Home » T-Mobile

Category Archives: T-Mobile

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!

Verizon, Comcast and Charter 3Q Earnings Review

opening pic 2Greetings from the Mile High City, the Queen City, and the City of Angels.  Attendees of the Mobile World Congress – Americas were greeted with multi-story advertisements on buildings touting original content, a reminder that investment in the TMT (telecom/ media/ technology) industry can take many forms (more on this thought when we discuss Verizon’s earnings below).

I had the chance to visit with many of you during the show, and, to a tee, no one was excited to be there.  “Where’s T-Mobile?” was a frequent question, usually accompanied by comments about slow vendor payments or delayed decisions.  Several had “I told you so” comments about Nokia (a summary of their bad week is best captured here).  And the fact that Sprint had the main entrance exhibit led some to theories that should be reserved for late night cable news.

Here’s the bottom line from the show:  Our industry is changing – a lot.  The mobile handset, and the licensed and unlicensed spectrum that it connects to, will be life-changing for nearly all who use it.  And software (largely not present at the show), not hardware, will define value.  More on this can be found from our earlier column “About This Thing Called 5G” in which we define the 5G value statement as “More software… doing more things… faster and better.”  Networks matter (we will see their importance below), but software fuels their engine.

This week, we will look at three companies who announced earnings (Verizon, Comcast, and Charter) and examine the differences in growth strategies versus their industry peers.  As a reminder, T-Mobile and AT&T announce earnings next week, with CenturyLink, Sprint and others following later in November.

 

Verizon:  Consumer Wholesale and Fiber Save the Day and Seed Long-Term Options

Verizon reported strong earnings on Friday, led by wireless service revenue growth and expense reductions (nearly 14,000 fewer employees in the last 12 months alone).  They had balanced growth in wireless net additions between consumer and business (and phone net adds in both, including public sector, which was a shot across the bow to AT&T’s FirstNet initiative).  And, while they paid down debt, they continued their significant capital spending ($12 billion year-to-date at the consolidated level, up slightly from 2018).

Rather than go deep on each statistic, let’s summarize three areas where Verizon and AT&T are pursuing markedly different strategies:

  1. Wireless wholesale revenues (found in the Wireless Historical Financial Results) are a key source of Verizon’s revenue growth. Verizon’s consumer income statement shows growth from multiple sources:

verizon q3 earnings schedule

Approximately $376 million of 3Q 2018 to 3Q 2019 growth comes from the Operating Revenues – Other line.  Excluding equipment, operating revenues grew $808 million.  Around half of the operating revenue growth is coming from wholesale, which has no CPGA and carries ~65% EBITDA margins.

Interestingly, segment EBITDA grew a paltry $77 million driven largely by an increase in equipment subsidies ($136 million in 3Q 2018 vs. $341 million in 3Q 2019).  Excluding the equipment subsidy, the $77 million EBITDA growth becomes $282 million (a good proxy for wireless service margin growth).  So, while revenues grew by $808 million year-over-year, only 35% translated into cash.

Verizon’s CFO Matt Ellis addressed the equipment subsidy in the earnings call, saying:

So on the wireless cost of service side, I mentioned that the phone net adds split was fairly even between Consumer and Business. Business had a more than 10% increase in phone gross adds. … a lot of our Business customers are still on a subsidy model rather than device payment model, so I think you see the impact of that.

Adjusting for subsidies, and assuming a very conservative 65% EBITDA margin on wholesale revenues, it’s highly likely that 85% or more of the 3Q 2018 to 3Q 2019 EBITDA improvement came from wholesale ($376 million * 65% = $244 million EBITDA/ $282 million = 87% of EBITDA growth comes from Other revenues).

On a 2Q to 3Q 2019 sequential basis, the impact of wholesale is even more dramatic, with the unit accounting for $312 million of the $466 million non-equipment revenue growth (67%) and, assuming EBITDA margins of 65% on the $312 million, more than 120% of the subsidy-adjusted sequential EBITDA growth ($119 million + $42 million of increased subsidy = $161 million).

What this says is that the negative margin impact from consumer retail growth (and write-downs thanks to new unlimited pricing plans) is being covered by consumer wholesale.  Without cable and Tracfone, the story line would have been very different.

The other major item that escaped the headlines is the continued fiber build in 60+ metropolitan areas outside of the Verizon franchise territory.  At the end of the earnings conference call, Matt Ellis called out the fiber impact:

… we’re rolling out more fiber as you know in our One Fiber initiative that is going to give us more opportunities to sell into those customers as they move off of legacy products and our fiber build has continued to gain momentum, increased at a little bit in the third quarter of over 1500 route miles a month on average in the quarter. So we’re getting to a good momentum there and that will open up additional opportunities for us as we go forward to replace those legacy volumes

An additional 20-40K route miles of fiber hitting the market starting early next year will not go unnoticed and marks a very different strategy from AT&T out of region, particularly for enterprise customers.  As that number accumulates (1,000 route miles means a lot in a city like Birmingham, AL or Albuquerque, NM).  And, as others have correctly noted, that fiber is largely being connected to wireless telecom infrastructure and not commercial real estate (an entirely different build/ approval process).  But it’s different because it’s a highly leverageable asset (this is a “Fiber Always Wins” case to quote a previous TSB article).  We have previously talked about the impact of the CenturyLink build (4.7 million fiber miles), but not as much about Verizon’s One Fiber initiative.

Lastly, the Disney+ announcement stands in stark contrast to what we will likely hear from Time Warner/ AT&T executives on Tuesday (free HBO for AT&T customers started to leak last Friday – see CNBC article here).  Content production with telco cash balances is unknown territory.  At a minimum, it dilutes management focus from strategic items like infrastructure buildout and fiber competitiveness.  More likely, it locks in AT&T to HBO and other Time Warner content at the expense of other options (as opposed to Verizon’s “playing the field” strategy of Apple Music last year, Disney+ this year and next, and maybe something entirely different in 2021).  We will have more to say on Disney+ vs. HBO Max in next week’s TSB (and why we think Apple Music lessons learned over the last 12 months prepares Verizon for a very successful Disney partnership), but it’s worth thinking about the value of the content selection option.

Bottom line:  Verizon’s earnings message was focused on wireless service revenue and content deals.  Their profit growth is increasingly being driven by non-retail sources, however.  One Fiber could translate into Enterprise market share gains if management quickly re-builds their local out of region wireline capabilities.  Verizon looks less and less like AT&T each day.

 

 

Comcast:  Residential Broadband Dominates – Now What About Wireless?

Comcast had a record quarter on broadband growth, with 359K residential and 20K business net additions.  The 359K figure is the highest net additions for any quarter since Q1 2017 (first quarters tend to be promotion-driven and Comcast was in the middle of DOCSIS 3.1 adoption at that point – no such tailwinds existed in 3Q 2019), and according to Brian Roberts, the most for any third quarter in ten years.  Penetration of homes and business passed grew to 48.2%.  Not only did subscribers grow, but total revenue grew as well, as existing customers upgraded their service and promotions expired.

The talk track for Comcast residential broadband is this:  New homes/ dwellings are being built, and Comcast is grabbing disproportionate market share from AT&T U-Verse (Chicago/ Houston), Century Link (Seattle/ Utah) and Verizon FiOS (Boston/ Philadelphia/ Washington DC).   In turn, existing customers are increasingly satisfied with their products and services, which keeps non-mover churn in check and increases bundling and upgrades.  We are ready for all broadband challengers.

comcast q3 earnings schedule

To put the 359K net additions in context, Verizon’s FiOS unit grew 30K net new additions from Q2 to Q3 2019 yielding a 12:1 advantage.  Including DSL, Verizon lost 5K residential customers in 3Q 2019, a figure 10K worse than 3Q 2018.

Over the last nine months, Verizon broadband has gained 9K residential broadband customers (106K net FiOS less 97K DSL losses).  This compares to total residential broadband gains at Comcast of 893K – a 99:1 advantage (!).

One would think that Brian Roberts and Michael Cavanagh could drop the microphone and walk away.  And, had Altice not deployed a very aggressively priced MVNO on Long Island using Sprint’s network, most analysts would have changed their questions to deal with softball topics like theme parks, debt and buybacks.  The Altice deployment drove many questions, including (TSB paraphrases of the questions based on the conference call transcript):

  1. Doug Mitchelson at Credit Suisse: How are you leveraging your base to get better pricing, and can Comcast implement strand mounts (a la Altice) to improve their cost/ GB and improve Verizon’s coverage?
  2. Brett Feldman at Goldman Sachs: Is the MVNO unit driving up technical and product support costs in the quarter and how will continued growth impact the fourth quarter?
  3. Jennifer Fritzsche at Wells Fargo: How does Comcast view the upcoming CBRS (Preferred Access License), C-Band and Millimeter Wave spectrum auctions?  Will spectrum ownership be a part of Comcast’s strategy going forward?
  4. Craig Moffett at MoffettNathanson: How will Comcast use eSIM (specifically dual SIM/ dual standby) to improve their wireless cost structure?
  5. Michael Rollins at Citi: How are you changing your bundling message to reflect your wireless offering?  Is Comcast experiencing difficulties in retailing wireless?  Could a media + wireless bundle drive more subscriber growth?

Of the ten questions in the Q&A, five (at least partially) dealt with the MVNO business.  Putting this into perspective, wireless represents slightly more than 2% of the 3Q 2019 Cable segment revenues and just over 1% of total 3Q 2019 corporate revenues.  Even on a growth basis, wireless was $90 million out of $561 million growth from 3Q 2018 to 3Q 2019 (16%) and would be an even smaller number if we excluded the advertising revenue drop.  Why so much interest in wireless?

Part of the answer could be the natural inclination to focus on those areas of the business that are dragging down EBITDA.  Xfinity Wireless lost $94 million in EBITDA in the quarter or about $18.50/ month/ average subscriber.  This figure is substantially better than the $178 million lost in Q3 2018 ($66.29/ month/ average subscriber) but largely unchanged from the $88 million lost the previous quarter ($19.60/ month/ average subscriber).  Upticks are hard to stomach even if they are explainable, and it’s likely that the iPhone 11 launch impacted 3Q EBITDA.

updated mobile net additions by quarterAnother answer is to look at wireless growth in light of the large High Speed Internet base.  Comcast had 1.689 million average wireless subscribers in Q3 against 25.811 million average High Speed Internet subscribers.  Assuming 1.8 Xfinity wireless lines per household (a figure below 2.0 assumes that By the Gig is more popular with individual/ single line users than other family-focused plans), 1.689 million subscribers would translate into roughly 940,000 households or below 3.7% penetration of current Xfinity household accounts (note that as the 1.8 lines per household grows, the penetration level shrinks).  That’s an underwhelming figure given the 2.5 years Comcast has been actively marketing retail wireless services.

Nearby is the updated net additions growth chart for both Comcast and Charter.  It’s very interesting to note that since 4Q 2017, net additions have been running in a very tight range.  In fact, the four quarter net additions rolling average ranges from a low of 196 to a high of 214 – a close-fitting cluster.  It appears that Comcast is being more deliberate in their growth strategy (in effect placing a 200K quarterly growth governor) in anticipation of additional events.

We have no doubts that Comcast has a long-term wireless strategy, and that it involves increased licensed and unlicensed spectrum ownership and operation at some point.  But we also understand that every piece of content added to the package hurts gross margin and keeping up with AT&T/ HBO and Verizon/ Disney is going to be difficult without offload.

Bottom line:  Comcast blew away High Speed Internet performance expectations which changed analyst focus to wireless, specifically unlimited plan profitability.  Absent the collapse of the Sprint/ T-Mobile merger, there’s a lot of planning ahead.

 

Charter:  Like Comcast, But with Less Content and no Europe Exposure

Charter also posted very strong growth with 351,000 net High Speed Internet additions and 276,000 wireless subscriber net additions.  This translated into $4.1 billion in EBITDA which included $145 million in total mobile EBITDA losses (across 656,000 average monthly subscribers, this equates to a loss of $74/ average customer/ month which is better than where Comcast was after their first five quarters of service).  Charter has grown slightly faster in their first five quarters of wireless service than Comcast did, and CEO Tom Rutledge believes that their sales productivity is just getting started.

charter adjusted EBITDA 3Q 2019

In the Question and Answer section of their earnings call, Charter reiterated their increased growth trajectory on both wireless and broadband, and also reiterated that they are looking at CBRS across a wide variety of fronts (rural wireless expansion, highly congested areas, etc.).  Charter did not mention any changes in their wireless strategy with respect to business, but it’s likely that small business expansion (< 20 lines) will continue to grow in 2020.

Bottom line:  The tone of the Charter call was completely different than Comcast, reflecting the differences between the companies.  Content discussions focused on retransmission agreement progress (with an acknowledgement that customers will see some increased costs), and there were absolutely no international discussions.  It’s clear that Charter wants to a) hit the 1 million subscriber milestone by the end of the year, and 2) continue to realize scale efficiencies in wireless.

Next week, we will incorporate AT&T’s Time Warner Cable analyst day, AT&T quarterly earnings, and T-Mobile earnings into the discussion.  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!

 

 

 

 

 

 

 

Four Earnings Questions

** Note – I will be at MWC-Americas on Wednesday (all day) and Thursday morning.  Please send a note to sundaybrief@gmail.com if you would like to catch up.  Thx, Jim **

opening pic

Greetings from Lake Norman, NC (picture of a recent sunrise is shown).  This week, we will discuss four questions that should be asked during earnings calls (which start this Thursday with Comcast, followed by Verizon and Charter on Friday and AT&T and Google the following Monday, Apple and Sprint (likely) on Oct 30 and CenturyLink on Nov 6).  Please note that these questions are not in priority order.  Here’s four questions we’d like to see answered in upcoming earnings calls:

 

1. To Apple: If Goldman Sachs is correct, and the Apple Card truly is “the most successful credit card launch… ever” how will Apple use these new relationships to increase the iPhone renewal rate?

To AT&T and Verizon:  Do you anticipate that Apple’s new credit card will disintermediate the store purchase and financing experience?  If that occurs, and customers finance their new device through Apple directly, how will that impact revenues, margins, and churn?

We received a strong indication of Apple Card’s success from Goldman Sachs this week when CEO David Solomon revealed on his earnings call that “we believe [the Apple Card] is the most successful credit card launch ever.”  Solomon went on to disclose:

…we have seen a pretty spectacular reception to the card as a product. The approval rates early on have been lower, and I say that that’s a decision, obviously, Goldman Sachs is making as the bank, but we’re doing that in concert with Apple. And it is because we’re quite vigilant from a risk point of view, of not being negatively selected out of the box. Meaning, over time, we’ll start to see better credits appear and the approval rates will go up, where we’ve seen an enormous inbound, we’ve issued a considerable amount of cards. We’ve just been through our first bill cycle, which went smoothly, and so from an operational point of view, it’s gone well

Apple announces earnings on October 30th.  It’s likely that they will not actively promote anything until after the Holidays (if demand is good, and they are throttling activations through selective credit scoring, probably not best to get promotionally aggressive).  However, if Apple attracts 10 million US card holders in the first year (we would not be surprised if this happens), you have to think that the ability to finance select transactions at 0% a.p.r is inevitable.

 

2.To AT&T: Do the list of divestitures you are working on with Elliott Management include unprofitable local phone exchanges?

 To each of the other local exchange providers (particularly rural):  How will you more effectively compete against a clustered (and therefore operationally efficient) cable industry?  Was your concern over valuation when you considered clustering in the past unfounded given the deep losses that have occurred in broadband acquisition over the past decade?

 

We briefly discussed this in the TSB focused on the Elliott Memo.  In our note, we described the diseconomies of scale arising from island or isolated exchanges in North Carolina.  To prove that the Tar Heel state was not a fluke, we show below the local telephone provider exchange map of South Carolina (link here):

sctba pic

In contrast with this menagerie of local exchange properties, cable broadband providers in South Carolina consist of the following (from the South Carolina Cable TV website and company websites):

  1. Spectrum/ Time Warner Communications: 72 million population covered
  2. Comcast Communications: 600,800 population covered
  3. Comporium Communications: 305,000 population covered
  4. Horry Broadband Cooperative: 205,000 population covered
  5. Northland Communications: 164,000 population covered
  6. Atlantic Broadband: 133,000 population covered
  7. Hargray Communications: 106,000 population covered

With a total population of about 5 million, to have more than 3.6 million (72%) covered by just three providers and more than 4.3 million (86%) by seven providers shows why cable broadband has an advantage:  they have clusters which produce economies of scale.

What is the critical importance of owning and operating the telephone exchange in Florence, SC (population just under 38,000) for AT&T?  Why not pursue a structure with other phone companies in Northeast South Carolina that mirrors the one proposed by Apollo Management for combining Dish and DirecTV assets?  What efficiencies (and increased business opportunities) could be realized from greater exchange consolidation?

How bad is it (likely) for AT&T?  Look at the May 29 Frontier sale announcement of their Northwestern exchanges, where they disclosed that the sold properties passed 1.7 million locations yet Frontier only had 350,000 consumer and business customers (20% relationship penetration).  Does AT&T (U-Verse/ Internet) have a relationship with 30% of the homes passed in Florence?  What are the value prospects, and how do they fit into all of the other things that AT&T is managing?

As for the other local exchanges, how long can they compete with the new T-Mobile, who, like we discussed in last week’s TSB, is promising 100 Mbps fixed wireless service to the vast majority of the United States (including Florence) in a few years?  Is it too late to change?

 

3.To T-Mobile: How do you continue to drive increased postpaid retail gross additions?  How much of it is driven by new device launch promotions (iPhone 11/ 11 Pro/ 11 Pro Max) versus increased 600 MHz footprint?

 

We have reported for the last several weeks on the lack of availability of both the iPhone 11 and the iPhone 11 Pro Max at T-Mobile (note: in last weeks report, most of the iPhone 11 issues were driven by specific colors).  Here’s the data for this week:

iphone 11 availability as of Oct 20

T-Mobile has really been selling a lot of iPhone 11 devices.  Their shortages on the 256GB storage level have been ongoing for three weeks, leading us to believe that this may be a supply chain miss (and perhaps a sign of economic good times).  Not surprisingly for Apple, the iPhone 11 in green (and, to a lesser extent, purple) is harder to come by than more standard red, white, and black.  Now the chart for the iPhone 11 Pro:

iPhone 11 Pro availability as of Oct 20

This is also an interesting chart for T-Mobile.  As we have pointed out several times, Magenta does not have a $0 option for either the iPhone 11 Pro or the iPhone 11 Pro Max.  Our guess is that the T-Mobile shortage is continuing for all but the 512GB memory model for two reasons:  a) greater upgrades within the T-Mobile base (presumably to get the 600 MHz coverage and all of the other iPhone features), and b) some movement from other carriers (Sprint?) to Magenta.  These are educated guesses (not stabs in the dark) and should not take away from any 600 MHz progress as a factor.

AT&T’s shortages (basically out of everything that is not gold colored) are likely much more weighted to upgrades.  A lot of changes have happened in AT&T’s network since the iPhone 7 (along with the 6S, most likely phone upgraded to the 11), and the business upgrade cycle is also in full swing (spending any available budget to improve corporate liable handsets).  There may also be a small amount attributable to the FirstNet initiative as their LTE band was not included until last year’s models (XR, XS, XS Max were the first models with LTE Band 14).

Similar trends are seen with the iPhone 11 Pro Max:

iPhone 11 Pro Max availability as of Oct 20

The backlog seems to be much more manageable here than for T-Mobile.  It’s likely that T-Mobile’s iPhone 11 Max shortages are attributable to supply chain/ forecasting, and nothing more.

 

4.To all carriers (especially CenturyLink): If low latency applications are critical to the value creation of 5G (basically keeping 5G more than a special access open expense reduction), what is your edge data center strategy?

This is a particularly important question for the large wireless carriers (including T-Mobile) and enterprise focused companies such as CenturyLink (who now owns Level3 Communications).  It’s hard to remember, but there was a time when both AT&T and Verizon (and Sprint and T-Mobile) owned several data centers apiece for internal use – both AT&T (Brookfield Infrastructure partners – $1.1 billion – 2018) and Verizon (Equinix – $3.6 billion in late 2016) sold their data center assets.  Investing in dozens (hundreds?) more could be necessary, however, if no closer solutions exist.

Also of interest with respect to edge is the entrance of Pensando Systems, who announced last week that they raised an additional $145 from Hewlett Packard Enterprise and Lightspeed Partners  to fund their edge computing interests.   Pensando has now raised a total of $278 million dollars (3 rounds in 3 years) with a high degree of interest from a wide variety of potential partners.  More on the startup (certainly a candidate for our next “Companies to Watch”) in this CNBC article (John Chambers of Cisco fame is their Chairman).

Also of interest are companies such as Qwilt, an edge video server company that has raised over $65 million from various partners including Cisco, Accel Ventures, and Bessemer.  Verizon has deployed Qwilt as their application edge delivery platform.

Understanding edge strategies is critical with the increase in over the top solutions (such as last week’s Hulu 4K device announcement which broadens their base to include Amazon Fire Stick, Microsoft’s Xbox One, and the LG WebOS TV platforms).  More capabilities will lead to higher expectations and even higher consumption.

 

TSB Follow Up

Several of you issued lengthy replies to last week’s TSB.  There is no doubt that strong feelings exist supporting maintaining equal outcomes of data packets.  There’s equal certainty that others see S.B. 822 (California Net Neutrality bill) as a stepping stone to more activist state proceedings with respect to cable unbundling (which would clearly deter new incumbent investments in the Golden State).  We decided not to go there in last week’s TSB (our focus was on how wireless companies would treat throttling) but see how and why the ghost of Brand X is more than a mirage to many of you.

One item that I think is undebatable – Congressional action would clearly eliminate the newfound love of Federalism that is breaking out in many state legislatures.  We will write more on this in the future, but we at TSB offer up the following bill parameters for consideration:

  1. Establishment of a minimum residential achieved average upload and download speed (wireless and wired) above which regulations would be loosened if not eliminated (we would propose 200 Mbps for 2020 (200 Mbps for stand-alone Hotspot; 100 Mbps per smartphone or tablet) and 500 Mbps for 2025 (500 for stand-alone Hotspot; 250 Mbps per smartphone or tablet) with agreement to establish the 2030 speed at no less than 700 Mbps). Residential averages would be evaluated by no less than two independent 3rd parties at a zip code level.

 

The rationale behind this is twofold:  a) Regardless of bit prioritization practices, the presence of 200 Mbps for 4-5 simultaneous users clearly provides a healthy broadband baseline.  This would be based on achieved as opposed to advertised speeds.

 

This also provides the ability to have lower speeds but uses market mechanisms to drive the mix.  If AT&T wants to offer Gbps speeds for $90/ month, then they will have a smaller fraction achieving this higher speed than if they offered the same product at $50.  The market will reach an equilibrium.

 

This would also greatly encourage the adoption of 5G services across wireless carriers.  If 50% of the base is wireless and achieving LTE speeds of 100 Mbps, they would need to be offset by 50% of the base experiencing average speeds of more than 300 Mbps.

 

It would also create a competitive mechanism assuming either telco or cable did not achieve the figure in the first measurement.  Some incremental capital expenditure would also occur (and this can be done prior to having a larger infrastructure spending bill if that is desired).

 

  1. Tighter enforcement of Type II provisions and regulations. Unbundling provisions in the 1996 Telecom Act have been watered down to a large extent, with telcos (and, to some extent, the business arms of the cable companies) replacing the harmful operational effects of unbundling with 60-month term discounts on traditional special access services.

 

If Type II were properly enforced (penalties properly monitored and assessed), there would be more impetus to be classified as an information service.  This is a fault of all regulators – state and federal – and should be addressed.

 

  1. Adding core control to Type II provisions for wireless providers. If national or regional wireless providers do not step up their game and have market-leading data infrastructure, they should allow others to disintermediate them (core control allows a rural-focused MVNO to set up infrastructure in the slower market and use the faster speeds in more metro areas).  This “nuclear option” would certainly spur innovation among the wireless carrier community and perhaps spawn a previously unthinkable concept – spectrum/ network sharing.

These are very measurable, practical legislative remedies which refocus objectives to weighted average usage (including testing price elasticities to a greater extent) and increased competition.  We clearly believe that the current approach will create a patchwork of network procedures as well as full employment for telecom attorneys.

 

Next week, we’ll look for clues from Comcast, Charter, and Verizon’s announcements, as well as some previews for AT&T’s earnings and the Time Warner analyst day (Oct 29).  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!

 

Three Up and Comers

opening pic

Greetings from Charlotte/Davidson, Norfolk/ Virginia Beach, Washington DC/ N Virginia, and Dallas/ Ft. Worth (picture is yours truly with Federated Wireless BoD member Tim McDonald).  This week’s TSB will focus on several start-ups that we think deserve attention.  We will also have several TSB Follow-Ups.

 

Three Up and Comers

Identifying disruptive telecom start-ups is a challenging topic to say the least, and we recently covered one, Federated Wireless, with its $51 million C-round raise.  Given high infrastructure barriers to entry, new fiber and service providers are scarce.  We will highlight a few companies who are bucking the trend and could challenge incumbents:

 

  1. Starry Internet (Boston, MA). Total Capital Raised = $300 million (4 rounds).  Principal funders include Tiger Global Management, Quantum Strategic Partners, KKR, IAC, HLVP, and FirstMark Capital.

 

Starry was the brainchild of Chet Kanojia, who was also the lead for TV-streaming service Aereo which sold to Tivo in a fire sale after losing a court case (relive that 2014 moment through this Ars Technica article).  Starry currently uses 37 GHz (LMDS) spectrum to offer their service and uses a Starry Point rooftop connection and existing inside wiring to bring connectivity to individual customers (see pic below).

starry diagram

Their service is focused on Multi-Dwelling Units (think fewer users per Wi-Fi Access Point);  customers must use the Starry-provided router (Starry Station).  $50 covers 200 Mbps symmetric service as well as all taxes and fees (roughly $30/ mo. less expensive than traditional cable costs).

Per their website, Starry is currently offered in New York, Los Angeles, Boston, Denver, and Washington DC.  Starry announced plans to expand to 13 additional LMDS-based markets including Chicago, Cleveland, Seattle and Indianapolis (total of 18) but there have been no public announcements of new launches.

Starry did participate, however, in the recently completed 24 GHz license auction (see their announcement here) and obtained additional licenses covering 25 million new homes passed (40 million population new from auction; 60 million total population across 40 million homes).  New markets include Cincinnati, Las Vegas, San Antonio, Nashville, Charlotte, Rochester, Buffalo, and Louisville.  Interestingly, many of the new markets are not traditionally home to dense multi-dwelling unit concentration (this implies a point-to-multipoint strategy that involves many more points).

 

Bottom line:  Starry is an intriguing company and using 802.11ax (Wi-Fi 6) is an extremely wise technology choice.  Their focus on gaining ~ 20 million total customers through Multi-Dwelling Units keeps them focused.  Oppenheimer recently conducted an analysis which indicated that Starry should be able to keep to their $20/ home passed capital number.  The company becomes even more valuable as 5G stand-alone radios emerge at lower price points.

However, Google is slowly but surely entering this market through their Webpass subsidiary (see Austin expansion announcement here).  The very early reaction to T-Mobile Home has been nothing short of ecstatic (see Light Reading article here), and Verizon and AT&T will be increasing their speeds and associated offerings.  The market is about to get very crowded for fixed wireless and bundling with mobile services is likely to be the norm.  This may make a $50 for 200 Mbps stand-alone offering more difficult to stomach.

 

 

  1. Cologix (Denver, CO). Total capital raised = $500 million+.  Principal funders are now Stonepeak Infrastructure Partners and Mubadala Investment Company, an Abu Dhabi sovereign fund with nearly $230 billion in assets under management.

 

Cologix is a neutral-host data center company operating across 10 North American markets (32 total data centers).  Per their website, half of the 32 are located in Montreal, Toronto and Vancouver.

cologix pic

As the map shows (note; an updated version of this map would include Ashburn, VA), they have a relatively unique focus, with presence in Dallas but not Houston/ Austin/ San Antonio, Minneapolis but not Chicago, Jacksonville/ Lakeland but not Miami, Tampa or Atlanta.  And no Phoenix, Los Angeles, Seattle/ Portland, or Silicon Valley.  A good way to summarize their market footprint is “deep over wide.”  Stonepeak, who also owns Vertical Bridge (wireless infrastructure) and Extenet (in-building and small cell infrastructure provider) is a very large infrastructure fund with top-tier management.

Their Sept 23rd announcement resonated across the data center industry: $500 million to expand, and Stonepeak would not lose their ownership stake in Cologix.  Having grown considerably through acquisition, Cologix now has the capital to add several more markets to its footprint.

The biggest question at this point is “What price?”  Public valuations in the data center space have widely recovered from 2017/2018 levels, and Stonepeak is not an “at any costs” private equity firm.  To gain scale, they could go smaller market (taking a stake in a company like EdgeConnex who has a complementary global footprint) or focus on a few leading data center assets such as Switch (a large acquisition), Tierpoint or Flexential (both easier to stomach acquisitions).

Bottom line:  Cologix is a compelling story with a good management team and dense second-tier locations.  Acquisition selection and integration determine whether they rise to the level of global mega-players such as Equinix and Digital Realty Trust.

 

  1. The Helium Network (San Francisco, CA). Total capital raised = $54 million.  Main funders include Google Ventures, Union Square Ventures, Khosla Ventures, Mark Benioff, Munich RE/ HSB, FirstMark Capital and Multicoin Capital.

 

One of the most interesting start-ups to challenge the status quo in the last decade is Helium.  I first got to know the company about a year ago while I was doing some research on low-powered networks.  The company was still in pre-launch and going through capital like mad, so I basically left them for Silicon Valley dead even through they had powerful founders (Shawn Fanning of Napster fame) and investors (see above).

The company asks current broadband customers to plug something called a Helium helium hotspot picHotspot into their current wireless router (it also requires AC power, but its website claims the Hotspots consume as much power as a lightbulb).  Each Heluim Hotspot costs $495 and customers are paid for their value added via a cryptocurrency called Helium (more on this in the Helium blogpost here which includes a revaluing of the currency).

Approximately 100-200 well-placed Hotspots are required to blanket most cities (Austin, Helium’s first fully launched market, required ~100, but there are another 110 active to make the network as robust as possible).

Helium uses the 900 MHz network in the United States.  This network is open and available for low-power transmission (5 Kbps).  There are many current device applications for Helium (Lime scooters, dog collars, water cooler levels, bikes, in-building air quality, and trackers of all shapes and sizes) and this list promises to grow.

Because of the low bandwidth requirements, Helium will not drive broadband users over a cap.   But the value of the service (crypto is hard to explain) needs to be targeted.  What’s most interesting about the service is that if Helium can achieve connectivity on a large scale (and it likely can do so very quickly after a few trials), new IoT inventions will not be constrained by high connectivity costs.

Bottom line:  The 900 MHz spectrum band has been fallow for some time, and Helium (and Amazon Sidewalk) are now going after it in a big way.  Helium has a first-class team and, according to early reviews of the service, has developed an easy to provision/ install, easy to track interface.  While they have not raised as much money as the other companies discussed in this TSB, they may have the fastest path to market dominance.

There are dozens more companies to cover, but these three stuck out as ones that could alter the addressable markets of traditional infrastructure and communications companies.  We welcome your thoughts and ideas for additional companies to cover in the future (using a $50 million minimum funding rule as the deciding factor for inclusion).

 

TSB Follow-Ups

  1. T-Mobile/ Sprint Merger has their third vote, and a key state (Florida) signs on to the Department of Justice consent decree. Late last Friday, Bloomberg reported that a third commissioner (Carr) had voted for the merger, and that neither of the Democrat commissioners had yet cast a vote.  It is likely that a formal vote will occur prior to October 16, though many associations have called for the Commission to delay their vote until allegations of Sprint’s wrongdoing with respect to subsidy payment violations have been fully vetted.

In addition to this good news heading into the weekend, the merger also received a boost from Florida Attorney General Ashley Moody, who announced that the Sunshine State had signed on to the terms of the DOJ consent decree.  Kansas, Nebraska, Oklahoma, South Dakota, and Ohio were the original states to sign the July 26 decree, and Louisiana has also joined since then.  It will be interesting to see which additional states join the DOJ or the 18 states (and District of Columbia) suing to block the merger.

 

  1. There was a major ruling upholding much of the Net Neutrality provisions this week, with additional activity likely pushed back to states. Here’s an excellent article summarizing the D.C. Court of Appeals decision from the New York Times.  If you would like to read the decision in its entirety, it’s here.  If you would like to read Roger Entner’s take on the decision (I agree with his take), it’s here.  I have not read the full transcript of the Court’s decision, but promise to comment on it more this week.

 

  1. In a surprise move, Apple requested a 10% increase in iPhone 11 and iPhone 11 Pro production. A good article summarizing their decision is here.  TSB readers who fully digested last week’s issues are not surprised.  I have attached the latest changes in inventory to the TSB and will post more on this on the web version (sundaybrief.com).  T-Mobile appears to have the greatest backlog, which, as we noted last week, is surprising given their upfront deposits on the iPhone 11 and iPhone 11 Pro Max.

 

Final Note

Many thanks to those of you who suggested additional titles for the History of Technology.  As of Saturday, October 5, we have the following 10 recommendations:

We will publish a final list at the end of October.  Please get your entries in by October 25 by sending an email to sundaybrief@gmail.com or responding to this LinkedIn post.

 

Next week we will cover additional industry events and news of the week.  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!