Home » Frontier Communications

Category Archives: Frontier Communications

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!

 

What Matters in Wireline – Enterprise, Expense Management and Extinction

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

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

Wireline Earnings:  Enterprise, Expense Management, and Extinction

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

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

leichtman broadband end of 2018 estimates

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

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

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

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

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

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

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

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

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

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

 

at&t 2q business wireline financials

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

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

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

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

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

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

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

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

 

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

 

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

 

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

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

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

 

TSB Follow-Ups

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

 

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

 

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

 

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

 

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

 

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

 

Have a terrific week… and GO CHIEFS!

Deeper – Fiber Always Wins (Until it Doesn’t)

Mission Hills notice on Google Fiber

The following articles provide a good overview of the role fiber plays in the telecommunications ecosystem today (there’s some good details on Google Kansas City and Louisville setbacks as well):

  1. An RCR Wireless article that details Verizon’s “integrated engineering process.” It also has some details on the fiber deal with Corning.
  2. Corning (Bob Whitman) and Verizon (Glenn Wellbrock) conversations from YouTube part 1 and part 2.
  3. Altice press release announcing first homes on Long Island to receive 960 Mbps symmetrical speeds for $80/ month.
  4. Google missing their deployment goals for Kansas City, KS and Mission Hills, KS
  5. Telecompetitor AT&T Fiber penetration article in which they talk about doubling market share. The map see in the article (AT&T Fiber cities) is here.
  6. Cincinnati Bell 2Q investor penetration showing that AT&T’s goal of achieving 50% market share is entirely possible with the right content bundles (they are at 44% without the content – see page 7).
  7. Blair Levin’s and Larry Downs Harvard Business Review article on Why Google Fiber failed and how it’s really a success in disguise. Rationalization gone awry.  This might have been the case if their more recent deployments had not damaged their brand.
  8. Local (Louisville Courier-Journal) coverage of Google’s decision to pull out of the Louisville market is here.
  9. Google’s plans to expand their Webpass (60 GHz wireless hub and spoke) service for Multi-Dwelling Units Austin is outlined here.
  10. The Dallas Morning News rant on Frontier’s failures is a classic and outlined here.

Fiber Always Wins (Until it Doesn’t)

opening pic

Greetings from Davidson, North Carolina, where the hazy days of summer will soon give way to the bustle of orientation.  There’s plenty to cover in this week’s TSB, and our main topic will be on the importance of fiber in the telecom industry.  But first, a brief comment on Verizon’s wireless pricing changes.

Before diving into commentary, a quick reminder that we will be posting a “Deeper” section for each TSB on the website.  Here is the Deeper section from last week’s TSB (State AG’s case against the T-Mobile/ Sprint merger).  We usually post these by Tuesday evening.

 

Verizon’s Bouquet of Plans – Something for Everyone?

When Verizon announced their pricing plan changes on Friday, August 2, the collective response was “Why?”

verizon plan description pic

A deeper inspection of each change explains Verizon’s strategy.  They are continuing to lead with a plan that includes no fixed allotment of high-speed data (the Go Unlimited legacy plan was changed as well to “Day 1” deprioritized data).  Verizon also put a stake in the ground:  the minimum rate for any individual 5G plan (or first line in a multi-line scenario) is $80/month.  Why one would purchase a Start Unlimited plan for $80, and forego a fixed allotment of high-speed data (and Hotspot capabilities) offered by the Do More Unlimited (50GB, 15GB can be Hotspot) or Play More Unlimited (25GB) is a head-scratcher.  Bottom line: the 5G pricing tier starts at $80/month with no 4G LTE premium data allotment.

The other interesting development (outside of the $5/ line/ month across the board price decrease) is the continuation of 720p HD video streaming on Verizon’s best plan.  Customers can get 1080p 4G LTE streaming for an additional $10/ month (total cost of $100/ month with taxes & fees versus T-Mobile’s 1080p Magenta Plus plan which includes 50GB of premium data as well as taxes and fees for $85/ month or AT&T’s 1080p Unlimited & More Premium plan which includes 1080p but only has 22 GB of premium data allotment for $80/ month).  It baffles me that Verizon sells devices with amazing screen solutions like the Samsung Galaxy Note 10 (3040 x 1440 pixel screen – Quad HD+) and the Apple iPhone XS Max (2688 x 1242 pixel resolution), advertise (and win) speed test awards, yet limit video streaming to ~5-8 Megabits/ second.  In the past, the argument was that smartphone resolutions weren’t good enough to tell the difference, but manufacturers have caught up and 5G adoption is still several quarters away for most wireless customers.

Bottom line:  There are likely no broad implications to the wireless industry from Verizon’s recent pricing changes.  This should not trigger a response from AT&T, T-Mobile or Cable (although making Full HD (1080p) standard on all pricing plans would be a very un-carrier move for T-Mobile).  It’s likely that if AT&T were to change their pricing plans as a part of a broader 5G announcement, they would align monthly rates to speeds (e.g., Cricket Wireless is cheaper but download speeds are capped).  Big Red is in a holding pattern until they can fully deploy 5G (more on that below).

 

 

Fiber Always Wins (Until it Doesn’t)

While I was running Access Management for Sprint ($3+ billion annual expenses at the time), we would frequently discuss fiber opportunities:  bankruptcy-driven system purchases, sub-duct IRU availability (sometimes packed with fiber), joint builds with other carriers, fewer fibers with Dense Wave Division Multiplexing, etc.  Our motto, developed by our lead engineer, was “Fiber Always Wins.”  Fiber drove our investments, first connecting to the incumbent Local Exchange Carrier (LEC), then to commercial buildings, data centers, wireless switching centers, small cells and cell towers.

Meanwhile, Verizon was building their FiOS network which at peak (2015, prior to the sale of former GTE properties to Frontier) passed 20 million homes.  While the current number of homes passed is not published, most analysts peg the post-Frontier total at 15.5-16.1 million homes.  Given Verizon’s current FiOS internet count of 5.84 million, they have approximately 37% share, with about 5-10% subscribed to copper or wireless alternatives and the remainder (50-55%) subscribing to cable.  FiOS comprised 87% of the total 2018 Consumer Markets division revenue.

Verizon’s FiOS fiber experience and the acquisition of XO Communications led to the formation of the One Fiber initiative (2019 RCR Wireless article on Fiber One is here which includes details of Verizon’s multi-year purchase agreement with Corning).  This cross-company cataloguing and joint planning is reshaping how Verizon invests billions of annual capital dollars nationwide.  As a result, as they stated in their most recent 10-K, “We expect our “multi-use fiber” Intelligent Edge Network initiative will create opportunities to generate revenue from fiber-based services in our Wireline business.”

Bottom line:  FiOS fiber deployments throughout the Northeast are extremely valuable and provide Verizon with a time-to-market advantage.  Nationwide, the fiber that is being deployed for 5G will improve wireline/ Ethernet/ cloud competitiveness.  One division feeds the other.

 

ACSI Internet service provider results by year.png

Customers love FiOS.  The nearby American Customer Satisfaction Index (ACSI) Internet Service Provider satisfaction survey results clearly show that both Verizon and AT&T (U-Verse fiber now passes more than 12 million homes) are preferred over cable.  Notably, Verizon’s lead over Altice (Long Island cable provider) is back to seven points.  This is one of several factors driving Altice to deploy fiber to the home (the only US cable company to commit to a 5 million home buildout).

Similarly positive results can be seen from the most recent J.D. Power Residential Wireline Survey, with Verizon taking top honors for both Internet and Television service.  Fiber speeds result in higher spending per household, and the long-term maintenance costs for fiber have been proven to be much lower than copper.

 

When does fiber not win?  Overbuilders using fiber are having mixed results.  The most heavily marketed competitive fiber provider over the past ten years, Google Fiber, has been a dud – there’s no two ways about it.  Experts like Blair Levin and Larry Downs (Harvard Business Review article here) believe that Google was using the Fiber effort simply to prod incumbents to accelerate their broadband deployments, but that’s inaccurate – they are still investing, expanding, and trying to be a disruptive broadband provider in their markets.

Google Fiber is generating the majority of Alphabet’s “other revenues” ($162 million in 2Q) and contributes in a small part to the content commitments needed to make YouTube TV affordable (Google TV customers are less than 75,000 and YouTube TV likely has more than 1 million paying subscribers).  Analysts estimate that Google Fiber probably serves no more than 475,000 broadband subscribers today, with 20% of those in their first market – Kansas City.  Google’s efforts to expand in Louisville using nano-trenching (two inches into the asphalt as opposed to six for micro-trenching) failed miserably and, as a result, Google Fiber ceased operations in Louisville last April (CNET article here).  Their acquisition of Webpass, which uses 60GHz spectrum to transport wireless data between fiber-fed buildings, is finally beginning to expand beyond their legacy markets to Austin (see blog post here).

Google Fiber would best serve its shareholders by either a) selling the asset or b) initiating efforts to wholesale fiber to wireless providers and business-focused managed service providers.  The value of deployed fiber in highly desired suburban neighborhoods would be welcomed by a variety of telecommunications companies.

Which brings us back to Verizon.  Could they have a joint build and/or fiber swap relationship with Google?  At least enough to enable Webpass (through Verizon’s XO communications asset) to expand rapidly to 60/80/100 markets? That would shake things up considerably, and multi-dwelling units are not a target of Google’s 5G initiative.  It isn’t lost on most telecom industry followers that Google decided not to initiate any builds in Verizon’s legacy Northeast telco territories.  Given their fairly strong corporate relationship (Pixel, YouTube TV), why not deploy together?

While Google was busy doing their initial rollouts, Frontier was acquiring the former GTE properties from Verizon.  They did this in two primary transactions:

  1. In 2009, Frontier announced the purchase of 4.8 million access lines from Verizon (all former GTE except for West Virginia which was a legacy Verizon asset) for $8.6 billion (~$1800/ line). Verizon received $5.3 billion in Frontier stock from the transaction – the remainder was in cash and assumed debt;
  2. In 2015, Frontier completed the purchase of GTE properties by purchasing the assets of California, Florida, and Texas (which included 1.6 million FiOS Internet and 1.2 million FiOS TV subscribers) for $10.5 billion ($9.9 billion in cash and $0.6 billion in assumed debt).

At the end of 2016, Frontier’s service territory looked like this (5.4 million customers including 4.1 million broadband lines spread across 29 states):

frontier service area map 2017.png

Since that time, the rest of the broadband industry has continued to grow, but Frontier has managed to lose 1.1 million customers (> 20% of its base) including 0.5 million broadband customers (> 12% of the base) in a mere 10 quarters.   Customer churn is rising and currently exceeds 25% on an annualized basis.  Even though the fiber base is being upgraded to 10 Gbps capacities, the FiOS base continues to lose customers.

We talked at length about Frontier’s woes in the TSB titled “What’s Changed Over the Past Three Years?” Last week’s stock performance (down an additional 27%) has significantly narrowed Frontier’s options.

Bottom line:  When does fiber not win?  When it’s the secondary/ tertiary focus of the company (Google), and when it’s hampered by the pressures created by aging copper plant (Frontier).

Billions of dollars of value have been created from fiber deployments, and local exchange providers (AT&T and Verizon) should be able to leverage previous fiber deployment for small cell and other high-bandwidth deployments.  Fiber wins… most of the time.

Next week’s issue will explore the industry implications of Apple’s new credit card (CNBC teaser article here).  If you would like a copy of either the Top 10 Trends or the IoT Basic presentation discussed in last week’s TSB, please let us know at the email below and we’ll get you a copy.

Until then, if you have friends who would like to be on the email distribution, please have them send an email to sundaybrief@gmail.com and will include them on the list.

Have a terrific week!

Sprint’s Head is Above Water

opening pic (15)Mother’s Day greetings from Charlotte (Wells Fargo Championship pictured) and Dallas.  Thanks again for all of the well wishes concerning my new job, and we’ll miss the interaction with each of you through The Sunday Brief every week.  Again, our last issue will be June 5 (four more issues including this one, as we’ll take a break for Memorial Day) and we have a lot to cover before then.

 

This week, we’ll spend some time discussing Sprint as well as the state of the cable industry.

 

Sprint’s Head is Above Water

There’s a lot to cover with Sprint’s earnings (full archive here).  Most importantly, they eked out 56,000 postpaid net additions (22,000 of which were phones) which translates into 0.18% growth (in contrast, T-Mobile grew their branded postpaid customer base by 3.3% or 18x faster).   Not exactly a marker that announces a comeback, but better than Verizon and AT&T phone net additions.

 

Sprint has purchased another year through a combination of collateralized loans, favorable lease financing terms, and dramatic cost reductions.   Their head is above water, but that’s about it.  Proclaiming a comeback is not only premature but incorrect, as the headwind of increased (lower ARPU) postpaid tablet churn needs to be offset by increased smartphone additions.  Sprint has no AT&T Mexico or Go90 to point to:   high ARPU smartphone growth is the only solution to Sprint’s problem. Incidentally, when we were in Stockholm – my buddy broke his arm one night doing something stupid, and we had to get a låna pengar direkt to get him to a hospital.

 

In last week’s Sunday Brief, we spent some time discussing what events would need to transpire to cause T-Mobile to stumble.  We discussed spectrum/ capacity, increased competition from Comcast and the cable industry as a whole, and from more activist regulation.  Admittedly, it’s hard to concoct the scenario that causes T-Mobile to weaken.

 

Contrast that with Sprint.  Everybody loves the underdog and wants to see them succeed.  But it’s just as hard to craft an equation that results in Sprint growing at T-Mobile’s rates as it was to write last week’s column.  How can Sprint regain its brand and get on the right track?

 

  1. Focus on data speeds. No doubt, Sprint’s Network Vision initiative is driving Sprint’s voice leadership.  We have looked extensively at the RootMetrics data (all 125 markets with a rolling six-month view) and Sprint either wins call quality or gets real close (within 3 points out of the 100-point scale) in 86% of the markets.  That’s a very respectable figure.  But Sprint is performing equally poorly with network speeds, with a material difference between Sprint and the winner (more than 3 points) in 91% of the markets.  In fact, Sprint has only won five markets of the 125 measured by Root Metrics over the past six months:  Corpus Christi (thanks in large part to the 2014/ 2015 Dish fixed wireless trial), Cincinnati, Denver, Houston and Las Vegas.

 

Improved data speeds are going to be needed to retain the current base.  Sprint has attracted many bargain hunters with 50% off service rates and attractive lease options, but what will keep the base from moving back to their previous carrier?  And what will compel previous Sprint customers to return?  One answer:  data speeds.

 

When Sprint can prove (hopefully through word-of-mouth testimonials) that their data network can perform consistently (and geographically) better than T-Mobile and Verizon, then their larger competitors should get worried.  They have done this in five markets, and have 120 left to go.

 

  1. Have a benchmark differentiator that others cannot (easily) replicate. We talked about this when we put together the 2016 “To Do” list for Sprint.  Sprint needs a “Push to Talk” equivalent for this decade.  More than a gimmick or headline for a commercial – something that attracts customers but also solves a pain point.  Here are two that we think might be worth exploring:

 

  1. Develop a postpaid retail relationship with Xiaomi to be their flagship phone provider in the US. The Chinese carrier has been very successful in its home country, but overseas growth has been elusive.  They received very strong reviews on their Mi 5 smartphone (see The Verge review here) which retails for $260, and their Mi Pad 2 has seen extremely strong demand in a very weak tablet market.  Get a little bit of exclusivity, and tune the device to work particularly well with Sprint’s 2.5 GHz network.  The result would be a great device with minimal lease payments (good for all balance sheets) and an association with the challengers.

 

  1. at&T fee structureEliminate the device addition fee for all customers. This “fee free” component would be a body blow to the industry and present Sprint as a viable alternative to Verizon and AT&T.  Shown nearby is AT&T’s current fee structure:  each new device carries a $10-30 monthly fee in addition to data usage.  Does the carrier incur any material additional costs to add a device?    Would a “fee free” structure be easy for Verizon and AT&T to replicate without significant economic harm?  It’s unlikely that they would match it right away, and T-Mobile does not have a shareable data plan to match Sprint’s offer.  Would this allow Sprint to have a competitive headline rate and still grow profitably?  Absolutely.  Sprint could build their future around the connected world with a commitment to no device add-on charges.  It’s this decade’s PTT.

 

  1. latency grid sprintnetSell the Internet backbone while there is still time. Sprint is a fundamentally different company than it was 2-5-10 years ago.  While they continue to report wireline division earnings on a separate basis, you would be hard pressed to find a wireline organizational chart in Overland Park.  Sprint has a world-class IP backbone which is being constrained by shrinking capital budgets.  As the nearby chart shows (see corresponding link here), SprintLink performs extremely well against its peers.  While its role in the Internet community is not what it was a decade or two ago, Sprint is still viewed as a legitimate and independent authority on routing, address management, and other critical infrastructure topics.  Others need Sprint’s capabilities and would pay for their embedded base.  Sell it now, before it is too late.

 

There are more ways that Sprint could create competitive differentiation, and they are taking a lot of steps in the right direction with third-party network maintenance, software-based network functionality (although small cells still require fiber) and personalized self-care solutions.

 

Bottom line:  Sprint is in fourth place, and they need to plan for a future where they are in third or second place.  The network is not ready to be scaled nationally, but could be in certain markets by the end of the year.  The LTE network reaches close to 300 million POPs, but Sprint’s continued dependence on CDMA as a backup will hinder their ability to compete against Verizon (who could introduce an LTE-only phone as early as 2017).   Sprint needs to get creative and take risks.  Otherwise, they will become the wireless equivalent of DSL to the telecom community (good, but not good enough).

 

Thoughts on Cable Performance

comcast revenue growth ratesIt’s great being Comcast in 2016.  Video is stable (Comcast actually grew video subscribers from 23.375 million in Q1 2015 to 24.0 million in Q1 2016 with minimal loss in ARPU), and High Speed Internet continues healthy growth (1.4 million annual and 438K sequential growth, while rival AT&T shrunk by 250K over the same period).  Business services remains on a roll (17.5% y-o-y growth) and segment revenues should top $6 billion in 2016 even as they are just getting started with medium and enterprise customers.

 

Everything is coming up roses for the nation’s largest cable company, and the best part of it is operating cash flow (OCF).  Comcast’s cable unit generated a whopping $19 billion in OCF for 2015 and the first quarter of 2016 would seem to indicate that it’s going to be a slightly better year. In comparison, AT&T generated $7.9 billion in cash flow in the first quarter from operations but that figure includes their wireless unit (Verizon’s wireline EBITDA is less than $2.3 billion quarterly).  It’s likely that Comcast is now the most profitable (quantity, not margin %) wireline operator in the US.  As we discussed in a previous column, they enjoy low leverage relative to their peers, and have just under $6 billion in the bank for the 600 MHz spectrum auctions.  Bottom line:  It’s great to be Comcast.

 

The rest of the cable industry is going through a massive consolidation through the rest of 2016.  This would seem to open the High Speed Internet door for Verizon, AT&T, Frontier and CenturyLink:  Use the disruption created by cable consolidation to increase telco share of decisions.  Traditional telcos have their own issues, however:  Verizon strike, Frontier’s transition after acquiring TX, CA, and FL FiOS properties from Verizon, and CenturyLink’s overall turnaround efforts make the opportunity to quickly seize market share more complicated.

 

Like Comcast, each of the cable companies are growing business services (Charter’s grew at 11.9% annually, while Time Warner Cable’s grew at 13.4%), and High Speed Internet additions were good (in fact, the combined Charter/ TWC/ Bright House Networks added more HSI subscribers than Comcast).  Based on the earnings reports to date, it’s likely that cable’s share of total HSI additions was very close to 100%.

 

Without a doubt, there will be threats to the current model.  Hulu is going to come out with a live streaming service similar to (or better than) Sling in 2017 (see Wall Street Journal report here – subscription required).  This will require more powerful modems and many bandwidth upgrades.  As Ultra HD proliferates (it needs a constant 25 Mbps according to Netflix), the pressure to upgrade will continue to accelerate.  This is the push and pull of being a cable operator:  How much for the bandwidth upgrade versus promoting the current video scheme?  Can Hulu market their over the top service better than cable?  And what about caps (and the government’s response if they are triggered too often)?

 

Bottom line:  Even with the turmoil of consolidation, the cable industry is in the catbird’s seat.  They should aggressively push DOCSIS 3.1 as their standard and charge customers the premium monthly service fee it deserves (and encourage customers to purchase their own modem if that is their preference).  After the “shiny new thing” hype that is OTT has died down, most customers will see that OTT expands and personalizes content options (primary benefit) while saving some money (secondary benefit).  Like all hardware transitions, however, the Hulu effect will take 3-5 years to fully materialize.  Until then, the good times will keep rolling.

 

Thanks for your readership and continued support of this column.  Next week, we’ll continue earnings analysis and hopefully be able to opine on the Appeals Court ruling on the Open Internet Order.  As a result of the job change, we are not going to accept any new readers, but you can direct them to www.mysundaybrief.com for the full archive.  Thanks again for your readership, and Go Royals!