless service margin growth). So, while revenues grew by $808 million year-over-year, only 35% translated into cash.
Verizon’s CFO Matt Ellis addressed the equipment subsidy in the earnings call, saying:
So on the wireless cost of service side, I mentioned that the phone net adds split was fairly even between Consumer and Business. Business had a more than 10% increase in phone gross adds. … a lot of our Business customers are still on a subsidy model rather than device payment model, so I think you see the impact of that.
Adjusting for subsidies, and assuming a very conservative 65% EBITDA margin on wholesale revenues, it’s highly likely that 85% or more of the 3Q 2018 to 3Q 2019 EBITDA improvement came from wholesale ($376 million * 65% = $244 million EBITDA/ $282 million = 87% of EBITDA growth comes from Other revenues).
On a 2Q to 3Q 2019 sequential basis, the impact of wholesale is even more dramatic, with the unit accounting for $312 million of the $466 million non-equipment revenue growth (67%) and, assuming EBITDA margins of 65% on the $312 million, more than 120% of the subsidy-adjusted sequential EBITDA growth ($119 million + $42 million of increased subsidy = $161 million).
What this says is that the negative margin impact from consumer retail growth (and write-downs thanks to new unlimited pricing plans) is being covered by consumer wholesale. Without cable and Tracfone, the story line would have been very different.
The other major item that escaped the headlines is the continued fiber build in 60+ metropolitan areas outside of the Verizon franchise territory. At the end of the earnings conference call, Matt Ellis called out the fiber impact:
… we’re rolling out more fiber as you know in our One Fiber initiative that is going to give us more opportunities to sell into those customers as they move off of legacy products and our fiber build has continued to gain momentum, increased at a little bit in the third quarter of over 1500 route miles a month on average in the quarter. So we’re getting to a good momentum there and that will open up additional opportunities for us as we go forward to replace those legacy volumes
An additional 20-40K route miles of fiber hitting the market starting early next year will not go unnoticed and marks a very different strategy from AT&T out of region, particularly for enterprise customers. As that number accumulates (1,000 route miles means a lot in a city like Birmingham, AL or Albuquerque, NM). And, as others have correctly noted, that fiber is largely being connected to wireless telecom infrastructure and not commercial real estate (an entirely different build/ approval process). But it’s different because it’s a highly leverageable asset (this is a “Fiber Always Wins” case to quote a previous TSB article). We have previously talked about the impact of the CenturyLink build (4.7 million fiber miles), but not as much about Verizon’s One Fiber initiative.
Lastly, the Disney+ announcement stands in stark contrast to what we will likely hear from Time Warner/ AT&T executives on Tuesday (free HBO for AT&T customers started to leak last Friday – see CNBC article here). Content production with telco cash balances is unknown territory. At a minimum, it dilutes management focus from strategic items like infrastructure buildout and fiber competitiveness. More likely, it locks in AT&T to HBO and other Time Warner content at the expense of other options (as opposed to Verizon’s “playing the field” strategy of Apple Music last year, Disney+ this year and next, and maybe something entirely different in 2021). We will have more to say on Disney+ vs. HBO Max in next week’s TSB (and why we think Apple Music lessons learned over the last 12 months prepares Verizon for a very successful Disney partnership), but it’s worth thinking about the value of the content selection option.
Bottom line: Verizon’s earnings message was focused on wireless service revenue and content deals. Their profit growth is increasingly being driven by non-retail sources, however. One Fiber could translate into Enterprise market share gains if management quickly re-builds their local out of region wireline capabilities. Verizon looks less and less like AT&T each day.
Comcast: Residential Broadband Dominates – Now What About Wireless?
Comcast had a record quarter on broadband growth, with 359K residential and 20K business net additions. The 359K figure is the highest net additions for any quarter since Q1 2017 (first quarters tend to be promotion-driven and Comcast was in the middle of DOCSIS 3.1 adoption at that point – no such tailwinds existed in 3Q 2019), and according to Brian Roberts, the most for any third quarter in ten years. Penetration of homes and business passed grew to 48.2%. Not only did subscribers grow, but total revenue grew as well, as existing customers upgraded their service and promotions expired.
The talk track for Comcast residential broadband is this: New homes/ dwellings are being built, and Comcast is grabbing disproportionate market share from AT&T U-Verse (Chicago/ Houston), Century Link (Seattle/ Utah) and Verizon FiOS (Boston/ Philadelphia/ Washington DC). In turn, existing customers are increasingly satisfied with their products and services, which keeps non-mover churn in check and increases bundling and upgrades. We are ready for all broadband challengers.
To put the 359K net additions in context, Verizon’s FiOS unit grew 30K net new additions from Q2 to Q3 2019 yielding a 12:1 advantage. Including DSL, Verizon lost 5K residential customers in 3Q 2019, a figure 10K worse than 3Q 2018.
Over the last nine months, Verizon broadband has gained 9K residential broadband customers (106K net FiOS less 97K DSL losses). This compares to total residential broadband gains at Comcast of 893K – a 99:1 advantage (!).
One would think that Brian Roberts and Michael Cavanagh could drop the microphone and walk away. And, had Altice not deployed a very aggressively priced MVNO on Long Island using Sprint’s network, most analysts would have changed their questions to deal with softball topics like theme parks, debt and buybacks. The Altice deployment drove many questions, including (TSB paraphrases of the questions based on the conference call transcript):
Doug Mitchelson at Credit Suisse: How are you leveraging your base to get better pricing, and can Comcast implement strand mounts (a la Altice) to improve their cost/ GB and improve Verizon’s coverage?
Brett Feldman at Goldman Sachs: Is the MVNO unit driving up technical and product support costs in the quarter and how will continued growth impact the fourth quarter?
Jennifer Fritzsche at Wells Fargo: How does Comcast view the upcoming CBRS (Preferred Access License), C-Band and Millimeter Wave spectrum auctions? Will spectrum ownership be a part of Comcast’s strategy going forward?
Craig Moffett at MoffettNathanson: How will Comcast use eSIM (specifically dual SIM/ dual standby) to improve their wireless cost structure?
Michael Rollins at Citi: How are you changing your bundling message to reflect your wireless offering? Is Comcast experiencing difficulties in retailing wireless? Could a media + wireless bundle drive more subscriber growth?
Of the ten questions in the Q&A, five (at least partially) dealt with the MVNO business. Putting this into perspective, wireless represents slightly more than 2% of the 3Q 2019 Cable segment revenues and just over 1% of total 3Q 2019 corporate revenues. Even on a growth basis, wireless was $90 million out of $561 million growth from 3Q 2018 to 3Q 2019 (16%) and would be an even smaller number if we excluded the advertising revenue drop. Why so much interest in wireless?
Part of the answer could be the natural inclination to focus on those areas of the business that are dragging down EBITDA. Xfinity Wireless lost $94 million in EBITDA in the quarter or about $18.50/ month/ average subscriber. This figure is substantially better than the $178 million lost in Q3 2018 ($66.29/ month/ average subscriber) but largely unchanged from the $88 million lost the previous quarter ($19.60/ month/ average subscriber). Upticks are hard to stomach even if they are explainable, and it’s likely that the iPhone 11 launch impacted 3Q EBITDA.
Another answer is to look at wireless growth in light of the large High Speed Internet base. Comcast had 1.689 million average wireless subscribers in Q3 against 25.811 million average High Speed Internet subscribers. Assuming 1.8 Xfinity wireless lines per household (a figure below 2.0 assumes that By the Gig is more popular with individual/ single line users than other family-focused plans), 1.689 million subscribers would translate into roughly 940,000 households or below 3.7% penetration of current Xfinity household accounts (note that as the 1.8 lines per household grows, the penetration level shrinks). That’s an underwhelming figure given the 2.5 years Comcast has been actively marketing retail wireless services.
Nearby is the updated net additions growth chart for both Comcast and Charter. It’s very interesting to note that since 4Q 2017, net additions have been running in a very tight range. In fact, the four quarter net additions rolling average ranges from a low of 196 to a high of 214 – a close-fitting cluster. It appears that Comcast is being more deliberate in their growth strategy (in effect placing a 200K quarterly growth governor) in anticipation of additional events.
We have no doubts that Comcast has a long-term wireless strategy, and that it involves increased licensed and unlicensed spectrum ownership and operation at some point. But we also understand that every piece of content added to the package hurts gross margin and keeping up with AT&T/ HBO and Verizon/ Disney is going to be difficult without offload.
Bottom line: Comcast blew away High Speed Internet performance expectations which changed analyst focus to wireless, specifically unlimited plan profitability. Absent the collapse of the Sprint/ T-Mobile merger, there’s a lot of planning ahead.
Charter: Like Comcast, But with Less Content and no Europe Exposure
Charter also posted very strong growth with 351,000 net High Speed Internet additions and 276,000 wireless subscriber net additions. This translated into $4.1 billion in EBITDA which included $145 million in total mobile EBITDA losses (across 656,000 average monthly subscribers, this equates to a loss of $74/ average customer/ month which is better than where Comcast was after their first five quarters of service). Charter has grown slightly faster in their first five quarters of wireless service than Comcast did, and CEO Tom Rutledge believes that their sales productivity is just getting started.
In the Question and Answer section of their earnings call, Charter reiterated their increased growth trajectory on both wireless and broadband, and also reiterated that they are looking at CBRS across a wide variety of fronts (rural wireless expansion, highly congested areas, etc.). Charter did not mention any changes in their wireless strategy with respect to business, but it’s likely that small business expansion (< 20 lines) will continue to grow in 2020.
Bottom line: The tone of the Charter call was completely different than Comcast, reflecting the differences between the companies. Content discussions focused on retransmission agreement progress (with an acknowledgement that customers will see some increased costs), and there were absolutely no international discussions. It’s clear that Charter wants to a) hit the 1 million subscriber milestone by the end of the year, and 2) continue to realize scale efficiencies in wireless.
Next week, we will incorporate AT&T’s Time Warner Cable analyst day, AT&T quarterly earnings, and T-Mobile earnings into the discussion. 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.
** Note – I will be at MWC-Americas on Wednesday (all day) and Thursday morning. Please send a note to firstname.lastname@example.org if you would like to catch up. Thx, Jim **
Greetings from Lake Norman, NC (picture of a recent sunrise is shown). This week, we will discuss four questions that should be asked during earnings calls (which start this Thursday with Comcast, followed by Verizon and Charter on Friday and AT&T and Google the following Monday, Apple and Sprint (likely) on Oct 30 and CenturyLink on Nov 6). Please note that these questions are not in priority order. Here’s four questions we’d like to see answered in upcoming earnings calls:
1. To Apple: If Goldman Sachs is correct, and the Apple Card truly is “the most successful credit card launch… ever” how will Apple use these new relationships to increase the iPhone renewal rate?
To AT&T and Verizon: Do you anticipate that Apple’s new credit card will disintermediate the store purchase and financing experience? If that occurs, and customers finance their new device through Apple directly, how will that impact revenues, margins, and churn?
We received a strong indication of Apple Card’s success from Goldman Sachs this week when CEO David Solomon revealed on his earnings call that “we believe [the Apple Card] is the most successful credit card launch ever.” Solomon went on to disclose:
…we have seen a pretty spectacular reception to the card as a product. The approval rates early on have been lower, and I say that that’s a decision, obviously, Goldman Sachs is making as the bank, but we’re doing that in concert with Apple. And it is because we’re quite vigilant from a risk point of view, of not being negatively selected out of the box. Meaning, over time, we’ll start to see better credits appear and the approval rates will go up, where we’ve seen an enormous inbound, we’ve issued a considerable amount of cards. We’ve just been through our first bill cycle, which went smoothly, and so from an operational point of view, it’s gone well
Apple announces earnings on October 30th. It’s likely that they will not actively promote anything until after the Holidays (if demand is good, and they are throttling activations through selective credit scoring, probably not best to get promotionally aggressive). However, if Apple attracts 10 million US card holders in the first year (we would not be surprised if this happens), you have to think that the ability to finance select transactions at 0% a.p.r is inevitable.
2.To AT&T: Do the list of divestitures you are working on with Elliott Management include unprofitable local phone exchanges?
To each of the other local exchange providers (particularly rural): How will you more effectively compete against a clustered (and therefore operationally efficient) cable industry? Was your concern over valuation when you considered clustering in the past unfounded given the deep losses that have occurred in broadband acquisition over the past decade?
We briefly discussed this in the TSB focused on the Elliott Memo. In our note, we described the diseconomies of scale arising from island or isolated exchanges in North Carolina. To prove that the Tar Heel state was not a fluke, we show below the local telephone provider exchange map of South Carolina (link here):
In contrast with this menagerie of local exchange properties, cable broadband providers in South Carolina consist of the following (from the South Carolina Cable TV website and company websites):
Spectrum/ Time Warner Communications: 72 million population covered
Comcast Communications: 600,800 population covered
Comporium Communications: 305,000 population covered
Horry Broadband Cooperative: 205,000 population covered
Northland Communications: 164,000 population covered
Atlantic Broadband: 133,000 population covered
Hargray Communications: 106,000 population covered
With a total population of about 5 million, to have more than 3.6 million (72%) covered by just three providers and more than 4.3 million (86%) by seven providers shows why cable broadband has an advantage: they have clusters which produce economies of scale.
What is the critical importance of owning and operating the telephone exchange in Florence, SC (population just under 38,000) for AT&T? Why not pursue a structure with other phone companies in Northeast South Carolina that mirrors the one proposed by Apollo Management for combining Dish and DirecTV assets? What efficiencies (and increased business opportunities) could be realized from greater exchange consolidation?
How bad is it (likely) for AT&T? Look at the May 29 Frontier sale announcement of their Northwestern exchanges, where they disclosed that the sold properties passed 1.7 million locations yet Frontier only had 350,000 consumer and business customers (20% relationship penetration). Does AT&T (U-Verse/ Internet) have a relationship with 30% of the homes passed in Florence? What are the value prospects, and how do they fit into all of the other things that AT&T is managing?
As for the other local exchanges, how long can they compete with the new T-Mobile, who, like we discussed in last week’s TSB, is promising 100 Mbps fixed wireless service to the vast majority of the United States (including Florence) in a few years? Is it too late to change?
3.To T-Mobile: How do you continue to drive increased postpaid retail gross additions? How much of it is driven by new device launch promotions (iPhone 11/ 11 Pro/ 11 Pro Max) versus increased 600 MHz footprint?
We have reported for the last several weeks on the lack of availability of both the iPhone 11 and the iPhone 11 Pro Max at T-Mobile (note: in last weeks report, most of the iPhone 11 issues were driven by specific colors). Here’s the data for this week:
T-Mobile has really been selling a lot of iPhone 11 devices. Their shortages on the 256GB storage level have been ongoing for three weeks, leading us to believe that this may be a supply chain miss (and perhaps a sign of economic good times). Not surprisingly for Apple, the iPhone 11 in green (and, to a lesser extent, purple) is harder to come by than more standard red, white, and black. Now the chart for the iPhone 11 Pro:
This is also an interesting chart for T-Mobile. As we have pointed out several times, Magenta does not have a $0 option for either the iPhone 11 Pro or the iPhone 11 Pro Max. Our guess is that the T-Mobile shortage is continuing for all but the 512GB memory model for two reasons: a) greater upgrades within the T-Mobile base (presumably to get the 600 MHz coverage and all of the other iPhone features), and b) some movement from other carriers (Sprint?) to Magenta. These are educated guesses (not stabs in the dark) and should not take away from any 600 MHz progress as a factor.
AT&T’s shortages (basically out of everything that is not gold colored) are likely much more weighted to upgrades. A lot of changes have happened in AT&T’s network since the iPhone 7 (along with the 6S, most likely phone upgraded to the 11), and the business upgrade cycle is also in full swing (spending any available budget to improve corporate liable handsets). There may also be a small amount attributable to the FirstNet initiative as their LTE band was not included until last year’s models (XR, XS, XS Max were the first models with LTE Band 14).
Similar trends are seen with the iPhone 11 Pro Max:
The backlog seems to be much more manageable here than for T-Mobile. It’s likely that T-Mobile’s iPhone 11 Max shortages are attributable to supply chain/ forecasting, and nothing more.
4.To all carriers (especially CenturyLink): If low latency applications are critical to the value creation of 5G (basically keeping 5G more than a special access open expense reduction), what is your edge data center strategy?
This is a particularly important question for the large wireless carriers (including T-Mobile) and enterprise focused companies such as CenturyLink (who now owns Level3 Communications). It’s hard to remember, but there was a time when both AT&T and Verizon (and Sprint and T-Mobile) owned several data centers apiece for internal use – both AT&T (Brookfield Infrastructure partners – $1.1 billion – 2018) and Verizon (Equinix – $3.6 billion in late 2016) sold their data center assets. Investing in dozens (hundreds?) more could be necessary, however, if no closer solutions exist.
Also of interest with respect to edge is the entrance of Pensando Systems, who announced last week that they raised an additional $145 from Hewlett Packard Enterprise and Lightspeed Partners to fund their edge computing interests. Pensando has now raised a total of $278 million dollars (3 rounds in 3 years) with a high degree of interest from a wide variety of potential partners. More on the startup (certainly a candidate for our next “Companies to Watch”) in this CNBC article (John Chambers of Cisco fame is their Chairman).
Also of interest are companies such as Qwilt, an edge video server company that has raised over $65 million from various partners including Cisco, Accel Ventures, and Bessemer. Verizon has deployed Qwilt as their application edge delivery platform.
Understanding edge strategies is critical with the increase in over the top solutions (such as last week’s Hulu 4K device announcement which broadens their base to include Amazon Fire Stick, Microsoft’s Xbox One, and the LG WebOS TV platforms). More capabilities will lead to higher expectations and even higher consumption.
TSB Follow Up
Several of you issued lengthy replies to last week’s TSB. There is no doubt that strong feelings exist supporting maintaining equal outcomes of data packets. There’s equal certainty that others see S.B. 822 (California Net Neutrality bill) as a stepping stone to more activist state proceedings with respect to cable unbundling (which would clearly deter new incumbent investments in the Golden State). We decided not to go there in last week’s TSB (our focus was on how wireless companies would treat throttling) but see how and why the ghost of Brand X is more than a mirage to many of you.
One item that I think is undebatable – Congressional action would clearly eliminate the newfound love of Federalism that is breaking out in many state legislatures. We will write more on this in the future, but we at TSB offer up the following bill parameters for consideration:
Establishment of a minimum residential achieved average upload and download speed (wireless and wired) above which regulations would be loosened if not eliminated (we would propose 200 Mbps for 2020 (200 Mbps for stand-alone Hotspot; 100 Mbps per smartphone or tablet) and 500 Mbps for 2025 (500 for stand-alone Hotspot; 250 Mbps per smartphone or tablet) with agreement to establish the 2030 speed at no less than 700 Mbps). Residential averages would be evaluated by no less than two independent 3rd parties at a zip code level.
The rationale behind this is twofold: a) Regardless of bit prioritization practices, the presence of 200 Mbps for 4-5 simultaneous users clearly provides a healthy broadband baseline. This would be based on achieved as opposed to advertised speeds.
This also provides the ability to have lower speeds but uses market mechanisms to drive the mix. If AT&T wants to offer Gbps speeds for $90/ month, then they will have a smaller fraction achieving this higher speed than if they offered the same product at $50. The market will reach an equilibrium.
This would also greatly encourage the adoption of 5G services across wireless carriers. If 50% of the base is wireless and achieving LTE speeds of 100 Mbps, they would need to be offset by 50% of the base experiencing average speeds of more than 300 Mbps.
It would also create a competitive mechanism assuming either telco or cable did not achieve the figure in the first measurement. Some incremental capital expenditure would also occur (and this can be done prior to having a larger infrastructure spending bill if that is desired).
Tighter enforcement of Type II provisions and regulations. Unbundling provisions in the 1996 Telecom Act have been watered down to a large extent, with telcos (and, to some extent, the business arms of the cable companies) replacing the harmful operational effects of unbundling with 60-month term discounts on traditional special access services.
If Type II were properly enforced (penalties properly monitored and assessed), there would be more impetus to be classified as an information service. This is a fault of all regulators – state and federal – and should be addressed.
Adding core control to Type II provisions for wireless providers. If national or regional wireless providers do not step up their game and have market-leading data infrastructure, they should allow others to disintermediate them (core control allows a rural-focused MVNO to set up infrastructure in the slower market and use the faster speeds in more metro areas). This “nuclear option” would certainly spur innovation among the wireless carrier community and perhaps spawn a previously unthinkable concept – spectrum/ network sharing.
These are very measurable, practical legislative remedies which refocus objectives to weighted average usage (including testing price elasticities to a greater extent) and increased competition. We clearly believe that the current approach will create a patchwork of network procedures as well as full employment for telecom attorneys.
Next week, we’ll look for clues from Comcast, Charter, and Verizon’s announcements, as well as some previews for AT&T’s earnings and the Time Warner analyst day (Oct 29). 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 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.