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Greetings from Charlotte and Dallas, where summer is beginning its sunset, and the never-ending parade of Facebook back to school pictures reminds me of how quickly our children grow up. Given the relative lack of events this week in the telecom world (including Steve Ballmer’s retirement announcement, which is meaningless compared to the one that names his successor), I thought I would take some time to answer fan mail (we get a lot of it here at The Sunday Brief), and to request reader participation next week while The Sunday Brief takes a brief hiatus for the Labor Day holiday.
Many of you (about 100) are very recent readers to The Sunday Brief, and several of you have recently asked “What prompted you to start The Sunday Brief?” The purpose of this column is to analyze the gaps that exist between segments, operating systems, companies, and industries. Our industry scope is broad – anything which affects the creation and distribution of Internet content. When I was running Wholesale Services for Sprint (I left four years ago this month), I gathered a reputation for lengthy, detailed memos. All of them contained an executive summary and a call to action, but they were grounded in an analytical understanding of the marketplace and focused on incremental value creation.
Many of my colleagues relegated them to the “Read” file, but several senior Sprint leaders digested every one. Just the other day, I had one forwarded to me from a senior leader who is no longer at Sprint citing the fact that my 2008/09 bandwidth forecast for cell site backhaul growth missed actuals by 2x (this same forecast was viewed as “crazy” and “out there” by many of my colleagues in 2008/09 as we were courting cable backhaul providers).
Those who read my tomes in 2008 and 2009 (which were bi-weekly then) asked that I consider writing an external version for the masses after I left Sprint. We started with seventeen readers in late August 2009 (the topic was the dispute between Google Voice, iTunes, and AT&T) and have never looked back. The first published column in RCR Wireless came about a month later. The rest is history.
We have published over 175 Sunday Briefs over the past four years, and some have been more memorable than others (comparing leadership in the corporate world to coaching under-10 boys soccer teams was one of the not so memorable columns. The Internet has permanently immortalized these B-side columns, however. Click here for that article on RCR Wireless).
One of the common questions I receive is “What has been the most popular Sunday Brief column?” Of the 175 or so, the most popular column was one I wrote in March 2010 contrasting Google’s exit from China to Hudson Taylor’s (he was a 19/20th century British missionary) decision to stay. The article was titled “Google’s Boxer Rebellion: What Would Hudson Taylor Do?” and I am told by several of you who work for Google that it made it to the top of the Mountain View company. Prior to selling www.thesundaybrief.com to a British soccer team blog site, the Hudson Taylor article had been viewed at least 9,000 times and had been linked by 50 other blog sites. I still have the original Sunday Brief email and am glad to forward it upon request.
Another common question is “How many people read The Sunday Brief each week?” I have no idea. Judging from the emails and conversations on the topic, my unscientific guess is that several hundred of you forward this email on to colleagues (our email list is about 1,000) which allows me to comfortably say that the email is likely read by thousands each week. We get several hundred unique visitors to the website each month, and probably 100-200 emails each month with questions/ comments/ thoughts etc. Since we adopted our new publishing format last April, we have added over 700 net new readers (consisting of 721 requests to add and 3 requests to unsubscribe).
One of the most frequent questions I get is “What do you read every week?” or “How do you stay on top of the industry?” As you see from the columns, I read a lot of financial reporting data. The secret to identifying gaps or understanding where companies or industries are headed is to understand their management. This includes what they say and do not say in public forums.
Financial data is most relevant when it is paired with management’s statements about strategy and results. One of the reasons why many readers like The Sunday Brief so much is because we expose the hypocrisy of management, many of whom do not have a clue about the disruptive powers about to engulf them.
I do not read a lot of other financial bloggers (Seeking Alpha commentary is a time waster, IMO), but do read the thoughts of a few financial analysts, including Craig Moffett (now at Moffett Research) and John Hodulik (UBS). Over ten percent of the subscribers to The Sunday Brief have Wall Street email address suffixes (e.g., jpmorgan.com, ubs.com, ml.com) so it’s important to have a good grounding in Wall Street news. I am also an avid reader of The Economist.
Within the telecom/ tech industries, I also spend a lot of time on RCR Wireless and the Fierce properties (Fierce Wireless, Fierce Cable). My favorite read each week is Ars Technica. I usually go “deep” with one or more articles (click here for a terrific article published this month on Android 4.3 changes). I also enjoy the user candor of www.dslreports.com. Unvarnished is the best way to summarize this site led by Karl Bode.
Every former entrepreneur or venture capitalist seems to have a blog site. Over 95% of them are…. not worth following (I have tried). They are inconsistent, untimely, self-serving and they provide inconsistent and conflicting advice to eager and naïve entrepreneurs. However, there are three that you should bookmark. The first is Feld Thoughts (www.feld.com), Brad Feld’s blog. I started to read this in 2009 and have never looked back. Many of Brad’s advice to entrepreneurs can be found in his book “Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist” available on Amazon here. While no blog can fully cover the breadth of topics one needs to start a business, Brad’s would be a good start.
I also occasionally read Fred Wilson’s blog (www.avc.com) from Union Square Ventures and also Mark Suster’s terrific blog called Both Sides of the Table (www.bothsidesofthetable.com). These blogs tend to focus on the mechanics of running a business which is why I like them so much. I think I have been reading Mark’s blog for four years and have not found one post that did not challenge me personally or professionally.
As far as books go, there are four that will never leave my home library:
- Smart Choices: A Practical Guide to Making Better Life Decisions by John Hammond
- Business Model Generation by Alexander Osterwalder and Yves Pigneur
- Design Rules: The Power of Modularity by Carliss Baldwin and Kim Clark
- Disciplined Entrepreneurship by Bill Aulet (just released this week)
These four books can take young, technology-focused entrepreneurs a long way in their business plans. I plan on devoting some time in future Sunday Briefs to the nuggets in Bill Aulet’s recently released book. I have read it cover to cover twice and it’s absolutely superb.
One of the most thought-provoking pieces I have read this summer is “The Blip” by Benjamin Wallace-Wells, a columnist for New York magazine. It was forwarded to me in July by a NYC resident who asked for my thoughts on the article. Rather than opine on the article, I’d like to ask each of you to read it and send me your thoughts (just as your kids are getting their first homework assignments, we are trying something new at The Sunday Brief and actively soliciting feedback from our readers). Please send your feedback to email@example.com and indicate whether your comments are anonymous or can be public (we will default to the former).
If we get enough feedback this week, we’ll publish a Labor Day special edition. Otherwise, try out the website (www.mysundaybrief.com) and read up on an old issue that is in your “Read” or “Sunday Brief” or “Patterson” folder.
Speaking of mojo, we had 19 referrals last week to receive the email edition of Sunday Brief. Thanks for passing it on. If you have friends who would like to be added, please have them drop a quick note to firstname.lastname@example.org and we’ll subscribe them as soon as practicable. Have a terrific week!
Greetings from Dallas, Denver, Philadelphia (pictured) and the overheated New York City. This week was full of change, from Microsoft’s $900 million Surface RT tablet write-off (see the Tech Crunch article here) to the dismal Nokia earnings (BGR summary here), to Google’s mixed earnings release, to Charter’s seismic aspirations to acquire Time Warner Cable, to what could be the largest “going dark” event in the ongoing retransmission saga between cable and content, the week did not lack for big news. On top of this, Verizon Wireless had their quarterly earnings call.
Before digging into the pricing and phone plan changes announced by each of the four largest carriers over the past month, let’s get a quick “health check” of the industry through the eyes of Verizon. On Thursday, the telecommunications giant announced impressive earnings and cash flow growth, driven almost entirely by their wireless segment.
First, the bad news: Verizon has a wireline unit that, despite continued investments in fiber, cannot manage to offset its losses from legacy technologies to earn a profit. With the exception of FiOS Internet and Video, the rest of the business is largely a victim of increased wireless substitution, VoIP (as opposed to traditional TDM voice) penetration, cable competition, and the cloud.
Structural issues create competition within the company for enterprise wallet share. New markets, such as cloud, have new competitors who are more expert in computing and data center management than Verizon. If there is an economic recovery, it’s not showing up in the results. If you are managing the wireline business, there’s plenty to be worried about at Verizon.
In fact, as we have said many times, if all they had were a wireline unit, they would not be a going concern. Have a look at Verizon’s consolidated liabilities (note: Verizon reported $2.41 billion in cash & marketable securities):
On the conference call, Fran Shammo responded to a question about Verizon Wireless’ share of that. He responded:
On the update of the net debt for Wireless, gross debt is at $10.1 billion and net debt is $9.7 billion. And as you know, we did a distribution at the end of June of a total of $7 billion out of the partnership to both of the owners. Also just to keep in focus here, we have about $1.5 billion of Wireless debt coming due in the fourth quarter this year and another approximately $3.5 billion coming due in the first quarter of next year and we plan to pay that debt off at this point in time.
Verizon has $39.7 billion in gross debt without Verizon Wireless and about $2 billion in cash. Their wireline segment generated $8.2 billion in annualized EBITDA but spent $6.2 billion in capital over the same period. That leaves $2 billion annually to pay taxes, nearly $6 billion in dividends, interest and principal for $40 billion in debt, and fund $34 billion in pension benefit obligations (I am taking some liberty in assigning all of the pension benefit and dividend obligations to the Telecom unit but you get the point). As a standalone business unit, Verizon Telecom would be nearly worthless.
But that is not the case. As we have discussed many times, wireless is a growth and cash machine. As Fran says above, they have $10.1 billion in debt and are generating $8.5 billion in EBITDA per quarter ($31.8 billion the past year). When they finish paying off $5 billion in debt at the end of the year, they will have a cash flow to debt ratio of 0.16. That’s a Google or Apple level, and, most importantly, it’s not a Sprint, T-Mobile, or AT&T level.
What will Verizon do with the over $6 billion in quarterly post-capital expenditures free cash flow it generated in the second quarter? They will not make a bid for Leap. They will actively explore the Canada market (Fran’s quote: “If you look at the population of Canada, about 70% of that population is between Toronto and Quebec. That’s adjacent to the Verizon Wireless properties. Again if you look at the spectrum auction, it mirrors up exactly what we launched here in the United States on the 700 megahertz contiguous footprint.”). Looks like someone has been reading The Sunday Brief (the picture is the same one we used in the July 1 earnings preview issue of TSB). How will Verizon invest its free cash flow?
The answer is simple: If the investment supports a stronger network or Internet delivery platform, Verizon has the capability to do it. Better LTE in-building coverage is on the list. Spectrum auctions are on the list. Pioneering the first LTE-only device by the end of 2014 is on the list. Moving to LTE Advanced and VoLTE technologies ahead of Sprint/ Clearwire and AT&T is on the list. Third-party paid (a.k.a, “Toll Free”) data platform development is on the list. As discussed above, international expansion is on the list. And, at the right price, buying out Vodaphone is on the list.
Verizon Wireless will also have to sing a few verses of “He’s Ain’t Heavy, He’s My Brother” (a classic video link worth watching) as they assist in lowering the liabilities of the Telecom unit. But where would you rather be – with a pre-Clearwire (Q1 2013) Sprint of $4.4 billion of annual adjusted EBITDA and $16.7 billion in net debt (3.8x net debt to EBITDA ratio) with several quarters of LTE investment and Clearwire integration remaining, or at Verizon Wireless’ 0.16x end of 2013 ratio with $24 billion in post capital spend free cash flow over the next four quarters to invest?
One thing is for certain, Verizon has chosen not to invest in acquiring postpaid customers through aggressive plan changes at this time. Their Edge announcement is great if you have to have the latest technology. For example, if you wanted the latest Nokia Lumia 928 (retail price = $450), you could pay $18.75 per month for 24 months for a) the right to upgrade after the first year, and b) no contract limitations. Or, if you paid the same $100 as you would in a traditional post-paid agreement, you could get a new phone after 7 months (50% of the balance is paid off). With a Samsung Galaxy S4 ($650 retail price), the new phone interval with $200 down is 17 months.
The issue with Verizon’s Edge and AT&T’s Next programs is that they fail to couple plan relief with the handset subsidy. To the consumer, both represent short and long-term drains on disposable income (and we have discussed many times how many Americans live paycheck to paycheck).
Let’s consider a family of four that wants to move to Verizon from another carrier. They have four smartphones and will consume 6GB of data per month. With Verizon’s Share Everything, that would cost $240 per month plus $108 per month in Edge payments. With Sprint’s new My Way Plan, that would cost at least $220 per month ($140 + $80) and yield 2GB less total data and no sharing capabilities. However, with current promotions, the family could get four new Samsung Galaxy S4s for $400. If the family could determine who would be using the most data (it’s probably inversely related to age), there’s a strong case that Sprint’s plan could be of equal cost but more valuable over the short and long-term than Verizon’s.
T-Mobile has a new, but not necessarily as compelling, offer. For the same four Galaxy S4 phones, and on the JUMP (Just Upgrade My Phone) plan, the family of four would be paying $140 (2.5 GB per line) + $80 in phone installment payments + $40 in JUMP plan payments (which includes phone insurance and mobile security) + $600 in phone deposits. That’s $260 per month + $600 in out of pocket costs. If the family has good credit, Verizon’s Edge/Share Everything plan is competitive. Sprint’s smartphone promotions (which will not end with the BOGO Galaxy S4 promotion) are compelling as well.
The problem is that consumers have to do a lot of math to figure this out. Store reps do not like to do a lot of math and neither do consumers. They have been trained to look for 2-yr promotional pricing, and, with T-Mobile’s recent success, perhaps consider this against a monthly payment plan alternative.
The bottom line for consumers is “WAIT and SAVE.” After 120 days from initial launch, the Blackberry Z10 went from $200 to free for both Verizon Wireless and AT&T customers. The heavily subsidized $100 Nokia Lumia 928 is now $30 on Amazon with contract. A family of four can get free Samsung Galaxy S3 devices on Amazon if they are switching. More phones, including a bunch of free LTE devices can be found on the attached table in a recent Sunday Brief post.
If consumers can wait six months to a year prior to buying their next device, they are probably better off pocketing the savings and using the balance to self-insure their device. That will certainly not end up being the case for many Americans, but the surcharges required for “latest and greatest” phone status are generally not worth it.
Next week, we’ll put the microscope to AT&T’s earnings. 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. Have a terrific week!
Greetings from Dallas, where the traditional summer heat is breaking for two days (Minneapolis is forecasted to be 10 degrees warmer today and 15 degrees warmer tomorrow than Dallas). However, there is no break from the blistering pace of telecom news that occurred this week.
On Friday, AT&T announced that they were acquiring Leap Wireless for $15 per share in cash. The transaction, including the acquisition of $2.8 billion in net debt as well as proceeds from the sale of the Chicago “A Block” 700MHz spectrum, is valued at just under $4.2 billion. While this transaction represents an impressive premium to Leap’s closing share price on Friday, it’s one fifth of the amount MetroPCS was willing to pay for Leap’s assets just six years ago (see the Fierce Wireless article here. It’s a “What were you thinking?” moment for the Leap Board).
Leap Wireless (a.k.a, Cricket) has a lot of spectrum, particularly in the AWS band, that AT&T can pair with its spectrum portfolio to produce a large LTE coverage area. Here’s the AWS coverage areas for Leap (the hashed area is the result of Denali Holdings’ win of the Great Lakes spectrum band) as well as for Cingular:
While is important to note that the large swaths of blue above are not in the same AWS block, they are in the same band. This improves AT&T’s coverage in the Great Lakes area, and complements AT&T’s 700MHz LTE coverage in the Eastern US. For a good spectrum band chart, click here for Phone Scoop’s tutorial.
That announcement dropped late Friday, and it’s nearly certain that there will be another bidder for the Leap Wireless asset. Regardless, this transaction will drive up spectrum values for remaining holders of 700MHz, 1900MHz, and AWS spectrum bands. C-Spire, US Cellular, Ntelos and other smaller (private) companies will be receiving phone calls. It’s a good day to be an asset owner.
It’s not a good day, however, to be a smartphone provider. This week, we learned just how bad sales of the Blackberry Z10 were in the second quarter as AT&T commenced a fire sale on the newly released Blackberry. Here’s the listing on Amazon – $49.99 (down from $199.99). Best Buy has the Blackberry Z10 listed at FREE.
This does not appear to be because the phone itself is defective. Over 225 people have reviewed the device on www.verizonwireless.com and it is clear that those who own the phone adore it (4.4 stars out of 5.0; 85% or reviewers recommend the phone). However, it lacks enthusiasm from shartphone switchers, at least compared to the other new phone entrant, the Nokia Lumia 928. It’s one of the highest rated devices on Verizon Wireless with 4.8 stars and a 95% recommendation level.
Blackberry’s CEO, Thorsten Heins, referred to “lessons learned” at Blackberry’s annual shareholder meeting this week. One of those lessons learned is that the bar for switching phone manufacturers and operating systems is very high. Blackberry has a real price point problem on its hands as they ready the US rollout of the Q5 in a few months. Not much room for a “scaled down” version of the Z10 or the Q10 with pricing for the Z10 at or nearly free. There are many chapters left to unfold with Blackberry, but the Z10 launch will be remembered as one of the most taxing times in the Canadian company’s history.
On the opposite end of the spectrum comes the super-premium Nokia 1020. As one reviewer put it, “You can sum up Nokia’s just-unveiled Lumia 1020 in three words: 41, mexapixel, camera.” Nokia held a pretty well attended launch in New York City this week, where reactions to the camera were generally positive. C|Net proclaimed, “The Lumia 1020 puts the mega back in megapixels.” However, there are concerns that there is too much camera focus in this model, and more than one analyst worried that it could relegate Nokia to the “niche” market.
I think there is a much larger market for image capture than many expect, especially with the social media-focused crowd. This is a phone that consumes LOTS of data (even with a 5 MP “shrunk for social” version of the picture, there’s the potential for many more uploads), and with the blogosphere continuing to demand higher resolution photography, there are many who will want this device. The accessories are fantastic.
Admittedly, this is not a device for everyone, and Nokia will need to balance this with a lineup that satisfies a palate of diverse smartphone budgets and interests. Without a doubt, Blackberry owns the keyboard phone. And now, without a doubt, Nokia owns the picture phone. They are both feet in the very large and unforgiving doors of smartphone incumbency. If Nokia can turn the corner on (business) applications, and then offer free Gigabytes of wireless data usage over AT&T for new 1020 buyers, we could have a challenger to the Galaxy S4 in the making.
In case you missed the significance of the last statement, let me reiterate: Smartphone differentiation, particularly for challengers, can be achieved with a) more storage (Microsoft Drive) and also b) application-driven subsidy (e.g., first 500MB of data charges to and from Microsoft Drive are free for the first year). AT&T can accommodate these changes today, and I would not be surprised if a “limited time offer” is extended to new Lumia 1020 users to allay fears about the increased data usage a 41MP/ 5 MP phone can drive.
As Nokia moves to change its position in the US phone market, their chief partner, Microsoft, announced a substantial restructuring on Thursday. The chief outcome of the reorganization was a functional structure, led by four engineering-focused groups: OS, Apps, Cloud, and Devices. This change should help Nokia as they integrate the Lumia product line into the Xbox2 and other products Microsoft will introduce.
There have been many debates about Separate Business Units (SBU) versus functional organizational models. Clearly, Microsoft sees a more integrated software/ hardware future (which seems to be the trend), and the change from traditional PC to Mobile/ Tablet computing is occurring at a very rapid rate. However, the SBU function allowed Microsoft to be competitively focused in the Enterprise space against business-oriented companies like Oracle and Cisco. This is not impossible in a functionally-aligned organization, but it’s certainly a lot harder to hear the voice of the customer when there is no division “lead” with P&L authority and responsibility.
Also, Windows 8 has not been wildly embraced, which goes to show that too much change can backfire. At the end of June, Microsoft announced Windows 8.1, which contains a host of features specifically designed to ease the transition from Windows 7 to Windows 8. A full recap of the Windows 8.1 features is here. Any reorganization should be able to definitely answer the question “How will Microsoft’s customers benefit?” I’m not sure that the Windows user community benefits from this reorganization. If anything, it’ll result in more changes with less regard to the velocity of the user impact which could backfire on Microsoft’s PC-based business.
Microsoft’s reorganization helps apps. It definitely helps their consumer business, especially Microsoft Drive integration. But will it improve customer interest in Windows, and will it create a more competitive Enterprise presence? That appears to be seen.
If spectrum-driven acquisitions, super-premium smartphone announcements, and the reorganization of one of the most important forces in technology aren’t enough, we had individual and family pricing plan changes announced from two of the four largest US wireless carriers this week. Given the length of this week’s article, we’ll devote the entirety of next week’s Sunday Brief to an economic analysis of T-Mobile’s JUMP (Just Upgrade My Phone) and Sprint’s Unlimited, My Way plans.
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!