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“Soon… soon” – The T-Mobile/Sprint Never-Ending Engagement

opening picGreetings from Charlotte, North Carolina, where summer is in full swing (the opening picture is yet another from our trip to Willard over the Independence Day holiday – Abby and Gus in “full throttle”).  This week we will discuss the never-ending engagement that is the T-Mobile/ Sprint merger.

A quick note before we dive into this week’s topic:  We are posting a Deeper section on the Website with links to key articles.  I found this living, breathing bibliography to be very useful with clients and welcome your feedback (articles we should have included, format, etc.).

A Chronicle of the T-Mobile/ Sprint Courtship

For those of you who have been hiding under a rock, here’s the timeline of the T-Mobile/ Sprint courtship from the past five years (we’ll have more timeline for readers in the Deeper version of this article on the website):

Once…

Trump and Masa pic

June, 2014:  Rumors circulate that Sprint will acquire T-Mobile for $32 billion.  The two companies would carry a combined $54 billion in long-term debt (NYT Dealbook article here).

August, 2014:  Sprint ends their pursuit of merging with T-Mobile after significant regulatory pushback (NYT Dealbook article here).

November, 16:  Donald J. Trump elected President.

December, 2016:  Masa Son visits President-elect Trump and commits to a $50 billion investment in the U.S. that would create 50,000 jobs.

Twice…

February, 2017:  Rumors begin to surface that Sprint and T-Mobile will merge and that Sprint is willing to cede control (Reuters article here).

November, 2017:  Sprint and T-Mobile announce that they had ended merger talks (NYT Dealbook article here and joint press release here).  Talks break down this time over who would control the new company’s Board of Directors (WSJ inside story here).

Three Times a Merger (???)

T-Mobile operational plan for success pic

April, 2018:  T-Mobile and Sprint agree to merge in an all-stock deal valuing Sprint at $26.5 billion.  The combined company would have $55 billion in enterprise value and $60 billion in debt.  T-Mobile parent Deutsche Telekom (DT) would own 42% of the new company but control 69% of the voting rights and appoint 9 of the 14 Board seats (WSJ article here; formal announcement here; investor presentation here).  John Legere to serve as CEO and Mike Sievert to serve as COO of the new entity.   

May, 2018:  Marcelo Claure becomes Executive Chairman of Sprint.  Current CFO Michel Combs (formerly of Altice) succeeds Claure as CEO.

September 2018, January 2019, and March 2019:  Federal Communications Commission (FCC) stops the merger clock three times to obtain and analyze information related to the merger.  As of this writing, the 180-day merger approval clock is on Day 222 (FCC timeline here).

December, 2018:  Committee on Foreign Investment in the United States (CFIUS) approves the merger.

April, 2019:  T-Mobile and Sprint delay the merger deadline to July 29 (Reuters article here and CNBC interview referenced in the article is here).

May, 2019:  The Federal Communications Commission’s (FCC) Chairman throws his support behind the merger under the conditions that rural broadband coverage is increased, 5G rollout commitments are met, prices are frozen for the next three years while the buildout is underway, and that Boost is divested (see FCC statement here).  The formal vote is expected in the next few weeks.

May 30, 2019:  Reuters reports that Amazon is interested in buying Boost Mobile and any wireless spectrum that would need to be divested.  Amazon neither confirms nor denies the report.  Craig Moffett pens one of the best blog posts on the topic called “Sprint and T-Mobile: Welcome to Crazy Town” in which he dismantles the arguments that a) Amazon would want to buy, and b) that Deutsche Telekom would want to sell to Amazon.

May 31, 2019:  Comcast issues a statement saying that they are not interested in buying the Boost Mobile business or wireless assets after David Faber (of Comcast-owned CNBC) reported that they might be interested.

June 11, 2019:  Thirteen states and the District of Columbia sue to block the merger.  A start date for the trial is set for October 7.  Two additional states (Texas and Indiana) report to the FCC in June that they are investigating the merger but do not join the lawsuit.  (Articles here and here).  T-Mobile, in their response to the court, claims that these states are “Living in the past” (full document from Scribd here).

June 18, 2019:  Bloomberg reports that Charlie Ergen, CEO of Dish, is close to striking a $6 billion deal with T-Mobile to purchase Boost and some wireless assets.

July 12, 2019:  T-Mobile and Sprint delay the merger deadline past July 29.  Deal terms imposed by T-Mobile and Deutsche Telekom surrounding maximum network usage percentage of the new Sprint/T-Mobile network for the interim period and third-party ownership of the new Dish are reported to be the holdups (WSJ article here).  Note:  per the merger agreement, the drop-dead date is October 29, 2019 – see page 33 of the Letter to Shareholders).

Are you exhausted yet?  Hopefully not, because this ballgame is going to go a few more innings.  The bottom line from this timeline is that Sprint/Softbank went from an acquiring position to an acquired position in a short amount of time.  Because of their large debt load (driven in part by ~$13 billion in Sprint and Nextel affiliate acquisition debt incurred a decade earlier), Sprint’s competitive options are limited.  Meanwhile, Verizon and AT&T continue to tap the capital markets for network buildouts and spectrum purchases to build their lead.

Is Sprint as Attractive Now as they were in April 2018?  

sprint metrics picOne of the issues with long engagements is that things can change.  The beauty of the merged entity vision, the promise of network and distribution synergies, the allure of attractive competitive positioning can dull after 18 months.  The questions DT shareholders might be asking are “Is Sprint still worth 0.10256 T-Mobile shares?” and “Can we achieve more value by just buying Dish or pursuing another structure with Sprint?”

Nearby is a snapshot of Sprint’s postpaid phone, prepaid phone, and net debt situation.  Here’s what’s going on:

  1. Sprint is moving prepaid customers into the postpaid base.  As a result, prepaid attractiveness is likely understated as are postpaid promotional pricing pressures.  In the four quarters ending March 31, 2019, Sprint migrated 388,000 net subscribers from prepaid to postpaid.  Sprint’s activity in this area has increased over the past year, largely driven by increases in credit quality of their prepaid base (note: T-Mobile migrated 555,000 subscribers as well during the four quarters ending 3/31/2019 but their level of activity appears to be flat to down).
  2. Net debt is flat and net debt to adjusted EBITDA ratios have improved over the past year(s).  This is largely driven in part by an increase in leased devices.  Sprint’s leverage ratio is in the 3.9 – 4.0x range with the phone rental depreciation included in EBITDA (a more comparable metric for their peers, including T-Mobile).  It’s worth noting that T-Mobile has pulled back on device leases and is moving back to traditional Equipment Installment Payment plans (with initial payments for super-premium models).  More on this trend on page 12 of the Investor Factbook here.
  3. Subscribers are down slightly but phone churn is rising (there’re about 100 basis points difference between T-Mobile’s branded postpaid phone churn and Sprint’s).  It’s unclear how the prepaid migration is included in the postpaid churn calculation, but if the 388,000 customers are treated as postpaid gross additions, it’s likely that the migrations are muting the promotional pricing pressures described earlier.
  4. Sprint is bleeding cash to build out their network.  Over the last four quarters, their free cash flow (see page 11 in the link here for annual information and page 18 in the link here for quarterly information) has decreased by nearly $2 billion and the network build is consuming cash (a lot of this build is presumably in advance of merger completion).  The good news, as shown by the recent RootMetrics and OpenSignal reports is that Sprint’s efforts are working.  In many markets where they were good they have gotten better, and in many markets where they were really bad they are now a lot closer to their peers.
  5. Sprint has received surprisingly positive accolades for their 5G network performance relative to their larger competitors.  These reviews are very early in the network upgrade process, but Tom’s GuideCNETTheVerge.com all come to the same conclusion:  Sprint’s approach results in faster speeds than 4G across a wider coverage area, while others have substantially faster speeds than 4G across a smaller area.

sprint graphIs Sprint as attractive as they were in April 2018?  The short answer is yes, but they were quite homely a year ago.  How Sprint can persevere while spending money on needed network upgrades given the $9.3 billion in redemptions coming due over the next two years remains to be seen (see chart from Sprint’s Investor Relations website nearby). It’s likely to be a painful financial restructuring should the merger end up being scuttled or significantly delayed.

 

I’ll close this week’s discussion with the last Q&A on Sprint’s May 7 Earnings Conference call:

Question (from Jeffrey Kvaal from Nomura Securities):  

There is the possibility that at some point over the next weeks or months that we wake up in the morning and the likelihood of a T-Mobile merger comes down quite a bit. Given these concerns and comments that you have just expressed to us, what should we be then making of the prospects for the company looking out a few years from that?

Answer (from Michel Combs, Sprint’s CEO):  

… We remain optimistic that the government will see a compelling argument in support of our merger…If the merger doesn’t go through, we expect to continue to make improvements to the business, including our Nexgen Network deployment… We will have to reposition the company, reposition the company in how we play and which battlefield will be ours. While Sprint has made a lot of progress improving network and financials, as I have just mentioned, we still lack, let’s say, we still have offsetting challenges that I’ve mentioned, which means that we will have to reduce, of course, our promotional activity in the market, we’ll have to narrow our geographic focus. So at the end of the day, that means that we will be less of a nationwide competitor to AT&T and Verizon. So that’s site based, and we’ll have to reposition the company that way.

Next week, if the merger has not been approved, we will attempt to answer the question “Should T-Mobile buy Dish instead?”

Until then, if you have friends who would like to be on the email distribution, please have them send an email to sundaybrief@gmail.com and will include them on the list.  We have been overwhelmed by requests this week (over 200 added since last Sunday) and greatly appreciate your continued interest and advocacy.

Have a terrific week!

Sprint’s Head is Above Water

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

 

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

 

Sprint’s Head is Above Water

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Thoughts on Cable Performance

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

 

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

 

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

 

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

 

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

 

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

 

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

President Obama and the Set Top Box

lead pic (16)Tax Day greetings from Washington DC (where I chaired a terrific discussion at INCOMPAS), Chicago, Charlotte, and Dallas.  Thanks to everyone who showed up at the panel and participated – all of the speakers on Monday were great, including Chairman Tom Wheeler (pictured).

 

This week, we continue to chronicle the developments of the Set Top Box saga as the Obama administration weighed in through the NTIA with comments.  We’ll also weigh in on the controversial “Ghettogate” ad.  First, however, we’ll look at a study of balance sheets across the telecom industry which was released last week by Craig Moffett.

 

Redefining Leverage Ratios

With continued densification (smaller cell sites in more places), spectrum acquisition, and competition, many investors turn to leverage ratios to benchmark long-term financial health and viability.  These ratios are not the first thing that companies highlight in their press releases, but many calculate and discuss their net debt to EBITDA metric.  Here’s that definition according to Investopedia:

 

The net debt to EBITDA ratio is a measurement of leverage, calculated as a company’s interest-bearing liabilities minus cash or cash equivalents, divided by its EBITDA. The net debt to EBITDA ratio is a debt ratio that shows how many years it would take for a company to pay back its debt if net debt and EBITDA are held constant. If a company has more cash than debt, the ratio can be negative.

 

Using that standard definition, communications company metrics would look like this:

leverage ratio beforeFrom a first glance, this looks as expected to most who follow the telecom industry.  Verizon and AT&T maintain low leverage ratios and as a result are afforded low interest rates.  Cablevision, Dish, Sprint, and Charter have historically been able to use high-yield debt markets to finance operations, spectrum purchases, stock buybacks, and other investments.  T-Mobile and Time Warner Cable lie somewhere in between.

 

Telecom is not a typical industry, however.  With Equipment Installment Plans (which entails moving away from subsidy and into subscriber-paid devices) and phone leasing proliferating, more “debt” is being created and sold to third parties at growing rates.  Operating leases create pressure on EBITDA but also frequently mean long and non-cancelable commitments for telecommunications carriers.  And pension obligations represent a promise to employees that rarely enters into leverage discussion dialogue.

revised ratiosMoffettNathanson’s adjusted leverage ratio schedule is shown to the right.  In this view, the relative health of each carrier is different than what was previously reported.  Verizon and AT&T look more like Cablevision and Charter thanks to large pension liabilities, even when the undiscounted size of the pension contribution tax credit is considered.  Comcast appears to be the healthiest of the industry with Time Warner a distant second.  Sprint’s revised ratio is a whopping 7.9x driven in large part by the reversing of the leasing construct.  While it should be emphasized that nothing is truly “real” in the accounting world, this analysis provides some insights into the high-yield market’s reluctance to lend the company money at reasonable rates.

 

Craig Moffett did a Bloomberg interview on the topic (see here) and his detailed analysis is only available to MoffettNathanson clients.  However, if you can get a copy of their work, it’s worth digesting and is on par with the seminal analysis on telecom affordability Craig did in his Bernstein days.

 

President Obama and the Set Top Box Kerfuffle

Since our article analyzing the Notice of Proposed Rulemaking was written (see here), there has been a lot of discussion across many constituencies as to who would benefit and suffer the most.  In the Sunday Brief devoted to the topic, we mentioned how this is pitting entrepreneurs against established programmers.  It’s also pitting Democrat Congresswoman Anna Eshoo (California), the ranking member of the House Energy and Commerce Subcommittee on Communications and Technology against Democrat Senator Bill Nelson (Florida), the ranking member of the Senate Commerce Committee.  Representative Eshoo is a supporter of the FCC’s initiative while Senator Nelson wants to study the implications of opening up the Set Top Box market in greater detail (Nelson is supported by the National Urban League, the National Action Network, and the Rainbow/ PUSH Coalition).

 

To make matters more complex for policymakers, President Obama decided to weigh in on Friday, devoting his weekly radio address to the set top box issue.  Here’s the situation assessment according to the White House (full blog address here):

 

… the set-top box is the mascot for a new initiative we’re launching today. That box is a stand-in for what happens when you don’t have the choice to go elsewhere—for all the parts of our economy where competition could do more.

 

Across our economy, too many consumers are dealing with inferior or overpriced products, too many workers aren’t getting the wage increases they deserve, too many entrepreneurs and small businesses are getting squeezed out unfairly by their bigger competitors, and overall we are not seeing the level of innovative growth we would like to see. And a big piece of why that happens is anti-competitive behavior—companies stacking the deck against their competitors and their workers. We’ve got to fix that, by doing everything we can to make sure that consumers, middle-class and working families, and entrepreneurs are getting a fair deal.

 

If that weren’t enough, the President’s National Telecommunications and Information Administration (NTIA) filed supportive comments with the FCC (read more about them here).  For those of you who are new to the process, the NTIA is managed under the Department of Commerce and the administrator of the Broadband Technology Opportunities Program (BTOP), one of the biggest boondoggles of the past decade (see New York Times article on BTOP titled “Waste is Seen in Program to Give Internet Access to Rural U.S.” here).

 

As we saw with the President’s actions on Net Neutrality (his YouTube message following the 2014 election is here), this administration is not afraid to use the power of the bully pulpit to influence the FCC.  Without rehashing the previous article, and to continue in the spirit of problem-solving, here’s a few questions I would suggest the FCC carefully consider:

 

  1. Will the ruling require Google to open up the Google TV Box? In other words, could the Xbox connect to a Google Fiber coax cable and allow customers to launch a Bing or Cortana query to pull up the latest in Google TV programming?  If not, why not? (Note:  while it is substantially less, Google TV charges a $5/ mo. lease for every TV after the first box).

 

  1. Will the new Electronic Programming Guide (EPG) providers be required to show consumers what information they are collecting on customers? How will consumers access this information as well as any other sources that are being used to drive channel selection.  For example, if I am shown the Kansas City Royals game as my first option and I have a Google EPG, will Google be required to show me that they recommended this because I have the MLB At Bat application on my Google Android phone?

 

  1. Can each customer of the new EPG service opt out of data collection? Will this selection process be easy for customers to access and install?  See the previous Sunday Brief here for more detail.

 

  1. With the replacement of a relatively simple, channel-driven search process (using up and down arrow keys on a specially designed remote control) with a more sophisticated algorithm-driven process as the likely decision, how can the Commission state that the process will not alter advertising rates (see Wired article here)? Won’t customers bid (and Google profit) from paying for higher page rankings on EPG search results?  If so, then what will prevent Black Entertainment Television (BET) from outbidding their apparent competition?  As Roza Mendoza, the Executive Director of the Hispanic Technology & Telecommunications Partnership stated in the aforementioned Wired article “They’re asking us to trust Google?  All of us know about their diversity record. The only people that are going to benefit from this are Silicon Valley companies.”

 

lease vs buy option from twc

Let’s keep the recommendation very simple:

  • Require all Multichannel Video Programming Distributors (MVPD) to provide the same set top box on-line and through distribution channels such as WalMart, just as they do with cable modems (see Time Warner Cable disclosure above).
  • Require all MVPDs publish a list of boxes that they support (according to the Tivo Bolt FAQ page, all of their devices are compatible with every major cable provider in the US as well as FiOS. Chairman Wheeler carefully omits Tivo’s competitive offer in this Washington Post interview when he says “Today there is no competition in set-top boxes, and therefore the incentive to innovate and come up with all kinds of new alternatives is somewhat limited”).
  • If the set-top box order is enacted, require opt-in consent and on-demand publication of how search results are being determined. Allow opt-out capabilities at any time and for any reason with no corresponding financial penalty (including termination penalties on the equipment).
  • If the set-top box order is enacted, allow cable companies five years to comply with the decision.

 

No one can defend the current state of the Electronic Programming Guide (with the exception of the Xfinity X1/X2 and the Tivo Bolt).  But to state that there is no set-top box competition when Tivo clearly positions itself as an alternative for digital cable providers is deceptive.  And to fail to acknowledge that Google will financially benefit from search result rankings, and that entrepreneurs will have to pay up to achieve a top page ranking, is equally deceptive.  The transition of value from cable companies to Google, Apple and Microsoft is apparent to anyone who digs deeper, and should receive the same bright spotlight that communications service providers have received throughout the entire Open Internet process.

 

Sprint’s Controversial (?) Ad

More than a few heads turned when Sprint released (and subsequently retracted) the following ad:

 

**

Lead statement:  Real questions.  Honest answers.  Actual Sprint, T-Mobile, Verizon and AT&T customers.  No actors.

 

Sprint CEO Marcelo Claure, talking to focus group but specifically addressing woman sitting to his right: “I’m going to tell you the carrier name, and I want you to basically tell me what comes to your mind.  T-Mobile.  When I say T-Mobile to you, just a couple of words.”

 

sprint ad pictureWoman sitting to Claure’s right: “Oh my God, the first word that came into my head was ghetto (laughter, Claure nods and smiles in approval).  That sounds like terrible.  Oh my God, I don’t know.  Like, I just felt like that there’s always like three carriers.  It’s AT&T, Sprint and Verizon.  And people who have T-Mobile, it’s like “Why do you have T-Mobile?” I don’t know.

 

Claure taps her shoulder in approval.   Sprint logo appears.  End of ad.

**

 

For those of you who are struggling with the definition of ghetto, here’s the version from dictionary.com:  a section of a city, especially a thickly populated slum area, inhabited predominantly by members of an ethnic or other minority group, often as a result of social or economic restrictions, pressures, or hardships.

legere twitter commentSprint had the sense to pull the ad, and Claure apologized, but his Twitter posts triggered intense reaction from many of Claure’s followers.  Interestingly, John Legere, T-Mobile’s CEO, declined to comment other than the exchange nearby.

 

This is probably an innocent mistake, a miss due to personnel changes occurring within Sprint’s marketing department.  Or perhaps Claure did not understand the racial undertones of the word ghetto.  Regardless, it provided some unneeded attention this week for the struggling carrier, and Sprint (and Boost) customers can rest assured that it will not occur again.

 

Thanks for your readership and continued support of this column.  Next week, we’ll dive into Verizon’s earnings as well as the Open Internet Order ruling if it is released.  Until then, please invite one of your colleagues to become a regular Sunday Brief reader by having them drop a quick note to sundaybrief@gmail.com.  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 Royals and Sporting KC!

 

Four (or more) Earnings Questions We’d Like to Ask

lead pic (15)April greetings from Louisville (pictured is the view of the Muhammed Ali Center and the Ohio River from my room at the Galt House Hotel) and Dallas.   This week, we begin the earnings watch list with some questions for AT&T, Verizon, Sprint, and T-Mobile.

 

Before diving into the questions, I wanted to let you know that Roger Entner, Jan Dawson, and I will be hosting a conference call a few days after the Appeals Court Open Internet Ruling comes out.  Please check my LinkedIn feed or check www.mysundaybrief.com for the details.  If the ruling comes out next Friday, I’ll provide the details on the conference call on Monday.

 

Also, for those of you who will be at the INCOMPAS (f.k.a. COMPTEL) show this week, I’ll be leading a panel discussion Monday morning on trends in wireless with representatives from Microsoft, T-Mobile, and Lumos networks.  Please join if you are at the show and ask a probing question or two.

 

Four (or more) Earnings Questions We’d Like to Ask 

 

  1. At what point should AT&T be viewed as a global communications network provider and not as a traditional wireless service company? It was reported by Telecompaper this week that AT&T will post net additions of ~1 million in Mexico.  For those of you who are familiar with this market, that equates to about 350-400K US post-paid wireless net additions from a revenue perspective, and likely less from an EBITDA view.  All of this has happened without really turning up most of Mexico City on the new platform.  How should investors look at AT&T Mexico?

 

As of the end of last year, AT&T Mexico had 8.7 million wireless subscribers, while Telefonica and Telcel (America Movil) had 23.4 and 73 million wireless subscribers. That equates to just over 8% market share for a brand that’s worth at least 15% market share just for showing up.  Adding a million customers in a quarter is newsworthy, but, considering the capital investment AT&T is making ($3 billion) as well as the brand, it’s not an unexpected number.

 

While AT&T has not disclosed a long-term target number, it’s hard to imagine that 20% market share by the end of 2020 is a moonshot given their fiber and LTE funding levels.  Assuming the market in 2020 is at least 120 million subscribers (~2.7% wireless subscriber annualized growth rate), that would equate to 32 million subscribers by the end of 2020 or roughly a $10 billion unit (it entered 2016 at a $2.5 billion annualized revenue run rate).  Said another way, AT&T has completed 1.6 million net adds or 7% of their (minimum) 23 million net addition five-year goal.

 

With $7.5 billion in growth over the next five years in Mexico alone, AT&T deserves a global communications provider designation.  The follow up question is “What’s the halo effect of the Mexico investment on US (likely Cricket) wireless growth?”  We commented a few weeks ago that Cricket is poised to have a very strong quarter (~400K net additions which will be their fourth consecutive quarter at this level), and, while a lot of this is attributed to solid execution, some of their growth has to be tied to a stronger Mexican operation.  Note:  the Sunday Brief post mentioned above focused on the possibility of bundling Cricket with DirecTV. There’s a growing sentiment that more Mexico success will spill over into retail prepaid net additions.

 

Bottom line:  AT&T’s broad and global strategy needs a corresponding scorecard if they are to receive the credit due for their execution in the financial markets.  If they fail to steer the conversation, they will fall into the same retail postpaid wireless comparisons that will mask the full extent of their efforts.  Communicating the full impact of Mexico is a good starting point.

 

  1. Can Verizon become a content and applications company? There was lots of speculation this week that Verizon is going to proceed with a bid for Yahoo (see Bloomberg article here). As was the case with the AOL acquisition, Yahoo brings with it some ad platform assets (enhanced through 2014’s acquisition of Brightroll) and also a legacy brand associated with web portals, news, and email.   There is no doubt that Yahoo’s acquisition would bolster Verizon’s content/ media position.

To answer the question above, let’s look at the performance of AOL since Verizon acquired the company:

 

  1. Verizon has kept key talent, including CEO Tim Armstrong, through the past year (the one-year anniversary of the closing is late June, and we might see some activity then, but the transition has been smooth). This is a good sign for integration with Yahoo assets.
  2. alexa verizon wireless rank (top)
    AOL/ Verizon’s first acquisition, Millennial Media (closed October 2015), has gone extremely well. Recently, AOL promoted Mark Connon, a top Millennial exec, into a key role in the company.  Given Millennial Media’s previous operating relationship with Verizon, it’s not a real surprise that the integration went smoothly, but it provides evidence that integrating most Yahoo ad platform operations should not be a challenge. alexa aol rankings (bottom)
  3. Both aol.com and Verizonwireless.com websites have been performing better since the acquisition (see Alexa measurement results for Verizon wireless and aol.com nearby). In comparison, AT&T has had a slight rise over the same period (and is US ranked #70), T-Mobile’s ranking is #200, and Sprint’s is #302.

 

The old thesis that “Verizon will screw it up” just isn’t holding up.  Go90 is doing well (top 5 in the Entertainment category in both the iTunes and Google Play stores and Top 100 in free apps overall), and signing up new content (see latest signings here).

 

Verizon’s potential acquisition of Yahoo would add $8 billion to the bet (using the figures from the Bloomberg article).  That would bring the total media investment to $13 billion and make Verizon one of the top online/ app content producers in the world.  It’s a long way from DSL, Private Lines, collocation and wireless voice, but there’s a growing body of evidence that they could pull it off.

  1. Can Sprint use their current network collateral and lease financing vehicles to transform the company? This week, Sprint announced that they will be selling network equipment assets for $3 billion and receiving proceeds from these assets of $2.2 billion.   This will provide immediate liquidity to pay down debt maturities of approximately $4 billion due in the next 12 months.  With this transaction, Sprint has emerged as the pioneer with customer handset leases and company equipment leases.

 

We have shown this chart from Morningstar several times (link is here), but it is worth providing one more time:

sprint morningstar debt maturity picture

Sprint has approximately $34 billion in debt with $5.3 billion due in the next 18 months.  They have been cutting costs with vigor and constantly looking for ways to improve their network performance (we reported in a previous column that cost cutting will likely take precedent over growth in the first quarter results and result in negative postpaid phone additions).  A sale leaseback of network assets solves the December maturity but March is a different story.

 

Bottom line:  If the repayment of the December note restores bond market confidence, Sprint’s leasing transaction could trigger a refinancing of some of the March 2017 maturities.  However, if Sprint has to collateralize additional assets, including spectrum, the cash committed to repaying bankruptcy remote lenders could exceed the projected discounted cash flows of the company.  More to come with their April earnings announcement.

 

  1. Will T-Mobile preannounce first quarter operating results this week? In 2015, T-Mobile waited until the actual news release to disclose earnings (they were terrific – see here).  Right now T-Mobile is in the middle of the 600 MHz auction and has not scheduled any events prior to May that would serve as a pre-announcement venue.  Most analysts expect that they will have a strong quarter driven by increased advertising (albeit they are competing with more political ads as a result of a competitive primary season) and lower churn (Binge On has been a “churn stopper” according to the company).

 

The biggest questions raised by many of you are “Does Binge On help or hurt growth?”  and “What are the long-term effects of Binge On?”  We’ll devote an entire Sunday Brief to the overall network pressure that their latest program brings, but the long and short of it is that Binge On helped the network in 2015 and will further help the network in 2016, and will hurt network performance in 2017 and beyond (when T-Mobile has network densification completed and more 600 MHz spectrum to deploy).  Overall, Binge On will put to rest the argument that consumers would gladly trade off paying more for higher resolution.  In fact, the results will likely show the exact opposite.

 

To support the “it has not hurt network performance so far” let’s examine the RootScore results since the beginning of the year.  As of last Friday (April 8), RootMetrics released 59 market results (out of 125 they review semi-annually).  Of these 59 that have been released, T-Mobile has won (including ties) 13 markets and finished second (including ties) 15 times.  Of these 28 first or second place finishes, they have beaten AT&T 10 times and tied with them 15 times (the other 3 times AT&T finished first and T-Mobile finished second).  These figures represent a big improvement over 2013 and 2014 and continue their LTE expansion and densification started in 2015.

 

There are no signs of a weakening network from these recent reports.  In fact, it’s very likely that T-Mobile’s quality metrics are improving because of the immediate network benefit Binge On provided.  SD quality is OK for consumers while they are out and about, but at home or in the office, WiFi speeds take over.

 

Bottom line:  While the long-term prospects of zero-rated data are uncertain, the short-term    benefits are clear – Binge On will be shown to attract and (more importantly) retain customers.  We will know more when earnings are (pre)announced.

 

Thanks for your readership and continued support of this column.  Next week, we’ll dive into the implications of the Appeals Court ruling on the Open Internet Order (due out this week).  Until then, please invite one of your colleagues to become a regular Sunday Brief reader by having them drop a quick note to sundaybrief@gmail.com.  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 Royals and Sporting KC!

Some Questions for Netflix (and the FCC)

opening pic (14)April greetings from Dallas, Charlotte, and Effingham, South Carolina (home of Margaret Holmes’ Peanut Patch Hot Boiled Peanuts – sign pictured).  The past two weeks have been busy; rather than diving too deep into one event, we’ll cover several important items instead.  But first, a quick roundup of the April Fools jokes from the telecom and Internet industries.

 

April Fool’s Day:  Some of These Ideas Are Good! 

We could do an entire article on the creativity of April Fools pranksters.  In the interest of discussing more substantive matters, however, we’ll limit ourselves to five that we thought were particularly innovative:

 

  1. samsung internet of trousersSamsung’s Internet of Trousers (IoT) features Wi-Fly (which sends you an alert that you need to XYZ), Get Up alert (which provides mild shocks to your posterior If you have not moved in three hours), and the ever popular Fridge Lock mode. More here.
  2. Google’s Parallel Universe (of Cats) Discovered. One of the best Nat and Lo episodes ever on the latest advances in String Theory.  Make sure you watch to the end.  More here.
  3. T-Mobile Binge on Up! Leave it the folks in Seattle to come up with a way to have a good April Fool’s joke and also poke fun at the competition.  I especially enjoyed the “Real Reality” mode.  Full video here.
  4. MarkForH&M. The all new clothing lineup designed by Facebook founder Mark Zuckerberg consists of seven identical grey t-shirts and one pair of jeans.  And many 20-something guys are saying “When can I get it?”
  5. Google’s “Send + Mic Drop” feature (see here). We need this back.    However, it’s understandable that a few unsuspecting folks might have inadvertently sent messages to potential employers or bosses without knowledge that “Mic Drop” meant “you cannot reply to this message.”  For those of you who did, chill out and make the most of it.

 

Honorable mentions:  Esurance Election Insurance, Lyft prank mode, Snoopavision, and Google Cardboard Plastic.

 

Some Questions for Netflix (and the FCC)

The Wall Street Journal reported last Thursday (not on April Fool’s Day) that Netflix has been throttling their video content to 600 Kbps when it is destined for AT&T and Verizon (and most other wireless carriers across the globe), but not when it is headed to Sprint or T-Mobile.

 

Netflix has been muted in their responses since the report has been issued, with only the Director of Corporate Communications commenting through a carefully scripted blog post that basically says “We’re working on it” (see here).

 

Here’re some questions that Netflix should answer:

  1. netflix logoHow did/ does this disclosure change current the customer service responses (FAQ, on-line help, one of two 800 numbers, etc.) to mobile connectivity issues (note: no changes to the FAQs have been made since the original disclosure)? Did customer service reps know that Netflix was throttling wireless traffic to some carriers and not others?
  2. How often were the plans to throttle AT&T and Verizon revisited? What criteria were used? For example, when Cricket was purchased by AT&T (which likely would have involved a change in Internet backbone providers), were all Cricket customers throttled as well? Or, when AT&T re-introduced unlimited wireless data plans for DirecTV customers, did Netflix contemplate removing (or actually remove) the speed caps?
  3. Will Netflix now begin to post a wireless bandwidth index? Can customers clearly see the speed options available to them on an un-throttled basis so they can make an intelligent choice?

 

Of biggest concern is the customer service aspect.  If Netflix service agents were not given the information or tools to accurately describe their wireless throttling policies, then there were likely thousands of calls per month made to AT&T and Verizon wireless agents trying to solve issues that originated with Netflix.  Verizon and AT&T could have had (and likely did have) network issues that prevented a good viewing experience, but Netflix made the troubleshooting issue more difficult by withholding their network practice.

 

On top of this, Verizon and AT&T missed out on the opportunity to upsell customers to higher data plans because of the Netflix practice.  The two largest wireless carriers received a double whammy:  higher customer service costs based on the assumption that the ISP must be at fault, and the missed opportunity to upsell customers to higher data plans faster because of the Netflix throttling policy.

 

Netflix is not the only one who is at fault here, however.  How the Open Internet Order was ultimately determined at the end of 2014/ beginning of 2015 should also be scrutinized.  The FCC faced a choice to increase their potential regulatory reach to edge providers such as Google, Netflix, Hulu, and Amazon Prime.  Here’re a few questions for each of the commissioners and Chairman Wheeler:

 

  1. When did the FCC engineers determine that Netflix was throttling wireless data (I’m willing to bet they were not surprised by the WSJ article)? When this data was received, what was done with it?  Who decided that this piece of information was not important or relevant?
  2. Did the FCC explicitly ask if Netflix had ever throttled data as a part of normal commercial operations? Did Netflix respond truthfully and completely?
  3. Has the FCC learned since this disclosure that other edge providers throttle data to selected wireless providers? Will the FCC require edge providers to publish their throttling policies and disclose them in their FAQs and advertising?

 

Given the unprecedented editorial influence over the final Open Internet Order draft that edge providers were rumored to have had, there should be a full reconciliation and publication of the “voted on” version and the final publication of the Order.  A simple redline could shed a lot of light on the process.

 

Bottom line:  Netflix has a lot of explaining to do.  The FCC also has a lot of explaining to do.  The foundational assumption that content streaming companies will be indiscriminate in their network streaming policies has been shattered by this disclosure.  Netflix should be held to a standard that is commensurate with a large and growing (~40% of US homes) market share.

 

AT&T is Becoming an Unlimited Company

“Bundle and Benefit.”  With these three words, AT&T has taken a page out of the cable playbook and used it against them.  It’s hard to believe, but there was a time when we paid for voice by the minute.  Voice customers had to know where the other person lived and whether that would result in additional charges.  Because of the uncertainty, customers held back, called at different times during the day, or made sure that they were “Friends” or “Family.”

 

Those were the early days of wireless voice, a similar model to what existed in the archane world of fixed/ landline service.  Longer distance calling meant higher charges, potential international settlements, and the like.

 

Cable’s Triple Play (and the introduction of unlimited wireless services from now forgotten MVNOs like Helio) made unlimited products an easy to understand and essential part of the telecom vocabulary.  Cable TV has always been unlimited (much to the chagrin of many parents).  High Speed Internet started as unlimited, although to a select few some caps may kick in for certain speeds.  When voice was introduced, it followed the unlimited pattern (and was priced at a slight premium to most fully featured local phone services).

 

att home internet pricingIt was the easiest sell on the planet:  Unlimited usage of home entertainment and communications essentials for $99 (then $89 and now in some promotions even $79).  Service was correspondingly easy – calls continued for standard network issues, but for the first year, the price remained constant.

 

AT&T watched what remained of the wireline voice market migrate to cable.  They also saw the unlimited message begin to penetrate the wireless carrier community as well (ironic as AT&T wireless pioneered single rate pricing a few years earlier).  Sprint began to offer truly unlimited wireless service for $99 (later $109) per line in 2008.  T-Mobile followed, as did other smaller providers.  All of this happened just as 3G networks were being replaced by 4G/ LTE speeds.  At this time, AT&T had the exclusive distribution rights to the bandwidth-intensive iPhone, so following their competition would have had significant network consequences.

 

AT&T ended unlimited data plans for wireless customers in June 2010.  This hiatus continued for over five years until the DirecTV merger was completed.  In January 2016, AT&T resumed offering unlimited LTE data (no throttling until 22GB per line threshold is reached) but there was a catch:  Customers needed to subscribe to DirecTV and AT&T Wireless.  The Double Play (Video + Wireless) was born.

 

The two-fer has enjoyed some success with over 2 million new or existing customers signing up for service.  Analysts predict that an additional 5-6 million will sign up for the service in 2016.  While this is a mere 10% of AT&T’s postpaid smartphone base, it’s not crazy to assume that 30-40% of the base could move to unlimited if the plan structure is right (this includes reasonable costs for DirecTV).  Four lines of unlimited wireless voice/ text/ data service for $180 is a very attractive rate.

 

This week, AT&T sweetened the pot even more as they announced new High Speed Internet pricing structures.  If a customer wants truly unlimited data, they will have to pay an additional $30 or have a qualifying DirecTV or U-Verse TV service (AT&T’s full announcement is here).  This means that a stand-alone customer in Dallas selecting 18 Mbps service (only) would pay $75 ($45 + $30 unlimited premium) per month for their service (Time Warner Cable charges $45 for 5x the speed with no caps).  That’s $30 more for 20% of the total throughput with Charter committing to keep the “no caps” policy provided that their merger with TWC and Bright House Networks is approved.

 

High Speed Internet pricing is not rocket science.  There are high gross margins and low product costs.  Also, AT&T is not remotely close to winning their share of decisions versus cable (AT&T lost 248K broadband customers in the past year – Comcast gained 1.4 million).  More AT&T penetration would have downstream effects on wireless network consumption as well (more Wi-Fi = less carrier spectrum radio capacity consumed and more Voice over Wi-Fi calling opportunities).

 

Bottom line:  AT&T got it right when they reintroduced unlimited wireless with DirecTV.  They started to get it right with unlimited U-Verse Internet with DirecTV (or U-Verse TV) but forgot to give consumers what they wanted most – more speed.  They need to introduce a free speed upgrades, and not the threat of capped surcharges, as a part of the bundle to compete against cable.

 

Thanks for your readership and continued support of this column.  You will not want to miss next week’s “First Quarter Earnings Watchlist” issue.  Until then, please invite one of your colleagues to become a regular Sunday Brief reader by having them drop a quick note to sundaybrief@gmail.com.  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 Royals!

Three Headlines that will Impact First Quarter Earnings

lead pic (13)Greetings from Kansas City (BBQ pictured – no “scratch and sniff” available for this photo), Columbus (OH), Charlotte, and Dallas.  This has been a busy travel week, and it has been difficult to reply to the myriad of responses I received to last week’s set-top box article (if you missed it, the link to the article is here).  One commenter had a very thought provoking statement: “How would Google react if the FCC moved to disintermediate their search results screen and allowed third party providers to provide their own ‘best search results for you’ screen?”  While not a perfect comparison, it does show how the Electronic Programming Guide is increasingly becoming a brand representation and competitive differentiator for Xfinity and other service providers.  Given the number of comments, we’ll continue to track the NPRM throughout the spring.

 

This week, we’ll look at three key headlines that will drive first quarter momentum in the wireless world.  Next week, we’ll look at the three most important events for the wired world.  First, however, let’s take a quick look at market performance since the beginning of 2016.

 

Value Tracker 2016: Dividends Are Back in Fashion

As many long-time readers of this column know, we like to track long-term value creation.  Daily and weekly returns can be impacted by the news cycle, but longer-term trends are rarely budged.  Below is the snapshot of equity returns (excluding dividends) through last Friday using end-of-year share counts provided by each of the carriers in their quarterly/ annual reports:

YTD gains.emf

 

It is no coincidence that the highest dividend-yielding stocks are performing well through the market turbulence of the first quarter.  Verizon (4.3% trailing dividend yield) is up a healthy 14% year to date, with over $25 billion in increased equity market value.  AT&T (4.9%) is not far behind.  CenturyLink, Windstream (which includes 1/5th of a Communications Leasing share), and Frontier are also attracting a lot of newfound interest.

 

Can this trend last?  It’s hard to say.  We have seen a lot of interest in dividend-yielding stocks at the beginnings of other years (2014 being the latest) only to see growth stocks come roaring back in the second half of the year.  That was during a low, but not negative, interest rate environment.

 

While the rest of the globe is trying to revalue their currencies and spur growth through short-term stimulus plans, stocks like CenturyLink look safe and secure.  Nothing in their latest earnings report would drive such robust short-term gains; it’s a global safety play.

 

Over the long-term, it is interesting to see how Google, Apple, and Microsoft are driving nearly identical absolute shareholder gains since the beginning of 2014.  It’s also worth noting that all of Apple’s gains during this period are in the first year, while Microsoft’s gains have been steady and Google’s gains came entirely in 2015.  Regardless of the timeline, any of these three companies (or Facebook) would have lapped the entire telecom and cable industry for shareholder value creation over the past 2+ years.  Something to think about as we head into the earnings season.

 

Three Headlines That Will Impact First Quarter Earnings (Wireless)

 

  1. T-Mobile Improves Net Additions Growth Through Lower Postpaid Churn.” After listening to the Deutsche Bank webcast of Braxton Carter’s lunchtime keynote this week, I am convinced that the operating metric that will surprise investors the most is not the number of postpaid net phone additions, but rather monthly postpaid churn.

 

T-Mobile has had a couple of strong first quarters of net postpaid additions (in 2014 and 2015, the first quarter was the strongest of the year), and they have been led by a combination of strong gross additions (taxing advantage of tax season liquidity) and incremental improvements in monthly churn.  Subprime credit quality tended to catch up with T-Mobile in subsequent quarters, and Braxton indicated on the call that they were tightening credit standards in the first quarter.

 

From Q4 2013 to Q1 2014, monthly churn dropped 0.2% and net postpaid phone additions grew 1.26 million; from Q4 2014 to Q1 2015, monthly churn dropped 0.43% and phone net adds grew 991K.  This year, the network is much better (Braxton commented that low-band improvements were helping both urban and rural churn in the quarter) and half the base has a 700 MHz band 12 capable phone.

t-mobie churn history

 

T-Mobile’s monthly postpaid and prepaid churn figures are shown in the above chart.  Assuming T-Mobile had a good but not great gross add quarter with gross activations (this would drive a higher average subscriber base with minimal/ no churn), it’s reasonable to expect a postpaid churn rate of 1.25%.  As a reminder, every one half of one percent (0.005%) increase in monthly churn equates to a 158,000 improvement in monthly ending subscribers.  Said differently, if T-Mobile came in at an average rate of 1.25% (which I think exceeds most expectations), the quarterly effect on their 31.7 million base would be approximately 475,000 net additions.

 

T-Mobile has a lot of levers to play with here.  For example, they could tighten up credit standards even more as lower churn rates are achieved, resulting in lower gross additions but still hitting their overall net postpaid additions target.  This is unlikely given Braxton’s comments that T-Mobile “will certainly be taking up their growth guidance”, but it’s still a possibility.

 

It’s more likely, however, that T-Mobile will hit 2.4-2.5 million postpaid gross additions (or more) while at the same time churning out 1.2-1.3 million subscribers.  Here’s why:  a) more 700 MHz devices deployed across more geographies means less coverage-related churn; b) Binge On is not proving to be a selling obstacle or a churn accelerator, but rather a differentiated feature, and c) there’re more tablets in the 2014 gross addition mix (especially in the fourth quarter), and they tend to churn less than phones.

 

One thing was learned from the webcast: significant growth will not be coming from 700 MHz or LTE market expansion gross additions in the first quarter.  Braxton clearly made it out to be a 2H 2016/ 1H 2017 growth story.

 

  1. phone net additions losses chart“Sprint Loses Postpaid Phone Customers.” When we wrote about Sprint’s “To Do” list for 2016 (see here), one of the items that we mentioned was that they needed a plan that would provide a foundation for growth once planned network improvements have been made.   As of today, that plan is not in place (the Better Choice Plans introduced in late February were completely overshadowed by the unlimited data announcement made the same day).  Instead, Sprint has decided to respond to the marketplace by drafting on others’ rate plans (“Half Off” and unlimited).  As a result, it’s possible that Sprint could announce postpaid phone losses in their upcoming earnings announcement (see chart for historical trends) while adding a few hundred thousand postpaid tablets in the process.

 

This event will come as a surprise to many industry observers, but Sprint’s super-aggressive lease offerings last September and October, as well as the resumption/expansion of the “Half Off” promotion at the end of 2015 brought out the majority of the “want to (re)investigate Sprint” segment.  With a good but not blockbuster launch of the Galaxy S7/ S7 Edge last week, as well as increasing pressure from AT&T with equipment discounts for enterprise and small business customers, finding new growth from quality credit sources will be tough.

 

A neutral result (+/- 150K net additions) that is driven by tablets is likely to have a negative effect on Sprint’s 2016 revenue prospects.  Sprint will prove adept at cutting costs, but translating improved network results into sustained customer growth and profitability is still several quarters away.

 


  1. “Cricket Unlimited Offers Now Included in DirecTV Bundles.”
    Admittedly, this is wishful thinking, but all signs point to another very strong quarter for Cricket Wireless, AT&T’s no-contract prepaid brand.  In January, AT&T announced the resumption of unlimited plans for AT&T postpaid wireless consumers IF they also cricket wireless characterssubscribed to a qualifying DirecTV service (nearly all services qualified).  As AT&T CFO John Stephens indicated in a recent investor conference, this was a very successful offer and attracted more than 2 million (combined) current wireless and DirecTV customers.

 

Given the completion of Cricket integration into AT&T, the next logical step would be to grow the bundled program through the addition of Cricket + DirecTV plans.  These would target customers who spend $150/ month for both wireless and video (the current plan targets customers who spend $250 more more).  More importantly, this could expand distributor opportunities for DirecTV and Cricket (if the same store is not selling these services already).

 

While this quarter’s AT&T earnings release will likely be focused on Mexico milestone achievement as well as DirecTV progress (and postpaid churn reduction), a Cricket headline would be a welcome surprise.

 

Next week, we’ll focus on three wireline headlines and examine a few other wild card events (such as the “In the Loop” Apple announcement in late March) that could shape the earnings season.  Until then, please invite one of your colleagues to become a regular Sunday Brief reader by having them drop a quick note to sundaybrief@gmail.com.  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 Sporting KC!