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What Matters in Wireline – Enterprise, Expense Management and Extinction

opening pic sept 22Greetings from the Queen City, where the IT scene is red hot even though cooler fall temperatures have finally arrived. I was pleased to be the guest of San Mateo-based Aryaka Networks at the 2019 Orbie (CIO of the Year) awards on Friday.  It was great to catch up with many folks in attendance including Karen Freitag (pictured), a Sprint Wholesale alum and the Chief Revenue Officer at Aryaka.

This week, we will dive into drivers of wireline earnings.  At the end of this week’s TSB, we will comment on several previous briefs (including the AT&T Elliott Memo fallout) in a new standing section called “TSB Follow Ups.” We close this week’s TSB with a special opportunity for reader participation.

Wireline Earnings:  Enterprise, Expense Management, and Extinction

One of my favorite things to write about in the TSB is wireline – that forgotten side of telecom and infrastructure that serves as the foundation for nearly all wireless services.  Wireline is a case study in competition, regulation, cannibalization, innovation, and a few other “-tions” that you can fill in as we explore the following dynamics:

  1. Residential broadband market share (measured by net additions). Before the Sunday Brief went off the air in June 2016, cable was taking more than 100% share of net additions.  This means that customers were leaving incumbent telco DSL (and possibly FiOS) faster than new customers were signing up.  At the end of 2018, cable continued its dominance with 2.9 million net adds compared to 400 thousand net losses for telcos (see nearby chart.  Source is Leichtman Research – their news release is here).  If this trend holds through the end of the month, it will mark 18 straight quarters where cable has accounted for more than 95% of net additions (Source: MoffettNathanson research).

leichtman broadband end of 2018 estimates

To be fair to the telcos, all of 2018’s losses can be attributed to two carriers: CenturyLink and Frontier.  We have been through the Frontier debacle twice in the last three months and will not retrace our steps in this week’s TSB (read up on it here).

But CenturyLink is a different story, with losses coming in areas like Phoenix (where Cox is lower priced), Las Vegas (Cox lower priced except for 1Gbps tier), and legacy US West areas like Denver/ Minneapolis/ Seattle/ Portland (Comcast has lower promotional pricing).  Even as new movers are considering traditional SVOD alternatives like Roku and AppleTV in droves, there’s a perception that the new CenturyLink fiber product is not worth the extra cost.

A good example of the perception vs reality dichotomy comes from the latest J.D. Power rankings for the South Region:

J D Power South ISP ratingsWhile these ratings reflect overall satisfaction with the Internet service, it’s very hard for new products to overcome old product overhang (and DSL experiences can create long memories).

But superior customer satisfaction (749 is a decent score for telecom or wireless providers regardless of product) does not guarantee market share gains.  AT&T (Bell South) has continued to improve its fiber footprint, invested heavily in retail presence, and improved the (self-install) service delivery experience.  Even with that, it’s highly likely that AT&T’s South region lost market share to Comcast (2nd place) and Spectrum (4th place).  Why is a three-circle product outperforming a five-circle product?

The answer lies in several factors:  Value (see comments above about promotional pricing and go to www.broadband.now for additional information), Bundled products (which links back to value – bundle cost may be significantly cheaper), and Legacy perceptions (DSL overhang mentioned above, tech support overhang, install overhang).

For more details, let’s look at two very fast-growing areas:  Dallas, TX and Hollywood at&t pricing vs cable in dallas and miami(Miami), FL.  Nearby is a chart showing online promotional pricing for AT&T, Spectrum (Charter) and Comcast.  There are some differences on contract term (AT&T has contracts in Dallas; Spectrum does not.  Comcast has a 2-yr term with early termination fees to get the $80/ mo. rate for their triple play in Miami).  Both zip codes selected above have over 50% served by AT&T fiber.  AT&T is more competitively priced than Spectrum in Dallas, and extremely competitive with Comcast especially at the mid-tier Internet only level (promotional rate gigabit speeds are $70/ month with no data caps).

With superior overall customer satisfaction and competitive pricing, why does AT&T continue to tread water on broadband and lose TV customers?  Are cable companies out-marketing Ma Bell?  Is there a previous AT&T experience overhang?  Are AT&T retail stores creating differentiation for AT&T Fiber (compared to minimal showcase store presence for Spectrum or Comcast)?

Bottom line:  Cable will still win a majority of net adds despite lower customer satisfaction and higher prices.  Why AT&T cannot beat cable especially in new home (AT&T fiber) construction areas is a function of marketing, operations and brand mismanagement.

  1. Enterprise spending – Did it return to cable instead of AT&T/ Verizon/CenturyLink? We commented last week on AT&T’s expected gains in wireless enterprise spending thanks to the FirstNet deal.  How that translates into wireline gains is an entirely different story.  Here’s the AT&T Business Wireline picture through 2Q 2019:

 

at&t 2q business wireline financials

While these trends are not as robust as wireless and operating income includes a $150 million intellectual property settlement, AT&T management described Business Wireline operating metrics as “the best they have seen in years.”  What this likely indicates is that AT&T’s legacy voice and data service revenue losses (high margin) are beginning to decelerate (at 14.6% annual decline, that’s saying a lot – Q1 2019 decline was 19.2% and the 2Q 2017 to 2Q 2018 decline was 22.0%!).

Meanwhile, Comcast Business grew 2Q 2019 revenues by 9.8% year over year and is now running an $8 billion run rate (still a fraction of AT&T Business Wireline’s $26.5 billion run rate but a significant change from Comcast’s run rate in 2Q 2016 of $5.4 billion).  Spectrum Business is also seeing good annualized growth of 4.7% and achieved a $6.5 billion annualized revenue run rate.   Altice Business grew 6.5% and is now over a $1.4 billion annualized revenue run rate.  Including Cox, Mediacom, CableOne and others, it’s safe to say that cable’s small and medium business run rate is close to $13 billion (assuming 33% of total business revenues come from enterprise or wholesale).  That leaves a consolidated enterprise and wholesale revenue stream of ~ $5.5 billion which is more than twice Zayo’s current ARR.

The business services divisions of cable companies are repeating the success of their residential brethren.  They are aggressively pricing business services, using their programming scale to grab triple play products in selected segments such as food and beverage establishments and retail/ professional offices.  And, as Tom Rutledge indicated in last week’s Bank of America Communacopia conference, they are starting to sign up small business customers for wireless as well.  I would not want to be selling for Frontier, CenturyLink or Windstream in an environment where cable had favorable wireless pricing and the ability to use growing cash flows to build a competitive overlay network.

Enterprise and wholesale gains are important for several reasons.  In major metropolitan areas, segment expansion gets cable out of the first floor (think in-building deli or coffee shop) and on to the 21st floor.  To be able to get there, cable needed to have a more robust offering.   Comcast bought Cincinnati-based Contingent services in 2015, and Spectrum also improved its large business offerings.  They are not fully ready to go toe-to-toe with Verizon and AT&T yet, but with some help from the new T-Mobile (all kidding and previous John Legere lambasting aside, a new T-Mobile + cable business JV would make perfect sense), things could get very difficult for the incumbents.

Moving up in the building is important, but there’s another reason to expand from the coffee shop:  CBRS (if you are new to TSB, the link to the “Share and Share Alike” column is here).  Given that 2-3 Gigabytes/ subscriber of licensed spectrum (non-Wi-Fi) capacity are consumed within commercial offices per month, there’s a ready case for MVNO cost savings as Comcast, Altice, and Spectrum Mobile continue to grow their wireless subscriber bases.

Further, since many enterprises are going to be introduced to LTE Private Networks soon, there’s a threat that Verizon and AT&T (and Sprint if the T-Mobile merger closes) stop provisioning cable last mile access out of their regions and only provision wireless access.  As we have discussed in this column previously, the single greatest benefit of 5G LTE networks is the ability to control the service equation on an end-to-end basis for branch/franchise locations.  It represents a compelling reason to move to SD-WAN, and allows cable to deepen its fiber reach and build more CBRS (and future spectrum) coverage.

Bottom line:  Cable continues to grab share in small, medium, and enterprise business segments as they move from connecting to the building to wirelessly enabling each building.  CBRS presents a very good opportunity to do that.  Even with cable’s entre into the enterprise segment, it will still be dominated by AT&T (with Microsoft and IBM as partners) and Verizon for years to come.

  1. Expense Management and Productivity Improvement. Flat to slowly declining operating costs in an environment where revenues are declining more precipitously is a recipe for increased losses.   Even with some of the capital and operating expense being shared with 5G/ One Fiber initiatives, the reality is that lower market share is leading to diseconomies of scale and both are going up a cost curve right now.

 

That’s why reducing operating expenses is not a spreadsheet exercise – operating in a territory originally engineered for 80-90% market share that is now at 30-40% share requires increased efficiency.  Connecting to neighborhoods is hard and connecting through neighborhoods to individual homes is even harder.  Combine this with a change in technology (fiber vs twisted copper) ratchets the degree of difficulty ever higher.

 

One of the great opportunities for all communications providers is using increased computing (big data) capabilities to quickly troubleshoot issues and recommend remedies.  For example, customers who go online or contact care and are “day of install” should have a different customer service page than someone who has been a 4-month regular paying customer or a 2+ year customer who is shopping around.

 

There’s no doubt that the online environment has been improved for every telco, and also no doubt that many more issues in the local service environment require physical inspection and troubleshooting.  But when telcos move to correctly predicting customer needs through online help 95+% of the time, the call center agent will go the way of the bank teller and the gas pumper:  Convenience and correct diagnosis will trump in-person service.

For those of you who are regular followers of TSB and read last week’s column, there’s also the issue of territory dispersion.  Without retreading the information discussed last week, one has to ask if there are trades to be made in the telco world (or spinoffs) that make sense to do immediately (Wilmington, North Carolina, a legacy Bell South and current AT&T property would be a good example using last week’s map).

Bottom line:  There won’t be any dramatic changes to the wireline trends – yet.  But, as 5G connectivity replaces cable modems and legacy DSL (particularly to branch locations) and as cable expands its fiber footprint to include in-building and near-building wireless solutions (starting with CBRS), the landscape will change.  And there will be a lot of stranded line extensions if wireless efforts are successful.

 

TSB Follow-Ups

  1. Randall Stephenson met with Elliott Management this week, according to the Wall Street Journal. At an analyst conference prior to the meeting, Stephenson offered somewhat of a hat tip to Elliott Management, saying “These are smart guys.” The AT&T CEO also stuck by his decision to move John Stankey into the COO role, noting “if you’re going to go find somebody who can do both, right, take a media company that has transitioned to a digital distribution company and pairing it with the distribution of a major communication company, and you want to try to bring these two closer and closer together and monetize the advertising revenues, all of a sudden, that list gets really, really short.”  If Elliott’s decision to go public with its criticism is based on the Stankey announcement, I wonder how that logic was received in New York last Tuesday.

 

  1. Apple iOS 13 fails again, this time failing to display the “Verified Caller” STIR/SHAKEN (robocall identifier standards) on Apple devices until after the called party has answered. Kind of defeats the point, right?  More in this short but sweet article from Chaim Gartenberg at The Verge – we agree with the T-Mobile quote in the article “I sure hope they get this fixed soon.”  Don’t hold your breath, as Apple is running on its 12th year of not allowing developers to access the incoming phone number.

 

  1. The Light Reading folks have a very good chronicle of what’s going on with CBRS trials here. Sharing can work, but it takes a lot to do it.  The value has to be clearly present to increase carrier attention and participation.

 

  1. Eutelsat can’t seem to make up its mind. On September 3, they dropped out of the C-Band Consortium (Bloomberg article here) and last week they seemed to backpedal based on this FCC memo.  Time for Commissioner Pai to save the day!

 

Next week, we will cover some additional earnings drivers.  Until then, if you have friends who would like to be on the email distribution, please have them send an email to sundaybrief@gmail.com and we will include them on the list.

 

One last request – we are currently on the hunt for some of your favorite titles that chronicle telecom/ tech history.  No title is off limits.  Currently, we have three that have made the cut:

 

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

The State Attorneys General Make Their Case

opening pic

Greetings from Charlotte, North Carolina (Uptown signpost pictured).  We will attempt to answer the question “Do the state Attorneys General have a case?” by summarizing and analyzing their case (find a copy of the complaint here – see point 7).

Following the ebullience of DOJ approval and a very strong earnings report from T-Mobile, investors digested Verizon’s (generally strong for wireless, and weak relative to AT&T for wireline) and Sprint’s (generally weak, Free Cash Flow negative) earnings.  We will weave some recent earnings results into this week’s TSB, but, if you want all the details and analysis, look to the Deeper post we will have on the website related to “State Attorneys General Make Their Case”

Let’s dig into the basics of the case by understanding the plaintiffs, the nature of the complaint, and possible remedies/ compromises.

 

Who is Suing?

For those of you who are not following recent events closely, fourteen states and the District of Columbia are filing suit to permanently block the merger of T-Mobile and Sprint.  Those states are as follows:

state attorneys general information table

*Note: US population density is ~92.6 and estimated median HH income $60,366.  Sources:  Wikipedia, World Population Review

 

There is a very good balance of incumbent telcos represented by the suing states and DC.states joining the t-mobile complaint as of aug 4  In fact, outside of Texas (let no one forget it’s the HQ of AT&T), there’s really no representation of the former Bell South or Southwestern Bell territories.  It is interesting that 11 out of the 15 states or territories have a population density that is higher than the national average (the promise of rural buildout is less attractive in these areas than in Kansas, Nebraska, Wyoming, Oklahoma or the Dakotas).  And there are some notable dense areas that are missing:  New Jersey, Rhode Island, Delaware and Florida all have high population densities but have not joined the group.   Florida and New Jersey split cable coverage between Comcast and Spectrum.

While the plaintiffs in the lawsuit make an argument that competition will raise prices and reduce choices for lower-income Americans, it’s interesting to note that 11 out of the 15 states have high median household income (with 7 of the top 10 household income states represented).  In fact, 12 out of the lowest 13 per household income states are not party to the complaint.

state attorneys general political party affiliationThe head-scratcher on this list is Colorado, home to Dish (admittedly not as much in the picture when the lawsuit was filed in mid-June) and a relatively less dense area.  But it also happens to be home to a significant and growing base of Comcast, Spectrum, and CableLabs employees and is one of the fastest growing states in the country.  And, as the nearby chart shows, Colorado has a Democrat Attorney General (profile here).

What isn’t a surprise is that 11 out of 15 states have a strong Comcast presence.  Admittedly, Comcast is pretty much everywhere (see map from Broadband Now here), and Illinois

(Comcast is primary provider to Chicago), Washington (Seattle, Tacoma), Georgia (Atlanta), Florida (Miami) and Pennsylvania (Comcast’s home state as well as provider in Philadelphia and Pittsburgh) are not currently represented in the legal action.  But if we see others join the lawsuit next week, don’t be surprised if they are one of the five mentioned above (Washington would be a particular blow to T-Mobile whose HQ are in Bellevue).

Bottom line:  There are 26 states with a Democrat Attorney General, and half of them have joined together to block the T-Mobile/ Sprint merger.  The one Republican state that recently joined the lawsuit happens to be home to T-Mobile’s former proposed merger partner and current competitor, AT&T.  While there is no clear pattern beyond political affiliation, it is interesting to note that Comcast/ Xfinity Mobile has a major presence in many of the suing states.

 

What’s Their Case? 

The case is best summed up in the last section (104) of the complaint: “Unless enjoined, the Merger likely will have the following effects in retail mobile wireless telecommunications services across the nation, among others:

  1. “Actual and potential competition between Sprint and T-Mobile will be eliminated;
  2. “Competition in retail mobile wireless telecommunications will be lessened substantially;
  3. “Prices for retail mobile wireless telecommunications services are likely to be higher than they otherwise would be;
  4. “The quality and quantity of mobile wireless telecommunications services are likely to be less than they otherwise would; and
  5. “Innovation will likely be reduced.”

Simply put, the telecom marketplace is better off with the current four-company structure, warts and all, then it would be with a three-company structure and Dish as a new entrant (with Sprint’s 800 MHz spectrum).  The complaint contends that prices would rise 17-20% as the new T-Mobile would exercise their dominant position in major metropolitan areas such as New York and Los Angeles to keep prices (particularly prepaid) high.  It also contends that fewer MVNOs would emerge and current MVNOs like Tracfone/ Straight Talk (20 million total customers) would struggle because neither the new T-Mobile nor Dish would make 4G or 5G capacity available at attractive prices.  Finally, they contend that the consequences for the new T-Mobile failing to fulfill their deployment promises to the FCC are too weak.

While the actual market shares are redacted in the complaint, the Herfindahl Index information and the disclosure that the new T-Mobile would have more than 50% market share in the New York and Los Angeles CMAs (see sections 48 and 49 in the complaint) is astounding (full map of the FCC CMAs and RSAs here).  CMA 1 and 2 are not small geographic areas, and, as we discussed last week, Dish owns some additional 600 MHz spectrum covering CMA 1.  The greater question is “If true, what have AT&T and Verizon been doing in these markets for the last seven years?  Have they been retreating to the Connecticut and New Jersey suburbs (as Long Island is covered by CMA 1)?”  The disclosure is damning to Verizon and AT&T as it represents their two largest facilities-based (incumbent telco) footprints.

Paterson NJ example mapAs for the argument that low-income subscribers would be disproportionately impacted, let’s have a look at the map of “mobile phone shops” in Paterson, NJ (I had the opportunity to tour every one of these and a few more as a part of my MVNO education in 2017).  As you can see from the nearby picture, there are 17 stores within a 12 square block radius selling every major carrier.  There’s a Boost City and two Boost Mobile stores.  There’s a Total Wireless (Tracfone MVNO served exclusively by Verizon) and AT&T, Verizon FiOS, T-Mobile and Sprint retail stores in the mall at the bottom of the picture.  There are traditional bodega-style shops selling H2O (AT&T MVNO), Ready Mobile (Tracfone MVNO served by T-Mobile), Ultra Mobile (T-Mobile MVNO) and several other brands.

Competition would suffer if T-Mobile eliminated their MVNO business entirely, but there’s absolutely no indication that they would ever throw Tracfone to the curb (their recent earnings call language backs it up).  But if they did, AT&T (Cricket) and Verizon (Total Wireless, Xfinity Mobile, Spectrum Mobile) would gladly take their customers.

If space permitted, there’s an argument to be made that if Apple’s new credit card is successful (see latest Bloomberg article here), the concept of device financing through a traditional carrier will be a thing of the past in several years and we will be ordering iPhones with Mint Mobile-like online plans.  Traditional carrier stores will go the way of bank branches (minus the need for an ATM).

Bottom line:  The case sounds strong, but there’s plenty of contrary evidence indicating that the new T-Mobile would not behave like AT&T and Verizon just because it is bigger.  The Herfindahl Index results highlight the metro retreat of the larger established brands more than the growing domination of their smaller rivals.

 

Let’s Make a Deal!

If a settlement can be achieved, it could include the following:

  1. Additional wireless subscriber divestitures in high-concentration markets to Dish.  That’s a “sleeves off the vest” give on the part of new T-Mobile if they believe that they can win those customers back (T-Mobile’s postpaid monthly phone churn was extremely low this quarter at 0.78%).  It may be easier to divest existing Sprint subscribers.
  2. Force a better MVNO deal for Dish (which would likely delay their construction of a replacement network).
  3. Mandate “cost plus” roaming rates T-Mobile offers to other carriers who wish to use the new T-Mobile network in rural areas (another “sleeves off the vest” argument which would improve scale for T-Mobile).
  4. Accelerate the Dish network deployment timeline (which would need to happen separately as Dish is not a party to the state Attorney’s General complaint) with additional penalties for non-compliance.
  5. Providing Dish (or near-Dish) terms to any new or existing MVNO that wishes to use the new T-Mobile network for the next 7 years (including the ability for any MVNO to exercise core control as outlined in the complaint).  This would increase T-Mobile’s overall scale but not improve Dish’s overall competitiveness.
  6. Significantly higher penalties should T-Mobile not comply with the FCC conditions.
  7. Additional commitments (including cash payments) to the states.  These might include requiring all new devices sold by new T-Mobile to be compatible with all other carriers, establishing a neutral-party run device compatibility database that would allow current and prospective customers to determine whether their current device could deliver a better network experience, and tools to make it easier to bring all text messages and voicemails to carriers should the customer leave the new T-Mobile.

Rather than focusing on the higher market share that the new T-Mobile will have (which has changed dramatically since 2012), the Attorneys General should focus on how to provide incentives to Verizon and AT&T to reestablish their presence in urban areas.

Bottom line:  There’s a deal to be made.  Rather than run the court through 5G cost models and timelines, the new T-Mobile executives and state officials should create a framework which will result in greater citywide competition and hasten the deployment of tomorrow’s network.

Next week’s issue will summarize 2Q earnings and look at Verizon’s new unlimited pricing plans.  If you would like a copy of either the Top 10 Trends or the IoT Basic presentation discussed in last week’s TSB, please let us know at the email below and we’ll get you a copy.

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 will include them on the list.

Have a terrific week!

The Value Creation Gap, Part 3 – Four Wireless Industry Trends

dallas weather June 22

** Editor’s Note:  This was originally sent to SB readers on June 22, 2014 **

June greetings from Dallas, where, as the picture shows, we are enjoying needed rain.  Thanks for the many comments on last week’s column.  Many of you shared your experiences with Google Fiber (those of you who have it in Kansas City don’t appear to be going back to cable or U-Verse in the near future), while others accused me of oversimpifying in-building wireless efforts (admittedly, I did leave the concept of obtaining Building Authorization Agreements out of the Brief.  They are hard to get and involve specialized real estate/ legal expertise).  Thanks for your readership, and please keep the comments coming!

Over the past two weeks, we have written about major changes in the telecom industry, including:

  1. The half trillion dollar value and multi-hundred billion dollar capital shift from network to software providers
  2. The threat of Google as a new entrant to the residential and small business markets
  3. Fundamental architecture changes that will take place as content is pushed to the edge
  4. In-building data capacity needs will accelerate fibered metro building deployments (which drove Level3 to offer to buy tw telecom this week for 12.5x EBITDA).

The last three points are “take it to the bank” certainties that will impact some parts of the telecommunications industry more than others.  Amid the hype, remember this:  If one carrier can deliver consistent experiences while outside, en route, near building, and in-building, all of the other carriers will need to follow suit.  The top three carriers (Verizon, AT&T, and Sprint) are driven to do this because most of their current data pricing plans are capped.  Not only is third-party Wi-Fi offloading viewed as inferior and inconsistent when compared to the increasing affordability of in-building small cell solutions, in-building Wi-Fi now has become a revenue threat to the carriers.

There are many drivers of change in the wireless industry, but four deserve special mention:

  1. The ripples of T-Mobile’s Uncarrier strategy are beginning to be seen throughout the industry.  First, it was the introduction of Equipment Installment Plans (EIP), and the separation it has driven between equipment sale and service revenue quality.  As AT&T, Verizon, and Sprint transition their bases from traditional subsidy (which, at the end of the two-year term and beyond, can have attractive economics) to EIP models, the pressure on service revenues (particularly data ARPA/ ARPU growth) becomes greater.  As we covered in Sunday Brief Q1 earnings reviews, the transition of T-Mobile’s base will be nearly complete by the end of 2014.

The most important thing to remember with these shifts, however, is the increased flexibility it provides the incumbent providers’ base of customers.  Under the traditional $325-350 subsidy model termination penalty scheme, the perception among the base was that they were “locked” until the end of the two years.  None of the new plans carry two-year contract terms, and, as Sprint and T-Mobile have shown, they are willing to pay multi-hundred dollar termination fees to drive up gross additions .  A more unstable base should have AT&T and Verizon on edge.

To add fuel to the fire, T-Mobile will launch a new program  to the AT&T/ Verizon base this week.  For a $700 hold on your creditt-mobile test drive picture
card, T-Mobile will send you a new iPhone 5s for a free one week test drive (I have confirmed with T-Mobile that the one week starts upon iPhone receipt – something to consider when you sign up).  This is not a plan that is aimed at the traditional T-Mobile base, but one that gets current (Sprint/AT&T/Verizon) iPhone 5s users into a T-Mobile store to have a conversation.  (If the customer is a current iPhone 4s user, they will receive a double benefit due to the 64bit processing and LTE capabilities inherent in the 5s – a very clever move on the part of T-Mobile).

Will this plan have the same effect as equalizing the cost of an Android Wi-Fi only tablet?  Likely not.  But it could erase perceptions of poor network coverage for some.  While many see this move as more “Carrier” than “Uncarrier”, I see this as Part 1 of a multi-part plan to reintroduce the T-Mobile network (voice, text, data) to millions of skeptical AT&T and Verizon customers (some of whom may have previously been T-Mobile customers).  At worst, this program will provide real-time feedback on their network improvements and identify coverage gaps (and hopefully reiterate the need to begin a substantial in-building coverage initiative for T-Mobile hopefuls who are captive to multi-story living/ working environments).  At best, it will propel 2-3 million gross additions through the end of 2014.

 

  1. The drive for spectrum outside of the FCC auction process will continue.  There have been a lot of discussions this week about Verizon’s interest in Dish network spectrum (this article places a $17 billion value on the asset, and it’s very likely that Verizon’s interest is focused on Dish’s AWS-4 holdings as opposed to the 700MHz spectrum band), and also T-Mobile’s interest in acquiring additional 700 MHz A-Block (a.k.a., “low band”) spectrum from the likes of Paul Allen’s Vulcan Ventures (who holds the Seattle and Portland licenses) and spectrum management companies King Street LLC and Cavalier Wireless (the full list of original A-Block winners can be found here).

We have already seen AT&T actively pursuing spectrum purchases since 2012 in the 2.3 GHz/ WCS band (see here for their Sprint spectrum purchase that escaped most media headlines), and this week Sprint announced their first wave of rural partnerships which will leverage their Tri-Band capabilities.

With the frequency-sharing rules of the upcoming AWS-3 auction, and the “reserved/ unreserved” designation for the 600 MHz auction discussed in a previous Sunday Brief, is anyone surprised that unrestrained and adjacent spectrum would be interesting to larger carriers?  Absolutely not.  Announcements serve to entice more broadcasters to participate in the 600 MHz auction process, and hopefully keep additional regulations to a minimum.

Interestingly, if there are a wave of spectrum sale transactions prior to the end of the year, look for new categories of bidders (e.g., non-traditional wireless providers) to emerge for the licensed spectrum.

 

  1. Consolidation efforts will fail, not because of Sprint’s lackluster efforts, but because of T-Mobile’s unbelievable success.   In second quarter earnings, we will see the full fruits of T-Mobile’s Early Termination Fee buyout initiative announced in January.  Surprisingly to most (although not all), T-Mobile’s results will equally impact Sprint and AT&T (given the process ease of SIM-card swapping between AT&T and T-Mobile, this might be viewed as a slight victory for AT&T).
sprint vs tmobile postpaid sub comparison

T-Mobile Closing the Postpaid Gap Vs Sprint

As we have shown in previous Sunday Briefs (see picture), the retail postpaid gap between T-Mobile and Sprint is shrinking (if one exists in retail prepaid after 2014  I’ll be very surprised).  The eleven million subscriber gap at the beginning of 2013 could be as small as four million as we exit 2014.  And, considering the composition of T-Mobile’s (smartphones) vs. Sprint’s (tablet) net additions, the revenue gap will be even smaller.

While there will be many traditional regulatory concerns (link to the Herfindahl index definition is here), the trends beg the question “Why should T-Mobile take on Sprint?”  Does Sprint’s base of customers provide unique differentiation (and, given a large portion of the base is still on unlimited and unthrottled LTE data plans, can the value of the customer base increase)?  Does Sprint’s base allow T-Mobile to build unique capabilities in the enterprise segment (which Sprint largely abandoned in 2013 to focus on small and medium customers)?  Can Sprint out-innovate T-Mobile with a new management team (or, as one of you wrote recently, “Where is the Sprint problem – with the quality of the clay or with the potter?”).

Time is not on Sprint’s side:  Service revenues are shrinking, management is leaving, and customers (particularly Corporate Liable enterprise customers) are questioning.  No doubt, there is a value to scale, but T-Mobile is worth much more than $40/ share in a couple of years without Sprint.  Could a cash infusion from Comcast/ Time Warner or a cable consortium be a viable alternative?  Does T-Mobile even need cable as a strategic investor?

Consolidation makes good headlines, but every month that goes by without an announcement opens up better alternatives for T-Mobile than Sprint (and makes the “Why?” question more difficult to answer).  Remember – at the beginning of 2006, Sprint Nextel, AT&T Wireless, and Verizon were basically the same size.  One non-traditional strategic partner/ investor could reset the equation for T-Mobile and the industry.

 

 4. The cable industry (as opposed to FiOS or U-Verse) will unveil Wi-Fi capabilities in 2015 that will be easier to use and intensify the battle for data in the home and office.  The blind spot in wireless carrier strategic plans is cable.  Their Wi-Fi efforts are very close to tackling the issue of in-home (and in-office) data usage.  The rollout of an additional 100MHz of 5GHz Wi-Fi capacity will also fuel the bandwidth fire.  More to come on this in a future Sunday Brief, but, given the arguments presented above and in previous analyses, cable would easily eliminate 10-20% of the data upside from the wireless carriers in 2015.  (Editor’s note:  for a view of the extra expansion from the cable industry’s point of view, check out this CableLabs blog post).

 

These are a few of the issues wireless service providers face, but they cover nearly every aspect of the business environment:  non-traditional competitors presenting real substitutes, traditional competitors redefining the buying process, increases in supply, new regulations, and the increasing sophistication of smartphones and tablets are but a few of the dynamics that will be discussed around the strategic planning table.  Who wins is anyone’s guess.  But every carrier will attempt to move the needle.

In other important news this week, we do not have space to do a full analysis of the new Amazon smartphone (we will try to tackle the new Fire Phone in depth next week).  In the meantime, check out two in-depth reviews here and here, and an excellent interview with Ian Freed from Amazon here.

Have a terrific week!

The Wired World’s Recovery – Fighting the Waterfall Chart

whole hog cafeGreetings from Little Rock, Tampa, Atlanta and Dallas (the picture is of a local BBQ joint in Little Rock that I highly recommend).  This was a relatively light news week in the telecom news world, with newsworthy items including the announcement of a new Comcast/ Time Warner JV to manage the Reference Design Kit (RDK) for next-generation set-top box devices, Cisco’s earnings release and announcement that they will have a fairly significant global layoff, and Wal-Mart reported same-store sales declines, sending shivers up the back of all suppliers (including each wireless carrier) to the retailing giant.

There was also a swift response from AT&T on T-Mobile’s recent proposal for the upcoming 600 MHz spectrum auction process (opinions welcome), and, in a feeble attempt to steal some of Apple’s thunder, Samsung will reveal a smart watch in early September.  If you use search services as a part of your job, you may have noticed a several minute Google outage on August 16 – here’s CNET’s take on the story.

It’s good to have a quieter week as this has been a summer full of changes across the industry.  It also allows us to go back and take a deeper look into the larger trends that are affecting both the wireless and the wireline industries.

Each of the wireline publicly traded companies has announced earnings, and, with the exception of AT&T and Verizon, the themes are the same:

  1. High Speed Internet is the platform for the future.  It’s the basis for each company’s existence and the primary value generator for the company.
  2. On this platform, our company offers services, including Over-the-Top (OTT) substitute products to (if applicable) traditional video services.
  3. Our company also offers phone services.  Many customers are disconnecting in favor of wireless services.  Phone services are effective for bundling, but not much else, with residential customers.
  4. (Cable companies) When it comes to advertising, we love election years, especially presidential election years.  This year is not a presidential election year.
  5. (Cable companies) Because of the increased role in on-line and social marketing, as well as a (regionally) weak economy, our advertising revenues are down this year.  We are innovating to improve our overall product offering across traditional video and Internet channels.
  6. (Cable companies).  Our investment in commercial services continues to grow and we are pleased with the results we have seen to date.

Most of these themes have been discussed in previous earnings analyses.  In this week’s column, we are going to look at some underlying data that support these themes.  First, as the economy recovers, certain states will enjoy the benefits faster than others.  Here’s a table of states where job growth is leading and lagging (click here for source information):

Picture1

Importantly, only three of the top 10 states will have added enough jobs to make up for those lost during the previous recession:  Utah, Texas, and Colorado (end of year).  This means that commercial office building starts (e.g., think new hotels on the Vegas strip and in Honolulu) will lag, but job growth will continue.  (Note:  Hawaii is a unique case as 28% of the population works for the federal, state, or city governments.  Unemployment may be low, but if Japanese tourists do not return, employment will not recover to pre-recession levels).

States with asterisks also are three of the highest new home start/ building permit states, excluding the effects of Superstorm Sandy.  Texas, Colorado, and Utah accounted for 16% of the increase in new construction permits in July and make up 19% of all year-over-year permit growth (a great stat for only 11% of the US population).

With the rise of job growth in the West and South, it’s no surprise to see the increased presence of CenturyLink as the incumbent phone provider of choice.  What is interesting is to see the power of an Embarq/ Qwest combination, adding capabilities to Nevada, North Carolina, South Carolina, and Florida.  In each of these states, growth can occur with minimal new capital investment – capacity utilization and corresponding cash flow increases.

It’s also interesting to note the absence of job and housing start growth in Verizon and some AT&T territories.  It is likely that Tampa is the sole bright spot for telco revenue growth in 2013 for Verizon.  It’s also no secret that AT&T will need a strong California performance to deliver wireline earnings that exceed expectations.

century link revenue waterfall slide 2Q 2013

If the future is so bright, then why the 5% dip in CenturyLink share prices since they announced earnings?    The following 2Q 2013 waterfall slide from their 2Q 2013 earnings release tells the story:

As we have discussed in several previous Sunday Briefs, CenturyLink is mired in several transitions:  a) movement from highly-regulated phone revenues and profits to less regulated High Speed Internet and IP TV services; b) movement from traditional SONET/ TDM-based business circuits to Ethernet; and c) movement toward the cloud (which is a positive for High Speed Internet, Enterprise, and Hosting revenues).

From here, it becomes a question of proportionality:  Can CenturyLink retain enough voice and data customers to be profitable in states such as Nebraska, Idaho, Wyoming, New Mexico and Minnesota?  Can CenturyLink recapture 50% or more business voice and data losses to new competitors such as tw telecom, Zayo, Cox (Omaha, Las Vegas, Phoenix), Brighthouse (Orlando) and Comcast?  Can CenturyLink win additional business for wireless infrastructure builds above the 16,700 towers already planned?

The questions posed above are easier to answer for Cox and Comcast because they do not have the legacy SONET and TDM compression that voice faces (the “greenfield effect”).  However, both cable and incumbent voice providers face the issue of wireless substitution (see Time Warner Cable and Cablevision earnings for worrying results on residential digital phone growth), FiOS and U-Verse competition, and video cord cutting.  No wireline/ infrastructure provider is safe from the effects of competition, but exposure is greatest for those who have more voice and less Ethernet in their current revenue streams.

By all indications, this is going to be slow recovery.  Consumer discretionary expenditures are going to be impacted by increased health care and energy expenses, as well as restoration of the payroll tax.  Wage growth remains slow for this stage of an economic upturn.

There are some bright spots, however, with South and West providers recovering much more quickly than their Midwest and Northeast peers.  While that recovery helps to absorb some under-utilized capacity, it will not produce the same building/ capital spending acceleration that we have seen in past recoveries – the telecom assets are already in place.  This is a positive for those providers who waited the recession out and have maintained their plant – first mover advantage is always great for Multi-Dwelling Units and housing developments.

For long-term growth, however, infrastructure spending must rise.  Today, it’s coming from wireless towers throughout metropolitan areas.  Tomorrow, it’s coming from small cell, Ethernet and other data needs within office structures.  The wireline industry must change its services equation faster to incorporate an “end-to-end” view, one that includes efficient and timely content delivery to their customers.  When the integration of content and services has taken place, the wireline community will have its mojo back.

Speaking of mojo, we had a few more referrals last week to receive the Sunday Brief.  Thanks for passing it on.  If you have friends who would like to be added to this email blog, please have them drop a quick note to sundaybrief@gmail.com and we’ll add them to the following week’s issue.  Have a terrific week!

Can Sprint Restore its Luster?

jim KU campusGreetings from Lawrence (KS) – pictured, Kansas City, and Dallas.  It’s been a busy week in the telecom world, with continued speculation about potential cable marriages (the latest on Friday was a combination of privately-held Cox Communications and Charter), robust cable earnings from Comcast, an entire network shut down as CBS and Time Warner continue their dispute, and the Obama administration’s intervention to overturn an International Trade Commission ban on certain older (3G) Apple products that was the subject of a lengthy lawsuit with Samsung.  Our industry is dynamic and multi-faceted, driven by speed to market.  We wouldn’t have it any other way.

Against this backdrop, Sprint announced earnings on Tuesday and, after a day or two of absorbing the earnings picture, Sprint’s stock rose 10%.  Since issuing post-Softbank shares (July 11 was the first full trading day – Sprint closed at $6.28), Sprint has performed better than T-Mobile USA, who will announce earnings this week.

Sprint_Horizontal_Full-color_on_transparent_LOGO

What is motivating the resurgence in Sprint interest?  Here are several thoughts from discussions with many of you as well as a quick scan of recent earnings analysis:

  1. Nextel, the “gift that keeps on giving” according to Sprint CEO Dan Hesse, is largely behind Sprint.  Admittedly, there remain several quarters of T-1 removals and Sprint warned, particularly in the third quarter, of continued losses in enterprise subscribers as a result of re-bid processes related to the iDEN shutdown.  (Note:  This buys a few hundred thousand more enterprise postpaid retail subscribers in 3Q for AT&T and Verizon).
  2. Sprint has a plan for Clearwire’s 2.5 GHz spectrum and it is aggressive.  New handsets that utilize the 2.5 GHz spectrum will be launched throughout 2014, and large-scale deployment in urban areas to deliver “comparable speeds” to others in those markets are underway.  I was very surprised at how little Sprint talked about Clearwire’s current operations as they are a $1.3 billion revenue-generating entity, with ~1.5 million retail customers (Q1 figure) and $800 million in retail annualized revenue (also Q1).  More on this in a future column, but Clearwire’s retail base might not be as easy to disconnect as one might think.
  3. Sprint has a strong understanding of the dynamics affecting the prepaid retail market and will recover by the third quarter.  As we discussed, in the second quarter (and particularly in the latter half of the quarter) Virgin Mobile offered significant discounts on iPhone devices to drive up gross additions.  In fact, we noted that in some cases, Virgin Mobile’s new phone pricing was better then AT&T’s All In One (AIO) refurbished device pricing (this anomaly continues today with VM offering a new 8GB iPhone4 for $297.49 and AT&T offering a refurbished iPhone4 for $349.99).  Virgin Mobile is also offering the iPhone5 16GB model for $549.99.
  4. As a result of good financial management and the Nextel network shutdown, margins will recover.  It’s hard to make the case that margins have recovered, as they are still in the 17-18% level (compare to T-Mobile’s Q1 adjusted EBITDA level of 29%).  But, even a recovery to 23% would mean $600-650 million in additional bottom line return, while a recovery to T-Mobile’s level would mean $1.2–1.3 billion in additional annual profitability.  These changes do not happen overnight, but some analysts have argued that the shutdown of the Nextel network will yield additional incremental savings of $400 million within the next two years.  I don’t see that much, but do see at least $120 million in annual access savings (20,000 iDEN towers; 2 T-1 circuits per tower, $250 per T-1 per month).

 

The allure of Sprint’s recovery story, especially against the backdrop of Verizon and AT&T, is music to the ears of many Sprint shareholders who remember a double-digit share price just a few years ago.  However, as Sprint noted on the call, competition continues to be intense.  Here’s a short list of the headwinds Sprint faces:

  1. Post iDEN retention efforts are just the tip of Sprint’s Business problem.  Sprint cannot afford to lose additional business revenues, yet they are behind on LTE POPs covered, in-building coverage, and data center/ cloud solutions.  As business environments move away from corporate-owned to employee-owned/ corporate-reimbursed devices, the size of their in-building coverage need grows.  Like their larger peers, Sprint has moved to a metered plan for business customers, and, as such, has an interest in growing (as opposed to offloading) revenues in these buildings.

 

Solving building/ floor level issues is Sprint’s Achilles heel.  It also happens to be an area of expertise for Verizon and AT&T, particularly where they are the incumbent wireline provider.  Relieving the pressure on the macro data network through in-building solutions is critical to spectrum optimization, customer satisfaction, and cost management.  It is not an optional strategy if Sprint wants to maintain their disproportionately high enterprise market share.

On top of this, cloud-based solutions (such as Desktop as a Service) are driving greater integration between office sites, remote servers, and wireless tablets/ phones.  Both Verizon and AT&T have the strategic pieces to assemble robust end-to-end service level agreements (Mean Time to Repair/ Fix, granular network reporting, applications monitoring and management).

Without computing and connectivity partners, Sprint will struggle to gain market share leadership in the enterprise space.   They will continue to struggle with connected device net additions (which were down 16,000 for the second quarter).  They will see more cable, Verizon, and AT&T in-region competition in the small business space.  They may even lose a partner because T-Mobile beats them to the punch.  Restoring the enterprise luster takes a lot of elbow grease and a lot of time – Sprint needs to apply the “enterprise polish” very liberally to remain relevant.

2. After Sprint completes 200 million LTE POPs, how do they get to 250/ 275/ 300 million?  When Sprint’s two larger competitors have completed or are near completion of 275-300 million LTE POPs covered, and T-Mobile has already announced a 200 million year-end POP coverage goal, how does Sprint respond?  Answering this question reveals how dependent Sprint is on Verizon (ALLTEL) for much of its non-metro/ non-highway coverage.  Here’s a good example of the difference in coverage between Sprint and Verizon:

From this picture, Sprint’s coverage is strong in the greater Atlanta metroplex (call it a 20-40 mile radius around metro Atlanta).

Sprint Atlanta coverageHere’s the same map for Verizon:

Verizon Atlanta coverage

It isn’t hard to see the effect of different capital spending levels (over many years) when you look at these charts.  Verizon Wireless has spent $16.7 billion over the past eight quarters building out their LTE network and maintaining their legacy networks.  Sprint has spent $6.6 billion over the same period.  That’s $2.53 in Verizon spending for every dollar Sprint spent.  This ratio has largely held at a 2.5 level since 2008, resulting in a $24 billion difference in capital spending between Verizon Wireless and Sprint (I included all of Sprint’s capital spending in the above calculation.  The gap would be even wider if Sprint’s wireline capital expenditures were removed, but we would need to include some Clearwire capital expenditures as an offset).

Sprint (and T-Mobile) cannot compete without filling in the “white spaces.”  The Clearwire spectrum will be very valuable in metro areas, but Sprint could start today with their existing 1900MHz and 800MHz spectrum in these regions.  The best way Sprint could win against AT&T and Verizon is to partner with T-Mobile on attacking the “breadth issue.”  A cooperative effort might allow both companies to reach an additional 50-60 million POPs.

3. Sprint has new owners, but more debt than before.  Previously, this was defined as a payment issue for Sprint, and quarter after quarter Sprint had to reassure jittery bond holders that they would not default on their debt.  Sprint is far from these levels, and, as noted on the conference call, has seen their debt rating raised since the Softbank transaction closed.

However, prior to Clearwire, Sprint has done very well managing their balance sheet.  Here’s a snapshot from the quarterly presentation deck:

sprint investor presentation debt maturity worksheet

At the end of the second quarter, Sprint had $17.8 billion in net debt.  Per the chart above, Sprint used $1.3 billion of cash since June 30 and added $0.8 billion in debt.  Sprint’s $20 billion in net debt compares to $9.7 billion in net debt announced by Verizon Wireless on their earnings call.

More debt reduces flexibility.  Verizon has options to expand in Canada – Sprint will likely pass on bidding for assets or spectrum.  Verizon has the opportunity to expand globally, perhaps through an acquisition of Vodaphone.  Sprint has to clean up Clearwire’s money-losing retail operation and decommission the Wi-Max network — a drag on earnings for several quarters. Verizon can focus on investments such as Home Fusion to bring LTE to less populated areas at economical scale.

Sprint needs to invest if they want to gain market share.  Their position is the best it has been in seven years, but Verizon and AT&T have also dramatically improved their balance sheets.  To win, Sprint will need to think differently – find the formula to restore the luster to their enterprise jewel, find the right partnerships to match Verizon and AT&T capabilities especially in well-populated but not urban areas, and execute flawlessly with their current capital resources.

There is a lot of blocking and tackling ahead for Sprint.  Moving from survival to leadership mode is not an easy thing to do.  But Sprint has surprised many before, and, thanks to Softbank, has the opportunity to prove them wrong again.  There’s a lot of buffing needed to remove layers of tarnish and restore the luster of 2005.

Next week, we’ll focus on wireline and cable earnings.  Until then, if you have friends who would like to be added to this email blog (over 100 in the past two months have been added), please have them drop a quick note to sundaybrief@gmail.com and we’ll add them to the following week’s issue.  Have a terrific week!