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Greetings from Charlotte, North Carolina (picture is, from left, Frank Cairon, formerly of Verizon Wireless and Ryan Barker, currently with Verizon Wireless enjoying some good Mexican food on Friday in the Queen City with yours truly).
This week’s TSB examines the short-term dynamics that could impact wireless growth in the third quarter and through the end of the year. At the end of this week’s TSB we will also briefly examine the current state of litigations and investigations active and pending (T-Mobile/ Sprint, Facebook, and Google).
Follow-up to Last Week’s CBRS article
Before diving into earnings drivers, a quick shout out to Federated Wireless, who raised $51 million this week in a mammoth C Round financing (full announcement here). Existing investors American Tower, Allied Minds, and GIC (Singapore sovereign wealth fund) all participated in the round, and Pennant Investors (Tim McDonald, formerly of Eagle River (Craig McCaw), will be joining the Federated board) and SBA joined with fresh cash. Kudos to Federated CEO Iyad Tarazi for his continued leadership and perseverance. With $51 million in additional cash, spectrum sharing gets a global boost.
In addition to this news, the FCC also has placed the approval and scheduling of the Private Access License auction (this is the dedicated band that gets priority over the General Authorized Access band) on the docket for June 2020 (FCC Commissioner Pai’s blog post is here). It’s generally assumed that this means a C-Band auction will come at the end of 2020/ beginning of 2021 (although this week’s news that Eutelsat has withdrawn from the C-Band Alliance has some believing that there may be a side deal afoot). The PAL auction timeline is in line with expectations, and it’s likely participants will include some new(ish) entrants.
Third Quarter Earnings – What Could Dislodge Wireless?
Speaking of expectations, there’re not a lot of dramatic changes expected in the wireless arena. Consensus has T-Mobile leading the postpaid phone net additions race (no surprise), with Sprint struggling to keep pace, AT&T in the 0-300K range for postpaid phone thanks in large part to FirstNet gains, and Verizon, excluding cable MVNO revenues, growing their retail postpaid phone base only slightly. With the exception of FirstNet (and a few quarters of decent Verizon growth), this is a pretty consistent story dating back to early 2017. What events could change the equation and dislodge the current structure?
- More rapid AT&T postpaid phone net additions led by FirstNet. Here’s how AT&T CFO John Stephens summarized the relationship between spectrum rollout and FirstNet deployments at an investor conference in early August:
We had some AWS-3 and some WCS spectrum that we had, so to speak, in the warehouse that we hadn’t deployed. We had 700 spectrum, Band 14 from FirstNet, which the government was requiring us to deploy. And then we got a whole new set of technologies that were coming out, 256 QAM and 4-way MIMO and carrier aggregation. They were particularly important to us because of our diverse spectrum portfolio. So we got the FirstNet contract and we had to touch a tower, have to go out on the network. And we decided, with this contract, now is the time to, so to speak, do everything. Put all the spectrum in service, that’s the 60 megahertz. In some towers, it’s 50, some towers, it’s 60, but it’s 60 megahertz of new spectrum that was generally unused that we’re putting in.
This has the effect of increased costs, but also improved network performance. With 350,000 net additions already from FirstNet (Stephens disclosed this in the same conference), it’s entirely possible that they could post a 100K net add surprise due to increased coverage and deployments. In turn, improved wireless bandwidth, while driving up costs, should lower churn in areas like Detroit (RootMetrics overall winner in a tie with Verizon – first since 2012), and Boston (first RootMetrics overall win in Bean Town since 2017).
- Faster cable MVNO growth. While this week’s news was on Altice’s aggressive $20 unlimited price point for existing customers (great analysis on their strategy here), both Charter and Comcast see a lot of mover activity in the third quarter. This would seem to be a very good time to present their wireless offer. Here’s a chart of net additions by both Charter and Comcast for the past two years:
While the two largest cable providers accounted for ~390K growth in 2Q (and over 1.3 million net additions growth over the last four quarters), there’s a strong likelihood that this figure could grow even greater as the attractiveness of the wireless bundle pricing takes effect. Both Spectrum and Comcast are maturing their service assurance processes, and those efforts should lower churn.
Comcast also made a number of changes to their “By the Gig” plans which encourage this option for multi-line plans that use 2-6 Gigabytes per line per month (and therefore use a lot of Xfinity Wi-Fi services). It basically amounts to a prepayment for overage services, but could be attractive for certain segments/ demographics (full details on these offer changes are here). Charter did not follow the Comcast changes described in the link and their “By the Gig” pricing continues to be $2/ mo / gigabyte higher.
Both Comcast and Charter are running into Apple iPhone announcement headwinds if next week’s headlines meet expectations (no 5G, no CBRS, no special financing deals, better camera). If the changes do not increase willingness to upgrade/ change to an iPhone, it’s going to be very difficult to craft a cable plan (even $20/ mo.) that will buck the trend. The upgrade cycle will be extended to 4Q 2020, when both the carriers and Comcast/ Charter will have full access to 5G.
Our prediction is that Charter and Comcast will have 475-500K net additions in the third quarter thanks to a combination of lower churn and higher gross additions (led by increased moving activity). Altice’s offer will add another 70K net additions in September, with those gains coming from Sprint retail and, to a lesser extent, T-Mobile retail and wholesale (Tracfone).
- T-Mobile’s 600 MHz coverage (and gross add) improvements. As T-Mobile, Sprint, and the state Attorneys General try to find a resolution to their quagmire, T-Mobile keeps on deploying 600 MHz spectrum. Here’re their reported (through Q2 2019) and estimated (Q3/Q4) progress:
Every new device on the T-Mobile.com website (and every T-Mobile store) is 600 MHz/ LTE Band 71 capable. Many older devices are not, however, and that is preventing greater market share gains in secondary and tertiary geographies (many/ most BYOD Android devices from AT&T, for example, will have the 700 MHz but not have the 600 MHz band). The expected Apple announcement represents a slight headwind for T-Mobile as well.
There’s a natural gross add/ upgrade path that follows 145 million coverage growth over a 12-month period. Assuming T-Mobile keeps their churn rate at 0.8%/ month over 3Q (2.4% of the ending branded postpaid 2Q base would be ~1.07 million disconnections), they have grown their 600 MHz marketable base by 20 million from Q1 to Q2 and by another 50 million from Q2 to Q3. If they just grew their penetration in the 600 MHz band by 1.5% for Q1-Q3 incremental POPs (or 0.5% penetration for the entire estimated 3Q 2019 footprint), they would negate the entire estimated branded postpaid churn for the rest of the country. This ex-urban/ rural growth opportunity is unique to T-Mobile and would at the expense of AT&T and Verizon.
Offsetting the 600MHz growth is small cell progress. T-Mobile committed at the beginning of the year to deploy 20,000 incremental small cells in 2019, but that guidance was withdrawn in their Q2 Factbook with H1 growth of only 1,000. That leaves a very large backlog of in-process capital (excluding capitalized interest, total capital spending was $3.48 billion vs an estimated spending range at the high end of $5.4 – $5.7 billion). T-Mobile should spend at least $2.2 billion in capital spending in the second half of 2019 on 5G, 600 MHz, and other initiatives and will undoubtedly be left with a lot of in-process small cell deployments.
- Sprint’s prepaid and postpaid churn. There’re a lot of headwinds for Sprint in the third quarter – overall 2Q churn trends are higher than previous year’s, and no one expects the seasonal respite to last long. It’s likely that 3Q postpaid churn could exceed 1.85%, led by postpaid phone churn of a similar level (look for late September promotional activity).
Prepaid churn is a bit tougher to forecast and will also be tracked closely. If the postpaid churn comes in below 2Q levels, check the prepaid recategorizations to postpaid (they were 116K in Q2 and 129K in Q1). Both prepaid and reclassified postpaid accounts will be transferred to Dish assuming the merger goes through, but it makes the postpaid headline number more palatable.
The 30-day guarantee promotion, according to most reports, has been an ineffective switching tool. (Sprint’s 5G rollout success has been much more impactful). Expect Sprint to say very little until there is clarity on the litigation, and to post greater than expected losses in prepaid subscribers as they preserve their marketing dollars for a post-merger world.
Litigation Tracker: Why the Facebook, Google, and T-Mobile/ Sprint cases are not all the same
Speaking of litigation and investigation, we were very dismayed that media sources are choosing to lump the New York-led Facebook investigation announced Friday, the to be announced Texas-led Google investigation, and the on-going T-Mobile/ Sprint (TMUS/S) litigation into one mega-story. While there are some similarities, the upcoming Google action is broader than Facebook and more bipartisan than the TMUS/S complaint.
As most of you who are following the TMUS/S suit know, the states of Oregon and Illinois recently joined the original 14 states and the District of Columbia to block the merger. (As an aside, Fox Business is reporting that the state AG group is focusing on the inexperience and shaky financial condition of Dish Networks as opposed to what would have been an uphill market concentration battle). In fact, in the original TSB concerning the lawsuit (here), we were surprised by the absence of Illinois. The figure below shows who is involved in what (underlined states are named in the Facebook litigation):
To recap, there are 40 states + the District of Columbia named in the National Association of Attorneys General comment letter to the FTC (filing here), and at least 30 of them are joining a Texas-led lawsuit against Google to be announced early this week.
The makeup of the states in the FTC letter is very bipartisan: 14 Republican and 26 Democrat attorneys general. All of the states involved in the TMUS/S litigation are also named in the FTC comment letter. To contrast, of the 17 states in the TMUS/S litigation, only Texas (AT&T HQ) is Republican and the other 16 are Democrat.
As we stated in the TSB on the AG lawsuit, very few sparsely-populated states, regardless of political affiliation, are participating in the T-Mobile/ Sprint litigation. Fourteen of the fifteen least densely populated states in the US (data here) are named in the Google/ FTC letter. However, only two of the fourteen (Colorado, Oregon) are participating in the TMUS/S litigation. The promise of a rural solution outweighs the benefits of a fourth carrier in metropolitan and suburban areas.
The Facebook investigation is also widely bipartisan with five Democrats and four Republican states represented. Florida is involved in the Facebook investigation but none of the other two legal activities. In addition, there are nine states (including New Jersey, a Democrat stronghold) that are not currently participating in any legal activity.
Bottom Line: Concerns about Google’s anti-competitive practices are supported by a large number of state Attorneys General and are very bipartisan. A subsegment of Democrat AGs (and TX) is also a part of the T-Mobile/ Sprint lawsuit. And an even smaller subsegment plus Florida is a part of the recently announced Facebook investigation.
Next week, we will highlight some wireline trends and talk about overall profitability across the telecommunications sector. Until then, if you have friends who would like to be on the email distribution, please have them send an email to firstname.lastname@example.org and we will include them on the list.
Have a terrific week… and GO CHIEFS!
The following articles provide a good overview of CBRS. There are a lot of things changing with CBRS each day, and we will be sure to keep the list updated as new developments occur.
- One of the best government sites is the NTIA CBRS page here. Included in this is the original NTIA October 2010 Fast Track Report cited in this week’s TSB
- The FCC Report and Order on CBRS from 2015 is here.
- This Ruckus on-line tutorial is a terrific place to start if you need a 20-minute high level overview of CBRS.
- The CBRS Alliance has a page devoted to certified devices that is updated frequently. The latest certified devices are here.
- Light Reading had a recent article summarizing AT&T’s, US Cellular’s and Verizon’s outdoor interests. It’s here.
- Charter’s SVP Technology Craig Cowden’s address at MCWA in 2018 is here (20 min). A good summary of the value of CBRS to the cable industry. Charter’s FCC application for their CBRS tests is here.
- Adam Koeppe’s June interview with RCR Wireless concerning 5G, CBRS, MIMO, Beamforming and more is here. The Light Reading article referenced in the TSB is here.
- A good summary of MIdCo’s 2018/ 2019 trial with Telrad and Federated Wireless from Fierce Wireless is here.
- Telecompetitor interview with Federated Wireless CEO Iyad Tarazi is here. In this article, Iyad describes Federated’s role in the Kinetic Edge Alliance, which we ran out of time to discuss and is a very interesting intersection point between computing, proximity, and network sharing. More on that group here.
The following articles provide a good overview of the role fiber plays in the telecommunications ecosystem today (there’s some good details on Google Kansas City and Louisville setbacks as well):
- An RCR Wireless article that details Verizon’s “integrated engineering process.” It also has some details on the fiber deal with Corning.
- Corning (Bob Whitman) and Verizon (Glenn Wellbrock) conversations from YouTube part 1 and part 2.
- Altice press release announcing first homes on Long Island to receive 960 Mbps symmetrical speeds for $80/ month.
- Google missing their deployment goals for Kansas City, KS and Mission Hills, KS
- Telecompetitor AT&T Fiber penetration article in which they talk about doubling market share. The map see in the article (AT&T Fiber cities) is here.
- Cincinnati Bell 2Q investor penetration showing that AT&T’s goal of achieving 50% market share is entirely possible with the right content bundles (they are at 44% without the content – see page 7).
- Blair Levin’s and Larry Downs Harvard Business Review article on Why Google Fiber failed and how it’s really a success in disguise. Rationalization gone awry. This might have been the case if their more recent deployments had not damaged their brand.
- Local (Louisville Courier-Journal) coverage of Google’s decision to pull out of the Louisville market is here.
- Google’s plans to expand their Webpass (60 GHz wireless hub and spoke) service for Multi-Dwelling Units Austin is outlined here.
- The Dallas Morning News rant on Frontier’s failures is a classic and outlined here.
Greetings from Davidson, North Carolina, where the hazy days of summer will soon give way to the bustle of orientation. There’s plenty to cover in this week’s TSB, and our main topic will be on the importance of fiber in the telecom industry. But first, a brief comment on Verizon’s wireless pricing changes.
Before diving into commentary, a quick reminder that we will be posting a “Deeper” section for each TSB on the website. Here is the Deeper section from last week’s TSB (State AG’s case against the T-Mobile/ Sprint merger). We usually post these by Tuesday evening.
Verizon’s Bouquet of Plans – Something for Everyone?
When Verizon announced their pricing plan changes on Friday, August 2, the collective response was “Why?”
A deeper inspection of each change explains Verizon’s strategy. They are continuing to lead with a plan that includes no fixed allotment of high-speed data (the Go Unlimited legacy plan was changed as well to “Day 1” deprioritized data). Verizon also put a stake in the ground: the minimum rate for any individual 5G plan (or first line in a multi-line scenario) is $80/month. Why one would purchase a Start Unlimited plan for $80, and forego a fixed allotment of high-speed data (and Hotspot capabilities) offered by the Do More Unlimited (50GB, 15GB can be Hotspot) or Play More Unlimited (25GB) is a head-scratcher. Bottom line: the 5G pricing tier starts at $80/month with no 4G LTE premium data allotment.
The other interesting development (outside of the $5/ line/ month across the board price decrease) is the continuation of 720p HD video streaming on Verizon’s best plan. Customers can get 1080p 4G LTE streaming for an additional $10/ month (total cost of $100/ month with taxes & fees versus T-Mobile’s 1080p Magenta Plus plan which includes 50GB of premium data as well as taxes and fees for $85/ month or AT&T’s 1080p Unlimited & More Premium plan which includes 1080p but only has 22 GB of premium data allotment for $80/ month). It baffles me that Verizon sells devices with amazing screen solutions like the Samsung Galaxy Note 10 (3040 x 1440 pixel screen – Quad HD+) and the Apple iPhone XS Max (2688 x 1242 pixel resolution), advertise (and win) speed test awards, yet limit video streaming to ~5-8 Megabits/ second. In the past, the argument was that smartphone resolutions weren’t good enough to tell the difference, but manufacturers have caught up and 5G adoption is still several quarters away for most wireless customers.
Bottom line: There are likely no broad implications to the wireless industry from Verizon’s recent pricing changes. This should not trigger a response from AT&T, T-Mobile or Cable (although making Full HD (1080p) standard on all pricing plans would be a very un-carrier move for T-Mobile). It’s likely that if AT&T were to change their pricing plans as a part of a broader 5G announcement, they would align monthly rates to speeds (e.g., Cricket Wireless is cheaper but download speeds are capped). Big Red is in a holding pattern until they can fully deploy 5G (more on that below).
Fiber Always Wins (Until it Doesn’t)
While I was running Access Management for Sprint ($3+ billion annual expenses at the time), we would frequently discuss fiber opportunities: bankruptcy-driven system purchases, sub-duct IRU availability (sometimes packed with fiber), joint builds with other carriers, fewer fibers with Dense Wave Division Multiplexing, etc. Our motto, developed by our lead engineer, was “Fiber Always Wins.” Fiber drove our investments, first connecting to the incumbent Local Exchange Carrier (LEC), then to commercial buildings, data centers, wireless switching centers, small cells and cell towers.
Meanwhile, Verizon was building their FiOS network which at peak (2015, prior to the sale of former GTE properties to Frontier) passed 20 million homes. While the current number of homes passed is not published, most analysts peg the post-Frontier total at 15.5-16.1 million homes. Given Verizon’s current FiOS internet count of 5.84 million, they have approximately 37% share, with about 5-10% subscribed to copper or wireless alternatives and the remainder (50-55%) subscribing to cable. FiOS comprised 87% of the total 2018 Consumer Markets division revenue.
Verizon’s FiOS fiber experience and the acquisition of XO Communications led to the formation of the One Fiber initiative (2019 RCR Wireless article on Fiber One is here which includes details of Verizon’s multi-year purchase agreement with Corning). This cross-company cataloguing and joint planning is reshaping how Verizon invests billions of annual capital dollars nationwide. As a result, as they stated in their most recent 10-K, “We expect our “multi-use fiber” Intelligent Edge Network initiative will create opportunities to generate revenue from fiber-based services in our Wireline business.”
Bottom line: FiOS fiber deployments throughout the Northeast are extremely valuable and provide Verizon with a time-to-market advantage. Nationwide, the fiber that is being deployed for 5G will improve wireline/ Ethernet/ cloud competitiveness. One division feeds the other.
Customers love FiOS. The nearby American Customer Satisfaction Index (ACSI) Internet Service Provider satisfaction survey results clearly show that both Verizon and AT&T (U-Verse fiber now passes more than 12 million homes) are preferred over cable. Notably, Verizon’s lead over Altice (Long Island cable provider) is back to seven points. This is one of several factors driving Altice to deploy fiber to the home (the only US cable company to commit to a 5 million home buildout).
Similarly positive results can be seen from the most recent J.D. Power Residential Wireline Survey, with Verizon taking top honors for both Internet and Television service. Fiber speeds result in higher spending per household, and the long-term maintenance costs for fiber have been proven to be much lower than copper.
When does fiber not win? Overbuilders using fiber are having mixed results. The most heavily marketed competitive fiber provider over the past ten years, Google Fiber, has been a dud – there’s no two ways about it. Experts like Blair Levin and Larry Downs (Harvard Business Review article here) believe that Google was using the Fiber effort simply to prod incumbents to accelerate their broadband deployments, but that’s inaccurate – they are still investing, expanding, and trying to be a disruptive broadband provider in their markets.
Google Fiber is generating the majority of Alphabet’s “other revenues” ($162 million in 2Q) and contributes in a small part to the content commitments needed to make YouTube TV affordable (Google TV customers are less than 75,000 and YouTube TV likely has more than 1 million paying subscribers). Analysts estimate that Google Fiber probably serves no more than 475,000 broadband subscribers today, with 20% of those in their first market – Kansas City. Google’s efforts to expand in Louisville using nano-trenching (two inches into the asphalt as opposed to six for micro-trenching) failed miserably and, as a result, Google Fiber ceased operations in Louisville last April (CNET article here). Their acquisition of Webpass, which uses 60GHz spectrum to transport wireless data between fiber-fed buildings, is finally beginning to expand beyond their legacy markets to Austin (see blog post here).
Google Fiber would best serve its shareholders by either a) selling the asset or b) initiating efforts to wholesale fiber to wireless providers and business-focused managed service providers. The value of deployed fiber in highly desired suburban neighborhoods would be welcomed by a variety of telecommunications companies.
Which brings us back to Verizon. Could they have a joint build and/or fiber swap relationship with Google? At least enough to enable Webpass (through Verizon’s XO communications asset) to expand rapidly to 60/80/100 markets? That would shake things up considerably, and multi-dwelling units are not a target of Google’s 5G initiative. It isn’t lost on most telecom industry followers that Google decided not to initiate any builds in Verizon’s legacy Northeast telco territories. Given their fairly strong corporate relationship (Pixel, YouTube TV), why not deploy together?
While Google was busy doing their initial rollouts, Frontier was acquiring the former GTE properties from Verizon. They did this in two primary transactions:
- In 2009, Frontier announced the purchase of 4.8 million access lines from Verizon (all former GTE except for West Virginia which was a legacy Verizon asset) for $8.6 billion (~$1800/ line). Verizon received $5.3 billion in Frontier stock from the transaction – the remainder was in cash and assumed debt;
- In 2015, Frontier completed the purchase of GTE properties by purchasing the assets of California, Florida, and Texas (which included 1.6 million FiOS Internet and 1.2 million FiOS TV subscribers) for $10.5 billion ($9.9 billion in cash and $0.6 billion in assumed debt).
At the end of 2016, Frontier’s service territory looked like this (5.4 million customers including 4.1 million broadband lines spread across 29 states):
Since that time, the rest of the broadband industry has continued to grow, but Frontier has managed to lose 1.1 million customers (> 20% of its base) including 0.5 million broadband customers (> 12% of the base) in a mere 10 quarters. Customer churn is rising and currently exceeds 25% on an annualized basis. Even though the fiber base is being upgraded to 10 Gbps capacities, the FiOS base continues to lose customers.
We talked at length about Frontier’s woes in the TSB titled “What’s Changed Over the Past Three Years?” Last week’s stock performance (down an additional 27%) has significantly narrowed Frontier’s options.
Bottom line: When does fiber not win? When it’s the secondary/ tertiary focus of the company (Google), and when it’s hampered by the pressures created by aging copper plant (Frontier).
Billions of dollars of value have been created from fiber deployments, and local exchange providers (AT&T and Verizon) should be able to leverage previous fiber deployment for small cell and other high-bandwidth deployments. Fiber wins… most of the time.
Next week’s issue will explore the industry implications of Apple’s new credit card (CNBC teaser article here). If you would like a copy of either the Top 10 Trends or the IoT Basic presentation discussed in last week’s TSB, please let us know at the email below and we’ll get you a copy.
Until then, if you have friends who would like to be on the email distribution, please have them send an email to email@example.com and will include them on the list.
Have a terrific week!