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Programming Tomorrow’s Network

 

opening pic dec 8

 

Holiday greetings from sunny and mild Lake Norman, North Carolina (sunrise shown – unaltered photo).  There are a lot of follow-ups to cover, and, if reports are true, there may even be a settlement between the Attorneys General and T-Mobile/ Deutsche Telekom/ Sprint/ Softbank prior to their trial start on Monday (hope springs eternal).

Many thanks for the multitudinous comments on last week’s Thanksgiving book review article.  We are not turning into the New York Times Book Review (won’t even try) but there’s a lot to discover and learn from the activities of our predecessors.  We will have a similar article on Steven Coll’s 1986 classic outlining the events that lead up to the breakup of AT&T on December 29.  Preceding that, we will have a “Three Companies to Watch” special TSB on December 22.

A final thanks for the many referrals that we have had over the past month – over 250 new readers have been added.  If you know someone who could benefit from this column, have them send a request to sundaybrief@gmail.com and we will get them on the list.  We are also in the process of revamping the website (end of January) and promise more things in 2020 (including a merchandise fundraiser for the Davidson College Jay Hurt Hub for Entrepreneurship and Innovation).

This week, we will lead with a discussion of a deep topic – rethinking the wireless (and wireline) network operating system.  As mentioned earlier, we have several TSB Follow-Ups.

 

Programming Tomorrow’s Network

Within wireless communications networks, there are multiple pieces of hardware, each running its own operating software.  Each needs to operate to a given specification (usually a 3GPP or LTE Release standard), and there are likely additional requirements placed on the suppliers by the local operators.

This model worked reasonably well when voice and text (using the SS7 TCAP standard) constituted the majority of activity.  However, the interest in pushing applications (e.g., WhatsApp owned by Facebook) deeper into the network has created a gap between legacy product development and entrepreneurs.  On top of this, there is a need to cost-effectively provide access to less developed areas.  On top of this, data growth continues to drive up costs, which create pressures on carriers (and, as a result their suppliers) to deliver a better experience and greater profitability.

This has forced two things to occur:

  1. Greater network sharing (predominately radios and transport) between network operators. CBRS is the beginning of this trend in the USA (see TSB on CBRS here); and
  2. Separation of hardware (e.g., a shared radio) and operating software (which may be custom to the operator).

Doing all of this in a secure environment is a challenge.  Developing new operating systems amidst a global shortage of software development talent (and recognition of venture capital and other investors that this can be a value-producing endeavor) is an additional challenge.  Integrating any operating system changes into the stream of concurrent innovations (e.g., 5G Standalone equipment development, increased mobile edge computing deployments, etc.) requires coordination.  Creating competitive advantage in addition to achieving cost reduction targets adds to the heap.  It’s like replacing Windows yet expecting no change in how current and future versions of Excel and PowerPoint will work.

We outlined the AT&T efforts in this space in a previous TSB (link is here) but think there’s a few “no brainer” areas where application developers and carriers should come together to improve experience.

  1. Voice calling. This experience is essentially the same across carriers:
  • There is a non-real time contact list that is invoked through a clumsy, 1990’s dialer dial by name schemescheme (see nearby picture);
  • There is no voicemail ubiquity within the carrier community (there is at the app layer, however, for WhatsApp, Google Voice, and others);
  • To the best of my understanding, there’s no way of automatically integrating stored voicemails into CRMs such as Salesforce;
  • There is no reminder or follow up function on voicemails (think how Gmail does this with emails);
  • There are inconsistent methods of identifying spam calling (and any other incoming call for that matter);
  • There’s no way of knowing any details or status about the party I am calling (such as whether they are on the phone or whether they have made a call in the past five/ten/fifty minutes or even the last day – think the notification scheme for apps such as Skype, etc.);
  • For incoming calls, there’s minimal context and no ability to instantly locate/trace the incoming caller (mobile edge computing could fix this pronto and you could see that the call showing 704/Charlotte area code is really originating from Omaha);
  • There’s no ability to interrupt a current call (e.g., spouse calling), a call feature common in contact centers (whisper tone);
  • There’s no common messaging portal incorporating LinkedIn, Facebook, carrier, WhatsApp and other sources;
  • Integration between conferencing services such as Zoom or Skype and the mobile device have not materially changed in 20 years. Still a phone number plus an access code and an announced name.

Is it any wonder that Google Voice, Facebook, and WhatsApp are succeeding and that carrier voicemail solutions are flat to declining?  Customers are communicating more than ever, but they are just not into that 1990’s dialer.

To change voice, the interaction between a customer’s contact list (directory), the universal contact list (macro directory), storage (voicemail), availability (presence/ proximity) and the network needs to change.  This can all be done faster within the network and is a prime example of how operating systems can and should be rewritten.

Voice application (the dialer provider) should be a choice.  It should be portable and interoperable.  It should be driven by a microphone and intelligence, not by typed search strings into contact list applications.  And the private directory should have live updates (if allowed by the directory listing).  The integration of applications functionality deeper into the network can do this, and advancements will occur a lot faster than we see today from the carriers.

  1. Predictive Analytics (and Customer Care). One of the eye-opening experiences I had with my Flash Wireless experience concerned troubleshooting device issues (Flash had a heavy Bring Your Own Device base).  As an MVNO, we tried when possible to go the extra mile if the issue was device-related as opposed to a network issue.  We formed a checklist which could easily be databased in today’s environment.  Some of the important topics included:
  2. IoS or Android version
  3. Recent activity (e.g., voice over Wi-Fi connectivity issue vs the network, messaging activity, new apps downloaded, Wi-Fi vs network data access, location)
  4. Port-in provider (experience expectations)
  5. Phone age (and purchase source if it came from one from a known vendor)
  6. Customer lifecycle age (pre-first bill; first 90 days; over 180 days; etc.)

The number of possible iterations quickly grew, especially since we were in a 3-carrier MVNO environment (location in section b. above really mattered for some of our network providers).

A system that continually interacts with the network could do a better job of measuring data and device quality.  If a customer had a service need, problem identification could be instant and highly accurate.  Success would not be determined by the smartest care expert, but by the network (and the collective experience of all previous users who had ever used the network in that location at that specific day/time).  The cost of caring for older devices could be calculated with high confidence.

To make predictive analytics work, measurement software needs to be pushed further into the network core.  Economics aside, if the problem can be remedied by a carrier sharing partner, that can be done instantly through the operating software (not through a SIM setting).  Anomalies can be detected for individual users and alerts can be delivered.  If the problem was with the provisioning process, for example, the device could be re-provisioned right away (in a nearby store or over the air) or overnight.

The network can be the service expert if issues can be detected quickly.  With the consolidation of device models (e.g., more iPhone 8, X, XR, XS, and 11 models in service than ever before), there’s plenty of correlations to be determined (e.g., Sprint iPhone XR users living in Somerset, Kentucky that have activated service in the last 90 days).  The result of greater analytical capabilities built into the core could result in dramatically lower cost for customer care.

These are two of probably ten or more use cases that demonstrate the value of rewriting equipment operating systems.  This will be an evolution, but not one that is done simply to lower costs – there are many product and customer experience benefits that could create competitive advantage.

 

TSB Follow-Ups

qualcomm secure processing unit pic

Qualcomm Snapdragon 865 Chipset specifics revealed.  Increasingly, what’s contained in Qualcomm’s chipsets finds its way into the subsequent generations of smartphones.  If that is true, we should expect to see more camera focus (new chipset accommodates up to 200 MP cameras), 5G networks (full support), and faster displays (supporting up to 144 Hz).  It was also interesting to learn that the Snapdragon 855 would also support Dual SIM/ Dual Standby (more details on that finding from this XDA Developers report here).  As we discussed in last week’s TSB, the Apple XR/XS/ XS Max was the first lineup to support Dual SIM/ Dual Standby – Android development efforts in this area have been slower to emerge.  The Qualcomm 855 should be the turning point and we should see the capability available on new devices in 2020.  According to the XDA Developers article referenced above, they worked with Gemalto to enable eSIM support within the Qualcomm Secure Processing Unit.

One additional note about the Snapdragon 865 is its support for the Android 11 IdentityCredential API.  This would allow, among other things, the ability to store your driver’s license in Android and it would be accepted as a proper form of identification.  The complete video of Day 2 which has the details on the 865 are here – the discussion of Dual SIM/ Dual Standby starts at minute 31.  The Snapdragon 865 spec sheet is also available here.

 

DOJ Calls Out Carriers on Remote SIM Provisioning (RSP) Collusion

The day before Thanksgiving, the New York Times ran an article describing the settlement between the Justice Department, the GSMA (standards body) and some US wireless carriers (presumably including AT&T and Verizon) over possible collusion surrounding the development of eSIM device locking.

The Times article is sparse on details – Assistant Attorney General Delrahim’s letter (here), however is not.  Here’s what was found concerning the current RSP process (actual findings – emphasis added):

First, RSPv2 requires consumer-users to express affirmatively their intent to switch profiles each time the eSIM toggles between profiles or networks, thereby preventing the eSIM from automatically switching (or optimizing) between profiles. Dynamic or automatic switching is a potential competitive threat because it could lead to a service where a device efficiently selects, on behalf of the user, which profile to use in any given situation. For example, the eSIM could switch services if it detects stronger network coverage or a lower cost network, providing consumers with better or less expensive service. The prohibition on automatic switching would tend to prevent at least one existing operator from offering a new innovative service using an eSIM. That is, in order to offer the new service, the operator would have to convince smartphone manufacturers to forego complying with the RSP Specification.

Second, RSPv2 prevents an eSIM from actively using profiles from multiple carriers simultaneously. Multiple active profiles is a potential competitive threat because it would allow a user to divide usage across operators. For instance, the user could actively maintain two profiles on one device if he or she wanted to receive work-related phone calls to one profile and personal phone calls to another profile, all while carrying only one phone. The user could also actively operate profiles optimized for different coverage areas or for international travel. Although there appear to be technical challenges to allowing multiple active profiles at present, the single active profile requirement in RSPv2 serves as a roadblock to additional disruptive innovation that could solve these technical challenges.

The DOJ’s issue was not only with these two outcomes (which are unmistakably anti-competitive), but with the entire approval process used by the GSMA.  Everyone agreed to comply with  new process, and, with the advent of the new Qualcomm 865 chipset described above, it’s likely that switching between networks will be placed as a consumer choice with the opportunity to mute future notifications (similar to the roaming notifications process followed for over two decades) and also to allow multiple networks to be accessed simultaneously (making data network selection easier for cable MVNOs and others while potentially keeping voice on the MNO network).

 

 

Adam Koeppe Takes the Stage in Vegas (While His Boss is on a Separate Stage in Vegas)

 

Given space constraints in this week’s TSB, I am going to keep this excerpt short (perhaps we will cover in another TSB this month), but, if you want to know what Verizon is doing with respect to network deployment, listen to his Well Fargo talk with Jennifer Fritzsche here or read the transcript here.   Adam covers the AWS 5G Edge announcement, fiber deployment strategy, CBRS (and Enterprise LTE solutions pairing CBRS and millimeter wave spectrum bands), Broadband to the home and relationship to cable MVNO, and a few other topics.  Less spin is good for Verizon, and Adam is a “balls and strikes” interview.

 

 

What Markets Will See the Greatest Improvement to Sprint/ Boost if New T-Mobile Actually Occurs?

 

We had been thinking about this topic for a while, and accessed publicly available RootMetrics data (2H 2019 measures only to be most current in our assessment) to see where the current gap between T-Mobile and Sprint exists.

 

To no one’s surprise, Sprint tends to solely occupy fourth place in nearly each of the 125 markets that RootMetrics measures every six months.  How would that performance improve once that Sprint/Boost customer (current device) could access the T-Mobile network?

 

To determine the greatest impact, we looked at the difference between Sprint and T-Mobile’s Overall Score (perhaps in a future TSB we will dive into the components).  As of Wednesday, RootMetrics had published the results of 96 out of 125 markets (77%).  The results break down as follows (100 pt scale):

 

Overall Score Difference        Number of Markets        Percentage of Total

Less than 3.0 points                                19                                        20%

3.1 – 5.0 points                                     13                                        13%

5.1 – 10.0 points                                   48                                        50%

More than 10.0 points                            16                                        17%

 

While there may be debate about the impact to customers for the first two levels (device age could play a significant role in a market where both T-Mobile and Sprint are relatively strong), there’s little debate when there’s a spread in excess of 10 points and the market is not one of the previously announced 5G markets.  Here’s a sampling of where Sprint has fallen behind:

 

  1. Oklahoma.  Below are the most recent charts for Tulsa and Oklahoma City.  ‘Nuf said.

oK City and Tulsa

  1. Florida. These are legacy MetroPCS markets for T-Mobile and have very dense coverage.  Miami, which was once a priority market for Sprint (non-executive Chairman Marcelo Claure has close ties to the area), has fallen off considerably and is no longer a competitive market for Sprint.  Other markets with more than a 10 point spread to T-Mobile include Port St. Lucie (12.2) and Sarasota (11.1).  Orlando, Kissimmee, Tampa, and Jacksonville have a 5.1 – 10.0 spread.  The other markets are waiting to report.

Miami and Ft Myers 

The remaining markets are both big and small metro areas:

  • Atlanta (fast growing area, large market, 5G market)
  • Baton Rouge, LA (been a weak network for Sprint for many years)
  • Charlotte, NC (fast growing area and second home to most of the financial services industry)
  • Denton, TX (North Dallas suburbs)
  • Kansas City, MO (very odd as it’s Sprint’s current HQ and a 5G market)
  • Louisville, KY
  • Memphis, TN
  • Nashville, TN (fast growing area)
  • San Antonio, TX (Sprint PCS dominated this market because of its design; large market)
  • Wichita, KS

 

Interestingly, no Northeast, Northwest, Southwest or California markets with large gaps.  We will update this list in January once RootMetrics has completed their 2H 2019 metro studies.

 

That’s it for this week.  Next week we will begin our discussion of 2020 trends unless events dictate otherwise.  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!

 

 

 

 

 

 

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!

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!