Home » DOJ

Category Archives: DOJ

The Unintended Consequences of an Attorneys General Victory

opening pic

 

Greetings from Davidson/ Lake Norman/ Charlotte, North Carolina where winter has finally begun its return (picture is from earlier in the week when our dog, Abby, was chasing ~40 ducks into the Lake).  Thanks again for the emails and comments on last week’s column – much appreciated and thought provoking.  This week, we will have some thoughts on the closing arguments made at this week’s AG v. T-Mobile/Sprint/ Softbank/ DT trial but spend most of our time focused on the earnings outlook for the telecommunications sector.  We will conclude with a few TSB follow-ups (although admittedly it reads more like the “Five You May Have Missed” feature of previous Briefs).

 

For those of you in Charlotte, there are still a few seats left at the table for the inaugural Launch LKN book club.  I’ll be leading the discussion on the first book (Tim Wu’s The Master Switch) – we are reading this book (and other lengthy tomes) across two months and splitting our discussion accordingly.  Sign up here – only a few spots left – thanks to The Hurt Hub at Davidson for providing the facility and Launch LKN for providing the forum.

 

Separately, I will also be delivering keynote addresses to a couple forums in the next new months.  The first one is the 5th Annual Colorado Wireless Association Education Conference.  If you are living in Colorado and not aware of the session, you should check it out.  It’s a full day of panels, speakers, and networking.  More on the conference here.

 

Finally, I am pleased to announce that one of the start-ups I am advising (Lucid Drone Technologies) recently won another “Best Charlotte Start-ups” award, this time from CharlotteInno.  Read more on their recognition and the other recipients here.

 

The Unintended Consequences of an Attorneys General Victory

On Wednesday, Judge Marrero heard closing arguments from the states’ attorney, Glenn Pomerantz, and from the defendants’ attorney, David Gelfand.  Both made strong cases for their clients, and the judge committed to render a verdict “as promptly as possible.”

 

Based on our readings of the Findings of Fact (summary:  AG Findings of Fact read like a Law School final exam response; Defendants’ Findings of Fact read like a Business School final exam response), this is by no means a slam dunk for either side.  The future of M&A transaction second-guessing hangs in the balance, which could be very important for all industries (airlines, energy, insurance, health care, retail specifically come to mind in addition to telecom/ cable).  If you don’t like the opinion of the Feds, you could shop the decision to a coalition of like-minded AGs and hold up approvals for months or even years.  In a recent article with the Wall Street Journal, Assistant Attorney General Makan Delrahim echoed these points, saying “I think if the states win, it creates major uncertainty in M&A.”

 

In addition to the practical matter of altering the M&A approval process going forward, t-mobile balance sheet 2011 2012there’s the issue of Sprint.  In his closing statement, Mr. Pomerantz stated “Let them compete” and there’s an erroneous assumption that an unmerged Sprint would be in a similar position that T-Mobile faced at the end of 2011 when the AT&T merger failed.  Let’s correct this faulty assumption with some data.  Pictured nearby is the T-Mobile 2011 and 2012 balance sheet from their 2012 news release (the 2011 release was not available).  The right column of figures reflects the balance sheet as of December 31, 2011.  T-Mobile had just over $1 billion in payables to affiliates (Deutsche Telekom) and slightly more than $15 billion in long-term payables to affiliates.  That’s it – $16 billion in debt with one primary debtholder who is also the primary shareholder.  As reference, T-Mobile had $5.3 billion in adjusted OIBDA and $2.3 billion in operating income in 2011, and was in the process of collecting a $3 billion break-up fee plus spectrum from AT&T.

 

Sprint is in a very different situation today, as shown by the following chart from their Investor Relations website:

Sprint debt maturities

 

Paired with this debt schedule is the following quarterly reconciliation to free cash flow:

sprint fcf reconciliation quarterly

 

The economic reality for Sprint is as follows:

  1. Last four quarters of cash provided by operating activities of $9.9 billion.
  2. Network spending requirements (using previous 12 months as a proxy) of $5 billion
  3. An additional $7 billion in cash required to finance leased devices (this assumes no Apple 5G device super-cycle)
  4. $1.6 billion in debt due within 2 months and another $3.8 billion in the subsequent 14 months (and another $20 billion due in the 36 months after that).

 

At current trends, Sprint will need $7.5 billion over the next two years to remain solvent.  Add in additional 5G expansion to remain market competitive (something CEO Michel Combes mentioned in trial testimony), and that figure easily exceeds $12 billion.

 

Back to T-Mobile for a moment.  Here’s the slide outlining what they were able to do in the 12 months following the AT&T merger dissolution:

t-mobile investor day presentation dt 2012

 

T-Mobile entered 2012 with mostly mid-band spectrum (1900 MHz).  They picked up AWS spectrum from AT&T as a result of the merger failure (1700 MHz/ 2100 MHz) and added additional spectrum through their Metro PCS acquisition.  Then they swapped some additional AWS spectrum with Verizon (announcement here).  Then they bought $2.4 billion in  700 MHz spectrum (called the A Block) from Verizon in 2014 (article here) and additional spectrum from other carriers in 2016 (article here).   Then they bought $8 billion of 600 MHz and additional $1.8 billion in AWS-3 spectrum.  Bottom line:  T-Mobile scrambled to fill in low-band spectrum gaps to more effectively compete with AT&T and Verizon.  This type of spectrum is not available to Sprint today, hindering their ability to be competitive in suburban and rural locations.

 

To use a card analogy, Sprint needs the face cards of low-band spectrum, a long-term oriented bondholder ready to finance $10-15 billion over the short-term (the approval process to engage another major shareholder is uncertain thanks to the recent AG action), and a solution to provide another $20 billion in debt restructuring for those redemptions due in 2021-2023.  T-Mobile, Verizon, and AT&T are holding those spectrum face cards and don’t plan to sell them to Sprint.  An investment from Google or Apple (both very unlikely) would draw extensive scrutiny from the same AGs who objected to the T-Mobile purchase.  And another foreign investor, even from Canada or Mexico, would be difficult (but not impossible), if they could afford it.

 

“Let them compete” under these conditions has clearly defined but unintended consequences:  Sprint either a) declares bankruptcy, sending shares to pennies and wiping out Softbank’s investment (and the Japanese banks that helped finance them), and then sells to a cable company (or consortium) if the DOJ, FCC and state AGs allow it; or b) as was stated in the trial, Sprint ceases to be a national provider, which might preserve competition in New York City but will drive up prices in Binghamton, Syracuse, Schenectady, Henrietta, North Chili and Medina.  Hopefully the pithy “Let them compete” soundbite is ignored by Judge Marrero and math prevails – that’s why this case is still a coin flip.

 

Fourth Quarter Earnings Questions

In last week’s TSB, we started to outline the key themes we expected to hear during earnings calls.  As a reminder, the earnings season starts next week with Comcast (Thursday, January 23, 8:30 a.m. ET).  The remaining calendar (as of Jan 19) is as follows (Neither Sprint nor T-Mobile have indicated times, but, if last year’s schedule is any indication, it’ll be either January 30, January 31, or the week of Feb 3.  No info on Windstream):

 

Apple:                  January 28 (afternoon)

AT&T:                   January 29

Verizon:               January 30

Spectrum:            January 31

Google:                 February 3

CenturyLink:      February 12

US Cellular:         week of February 10 (est.)

Altice:                   week of February 17 (est.)

Frontier:              week of February 24 (est.)

 

Here’s five general questions and five specific-company questions we think should be asked:

 

  1. How is the healthy economic picture translating into telecommunications spending? While more agricultural purchases by the Chinese help the overall economy (especially in the Midwest), it does not have a direct tie to telecom spending.  But more Roku/ Fire stick/ Chromecast/ Apple TV device sales do drive more residential broadband consumption, more Apple iPhone 11/ 11 Pro/ 11 Pro Max sales drive higher application usage levels (and tonnage if those apps are video-capable), and newly launched Disney + content was likely consumed at an equal or greater rate over mobile devices (call it the American Idol network congestion moment for the 2020s).

 

Our take is that a strong economy drives device and bandwidth upgrades, but only to a point.  Bad debt is going to stay low in 2020 (not only due to economic conditions, but also because of increased relative importance), and all attention is going to be on the wireless and wired broadband tonnage impact of increased content launches as Quibi, Comcast/ NBC/ Peacock, Apple, HBO and others all bring new services to or expand current services in the market.

 

  1. How are the overall retail environment struggles impacting wireless carriers? We have written about this extensively, and see the struggles faced by all retailers (in malls, in parking lots near malls, etc.) as a headwind for each carrier, even if it’s not a company-owned store.  Couple this with the 6% off all Apple Card/ Apple Store purchases promotion continued through January (as well as Apple Stores being a destination for the hottest product of the Holiday season – AirPods Pro), and there’s a good chance that the lines were shorter at many Verizon, Sprint, T-Mobile and AT&T stores.

 

  1. With a possible 5G iPhone launch many months away, will customers continue to upgrade? The initial thought behind slow iPhone 11 sales (which ended up being quite robust) was “Customers will wait for the 5G iPhone.”  Then, as reports leaked out that Apple may not have a fully robust 5G version until 2021, customers decided to make the switch (a 3-yr old iPhone upgrade completed in December 2017 would have been from the iPhone 7 which would be a worthy upgrade).  AT&T recently reiterated their belief that there could be a 2H 2020 super cycle driven by upgraded 5G device sales (note: this is not publicly shared by any other wireless carrier).

 

  1. How quickly will 5G (and specifically mmWave) be deployed? T-Mobile is in the process of deploying 5G over their 600 MHz spectrum band (200 million people; 1 million square miles), giving them 20-25% improved speeds (and really speedy bandwidth in areas not on Verizon’s or AT&T’s 2020 5G deployment radar).  AT&T has committed to a nationwide 5G deployment this year (which we interpret to mean that they will have 5G Plus deployed in many areas throughout the country, but that there will still be suburban and rural areas that predominately use 4G LTE).  The answer to this question impacts the answer to question #3.

 

  1. How quickly are customers cutting their cable cords? Are we moving from OTT as a supplemental content service to being primary?   Comcast and Charter lost 313,000 video customers in 3Q 2019 – this could easily go to 400,000 this quarter even with Sony’s PlayStation Vue shutting down (Comcast will set the tone this Thursday, but we expect the greater acceleration at Charter).  Revenue concentration is increasing at the cable companies, and some broadband price hikes are holding (for now), but one has to wonder how the long-term health is impacted as others (re)enter the home broadband market.

 

Specific-company questions: 

  1. For AT&T. What’s the rationale for continuing to hold on to local telephone lumberton nc picexchanges, particularly where AT&T is poorly clustered?  We have discussed this ad infinitum, but there’s a great opportunity for the larger players in the local telephone industry to swap exchanges (see North Carolina map here).  Why AT&T continues to operate in island exchanges such as Lumberton, North Carolina is a mystery (picture of downtown from Wikipedia is nearby).  Let CenturyLink serve Lumberton and swap it for a Tennessee or other property that AT&T can serve efficiently.  That’s how you compete against cable’s wireline juggernaut.

 

  1. Also for AT&T. In-vehicle M2M was enormously successful for AT&T in terms of number of embedded vehicles (24 million cars and 3 million commercial vehicles as of 3Q 2018).  But the total annual data consumption from the embedded modems in these vehicles was a scant 45 million GB (3.75 million GB per month or about the equivalent of 450,000 smartphones on unlimited plans).  In the link above, AT&T also prominently reveals that they have 1 million retail postpaid subscriptions across the 24 million embedded base – is a slightly more than 4% share something to be proud about?  Did AT&T spend a lot of money to get a lot of subpar subscribers, or did the payments from the auto companies (car performance data, which is paid for separately) justify the IT and product development efforts?

 

  1. For Verizon. How many Verizon-branded customers left postpaid retail and signed up for Xfinity Mobile and Spectrum mobile?  Are any returning?  T-Mobile implied at a recent investor conference that many of Xfinity and Spectrum’s gross additions are coming from Verizon retail.  We think that their gains are far broader than that, but will see what color is released by Verizon and the cable companies.

 

  1. For T-Mobile. How many gross additions remain in 2020 and 2021 from 600 MHz network expansion?  As we saw with their 700 MHz deployment, there’s a long runway for T-Mobile in the suburbs and rural markets. If the merger is rejected, we expect T-Mobile to significantly “thicken” these areas (including outdoor CBRS deployments) and aggressively pursue customers.

 

  1. For Sprint. How will Sprint “right the network” in Florida?  We spend a lot of time looking at network quality for one of our clients, and noticed that Sprint really fell off in all performance areas at the end of 2019.  Here’s the RootMetrics RootScore chart for Marcelo Claure’s adopted hometown, Miami:

 

rootmetrics 2H 2019 miami

It’s amazing to think that in the first half of 2018, the spread between Verizon (sole winner in Miami) and Sprint was slightly more than 4 points, at the end of 2017 was 3.7 points, and at the beginning of 2017 was 2.0 points).  Regardless of the specific weighting or other quibbling about how RootMetrics conducts their surveys, this is an undoubtedly troubling trend, and it’s not confined to South Florida.  Orlando (1.5 pt spread in 1H 2017 has grown to 9.3 pts in 2H 2019), Tampa (2.9 pt spread to 10.1), and Jacksonville (4.6 pt spread to 8.4) have all deteriorated.

Perhaps this is all prepping for the T-Mobile merger, and there’s a plan in place to turn all of Florida into a 5G heaven, but their recent performance signals that they are falling behind – fast.

 

There are many more questions, but time and space force them to next week’s column.  We welcome your thoughts and feedback on which questions you would pose.

 

TSB Follow-Ups

Here’s a few of the many follow-ups that we thought would make for additional interesting reading:

 

  1. If you have not watched the NBC Universal Peacock unveiling, take the time and view it here. It’s an amazing production. One of you described the day as “beautiful” – that pretty much captures what we saw.

 

  1. Verizon introduced a privacy browser called OneSearch that is powered by Bing. Article from The Verge is here and actual website that you can try out is here.  Kudos to the company for building it – hope they can effectively market it even with their very strong Google relationship.

 

  1. Everyone tried to interpret the latest Goldman Sachs earnings report to figure out how successful the Apple Card has been. It does not appear to have slowed much if at all, but the exact quantities are vague.  More here (earnings call transcript) and here (earnings presentation).

 

  1. FierceWireless has a great article on Tracfone’s SmartSIM program. According to Jeff Moore of Wave7 research, the largest MVNO in the US appears to be pulling back from the idea for now (we think this could have to do with the overall economics of the program).  As the article indicates, the method and algorithm used by Tracfone are unknown at this time (but likely a license of Google Fi which is its own headline).

 

  1. One of the best research reports on edge computing is the State of the Edge, a collective research project funded by ARM, Ericsson, Packet (now Equinix), Rafay and Vapor. They updated their 2018 report last month and it’s available for download here (I am about 50% through the 2020 Update and it’s even better than the original).

 

That’s it for this week.  Next week, we’ll comb through Comcast’s release and hit on a few other topics that were raised from our CES article.  Until then, if you have friends who would like to be on the email distribution, please have them send an email to sundaybrief@gmail.com and we will include them on the list.

 

Have a great week – and GO CHIEFS!

Chronicling AT&T’s Divestiture

opening bell picEnd of year greetings from Fraser, CO and Lake Norman, NC.  This has been a week of reflection, not only on the year but also on the decade that was.  Taking some time to contemplate the changes that have occurred over the past ten years is instructive and helpful.  Scheduled broadcasts (except for live sports?) died over the last decade – the term “binge” was most likely preceded by “spending” in 2010, as opposed to referring to online watching today.  Our digital “wait time” expectations shortened (try to pull up a full version of any content-rich website in a poor coverage area).  The quality of our smartphone (video) cameras improved and became the “lead” or replacement for our social media posts.  And many of us now answer messages and calls that appear on our wrist from Bluetooth earbuds using speech recognition.

 

Against this technological whirlwind we evaluate the breakup of AT&T in this week’s TSB, an event that started on November 20, 1974, and culminated on January 1, 1984. Many books have been written on the topic in addition to Steve Coll’s “The Deal of the Century: The Breakup of AT&T” (including “The Fall of the Bell System” by Peter Temin and Louis Galambos and “Network Nation: Inventing American Telecommunications” by Richard John), and when applicable we will draw on them in this review.  Our focus, however, will be on Coll’s chronicle.  As we mentioned in Tim Wu’s The Master Switch (see TSB here), the study of history helps us understand the influences and beliefs that shaped business decisions, many of which parallel those seen in today’s world.

 

Understanding AT&T’s World in the Early 1970s

Against post-WWII prosperity, America came of age in the 1960s, with baby “boomers” going to work, battling communism in Vietnam, or pursuing university degrees.  Science and technology were national interests, and, as a result, subject to increased federal (and sometimes state) attention.  The Cold War embers were still hot, although the fiery and dramatic rhetoric of Kennedy and Johnson had evolved by the end of the 1960s – détente was in, shoe-banging was out.

 

For the two decades following the end of WWII, “systems development” was popular – components working in concert to achieve a particular national or social objective.  In the case of telephony, the system consisted of

  1. terminating equipment
  2. local networks
  3. switching (which was often assisted by personnel called operators)
  4. long-distance networks
  5. interconnection facilities (to complete calls to independent phone companies)
  6. operations support: customer service, billing/ collection, research & development, product management

 

To AT&T executives, the quality of the network was directly correlated to system control.  This was not necessarily, as some back-casting historians presume, a vestige of power-hungry monopolists eager to satisfy increasingly demanding shareholders.  No doubt that there were some malevolent managers at Ma Bell (as discussed below), but there is a fundamental difference between a stalwart belief in operational efficiency (providing telephone service to everyone at affordable rates) and overt anti-competitive monopolism.  Keeping the system together created consistent stability in an increasingly less stable world[1].

 

Equally as important, the system control depended on a delicate mix of businesses and consumers.  Too many consumers, particularly in high-cost rural locations, and profitability would be compromised.  Too many businesses, and capital and service costs would skyrocket.  Customer mix was a Jenga puzzle, and MCI’s focus on enterprise voice and private line services threatened its balance.

 

MCI and AT&T’s Initial Interconnection Discussions

Despite AT&T’s arguments to the contrary, the Federal Communications Commission (FCC) and the capital markets were very interested in MCI’s plans to disintermediate the Bell system.  Coll ends Chapter 1 summarizing MCI’s $100 million equity raise in June 1972 (and follow-on $72 million line of credit later that year) and begins the following chapter with a recap of the roundtable discussion that ensued at MCI.  Rather than a complete overbuild, MCI would negotiate connections to AT&T’s switches in St. Louis and Chicago (it’s hard to imagine the first interconnection negotiation given their commonplace nature today), and AT&T had complete leverage.

 

In March 1973, Jack McGowan, MCI’s Chairman, met with AT&T Chairman John deButts and George Cook, an AT&T attorney, at AT&T’s headquarters in New York City (195 Broadway).  McGowan dictated a memo after the meeting, saying:

 

“On the one hand, they piously state a willingness to be fair and are willing to believe it themselves while at the same time they interpret their mandate to compete hard by actions which they know will result in a denial of their position on fairness… It would be incorrect to be encouraged by the potential impact of antitrust action, although it might receive a very favorable reaction at 195 Broadway simply by having them spend more time being advised by counsel. ”[2]

 

For the next nine years, dozens of attorneys would be employed by each side engulfed in the largest antitrust lawsuit to date.  The system was breaking, and MCI cracked open AT&T at its most vulnerable point – interconnection.

 

The AT&T Chairman Speaks

 

john deButts picCompetition intensified over the summer of 1973, and AT&T Chairman John deButts used the fall meeting of the National Association of Regulatory Commissioners to respond.  Coll spends an entire chapter describing deButts’ speech, which culminates with the following recommendation:

 

“The time has come for a thinking-through of the future of telecommunications in this country, a thinking-through sufficiently objective as to at least admit the possibility that there may be sectors of our economy – and telecommunications [is] one of them – where the nation is better served by modes of cooperation than by modes of competition, by working together rather than by working at odds.

 

“The time has come, then, for a moratorium on further experiments in economics, a moratorium sufficient to permit a systematic evaluation not merely of whether competition might be feasible in this or that sector of telecommunications but of the more basic question of the long-term impact on the public.” [3]

 

The crowd of regulators stomped and cheered.  Bernie Strassburg, the head of the FCC Common Carrier Bureau for the past decade and a 21-year staff lawyer at the Commission prior to that, was in the audience and, according to Coll, took deButts’ comments to mean that AT&T was above the law.

 

Meanwhile, MCI continued to test the regulatory waters, expanding service from private lines (voice calls between two regional offices) to something called Foreign Exchange or FX, which can best be described as a precursor to toll-free 800 service (Coll offers the example of an airline customer calling a local New York City phone number and being serviced by a customer service representative in Chicago).  The challenger had moved from connecting two company locations to connecting customers to company locations.  Both private line and FX were highly profitable services.

 

AT&T took the case to court, and, after losing the first ruling, won on appeal.  Coll describes their activities after that decision:

 

“As soon as the appeals court decision was handed down, it was ordered that all of MCI’s FX lines be disconnected immediately.  AT&T engineers worked an entire weekend unplugging the circuits, inconveniencing MCI’s customers and infuriating McGowan.  John deButts would later say that the decision to disconnect MCI’s customers was one of the few he ever regretted.  The FCC ruled that MCI was, in fact, entitled to sell FX lines, and AT&T was forced to reconnect all of MCI’s customers.  The damage, however, was already done. ”[4]

 

It is tempting to draw some analogies of “above the law” behavior seen today by trillion-dollar market cap companies, but the behavior described above would be akin to Apple removing Google Maps, Netflix or Spotify from the iTunes store.  As we have described in very early TSB editions, there’s always been a delicate balance (Apple’s relationship with Google Maps in 2012-2013, for example) initially, but today’s systems, thanks to the role of applications, has been much more friendly than the early days of telecommunications competition.

 

Attorney General William Saxbe: “I Intend to Bring an Action.”

saxbe picThanks to the administrative turmoil created by Watergate (Nixon resigned in August, 1974), most of the attorneys in the Justice Department thought that the AT&T case would be placed on hold.  Nixon had appointed William Saxbe, an elder senator from Ohio who enjoyed the golf links much more than the office, as Attorney General earlier in 1974.

 

The recommendation to file an antitrust suit against AT&T made its way to General Saxbe’s desk in November, 1974.  After being briefed by two senior DOJ lawyers working on the case, it was AT&T’s turn to make their case.  Coll describes this situation as follows:

 

“John Wood, a Washington lawyer retained by AT&T, stood up to begin AT&T’s presentation.  Mark Garlinghouse, the company’s general counsel, was seated beside him.

 

“Mr. Saxbe,” Wood began, puffing on a pipe, “before we start our presentation, I’d like to know exactly what your state of mind is on this case.  It might help me shape my arguments to you.”

 

Saxbe paused, spit [tobacco juice], looked at Wood, and said, “I intend to bring an action against you.”[5]

 

Within an hour of this statement, the SEC stopped trading in AT&T’s stock.  John deButts, who happened to be the chairman of the United States Savings Bond campaign in 1974, called Treasury Secretary William Simon to let him know the news.  Even President Ford, who was in Japan while all of these actions unfolded, was caught unawares.  According to Coll, “Simon then tried to call Saxbe, but the attorney general had left the office for the day.  He had gone pheasant hunting.”[6]

 

Enter George Saunders

Of all of the characters in the AT&T drama, few rise to the importance of George Saunders, a partner at Chicago-based Sidley & Austin who would devote eight years of his life to defending AT&T from the attacks of MCI and the Justice Department.  Coll describes Saunders as follows:

 

“Saunders was an unabashed fat cat, a smooth, luxuriant attorney who wore expensive suits, drank martinis like they were water, and smoked more than a dozen cigars a day.  He had been born and raised in Birmingham, Alabama, the son of a house painter, and the first member of his family to ever attend college.  He went because even at age fifteen… his extraordinary intellectual gifts were obvious – his mind was like some strange machine.  He had nearly total recall of the most complex and obscure facts, and he could effortlessly organize knowledge in sophisticated, well-developed models.  The lawyers who worked with him later tried to describe this capacity to others by saying that it was like Saunders had a giant flip-chart in his head that he could summon up instantaneously, search for the information he needed, and then flip forward to make his next point without ever skipping a beat.”[7]

 

Saunders scored his first victory after a hearing before Judge Joseph Waddy in February, 1975, when he requested, purely as a tactic, that the federal government be required to preserve every document in its possession that might be relevant in the AT&T case (in the pre-email/ server environment, this is a bold request to say the least.  Saunders backed off the request from all federal agencies to a mere 44).

 

After some vigorous conversation (described by Coll in vivid language), Saunders convinced Judge Waddy that AT&T’s fate should be a decision of the FCC and not the courts.  He convinced Judge Waddy to postpone any discovery until the jurisdictional case was settled.  A mere three months after filing, the case against AT&T was dead and, due to Judge Waddy’s terminal illness, jurisdiction would not be decided for three years.

 

Enter Ken Anderson
One of my favorite characters in Coll’s book is Ken Anderson, chief of the Special Regulated Entities section of the Department of Justice and the owner of the AT&T case when it resumed in late 1977.  Coll describes Anderson as follows:

“Anderson’s approach to life and to the practice of law was somewhat unorthodox.  Though he worked in the heart of the city, he lived on a farm in rural Virginia, and on summer weekends he liked to ride around on his big tractor under the hot sun, and then pull off his shirt and bale some hay…. He was a health food enthusiast, and when he rode into Washington on the train he often carried a large paper sack full of raw vegetables.  He kept the sack on a shelf in his Justice department office, and during important meetings he would wander over, pull out a carrot stick or a piece of cauliflower, and take a large, loud bite.”[8]

 

With the previous DOJ attorney (Phil Verveer) off of the case, AT&T saw an opportunityKen Anderson pic to test the settlement waters as they sized up Anderson.  Hal Levy, an AT&T staff lawyer who was working side-by-side with George Saunders, proposed that the parties discuss injunctive relief with AT&T self-sourcing less equipment, and the government agreeing to keep AT&T intact.  After hearing Levy out, Anderson replies:

 

“I’ll tell you one thing.  This case is going to be a severed limbs case.  We’re going to have severed limbs, AT&T limbs, on the table dripping blood.  That’s the way this case is going to be settled.  We’re not going to settle this thing with injunctive relief.”[9]

 

AT&T was also preparing for a transition as John deButts was preparing for his planned retirement (announced in late 1978).  George Saunders’ boss, Howard Trienens, left his position as the managing partner of Sidley & Austin to become VP and General Counsel of AT&T under new Chairman Charles Brown in early 1979.

Enter Judge Greene

harold greene pic

Of the characters in this multi-act drama, none is as important as Judge Harold H. Greene, who was assigned the case in August, 1978.  Coll describes the influence of politics on Greene in the following manner:

 

“A Jew, Greene was raised in Germany during the 1920s and 1930s.  His father owned a jewelry store, and in 1939, as the terror of Hitler’s Reich reached fever pitch, his family fled to Belgium, where it had relatives.  Greene was just sixteen years old.  When the Germans invaded Belgium, the Greenes fled again, this time to Vichy France.  From there, they made their way to Spain, and later Portugal, before emigrating to the United States in 1943.  Young Harold Greene was immediately drafted into the U.S. Army and sent back to Europe with a military intelligence unit to work against the Nazis.  He saw combat action in his former homeland, but he escaped injury.”[10]

 

Greene grew up in the youthfulness of Attorney General Robert Kennedy and, according to Coll, wrote the Civil Rights Act of 1964 and the Voting Rights Act of 1965.  After leaving the Justice Department in 1967, Greene served as chief judge of the District of Columbia’s Court of General Sessions (municipal court for the District).  He would remain there until Jimmy Carter was elected to the presidency, when he was appointed a federal judge.  In his new role, he inherited the caseload of the late Joseph Waddy, and was thrown into the middle of a nearly four-year dispute.

 

Judge Greene was a strong believer in due process and the strict preservation of constitutional rights.  He also supported a strong judiciary to check the executive and legislative branches (a hot topic on the heels of Watergate).  Unsurprisingly (given his German descent), he was also focused on continuous improvement and courtroom efficiency.  Greene was very different from both Saunders and Anderson – his goal was to run his courtroom like clockwork.

 

The Ending

1981 marked the beginning of the fourth presidency to span the AT&T antitrust trial.  Conventional wisdom indicated that AT&T would finally be vindicated.  That was the case until President Ronald Reagan nominated Bill Baxter to lead the antitrust division of the Justice department.  While a conservative, Baxter strongly supported the Justice department lawsuit because he strongly believed that regulated local telephone divisions were subsidizing their unregulated counterparts.

 

This was not the position of other members of Reagan’s incoming cabinet.  Secretary of Commerce Malcom Baldridge, Secretary of Defense Casper Weinberger, and counselor Ed Meese all had publicly stated their preference to dismiss the lawsuit.  But Attorney General William French Smith was forced to recuse himself form the case due to his previous affiliations with Pacific Telephone.  And James Baker, who managed now Vice President George H.W. Bush’s 1980 campaign, was Reagan’s Chief of Staff.  Assisting Baxter was Jonathan Rose, an assistant attorney general for the DOJ Office of Legal Policy under Nixon.

 

Rose ultimately proved an effective partner to Baxter, carefully running point for Justice within the White House.  Over the July 4th weekend in 1981, after great deliberation, Baker decided to wait to dismiss the case.

 

Meanwhile, in Judge Greene’s courtroom, the prosecution had finished calling their witnesses and AT&T made a bold move to dismiss the case.  Judge Greene’s response denying the dismissal was succinct:

 

“Whatever the substantive merits of the motions and the case generally turn out to be, I don’t believe the government’s evidence justifies such cavalier treatment.  The government has presented a respectable case that the defendants have violated the antitrust laws, … Defenses have been raised, but I certainly could not say that these defenses are self-evident and will prevail…

 

I don’t propose to act on the basis of press reports or someone’s concerns unrelated to this lawsuit. The court has an obligation to deal with this lawsuit under existing antitrust laws, and it will do so irrespective of speculation outside the judicial arena.”[11]

 

The judge would later deny a proposal to continue the case until Congress could pass comprehensive telecommunications legislation (known as bill S. 898).  The defense continued to call witnesses throughout the fall of 1981, and, by a 90-4 vote, the Senate passed comprehensive telecommunications legislation to the House, led by Tim Wirth.  With a new report on competition released in November, it appeared to AT&T Chairman Brown that pursuing a solution other than complete divestiture was going to be difficult if not impossible.

 

On January 8, 1982, AT&T and the Justice department signed a consent decree that separated the local phone companies into independent operating units.  The concept of intra-LATA vs. inter-LATA access was established, and AT&T retained control of its equipment unit (Western Electric).  Over the next two years, AT&T would structurally separate and become independent companies on January 1, 1984.

 

While Coll’s book ends in 1988, we have the benefit of seeing the full effects of the breakup of AT&T:  The rise of multiple fiber-based networks, rapidly decreasing costs to call between states and globally, the rise of wireless spectrum and the rise of the Internet.  Had AT&T controlled the network, it’s unlikely a subsequent Telecommunications Act would have been enacted in 1996, the development of the enhanced services provider would never have occurred, and companies such as AOL would have raised capital to quickly establish early Internet infrastructure.  While it’s difficult to hang too many events on the AT&T tree, it’s important to understand and evaluate the fundamental changes the consent decree and Modified Final Judgement enabled.

 

 

That’s it for this week.  Next week, we’ll preview the 2020 Consumer Electronics Show.  Until then, if you have friends who would like to be on the email distribution, please have them send an email to sundaybrief@gmail.com and we will include them on the list.

 

Also, I’ll be at CES this year on the 7th and 8th.  We have set up a special Sunday Brief table at Gordon Ramsay’s Pub & Grill at 7:30 p.m. on Wednesday January 8 – only three additional slots available, but please reply to sundaybrief@gmail.com if you are interested in attending.

 

Have a great week… and GO CHIEFS!

 

[1] IBM, and to a lesser extent, Apple, shared this belief in systems efficiency.

[2] Coll, p. 26

[3] Coll, p. 43

[4] Coll, p. 52

[5] Coll, p. 68

[6] Coll, p. 71

[7] Coll, pp. 75-76

[8] Coll, p. 115

[9] Coll, p. 120

[10] Coll, p. 125

[11] Coll, p. 234

The Long, Long Run

opening picGreetings 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:

 

  1. 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.

 

 

  1. Business and technology strategy which drives network equipment (and service) performance. This super-critical element is often ignored under the Michael Armstrong and John Malonepressure 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.

AT&T architecture slide 2002

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.

LTE logo slideA 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.

 

  1. 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 new Moto RZRMotorola 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

M Claure and J Legere pic

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 sundaybrief@gmail.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 sundaybrief@gmail.com and we will include them on the list.

 

Have a terrific week… and GO CHIEFS!

The Case Against the T-Mobile/ Sprint Merger

opening pic

Greetings from Davidson, North Carolina, and Virginia Beach, Virginia (sunrise pictured), where we are enjoying several days of R&R prior to two weeks of travel.  This week’s TSB will contain an update on and a detailed analysis of the state attorneys general case against the T-Mobile/ Sprint merger.  We will also have several TSB Follow-Ups.

 

Many thanks to those of you who suggested additional titles for the History of Technology.  Next week, we will provide an amended list of the top six most important telecommunications and technology chronicles.  If you have additional suggestions, please send them to sundaybrief@gmail.com.

 

The Implications of This Case are Significant

One of the most important events to impact the telecom industry for the next decade is the now nineteen state attorneys general lawsuit against T-Mobile USA and Sprint (copy here).  If the attorneys general successfully prosecute their case, Sprint will need to find another merger partner or significantly restructure their balance sheet.  If the wireless companies win, new T-Mobile will prove a formidable challenger to AT&T and Verizon in postpaid and enterprise, and prepaid (or credit-challenged) wireless subscribers could see higher prices or reduced service quality.

 

We devoted an issue to the trial in early August and believe that an update is warranted.  This week’s TSB examines the details of the complaint and provides insight into possible outcomes.

 

Case Timeline

The case was originally filed in the Southern District of New York on June 11 (this date is prior to the late July DOJ settlement but after FCC Chairman Pai publicly supported the merger with conditions) by nine state attorneys general and the District of Columbia.  Ten days later an additional four states joined the amended complaint.

 

Texas’ Republican attorney general, Ken Paxton, joined the lawsuit on August 1 after fully reviewing the Department of Justice settlement with the merging parties and Dish networks.  “After careful evaluation of the proposed merger and the settlement, we do not anticipate that the proposed new entrant will replace the competitive role of Sprint anytime soon” stated Attorney General Paxton.  The Lone Star State continues to be the lone Republican attorney general in the complaint.  After Texas joined, the trial start date was moved form October 7 to December 9.  The case continues to be expected to last 2-3 letita james tweetweeks.  140 hours of total depositions were allowed by the judge.

 

After Texas joined the party, Oregon (Aug 12), Illinois (Sept 3), and Pennsylvania (Sept 18) added their support.  Notable population centers not participating in the lawsuit are Florida, Georgia, North and South Carolina, Washington (T-Mobile HQ), Ohio, Missouri (de facto Sprint HQ) and Arizona.

 

The Case Against the Merger

The states make the following arguments in their June 11 complaint:

 

  1. The merger of T-Mobile and Sprint would lessen competition. Based on redacted documents discussed in the complaint, it has been a long-held view of Deutsche Telekom and T-Mobile USA that market rationalization (four to three providers) would lead to higher profitability.
    1. Contained in the competition arguments is the implication that Sprint is capitalized to continue their aggressive rollout of 5G services nationwide.
    2. Also contained in these arguments is the assumption that a roaming deal between T-Mobile and Sprint would enable Sprint to cost-effectively fill in coverage and speed gaps until Sprint could economically supplement their network.

 

  1. MVNOs are not long-term competitors because they are subject to a shrinking number of networks who will wholesale to them. Specifically, the lawsuit points out that T-Mobile currently does not permit an MVNO to have core control.  The Dish agreement will apparently be the exception to this rule.

 

  1. While the new T-Mobile will likely provide a broadband replacement product, that is not a relevant determinant (or offset) to the lack of competition that will occur in mobile wireless services. Any fixed wireless offsets should not count in the competitiveness calculation.

 

  1. The merger, even with the divestiture of Boost Mobile, would also provide the new
    new york cellular market area 1

    CMA 1 includes New York City and Long Island

    company with a dominant market share in two large Cellular Market Areas (CMAs) – New York City (CMA #1 shown nearby) and Los Angeles (note that these data points represent two highly dense incumbent telco areas of AT&T and Verizon).

    1. The new entity would also have significant pro forma market share in Austin, Dallas, Houston, and San Antonio, TX; San Francisco, San Jose, San Diego, and Sacramento, CA; Tampa/ St. Petersburg, Orlando, and Miami, FL; Chicago, IL; Washington, DC, Baltimore, MD and Philadelphia, PA; Detroit, MI; Minneapolis, MN, and many other areas represented by the states that have joined in the case.  While the numbers have been redacted, the largest gains appear to be in Los Angeles, New York City, Chicago, Houston, Atlanta, Miami, Detroit, and Tampa/ St. Pete.

 

  1. While there will be significant activity occurring post-merger, this activity will not spur the type of innovation needed to provide lower prices and higher quality services to credit-challenged, low income, prepaid wireless subscribers.

 

In addition to the document, Fox Business News is reporting that the states are preparing an argument that Dish, even with the terms of the deal we discussed in a previous TSB entitled “Playing Charlie’s Hand”, will be a financially weaker competitor than a non-merged Sprint.

 

Reframing and Refocusing the Argument

The state attorneys general make an average to weak case to prevent the merger of T-Mobile and Sprint.  Without a doubt, merging the third and fourth largest wireless carriers will create more competition for Verizon and AT&T with respect to multi-line, enterprise, and state government segments.  However, to contend that Verizon and AT&T have no competitive counterpunch in New York and Los Angeles is laughable.

 

Imagine the cross-examination of Ronan Dunne, Verizon’s CEO of their Consumer Group, or of Jeff McElfresh, the new CEO of AT&T Communications, concerning their respective companies’  competitiveness in their two most densely populated markets:

 

  • How much has AT&T/ Verizon invested in New York/ Los Angeles in the last decade?
  • Specifically, how much has your company spent with tower company leases, how many route miles of fiber, etc., in New York City and Los Angeles (these figures would include enterprise and government spending on infrastructure that could be leveraged)?
  • How successful has your company been with wired broadband deployment in these markets?
  • What is the state of under-utilization in these markets? How easy would it be to upgrade tower and backhaul infrastructure to make these markets more competitive? How long would it take?
  • How dependent are these markets on deploying a successful 5G strategy?

 

The answers will significantly diminish the argument that New York and Los Angeles (or any other major metropolitan market) are going to be markedly impacted by less investment.  Even if Boost faltered (and we have highlighted the execution risks that will occur with the transition from legacy Sprint to new Dish networks), Cricket (AT&T’s MVNO), Visible (Verizon MVNO started by ex-Verizon execs), Xfinity Mobile (Verizon MVNO), Spectrum Mobile (Verizon MVNO with core control ambitions), Altice Mobile (Sprint and AT&T MVNO with core control capabilities), Mint Mobile (T-Mobile MVNO), and Tracfone (a multi-carrier MVNO doing business as Wal Mart’s Straight Talk or as Ready Mobile) would jump at the opportunity to pick up 1-3-5 market share points.   Bottom line:  The reason why T-Mobile’s share is great in New York and Los Angeles is that they built robust networks and effective distribution channels in these markets.  Distribution barriers to entry for large, well-funded competitors are low.  As a result, the possibility, driven by new network (5G) deployment, that Verizon and AT&T, either on a retail basis or through MVNOs of their own, reverse the market share gains T-Mobile and Sprint have achieved over the past decade are high.  Distribution will follow investment.

 

On top of this, however, is the increased discussion of competition the new T-Mobile will provide in rural markets.  T-Mobile committed to deploy 100 Mbps speeds to 67% of the US rural population in six years.  From a competitive perspective, less densely populated areas have a longer payback because the addressable market (homes passed, number of wireless subscribers, machine-2-machine connected devices) is smaller.  Verizon and AT&T have enjoyed duopoly returns (which, when unregulated, can be greater than regulated monopoly returns), especially where they are also the incumbent telecommunications provider.  Bottom line:  The competitiveness ledger needs to account for the overwhelmingly positive impact the new T-Mobile’s commitment will have on widely dispersed markets.  This is not to diminish the need to serve poorer urban communities, but to acknowledge the increased risks taken in areas where few homes and people exist.

 

Finally, the likelihood of substantial interest in Dish’s new business model is underestimated.  Without going into all of the cost savings details of deploying the next generation of 5G standards (called Stand Alone 5G), Dish was smart to hold firm to having the option to deploy new systems when the lower cost structure was available.  (Here’s a very interesting article showing that there is increased interest among the carrier community in deploying Stand Alone 5G standards – it will quickly become the default configuration, and Dish will be a direct beneficiary).  It is difficult to imagine that a data-centric network will be unattractive to others, and that (gasp) it might be perfectly paired with the regional networks deployed by cable to support their MVNOs.  Bottom line:  Only the most delusional industry analysts think that Sprint can emerge from a failed merger without a recapitalization/ reorganization.  That will cost the telecom industry more than the risk of Dish building out their network (including 800 MHz from Sprint) and failing.  Trading the risk of a much less expensive new network build for the certainty of the long-term financial damage done through an inevitable Chapter 11 reorganization is rational and reasonable.

 

The trial date is a little more than two months away, and, from a thorough read of the initial and amended documentation, there’s no reason why the parties should not settle.  The attorneys general should focus their efforts on how to make Dish more successful, and not on how to maintain the status quo.

 

(For those of you who want to view some good dialogue supporting the settlement from Assistant Attorney General Makan Delrahim, this YouTube video of the September 17 Senate Judiciary Committee Hearing has two very interesting dialogues at minute 20 with Senator Klobuchar and at minute 54 with Senator Leahy).

 

TSB Follow-Ups

  1. Faster speeds for the same price: Comcast does it again.  The Internet provider raised their speeds on four offerings across 11 states last week:

 

— Performance Plus increased from 60 Mbps to 75 Mbps

— Performance Pro increased from 150 Mbps to 175 Mbps

— Blast! Pro increased from 250 Mbps to 275 Mbps

— Extreme Pro increased from 400 Mbps to 500 Mbps

 

This represents the 17th time in the past 18 years that Comcast has increased speeds.  Approximately 85% of Comcast’s 25.6 million (end of 2Q 2019) subscribers will see this increase.   This turns up the heat on their telco competitors to match the speed growth and increase their fiber builds.  It also means that many more Xfinity subscribers will enjoy higher speeds/performance working from home than at the office.  More on the speed increases from this GeekWire article.

 

  1. CableLabs announces that they will be releasing the DOCSIS 4.0 standards in early 2020 (CableLabs blog post here). These standards will improve the total capacity available in an existing cable connection (using a technology innovation called Extended Spectrum DOCSIS) and also improve the utilization within the current DOCSIS 3.1 capacities through a development called Full Duplex DOCSIS.

 

At a minimum, these changes will double maximum speeds from the 1 Gbps in the current standard.  Assuming that the rollout of the standard leads to the first product deployment by the end of 2021, millions of existing customers will have the ability to have increased home and small business capacity.

 

  1. Apple iPhone 11, iPhone 11 Pro, and iPhone 11 Pro Plus online availability updates. Attached and shown below are the online inventory levels as of Friday, September 27.  Updates are compared to Tuesday, September 24 levels.  Generally speaking, iPhone 11 levels are remaining stable with immediate availability of certain colors and sizes for AT&T and Verizon (green and yellow are the most popular colors).  T-Mobile has less availability of the iPhone 11 due to their aggressive iPhone trade-in credit promotion (at least $350 for iPhone 7 and higher).  Magenta has more incentive to move customers to the latest devices (versus the iPhone 8 or earlier) due to the 600 MHz availability (which started with last year’s XR and XS/ XS Max models).

iphone 11 availability

iphone 11 pro availability

iphone 11 pro max availability

T-Mobile’s online shortages continue into the iPhone 11 Pro and 11 Pro Max.  This is more surprising given the fact that all T-Mobile customers who want to purchase these devices need to pay something upfront (no $0 down offer).  The iPhone 11 Pro carries a $249-599 upfront payment, and the iPhone 11 Pro Max carries a $349-699 upfront payment.

 

We will be updating this weekly in partnership with Wave7 Research.  Note: in-store inventory levels will differ from online availability.

 

 

 

  1. Trial Balloon? DirecTV signals NFL Sunday Ticket exclusivity may be ending.  Late Friday afternoon, the Wall Street Journal reported that AT&T is seriously looking at not renewing exclusivity for the DirecTV Sunday Ticket product.  Based on estimates outlined in the article, Sunday Ticket is generates approximately $900 million in annual revenues (~2% of AT&T’s Entertainment Group) with about $1.5 billion in total costs (the Entertainment Group EBITDA would rise ~5% if the exclusivity costs were eliminated and AT&T broke even on the product).

 

Next week, we will cover several investments being made in the VC/start-up world that have the potential to influence the telecommunications landscape.  Until then, if you have friends who would like to be on the email distribution, please have them send an email to sundaybrief@gmail.com and we will include them on the list.

 

Have a terrific week… and GO CHIEFS!

Dominate, Divest, Dedicate, Deliver – The Elliott Memo Appendix

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.

  

Apple monthly plans 

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:

  1. 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.

 

  1. 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.

 

  1. 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.

 

  1. 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 pic

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):

global market cap leaders

 

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:

  1. 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.

 

  1. 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):

nc exchange map

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).

 

  1. 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.

 

  1. 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 sundaybrief@gmail.com and we will include them on the list.

 

Have a terrific week… and GO CHIEFS!

opening pic sept 15

Third Quarter Earnings – What Could Dislodge Wireless?

opening pic

Greetings from Charlotte, North Carolina (picture is, from left, Frank Cairon, formerly of Verizon Wireless and Ryan Barker, currently with Verizon Wireless enjoying some good Mexican food on Friday in the Queen City with yours truly).

 

This week’s TSB examines the short-term dynamics that could impact wireless growth in the third quarter and through the end of the year.  At the end of this week’s TSB we will also briefly examine the current state of litigations and investigations active and pending (T-Mobile/ Sprint, Facebook, and Google).

 

Follow-up to Last Week’s CBRS article

 

federated wireless logoBefore diving into earnings drivers, a quick shout out to Federated Wireless, who raised $51 million this week in a mammoth C Round financing (full announcement here).  Existing investors American Tower, Allied Minds, and GIC (Singapore sovereign wealth fund) all participated in the round, and Pennant Investors (Tim McDonald, formerly of Eagle River (Craig McCaw), will be joining the Federated board) and SBA joined with fresh cash.  Kudos to Federated CEO Iyad Tarazi for his continued leadership and perseverance.  With $51 million in additional cash, spectrum sharing gets a global boost.

 

In addition to this news, the FCC also has placed the approval and scheduling of the Private Access License auction (this is the dedicated band that gets priority over the General Authorized Access band) on the docket for June 2020 (FCC Commissioner Pai’s blog post is here).  It’s generally assumed that this means a C-Band auction will come at the end of 2020/ beginning of 2021 (although this week’s news that Eutelsat has withdrawn from the C-Band Alliance has some believing that there may be a side deal afoot).  The PAL auction timeline is in line with expectations, and it’s likely participants will include some new(ish) entrants.

 

Third Quarter Earnings – What Could Dislodge Wireless?

Speaking of expectations, there’re not a lot of dramatic changes expected in the wireless arena.  Consensus has T-Mobile leading the postpaid phone net additions race (no surprise), with Sprint struggling to keep pace, AT&T in the 0-300K range for postpaid phone thanks in large part to FirstNet gains, and Verizon, excluding cable MVNO revenues, growing their retail postpaid phone base only slightly.  With the exception of FirstNet (and a few quarters of decent Verizon growth), this is a pretty consistent story dating back to early 2017.  What events could change the equation and dislodge the current structure?

 

  1. More rapid AT&T postpaid phone net additions led by FirstNet. Here’s how AT&T CFO John Stephens summarized the relationship between spectrum rollout and FirstNet deployments at an investor conference in early August:

 

We had some AWS-3 and some WCS spectrum that we had, so to speak, in the warehouse that we hadn’t deployed. We had 700 spectrum, Band 14 from FirstNet, which the government was requiring us to deploy. And then we got a whole new set of technologies that were coming out, 256 QAM and 4-way MIMO and carrier aggregation. They were particularly important to us because of our diverse spectrum portfolio. So we got the FirstNet contract and we had to touch a tower, have to go out on the network. And we decided, with this contract, now is the time to, so to speak, do everything. Put all the spectrum in service, that’s the 60 megahertz. In some towers, it’s 50, some towers, it’s 60, but it’s 60 megahertz of new spectrum that was generally unused that we’re putting in.

 

This has the effect of increased costs, but also improved network performance.  With 350,000 net additions already from FirstNet (Stephens disclosed this in the same conference), it’s entirely possible that they could post a 100K net add surprise due to increased coverage and deployments.  In turn, improved wireless bandwidth, while driving up costs, should lower churn in areas like Detroit (RootMetrics overall winner in a tie with Verizon – first since 2012), and Boston (first RootMetrics overall win in Bean Town since 2017).

 

  1. Faster cable MVNO growth. While this week’s news was on Altice’s aggressive $20 unlimited price point for existing customers (great analysis on their strategy here), both Charter and Comcast see a lot of mover activity in the third quarter.  This would seem to be a very good time to present their wireless offer.  Here’s a chart of net additions by both Charter and Comcast for the past two years:

cable mobile net additions trend chart

While the two largest cable providers accounted for ~390K growth in 2Q (and over 1.3 million net additions growth over the last four quarters), there’s a strong likelihood that this figure could grow even greater as the attractiveness of the wireless bundle pricing takes effect.   Both Spectrum and Comcast are maturing their service assurance processes, and those efforts should lower churn.

 

Comcast also made a number of changes to their “By the Gig” plans which encourage this option for multi-line plans that use 2-6 Gigabytes per line per month (and therefore use a lot of Xfinity Wi-Fi services).  It basically amounts to a prepayment for overage services, but could be attractive for certain segments/ demographics (full details on these offer changes are here).  Charter did not follow the Comcast changes described in the link and their “By the Gig” pricing continues to be $2/ mo / gigabyte higher.

 

Both Comcast and Charter are running into Apple iPhone announcement headwinds if next week’s headlines meet expectations (no 5G, no CBRS, no special financing deals, better camera).  If the changes do not increase willingness to upgrade/ change to an iPhone, it’s going to be very difficult to craft a cable plan (even $20/ mo.) that will buck the trend.  The upgrade cycle will be extended to 4Q 2020, when both the carriers and Comcast/ Charter will have full access to 5G.

 

Our prediction is that Charter and Comcast will have 475-500K net additions in the third quarter thanks to a combination of lower churn and higher gross additions (led by increased moving activity).  Altice’s offer will add another 70K net additions in September, with those gains coming from Sprint retail and, to a lesser extent, T-Mobile retail and wholesale (Tracfone).

 

  1. T-Mobile’s 600 MHz coverage (and gross add) improvements. As T-Mobile, Sprint, and the state Attorneys General try to find a resolution to their quagmire, T-Mobile keeps on deploying 600 MHz spectrum.  Here’re their reported (through Q2 2019) and estimated (Q3/Q4) progress:

t-mobile 600 MHz chart

Every new device on the T-Mobile.com website (and every T-Mobile store) is 600 MHz/ LTE Band 71 capable.  Many older devices are not, however, and that is preventing greater market share gains in secondary and tertiary geographies (many/ most BYOD Android devices from AT&T, for example, will have the 700 MHz but not have the 600 MHz band).  The expected Apple announcement represents a slight headwind for T-Mobile as well.

There’s a natural gross add/ upgrade path that follows 145 million coverage growth over a 12-month period.  Assuming T-Mobile keeps their churn rate at 0.8%/ month over 3Q (2.4% of the ending branded postpaid 2Q base would be ~1.07 million disconnections), they have grown their 600 MHz marketable base by 20 million from Q1 to Q2 and by another 50 million from Q2 to Q3.  If they just grew their penetration in the 600 MHz band by 1.5% for Q1-Q3 incremental POPs (or 0.5% penetration for the entire estimated 3Q 2019 footprint), they would negate the entire estimated branded postpaid churn for the rest of the country.  This ex-urban/ rural growth opportunity is unique to T-Mobile and would at the expense of AT&T and Verizon.

Offsetting the 600MHz growth is small cell progress.  T-Mobile committed at the beginning of the year to deploy 20,000 incremental small cells in 2019, but that guidance was withdrawn in their Q2 Factbook with H1 growth of only 1,000.  That leaves a very large backlog of in-process capital (excluding capitalized interest, total capital spending was $3.48 billion vs an estimated spending range at the high end of $5.4 – $5.7 billion).  T-Mobile should spend at least $2.2 billion in capital spending in the second half of 2019 on 5G, 600 MHz, and other initiatives and will undoubtedly be left with a lot of in-process small cell deployments.

 

  1. Sprint’s prepaid and postpaid churn. There’re a lot of headwinds for Sprint in the third quarter – overall 2Q churn trends are higher than previous year’s, and no one expects the seasonal respite to last long.  It’s likely that 3Q postpaid churn could exceed 1.85%, led by postpaid phone churn of a similar level (look for late September promotional activity).

 

Prepaid churn is a bit tougher to forecast and will also be tracked closely.  If the postpaid churn comes in below 2Q levels, check the prepaid recategorizations to postpaid (they were 116K in Q2 and 129K in Q1).  Both prepaid and reclassified postpaid accounts will be transferred to Dish assuming the merger goes through, but it makes the postpaid headline number more palatable.

 

The 30-day guarantee promotion, according to most reports, has been an ineffective switching tool.  (Sprint’s 5G rollout success has been much more impactful).  Expect Sprint to say very little until there is clarity on the litigation, and to post greater than expected losses in prepaid subscribers as they preserve their marketing dollars for a post-merger world.

 

Litigation Tracker:  Why the Facebook, Google, and T-Mobile/ Sprint cases are not all the same

Speaking of litigation and investigation, we were very dismayed that media sources are choosing to lump the New York-led Facebook investigation announced Friday, the to be announced Texas-led Google investigation, and the on-going T-Mobile/ Sprint (TMUS/S) litigation into one mega-story.  While there are some similarities, the upcoming Google action is broader than Facebook and more bipartisan than the TMUS/S complaint.

As most of you who are following the TMUS/S suit know, the states of Oregon and Illinois recently joined the original 14 states and the District of Columbia to block the merger.  (As an aside, Fox Business is reporting that the state AG group is focusing on the inexperience and shaky financial condition of Dish Networks as opposed to what would have been an uphill market concentration battle).  In fact, in the original TSB concerning the lawsuit (here), we were surprised by the absence of Illinois.  The figure below shows who is involved in what (underlined states are named in the Facebook litigation):

litigation tracker chart

To recap, there are 40 states + the District of Columbia named in the National Association of Attorneys General comment letter to the FTC (filing here), and at least 30 of them are joining a Texas-led lawsuit against Google to be announced early this week.

The makeup of the states in the FTC letter is very bipartisan:  14 Republican and 26 Democrat attorneys general.  All of the states involved in the TMUS/S litigation are also named in the FTC comment letter.  To contrast, of the 17 states in the TMUS/S litigation, only Texas (AT&T HQ) is Republican and the other 16 are Democrat.

As we stated in the TSB on the AG lawsuit, very few sparsely-populated states, regardless of political affiliation, are participating in the T-Mobile/ Sprint litigation.  Fourteen of the fifteen least densely populated states in the US (data here) are named in the Google/ FTC letter.  However, only two of the fourteen (Colorado, Oregon) are participating in the TMUS/S litigation.  The promise of a rural solution outweighs the benefits of a fourth carrier in metropolitan and suburban areas.

The Facebook investigation is also widely bipartisan with five Democrats and four Republican states represented.  Florida is involved in the Facebook investigation but none of the other two legal activities.  In addition, there are nine states (including New Jersey, a Democrat stronghold) that are not currently participating in any legal activity.

Bottom Line:  Concerns about Google’s anti-competitive practices are supported by a large number of state Attorneys General and are very bipartisan.  A subsegment of Democrat AGs (and TX) is also a part of the T-Mobile/ Sprint lawsuit.  And an even smaller subsegment plus Florida is a part of the recently announced Facebook investigation.

Next week, we will highlight some wireline trends and talk about overall profitability across the telecommunications sector.  Until then, if you have friends who would like to be on the email distribution, please have them send an email to sundaybrief@gmail.com and we will include them on the list.

 

Have a terrific week… and GO CHIEFS!