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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!

Four Earnings Questions

** Note – I will be at MWC-Americas on Wednesday (all day) and Thursday morning.  Please send a note to sundaybrief@gmail.com if you would like to catch up.  Thx, Jim **

opening pic

Greetings from Lake Norman, NC (picture of a recent sunrise is shown).  This week, we will discuss four questions that should be asked during earnings calls (which start this Thursday with Comcast, followed by Verizon and Charter on Friday and AT&T and Google the following Monday, Apple and Sprint (likely) on Oct 30 and CenturyLink on Nov 6).  Please note that these questions are not in priority order.  Here’s four questions we’d like to see answered in upcoming earnings calls:

 

1. To Apple: If Goldman Sachs is correct, and the Apple Card truly is “the most successful credit card launch… ever” how will Apple use these new relationships to increase the iPhone renewal rate?

To AT&T and Verizon:  Do you anticipate that Apple’s new credit card will disintermediate the store purchase and financing experience?  If that occurs, and customers finance their new device through Apple directly, how will that impact revenues, margins, and churn?

We received a strong indication of Apple Card’s success from Goldman Sachs this week when CEO David Solomon revealed on his earnings call that “we believe [the Apple Card] is the most successful credit card launch ever.”  Solomon went on to disclose:

…we have seen a pretty spectacular reception to the card as a product. The approval rates early on have been lower, and I say that that’s a decision, obviously, Goldman Sachs is making as the bank, but we’re doing that in concert with Apple. And it is because we’re quite vigilant from a risk point of view, of not being negatively selected out of the box. Meaning, over time, we’ll start to see better credits appear and the approval rates will go up, where we’ve seen an enormous inbound, we’ve issued a considerable amount of cards. We’ve just been through our first bill cycle, which went smoothly, and so from an operational point of view, it’s gone well

Apple announces earnings on October 30th.  It’s likely that they will not actively promote anything until after the Holidays (if demand is good, and they are throttling activations through selective credit scoring, probably not best to get promotionally aggressive).  However, if Apple attracts 10 million US card holders in the first year (we would not be surprised if this happens), you have to think that the ability to finance select transactions at 0% a.p.r is inevitable.

 

2.To AT&T: Do the list of divestitures you are working on with Elliott Management include unprofitable local phone exchanges?

 To each of the other local exchange providers (particularly rural):  How will you more effectively compete against a clustered (and therefore operationally efficient) cable industry?  Was your concern over valuation when you considered clustering in the past unfounded given the deep losses that have occurred in broadband acquisition over the past decade?

 

We briefly discussed this in the TSB focused on the Elliott Memo.  In our note, we described the diseconomies of scale arising from island or isolated exchanges in North Carolina.  To prove that the Tar Heel state was not a fluke, we show below the local telephone provider exchange map of South Carolina (link here):

sctba pic

In contrast with this menagerie of local exchange properties, cable broadband providers in South Carolina consist of the following (from the South Carolina Cable TV website and company websites):

  1. Spectrum/ Time Warner Communications: 72 million population covered
  2. Comcast Communications: 600,800 population covered
  3. Comporium Communications: 305,000 population covered
  4. Horry Broadband Cooperative: 205,000 population covered
  5. Northland Communications: 164,000 population covered
  6. Atlantic Broadband: 133,000 population covered
  7. Hargray Communications: 106,000 population covered

With a total population of about 5 million, to have more than 3.6 million (72%) covered by just three providers and more than 4.3 million (86%) by seven providers shows why cable broadband has an advantage:  they have clusters which produce economies of scale.

What is the critical importance of owning and operating the telephone exchange in Florence, SC (population just under 38,000) for AT&T?  Why not pursue a structure with other phone companies in Northeast South Carolina that mirrors the one proposed by Apollo Management for combining Dish and DirecTV assets?  What efficiencies (and increased business opportunities) could be realized from greater exchange consolidation?

How bad is it (likely) for AT&T?  Look at the May 29 Frontier sale announcement of their Northwestern exchanges, where they disclosed that the sold properties passed 1.7 million locations yet Frontier only had 350,000 consumer and business customers (20% relationship penetration).  Does AT&T (U-Verse/ Internet) have a relationship with 30% of the homes passed in Florence?  What are the value prospects, and how do they fit into all of the other things that AT&T is managing?

As for the other local exchanges, how long can they compete with the new T-Mobile, who, like we discussed in last week’s TSB, is promising 100 Mbps fixed wireless service to the vast majority of the United States (including Florence) in a few years?  Is it too late to change?

 

3.To T-Mobile: How do you continue to drive increased postpaid retail gross additions?  How much of it is driven by new device launch promotions (iPhone 11/ 11 Pro/ 11 Pro Max) versus increased 600 MHz footprint?

 

We have reported for the last several weeks on the lack of availability of both the iPhone 11 and the iPhone 11 Pro Max at T-Mobile (note: in last weeks report, most of the iPhone 11 issues were driven by specific colors).  Here’s the data for this week:

iphone 11 availability as of Oct 20

T-Mobile has really been selling a lot of iPhone 11 devices.  Their shortages on the 256GB storage level have been ongoing for three weeks, leading us to believe that this may be a supply chain miss (and perhaps a sign of economic good times).  Not surprisingly for Apple, the iPhone 11 in green (and, to a lesser extent, purple) is harder to come by than more standard red, white, and black.  Now the chart for the iPhone 11 Pro:

iPhone 11 Pro availability as of Oct 20

This is also an interesting chart for T-Mobile.  As we have pointed out several times, Magenta does not have a $0 option for either the iPhone 11 Pro or the iPhone 11 Pro Max.  Our guess is that the T-Mobile shortage is continuing for all but the 512GB memory model for two reasons:  a) greater upgrades within the T-Mobile base (presumably to get the 600 MHz coverage and all of the other iPhone features), and b) some movement from other carriers (Sprint?) to Magenta.  These are educated guesses (not stabs in the dark) and should not take away from any 600 MHz progress as a factor.

AT&T’s shortages (basically out of everything that is not gold colored) are likely much more weighted to upgrades.  A lot of changes have happened in AT&T’s network since the iPhone 7 (along with the 6S, most likely phone upgraded to the 11), and the business upgrade cycle is also in full swing (spending any available budget to improve corporate liable handsets).  There may also be a small amount attributable to the FirstNet initiative as their LTE band was not included until last year’s models (XR, XS, XS Max were the first models with LTE Band 14).

Similar trends are seen with the iPhone 11 Pro Max:

iPhone 11 Pro Max availability as of Oct 20

The backlog seems to be much more manageable here than for T-Mobile.  It’s likely that T-Mobile’s iPhone 11 Max shortages are attributable to supply chain/ forecasting, and nothing more.

 

4.To all carriers (especially CenturyLink): If low latency applications are critical to the value creation of 5G (basically keeping 5G more than a special access open expense reduction), what is your edge data center strategy?

This is a particularly important question for the large wireless carriers (including T-Mobile) and enterprise focused companies such as CenturyLink (who now owns Level3 Communications).  It’s hard to remember, but there was a time when both AT&T and Verizon (and Sprint and T-Mobile) owned several data centers apiece for internal use – both AT&T (Brookfield Infrastructure partners – $1.1 billion – 2018) and Verizon (Equinix – $3.6 billion in late 2016) sold their data center assets.  Investing in dozens (hundreds?) more could be necessary, however, if no closer solutions exist.

Also of interest with respect to edge is the entrance of Pensando Systems, who announced last week that they raised an additional $145 from Hewlett Packard Enterprise and Lightspeed Partners  to fund their edge computing interests.   Pensando has now raised a total of $278 million dollars (3 rounds in 3 years) with a high degree of interest from a wide variety of potential partners.  More on the startup (certainly a candidate for our next “Companies to Watch”) in this CNBC article (John Chambers of Cisco fame is their Chairman).

Also of interest are companies such as Qwilt, an edge video server company that has raised over $65 million from various partners including Cisco, Accel Ventures, and Bessemer.  Verizon has deployed Qwilt as their application edge delivery platform.

Understanding edge strategies is critical with the increase in over the top solutions (such as last week’s Hulu 4K device announcement which broadens their base to include Amazon Fire Stick, Microsoft’s Xbox One, and the LG WebOS TV platforms).  More capabilities will lead to higher expectations and even higher consumption.

 

TSB Follow Up

Several of you issued lengthy replies to last week’s TSB.  There is no doubt that strong feelings exist supporting maintaining equal outcomes of data packets.  There’s equal certainty that others see S.B. 822 (California Net Neutrality bill) as a stepping stone to more activist state proceedings with respect to cable unbundling (which would clearly deter new incumbent investments in the Golden State).  We decided not to go there in last week’s TSB (our focus was on how wireless companies would treat throttling) but see how and why the ghost of Brand X is more than a mirage to many of you.

One item that I think is undebatable – Congressional action would clearly eliminate the newfound love of Federalism that is breaking out in many state legislatures.  We will write more on this in the future, but we at TSB offer up the following bill parameters for consideration:

  1. Establishment of a minimum residential achieved average upload and download speed (wireless and wired) above which regulations would be loosened if not eliminated (we would propose 200 Mbps for 2020 (200 Mbps for stand-alone Hotspot; 100 Mbps per smartphone or tablet) and 500 Mbps for 2025 (500 for stand-alone Hotspot; 250 Mbps per smartphone or tablet) with agreement to establish the 2030 speed at no less than 700 Mbps). Residential averages would be evaluated by no less than two independent 3rd parties at a zip code level.

 

The rationale behind this is twofold:  a) Regardless of bit prioritization practices, the presence of 200 Mbps for 4-5 simultaneous users clearly provides a healthy broadband baseline.  This would be based on achieved as opposed to advertised speeds.

 

This also provides the ability to have lower speeds but uses market mechanisms to drive the mix.  If AT&T wants to offer Gbps speeds for $90/ month, then they will have a smaller fraction achieving this higher speed than if they offered the same product at $50.  The market will reach an equilibrium.

 

This would also greatly encourage the adoption of 5G services across wireless carriers.  If 50% of the base is wireless and achieving LTE speeds of 100 Mbps, they would need to be offset by 50% of the base experiencing average speeds of more than 300 Mbps.

 

It would also create a competitive mechanism assuming either telco or cable did not achieve the figure in the first measurement.  Some incremental capital expenditure would also occur (and this can be done prior to having a larger infrastructure spending bill if that is desired).

 

  1. Tighter enforcement of Type II provisions and regulations. Unbundling provisions in the 1996 Telecom Act have been watered down to a large extent, with telcos (and, to some extent, the business arms of the cable companies) replacing the harmful operational effects of unbundling with 60-month term discounts on traditional special access services.

 

If Type II were properly enforced (penalties properly monitored and assessed), there would be more impetus to be classified as an information service.  This is a fault of all regulators – state and federal – and should be addressed.

 

  1. Adding core control to Type II provisions for wireless providers. If national or regional wireless providers do not step up their game and have market-leading data infrastructure, they should allow others to disintermediate them (core control allows a rural-focused MVNO to set up infrastructure in the slower market and use the faster speeds in more metro areas).  This “nuclear option” would certainly spur innovation among the wireless carrier community and perhaps spawn a previously unthinkable concept – spectrum/ network sharing.

These are very measurable, practical legislative remedies which refocus objectives to weighted average usage (including testing price elasticities to a greater extent) and increased competition.  We clearly believe that the current approach will create a patchwork of network procedures as well as full employment for telecom attorneys.

 

Next week, we’ll look for clues from Comcast, Charter, and Verizon’s announcements, as well as some previews for AT&T’s earnings and the Time Warner analyst day (Oct 29).  Until then, if you have friends who would like to be on the email distribution, please have them send an email to sundaybrief@gmail.com and we will include them on the list.

 

Have a terrific week… and GO CHIEFS!

 

The Case Against the T-Mobile/ Sprint Merger

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

 

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

 

The Implications of This Case are Significant

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

 

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

 

Case Timeline

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

 

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

 

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

 

The Case Against the Merger

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

 

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

 

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

 

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

 

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

    CMA 1 includes New York City and Long Island

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

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

 

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

 

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

 

Reframing and Refocusing the Argument

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

TSB Follow-Ups

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

 

— Performance Plus increased from 60 Mbps to 75 Mbps

— Performance Pro increased from 150 Mbps to 175 Mbps

— Blast! Pro increased from 250 Mbps to 275 Mbps

— Extreme Pro increased from 400 Mbps to 500 Mbps

 

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

 

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

 

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

 

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

iphone 11 availability

iphone 11 pro availability

iphone 11 pro max availability

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

 

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

 

 

 

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

 

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

 

Have a terrific week… and GO CHIEFS!

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

Greetings from the Windy City, where yours truly (and the Editor) spent some time sightseeing, working, and enjoying the architecture (the Trump Tower is “huge” – see pic at the end of the TSB).  This week, we have space to cover two key events – the September 10 Apple product announcement and the Elliott Management memo to AT&T.

  

Apple monthly plans 

The Apple Announcement:  Waiting for the Other (Apple Card) Shoe to Drop

On Tuesday, Apple announced a slew of new products including the iPhone 11, iPhone Pro and iPhone Pro Plus.  Many analysts have written entire briefs on the products (two examples are Ars Technica here and CNET here), but there are three specific items that are worth emphasizing:

  1. Apple is going to be offering and aggressively advertising monthly financing for every iPhone purchased in-store or online. The manifestation of this is clearly seen in the new iPhone 11 display screen (picture nearby).  While this new detail may seem small, the fact that an after trade-in monthly price is shown (24 months, good credit at 0% a.p.r) is new for the Cupertino giant.  Previously, 24-month financing was only available if customers purchased the device and AppleCare+ (the premium was equal to the 2-year price of AppleCare+ divided by 24).  This com article describes the current Apple Store upgrade process; the good news is that Apple Payment and Apple Upgrade will exist side-by-side with the AppleCare+ upgrade.

 

  1. Apple is also going to accept devices for an instant top-dollar trade-in online and in-store. This is completely new and covers a wide range of Apple products (iPhone, iPad, Mac, etc.).  The structure of the trade-in (including the trade-in values used in the example) looks a lot like that used by Best Buy (who has a very good reputation for fair trade-in values).  It also appears that Best Buy is adding an extra activation bonus to their offer (see here), giving the Minnesota retailer the lowest entry point for equipment installment plan purchases (Sprint’s leasing plans are the lowest overall entry cost).

 

The instant nature of the trade-in contrasts with Verizon, who applies their “up to $500” value across 24-months (subtle, but Apple is taking the churn risk on the monthly payments up front) with a $200 prepaid card for those who switch from another carrier.

 

  1. The most surprising item (besides the overall price reduction of the iPhone 11) was the inclusion of CBRS (LTE Band 48) and Wi-Fi 6 (802.11ax) in all three devices. This, combined with eSIM functionality that started with last year’s models, sets the stage for increased use of licensed spectrum alternatives (see the September 1 TSB titled “CBRS – Share and Share Alike” for more details).  A great Light Reading article outlining Charter/ Spectrum’s use of eSIM to offload Verizon data traffic is here.

 

  1. It goes without saying, but the inclusion of a free year of Apple TV+ with every new iPhone purchased ($60 value) might tip the scales towards an immediate purchase.

Interestingly, there was no separate presentation focused on the Apple Card (although it was mentioned many times, including in Dierdre O’Brien’s presentation).  Our assumption is that Apple Card orders are plentiful and given Apple’s recent advertising push needed no additional on-stage fuel.

Our prediction still stands:  Soon, Apple Cards will be used to finance devices on 24-month installments and customers will be able to instantly apply their credit card usage perks to their monthly payment (perhaps with an additional kicker if it’s used for that purpose first).  This will create increased attractiveness for Apple Store (and online) purchases of the device and will boost retention at the expense of low/zero margin wireless carrier revenues.  While the short-term financial ramifications are positive for the carriers (and likely neutral for Apple), the long-term impact of removed “hook” to the customer will either drive wireless carrier churn higher or drive plans back to contracts.

 

The Elliott Management Memo:  Dominate, Divest, Dedicate, Deliver

As most of you know by now, Elliott Management went public with their concerns about AT&T through the www.activatingatt.com website and a 28-page memo that challenges nearly every major management decision made in the past decade.

While the tone is cordial, its uncharacteristic Southern “Bless Your Little Heart” gentility

jesse cohn pic

Jesse Cohn of Elliott Management

is thinly veneered.  As my senior English teacher, Joan Foley, prominently said: “Be what you are.” – Mr. Stephenson and the AT&T Board can take it.

The memo’s points are extremely well laid out, balanced, and challenging.  One would think that the Elliott Management team were long-time TSB readers with the stinging indictment of AT&T’s merger moves, content + connectivity strategy, and insular succession planning.  The result of this over the past 3 years was shown in the Mark Meeker presentation slide below (from the June 30 TSB – full post here):

global market cap leaders

 

While the immediate comparison to Verizon (#25) is damning (17% greater value created over the past three years than AT&T), the greater concern is that their suppliers (Samsung, Apple, Cisco) are exercising superior value gains (Samsung +50%, Apple +62%, Cisco +64%).

We don’t know every detail of the Elliott Management plan but believe that it’s definitely a good start.  AT&T has been playing a lot of “play not to lose” defense over the past decade; the “Bring the Bell Band back together” strategy of the 1990s and 2000s did not port to non-Bell acquisitions.  We would like to propose some slight amendments to Elliott Management’s strategy and propose structuring AT&T’s transformation around four elements:

  1. Dominate the wireline and wireless markets (and be bold about it). Where you are the incumbent local provider, be the most important player in connecting homes and buildings to mobile.  Leverage your local presence with widespread use of fiber that you have been supposedly been deploying for the past seven years (AT&T’s DNA is to think “One Fiber”).  Aggressively move away from legacy technologies – not because they are too costly, but because your customers desire mobility over stationary premise equipment.  Prioritize fiber above everything else, operate and care for it as if it’s the corporate crown jewel (it is), and deliver meaningful market share.  Value wireline.  Beat cable to a pulp.  Break out into a little Charlie Daniels: “We’re walking real loud and we’re talking real proud again.”

 

On the wireless front, leverage the FirstNet capacity discussed by John Stephens in August and allow customers who have 1080p devices to receive 1080p streaming for free.  This would force T-Mobile and Verizon to show their 480p hands and likely drive more upgrades to 1080p-capable devices.  Apply this to both Cricket and wholesale customers as well.

 

  1. Divest (or deal) where it makes sense. We think that Elliott Management is a bit too quick to declare DirecTV, Time Warner and AT&T Mexico as failures.  But it does make sense to decide whether Alarm.com, ADT or Vivint are better companies to serve the residential security market.  And, if AT&T can only implement their fiber strategy in metropolitan areas, sell off the more rural parts of the franchise (with very attractive DirecTV rates as a sweetener).  For example, here’s a map of the North Carolina local exchanges (full map is here):

nc exchange map

The olive-colored area is AT&T.  The remaining areas are not AT&T.  Follow cable’s moves of 25+ years ago and re-cluster the local exchange footprint.  Unless it’s an area where you can win with a fiber footprint or CBRS last mile, trade or sell, using DirecTV service price as a sweetener.  This will allow you to focus on winning (offense – fiber), not preserving (defense – DSL).

 

  1. Dedicate resources to convergence. We spent nearly an entire TSB two weeks ago talking about AT&T’s Domain 2.0/ SDN/ NFV moves (led by John Donovan and Jeff McElfresh).  Now that those efforts are largely underway (and AT&T is regarded as the leader), focus on using the entire suite of assets to deliver innovation.  An easy example:  Every bit of content that AT&T owns can be stored on any AT&T subscriber device as a part of their monthly service.  For example, if an HBO customer has a history of watching HBO through their mobile device, AT&T should ask if they can download the entire season to mobile ROM (storage) that evening.  This is what Pandora does with Thumbs Up Radio.  It might consume 2-3 Gigabytes, but the customer gets the entire season and AT&T’s streaming resources are not taxed.  AT&T should be more aggressive with each music provider about duplicating premium “save for offline” services (YouTube Premium does this in addition to Pandora).  And AT&T should allow customers to replay any (start with Time Warner) recording, selected or not, that was broadcasted in the last 24 hours through DirectTV or AT&T’s TV services.  This strategy may require more resources than merely product and marketing – a lot of legal action may be needed.  Cloud is cheap, and, with Microsoft and IBM as strategic partners, the lift just got a lot easier.

 

  1. Deliver brand promises. AT&T and IBM used to be known as the brands that “no one was ever fired for selecting.”  Times have changed, and Microsoft, Amazon, Cisco, Google, Netflix, Hulu, Verizon and others command an equal footing to Ma Bell and Big Blue depending on the market and the product.  Own the service standard for residential and business communications.  Fire or retire those suppliers/ partners/ employees who will only “play not to lose.”  Be known for going the extra mile and not cutting corners.

 

To beat Verizon, AT&T will need to leverage their larger local fiber footprint and the aforementioned Microsoft/ IBM/ Airship relationships.  To beat T-Mobile, AT&T will need to deliver 1080p services for the same price as 480p, use Time Warner and other content partnerships to deliver content efficiently and improve their in-store and web-based service.  To beat Comcast and Spectrum, AT&T will need to deliver more reliable broadband (with service guarantees) for 10-20% less.  To beat Dish, AT&T will need to build a more competitive video equation for rural markets.  All of these are possible, and all can be executed simultaneously with the right leadership.

Unlike Elliott, I think AT&T has several strong layers of strategic, smart leaders.  From within, they need a standard bearer who can rally each employee around a vision of “defeat and deliver – or get out.” If AT&T uses the Elliott memo to play more offense, their shareholders will cheer.

 

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

 

Have a terrific week… and GO CHIEFS!

opening pic sept 15

Third Quarter Earnings – What Could Dislodge Wireless?

opening pic

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

 

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

 

Follow-up to Last Week’s CBRS article

 

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

 

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

 

Third Quarter Earnings – What Could Dislodge Wireless?

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

 

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

 

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

 

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

 

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

cable mobile net additions trend chart

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

 

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

 

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

 

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

 

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

t-mobile 600 MHz chart

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

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

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

 

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

 

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

 

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

 

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

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

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

litigation tracker chart

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

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

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

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

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

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

 

Have a terrific week… and GO CHIEFS!

CBRS – Share and Share Alike

opening pic

Greetings from Lake Norman/ Davidson, North Carolina, where the college football season has started.  We took in the Davidson College home opener and the Wildcats (red jerseys) defeated Georgetown 27-20 to a crowd of more than 2,300.  It was an exciting part of the Labor Day weekend and a good win for the Cats.

 

This week’s Sunday Brief focuses on the potential of Citizens Broadband Radio Service (CBRS) to change the telecommunications landscape.  We will also have an update on C-Band spectrum auction news.  First, however, a quick follow up to last week’s article on AT&T’s system and network architecture changes.

 

Follow-up to last week’s AT&T article

We had greater than expected interest concerning last week’s TSB including receiving several background articles that we had not uncovered in our research.  One of the most important of these was a blog post by AT&T Senior Vice President Chris Rice on their Domain 2.0 developments that was posted on August 21.  In this article, Chris describes their major architectural change:

 

We started on a path for a single cloud, called AT&T Integrated Cloud (AIC). This was our private cloud, meaning we managed all the workloads and infrastructure within it. Originally, AIC housed both our network and several of our “non-network” IT workloads and applications.

But we quickly learned it wasn’t optimal to combine both types of workloads on a single cloud. It required too many compromises, and the IT and network workloads needed different profiles of compute, network and storage.

We opted for a better approach: Create a private cloud for our network workloads, optimize it for those workloads, and drive the software definition and virtualization of our network through this cloud approach and through the use of white boxes for specific switching and routing functions.

 

The change to last week’s article is subtle but not insubstantial:  AT&T’s network cloud (formerly AIC) is optimized for network traffic loads and functions (but still built on white box/ generic switching and routing), while non-network functions are operated in the public cloud through Microsoft and IBM.

 

john-donovanIt’s important to note that the executive champion of this cloud strategy, John Donovan, is going to be retiring from AT&T on October 1 (announcement here).  We have included an early speech he gave on AT&T’s Domain 2.0 strategy in the Deeper post on the website.  John brought engineering discipline to AT&T’s management, and, while the parlor game of his replacement has begun, the magnitude of his contributions to Ma Bell over the past 11+ years should not go unnoticed.

 

CBRS – Share and Share Alike

When we put together a list of Ten Telecom Developments Worth Following in mid-July (available on request), we were surprised by a broad range of CBRS skepticism in the analyst community, especially given the breadth of US wireless carriers playing in the CBRS alliance.  “Nice feature” or “science experiment” was the general reaction.  Many of you chose instead to focus on the C-Band auctions, which are important and addressed below.

 

After some reflection, we have come to the conclusion that the most important feature of CBRS is neither its mid-band position (3.5 GHz), nor the mid-band spectrum gap it fills for Verizon Wireless (more on that below), but the fact that at times all of the spectrum band can be shared.  Customers receive the benefits of an LTE band without a costly auction process.

 

If you are intimately familiar with CBRS, you can skip the next couple of paragraphs.  For those of you new to TSB or the industry, here’s a copy of the slide we used to describe CBRS in the Ten Telecom Developments presentation to start your education:

cbrs top 10 slide

 

 

The commercialization of shared LTE bands is pioneering and one of the reasons why it has taken nearly a decade to move from concept to commercialization (the original NTIA report which identified the CBRS opportunity is here).  This does not appear to be a singular experiment, however, as Europe is proceeding with shared spectrum plans of their own in the 2.3-2.4 GHz frequencies (more on that here).

 

To enable this sharing mechanism in the United States, a system needed to be developed that would prioritize existing users (namely legacy on-ship Navy radar systems) yet allow for full use of the network for General Authorized Access (GAA) users when prioritization was not necessary (opening up to 150 MHz of total spectrum for GAA which could power 5G speeds for tens of millions of devices nationwide).  A great primer on how CBRS generally works and how spectrum sharing is performed is available here from Ruckus, a CommScope company and one of five Spectrum Access System providers.

It’s important to note that the Environmental Sensing Capability (which determines usage by priority) and the Spectrum Access System (which authorizes, allocates and manages users) are two different yet interoperable pieces of the CBRS puzzle.  And, while the ESC providers have been approved by the NITA (CommScope, Google, and Federated Wireless), the SAS providers have not been approved (more on that here in this Light Reading article).  While all of the SAS providers have not been made public, it’s widely assumed that they include the three ESC providers mentioned above.

 

Delays in the SAS approval process have not kept the CBRS Alliance from heavily promoting a commercial service launch on September 18 (news release here).  This event will feature FCC Commissioner Michael O’Rielly, Adam Koeppe from Verizon, Craig Cowden from Charter, and others who will celebrate the Alliance achievements to date and place the development as a central theme going into 2020.

 

CBRS Use Cases:  Not Everyone is Waiting for Private Licenses

The myriad of CBRS use cases mirror the different strategies for telecommunications industry players.  Here are four ways carriers are using CBRS in trials today:

 

  1. CBRS as a last mile solution for rural locations (AT&T and rural cable providers MidCo Communications mapMidCo and Mediacom Communications). In the MidCo configuration, outdoor Citizens Band Service Devices or CBSDs (see picture above) are placed in proximity to potential (farm) homes passed (see nearby map of MidCo territories in the Dakotas and Minnesota).  Per their recent tests, MidCo was able to connect homes up to eight miles from the outdoor CBSD.  They estimate that CBRS will add tens of thousands of homes and businesses to their footprint (they serve 400K today so every 10K new customers is meaningful).  Good news for an over the top service like Hulu, Netflix, and YouTube TV and bad news for DirecTV and Dish.

 

AT&T has been testing CBRS as a similar “last mile solution” in Ohio and Tennessee using equipment from several providers including CommScope (ESC, SAS) as well as Samsung (network).  These trials are expected to wrap up in October.  If AT&T can find a more effective last mile solution for copper-based DSL in rural areas, revenues and profitability will grow (by how much depends on Connect America Fund subsidies and service affordability).

 

AT&T has been mum on their trial progress to date.  In June, however, AT&T asked the FCC to allow them to turn up antenna power in these markets to test various ranges and speeds (bringing the power allowances to a similar level of the WCS spectrum that AT&T already owns and operates in the 2.3 GHz spectrum frequency).  This was met with strong opposition by a coalition of providers, and it’s not clear that AT&T’s request was ultimately granted.  More on the AT&T request and response can be found in their FCC filing here, and in this June 2019 RCR Wireless article.

 

  1. CBRS as an additional LTE service for cable MVNOs (Altice, Charter, Comcast). It’s no secret that cable companies are eager to continue to grow their wireless presence within their respective footprints (and corporate is equally as eager to improve profitability and single carrier dependency).  CBRS would add a secure option that is seamlessly interoperable with other LTE bands to create an alternative to their current providers (Verizon, Sprint, etc.).  It also provides a new “secure wireless” service for small and medium-sized businesses which can be deployed with Wi-Fi.  A cheaper alternative for out-of-home wireless data?  Count cable in.

 

We spent some time a few weeks ago talking about the evolution of Verizon plans, specifically how their cheapest unlimited plan now includes no prioritized high-speed data (article here).  Is CBRS a better alternative to deprioritized LTE?

 

The short answer is “not yet.”  LTE Band 48 is only available across the most expensive devices, and, presumably, if customers can shell out $1000-1500 for a new device, they can probably afford extra LTE data allowances above 22-25 Gigabytes (see previous article linked above).  Notably, the new Moto E6 (budget-minded Android device) includes neither CBRS nor Wi-Fi 6 (specs here).  The new ZTE Axon 10 Pro phone does not include Band 48 or Wi-Fi 6 (specs here).  The OnePlus 7 Pro, however, does include Band 48 but not Wi-Fi 6 (specs here).  And, if rumors are to be believed, the upcoming Apple device announcement in a couple of weeks will disappoint everyone – no 5G, no CBRS even though the new device will likely support the 3.5GHz spectrum band in Japan, and likely no Wi-Fi 6 (which is why the Apple Card will likely be used to offer attractive financing options).

 

This leaves cable companies with a good selection of Samsung and Google devices that can use CBRS (Galaxy Note 10, Galaxy S10 5G, upgraded Pixel 3X and 3XL, and likely the upcoming Galaxy 11 release).  For cable to win on this front, they may need to provide plan incentives to influence the pace of upgrades and request this band for Moto and low-end Samsung devices.

 

  1. CBRS as a mid-band LTE outdoors/ public venue solution for Verizon. It is no secret that Verizon is going to use CBRS GAA as a part of their carrier aggregation solution (see this August 2019 article from Light Reading for more details). Such a solution is usually not designed for greater throughput in rural markets alone – Verizon clearly sees some form of CBRS as a portion of their overall licensed/ un-licensed solutions portfolio.

 

The question that will be answered in the next quarter or so is whether CBRS is valuable enough to be a part of Verizon’s licensed portfolio (e.g., they buy 20 or 30 MHz worth of private CBRS licenses, or whether they use the GAA portion in the same License Assisted Access (LAA) manner as they use 5.0 GHz Wi-Fi).  It’s likely that if CBRS is important, they will be at the auction table.

 

It appears that the C-Band (3.7-4.2 GHz) license quantity and auction schedule is in flux, if the latest report from Light Reading (and the corresponding New Street Research analysis references in the article) is true.  This also impacts Verizon’s near-term interest in CBRS PALs.

 

Verizon’s interest is important as they can drive manufacturers to quickly include Band 48 in devices.

 

  1. CBRS as an indoor and/or private LTE solution for wireline. One lesser-discussed option for CBRS is as a private LTE indoor solution for enterprises and building owners.  While we touched on this option for cable companies (who will undoubtedly drive business ecosystem development), this could also have ruckus cbrs routerinteresting implications for companies like CenturyLink (Level3), Masergy, and Windstream.  Ruckus, a traditional Wi-Fi solutions provider now owned by CommScope, already has an indoor unit for sale here (picture nearby).  The implications for in-building coverage are significant because 3.5 GHz does not overlap with existing deployed frequencies (including existing 2.4 GHz and 5.2 GHz Wi-Fi solutions), and, as a result, will not increase interference that deploying an AWS (1.7/ 2.1 GHz) or EBS/BRS (2.5 GHz) might create.  With solutions as cheap as industrial Wi-Fi and minimal interference concerns, there might be more value created with CBRS indoors than outdoors.

 

Bottom line:  CBRS is a real solution for rural broadband deployments and will attract the interest of large and small rural providers.  CBRS will be important to wireless carriers when Samsung and Apple join Google and Facebook in building a robust ecosystem.  This is a good/great but not an industry-changing technology.  If the first commercial applications are successful in 2019 (the odds are good), demand for Private Licenses will be significant (if not, expect more pressure to resolve C-Band spectrum allocation issues quickly).

 

What makes CBRS great is dynamic spectrum sharing among carriers.  Should that continue with all new frequencies auctioned (including C-Band), you should expect to see competitive pressures grow in the sector, particularly with private LTE/ indoor applications.

 

Next week we will provide the first of two third quarter earnings previews, focusing on wireless service providers ahead of the Apple event.  Until then, if you have friends who would like to be on the email distribution, please have them send an email to sundaybrief@gmail.com and we will include them on the list.

 

Have a terrific week!