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Greetings from Willard, Missouri! It’s been a busy independence week on the farm mowing with the brush hog, clearing trees left by recent flooding (Jimmy and yours truly in the picture), and installing a Wilson WeBoost 4G amplifier to improve cell phone coverage for my in-laws.
What is 5G and Why Should I Care?
I was recently asked to help a large, global conglomerate think about the effects of 5G on their business. After studying the company for some time, I came to the unsatisfying conclusion that one of two things could occur: a) The effects of 5G would be minimal to their business (some transaction/process efficiencies), or b) The company would have to change their entire structure, purpose and meaning because of 5G. The key variable was defining 5G.
Here’s what technology advancements and activities have been associated with 5G:
- New spectrum purchases, auctions, and deployments, particularly 24GHz and 28GHz frequencies (Fierce Wireless summary of recent auction results and spectrum here)
- Technologies which improve data experiences in certain locations (beamforming, massive MiMO, full duplex, etc.)
- Mobile edge computing which places servers closer to wireless customers and enables Cloud Radio Access Networks (which obviate the need to deploy cell site base stations at the cell site in many metropolitan and suburban areas)
- New devices that access the new radio frequencies in #1 and could use the new technologies defined in #2 with better computing defined in #3 (an example is the new LG V50 spec for their Sprint device here)
- LTE private networks for enterprises (which augment and eventually replace the use of in-building Wi-Fi)
- Pricing changes which set a cap on maximum speeds, such as those introduced by the fourth-largest wireless company in the United Kingdom (Vodaphone). A 5G network with a 2 Mbps throttle – intriguing to say the least
As you read down the list, the trend becomes clear: 5G can represent anything that you (or your agency/marketing arm) want it to be. It’s the dot.com and e-whatever 20 years ago and the cloud of 10 years ago. This is not a criticism of the use of 5G as an umbrella term for all things good (and the business justification of new); nonetheless, the examples above highlight the fact that 5G is a multi-faceted, multi-dimensional marketing term as well as a series of technological innovations.
5G can be the justification for wireless carrier or device manufacturer pricing changes (see Sprint’s rule that 5G devices must take a premium plan type, and Verizon’s statements that 5G pricing freezes will only be temporary). It can be used to reignite/redefine previous business plans (e.g., smart cities, Private LTE, Narrowband Internet of Things). 5G can also be the cure for long-standing regulatory/ social ills (availability throughout rural America, or in underserved urban areas, or net neutrality considerations, etc.).
The Future of 5G Depends on…
After considerable thought, here’s a pretty good summary of what 5G will mean in five years:
Doing more things
I know that the lack of traditional telecom lingo may come as a surprise to many of you who see 5G as an industry project, but let’s explore what low-latency/ high-frequency networks create:
- Faster decisions, driven by
- Decision making structures (algorithms), powered by
- Faster microprocessors, located in
- Proximity-based data centers and transmitted through
- Concentrated wireless networks
Faster transmission of today’s content just grazes the surface. Replacing an existing at-scale coaxial broadband service with a wireless variant is not a value-adding strategic cornerstone. The network is only one component of the experience, and, while immensely valuable, is not the drum major leading the 5G parade. Software is at the front, supported by hardware which accesses the network.
For example, consider the student who is having difficulty grasping algebraic concepts. What if tomorrow’s networks and software could detect a pattern of errors (via online homework responses, (lack of) notes or page turns in an electronic notepad/textbook, or other means), match it with a different presentation of the concept, which then allows the child to overcome frustrations and master the material right away? Even the longest-tenured, best-educated human instructor cannot be trained on every possible array of learning styles.
What’s changed from today’s world? Nothing, if the student has instant access an instructor who has expert skills to quickly diagnose learning styles and associated remedies. But that’s a tiny sliver of the population. The effects of better diagnosis could create tens of thousands of new mathematicians, software developers, analysts, technicians, and scientists. It could change the global balance of knowledge.
Did a 5G network enable this breakthrough? Maybe (Wi-Fi 6 is equally fast). Without activity monitoring and diagnosis, however, that student might have just given up, or decided her strengths lie elsewhere, or … Software leads the parade, enabled by hardware which accesses the network.
Another example is this video from Upskill, a company I got to know several years ago under their previous name (Apex Labs). They have built software into devices like the Microsoft HoloLens (see last week’s TSB) to ensure a perfect build. And every rivet, fastener, and connection can be recorded to prove it was built to spec. Entirely possible with Wi-Fi 6, but impossible without the right software.
While written to reflect an earlier network generation, Mark Andreessen summarizes it best in his seminal 2011 article called “Why Software is Eating the World” when he states:
In some industries, particularly those with a heavy real-world component such as oil and gas, the software revolution is primarily an opportunity for incumbents. But in many industries, new software ideas will result in the rise of new Silicon Valley-style start-ups that invade existing industries with impunity. Over the next 10 years, the battles between incumbents and software-powered insurgents will be epic. Joseph Schumpeter, the economist who coined the term “creative destruction,” would be proud.
We are living in that innovative tornado today, and the wind speeds are about to double thanks to lower latency and proximity-based processing. The winner is not necessarily the fastest or even the broadest network, but the one that increases consistent software performance.
AT&T’s recent blogpost outlining their recent tests with Microsoft Azure cloud and an Israeli-based software company (Vorpal) shows that they get it (an excellent use case). Verizon’s drone software and advisory company, Skyward (acquired in 2017), has partnered with Unleash live to quickly identify infrastructure defects (more in this Medium blog post). A slightly different strategy, but Big Red also gets it.
More software… doing more things… faster/better. That’s the result of 5G. That’s what it’s all about.
Next week, we’ll untangle the Dish/T-Mobile/Sprint ball of yarn (assuming CNBC’s reporting is accurate). Until then, if you know of someone who would be interested in receiving TSB, have them drop a quick note to email@example.com and we will add them to the distribution (or they can go to www.mysundaybrief.com for the archive and a new feature called Deeper which will have a complete listing of all cited sources).
Thanks again for your readership, advice, and recommendations. Have a terrific week!
Greetings from Dallas. That’s right – a week without travel- a “Spring Break” of sorts from January and February’s crazy schedule. Rather than talking with many of you from airports or the car, I called from balmy Texas. I was also able to take in the Jesuit College Prep Rugby Showdown this weekend which is pictured (Jesuit in gold and blue; Memphis, TN, Christian Brothers High School in purple and gold). My batteries are now recharged and I’m ready for a seven-city tour over the next two weeks.
This week, we’ll dive into the set-top box Notice of Proposed Rulemaking that’s underway and estimate the ramifications to the cable industry and over-the-top providers. We’ll also begin to discuss a few events over the past month that are going to impact quarterly and annual earnings.
The FCC’s Set Top Box (STB) Kerfuffle
Fresh off the one-year anniversary of enacting Net Neutrality rules, the FCC turned its attention to section 629 of the Telecom Act of 1996. Yes, the STB has been clinging to the same rules and regulations that we had before Yahoo!, YouTube, Twitter, and the iPhone existed. Innovation at that time was best captured by the America On-Line screen pictured nearby.
It’s hard to argue that the rules shouldn’t be refreshed, but what should they encompass? The current NPRM objective (full link here) is as follows (editor’s note: MVPD stands for Multichannel Video Programming Distributor, a.k.a. a cable/ satellite/ fiber provider):
…Consumers should be able to have the choice of accessing programming through the MVPD-provided interface on a pay-TV set-top box or app, or through devices such as a tablet or smart TV using a competitive app or software. MVPDs and competitors should be able to differentiate themselves and compete based on the experience they offer users, including the quality of the user interface and additional features like suggested content, integration with home entertainment systems, caller ID and future innovations.
It’s important to realize the ramifications of the FCC’s decision. First, the FCC is mandating change that has broad implications to several industries. This should come as no surprise to anyone who has dealt with this FCC, which issues regulatory mandates to counteract the inability of the legislative branch to revise what’s now a 20-year-old-technology focused law. The FCC would like to have a “[World Wide] Web” look and feel to the first screen, which incorporates as many options as possible (compare the AOL screen above to a search results screen from Netflix). This could include “recently watched” or “Facebook friends recommend” or even “Sponsored programming” (let’s not forget that High Speed Internet caps are going to become more prevalent over the next decade). A more sophisticated box could have biometric (fingerprint) detection which would personalize the Electronic Programming Guide (EPG) for each member of the family. Choices would proliferate, and more opportunities leads to more competition, higher quality content, and a better customer experience.
This all sounds good, but is the problem one of content availability, or one of content organization? Is the FCC trying to get rid of broadcast channels (and their scheduling/ organization model) through this process? That would appear to be the likely outcome – an interesting “back door” regulation whereby the FCC alters the structure of set-top box provider, MVPD, and broadcasting industries with one rulemaking (for an excellent read on this ruling’s effect on minorities, see this LA Times article).
Second, the FCC is mandating change when voluntary options currently exist to solve the problem. Before making this proposal, the FCC should have asked “Why has TiVo faltered (see stock price chart here)?” TiVo’s new TiVo Bolt (pictured) is beautiful and does everything the FCC wants it to do (see specs here). But it costs $299 for the first year + $12.50/ month after the first year (this is in addition to cable package costs). To TiVo’s credit, if the customer has multiple TVs, they could save money versus buying a Whole Home DVR system, but there’s still the high cash outlay. While this is worth it to TiVo’s current base of 6.6 million users worldwide, is the extra cost worth it to 50, 60, or even 70 million homes? Someone needs to ask the FCC why TiVo (a company started out of the 1996 Act) has faltered and how these new rules will change the equation.
Then there is the issue of existing equipment like Roku, an over-the-top streaming service providing nearly every streaming option possible (including access to TWC TV and Spectrum (Charter) TV). Roku offers very affordable hardware (pricing here), and their relationship with both TWC and Charter is strong. While Roku does not provide web content that could be delivered from a search (or Google Now recommendation), isn’t a Roku solution also solving most of the objectives laid out by the FCC (with over 10 million devices sold in the US)?
Finally, the FCC’s mandate will likely drive up prices for consumers who have the little interest in expanding their television horizons. To use the original picture in this section as an example, the FCC thinks we are living under the same limitations as “America Online” provided to dial up users. If we had a browser and the web connected to our televisions, things would be better. To many viewers, the ability to watch college basketball in February/ March, opening day of the baseball season in April, the Masters in May, the Olympics over the summer, the opening of college and professional football in September, and the World Series in October is enough. Those sports fans might watch college baseball, but they are not going to search for Episode 9 of “Curling Night in America.”
To be fair, there are many other user viewing segments that could be benefit from the FCC’s proposal. Education channels could emerge that teach children other languages and incorporate those learnings into actual broadcasts (kind of an enhanced Khan Academy). America’s cooking skills could improve through a mix of traditional broadcast media and web-based supplemental data. And Amazon could launch a “channel” that would sit next to QVC and other shopping channels providing alternative (cheaper??) options to those they are viewing.
These options sound appealing, but will television viewers make the switch from their ESPN/ CBS/ NBC/ ABC/ Fox/ Fox News habits to this new mode? If not, will the costs of the mandate exceed the benefits? If my box has issues, who gets the call – Comcast, the EPG developer, Walmart/ BestBuy, or the hardware maker? And, since the FCC chairman has promised that there will be no ad inserts or wrap-around advertising permitted by Google or others, how will the new entrants make money?
Bottom line: The FCC’s proposal sounds good, and no one points to their set-top box as the paragon of technological development (except for the latest version of Comcast’s Xfinity X1, or the TiVo, or perhaps the Roku). But replacing today’s equipment and EPG with new models is going to cost customers more money than $8/ month unless the customer sacrifices its privacy (to improve Google’s profile). The FCC should say to communications providers “Treat your set-top box the same way you treat your cable modems, and make each model available at mass retailers such as Amazon and Wal-Mart.”
However, if the FCC were to move forward with their current proposal, they should mandate that customers of these new devices are allowed to opt out of data collection at any time with no ramifications (including pricing), and to require the opt-out option to be clearly and uniquely presented each year thereafter. This would remove the current perception that that the FCC is in Google’s back pocket.
Five You May Have Missed
- California’s Office of Ratepayer Advocates weighed in Friday against the Time Warner Cable + Charter + Bright House Networks merger. Their arguments against the merger largely mirror those of Dish Networks. This will likely have a minimal effect on the PUC’s decision, but some of the conditions they are attaching up the ante considerably. More in this Multichannel News article here.
- Wall Street research analyst Craig Moffett sent a note out Thursday detailing Google Fiber’s video customer count (obtained through the Copyright Office). (Note: High Speed Data customer counts and home penetration rates are expected to be higher). Of special note: the Provo, Utah, market has grown a whopping 65 customers over the past six months. While Craig’s analysis is not public, there were several articles on his work including here and here.
- Amazon reverses course and says that the next version of the Fire Operating System (OS) will have an encrypted data option. While The Sunday Brief has decided not to weigh in on the current legal activities between Apple and the Justice Department, it is interesting that one of Apple’s biggest supporters admitted this week that they are dropping device encryption support in their latest OS release. An Amazon spokesperson wrote to TechCrunch that “We will return the option for full disk encryption with a Fire OS update coming this spring.” More on the admission and Amazon’s u-turn here, here, and from the Washington Post here.
- Sprint replaced the last of the Dan Hesse operating team with the hiring of Robert Hackyl to lead customer experience and service functions. Hackyl comes from Vodaphone, but also formed T-Mobile USA’s channel strategy “from scratch” during his work there from 2010-2013. More about the change (from “Bob” Johnson to “Robert” Hackly) in this release.
- Sprint has quietly brought back subsidized devices. More in this recent article from FierceWireless.
Next week, we’ll use our previously published “To Do” lists and begin evaluate each carrier’s first quarter progress. We’ll also have our first view at which companies are creating the most shareholder value to date in 2016. Until then, please invite one of your colleagues to become a regular Sunday Brief reader by having them drop a quick note to firstname.lastname@example.org. We’ll subscribe them as soon as we can (and they can go to www.mysundaybrief.com for the full archive). Thanks again for your readership, and Go Davidson Wildcats!
Greetings from soggy Atlanta, mild St. Louis, and red-hot Dallas. I took this picture Friday morning to remind us all of the value of entrepreneurship. eTrak, a PAG client, was in the process of readying a multiple hundred-site order, and had to move into the Board Room to finish up the process to hit the customer desired due date. “These schools want our product badly,” said the eTrak President Bill Nardiello. The excitement yet exhaustion of the team showed early Friday morning – it’s likely they were there through the night to meet the shipping deadline.
This is why Adam Smith classified entrepreneurship as one of the factors of production (along with land, labor and capital). Someone has to take the first step. In personal and commercial asset tracking, eTrak took the risk and is now beginning to reap the rewards. Many of you are probably remembering a similar time in your business right now – and smiling.
I also led with the picture because we are discussing the value of a good value this week and the possible implications for AT&T. Nowhere else was this more apparent than in Google’s launch of their Chromecast product (more on the product including a cool commercial here). For those of you who missed the announcement and overall hoopla, Google offered Chromecast + three months of Netflix for $35. The Netflix service could be applied to new or existing service. Predictably, many current Netflix customers saw the device as an $11 computer-to-TV connection product as a result.
The results were astounding. Amazon: Out of Stock. Best Buy: Out of Stock. Google Chrome Store: Ships in 3-4 weeks. The sellout happened in days (really hours), not weeks. It happened after all of the Netflix promotional coupons had been used up, so most buyers were paying a full $35 for wireless/ cordless streaming. It was kind of Black Friday meets mid-July doldrums. We needed something (other than Windows RT clearance sales) to get excited about this summer, and Chromecast was it.
On top of this, Apple announced earnings this week. If you read their conference call transcript (as well as that of Verizon Wireless), it’s very apparent that the iPhone4 (free with 2-year contract at Verizon, AT&T, and Sprint) is an important introductory product to new smartphone users. While Apple focused their conference call comments on the value being generated abroad from the pre-paid/ no contract developing world (where 3G networks are the norm and LTE is emerging but not ubiquitous), it’s very evident that even in North America, the value of a good value (free iPhone 4 devices with a corresponding 2-yr contract) is very important.
This concept is not new if you work for Amazon. The Kindle and Whispernet products were based on the value of a good value mantra – just look at all of the price reductions that have occurred on the standard Kindle hardware product. Amazon bundled the cost to the carrier to download a book into its price – this was a radical concept in 2007. The carriers (Sprint and later AT&T) priced services to Amazon at a wholesale or per kilobyte level. If the Kindle had to carry a separate MRC because of the wireless carriers’ historical bias to sell subscriptions, it would never have become the electronic reading standard.
The Amazon model has eluded tablets and laptops. No one appears willing to take the risk and embed a wireless carrier chipset in every new Google Nexus 7 (a stunning device, BTW, and going on my wish list). With the advent of shared plans, wouldn’t this be the time to try one embedded SKU? Maybe with just an LTE as opposed to a 2G/3G/LTE integrated chipset? Would the value of “free” carrier connectivity drive additional postpaid connections and shared plan usage?
With this lingering question, we turn to AT&T’s earnings which were announced Tuesday afternoon. AT&T had a very good quarter with 551,000 postpaid net additions, with nearly 75% of that total being tablets. In addition, they added 484,000 connected devices, the strongest showing since the end of 2011. 884,000 total net additions have no voice or text ARPU.
With the Sprint iDEN network turndown at its last (and heaviest) quarter, it’s highly probable that absent the iDEN network bluebird and tablet additions, AT&T would have posted negative postpaid net adds for the quarter:
AT&T reported retail postpaid net additions: 551,000
AT&T reported postpaid tablet net additions: 400,000
Retail postpaid net additions less tablets: 151,000
Est. iDEN net additions: 300,000
Retail postpaid net adds less tablets and iDEN (151,000)
Based on Verizon Wireless’ comments on the relative insignificance of iDEN to their retail postpaid gross adds picture, the 300,000 iDEN number is probably conservative. In addition, AT&T made comments on the conference call that the second quarter was the “best ever” for business net additions. Overall, it must have been a tough quarter for AT&T’s consumer smartphone business (particularly for the iPhone given T-Mobile’s April launch), even with an aggressive trade-in program that drove up customers under contract but drove down quarterly margins.
AT&T implemented the upgrade program with purpose, however. The LTE network is robust but new (and therefore under-utilized). Rather than run a “double your data” promotion, they chose to allow customers to upgrade their phones at discounted rates while they trade in their old smartphone to AT&T. They did this prior to changing their handset upgrade parameters to 24 months (from 20). As a result, there are millions of new customers who likely own an LTE-capable phone. Assuming the customer uses exactly the same amount of data, AT&T will achieve $2.50-3.00 in additional profitability per Gigabyte consumed (and more if the upgrade triggered conversion to a shared data plan).
All of the benefits of these upgrades will be felt on a full quarter basis in Q3. This will drive up ARPUs and profits. It will also likely accelerate device attachment IF AT&T can create a compelling, Chromecast-like offer. How can AT&T use their market leadership to realize extraordinary gains?
Start with the Kindle Fire HD. We know from this week’s Amazon earnings that Kindle sales are good on a global basis, but could stand to be better in the US. Leveraging the success of the smartphone trade-in program, why not have a Kindle trade-in program that allows all current Kindle owners to trade up to a new 3G (Kindle reader) or a 4G (Kindle Fire) version? The Kindle Fire could then be added to a Mobile Share plan like a Samsung Note or an Apple iPad. Or, if the customer is not an AT&T customer today, a $59 for 10GB annual plan could be offered. Separating the Kindle/ AT&T relationship is less important than it was five years ago, and Amazon and AT&T could benefit from LTE’s ubiquity and speed. It would also be an easy and cost effective way to allow customers to experience AT&T’s new network. This low-cost, low execution risk opportunity is probably worth several hundred thousand retail postpaid conversions over the next six quarters.
After Kindle, move on to HotSpot adoption. Google’s Chromecast success played to two deeply rooted needs: 1) The need to effortlessly connect to the television (“works every time” from YouTube to the TV), and 2) Frustration with the rising costs of content in the cable model. Free(r) and easier access to shared web content on existing in-home devices is now possible with a one-time $35 purchase. Other solutions exist, but not for $35.
AT&T has an even easier model – they have installed a valuable yet widely unused component in every one of their smartphones. It’s called a HotSpot. 73% of AT&T’s postpaid base uses a smartphone, and 35% of them are using an LTE device (thanks to things like 2Q’s aggressive trade-in program).
The HotSpot is a premium service, like HBO or Cinemax or MLB Extra Innings. Why not have a “free weekend” for all (LTE) HotSpot customers? This would certainly be a social media darling; would it be enough incentive to get the 40% or so of smartphone customers who don’t know how to activate an AT&T HotSpot off the couch and learning? Bolder yet, what about in conjunction with U-Verse to increase service bundling (maybe HBO to go)? The possibilities here are endless, and there’s no extra equipment to sell. The data network is largely empty on the weekends (I have speed test history from my AT&T Samsung Galaxy SIII to prove it) and social (and traditional) media will market it for you.
Finally, AT&T needs to leverage the fiber-fed buildings that they are installing as a result of project VIP. They announced that they would have 250,000 business locations covered by these buildings at the end of 2013. This probably equates to 40,000 or so actual physical structures, or about 2x the current footprint of tw Telecom. While strategic business revenues are on the rise (up more than 15% in the second quarter and an $8 billion annualized revenue stream), the rest of the business market is suffering.
With each VIP building added, AT&T achieves a lower unit cost and opens up the door to new integrated revenue opportunities. Wireless coverage (including Wi-Fi) can immediately be addressed through deployment of in-building solutions. Storage and backup solutions can be implemented which never leave the AT&T network (adding new meaning to the term “private” cloud). Location-aware devices can be pinpointed to the room, and not within a large radius, for emergency management services. And the quality of the video surveillance system – it would be best if you stayed away from these buildings as the cameras have 41-Megapixel quality. VIP presents many opportunities to tap into latent business demand beyond faster speeds, provided customers are presented with the value of a good value.
Bringing Amazon devices into the AT&T Postpaid fold, driving HotSpot adoption through HBO-like Free (LTE) Weekends, and maniacal focus on the best possible customer experience (and AT&T market share) for each of the VIP fiber-fed buildings provides the basis for differentiation against Verizon. It sets AT&T above the T-Mobile fray, and drives incremental value without changing pricing plans or new product development. It also establishes AT&T as the price/ performance leader across wireless and wireline.
Positioned correctly, AT&T could drive the same hysteria as Google just accomplished with Chromecast and erase some of the past memories of network failures (worth watching this Daily Show link – caution: Daily Show language). The components are there. Will AT&T take the risk? Stay tuned.
Next week, we’ll add Sprint earnings to the mix and see what that means for T-Mobile. Until then, if you have friends who would like to be added to this email blog, please have them drop a quick note to email@example.com and we’ll add them to the following week’s issue. We will also be posting some additional analysis to the www.mysundybrief.com blog site. Have a terrific week!
Greetings from San Diego and Dallas. Hopefully most of you are reading this after your Fourth of July weekend has ended. This has been a busy week in telecom. Late Friday, as we predicted, the FCC unanimously approved the Sprint/ Softbank and Sprint/ Clearwire mergers. This paves the way for the Clearwire shareholder vote on Monday (July 8) and then the synergy expectations game begins. Exciting changes are afoot, and, as I indicated in my Bloomberg interview last Monday, they must execute with an unprecedented degree of precision.
Many of you commented on the interview through LinkedIn or through direct emails/ texts. A couple of you asked me for my sources on the EBITDA and debt levels that I mention in the interview: Sprint is here, Clearwire is here, and Verizon Wireless is here (click on the transcript for the net debt comment and the financial and operating information for the trailing 12-month EBITDA). The exact numbers (and I have excluded the EBITDA for Sprint and Verizon’s wireline operations in this metric) are Sprint wireless + Clearwire adjusted trailing 12-month EBITDA = $4.3 billion; Sprint + Clearwire adjusted net debt as of 3/31/2013 = $20.2 billion; Verizon Wireless net debt = $6.2 billion, and Verizon Wireless trailing 12-month EBITDA = $31.0 billion.
This equates to a debt-to-EBITDA ratio of ~ 4.7x for the combined Sprint/Clearwire and 0.2x for Verizon Wireless. Clearly two different ends of the spectrum (pun intended) when we are looking at financial “wiggle room” should synergy expectations be delayed. The 4.7x is better than it would have been under Dish, and there are few doubts about Sprint’s ability to pay their debts for the next few years, but Verizon’s options are far greater. It’s why Verizon has returned more equity value to their shareholders in the past six months than the entire market capitalization of Sprint (see chart below).
We’ll talk about Sprint more after their earnings announcement on July 30, but, as I said in the interview, a new captain (Softbank) with discarded (iDEN) ballast and cash availability filling their sails makes the Sprint ship more formidable. But the straits they must navigate are narrow, and the room for error is slim to none.
In the “missing expectations is everything” column, Samsung Electronics reset second quarter expectations this week – consolidated revenues would only be 20% higher, and operating profits only 47% higher (to $8.3 billion). The stock was not bludgeoned as Blackberry was, but it did add to the chorus of ecclesiastical analysts who are convinced that smartphone growth will never return to the good old days of 2011/2012. Here’s one analysis by The New York Times who almost feels obliged to quote Mark Newman from Sanford C. Bernstein at the end.
The reporting misses two key factors that affected smartphone sales – 1) the Galaxy S4 really did experience supply chain/ inventory shortages with Sprint and T-Mobile at the end of April (and expectations did not adjust); and 2) Verizon and AT&T adjusted their handset upgrade programs from 20 to 24 months, creating potential confusion among the current subscriber base (these changes do not take effect until January and March, 2014, respectively). As others begin to aggressively adopt T-Mobile’s “Pay for your device each month” model, the power of high-end devices like the Galaxy S4 become affordable to tens of millions of additional users. This is also will be very good news for Apple.
In the “It’s good to be king” column, Amazon is facing a fresh set of charges alleging that it is taking price increases on books where there is less demand (and as a result less competition) for the title. The first report of this came from The New York Times on Friday. This is an excellent article, but leaves me at a loss – don’t most publishers have their e-book formats distributed across multiple operating systems (Amazon, Google, Apple, Nook)? Did Amazon simply raise the price to the Google Books level (I spot checked several popular books and they all happen to be nearly or exactly the same price)? Regardless, this article could not come as a less opportune time for Amazon as the Apple price fixing trial awaits a decision.
In the “Every dog has his day” column, Xobni (Inbox spelled backwards), an innovative yet aging contact management application was purchased by Yahoo! for a rumored $30-40 million (although there appear to be another $30 million or so in earnouts according to TechCrunch). I was a Xobni user during the Mobile Symmetry (MS) days. The software in 2009 was better than anything else in the market – it tried. But, as my former MS colleague, Neil Tenbrook, said, “This contact management stuff is hard!” Xobni raised $42 million (not even a 1x return before earnouts), had 100 million+ Microsoft Outlook downloads, and some success in the iOS, Blackberry and Android formats. But it missed the restructuring of information, the demise of email as a communications medium, and the rise of contact management through social/ business networks. Good luck to the team as they integrate into Yahoo – if done right, I might even rethink using a Yahoo email account.
Finally, in the “Just Weird” column, we have Prince. In a wide-ranging interview with V magazine, he is asked whether he owns an iPhone. Prince’s response:
“Are you serious?” he says. “Hell, no.” He mimics a high-voices woman. “Where is my phone? Can you call my phone? Oh, I can’t find it.”
I think there is a bit of Prince in all of us. Even if it’s a very tiny amount.
This week, we continue our evaluation of second quarter earnings. Here are our findings to date:
- The beginnings of a meaningful metrics (but not EBITDA) change will appear at T-Mobile.
- Verizon’s lead in profitability will widen because of their high mix of LTE-based traffic.
- Sprint’s 2Q will be driven by networks in transition (iDEN to CDMA; 3G to 4G; contract to no contract; government-subsidized to consumer-driven).
- No one will see an EBITDA dip due to new phone brand launches (Samsung, HTC, and Blackberry numbers all back this up).
- AT&T will (slightly) surprise on LTE footprint and postpaid additions (thanks to Sprint’s iDEN turndown), but disappoint on many other metrics.
That leaves us with cable and LEC/ CLEC wireline earnings. As you can see from the table at the end of this column, publicly traded cable stocks have been driven up in the past month by M&A speculation. Through mid-April, only Comcast and Charter had posted gains for the sector.
Outside of synergy speculation, there are two reasons to be excited about cable and, to a lesser extent, LEC/ CLEC broadband. First, the housing sector is beginning to recover. As the chart from the St. Louis Federal Reserve shows, new housing starts are beginning to come back from historical lows.
Because we suffered a 75% decline in new housing starts over three years, it’s hard to see the bottom. Clearly, however, we hit it in 2009 and a have recovered about half of the expected gains. (Note: that leaves at least 500,000 new units to get back to a median historical level for the industry, or about $600 million in new telecommunications services opportunity).
Turning housing starts into profits depends on strong and steady plant investment, especially in high growth areas such as Texas, Florida, Georgia, North Carolina, Arizona and California (see here and here for ADP job figures). This favors cable companies such as Brighthouse Networks (Tampa/ Orlando), Comcast (Houston, Atlanta, South Florida), Time Warner (North Carolina, LA, Dallas, Austin, San Antonio), Cox (Orange County, Phoenix, San Diego), and Suddenlink (West Texas, who is having an economic boom like no other).
However, with the exception of Arizona, the states mentioned are in the heart of AT&T territory (although parts of FL and NC are managed by CenturyLink). This is where they have concentrated much of their fiber investments for the past decade. When the South and West recover, AT&T’s opportunity grows. This is one of the reasons why we started to see consumer revenues grow in Q1 (+2% annually) and why 2013 will be the fastest growing year for U-Verse since their early launch days (2008). With “mover” activity on the rise into and within these markets, it’s a promising time for AT&T.
On the enterprise front, fiber and Ethernet connectivity from office buildings to geographically redundant and secure servers is growing. The transition from client-based servers to private and “hybrid” clouds began in 2005 (if not earlier). Much (although not all) of the server growth for the mid-market and non-essential enterprise information is occurring offsite. This is driving up the need for bandwidth and accompanying managed services.
Since this issue is running a bit long, I’ll reference the latest earnings and investor conference presentations from tw telecom (TWTC) as reference for fiber/ Ethernet trends. They are investing $350-370 million in 2013 to densify their networks in 75 markets and satisfy the “fiber to the building” need. While they will face formidable competition from Verizon, AT&T, CenturyLink/ Savvis, Zayo, Level3, and Comcast (and Time Warner) Business, the dynamics of the recovery are covered in their earnings and investor conference discussions. Companies that are successful in this space are unwavering, consistent, and patient. There are no “quick bucks” with metro fiber.
Next week, we’ll take a closer look at Dish’s options after Sprint/ Clearwire (opinions welcome). Until then, if you have friends who would like to be added to this email blog, please have them drop a quick note to firstname.lastname@example.org and we’ll add them to the following week’s issue. Have a terrific week!