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The Unintended Consequences of an Attorneys General Victory

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Greetings from Davidson/ Lake Norman/ Charlotte, North Carolina where winter has finally begun its return (picture is from earlier in the week when our dog, Abby, was chasing ~40 ducks into the Lake).  Thanks again for the emails and comments on last week’s column – much appreciated and thought provoking.  This week, we will have some thoughts on the closing arguments made at this week’s AG v. T-Mobile/Sprint/ Softbank/ DT trial but spend most of our time focused on the earnings outlook for the telecommunications sector.  We will conclude with a few TSB follow-ups (although admittedly it reads more like the “Five You May Have Missed” feature of previous Briefs).

 

For those of you in Charlotte, there are still a few seats left at the table for the inaugural Launch LKN book club.  I’ll be leading the discussion on the first book (Tim Wu’s The Master Switch) – we are reading this book (and other lengthy tomes) across two months and splitting our discussion accordingly.  Sign up here – only a few spots left – thanks to The Hurt Hub at Davidson for providing the facility and Launch LKN for providing the forum.

 

Separately, I will also be delivering keynote addresses to a couple forums in the next new months.  The first one is the 5th Annual Colorado Wireless Association Education Conference.  If you are living in Colorado and not aware of the session, you should check it out.  It’s a full day of panels, speakers, and networking.  More on the conference here.

 

Finally, I am pleased to announce that one of the start-ups I am advising (Lucid Drone Technologies) recently won another “Best Charlotte Start-ups” award, this time from CharlotteInno.  Read more on their recognition and the other recipients here.

 

The Unintended Consequences of an Attorneys General Victory

On Wednesday, Judge Marrero heard closing arguments from the states’ attorney, Glenn Pomerantz, and from the defendants’ attorney, David Gelfand.  Both made strong cases for their clients, and the judge committed to render a verdict “as promptly as possible.”

 

Based on our readings of the Findings of Fact (summary:  AG Findings of Fact read like a Law School final exam response; Defendants’ Findings of Fact read like a Business School final exam response), this is by no means a slam dunk for either side.  The future of M&A transaction second-guessing hangs in the balance, which could be very important for all industries (airlines, energy, insurance, health care, retail specifically come to mind in addition to telecom/ cable).  If you don’t like the opinion of the Feds, you could shop the decision to a coalition of like-minded AGs and hold up approvals for months or even years.  In a recent article with the Wall Street Journal, Assistant Attorney General Makan Delrahim echoed these points, saying “I think if the states win, it creates major uncertainty in M&A.”

 

In addition to the practical matter of altering the M&A approval process going forward, t-mobile balance sheet 2011 2012there’s the issue of Sprint.  In his closing statement, Mr. Pomerantz stated “Let them compete” and there’s an erroneous assumption that an unmerged Sprint would be in a similar position that T-Mobile faced at the end of 2011 when the AT&T merger failed.  Let’s correct this faulty assumption with some data.  Pictured nearby is the T-Mobile 2011 and 2012 balance sheet from their 2012 news release (the 2011 release was not available).  The right column of figures reflects the balance sheet as of December 31, 2011.  T-Mobile had just over $1 billion in payables to affiliates (Deutsche Telekom) and slightly more than $15 billion in long-term payables to affiliates.  That’s it – $16 billion in debt with one primary debtholder who is also the primary shareholder.  As reference, T-Mobile had $5.3 billion in adjusted OIBDA and $2.3 billion in operating income in 2011, and was in the process of collecting a $3 billion break-up fee plus spectrum from AT&T.

 

Sprint is in a very different situation today, as shown by the following chart from their Investor Relations website:

Sprint debt maturities

 

Paired with this debt schedule is the following quarterly reconciliation to free cash flow:

sprint fcf reconciliation quarterly

 

The economic reality for Sprint is as follows:

  1. Last four quarters of cash provided by operating activities of $9.9 billion.
  2. Network spending requirements (using previous 12 months as a proxy) of $5 billion
  3. An additional $7 billion in cash required to finance leased devices (this assumes no Apple 5G device super-cycle)
  4. $1.6 billion in debt due within 2 months and another $3.8 billion in the subsequent 14 months (and another $20 billion due in the 36 months after that).

 

At current trends, Sprint will need $7.5 billion over the next two years to remain solvent.  Add in additional 5G expansion to remain market competitive (something CEO Michel Combes mentioned in trial testimony), and that figure easily exceeds $12 billion.

 

Back to T-Mobile for a moment.  Here’s the slide outlining what they were able to do in the 12 months following the AT&T merger dissolution:

t-mobile investor day presentation dt 2012

 

T-Mobile entered 2012 with mostly mid-band spectrum (1900 MHz).  They picked up AWS spectrum from AT&T as a result of the merger failure (1700 MHz/ 2100 MHz) and added additional spectrum through their Metro PCS acquisition.  Then they swapped some additional AWS spectrum with Verizon (announcement here).  Then they bought $2.4 billion in  700 MHz spectrum (called the A Block) from Verizon in 2014 (article here) and additional spectrum from other carriers in 2016 (article here).   Then they bought $8 billion of 600 MHz and additional $1.8 billion in AWS-3 spectrum.  Bottom line:  T-Mobile scrambled to fill in low-band spectrum gaps to more effectively compete with AT&T and Verizon.  This type of spectrum is not available to Sprint today, hindering their ability to be competitive in suburban and rural locations.

 

To use a card analogy, Sprint needs the face cards of low-band spectrum, a long-term oriented bondholder ready to finance $10-15 billion over the short-term (the approval process to engage another major shareholder is uncertain thanks to the recent AG action), and a solution to provide another $20 billion in debt restructuring for those redemptions due in 2021-2023.  T-Mobile, Verizon, and AT&T are holding those spectrum face cards and don’t plan to sell them to Sprint.  An investment from Google or Apple (both very unlikely) would draw extensive scrutiny from the same AGs who objected to the T-Mobile purchase.  And another foreign investor, even from Canada or Mexico, would be difficult (but not impossible), if they could afford it.

 

“Let them compete” under these conditions has clearly defined but unintended consequences:  Sprint either a) declares bankruptcy, sending shares to pennies and wiping out Softbank’s investment (and the Japanese banks that helped finance them), and then sells to a cable company (or consortium) if the DOJ, FCC and state AGs allow it; or b) as was stated in the trial, Sprint ceases to be a national provider, which might preserve competition in New York City but will drive up prices in Binghamton, Syracuse, Schenectady, Henrietta, North Chili and Medina.  Hopefully the pithy “Let them compete” soundbite is ignored by Judge Marrero and math prevails – that’s why this case is still a coin flip.

 

Fourth Quarter Earnings Questions

In last week’s TSB, we started to outline the key themes we expected to hear during earnings calls.  As a reminder, the earnings season starts next week with Comcast (Thursday, January 23, 8:30 a.m. ET).  The remaining calendar (as of Jan 19) is as follows (Neither Sprint nor T-Mobile have indicated times, but, if last year’s schedule is any indication, it’ll be either January 30, January 31, or the week of Feb 3.  No info on Windstream):

 

Apple:                  January 28 (afternoon)

AT&T:                   January 29

Verizon:               January 30

Spectrum:            January 31

Google:                 February 3

CenturyLink:      February 12

US Cellular:         week of February 10 (est.)

Altice:                   week of February 17 (est.)

Frontier:              week of February 24 (est.)

 

Here’s five general questions and five specific-company questions we think should be asked:

 

  1. How is the healthy economic picture translating into telecommunications spending? While more agricultural purchases by the Chinese help the overall economy (especially in the Midwest), it does not have a direct tie to telecom spending.  But more Roku/ Fire stick/ Chromecast/ Apple TV device sales do drive more residential broadband consumption, more Apple iPhone 11/ 11 Pro/ 11 Pro Max sales drive higher application usage levels (and tonnage if those apps are video-capable), and newly launched Disney + content was likely consumed at an equal or greater rate over mobile devices (call it the American Idol network congestion moment for the 2020s).

 

Our take is that a strong economy drives device and bandwidth upgrades, but only to a point.  Bad debt is going to stay low in 2020 (not only due to economic conditions, but also because of increased relative importance), and all attention is going to be on the wireless and wired broadband tonnage impact of increased content launches as Quibi, Comcast/ NBC/ Peacock, Apple, HBO and others all bring new services to or expand current services in the market.

 

  1. How are the overall retail environment struggles impacting wireless carriers? We have written about this extensively, and see the struggles faced by all retailers (in malls, in parking lots near malls, etc.) as a headwind for each carrier, even if it’s not a company-owned store.  Couple this with the 6% off all Apple Card/ Apple Store purchases promotion continued through January (as well as Apple Stores being a destination for the hottest product of the Holiday season – AirPods Pro), and there’s a good chance that the lines were shorter at many Verizon, Sprint, T-Mobile and AT&T stores.

 

  1. With a possible 5G iPhone launch many months away, will customers continue to upgrade? The initial thought behind slow iPhone 11 sales (which ended up being quite robust) was “Customers will wait for the 5G iPhone.”  Then, as reports leaked out that Apple may not have a fully robust 5G version until 2021, customers decided to make the switch (a 3-yr old iPhone upgrade completed in December 2017 would have been from the iPhone 7 which would be a worthy upgrade).  AT&T recently reiterated their belief that there could be a 2H 2020 super cycle driven by upgraded 5G device sales (note: this is not publicly shared by any other wireless carrier).

 

  1. How quickly will 5G (and specifically mmWave) be deployed? T-Mobile is in the process of deploying 5G over their 600 MHz spectrum band (200 million people; 1 million square miles), giving them 20-25% improved speeds (and really speedy bandwidth in areas not on Verizon’s or AT&T’s 2020 5G deployment radar).  AT&T has committed to a nationwide 5G deployment this year (which we interpret to mean that they will have 5G Plus deployed in many areas throughout the country, but that there will still be suburban and rural areas that predominately use 4G LTE).  The answer to this question impacts the answer to question #3.

 

  1. How quickly are customers cutting their cable cords? Are we moving from OTT as a supplemental content service to being primary?   Comcast and Charter lost 313,000 video customers in 3Q 2019 – this could easily go to 400,000 this quarter even with Sony’s PlayStation Vue shutting down (Comcast will set the tone this Thursday, but we expect the greater acceleration at Charter).  Revenue concentration is increasing at the cable companies, and some broadband price hikes are holding (for now), but one has to wonder how the long-term health is impacted as others (re)enter the home broadband market.

 

Specific-company questions: 

  1. For AT&T. What’s the rationale for continuing to hold on to local telephone lumberton nc picexchanges, particularly where AT&T is poorly clustered?  We have discussed this ad infinitum, but there’s a great opportunity for the larger players in the local telephone industry to swap exchanges (see North Carolina map here).  Why AT&T continues to operate in island exchanges such as Lumberton, North Carolina is a mystery (picture of downtown from Wikipedia is nearby).  Let CenturyLink serve Lumberton and swap it for a Tennessee or other property that AT&T can serve efficiently.  That’s how you compete against cable’s wireline juggernaut.

 

  1. Also for AT&T. In-vehicle M2M was enormously successful for AT&T in terms of number of embedded vehicles (24 million cars and 3 million commercial vehicles as of 3Q 2018).  But the total annual data consumption from the embedded modems in these vehicles was a scant 45 million GB (3.75 million GB per month or about the equivalent of 450,000 smartphones on unlimited plans).  In the link above, AT&T also prominently reveals that they have 1 million retail postpaid subscriptions across the 24 million embedded base – is a slightly more than 4% share something to be proud about?  Did AT&T spend a lot of money to get a lot of subpar subscribers, or did the payments from the auto companies (car performance data, which is paid for separately) justify the IT and product development efforts?

 

  1. For Verizon. How many Verizon-branded customers left postpaid retail and signed up for Xfinity Mobile and Spectrum mobile?  Are any returning?  T-Mobile implied at a recent investor conference that many of Xfinity and Spectrum’s gross additions are coming from Verizon retail.  We think that their gains are far broader than that, but will see what color is released by Verizon and the cable companies.

 

  1. For T-Mobile. How many gross additions remain in 2020 and 2021 from 600 MHz network expansion?  As we saw with their 700 MHz deployment, there’s a long runway for T-Mobile in the suburbs and rural markets. If the merger is rejected, we expect T-Mobile to significantly “thicken” these areas (including outdoor CBRS deployments) and aggressively pursue customers.

 

  1. For Sprint. How will Sprint “right the network” in Florida?  We spend a lot of time looking at network quality for one of our clients, and noticed that Sprint really fell off in all performance areas at the end of 2019.  Here’s the RootMetrics RootScore chart for Marcelo Claure’s adopted hometown, Miami:

 

rootmetrics 2H 2019 miami

It’s amazing to think that in the first half of 2018, the spread between Verizon (sole winner in Miami) and Sprint was slightly more than 4 points, at the end of 2017 was 3.7 points, and at the beginning of 2017 was 2.0 points).  Regardless of the specific weighting or other quibbling about how RootMetrics conducts their surveys, this is an undoubtedly troubling trend, and it’s not confined to South Florida.  Orlando (1.5 pt spread in 1H 2017 has grown to 9.3 pts in 2H 2019), Tampa (2.9 pt spread to 10.1), and Jacksonville (4.6 pt spread to 8.4) have all deteriorated.

Perhaps this is all prepping for the T-Mobile merger, and there’s a plan in place to turn all of Florida into a 5G heaven, but their recent performance signals that they are falling behind – fast.

 

There are many more questions, but time and space force them to next week’s column.  We welcome your thoughts and feedback on which questions you would pose.

 

TSB Follow-Ups

Here’s a few of the many follow-ups that we thought would make for additional interesting reading:

 

  1. If you have not watched the NBC Universal Peacock unveiling, take the time and view it here. It’s an amazing production. One of you described the day as “beautiful” – that pretty much captures what we saw.

 

  1. Verizon introduced a privacy browser called OneSearch that is powered by Bing. Article from The Verge is here and actual website that you can try out is here.  Kudos to the company for building it – hope they can effectively market it even with their very strong Google relationship.

 

  1. Everyone tried to interpret the latest Goldman Sachs earnings report to figure out how successful the Apple Card has been. It does not appear to have slowed much if at all, but the exact quantities are vague.  More here (earnings call transcript) and here (earnings presentation).

 

  1. FierceWireless has a great article on Tracfone’s SmartSIM program. According to Jeff Moore of Wave7 research, the largest MVNO in the US appears to be pulling back from the idea for now (we think this could have to do with the overall economics of the program).  As the article indicates, the method and algorithm used by Tracfone are unknown at this time (but likely a license of Google Fi which is its own headline).

 

  1. One of the best research reports on edge computing is the State of the Edge, a collective research project funded by ARM, Ericsson, Packet (now Equinix), Rafay and Vapor. They updated their 2018 report last month and it’s available for download here (I am about 50% through the 2020 Update and it’s even better than the original).

 

That’s it for this week.  Next week, we’ll comb through Comcast’s release and hit on a few other topics that were raised from our CES article.  Until then, if you have friends who would like to be on the email distribution, please have them send an email to sundaybrief@gmail.com and we will include them on the list.

 

Have a great week – and GO CHIEFS!

CES Observations – Out of the Lab and On to the Production Line

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Greetings from Las Vegas, NV where 170,000 tech-hungry attendees gobbled up products and services from hundreds of exhibitors.  Pictured is our motley crew at the first Sunday Brief CES dinner held this year at Gordon Ramsay’s Pub at the Caesar’s Palace.  Everyone had a terrific time – no one lacked an opinion and GRs has a diverse menu that accommodated any palate.

 

This week, we’ll divide our focus between show observations (there are many), and some commentary from Verizon, AT&T, and T-Mobile executives at the Citi TMT conference which was concurrently running in Las Vegas.

 

 

CES Observations – Out of the Lab and On to the Production Line

 

Many CES shows focus on concepts, and this year’s show was full of them (see here for Business Insider’s take on the Mercedes Benz Avatar concept car – one of many futuristic automobiles in Vegas this week).   But for every “could be” invention at the show, there were several “in or near production” items that showed how far concepts from the last decade have come.

 

First up comes from the smart home, where several of us really liked the concept of puripot detailed descriptionmixing lighting (which has to have AC power) with air purification.  Many of you remember the concept several years ago of mixing lighting and Wi-Fi access (called Li-Fi) which is now available widely online from companies such as Sengled and de.Light – early reviews were mixed, and mesh Wi-Fi extensions from Google and Eero (now owned by Amazon) proved to be a better value.

 

Now, there’s a new lamp product from Puripot (parent company is dadam Micro – more on them here) that brings air purification to the tabletop (in addition to a wall mounted version).  The nearby diagram from the Puripot website shows how it works.  The company describes the technology as follows:

 

 “The puripot airLamp is a lamp-type air purifier that applies two innovative and environment [sic] friendly technologies to household lamps that are used universally in most every life: 1) a polyester-based non-woven fabric filter treated with meta-doped TiO2 photocatalyst, and 2) a market proven visible light-based titanium dioxide photocatalyst technology together to removes harmful VOCs viruses, bacteria and fine dust.

The transition meta-doped titanium dioxide non-photocatalyst filter used in the device is an eco-friendly, inorganic material-based fiber filter that is made by coating polyester non-woven fiber with the TiO2 photocatalyst. The filter has strong destructive effect on almost all kinds of virus regardless of the light irradiation. The performance of the filter is not deteriorated even after long hour use and periodic washing to remove dust attached. The filter has more than 50% better dust removal efficiency than the general HEPA filters.”

puripot lamp picFor people who have allergies or live in polluted areas (or improperly maintained office spaces), this could be a productivity-improving device (less sick time, improved employee psychology, etc.).  The company indicated that the solution would be available in 2020 (the precursor air filter is available for preorder here and should ship in Feb).

 

While an excellent invention in and of itself, the concept of a power + light + ______ elicits some interesting ideas for home and office tech.  For example, the ability to attach a CBRS or Wi-Fi access point in the base of this lamp would be a useful addition to many offices.   And coupling a terabyte storage option for most commonly used DropBox or Box files would also help performance.  As we saw from the addition of IoT devices (including Wi-Fi repeaters) to electrical outlets, the concept is not new, but puripot has moved the functionality from the power outlet and the light socket to the table/ desktop.  That’s big, and, with the right modular design, could be a boon for technology adoption.

 

hydraloop logoAnother widely discussed theme at this year’s CES was sustainability, specifically water reclamation.  Live through one drought (ours was in Dallas, but we have had our share of dry summers in Colorado) and you understand the importance of water availability.  A new company called Hydraloop had their debut at CES after very successful alpha and beta trials.  Their technology takes water used in everyday tasks (showers, washing machines, tubs), and enables it to be reused again through a patented recycling process (see nearby picture).

hydraloop flow diagram

In Texas, the water bill can frequently be higher than those of other utilities.  Being able to reclaim or reuse a portion of the water without being charged twice is an attractive proposition.  Hyrdraloop indicated on their website that most homes could be equipped with the new technology for ~ $4,000 plus shipping and professional installation.  Assuming this price comes down with volume (and more affordable with financing, similar to that used for solar projects), this could be a self-financing upgrade for many homes.  It’s an “edge” application for another utility – water.

 

For more on the company, CES’s “Best in Show” for 2020, have a look at their YouTube video from CES.

plume logoOne additional technology closer to telecom and tech that caught our eye is Wi-Fi based motion sensing.  This was on display at CES using Cognitive Systems software on Plume Systems adaptive Wi-Fi system (note – Plume is backed by several corporate venture arms, including Comcast Ventures and Samsung Ventures).  This technology has been in testing for a couple of years, and Plume decided to launch their Motion product at this year’s CES.  Here’s a video briefly describing the product and a short Forbes article authored by Moor Insights and Strategy on various benefits and use cases.

 

The bottom line for the Plume Motion product is that when a visual recording of an event is not triggered or desirable (e.g., bathroom motion), Wi-Fi motion detection can be a high-quality, cost-effective alternative.  For more on the company and their subscription service, check out www.plume.com.

 

Each of these three products will broadly launch this year.  They combine many of the themes we described in last week’s article (compact or eliminated equipment, tied to remote cloud-based systems, and enabled by faster processors) and bring high-value/ high-utility products to the market.

 

In case you missed the show (or its coverage), here’s six additional articles you should probably read to get a good take on tech:

 

  1. For IoT and CES, read the latest weekly blog from Stacey Higginbotham. I was especially intrigued by her panelist’s take on Virtual Reality (VR) tech for aging adults.
  2. For Engadget’s take on Samsung’s NEON avatars (apparently a viral topic), read here.
  3. For a good summary of laptop announcements that will have 5G available as an option, read here.
  4. The Samsung release on their digital companion product called Ballie is here. (I think the company should revisit their pet friendliness assumption).
  5. I missed the AMD keynote on Monday, but if you don’t believe that speed is still a theme, check out this condensed presentation.
  6. Quibi (short-form video service) held their launch announcement at CES (Bloomberg interview is here). T-Mobile is going to be a key partner and will include the service for most of their current customer base.

 

Lastly, we leave the CES discussion with a picture of the Hyundai Uber drone.  About a decade ago, cars started to take over the show, and now we have the S-A1, an Urban Mobility Vehicle prototype developed by Hyundai and Uber:

hyundai uber concept CES 2020

 

 

Fourth Quarter Hints from the Citi Conference in Las Vegas

There were three wireless companies (Verizon, T-Mobile, and AT&T) and one notable Local Telco (CenturyLink) participating in the Citi Global TMT West Conference that paralleled the first two days of CES.  While we do not have enough space in this week’s column to fully cover each presentation, here are the high points of the wireless participants:

 

  1. Ronan Dunne, EVP at Verizon and Group CEO for the Consumer Division, spoke first. “We have laid the platform for growth…  We have all of the assets we need to execute the strategy…. We are not a business that’s waiting on the outcome of someone else’s strategy.”  Verizon is aggressively developing an information-led platform that lays the groundwork for large experiences like Disney.  While not disclosing any specific numbers, Ronan went on to convey that “the momentum we saw in Q3 continued into Q4.”  On personalized base management, he said “We have 100 million consumers, and my ambition is to personalize the experience for every one of them.”

 

On Disney, Dunne offered no specific numbers, but he did convey that there might be ronan dunne pic and captionsome short-term dilution primarily as a result of higher than expected demand.  He was quick to point out that if the Disney relationship could extend the customer/ family account life even one month, it was a terrific investment.

 

On cable, Dunne talked about his personal investment in the relationship, and the fact that Verizon’s network-as-a-platform strategy lends itself well to a relationship with cable.  On 5G, he went on to reiterate their investment in millimeter wave technology, citing that 70% of Verizon’s traffic occurs in metro areas.  On devices, he predicted that new models will be introduced that carry millimeter wave technology for under $800 ($33.33/ mo. for 24 months) “soon” with sub-$600 ($25/ mo. for 24 months) devices by the end of the year.

 

On home broadband, Verizon is likely holding their marketing power until higher-power chipsets are available to expand their reach (likely date = 2H 2020).  The most likely deployments of highest-speed networks will be in dense traffic areas that tend to have lower residential concentrations.

 

On the economy, Dunne commented that that holiday season shifted to more digital than retail storefront (re: Verizon charges less for online conversions than in-store or customer-service assisted transactions).  Verizon seems to be seeing a fair amount of pricing optimization as well as some upsells into higher unlimited categories.

 

On the Verizon relationship with Amazon AWS, Dunne praised the partnership, emphasizing that their new edge relationship was completely built within their (Verizon’s) infrastructure.

 

The most important “drop mic” comment came from an audience question at the end about Wi-Fi offload.  “The thing that we see that may be different from the world of others is that we don’t see the need for Wi-Fi in the future because we have a more secure network environment, we have much higher performance criteria, and we have the ability to hand off sessions… When we are fully deployed, there are entire environments where public Wi-Fi can be eliminated.”  We could not find any other statement from Verizon in which it sought to absorb Wi-Fi volumes (a 3x growth given Wi-Fi is ~ 75% of total data traffic for wireless subscribers today).

 

  1. T-Mobile released preliminary subscriber figures prior to their participation in the conference, which feature current President and COO (and future CEO) Mike Sievert, President – Technology Neville Ray, and EVP and CFO Braxton Carter. In the press release, the most telling figures were as follows:

 

  1. 86 million total subscribers
  2. 1.0 million branded postpaid net phone additions (on par with Q4 2018)
  3. Gross postpaid phone additions up 5%, and postpaid churn up to 1.01%. Braxton Carter’s comment was very telling: “I wish churn was a little bit higher [in the industry].  The hallmark was a more competitive environment with more switching going on, reversing a trend from the rest of 2019.  We are very excited about a higher switching pool.”
  4. Prepaid net additions of 77K for the quarter, up from 62K in 3Q but down from 135K in 4Q 2018
  5. Wholesale net additions of 472K for the quarter, down from 611K in 3Q and 909K in 4Q 2018
  6. “A beautiful quarter” was Carter’s description of the total operating performance, leading many to believe that the margin pressures from increased gross adds were able to be readily absorbed.

 

“Our team is focusing on all cylinders” was Mike Sievert’s lead comment.  Key objectives for 2020, per Sievert,  include a) Get the integration with Sprint underway in a very significant way, b) Get off to the races in building the world’s best 5G network, and c) turn a) and b) into great operating performance for the business and lay a foundation for growth under the context of the new company.

 

On the Sprint merger, the audience seemed split on the judge’s verdict but Mike Sievert was not worried.  “We have to see where it all shakes out.”  On the prospects of a settlement, he stated “Through the process… we have been an open book about what we were willing to do.  Nothing has changed with that approach.  So far there hasn’t been a settlement, but you never say never.”

t-mobile execs pic and caption

On 5G, the executives were quick to reference that the current activities were just the beginning.  “The breath is coming along nicely, and the breadth will come with the [Sprint] transaction” said Neville Ray.  Mike Sievert used the 5G discussion to launch into his confidence in the network synergies from the Sprint transaction, citing T-Mobile’s progress with 600 MHz deployment which is two quarters ahead of the originally announced plan.

 

“The base business case for 5G is capacity” answered Braxton Carter.  “We have been consistently ahead of the cost curve, and 5G is a critical piece.”  On a super cycle, it’s clear that nearly every new device will be 5G capable on T-Mobile’s network, although Neville Ray seemed to imply that the momentum would start in 2020 but that 2021 would likely be an even greater year.

 

Braxton conveyed that the industry is probably at the low point of the upgrade cycle.  “We should see higher switching as the 5G cycle accelerates.”  On increased competition entering 2020, Sievert talked about cable and it appeared to him that “cable is taking share from Verizon… their share gains are not coming from us.”  Mike was also quick to discuss how despite lower promotional activity in the quarter (their advertising focused on their 600 MHz network reach), T-Mobile still delivered healthy net additions with low postpaid churn.  “We have not unlocked the potential of having not only a great value but also having the best network.”

 

“If this transaction does not occur, we would immediately reinstitute a $9 billion board-approved buyback” was Braxton’s response to an audience survey question about T-Mobile’s direction should the transaction be rejected.

 

On targeting, Mike Sievert commented that T-Mobile has “good network quality for 326 million Americans, including low-band spectrum for over 300 million.  We market in just 265 million, and 35 million of that is recent – in the past 2-2.5 years.  There remains plenty of opportunity.” On share, Sievert commented “We continue to have disproportionately low share in suburban, rural, small towns and enterprises.  While these segments have been feeding our growth over the past couple of years, we continue to have disproportionately low share.”

 

On the economy, Sievert commented “Things have changed a lot since the last recession.  Smartphones weren’t really deeply embedded into scale usage yet – that’s amazing.  When you are forced to choose, the smartphone is not going to be the first thing to get downgraded.  You will see a lot more optimization, and we are well served for that situation.  I think our business is positioned to be resilient regardless of economic circumstances.”

 

  1. The following day AT&T CFO John Stephens spoke on a wide variety of topics. After checking off a long list of operating and financial metrics, he concluded with “we did what we said we were going to do, and we have set ourselves up for a bright future.”

 

On their asset mix, Stephens talked about AT&T’s bundled (content + network) productsjohn stephens pic and caption and distribution capabilities.  “We will be best positioned in the future to bundle wireless services because we have owners economics – it’s really important”

On 5G, Stephens noted that for the first time ever, the network is leading device availability.  He considers HBO Max to be an unappreciated asset and is very confident in the prospects for the product.  $500 million in content was invested in the fourth quarter but was held back for the HBO Max launch.

 

The AT&T CFO also touted their spectrum capabilities, especially when AT&T “hotwires it all” with the FirstNet buildout.  John Stephens was the most bullish of the executives on the wireless upgrade cycle in 2020.  He cited several sources of revenue growth, yet also discussed the need to further reduce costs for network and customer service functions.  He also signaled that there would be additional product rationalization throughout the business.

 

On the communications front, Stephens talked about the need to emphasize the breadth and depth of the AT&T fiber asset, and also the expected decreases in legacy declines due to their diminished size and relative importance to the business.  John also separated equipment sales from other profitability sources due to their low margins.

 

On industry structure, Stephens had some of his strongest comments.  Because of FirstNet, AT&T deployed more spectrum, and this improved geographic coverage presents a unique competitive advantage for the company.  And FirstNet will expand into the hospital which opens up a large incremental population.  AT&T has been growing their postpaid base, and Cricket has grown to over 10 million customers.  But the most competitive advantage is content ownership, which is manifested through HBO Max.

 

Stephens clearly stated that any future spectrum purchases were going to need to be self-financed “If I want to buy some spectrum, I need to find some assets to monetize” said the CFO.

 

On the economy, Stephens cited lower gas prices (“a dividend to consumers”), lower home costs, real wage increases, and lower unemployment as key health indicators.  “Our economy has much less risk” because housing has a lower weighting in the economy.  “We see a fairly stable, reasonable economic picture.”  On the business side, because there are more employees “we are seeing more demand for mobility, both hardware and services.”

 

The bottom line from these three presentations is that challengers have more fun, wholesale partnerships are becoming more important to Verizon and AT&T, and that HBO is viewed as a strategic asset by AT&T (versus the network platform as the strategic asset by Verizon).

 

That’s it for this week.  Next week, we’ll hit the CenturyLink presentation and discuss specific questions we have for the wireless carriers as we enter the quarterly earnings cycle.  Until then, if you have friends who would like to be on the email distribution, please have them send an email to sundaybrief@gmail.com and we will include them on the list.

 

Have a great week – and GO CHIEFS!

Programming Tomorrow’s Network

 

opening pic dec 8

 

Holiday greetings from sunny and mild Lake Norman, North Carolina (sunrise shown – unaltered photo).  There are a lot of follow-ups to cover, and, if reports are true, there may even be a settlement between the Attorneys General and T-Mobile/ Deutsche Telekom/ Sprint/ Softbank prior to their trial start on Monday (hope springs eternal).

Many thanks for the multitudinous comments on last week’s Thanksgiving book review article.  We are not turning into the New York Times Book Review (won’t even try) but there’s a lot to discover and learn from the activities of our predecessors.  We will have a similar article on Steven Coll’s 1986 classic outlining the events that lead up to the breakup of AT&T on December 29.  Preceding that, we will have a “Three Companies to Watch” special TSB on December 22.

A final thanks for the many referrals that we have had over the past month – over 250 new readers have been added.  If you know someone who could benefit from this column, have them send a request to sundaybrief@gmail.com and we will get them on the list.  We are also in the process of revamping the website (end of January) and promise more things in 2020 (including a merchandise fundraiser for the Davidson College Jay Hurt Hub for Entrepreneurship and Innovation).

This week, we will lead with a discussion of a deep topic – rethinking the wireless (and wireline) network operating system.  As mentioned earlier, we have several TSB Follow-Ups.

 

Programming Tomorrow’s Network

Within wireless communications networks, there are multiple pieces of hardware, each running its own operating software.  Each needs to operate to a given specification (usually a 3GPP or LTE Release standard), and there are likely additional requirements placed on the suppliers by the local operators.

This model worked reasonably well when voice and text (using the SS7 TCAP standard) constituted the majority of activity.  However, the interest in pushing applications (e.g., WhatsApp owned by Facebook) deeper into the network has created a gap between legacy product development and entrepreneurs.  On top of this, there is a need to cost-effectively provide access to less developed areas.  On top of this, data growth continues to drive up costs, which create pressures on carriers (and, as a result their suppliers) to deliver a better experience and greater profitability.

This has forced two things to occur:

  1. Greater network sharing (predominately radios and transport) between network operators. CBRS is the beginning of this trend in the USA (see TSB on CBRS here); and
  2. Separation of hardware (e.g., a shared radio) and operating software (which may be custom to the operator).

Doing all of this in a secure environment is a challenge.  Developing new operating systems amidst a global shortage of software development talent (and recognition of venture capital and other investors that this can be a value-producing endeavor) is an additional challenge.  Integrating any operating system changes into the stream of concurrent innovations (e.g., 5G Standalone equipment development, increased mobile edge computing deployments, etc.) requires coordination.  Creating competitive advantage in addition to achieving cost reduction targets adds to the heap.  It’s like replacing Windows yet expecting no change in how current and future versions of Excel and PowerPoint will work.

We outlined the AT&T efforts in this space in a previous TSB (link is here) but think there’s a few “no brainer” areas where application developers and carriers should come together to improve experience.

  1. Voice calling. This experience is essentially the same across carriers:
  • There is a non-real time contact list that is invoked through a clumsy, 1990’s dialer dial by name schemescheme (see nearby picture);
  • There is no voicemail ubiquity within the carrier community (there is at the app layer, however, for WhatsApp, Google Voice, and others);
  • To the best of my understanding, there’s no way of automatically integrating stored voicemails into CRMs such as Salesforce;
  • There is no reminder or follow up function on voicemails (think how Gmail does this with emails);
  • There are inconsistent methods of identifying spam calling (and any other incoming call for that matter);
  • There’s no way of knowing any details or status about the party I am calling (such as whether they are on the phone or whether they have made a call in the past five/ten/fifty minutes or even the last day – think the notification scheme for apps such as Skype, etc.);
  • For incoming calls, there’s minimal context and no ability to instantly locate/trace the incoming caller (mobile edge computing could fix this pronto and you could see that the call showing 704/Charlotte area code is really originating from Omaha);
  • There’s no ability to interrupt a current call (e.g., spouse calling), a call feature common in contact centers (whisper tone);
  • There’s no common messaging portal incorporating LinkedIn, Facebook, carrier, WhatsApp and other sources;
  • Integration between conferencing services such as Zoom or Skype and the mobile device have not materially changed in 20 years. Still a phone number plus an access code and an announced name.

Is it any wonder that Google Voice, Facebook, and WhatsApp are succeeding and that carrier voicemail solutions are flat to declining?  Customers are communicating more than ever, but they are just not into that 1990’s dialer.

To change voice, the interaction between a customer’s contact list (directory), the universal contact list (macro directory), storage (voicemail), availability (presence/ proximity) and the network needs to change.  This can all be done faster within the network and is a prime example of how operating systems can and should be rewritten.

Voice application (the dialer provider) should be a choice.  It should be portable and interoperable.  It should be driven by a microphone and intelligence, not by typed search strings into contact list applications.  And the private directory should have live updates (if allowed by the directory listing).  The integration of applications functionality deeper into the network can do this, and advancements will occur a lot faster than we see today from the carriers.

  1. Predictive Analytics (and Customer Care). One of the eye-opening experiences I had with my Flash Wireless experience concerned troubleshooting device issues (Flash had a heavy Bring Your Own Device base).  As an MVNO, we tried when possible to go the extra mile if the issue was device-related as opposed to a network issue.  We formed a checklist which could easily be databased in today’s environment.  Some of the important topics included:
  2. IoS or Android version
  3. Recent activity (e.g., voice over Wi-Fi connectivity issue vs the network, messaging activity, new apps downloaded, Wi-Fi vs network data access, location)
  4. Port-in provider (experience expectations)
  5. Phone age (and purchase source if it came from one from a known vendor)
  6. Customer lifecycle age (pre-first bill; first 90 days; over 180 days; etc.)

The number of possible iterations quickly grew, especially since we were in a 3-carrier MVNO environment (location in section b. above really mattered for some of our network providers).

A system that continually interacts with the network could do a better job of measuring data and device quality.  If a customer had a service need, problem identification could be instant and highly accurate.  Success would not be determined by the smartest care expert, but by the network (and the collective experience of all previous users who had ever used the network in that location at that specific day/time).  The cost of caring for older devices could be calculated with high confidence.

To make predictive analytics work, measurement software needs to be pushed further into the network core.  Economics aside, if the problem can be remedied by a carrier sharing partner, that can be done instantly through the operating software (not through a SIM setting).  Anomalies can be detected for individual users and alerts can be delivered.  If the problem was with the provisioning process, for example, the device could be re-provisioned right away (in a nearby store or over the air) or overnight.

The network can be the service expert if issues can be detected quickly.  With the consolidation of device models (e.g., more iPhone 8, X, XR, XS, and 11 models in service than ever before), there’s plenty of correlations to be determined (e.g., Sprint iPhone XR users living in Somerset, Kentucky that have activated service in the last 90 days).  The result of greater analytical capabilities built into the core could result in dramatically lower cost for customer care.

These are two of probably ten or more use cases that demonstrate the value of rewriting equipment operating systems.  This will be an evolution, but not one that is done simply to lower costs – there are many product and customer experience benefits that could create competitive advantage.

 

TSB Follow-Ups

qualcomm secure processing unit pic

Qualcomm Snapdragon 865 Chipset specifics revealed.  Increasingly, what’s contained in Qualcomm’s chipsets finds its way into the subsequent generations of smartphones.  If that is true, we should expect to see more camera focus (new chipset accommodates up to 200 MP cameras), 5G networks (full support), and faster displays (supporting up to 144 Hz).  It was also interesting to learn that the Snapdragon 855 would also support Dual SIM/ Dual Standby (more details on that finding from this XDA Developers report here).  As we discussed in last week’s TSB, the Apple XR/XS/ XS Max was the first lineup to support Dual SIM/ Dual Standby – Android development efforts in this area have been slower to emerge.  The Qualcomm 855 should be the turning point and we should see the capability available on new devices in 2020.  According to the XDA Developers article referenced above, they worked with Gemalto to enable eSIM support within the Qualcomm Secure Processing Unit.

One additional note about the Snapdragon 865 is its support for the Android 11 IdentityCredential API.  This would allow, among other things, the ability to store your driver’s license in Android and it would be accepted as a proper form of identification.  The complete video of Day 2 which has the details on the 865 are here – the discussion of Dual SIM/ Dual Standby starts at minute 31.  The Snapdragon 865 spec sheet is also available here.

 

DOJ Calls Out Carriers on Remote SIM Provisioning (RSP) Collusion

The day before Thanksgiving, the New York Times ran an article describing the settlement between the Justice Department, the GSMA (standards body) and some US wireless carriers (presumably including AT&T and Verizon) over possible collusion surrounding the development of eSIM device locking.

The Times article is sparse on details – Assistant Attorney General Delrahim’s letter (here), however is not.  Here’s what was found concerning the current RSP process (actual findings – emphasis added):

First, RSPv2 requires consumer-users to express affirmatively their intent to switch profiles each time the eSIM toggles between profiles or networks, thereby preventing the eSIM from automatically switching (or optimizing) between profiles. Dynamic or automatic switching is a potential competitive threat because it could lead to a service where a device efficiently selects, on behalf of the user, which profile to use in any given situation. For example, the eSIM could switch services if it detects stronger network coverage or a lower cost network, providing consumers with better or less expensive service. The prohibition on automatic switching would tend to prevent at least one existing operator from offering a new innovative service using an eSIM. That is, in order to offer the new service, the operator would have to convince smartphone manufacturers to forego complying with the RSP Specification.

Second, RSPv2 prevents an eSIM from actively using profiles from multiple carriers simultaneously. Multiple active profiles is a potential competitive threat because it would allow a user to divide usage across operators. For instance, the user could actively maintain two profiles on one device if he or she wanted to receive work-related phone calls to one profile and personal phone calls to another profile, all while carrying only one phone. The user could also actively operate profiles optimized for different coverage areas or for international travel. Although there appear to be technical challenges to allowing multiple active profiles at present, the single active profile requirement in RSPv2 serves as a roadblock to additional disruptive innovation that could solve these technical challenges.

The DOJ’s issue was not only with these two outcomes (which are unmistakably anti-competitive), but with the entire approval process used by the GSMA.  Everyone agreed to comply with  new process, and, with the advent of the new Qualcomm 865 chipset described above, it’s likely that switching between networks will be placed as a consumer choice with the opportunity to mute future notifications (similar to the roaming notifications process followed for over two decades) and also to allow multiple networks to be accessed simultaneously (making data network selection easier for cable MVNOs and others while potentially keeping voice on the MNO network).

 

 

Adam Koeppe Takes the Stage in Vegas (While His Boss is on a Separate Stage in Vegas)

 

Given space constraints in this week’s TSB, I am going to keep this excerpt short (perhaps we will cover in another TSB this month), but, if you want to know what Verizon is doing with respect to network deployment, listen to his Well Fargo talk with Jennifer Fritzsche here or read the transcript here.   Adam covers the AWS 5G Edge announcement, fiber deployment strategy, CBRS (and Enterprise LTE solutions pairing CBRS and millimeter wave spectrum bands), Broadband to the home and relationship to cable MVNO, and a few other topics.  Less spin is good for Verizon, and Adam is a “balls and strikes” interview.

 

 

What Markets Will See the Greatest Improvement to Sprint/ Boost if New T-Mobile Actually Occurs?

 

We had been thinking about this topic for a while, and accessed publicly available RootMetrics data (2H 2019 measures only to be most current in our assessment) to see where the current gap between T-Mobile and Sprint exists.

 

To no one’s surprise, Sprint tends to solely occupy fourth place in nearly each of the 125 markets that RootMetrics measures every six months.  How would that performance improve once that Sprint/Boost customer (current device) could access the T-Mobile network?

 

To determine the greatest impact, we looked at the difference between Sprint and T-Mobile’s Overall Score (perhaps in a future TSB we will dive into the components).  As of Wednesday, RootMetrics had published the results of 96 out of 125 markets (77%).  The results break down as follows (100 pt scale):

 

Overall Score Difference        Number of Markets        Percentage of Total

Less than 3.0 points                                19                                        20%

3.1 – 5.0 points                                     13                                        13%

5.1 – 10.0 points                                   48                                        50%

More than 10.0 points                            16                                        17%

 

While there may be debate about the impact to customers for the first two levels (device age could play a significant role in a market where both T-Mobile and Sprint are relatively strong), there’s little debate when there’s a spread in excess of 10 points and the market is not one of the previously announced 5G markets.  Here’s a sampling of where Sprint has fallen behind:

 

  1. Oklahoma.  Below are the most recent charts for Tulsa and Oklahoma City.  ‘Nuf said.

oK City and Tulsa

  1. Florida. These are legacy MetroPCS markets for T-Mobile and have very dense coverage.  Miami, which was once a priority market for Sprint (non-executive Chairman Marcelo Claure has close ties to the area), has fallen off considerably and is no longer a competitive market for Sprint.  Other markets with more than a 10 point spread to T-Mobile include Port St. Lucie (12.2) and Sarasota (11.1).  Orlando, Kissimmee, Tampa, and Jacksonville have a 5.1 – 10.0 spread.  The other markets are waiting to report.

Miami and Ft Myers 

The remaining markets are both big and small metro areas:

  • Atlanta (fast growing area, large market, 5G market)
  • Baton Rouge, LA (been a weak network for Sprint for many years)
  • Charlotte, NC (fast growing area and second home to most of the financial services industry)
  • Denton, TX (North Dallas suburbs)
  • Kansas City, MO (very odd as it’s Sprint’s current HQ and a 5G market)
  • Louisville, KY
  • Memphis, TN
  • Nashville, TN (fast growing area)
  • San Antonio, TX (Sprint PCS dominated this market because of its design; large market)
  • Wichita, KS

 

Interestingly, no Northeast, Northwest, Southwest or California markets with large gaps.  We will update this list in January once RootMetrics has completed their 2H 2019 metro studies.

 

That’s it for this week.  Next week we will begin our discussion of 2020 trends unless events dictate otherwise.  Until then, if you have friends who would like to be on the email distribution, please have them send an email to sundaybrief@gmail.com and we will include them on the list.

 

Have a great week… and GO CHIEFS!

 

 

 

 

 

 

The Long, Long Run

opening picGreetings from Chicago, Illinois (where the pre-winter winds were tame), and Davidson, NC (where it really feels like winter even though it’s mid-November).  This week’s TSB is less about the week’s events and more about strategy fundamentals.  Next week’s edition will focus on several “What if?” questions posed by this week’s article, and we will follow it up with a Thanksgiving edition retrospective review of Dr. Tim Wu’s The Master Switch.

 

 

The Long, Long Run

We have been doing a lot of reading and thinking recently about how telecommunications and technology have evolved, the role of the government in protecting free and fair commerce, and disintermediation of traditional communications functions primarily through applications.

 

Through our research, we have established several foundations of long-term success in the telecommunications industry, which include:

 

  1. Purchase, deployment, and maintenance/upgrade of long-lived assets. These include but are not limited to items such as fiber, spectrum, land/building (including sale/leasebacks of such), and other long-term leases.  Regardless of the type of communications service offered, the greatest potential long-run incremental costs begin with assets like these.

 

When Verizon discusses their out-of-region 5G-based fiber deployments (4,500 in-metro route miles per quarter for multiple quarters) as well as their willingness to lease/ rent to others, that’s a current example of the deployment of long-lived assets.  (When Verizon paid $1.8 billion for the fiber and spectrum of XO Communications in 2016, it was a bet on the long-term value of the asset and not XO’s previous annual or quarterly earnings).

 

All long-lived assets rely at least partly on location.  Fiber, land, building and similar assets cannot easily be moved.  Building or buying assets in the right places matters – a lot.  Local exchange end offices that were in the right places when they were built in the 1950s, 1960s, and 1970s may not be in the right places today.  The same could be said of fiber networks and Points of Presence (PoPs) deployed by MCI and Sprint in the 1980s and 1990s (AT&T’s fiber upgrades came 10-20 years later).  The location of these assets (e.g., locating a PoP at a major point in the city versus a village bus stop) is critical to product competitiveness.  The less moveable the asset, the higher importance to get the initial investment decision, including location, correct.

 

It’s important to note that things like voice switching and eNodeB (tower switching) are not long-term assets.  They are important investment decisions but can be moved (somewhat) more easily than fiber PoPs and tower lease locations.

 

Spectrum is more fungible but is still local (Just ask T-Mobile as they are in the middle of negotiating a lease for Dish’s AWS spectrum in New York City).  And spectrum bands have different values at different times: just ask Teligent (24 GHz spectrum), Nextlink (28 GHz) and Winstar (28 and 39 GHz).

 

Bottom line:  With few exceptions, sustainable telecommunications strategies begin with long-lived assets.  Get these selections right, and subsequent decisions are easier.  Cut corners on long-term assets, and future determinations become a lot harder.  Match the deliberation level to the expected life of the asset.

 

 

  1. Business and technology strategy which drives network equipment (and service) performance. This super-critical element is often ignored under the Michael Armstrong and John Malonepressure of a quarterly earning focus.  For example, AT&T purchased cable giant TCI in 1998 for $55 billion.  AT&T ended up spending over $105 billion on its cable assets, only to sell them to Comcast a few years later for $47.5 billion (news release here – that was a mere 17 years ago almost to the day).  This acquisition was not simply driven by scale (although it was an important consideration), but because AT&T saw value from TCI’s cable plant.

 

After AT&T decided to break itself up into four pieces in 2000 (Broadband, Wireless, Consumer, and Business), they had the opportunity to cover both DOCSIS and DSL technologies (see more in this detailed New York Times article here).  Even then, as shown in the slide below from a 2002 SEC filing, it was contemplated that AT&T would have Digital Subscriber Line (DSL) for some types of data transmission as well as DOCSIS for broadband (not to mention Time Division Multiplexed or TDM, SONET, and eventually Ethernet technologies for enterprise customers).  For a few years, AT&T provided both DOCSIS and DSL services to customers – one can only wonder what the outcome would have been had AT&T Consumer and Broadband remained as one unit.

AT&T architecture slide 2002

Meanwhile, in 2004, Verizon Communications announced their Fiber Optic Service (FiOS) to battle the perceived bundle advantage of cable’s triple play.   It’s important to note that this strategy change came less than 24 months after the sale of AT&T Broadband to Comcast.  Many of the initial FiOS markets will celebrate their 15th birthdays next year.  However, Verizon miscalculated the speed with which the cable industry would respond with their bundles as well as their upgrades of DOCSIS 2.1 (standard released in 2001 with commercial deployments starting in 2003) and DOCSIS 3.0 (standard released in 2006 with commercial deployments by 2008).  The result of cable’s deployment speed was significant – local phone market share shifted to the cable industry by 20-35% over the 2004-2009 time period, quickly depleting the prospects of both DSL (specifically ADSL) and switched access cash flows.

 

Then, in 2016, Long Island cable provider Cablevision (now a part of Altice USA) announced plans to deploy fiber to 1 million homes (and eventually 3-4 million homes) in their territory, removing FiOS’s underlying competitive advantage for those locations.  Per their most recent earnings announcement, Altice is quickly deploying the latest version of DOCSIS (3.1) and fiber to minimize Verizon’s competitive advantage and blunt any impact of 5G/CBRS as Wi-Fi replacement technologies.

LTE logo slideA more remarkable change has occurred in the wireless industry, who collectively rallied around a single common technology standard called Long Term Evolution (LTE) by 2009.  This service was eventually deployed first by Verizon in March 2011 then by AT&T starting later that year (Sprint launched LTE in 2012, and T-Mobile in 2013).  Standardization (versus an alternative of up to three standards – LTE, UMTS, and Wi-Max) streamlined the device ecosystem, strengthening brands like Apple and Samsung, and resulting in the accelerated demise of brands such as Motorola (forced to Droid exclusivity and then low-end), Palm, HTC (who reached its pinnacle with the Sprint HTC Evo which was Wi-Max dependent), and Nokia (Microsoft/ Windows Mobile dependent).

 

Bottom line:  The greater the reliance on DSL advancements (as opposed to fiber overbuilds), the faster value degradation occurred in the telco local exchanges.  Slow data became the competitor-defined brand of the local exchanges, and, with diminishing share of decisions, diseconomies of scale followed.  Wireless carrier adoption of a single, global technology strategy cemented the supply chain for the segment and allowed disintermediation of wireline voice services to occur at a more rapid pace (56.7% of adults are wireless-only as of the end of 2018, according to the Centers for Disease Control).  Technology strategies that run cross-grain end up on the Asynchronous Transfer Mode/ HSPA/ iDEN/ ADSL graveyard.

 

  1. Operational excellence/ marketing and product competitiveness. Once assets have been deployed and the technology strategy has been selected, the customer’s value proposition needs to be defined.  While the underlying evidence of a successful technology strategy is less identifiable in one earnings call, changes in value propositions are clearly evident sooner through lower churn, higher revenues per user, and third-party recognition.

 

For example, Verizon announced this week that they will be the exclusive provider of the new Moto RZRMotorola RAZR, a foldable $1,500 smartphone (more details here).  Strategically, Verizon went this route to remove the prospect of AT&T exclusivity (the original RAZR exclusive 15+ years ago), not because they believed this was a transformational device (read the review in the above link for more details).  Verizon’s Droid strategy (through Moto) and their Google Pixel 3 exclusivity enabled the company to have brand name devices that made Big Red’s network shine.

 

Another good example of a successful strategy is Time Warner Cable’s 1-hour service installation and delivery window across the Carolinas announced in 2012 (announcement here).  This was accompanied by an app that reminded customers that the technician was headed to their home.  They staked a claim on service against AT&T, Verizon/GTE/Frontier, CenturyLink and Windstream and forced each of them to respond.

 

Many case studies have been and will be written on the pricing and product strategy shifts (dubbed “Uncarrier moves”) that T-Mobile has employed over the past seven years.  Three strike us as being supremely critical to their growth trajectory:  a) Simple Choice plan rollout in early 2013 (announcement here); b) Binge On Implementation in 2015 (announcement here), and c) their changes in service strategy called Team of Experts introduced in 2018 (announcement here).

 

Earlier, we discussed the role of co-branding/ exclusivity as a part of a successful marketing strategy.  Many Sunday Briefs have highlighted the puts and takes of bundling wireless with Spotify (Sprint, then AT&T) or Hulu (Sprint) or Tidal (Sprint) or Netflix (T-Mobile) or Apple Music (Verizon) or YouTube TV (Verizon) or Amazon Prime (Sprint, Metro by T-Mobile) or HBO (AT&T).  A few weeks ago, we started to tackle a more fundamental question: “What’s the advantage of owning premium content (AT&T, Comcast, Altice, Canadian wireless and cable conglomerates) versus playing the field (Verizon, T-Mobile, Dish)?”

 

There are many more examples (good and bad) to discuss here (Verizon’s network quality marketing, AT&T’s iPhone exclusivity, AT&T’s multiple attempts to bundle wireless and wireline over the past decade, cable’s coordinated Triple Play strategy, Comcast’s Xfinity development, etc.) but the point is that no operations, marketing, or product strategy can be effective over the long, long run without the effective implementation of long-lived asset and well-conceived technology strategies.  While this sounds elementary to most of you, it’s worth thinking about the abundance of ill-conceived strategies that have destroyed tens of billions of dollars of shareholder value over the past two decades.  As we will discuss in part two of this strategic primer next week (called “What if?”), the blunders were both due to commission and omission.

 

TSB Follow Ups

M Claure and J Legere pic

I attended a private equity conference this week and walked into the cocktail reception to the question “Did you hear that John Legere might go to WeWork?”  I had no response other than to describe the conjecture using my best Legere language, categorizing the report as total BS and stating that it would be more likely for John to lead a challenger technology company like Tesla than WeWork.

 

By the end of Thursday, T-Mobile had lost ~$4/ share over three days (~$3.5 billion in market capitalization) as investors fretted.  Fortunately, by Friday evening news reports emerged that Legere was not going to leave T-Mobile for WeWork… at least yet.  We are not sure whether this is a market hungry for any Adam Neumann follow-up, any out-of-Washington news headlines, or if it’s just jittery in general.

 

T-Mobile’s Latest Olive Branch:  A Nassau County Customer Service Center

T-Mobile raised the stakes this week in their continuing public negotiation with the state Attorneys General, unveiling plans to build a new customer service center in the heart of the New York metro area (and, ironically, smack dab in the middle of the service area of one of their largest MVNOs – Altice).  This is the fourth of five new service center announcements (current ones include two in New York, one in California, and one near Sprint’s current headquarters in Overland Park, KS).  That leaves us speculating about the fifth location – could it be in the Lone Star State or the Windy City?

 

We should expect a steady stream of offerings up to the December 9 trial start.  Local jobs matter even in a full employment economy, and the Nassau County announcement received a lot of local press.

 

Disney+ Success:  10 Million Customers Day One

After some initial reports of activation and streaming hiccups, Disney announced on November 13 that they had signed up more than 10 million customers on the first day of service.  They also announced a new bundling plan (anyone watching college football yesterday couldn’t miss it) which includes Hulu Basic, ESPN+ and Disney+ for $12.99/ month (presumably to blunt the potential impact of AT&T’s HBO Max announcement).  The company also indicated that they would not announce any additional subscriber figures until their next quarterly earnings call.

 

Will this translate into further net additions for Verizon?  The unequivocal answer is yes, but how much remains to be seen.  Disney+ has front page billing on the Verizon website, and they began to run ads this week touting their association with the latest streaming craze.  One of the “What if?” questions in next week’s column deals with Verizon and content ownership so we’ll be discussing their “multiple choice” strategy then.

 

CBA Breakthrough?  We Should Know Very Soon

Last Friday, the C-Band Alliance (CBA), which now consists of all of the major holders of this spectrum (3.7 – 4.2 GHz downlink; 5-9 – 6.4 GHz uplink) frequency except Eutelsat, sent a letter proposing economic terms for a CBA-Led auction.  The anticipated proceeds to the US Treasury are as follows (note that these are incremental amounts to the Treasury based on overall proceeds):

 

Cents per MHz PoP bid                % to Treasury                   % to C-Band Alliance

$0.01-$0.35                             30%                                     70%

$0.36-$0.70                             50%                                     50%

Over $0.70                               70%                                    30%

 

This also comes with a pledge to conduct the auction in a timely manner (within 90 days) after FCC approval which would put it ahead of the Priority Access License for the CBRS spectrum currently scheduled for the end of June.  The letter also includes a vague, good faith effort to build an open access network with a portion of the auction proceeds to improve rural coverage.

The FCC has been asked to speak with Senator Kennedy’s committee later this week, and, to make it on to the FCC December calendar, any proposal will need to be added by next Thursday (November 21). The odds of approval of any proposal by December are diminishing each day, and it’s likely that the C-Band auction will occur after the CBRS PAL auction, likely August or September.  Analysts’ estimates of C-Band auction proceeds range from $10 to $60 billion.  Meanwhile, CBA member stocks are trading at nearly half of their summer levels due to the uncertainty (Intelsat 5-day stock price chart nearby).

 

That’s it for this week.  Next week, we will continue this strategy theme with several “What if?” questions (please submit yours with a quick email to sundaybrief@gmail.com) unless there is other breaking news (perhaps related to the T-Mobile/ Sprint merger or the C-Band auctions).  Until then, if you have friends who would like to be on the email distribution, please have them send an email to sundaybrief@gmail.com and we will include them on the list.

 

Have a terrific week… and GO CHIEFS!

iPhone Availability Update (Nov 3)

We continue to monitor iPhone availability (backorder by model, memory size, and color) in conjunction with our partnership with Wave7 Research.   A link to the PDF can be found at the end of the document

As most of you will recall, we had significant shortages of most models in the first weeks of sales (late Sept/ early October).  These shortages have continued with T-Mobile for the iPhone 11 and some of the larger memory sizes of the iPhone 11 Pro and iPhone 11 Pro Max.  Given T-Mobile’s marketplace attraction, this is not too surprising, although continued shortages of the higher-end models (T-Mobile requires an up front payment on all sizes of the iPhone 11 Pro and iPhone 11 Pro Max) are a bit surprising.  We would attribute some of this to supply chain conservativeness, although that should have been alleviated by now.  In reality, it’s probably a combination of great sales, a robust economy, and supply chain conservatism.

What is very interesting is the higher likelihood of backorders at AT&T versus Verizon.  Both have long histories with Apple (especially AT&T) and neither tends to run a backorder deficit after 6+ weeks of sales (due to sheer size).  AT&T seems to be experiencing a larger number of upgrades (and, due to a higher mix of Apple devices vs Verizon, a small change in upgrade rate can impact total device volumes).

Bottom line:  T-Mobile’s backlog is primarily iPhone 11 and should be corrected by Thanksgiving.  No backlog at Verizon (no surprise given no 5G).  AT&T should continue to be watched very closely.

Apple iPhone 11 availability nov 3

Apple iPhone 11 Pro availability as of Nov 3

Apple iPhone 11 Pro Max availability as of Nov 3

iPhone availability as of Nov 3

Link to PDF listing all three models is above.

 

AT&T’s Big Week

opening pic

Greetings from our nation’s capital (now home to the World Series champion Washington Nationals) and Lake Norman, NC.  This was a very busy week for earnings with Apple, AT&T and T-Mobile all announcing earnings.  We are going to start with AT&T given their 3-year guidance but will also devote time to both Apple and T-Mobile earnings.

Given the level of earnings-related news, we will not have a TSB Follow-Ups section this week but will resume this section in an upcoming Brief.  First up – AT&T.

 

AT&T’s Multiple Headlines:  Legacy Bottom Within Sight, New Wireless Pricing Plans, Fiber Penetration Coming, and Renewed Reseller Focus

 

AT&T led this week’s earnings with a detailed assessment and lengthy earnings call hosted by CEO Randall Stephenson and CFO John Stevens.  At the end of the earnings presentation, they showed the following waterfall chart outlining how they would improve earnings per share:

at&t waterfall chart

There are many important things to note in this slide.  First, the 2.0% (200 basis point) improvement in overall margins.  AT&T’s reported 3Q EBITDA was ~ $15.4 billion when you exclude Puerto Rico operations (entire PR and US Virgin Islands P&L is held in Corporate & Other) on a base of $44.6 billion in 3Q operating revenues (34.5% EBITDA margin).

 

To improve 200 basis points, AT&T will need to remove ~$890 million in quarterly costs or about 5.5-6.0% of their total expense base across the corporation AND replace each lost dollar of EBITDA (e.g., from premium video or DSL or legacy business voice) with a dollar of EBITDA from new sources (higher value-added fiber subscribers, mobility ARPU increases from service upgrades, higher revenues from smartphone insurance).

 

On top of this, AT&T will need to cut an additional $350 million in quarterly costs ($1.4 billion annually) to cover the HBO Max investment (which will not significantly impact revenues and EBITDA until early 2Q 2020).  Roughly speaking, the operating expense net improvement will need to be ~$1.24 billion per quarter or about $5 billion per year (again, some of this improvement may come from the differential between higher new product and lower legacy product margin differentials, as we will explain below with fiber).

 

Highlighted throughout the earnings call was the need to penetrate more households with fiber.  On the residential side (small business and enterprise were not reported), AT&T ended 3Q with 3.7 million fiber customers on a total base of 20 million fiber homes and businesses passed.  This equates to a 19% penetration.  Assuming 10% of the 20 million represent business locations passed, the residential penetration rate comes out at 21%, within the 20-25% range mentioned by Randall Stephenson on the earnings call.

 

Assuming the fiber penetration in the chart above is achievable, AT&T is targeting growing the 3.7 million base to ~ 9 million (on an 18 million homes passed with fiber base) over the 2020-2022 period.  An incremental 5.3 million broadband customers (at a $55 ARPU – 10% higher than current) represents 440,000 net additions every quarter for the next 12 quarters and would generate $3.5 billion in incremental annual revenues and $1.8-2.0 billion in annual incremental EBITDA by the end of 2022.  Bottom line: Increased fiber penetration to homes is a big part of AT&T’s profitability improvement plan.

 

To put this in context, Comcast’s rolling four quarter High Speed Internet additions quarterly average is 304,000 and Charter’s metric is around 350,000.  Assuming that Comcast and Charter are ~100% share of decisions (including DSL migrations), the 440,000 net additions figure assumes that AT&T reverses that trend nearly overnight AND take some legacy share from cable (!).  All this in light of the DOCSIS 4.0 rollout of cable to multi-Gigabit speeds at very low incremental capex costs.

 

To reemphasize, AT&T’s average growth in the fiber base (much of it from fiber-fed DSL, also called IP broadband) over the last several quarters has been between 300,000-320,000.  Assuming growth comes from net new growth (not DSL conversions), the operation will need to grow 30-40% overnight.

 

More to come here, as we have assumed a 10% premium and cable is either matching or 10% lower than AT&T pricing, and we have not begun to talk about T-Mobile’s plan to acquire wireless high speed data customers using their combined spectrum holdings.  Bottom line:  There’s little reason to believe that AT&T will be able to materially move the share of decisions needle and grow 20-30% market share points in Los Angeles (Charter), Dallas (Charter), Chicago (Comcast), Atlanta (Comcast), or Miami (Comcast) at a market premium in light of T-Mobile’s (and others) market entry.  As a duopoly, it’s a stretch – with three or four players, it’s a pipe dream.

 

Another source of growth mentioned on the call was Reseller.  As we noted in other blog posts, Reseller losses were almost perfectly offset by Cricket (Prepaid) gains.  As AT&T explained on the call, this was largely by design due to spectrum capacity constraints.  Asked in the earnings call Q&A whether AT&T would consider an MVNO relationship with cable, Randall Stephenson replied:

Yes. We would actually be open to that. So you should assume that, that’s something we’d be open to. And not just cable guys, but there are a number of people in the reseller space that are reaching out. And it’s just as John said, we got a lot of capacity now in this network, and we’re at the point of evolution in this industry where we ask, how do you monetize most efficiently, capacity? And so we’re going to look at all those channels.

As we discussed in last week’s TSB, the cable operators want more call control.  Would AT&T really offer that?  At what cost?  At what margin?  Could Altice convert their new T-Mobile core + AT&T roaming relationship into a true wireless least cost route mechanism which would only use AT&T in areas where their own (CBRS, C-Band, other) network and new T-Mobile could not reach?

 

This was a surprising comment to say the least.  AT&T has not courted large wholesale customers since Tracfone in 2009.   A simple glance of the Wikipedia AT&T MVNO list includes a number of smaller players as well as AT&T-primary providers such as  Consumer Cellular, PureTalk USA, and h2o.  It’s very hard to imagine a major MVNO play that would not harm Cricket (which grew 700,000 net additions over the last four quarters) or the core business.

 

Lastly, the mobility business, even in the “golden era” of relative price stability, video compression, and low device upgrades, did not improve adjusted earnings much in Q3.  Here’s their income statement:

AT&T Mobility Results 3Q 2019

 

Unlike Verizon, who still has a large base of traditional subsidy-oriented plans (for every dollar of equipment revenue, Verizon has $1.06 in equipment costs) AT&T has minor if any equipment subsidies.  The implication is that for every dollar in reduced equipment revenues, operations and support costs should decrease a dollar.  This did not happen on a sequential basis (equipment costs +$303 million, operations costs +$426 million) and the 3Q to 3Q reduction is negligible (equipment revenues down $136 million, costs down $156 million).  If incremental scale is driving incremental profitability, it’s being offset by other spending.

 

Embedded in these numbers is FirstNet, now with close to 900,000 connections across 9,800 agencies per the most recent Investor Handbook.  In the second quarter, the same figures were “over 700,000” connections.  Given our understanding of the public space, let’s assume this translates into 175,000 net additions from FirstNet in 3Q with 125,000 (70%) of these coming from phones.  Bottom Line: AT&T reported 101,000 postpaid phone net adds in the quarter, and without FirstNet, it’s very likely they would have been negative.

 

Bottom line:  AT&T continues to integrate into an end-to-end premium content and network communications provider.  They made a big three-year earnings promise that depends on new and different execution (particularly broadband growth and reseller market penetration) that has not been seen from AT&T in decades.  We are confident that AT&T can cut costs but equally skeptical that they can grow share.

 

Apple Card Launches, and 0% a.p.r Financing is Announced.  The First Impact is Device Financing. 

 

On Wednesday, the Cupertino hardware (and now services) giant announced strong, Apple Card picbroad, and expectations-beating earnings.  iPhone sales, while down 9% from last year’s quarter, were still strong and Apple CEO Tim Cook gave very bullish guidance on this quarter’s device sales.  In this light, Apple announced that trade-in volumes were more than 5x greater than they were a year ago (recall that Apple highlighted lower monthly payments and device values with trade-in starting with last September’s announcement.  The 5x figure is therefore based on a few weeks – this figure could be much higher after a full quarter is measured).

 

The big announcement came through Tim Cook’s discussion of Apple Card performance:

… I am very pleased to announce today that later this year, we are adding another great feature to Apple Card. Customers will be able to purchase their new iPhone and pay for it over it over 24 months with zero interest. And they will continue to enjoy all the benefits of Apple Card, including 3% cash back on the total cost of their iPhone with absolutely no fees and the ability to simply manage their payments right in the Apple Wallet app on iPhone. We think these features appeal broadly to all iPhone customers, and we believe this has been the most successful launch of a credit card in United States ever.

A customer purchasing an iPhone 11 (64 GB) with their Apple Card would pay $21 less using this plan than purchasing through Verizon or AT&T (T-Mobile offers the 3% cash back Apple Card feature) or $28.25 per month prior to trade-in.  This represents a $71 reduction ($2.96/ month) from what a customer would have paid for the iPhone XR (64 GB) in 2018 and produces an optically significant sub-$30/ month price point.

 

On top of this, Apple is offering slightly better than average trade-ins per our comments with analysts who follow store activity (hence the 5x increase described earlier).  If customers believe that using Apple directly delivers a better financial outcome, they will go direct.

 

The 0% a.p.r, 24-month term mirrors the offer Best Buy currently gives to their My Best Buy Visa Credit Card customers (more on that offer here).  While unlocked Android devices are currently covered (including the Samsung Galaxy S10 and Note 10), it remains to be seen if/ how the interest-free offer might be extended to Best Buy.

 

As we have discussed in previous Sunday Briefs, Best Buy and Apple recently extended their service relationship (more on that here), and Apple announced that their Authorized Service Provider locations had grown to over 5,000 globally.  Extending this relationship into financing is not a slam dunk, especially given the current success Apple experienced last quarter without Best Buy, but the option exists to tie Apple Card promotions to Best Buy distribution.  If this were to happen, the wireless carriers would need to demonstrate more value (financial, bundling, services) than both Apple and Best Buy.

 

As Apple disclosed on the call, this was the best quarter for Apple Care revenues on record.  As was also disclosed on the AT&T and Verizon calls, device protection was a driver for their wireless service ARPUs in the quarter.  This business is profitable to the carriers ($5-7/ mo. in incremental EBITDA for every device protection plan is material to customer lifetime values), and the consequence of the loss of this profit stream should not be ignored.  There’s more to this than the loss of revenues – service margins will be impacted by any move to Apple Card.

 

In the August 25 Sunday Brief, we suggested an enhancement that would significantly accelerate Apple Card usage and iPhone upgrades:  Multiply the Daily Cash savings (we suggest 2x) when it’s applied to your iPhone 0% a.p.r plan.  This would shift marginal purchases (especially for multi-line accounts) to the Apple Card (driving up transaction fees and potentially interest charges) while providing the benefit of potentially paying off the device faster.  Fully paid devices could encourage additional upgrades and improve customer satisfaction.  This would also be more difficult for the wireless carriers (or Samsung) to duplicate.

 

Five-fold increases in trade-ins with only a partial quarter of measurement… best-ever Apple Care revenues… now Apple Card 0% a.p.r financing and 3% daily cash for 24-months.  That would be a lot to digest even if iPhone sales were missing expectations.  But, as we will show in a TSB online post in a few days, the iPhone 11/ Pro/ Pro Max inventory levels are still tight heading into the Holiday season.  This may not be the time to push the idea of Daily Cash sweeteners. The opportunity, however, is almost too good to pass up.

 

T-Mobile’s Stellar Quarter – Only Treats from BellevueJohn Legere Halloween pic from Earnings Call

Caught between AT&T’s earnings, the HBO Max announcement, and Apple’s surprise financing offer was the continued strong performance of T-Mobile.  They reported the following:

 

  • 754,000 branded postpaid phone net additions (versus 101,000 for AT&T – see above – and 239,000 for Verizon). Most importantly, T-Mobile’s net additions beat Comcast + Charter’s combined figure of 453,000.
  • Branded postpaid monthly phone churn of 0.89% (versus 0.95% at AT&T and 0.79% at Verizon)
  • Service revenue growth of 6% (versus 0.7% total mobility services growth at AT&T and 1.83% at Verizon)

 

We were very close to our early September estimates of 205 million POPs covered by 600 MHz (200 million actual) and 235 million POPs cleared (231 million actual).  T-Mobile also updated their estimate of POPs cleared by the end of 2019 to 275 million, slightly down from previous guidance of 280 million.

 

We think that the addition of 100-110 million new POPs in the second half of 2019 provides plenty of room to grow even without Sprint.  Also, T-Mobile’s total debt (including debt to Deutsche Telekom) is down to $25.5 billion from $27.5 billion at the end of 2019, and the resulting debt to EBITDA ratio stands at 2.0x, down from 2.3x in 3Q 2019.

 

We will have a full readout of T-Mobile’s earnings in next week’s TSB (which should be viewed against Sprint’s earnings due Monday and T-Mobile’s special Uncarrier announcement this Thursday).

 

Bottom line:  T-Mobile had a spectacular quarter, outpacing AT&T and Verizon in nearly all consumer metrics and is well prepared to thrive in a post-merger environment.  We still anticipate a settlement of the AG lawsuit in the next month or so, but believe that a trial outcome is likely to be found in T-Mobile’s favor for reasons stated in previous TSBs.

 

That’s it for this week.  As mentioned earlier, we will be posting the latest Apple inventory charts to www.sundaybrief.com in the next day or so.  Next week, we have Sprint and CenturyLink earnings as well as the T-Mobile Uncarrier announcement to cover.  Until then, if you have friends who would like to be on the email distribution, please have them send an email to sundaybrief@gmail.com and we will include them on the list.

 

Have a terrific week… and GO CHIEFS!