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The Unintended Consequences of an Attorneys General Victory

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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

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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!

Smarter, Smaller, Speedier – Our Ever-Changing Consumer World

 

opening picGreetings from the slopes of Fraser, CO (pic from the previous week) and Lake Norman, NC where we rang in 2020, toasted with friends and caught up on sleep.  We hope each of you have a banner year filled with happiness and success.

 

About 170,000 of us are predicted to descend on Las Vegas, Nevada, starting today for the annual Consumer Electronics Show (CES).  It’s a logistics and endurance test for most folks with three separate exhibition halls and scores of events.  Most importantly, it’s a test of growth, as new technologies compete for global marketing and development resources alongside existing standards and protocols.

 

This week, we’ll examine three of the changes that are taking place.  But first, some commentary on events of the past two weeks.

 

 

T-Mobile/ Sprint Trial Prognostication and Two Omissions…

 

The Attorneys General v. T-Mobile, et. al., trial finished and opinions poured in while the rest of us were either preparing, hosting or traveling for the Christmas holiday.  Light Reading posted “An Insider’s View of the Sprint/ T-Mobile Trial” on Christmas Eve in which Matthew Lee described in detail the volleys over the two week event.  His conclusion (note – Mr. Lee is a good reporter but not a telecom analyst) was “A betting man, having observed the trial, might predict that Judge Marrero will deny the states’ request to block the merger, thereby letting it go forward, sometime after he hears final oral arguments next month.  But when a multi-billion dollar merger comes down to a single individual’s opinion, one never knows.”

 

This echoes the opinions of two of three noted telecom industry analysts (Walt Piecyk with Lightshed, Rick Prentiss at Raymond James, and Paul Gallant at Cowen), summarized here in a Fortune column.  As we noted a in the December 23 TSB, Judge Marrero conducted a speedy trial which we think has been widely misinterpreted as “his mind was already made up.”  Attorneys like the spotlight, and, as Lee describes in this column, the states appeared to be more focused on the “but you said… gotcha” comments of T-Mobile, Sprint, and Deutsche Telekom executives.

 

There are two items that did not receive enough attention in analysts’ comments, and dish logoperhaps the trial itself.  First, there is a closed door session in which Charlie Ergen, the Dish CEO, describes the Dish go-to-market plan and their work with one or more large companies (presumably Google, but we cannot rule out distribution partners like Apple or Best Buy).  The classified documents that were distributed in that session could be a total smokescreen, or (more likely), clear evidence that Dish can create a competitor to Verizon, AT&T, and the new T-Mobile.  While Dish is likely to receive at least $10 billion in new financing (and a new 5G architecture called “stand-alone 5G” that will support lower cost equipment), a major distribution partner adds credibility.

 

It’s important to note that the merger opponents’ message has shifted from “Dish cannot build a meaningful competitor (presumably ever)” to “Dish cannot build a meaningful competitor in four years.”  This is a subtle but important change and a goal post movement – the same states that are suing to block the merger are the ones that can actually accelerate Dish’s deployment (!).

 

The second item that seems to have been missed in the trial is that the fourth competitor already exists in wireless, and it’s not Dish.  Technology is moving at a very rapid pace, and new models are emerging that could render the “one phone, one SIM, one service provider contract” model obsolete.  We have discussed the role of eSIM in several columns (good summary is here), and we recently discussed the DOJ settlement with AT&T and Verizon concerning their eSIM implementation objections here.  Enabling choice within many existing devices (iPhone XR, XS, XS Max, iPhone 11, iPhone 11 Pro, and iPhone 11 Pro Max all have the technology) seems like an instant alternative to the SIM-switcher model, and the new T-Mobile agreed to implement the technology in their settlement with the DOJ.  Combine eSIM with Apple Card and monthly financing, and the ties that traditionally have bound wireless subscribers to Verizon or AT&T are gone.

 

But wait, there’s more… Last month, the FCC announced that they were considering employing a model similar to that used for CBRS (spectrum sharing, which eliminates the initial spectrum purchase barrier to entry) in the 3.1 – 3.55 MHz range, just below the CBRS band (Light Reading article here).  Combine this with the max 150 MHz spectrum available for CBRS (re: the CBRS Preferred Access License does not lock up the spectrum as a traditional license purchase does – it merely grants preference) and you have the spectrum equivalent of the new T-Mobile.

 

And, if you still want more, look at how Altice implemented their MVNO agreement with Sprint which allows for something called “core control,” the holy grail for the MVNO community, which easily allows new carriers to switch from one network to the other, effectively creating a “least cost network” for the wireless industry.

 

Bottom line:  The FCC, Congress and the states can push the technology envelope and create a viable, facilities-based fourth alternative for MVNOs.  They can do this as a hedge to Dish’s success or enable Dish to be an active participant/ beneficiary of the process.  Shared spectrum + eSIM is a tasty cocktail for competition and will only get better with time.

 

 

Cincinnati Bell and Brookfield – If a Tree Falls in the Forest…

On December 23, Cincinnati Bell announced that they would be acquired by Toronto-based Brookfield Capital in a transaction valued at $10.50 per share or 7.6x trailing 12-month EBITDA.  Including debt, the total transaction value is $2.6 billion.  For those of us who have been following the Cincinnati Bell process, this seems a bit rich even for an infrastructure fund that’s trading at 2.32x trailing 12-month revenue (the transaction is for 1.8x revenue).

 

While it’s a terrific value for the CBB shareholders, it’s difficult to read a lot into this for the local telephone industry prospects generally.  CenturyLink (CTL), a decent proxy for the local phone industry, has dropped 4% since the CBB deal was announced, and has been a better investment for shareholders over the past two years (CTL down 27% vs 45% for CBB).

 

As we discussed in our three trends TSB here, home broadband is going to be getting a lot of attention this year.  This is going to place more pressure on SMB, Enterprise, and Wholesale (carrier) sales for the respective local telephone divisions.  But Verizon (in particular) is aggressively deploying fiber which is not going to stay idle, and capacity is going to be increasingly deployed to be the primary last mile for many branch/ small locations, especially in suburbs.  We’ll try to focus on this point in the fourth quarter earnings releases (although the information is increasingly harder to obtain), but last mile access is a disproportionately large portion of local carrier provider profits with rich margins and multi-year contract terms.  Special access is ripe for disruption, and Verizon will be at the forefront of that battle as a part of their One Fiber initiative.

 

All of this begs the question “How does CBB/ Brookfield impact AT&T’s thinking?”  Certainly, there are bankers touting how large swaths of AT&T’s footprint could be monetized at the CBB benchmark of $2,300 per revenue generating unit (RGU).  The better way to generate value (and we are confident that Brookfield is thinking about this) is to buy the “petals” that have value.  The latest telephone service area map for Ohio is shown nearby.

ohio telephone service areas

CBT (pink) is the Ohio area servicing Cincinnati.  UTO (blue) stands for United Telephone of Ohio, GTE for Frontier, and AIT for AT&T.  What’s the specific value of the Warren, Ohio territory?  It’s an island exchange which brings all sorts of increased costs and inefficiencies.  According to census reports, Warren County’s population is growing just over 9% in the past nine years (20,000+ increase).  Why not do what cable did 20+ years ago and re-cluster?  What’s the holdup?

 

Then there’s the issue of GTE/ Frontier which is teetering on the edge of Chapter 11, and Windstream (WRT in purple and ALO in green) who are already in bankruptcy with emergence not expected until early summer (at best).  Island exchanges made sense when it was a local telephone world and cable was providing TV only – the word for 2020 in the local telephone industry should be “recluster” and AT&T should lead the way.

 

Bottom line:  The CBB/ Brookfield transaction is rich and all cash.  There’s good value in the transaction if they can use Cincinnati as a base and purchase “petal” exchanges that are growing from others at attractive rates.  This is not a balance sheet or local copper renaissance, but a re-clustering project that can provide an effective wireline competitor to cable.

 

 

CES Preview – Smaller, Smarter, Speedier

Like many of you, I’ll be at CES this week walking the floor, hitting a few parties (including our first TSB CES event at Gordon Ramsay’s Pub on Wednesday), and taking in a few keynotes.  If you prepare for it, CES is actually a very informative and fun event, but bring comfortable shoes.

 

The things I am looking for at CES can be summarized as follows:

  1. Smaller. Chipsets are getting smaller.  Small cells are getting smaller (see nearby accelleran small cell picpicture of the Accelleran E1000).  Lots of focus will be on the size of the TV screen, but the computing power now present in many of these devices is astounding.  For smartphones, sizes are going to stay the same, but we are going to push pixels per inch (ppi) into the 550-600 range even for mid-range phones, so not a shrinking of the device itself, but packing a more vivid display into a similar screen size.  There’s a lot of value in miniaturization, particularly as it relates to health care and wearables, and I’m looking for a few good examples at the show.

 

Kohler smart shower head pic2. Smarter. Intelligence is being added to nearly all consumer electronics devices.  Worries about Alexa and Google listening into every spoken word are diminishing as their software appears to be embedded everywhere.  This shower head by Kohler (pictured nearby, article here) is a perfect example of something that was made smarter so we could sing better (no doubt, any advertisements for shampoo, soap, or similar products will be completely coincidence).

 

A good question I’ll be asking at the show is “How is the smartness of the next device added contributing to the overall intelligence of the platform?”  Can Alexa be smart enough to play my CNBC Sqwak Box audio feed with minimal prompting while I am in the shower provided it’s after 6 a.m. and before 9 a.m.?

 

Smart detection (vibration, sound, sight, etc.) feeds analysis and recommends (or directly undertakes) activity.  Clusters of correlated events (same time, same neighborhood, same school, same religion) can improve efficiency and customer experience, but it can also mess up.  I am looking for examples where the large analytical pools are constantly improving while protecting the privacy of an individual event (the evolution of Google Maps is a terrific example of improvement).

 

  1. Speedier. As we see the advent of 8K TVs with 5G and computer monitors, it’s important to remember that the speed requirements for these new electronics are not a doubling of 4K.  According to this article from ExtremeTech, even with compression included, an 8K signal will require 500 Mbps per stream (compare to a 1080p stream at about 10Mbps).  Something to think about as we contemplate the role of higher resolution in our homes and offices.   I’ll be looking for examples of devices that deliver superior experiences yet are cognizant of the bandwidth limitations for most offices and households (not to mention looking at some cool 8K cameras and how they would get their live signals back to a transmission tower).

There is always a lot of interesting technology at CES.  Most of it fails to live up to expectations.  With more solutioning (hardware + network + software/ intelligence) at this year’s show, the utility of the technology might actually improve.  More on that in next week’s column.

 

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 – see you at the show – 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

Three More Up and Comers

opening pic

Greetings from Fraser, CO, where near zero temperatures are the norm in December.  We hope each of you have a very restful and happy Holiday season.  2020 promises to be an eventful year and we will be here to follow every inch of it.

 

Due to popular demand from our September column titled “Three Up and Comers” which highlighted three companies who had demonstrated enough progress to warrant significant investments (updates on each below), we are ending the year highlighting three additional companies who are impacting the telecom landscape.  Next week, we will have a book review of Steve Coll’s landmark work “The Deal of the Century: The Breakup of AT&T.”

 

The AGs v. T-Mobile/Sprint Trial Has Ended – What Happens Next? 

Here’s a brief summary of what happened over the last two weeks in the T-Mobile trial:

  1. The judge, Victor Marrero, started the trial by cancelling opening statements. This is john legere at trial 2not surprising (since it’s not a jury trial), but seemed to set an accelerated tone nonetheless
  2. Academics argued over whether the merger would lead to cost decreases
  3. Sprint executives painted a bleak picture of Sprint’s future if the merger is not completed, with both Chairman Marcelo Claure and CEO Michel Combes echoing previous comments that Sprint would serve fewer markets and likely raise prices (these have been covered in several TSB).
  4. T-Mobile executives extoled the future competitor to AT&T and Verizon if the merger is completed. T-Mobile CEO John Legere predicted that Sprint would be “sold for parts” if the merger was not completed.
  5. Dish CEO Charlie Ergen, to the AGs surprise, delivered three $10 billion high confidence (funding) letters from JP Morgan, Deutsche Bank, and Morgan Stanley during his testimony (and a $1 billion loan from Softbank for general purposes if the merger closes)
  6. The FCC and DOJ filed briefs in support of the merger as the trial closed
  7. Both sides have the ability to provide Statements of Fact by January 8 with closing arguments by January 15.

 

As other analysts have noted, the odds of approval were boosted by Ergen’s and Legere’s testimonies (and hurt by Claure, Combes, and other Sprint executives).  From reading various accounts of the trial Twitter feeds and transcripts, it’s apparent that Judge Marrero is fully cognizant that if he rules with the state AGs, he’ll be ruling against Assistant Attorney General Makan Delrahim and FCC Chairman Ajit Pai.  That may be the deciding factor – Judge Marrero will clearly need to explain why the DOJ settlement is too risky and anticompetitive (and not create a firm basis for appeal).

 

A lot of things can change between now and January 15.  The states had a weak series of arguments going into the trial, and they did not materially advance their position.  However, there’s more than a slight political tinge here — foreign to previous telecommunications mergers (including T-Mobile/ MetroPCS and AT&T/ Cricket Wireless in the Obama administration, and Sprint/ Nextel, Sprint/ Clearwire, and Verizon/ Alltel Wireless mergers in the George W. Bush administration).

 

b ebbersBernie is Out of the Slammer

In case you missed the news, convicted felon and former CEO of Worldcom, Bernie Ebbers, is scheduled to be compassionately released this week according to news reports (New York Times and Wall Street Journal articles are linked).  Ebbers, now 78, is suffering from dementia.  While we have significant issues with the way he led Worldcom (TSB that examined the fraud a decade later is here), we wish the best for him and his family as he is treated.  It’s a good reminder of how much our industry has evolved over the past two decades.

 

 

 

Update to the Previous “Up and Comers” Class (Starry Wireless, Cologix, and Helium)

 

Before discussing the new trio of new companies to watch, it’s worth updating the status of the three we covered back in October:

 

  • Starry Wireless continues to be focused on improving their footprint in their core markets (Los Angeles, Boston, Washington DC, Denver, and New York City). A recent article in Light Reading highlighted that the company did not achieve their market expansion goal of 22 markets but did disclose that they are well on their way to fourteen (five above plus nine that are in “active build” status).  The company is in full marketing mode, having recently launched a website (betterbroadbandnow.com) targeted at municipalities considering the impacts of broadband competition.   Since Starry just completed a fundraise, it’s not likely we’ll get a lot of public information on their progress until their next batch of markets launches.

 

  • Cologix has not made a lot of headlines since their $500 million growth capital announcement a few months ago. In our article, we cautioned the company to be prudent in their investments, and they appear to have followed that course.  In fact their most recent infrastructure activity has been focused on expanding their current markets (more power in Montreal, a third data center in Dallas, etc.).

 

  • Helium, in contrast, has been on a tear in the past two months, deploying over 2,027 hotspots in the first quarter of launch (see Twitter announcement here) and garnering awards from Time Magazine as a 2019 Special Mention Award and prominently placed in the 2019 IoT For All Holiday Gift Guide. Brad Feld, a well-known entrepreneur, announced through his blog that he was ordering 50 to cover his hometown, Boulder (CO).  They still have some work to do with IoT providers but are likely a few announcements away from hitting the tipping point with OEMs (they appear to be well on their way to hitting critical mass on the user-provisioned network).

 

As we noted in a subsequent TSB, we should have had CBRS pioneer Federated Wireless on the original list, and there are plenty of updates where we have highlighted their progress.

 

 

 

New additions to the “Up and Comers” Class

To be considered an “Up and Comer” a company must have had a funding round in excess of $30 million in the calendar year that they are selected and have an influential or disruptor status in their area of expertise.  Here are three companies that we think are excellent additions to the four above:

Netly Fiber (latest Funding round of $40 million led by Uniquity Partners closed netly logoDecember 10).  We have discussed fiber a lot in the last several months, starting with the TSB “Fiber Always Wins (Until it Doesn’t)”. Netly’s corporate description is as follows:

 

“We provide the layer 1 digital infrastructure that Service Providers need to innovate and build the ultimate internet experience for their end users. We deliver dedicated, unsplit fiber strands to every location in a city, and our tenants provide the end-to-end electronics to light the fiber. We offer long-term wholesale contracts to world class service providers so they can deliver 21st century solutions.”

 

solana beach mapThe most interesting aspect of this description is “every location in a city.”  This is a critical driver for Internet Service Providers such as Ting Internet, who announced that they would be lighting up Solana Beach, California after Netly completes their deployment in 2020.  It will be very important for wireless service providers like Verizon Wireless and T-Mobile/Sprint (assuming they are merged), who will be able to immediately access critical fiber strands at reasonable prices.  (Interestingly, Solana Beach is served by AT&T, yet a search of both zip codes on Broadbandnow.com reveals that only DSL-based Internet services are available.  Perhaps AT&T will come calling!).

 

Netly is run by two former Nextel executives (Jack Demers and Jim Hanley) and advised by former Sprint Nextel Chairman Tim Donahue and former Nextel Chairman and telecom pioneer Morgan O’Brien.  $40 million is a drop in the bucket for fiber construction, but, if they show that they can make the plan work (I think they will receive significant demand), the model for municipally-controlled, independently managed networks for second and third-tier markets might be feasible (we are skeptical as to its national ubiquity, but they have a host of strong partners behind them).

 

 

onecom logoOnecom (latest funding of 100 million pounds (~$130 million) closed in late July 2019 and was led by private equity buyout specialist LDC).  While traditional telecommunication firms struggle to survive (see the Windstream bankruptcy emergence delay announcement last week and the plight of Fusion Connect), UK-based Onecom is growing rapidly serving business customers and recently inked a 600 million pound deal with Vodafone (details here).

 

Managing the conversion from wireline to wireless (led by 5G and NB-IoT) is quickly becoming the firm’s specialty.  Onecom has also successfully completed four acquisitions over the past six years.  We will focus on their secret sauce in an upcoming TSB (hint: it’s about smart employees who are focused on technology transition and business productivity), but thought that the investment above, combined with an additional credit line of 30 million pounds from HSBC, warrants “Up and Comer” status.

 

Augury (2019 funding of $33 million includes $8 million Qualcomm Ventures investmentaugury logo which closed on December 12; total funding of $59 million since inception.  Largest investor is Insight Ventures).  The word augury is defined as “a sign of what might happen in the future” in the Cambridge English Dictionary.  We have been following this company since the summer, and the Qualcomm Ventures investment a few weeks ago rekindled our interest.

 

Augury describes their business purpose as follows: “We combine artificial intelligence and the Internet of Things to make machines more reliable, reduce their environmental impact, and enhance human productivity.” Simply put, the company listens (via installed sensors) to machines, establishes a baseline of the soundwaves, temperature, and magnetic field data that’s produced, and then uses artificial intelligence to detect abnormalities.

 

augury halo product in action

 

The New York-based company has established relationships with 40 of the Fortune 500, which is amazing considering they have been in business for eight years.  Saar Yoskovitz, Augury’s COO, has a background in speech recognition, which uses the same soundwave patterning (to convert into a search string) that would be used in an industrial machinery application.

 

What makes Augury unique is their integration into business operations software which extends the utility of their products beyond predictive failure to total business productivity.  This allows managers to focus on improving overall asset utilization and improving defect rates.  That’s different from the performance of their predecessors.

 

How broadly Augury can extend their product line is anyone’s guess, and that’s likely what has attracted large telecom investors such as Qualcomm.  As sensor capabilities continue to advance (another future TSB topic), and as their baseline analytics continue to improve, Augury’s value will grow.

 

That’s it for this week.  Next week, we’ll close the year with another book review (Steve Coll’s “The Deal of the Century: The Breakup of AT&T”).  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 five slots available, but please reply to sundaybrief@gmail.com if you are interested in attending.

 

Have a great week… and GO CHIEFS!

 

 

 

 

 

 

Three Very Important Trends Impacting the Telecommunications Landscape in 2020

opening pic

Greetings from Charlotte, where the Holiday spirit is in full swing (picture courtesy of Alex Gerrard, a Davidson friend).  We are focusing this week’s TSB on three foundational trends:  a) Increased home broadband competition, b) Increased “channelization” of content thanks to Verizon and AT&T launchpads, and c) Increased commercial-focused connectivity.  Between these trends wind the threads of increased fiber deployments, decreasing overall capital expenditures, and industry consolidation (assuming T-Mobile wins the current case pending with the attorneys general).  There are many ways for each telecommunications provider to increase its value in 2020, with the greatest opportunities awaiting Verizon and AT&T.

 

Because of the depth of this week’s TSB, we will not have a TSB Follow-ups section.  This will resume on the 22nd when we will reveal three additional “Up and Comers” in 2020 (you can read about the previous three – Starry, Cologix, and Helium – here).

 

Trend #1:  Increased Home Broadband Competition

The telecommunications landscape is about to be jolted, and this will start in 2020.  Driven by the deployment of significant amounts of fiber by both AT&T and Verizon (perhaps CenturyLink or Zayo will aid the new T-Mobile in their efforts), connectivity options will be opening for the carriers.  This will drive two new models in 2020:

a. An entry-level model consisting of at least 300 Mbps per home (perhaps with a 1 Terabyte monthly cap) for $50 per month. No contracts, and, if Verizon’s Chicago rollout is duplicated, customers will receive a Wi-Fi access point equipped with the latest version (802.11ax, aka Wi-Fi 6).  See nearby coverage map (or link here) for an idea of their development progress.

verizon chicago 5g network Dec 15 2019

b. Full fiber capabilities consisting of 1 Gbps or more. These services tend to cost ~$70-80/ month and may require a 1-2 year contract.  Frequently, additional charges are assessed for broadband modems (AT&T charges $10/ mo.).  Many times, full fiber offerings include content or security software in their product offerings (see AT&T offering here and Comcast’s Xfinity Flex offering here.  Verizon also is offering a free year of Disney+ to all 5G Home subscribers).

 

These offerings serve two different family segments:  Internet connected (1-2 residents, some streaming to 1-2 TVs, no home office), and Internet needy (3-5 residents, significant streaming to 3-6 devices including 4K TVs, at least one teleworker).  Within these segments, there are unique needs (teens, international content, etc.), but the key product drivers are the capabilities of the TVs and computers connected to the home broadband service.  Budget is the most important driver, but right behind it is service quality (and uptime), as well as the installation experience and any contract terms (including early termination fees).

 

What’s most intriguing about the Verizon offer is that it can be tested side-by-side with existing cable services (the only change is in the Wi-Fi SSID or which Ethernet cable is connected to the back of the TV).  Also, the 5G Home offering does not require broadband customers to own a 5G-capable device.  For example, the latest iPhone 11 (specs here) offers 802.11ax (Wi-Fi 6) but is not equipped with 5G (note: the resolution displayed on most iPhone screens does not require more than a 15 Mbps constant stream per device.  TVs are a different story).  Given the fact that Verizon is offering three months of free service, side-by-side could be a relatively pain-free experience.

 

By the end of the year, there will likely be four separate and distinct offers in Chicagoland for home broadband from established telecommunications providers:

 

  • Comcast Xfinity – the broadband market share leader and wireless services challenger
  • AT&T Fiber (where available) – the non-wireless challenger
  • Verizon 5G Home (wireless only – as a 5G offering, speeds expected to be ~ 350 Mbps). Bundling opportunities with YouTube TV and 12 months of Disney+ included
  • T-Home Internet (wireless only – as an LTE-based offering, speeds are expected to be ~ 50 Mbps)

 

As T-Mobile did with smartphone and low-end family plans, they will likely target smaller, less Internet needy households until they have an offering that can be built incorporating Sprint’s 2.5 GHz (Clearwire) network as well as 5G standalone network equipment.  That lower-cost offer will be available no sooner than the end of 2020. Until then, expect Verizon to get very targeted even as AT&T continues to ramp off their fiber marketing efforts.

 

The expectations game could not be higher for AT&T.  At an investor conference this week, Jeff McElfresh, the new CEO of AT&T Communications unit stated:

 

“In the fiber business and the fiber product line, where we have fiber, we win, and we jeff mcelfresh picwin handedly. As you mentioned, we’ve guided to driving penetration of our 14.5 million households to our fiber network to a 50% mark over the 3-year period. And we have proof of how we do this historically. As you look at the fiber that we built out in the ground in 2016, at the 3-year mark, we roughly approach about a 50% share gain in that territory. And so, for 2020, with the bulk of our investments behind us in this fiber plan, our tactics are to drive penetration with the fiber that we’ve built.

 

One would expect Verizon and T-Mobile to have a slightly different take on AT&T’s market share goals (AT&T does not seem to think that 5G wireless will be a threat to fiber-based systems, presumably at any price).  As we documented in the November 3rd TSB here, AT&T will need to acquire an additional 5.0-5.5 million residential home broadband customers to hit a 50% milestone.

 

Where this leaves Comcast’s broadband net additions growth is unknown.  More competition reduces the chances of a blowout quarter (and also the likelihood that Comcast will automatically gain share at the expense of legacy Digital Subscriber Line technology in non-fibered areas), but, they will be the first carrier customers return to if something goes wrong with a challenger.  Out prediction is that Comcast’s growth could be dented by as much as 50% (from 300K net additions per quarter to as low as 150K) but it’s unlikely that the 26 million residential subscriber base will be materially impacted in 2020 or 2021 unless AT&T begins to aggressively market their service with contract buyouts (which rarely result in long-term market share gains).

 

Bottom line:  Watch the home broadband space carefully, especially in the second half of 2020 (starting with “movers”).

 

 

Trend #2:  Increased “Channelization” of Content Thanks to Verizon and AT&T Launchpads

One of the great debates through the AT&T/ Elliott Memo crisis was whether AT&T should be a content provider and an infrastructure provider.  AT&T clearly believes that it’s best economic return occurs when they do both – the worst case, they argue, is that owned Time Warner content is used as a “bargaining chip” in larger programming negotiations.

 

Verizon is following a markedly different “best of breed” strategy and, from Hans Vestberg’s comments at the UBS conference this week, the Disney+ launch has exceeded their already high expectations.  In short, mobile data usage is exploding thanks to Disney+, and that means that the half of Verizon customers who are not already on Unlimited plans have a reason to upgrade to higher ARPUs.  At the margin, Disney+ also attracts new families who are carrier indifferent.   Now that Verizon has a winner with Disney+ (which, as we shall see in January, will have had a big impact on the Verizon brand and churn), the question becomes “What’s Verizon’s follow-up offer as HBO Max gets ready to launch?”

 

Unlike the Apple Music promotion at the end of 2018/ beginning of 2019 (Apple Music was launched in 2015), Disney+ is days/weeks old.  Verizon’s brand is heavily tied to Disney+ (a good thing for Verizon), and, to a lesser extent, the Hulu/Disney+/ESPN+ larger bundle.  Verizon’s home broadband service is promoting a competitive product to Hulu Live (YouTube TV), albeit a free month compared to a free year of Disney+.  With 35.4 million retail postpaid accounts (and 115 million retail postpaid subscribers), Verizon has become tomorrow’s broadcaster – a content kingmaker.

 

This time, the content structure is a bit different.  Unlike Verizon’s failed content creation service Go90 (how quickly we forget), Disney+ current content is less episodic/ more long-form – good for the multi-hour car trips/plane rides and not as good for in-town pick-up/drop-off.  Long-form content is not as conducive to ad placement as episodic content, which likely means less monetization opportunities until Disney+ revamps it’s lineup.  Long-form content also needs a larger buffer (Disney+ allows subscribers to download entire movies over Wi-Fi) – Verizon will be an enthusiastic supporter.

 

Assuming launch momentum continues throughout 2019 (there’s little reason to think that customers would disconnect a “free for the year” service), how do Verizon and Disney use 5G network deployments to counter next May’s HBO Max launch?  How can recently viewed content be personalized?  What digital merchandising can Verizon enable through future promotions?   Can long-form content products be extended into live sports?

 

There’s a new Disney channel that will be consuming hours of time this Holiday season (the fact that Disney+ is Google’s most searched term for 2019 is a very good indicator of what’s to come – see nearby chart) at the expense of traditional broadcast viewing.  Well-organized content bookshelves are slowly replacing Electronic Programming Guides (EPGs).  Content snacking has been replaced with entire all-you-can-eat banquets.

 

top trending google searches

 

Each of these trends are good for AT&T – if they can execute a late spring/ early summer launch (a less attractive period than the Holidays).  If Verizon and AT&T become the new launch pads for channels, where does that leave traditional cable providers and broadcasters?  We have had many predictions of broadcasting’s demise – is it different this time?

 

There’s a lot to track here, but for those 5G naysayers who bemoan the lack of use cases, look no further than the creative genius of Disney and HBO.  I’m sure they have a few ideas.  Bottom line:  Verizon and, to a lesser extent, AT&T have found a way to help digital content launch new products.  Disney+ is the best co-branding association in telecom since the Apple iPhone and AT&T.  Verizon needs to extend this association into increased 5G adoption.

 

 

Trend #3:  Increased Commercial-Focused Connectivity

In an  interview at the Wells Fargo conference we referenced in last week’s TSB, Adam Koeppe touched on the overall fiber deployment strategy (also known as the One Fiber initiative):

 

“When we pursue our fiber build on a market-by-market basis, we’re looking for the sweet spot of a really strong case that allows us to leverage our owners’ economics. And what I mean by that is when we look at the 4G and 5G node expectations that we have for the coming years, we can very carefully calculate what it would cost to spend money with a third party, if you will, in a market to launch 5G or increase the 4G density. We then look at the cost to build in that market. And it’s a fairly simple case to say, listen, it’s much more cost-effective for us to build our own fiber in this market because not only can we serve our own needs on the wireless network, we can then open up incremental use cases. So, whether it’s small, medium business, enterprise, wholesale opportunities that comes from having the owner’s economics of our fiber deployment. So that’s the key determining factor, basically, in how we look at each market where we’re building fiber.

 

If one pairs the likely deployment of fiber for 5G with commercial real estate locations, there’s a high correlation between “near-net” fiber and key tenant locations.  This is what Adam is referring to as an “incremental use case.”  Let’s look at a market example (5G deployment in downtown/ Centennial Park areas of Atlanta with the large red area to the left being the Georgia Dome):

verizon 5G network atlanta downtown dec 15 2019

 

Here’s what that same area looks like with Google Earth:

google earth atlanta downtown dec 15 2019

 

An educated guess is that the red lines in the Verizon map above pass near (but not necessarily in) 150 commercial office buildings of various sizes and shapes likely totaling 40 million square feet or more (270,000 square feet per building or about 13-14 stories on average with a large variance).  Assuming 200 square feet per worker per building (a generous assumption), that equates to ~ 200,000 smartphones in this radius alone (game day figures would be higher).  The in-building wireless coverage improvement opportunities from this deployment alone are significant – and this is just the beginning.

 

However, it’s also safe to assume that Verizon’s out of region play with the lower half of the Fortune 1000 could use improvement.  They have been hindered by their inability to create differentiated product bundles, as well as the continued high cost of connecting to customer sites.  In an era where Wi-Fi delivers 5-8 Mbps on a good day, could Verizon (with CBRS deployed) deliver 40 Mbps, and have full integration with mobility (see last week’s article)?  The answer is undoubtedly yes, and, in a capital environment in search of incremental use cases, the risk appetite is higher.  Add in the Amazon AWS edge deployment announced earlier this month, and one can see the pieces of a low-latency secure cloud coming into place in 2020 and 2021.

 

Verizon is relatively weaker in the enterprise segment as organizations get smaller and farther away from their Northeastern home field.  One of the great opportunities facing Big Red is maximizing the incremental opportunity with commercial customers.  Integrated voice solutions is an easy first choice (see last week’s TSB), but there are many others.

 

Bottom line:  5G deployments require more in-city fiber, and that presents a terrific opportunity for Verizon Business.  A clear channel strategy needs to be developed that fuses in-building and mobile solutions.  CBRS can play a role, and, to the extent it does, Verizon can minimize spectrum interference.  If Verizon can walk the incremental talk here, they will quickly turn their network organization into a profit center and create a competitive differentiator, especially against T-Mobile.

 

That’s it for this week.  We will be publishing a short presentation incorporating these and other ideas prior to CES (January 6) for distribution to your teams.  Next week, we’ll capitalize on our previous “Up and Comers” column (with an initial take on the AG/ T-Mobile trial outcome) and will close the year with another book review (Steve Coll’s Deal of the Century: The Breakup of AT&T).  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!