Home » FCC

Category Archives: FCC

The Unintended Consequences of an Attorneys General Victory

opening pic

 

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

 

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

 

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

 

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

 

The Unintended Consequences of an Attorneys General Victory

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

 

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

 

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

 

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

Sprint debt maturities

 

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

sprint fcf reconciliation quarterly

 

The economic reality for Sprint is as follows:

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

 

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

 

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

t-mobile investor day presentation dt 2012

 

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

 

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

 

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

 

Fourth Quarter Earnings Questions

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

 

Apple:                  January 28 (afternoon)

AT&T:                   January 29

Verizon:               January 30

Spectrum:            January 31

Google:                 February 3

CenturyLink:      February 12

US Cellular:         week of February 10 (est.)

Altice:                   week of February 17 (est.)

Frontier:              week of February 24 (est.)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Specific-company questions: 

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

 

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

 

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

 

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

 

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

 

rootmetrics 2H 2019 miami

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

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

 

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

 

TSB Follow-Ups

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Have a great week – and GO CHIEFS!

CES Observations – Out of the Lab and On to the Production Line

opening pic

Greetings from Las Vegas, NV where 170,000 tech-hungry attendees gobbled up products and services from hundreds of exhibitors.  Pictured is our motley crew at the first Sunday Brief CES dinner held this year at Gordon Ramsay’s Pub at the Caesar’s Palace.  Everyone had a terrific time – no one lacked an opinion and GRs has a diverse menu that accommodated any palate.

 

This week, we’ll divide our focus between show observations (there are many), and some commentary from Verizon, AT&T, and T-Mobile executives at the Citi TMT conference which was concurrently running in Las Vegas.

 

 

CES Observations – Out of the Lab and On to the Production Line

 

Many CES shows focus on concepts, and this year’s show was full of them (see here for Business Insider’s take on the Mercedes Benz Avatar concept car – one of many futuristic automobiles in Vegas this week).   But for every “could be” invention at the show, there were several “in or near production” items that showed how far concepts from the last decade have come.

 

First up comes from the smart home, where several of us really liked the concept of puripot detailed descriptionmixing lighting (which has to have AC power) with air purification.  Many of you remember the concept several years ago of mixing lighting and Wi-Fi access (called Li-Fi) which is now available widely online from companies such as Sengled and de.Light – early reviews were mixed, and mesh Wi-Fi extensions from Google and Eero (now owned by Amazon) proved to be a better value.

 

Now, there’s a new lamp product from Puripot (parent company is dadam Micro – more on them here) that brings air purification to the tabletop (in addition to a wall mounted version).  The nearby diagram from the Puripot website shows how it works.  The company describes the technology as follows:

 

 “The puripot airLamp is a lamp-type air purifier that applies two innovative and environment [sic] friendly technologies to household lamps that are used universally in most every life: 1) a polyester-based non-woven fabric filter treated with meta-doped TiO2 photocatalyst, and 2) a market proven visible light-based titanium dioxide photocatalyst technology together to removes harmful VOCs viruses, bacteria and fine dust.

The transition meta-doped titanium dioxide non-photocatalyst filter used in the device is an eco-friendly, inorganic material-based fiber filter that is made by coating polyester non-woven fiber with the TiO2 photocatalyst. The filter has strong destructive effect on almost all kinds of virus regardless of the light irradiation. The performance of the filter is not deteriorated even after long hour use and periodic washing to remove dust attached. The filter has more than 50% better dust removal efficiency than the general HEPA filters.”

puripot lamp picFor people who have allergies or live in polluted areas (or improperly maintained office spaces), this could be a productivity-improving device (less sick time, improved employee psychology, etc.).  The company indicated that the solution would be available in 2020 (the precursor air filter is available for preorder here and should ship in Feb).

 

While an excellent invention in and of itself, the concept of a power + light + ______ elicits some interesting ideas for home and office tech.  For example, the ability to attach a CBRS or Wi-Fi access point in the base of this lamp would be a useful addition to many offices.   And coupling a terabyte storage option for most commonly used DropBox or Box files would also help performance.  As we saw from the addition of IoT devices (including Wi-Fi repeaters) to electrical outlets, the concept is not new, but puripot has moved the functionality from the power outlet and the light socket to the table/ desktop.  That’s big, and, with the right modular design, could be a boon for technology adoption.

 

hydraloop logoAnother widely discussed theme at this year’s CES was sustainability, specifically water reclamation.  Live through one drought (ours was in Dallas, but we have had our share of dry summers in Colorado) and you understand the importance of water availability.  A new company called Hydraloop had their debut at CES after very successful alpha and beta trials.  Their technology takes water used in everyday tasks (showers, washing machines, tubs), and enables it to be reused again through a patented recycling process (see nearby picture).

hydraloop flow diagram

In Texas, the water bill can frequently be higher than those of other utilities.  Being able to reclaim or reuse a portion of the water without being charged twice is an attractive proposition.  Hyrdraloop indicated on their website that most homes could be equipped with the new technology for ~ $4,000 plus shipping and professional installation.  Assuming this price comes down with volume (and more affordable with financing, similar to that used for solar projects), this could be a self-financing upgrade for many homes.  It’s an “edge” application for another utility – water.

 

For more on the company, CES’s “Best in Show” for 2020, have a look at their YouTube video from CES.

plume logoOne additional technology closer to telecom and tech that caught our eye is Wi-Fi based motion sensing.  This was on display at CES using Cognitive Systems software on Plume Systems adaptive Wi-Fi system (note – Plume is backed by several corporate venture arms, including Comcast Ventures and Samsung Ventures).  This technology has been in testing for a couple of years, and Plume decided to launch their Motion product at this year’s CES.  Here’s a video briefly describing the product and a short Forbes article authored by Moor Insights and Strategy on various benefits and use cases.

 

The bottom line for the Plume Motion product is that when a visual recording of an event is not triggered or desirable (e.g., bathroom motion), Wi-Fi motion detection can be a high-quality, cost-effective alternative.  For more on the company and their subscription service, check out www.plume.com.

 

Each of these three products will broadly launch this year.  They combine many of the themes we described in last week’s article (compact or eliminated equipment, tied to remote cloud-based systems, and enabled by faster processors) and bring high-value/ high-utility products to the market.

 

In case you missed the show (or its coverage), here’s six additional articles you should probably read to get a good take on tech:

 

  1. For IoT and CES, read the latest weekly blog from Stacey Higginbotham. I was especially intrigued by her panelist’s take on Virtual Reality (VR) tech for aging adults.
  2. For Engadget’s take on Samsung’s NEON avatars (apparently a viral topic), read here.
  3. For a good summary of laptop announcements that will have 5G available as an option, read here.
  4. The Samsung release on their digital companion product called Ballie is here. (I think the company should revisit their pet friendliness assumption).
  5. I missed the AMD keynote on Monday, but if you don’t believe that speed is still a theme, check out this condensed presentation.
  6. Quibi (short-form video service) held their launch announcement at CES (Bloomberg interview is here). T-Mobile is going to be a key partner and will include the service for most of their current customer base.

 

Lastly, we leave the CES discussion with a picture of the Hyundai Uber drone.  About a decade ago, cars started to take over the show, and now we have the S-A1, an Urban Mobility Vehicle prototype developed by Hyundai and Uber:

hyundai uber concept CES 2020

 

 

Fourth Quarter Hints from the Citi Conference in Las Vegas

There were three wireless companies (Verizon, T-Mobile, and AT&T) and one notable Local Telco (CenturyLink) participating in the Citi Global TMT West Conference that paralleled the first two days of CES.  While we do not have enough space in this week’s column to fully cover each presentation, here are the high points of the wireless participants:

 

  1. Ronan Dunne, EVP at Verizon and Group CEO for the Consumer Division, spoke first. “We have laid the platform for growth…  We have all of the assets we need to execute the strategy…. We are not a business that’s waiting on the outcome of someone else’s strategy.”  Verizon is aggressively developing an information-led platform that lays the groundwork for large experiences like Disney.  While not disclosing any specific numbers, Ronan went on to convey that “the momentum we saw in Q3 continued into Q4.”  On personalized base management, he said “We have 100 million consumers, and my ambition is to personalize the experience for every one of them.”

 

On Disney, Dunne offered no specific numbers, but he did convey that there might be ronan dunne pic and captionsome short-term dilution primarily as a result of higher than expected demand.  He was quick to point out that if the Disney relationship could extend the customer/ family account life even one month, it was a terrific investment.

 

On cable, Dunne talked about his personal investment in the relationship, and the fact that Verizon’s network-as-a-platform strategy lends itself well to a relationship with cable.  On 5G, he went on to reiterate their investment in millimeter wave technology, citing that 70% of Verizon’s traffic occurs in metro areas.  On devices, he predicted that new models will be introduced that carry millimeter wave technology for under $800 ($33.33/ mo. for 24 months) “soon” with sub-$600 ($25/ mo. for 24 months) devices by the end of the year.

 

On home broadband, Verizon is likely holding their marketing power until higher-power chipsets are available to expand their reach (likely date = 2H 2020).  The most likely deployments of highest-speed networks will be in dense traffic areas that tend to have lower residential concentrations.

 

On the economy, Dunne commented that that holiday season shifted to more digital than retail storefront (re: Verizon charges less for online conversions than in-store or customer-service assisted transactions).  Verizon seems to be seeing a fair amount of pricing optimization as well as some upsells into higher unlimited categories.

 

On the Verizon relationship with Amazon AWS, Dunne praised the partnership, emphasizing that their new edge relationship was completely built within their (Verizon’s) infrastructure.

 

The most important “drop mic” comment came from an audience question at the end about Wi-Fi offload.  “The thing that we see that may be different from the world of others is that we don’t see the need for Wi-Fi in the future because we have a more secure network environment, we have much higher performance criteria, and we have the ability to hand off sessions… When we are fully deployed, there are entire environments where public Wi-Fi can be eliminated.”  We could not find any other statement from Verizon in which it sought to absorb Wi-Fi volumes (a 3x growth given Wi-Fi is ~ 75% of total data traffic for wireless subscribers today).

 

  1. T-Mobile released preliminary subscriber figures prior to their participation in the conference, which feature current President and COO (and future CEO) Mike Sievert, President – Technology Neville Ray, and EVP and CFO Braxton Carter. In the press release, the most telling figures were as follows:

 

  1. 86 million total subscribers
  2. 1.0 million branded postpaid net phone additions (on par with Q4 2018)
  3. Gross postpaid phone additions up 5%, and postpaid churn up to 1.01%. Braxton Carter’s comment was very telling: “I wish churn was a little bit higher [in the industry].  The hallmark was a more competitive environment with more switching going on, reversing a trend from the rest of 2019.  We are very excited about a higher switching pool.”
  4. Prepaid net additions of 77K for the quarter, up from 62K in 3Q but down from 135K in 4Q 2018
  5. Wholesale net additions of 472K for the quarter, down from 611K in 3Q and 909K in 4Q 2018
  6. “A beautiful quarter” was Carter’s description of the total operating performance, leading many to believe that the margin pressures from increased gross adds were able to be readily absorbed.

 

“Our team is focusing on all cylinders” was Mike Sievert’s lead comment.  Key objectives for 2020, per Sievert,  include a) Get the integration with Sprint underway in a very significant way, b) Get off to the races in building the world’s best 5G network, and c) turn a) and b) into great operating performance for the business and lay a foundation for growth under the context of the new company.

 

On the Sprint merger, the audience seemed split on the judge’s verdict but Mike Sievert was not worried.  “We have to see where it all shakes out.”  On the prospects of a settlement, he stated “Through the process… we have been an open book about what we were willing to do.  Nothing has changed with that approach.  So far there hasn’t been a settlement, but you never say never.”

t-mobile execs pic and caption

On 5G, the executives were quick to reference that the current activities were just the beginning.  “The breath is coming along nicely, and the breadth will come with the [Sprint] transaction” said Neville Ray.  Mike Sievert used the 5G discussion to launch into his confidence in the network synergies from the Sprint transaction, citing T-Mobile’s progress with 600 MHz deployment which is two quarters ahead of the originally announced plan.

 

“The base business case for 5G is capacity” answered Braxton Carter.  “We have been consistently ahead of the cost curve, and 5G is a critical piece.”  On a super cycle, it’s clear that nearly every new device will be 5G capable on T-Mobile’s network, although Neville Ray seemed to imply that the momentum would start in 2020 but that 2021 would likely be an even greater year.

 

Braxton conveyed that the industry is probably at the low point of the upgrade cycle.  “We should see higher switching as the 5G cycle accelerates.”  On increased competition entering 2020, Sievert talked about cable and it appeared to him that “cable is taking share from Verizon… their share gains are not coming from us.”  Mike was also quick to discuss how despite lower promotional activity in the quarter (their advertising focused on their 600 MHz network reach), T-Mobile still delivered healthy net additions with low postpaid churn.  “We have not unlocked the potential of having not only a great value but also having the best network.”

 

“If this transaction does not occur, we would immediately reinstitute a $9 billion board-approved buyback” was Braxton’s response to an audience survey question about T-Mobile’s direction should the transaction be rejected.

 

On targeting, Mike Sievert commented that T-Mobile has “good network quality for 326 million Americans, including low-band spectrum for over 300 million.  We market in just 265 million, and 35 million of that is recent – in the past 2-2.5 years.  There remains plenty of opportunity.” On share, Sievert commented “We continue to have disproportionately low share in suburban, rural, small towns and enterprises.  While these segments have been feeding our growth over the past couple of years, we continue to have disproportionately low share.”

 

On the economy, Sievert commented “Things have changed a lot since the last recession.  Smartphones weren’t really deeply embedded into scale usage yet – that’s amazing.  When you are forced to choose, the smartphone is not going to be the first thing to get downgraded.  You will see a lot more optimization, and we are well served for that situation.  I think our business is positioned to be resilient regardless of economic circumstances.”

 

  1. The following day AT&T CFO John Stephens spoke on a wide variety of topics. After checking off a long list of operating and financial metrics, he concluded with “we did what we said we were going to do, and we have set ourselves up for a bright future.”

 

On their asset mix, Stephens talked about AT&T’s bundled (content + network) productsjohn stephens pic and caption and distribution capabilities.  “We will be best positioned in the future to bundle wireless services because we have owners economics – it’s really important”

On 5G, Stephens noted that for the first time ever, the network is leading device availability.  He considers HBO Max to be an unappreciated asset and is very confident in the prospects for the product.  $500 million in content was invested in the fourth quarter but was held back for the HBO Max launch.

 

The AT&T CFO also touted their spectrum capabilities, especially when AT&T “hotwires it all” with the FirstNet buildout.  John Stephens was the most bullish of the executives on the wireless upgrade cycle in 2020.  He cited several sources of revenue growth, yet also discussed the need to further reduce costs for network and customer service functions.  He also signaled that there would be additional product rationalization throughout the business.

 

On the communications front, Stephens talked about the need to emphasize the breadth and depth of the AT&T fiber asset, and also the expected decreases in legacy declines due to their diminished size and relative importance to the business.  John also separated equipment sales from other profitability sources due to their low margins.

 

On industry structure, Stephens had some of his strongest comments.  Because of FirstNet, AT&T deployed more spectrum, and this improved geographic coverage presents a unique competitive advantage for the company.  And FirstNet will expand into the hospital which opens up a large incremental population.  AT&T has been growing their postpaid base, and Cricket has grown to over 10 million customers.  But the most competitive advantage is content ownership, which is manifested through HBO Max.

 

Stephens clearly stated that any future spectrum purchases were going to need to be self-financed “If I want to buy some spectrum, I need to find some assets to monetize” said the CFO.

 

On the economy, Stephens cited lower gas prices (“a dividend to consumers”), lower home costs, real wage increases, and lower unemployment as key health indicators.  “Our economy has much less risk” because housing has a lower weighting in the economy.  “We see a fairly stable, reasonable economic picture.”  On the business side, because there are more employees “we are seeing more demand for mobility, both hardware and services.”

 

The bottom line from these three presentations is that challengers have more fun, wholesale partnerships are becoming more important to Verizon and AT&T, and that HBO is viewed as a strategic asset by AT&T (versus the network platform as the strategic asset by Verizon).

 

That’s it for this week.  Next week, we’ll hit the CenturyLink presentation and discuss specific questions we have for the wireless carriers as we enter the quarterly earnings cycle.  Until then, if you have friends who would like to be on the email distribution, please have them send an email to sundaybrief@gmail.com and we will include them on the list.

 

Have a great week – and GO CHIEFS!

Chronicling AT&T’s Divestiture

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

 

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

 

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

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

 

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

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

 

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

 

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

 

MCI and AT&T’s Initial Interconnection Discussions

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

 

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

 

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

 

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

 

The AT&T Chairman Speaks

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

 

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

 

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

 

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

 

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

 

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

 

Enter George Saunders

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

 

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

 

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

 

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

 

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

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

 

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

 

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

 

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

Enter Judge Greene

harold greene pic

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

 

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

 

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

 

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

 

The Ending

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

Have a great week… and GO CHIEFS!

 

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

[2] Coll, p. 26

[3] Coll, p. 43

[4] Coll, p. 52

[5] Coll, p. 68

[6] Coll, p. 71

[7] Coll, pp. 75-76

[8] Coll, p. 115

[9] Coll, p. 120

[10] Coll, p. 125

[11] Coll, p. 234

The Long, Long Run

opening picGreetings from Chicago, Illinois (where the pre-winter winds were tame), and Davidson, NC (where it really feels like winter even though it’s mid-November).  This week’s TSB is less about the week’s events and more about strategy fundamentals.  Next week’s edition will focus on several “What if?” questions posed by this week’s article, and we will follow it up with a Thanksgiving edition retrospective review of Dr. Tim Wu’s The Master Switch.

 

 

The Long, Long Run

We have been doing a lot of reading and thinking recently about how telecommunications and technology have evolved, the role of the government in protecting free and fair commerce, and disintermediation of traditional communications functions primarily through applications.

 

Through our research, we have established several foundations of long-term success in the telecommunications industry, which include:

 

  1. Purchase, deployment, and maintenance/upgrade of long-lived assets. These include but are not limited to items such as fiber, spectrum, land/building (including sale/leasebacks of such), and other long-term leases.  Regardless of the type of communications service offered, the greatest potential long-run incremental costs begin with assets like these.

 

When Verizon discusses their out-of-region 5G-based fiber deployments (4,500 in-metro route miles per quarter for multiple quarters) as well as their willingness to lease/ rent to others, that’s a current example of the deployment of long-lived assets.  (When Verizon paid $1.8 billion for the fiber and spectrum of XO Communications in 2016, it was a bet on the long-term value of the asset and not XO’s previous annual or quarterly earnings).

 

All long-lived assets rely at least partly on location.  Fiber, land, building and similar assets cannot easily be moved.  Building or buying assets in the right places matters – a lot.  Local exchange end offices that were in the right places when they were built in the 1950s, 1960s, and 1970s may not be in the right places today.  The same could be said of fiber networks and Points of Presence (PoPs) deployed by MCI and Sprint in the 1980s and 1990s (AT&T’s fiber upgrades came 10-20 years later).  The location of these assets (e.g., locating a PoP at a major point in the city versus a village bus stop) is critical to product competitiveness.  The less moveable the asset, the higher importance to get the initial investment decision, including location, correct.

 

It’s important to note that things like voice switching and eNodeB (tower switching) are not long-term assets.  They are important investment decisions but can be moved (somewhat) more easily than fiber PoPs and tower lease locations.

 

Spectrum is more fungible but is still local (Just ask T-Mobile as they are in the middle of negotiating a lease for Dish’s AWS spectrum in New York City).  And spectrum bands have different values at different times: just ask Teligent (24 GHz spectrum), Nextlink (28 GHz) and Winstar (28 and 39 GHz).

 

Bottom line:  With few exceptions, sustainable telecommunications strategies begin with long-lived assets.  Get these selections right, and subsequent decisions are easier.  Cut corners on long-term assets, and future determinations become a lot harder.  Match the deliberation level to the expected life of the asset.

 

 

  1. Business and technology strategy which drives network equipment (and service) performance. This super-critical element is often ignored under the Michael Armstrong and John Malonepressure of a quarterly earning focus.  For example, AT&T purchased cable giant TCI in 1998 for $55 billion.  AT&T ended up spending over $105 billion on its cable assets, only to sell them to Comcast a few years later for $47.5 billion (news release here – that was a mere 17 years ago almost to the day).  This acquisition was not simply driven by scale (although it was an important consideration), but because AT&T saw value from TCI’s cable plant.

 

After AT&T decided to break itself up into four pieces in 2000 (Broadband, Wireless, Consumer, and Business), they had the opportunity to cover both DOCSIS and DSL technologies (see more in this detailed New York Times article here).  Even then, as shown in the slide below from a 2002 SEC filing, it was contemplated that AT&T would have Digital Subscriber Line (DSL) for some types of data transmission as well as DOCSIS for broadband (not to mention Time Division Multiplexed or TDM, SONET, and eventually Ethernet technologies for enterprise customers).  For a few years, AT&T provided both DOCSIS and DSL services to customers – one can only wonder what the outcome would have been had AT&T Consumer and Broadband remained as one unit.

AT&T architecture slide 2002

Meanwhile, in 2004, Verizon Communications announced their Fiber Optic Service (FiOS) to battle the perceived bundle advantage of cable’s triple play.   It’s important to note that this strategy change came less than 24 months after the sale of AT&T Broadband to Comcast.  Many of the initial FiOS markets will celebrate their 15th birthdays next year.  However, Verizon miscalculated the speed with which the cable industry would respond with their bundles as well as their upgrades of DOCSIS 2.1 (standard released in 2001 with commercial deployments starting in 2003) and DOCSIS 3.0 (standard released in 2006 with commercial deployments by 2008).  The result of cable’s deployment speed was significant – local phone market share shifted to the cable industry by 20-35% over the 2004-2009 time period, quickly depleting the prospects of both DSL (specifically ADSL) and switched access cash flows.

 

Then, in 2016, Long Island cable provider Cablevision (now a part of Altice USA) announced plans to deploy fiber to 1 million homes (and eventually 3-4 million homes) in their territory, removing FiOS’s underlying competitive advantage for those locations.  Per their most recent earnings announcement, Altice is quickly deploying the latest version of DOCSIS (3.1) and fiber to minimize Verizon’s competitive advantage and blunt any impact of 5G/CBRS as Wi-Fi replacement technologies.

LTE logo slideA more remarkable change has occurred in the wireless industry, who collectively rallied around a single common technology standard called Long Term Evolution (LTE) by 2009.  This service was eventually deployed first by Verizon in March 2011 then by AT&T starting later that year (Sprint launched LTE in 2012, and T-Mobile in 2013).  Standardization (versus an alternative of up to three standards – LTE, UMTS, and Wi-Max) streamlined the device ecosystem, strengthening brands like Apple and Samsung, and resulting in the accelerated demise of brands such as Motorola (forced to Droid exclusivity and then low-end), Palm, HTC (who reached its pinnacle with the Sprint HTC Evo which was Wi-Max dependent), and Nokia (Microsoft/ Windows Mobile dependent).

 

Bottom line:  The greater the reliance on DSL advancements (as opposed to fiber overbuilds), the faster value degradation occurred in the telco local exchanges.  Slow data became the competitor-defined brand of the local exchanges, and, with diminishing share of decisions, diseconomies of scale followed.  Wireless carrier adoption of a single, global technology strategy cemented the supply chain for the segment and allowed disintermediation of wireline voice services to occur at a more rapid pace (56.7% of adults are wireless-only as of the end of 2018, according to the Centers for Disease Control).  Technology strategies that run cross-grain end up on the Asynchronous Transfer Mode/ HSPA/ iDEN/ ADSL graveyard.

 

  1. Operational excellence/ marketing and product competitiveness. Once assets have been deployed and the technology strategy has been selected, the customer’s value proposition needs to be defined.  While the underlying evidence of a successful technology strategy is less identifiable in one earnings call, changes in value propositions are clearly evident sooner through lower churn, higher revenues per user, and third-party recognition.

 

For example, Verizon announced this week that they will be the exclusive provider of the new Moto RZRMotorola RAZR, a foldable $1,500 smartphone (more details here).  Strategically, Verizon went this route to remove the prospect of AT&T exclusivity (the original RAZR exclusive 15+ years ago), not because they believed this was a transformational device (read the review in the above link for more details).  Verizon’s Droid strategy (through Moto) and their Google Pixel 3 exclusivity enabled the company to have brand name devices that made Big Red’s network shine.

 

Another good example of a successful strategy is Time Warner Cable’s 1-hour service installation and delivery window across the Carolinas announced in 2012 (announcement here).  This was accompanied by an app that reminded customers that the technician was headed to their home.  They staked a claim on service against AT&T, Verizon/GTE/Frontier, CenturyLink and Windstream and forced each of them to respond.

 

Many case studies have been and will be written on the pricing and product strategy shifts (dubbed “Uncarrier moves”) that T-Mobile has employed over the past seven years.  Three strike us as being supremely critical to their growth trajectory:  a) Simple Choice plan rollout in early 2013 (announcement here); b) Binge On Implementation in 2015 (announcement here), and c) their changes in service strategy called Team of Experts introduced in 2018 (announcement here).

 

Earlier, we discussed the role of co-branding/ exclusivity as a part of a successful marketing strategy.  Many Sunday Briefs have highlighted the puts and takes of bundling wireless with Spotify (Sprint, then AT&T) or Hulu (Sprint) or Tidal (Sprint) or Netflix (T-Mobile) or Apple Music (Verizon) or YouTube TV (Verizon) or Amazon Prime (Sprint, Metro by T-Mobile) or HBO (AT&T).  A few weeks ago, we started to tackle a more fundamental question: “What’s the advantage of owning premium content (AT&T, Comcast, Altice, Canadian wireless and cable conglomerates) versus playing the field (Verizon, T-Mobile, Dish)?”

 

There are many more examples (good and bad) to discuss here (Verizon’s network quality marketing, AT&T’s iPhone exclusivity, AT&T’s multiple attempts to bundle wireless and wireline over the past decade, cable’s coordinated Triple Play strategy, Comcast’s Xfinity development, etc.) but the point is that no operations, marketing, or product strategy can be effective over the long, long run without the effective implementation of long-lived asset and well-conceived technology strategies.  While this sounds elementary to most of you, it’s worth thinking about the abundance of ill-conceived strategies that have destroyed tens of billions of dollars of shareholder value over the past two decades.  As we will discuss in part two of this strategic primer next week (called “What if?”), the blunders were both due to commission and omission.

 

TSB Follow Ups

M Claure and J Legere pic

I attended a private equity conference this week and walked into the cocktail reception to the question “Did you hear that John Legere might go to WeWork?”  I had no response other than to describe the conjecture using my best Legere language, categorizing the report as total BS and stating that it would be more likely for John to lead a challenger technology company like Tesla than WeWork.

 

By the end of Thursday, T-Mobile had lost ~$4/ share over three days (~$3.5 billion in market capitalization) as investors fretted.  Fortunately, by Friday evening news reports emerged that Legere was not going to leave T-Mobile for WeWork… at least yet.  We are not sure whether this is a market hungry for any Adam Neumann follow-up, any out-of-Washington news headlines, or if it’s just jittery in general.

 

T-Mobile’s Latest Olive Branch:  A Nassau County Customer Service Center

T-Mobile raised the stakes this week in their continuing public negotiation with the state Attorneys General, unveiling plans to build a new customer service center in the heart of the New York metro area (and, ironically, smack dab in the middle of the service area of one of their largest MVNOs – Altice).  This is the fourth of five new service center announcements (current ones include two in New York, one in California, and one near Sprint’s current headquarters in Overland Park, KS).  That leaves us speculating about the fifth location – could it be in the Lone Star State or the Windy City?

 

We should expect a steady stream of offerings up to the December 9 trial start.  Local jobs matter even in a full employment economy, and the Nassau County announcement received a lot of local press.

 

Disney+ Success:  10 Million Customers Day One

After some initial reports of activation and streaming hiccups, Disney announced on November 13 that they had signed up more than 10 million customers on the first day of service.  They also announced a new bundling plan (anyone watching college football yesterday couldn’t miss it) which includes Hulu Basic, ESPN+ and Disney+ for $12.99/ month (presumably to blunt the potential impact of AT&T’s HBO Max announcement).  The company also indicated that they would not announce any additional subscriber figures until their next quarterly earnings call.

 

Will this translate into further net additions for Verizon?  The unequivocal answer is yes, but how much remains to be seen.  Disney+ has front page billing on the Verizon website, and they began to run ads this week touting their association with the latest streaming craze.  One of the “What if?” questions in next week’s column deals with Verizon and content ownership so we’ll be discussing their “multiple choice” strategy then.

 

CBA Breakthrough?  We Should Know Very Soon

Last Friday, the C-Band Alliance (CBA), which now consists of all of the major holders of this spectrum (3.7 – 4.2 GHz downlink; 5-9 – 6.4 GHz uplink) frequency except Eutelsat, sent a letter proposing economic terms for a CBA-Led auction.  The anticipated proceeds to the US Treasury are as follows (note that these are incremental amounts to the Treasury based on overall proceeds):

 

Cents per MHz PoP bid                % to Treasury                   % to C-Band Alliance

$0.01-$0.35                             30%                                     70%

$0.36-$0.70                             50%                                     50%

Over $0.70                               70%                                    30%

 

This also comes with a pledge to conduct the auction in a timely manner (within 90 days) after FCC approval which would put it ahead of the Priority Access License for the CBRS spectrum currently scheduled for the end of June.  The letter also includes a vague, good faith effort to build an open access network with a portion of the auction proceeds to improve rural coverage.

The FCC has been asked to speak with Senator Kennedy’s committee later this week, and, to make it on to the FCC December calendar, any proposal will need to be added by next Thursday (November 21). The odds of approval of any proposal by December are diminishing each day, and it’s likely that the C-Band auction will occur after the CBRS PAL auction, likely August or September.  Analysts’ estimates of C-Band auction proceeds range from $10 to $60 billion.  Meanwhile, CBA member stocks are trading at nearly half of their summer levels due to the uncertainty (Intelsat 5-day stock price chart nearby).

 

That’s it for this week.  Next week, we will continue this strategy theme with several “What if?” questions (please submit yours with a quick email to sundaybrief@gmail.com) unless there is other breaking news (perhaps related to the T-Mobile/ Sprint merger or the C-Band auctions).  Until then, if you have friends who would like to be on the email distribution, please have them send an email to sundaybrief@gmail.com and we will include them on the list.

 

Have a terrific week… and GO CHIEFS!

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

opening pic

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

 

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

 

The Implications of This Case are Significant

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

 

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

 

Case Timeline

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

 

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

 

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

 

The Case Against the Merger

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

 

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

 

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

 

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

 

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

    CMA 1 includes New York City and Long Island

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

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

 

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

 

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

 

Reframing and Refocusing the Argument

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

TSB Follow-Ups

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

 

— Performance Plus increased from 60 Mbps to 75 Mbps

— Performance Pro increased from 150 Mbps to 175 Mbps

— Blast! Pro increased from 250 Mbps to 275 Mbps

— Extreme Pro increased from 400 Mbps to 500 Mbps

 

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

 

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

 

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

 

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

iphone 11 availability

iphone 11 pro availability

iphone 11 pro max availability

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

 

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

 

 

 

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

 

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

 

Have a terrific week… and GO CHIEFS!