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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!

Deeper: CBRS – Share and Share Alike

cbrs top 10 slide

The following articles provide a good overview of CBRS.  There are a lot of things changing with CBRS each day, and we will be sure to keep the list updated as new developments occur.

  1. One of the best government sites is the NTIA CBRS page here. Included in this is the original NTIA October 2010 Fast Track Report cited in this week’s TSB
  2. The FCC Report and Order on CBRS from 2015 is here.
  3. This Ruckus on-line tutorial is a terrific place to start if you need a 20-minute high level overview of CBRS.
  4. The CBRS Alliance has a page devoted to certified devices that is updated frequently. The latest certified devices are here.
  5. Light Reading had a recent article summarizing AT&T’s, US Cellular’s and Verizon’s outdoor interests. It’s here.
  6. Charter’s SVP Technology Craig Cowden’s address at MCWA in 2018 is here (20 min). A good summary of the value of CBRS to the cable industry.  Charter’s FCC application for their CBRS tests is here.
  7. Adam Koeppe’s June interview with RCR Wireless concerning 5G, CBRS, MIMO, Beamforming and more is here. The Light Reading article referenced in the TSB is here.
  8. A good summary of MIdCo’s 2018/ 2019 trial with Telrad and Federated Wireless from Fierce Wireless is here.
  9. Telecompetitor interview with Federated Wireless CEO Iyad Tarazi is here. In this article, Iyad describes Federated’s role in the Kinetic Edge Alliance, which we ran out of time to discuss and is a very interesting intersection point between computing, proximity, and network sharing.  More on that group here.

CBRS – Share and Share Alike

opening pic

Greetings from Lake Norman/ Davidson, North Carolina, where the college football season has started.  We took in the Davidson College home opener and the Wildcats (red jerseys) defeated Georgetown 27-20 to a crowd of more than 2,300.  It was an exciting part of the Labor Day weekend and a good win for the Cats.

 

This week’s Sunday Brief focuses on the potential of Citizens Broadband Radio Service (CBRS) to change the telecommunications landscape.  We will also have an update on C-Band spectrum auction news.  First, however, a quick follow up to last week’s article on AT&T’s system and network architecture changes.

 

Follow-up to last week’s AT&T article

We had greater than expected interest concerning last week’s TSB including receiving several background articles that we had not uncovered in our research.  One of the most important of these was a blog post by AT&T Senior Vice President Chris Rice on their Domain 2.0 developments that was posted on August 21.  In this article, Chris describes their major architectural change:

 

We started on a path for a single cloud, called AT&T Integrated Cloud (AIC). This was our private cloud, meaning we managed all the workloads and infrastructure within it. Originally, AIC housed both our network and several of our “non-network” IT workloads and applications.

But we quickly learned it wasn’t optimal to combine both types of workloads on a single cloud. It required too many compromises, and the IT and network workloads needed different profiles of compute, network and storage.

We opted for a better approach: Create a private cloud for our network workloads, optimize it for those workloads, and drive the software definition and virtualization of our network through this cloud approach and through the use of white boxes for specific switching and routing functions.

 

The change to last week’s article is subtle but not insubstantial:  AT&T’s network cloud (formerly AIC) is optimized for network traffic loads and functions (but still built on white box/ generic switching and routing), while non-network functions are operated in the public cloud through Microsoft and IBM.

 

john-donovanIt’s important to note that the executive champion of this cloud strategy, John Donovan, is going to be retiring from AT&T on October 1 (announcement here).  We have included an early speech he gave on AT&T’s Domain 2.0 strategy in the Deeper post on the website.  John brought engineering discipline to AT&T’s management, and, while the parlor game of his replacement has begun, the magnitude of his contributions to Ma Bell over the past 11+ years should not go unnoticed.

 

CBRS – Share and Share Alike

When we put together a list of Ten Telecom Developments Worth Following in mid-July (available on request), we were surprised by a broad range of CBRS skepticism in the analyst community, especially given the breadth of US wireless carriers playing in the CBRS alliance.  “Nice feature” or “science experiment” was the general reaction.  Many of you chose instead to focus on the C-Band auctions, which are important and addressed below.

 

After some reflection, we have come to the conclusion that the most important feature of CBRS is neither its mid-band position (3.5 GHz), nor the mid-band spectrum gap it fills for Verizon Wireless (more on that below), but the fact that at times all of the spectrum band can be shared.  Customers receive the benefits of an LTE band without a costly auction process.

 

If you are intimately familiar with CBRS, you can skip the next couple of paragraphs.  For those of you new to TSB or the industry, here’s a copy of the slide we used to describe CBRS in the Ten Telecom Developments presentation to start your education:

cbrs top 10 slide

 

 

The commercialization of shared LTE bands is pioneering and one of the reasons why it has taken nearly a decade to move from concept to commercialization (the original NTIA report which identified the CBRS opportunity is here).  This does not appear to be a singular experiment, however, as Europe is proceeding with shared spectrum plans of their own in the 2.3-2.4 GHz frequencies (more on that here).

 

To enable this sharing mechanism in the United States, a system needed to be developed that would prioritize existing users (namely legacy on-ship Navy radar systems) yet allow for full use of the network for General Authorized Access (GAA) users when prioritization was not necessary (opening up to 150 MHz of total spectrum for GAA which could power 5G speeds for tens of millions of devices nationwide).  A great primer on how CBRS generally works and how spectrum sharing is performed is available here from Ruckus, a CommScope company and one of five Spectrum Access System providers.

It’s important to note that the Environmental Sensing Capability (which determines usage by priority) and the Spectrum Access System (which authorizes, allocates and manages users) are two different yet interoperable pieces of the CBRS puzzle.  And, while the ESC providers have been approved by the NITA (CommScope, Google, and Federated Wireless), the SAS providers have not been approved (more on that here in this Light Reading article).  While all of the SAS providers have not been made public, it’s widely assumed that they include the three ESC providers mentioned above.

 

Delays in the SAS approval process have not kept the CBRS Alliance from heavily promoting a commercial service launch on September 18 (news release here).  This event will feature FCC Commissioner Michael O’Rielly, Adam Koeppe from Verizon, Craig Cowden from Charter, and others who will celebrate the Alliance achievements to date and place the development as a central theme going into 2020.

 

CBRS Use Cases:  Not Everyone is Waiting for Private Licenses

The myriad of CBRS use cases mirror the different strategies for telecommunications industry players.  Here are four ways carriers are using CBRS in trials today:

 

  1. CBRS as a last mile solution for rural locations (AT&T and rural cable providers MidCo Communications mapMidCo and Mediacom Communications). In the MidCo configuration, outdoor Citizens Band Service Devices or CBSDs (see picture above) are placed in proximity to potential (farm) homes passed (see nearby map of MidCo territories in the Dakotas and Minnesota).  Per their recent tests, MidCo was able to connect homes up to eight miles from the outdoor CBSD.  They estimate that CBRS will add tens of thousands of homes and businesses to their footprint (they serve 400K today so every 10K new customers is meaningful).  Good news for an over the top service like Hulu, Netflix, and YouTube TV and bad news for DirecTV and Dish.

 

AT&T has been testing CBRS as a similar “last mile solution” in Ohio and Tennessee using equipment from several providers including CommScope (ESC, SAS) as well as Samsung (network).  These trials are expected to wrap up in October.  If AT&T can find a more effective last mile solution for copper-based DSL in rural areas, revenues and profitability will grow (by how much depends on Connect America Fund subsidies and service affordability).

 

AT&T has been mum on their trial progress to date.  In June, however, AT&T asked the FCC to allow them to turn up antenna power in these markets to test various ranges and speeds (bringing the power allowances to a similar level of the WCS spectrum that AT&T already owns and operates in the 2.3 GHz spectrum frequency).  This was met with strong opposition by a coalition of providers, and it’s not clear that AT&T’s request was ultimately granted.  More on the AT&T request and response can be found in their FCC filing here, and in this June 2019 RCR Wireless article.

 

  1. CBRS as an additional LTE service for cable MVNOs (Altice, Charter, Comcast). It’s no secret that cable companies are eager to continue to grow their wireless presence within their respective footprints (and corporate is equally as eager to improve profitability and single carrier dependency).  CBRS would add a secure option that is seamlessly interoperable with other LTE bands to create an alternative to their current providers (Verizon, Sprint, etc.).  It also provides a new “secure wireless” service for small and medium-sized businesses which can be deployed with Wi-Fi.  A cheaper alternative for out-of-home wireless data?  Count cable in.

 

We spent some time a few weeks ago talking about the evolution of Verizon plans, specifically how their cheapest unlimited plan now includes no prioritized high-speed data (article here).  Is CBRS a better alternative to deprioritized LTE?

 

The short answer is “not yet.”  LTE Band 48 is only available across the most expensive devices, and, presumably, if customers can shell out $1000-1500 for a new device, they can probably afford extra LTE data allowances above 22-25 Gigabytes (see previous article linked above).  Notably, the new Moto E6 (budget-minded Android device) includes neither CBRS nor Wi-Fi 6 (specs here).  The new ZTE Axon 10 Pro phone does not include Band 48 or Wi-Fi 6 (specs here).  The OnePlus 7 Pro, however, does include Band 48 but not Wi-Fi 6 (specs here).  And, if rumors are to be believed, the upcoming Apple device announcement in a couple of weeks will disappoint everyone – no 5G, no CBRS even though the new device will likely support the 3.5GHz spectrum band in Japan, and likely no Wi-Fi 6 (which is why the Apple Card will likely be used to offer attractive financing options).

 

This leaves cable companies with a good selection of Samsung and Google devices that can use CBRS (Galaxy Note 10, Galaxy S10 5G, upgraded Pixel 3X and 3XL, and likely the upcoming Galaxy 11 release).  For cable to win on this front, they may need to provide plan incentives to influence the pace of upgrades and request this band for Moto and low-end Samsung devices.

 

  1. CBRS as a mid-band LTE outdoors/ public venue solution for Verizon. It is no secret that Verizon is going to use CBRS GAA as a part of their carrier aggregation solution (see this August 2019 article from Light Reading for more details). Such a solution is usually not designed for greater throughput in rural markets alone – Verizon clearly sees some form of CBRS as a portion of their overall licensed/ un-licensed solutions portfolio.

 

The question that will be answered in the next quarter or so is whether CBRS is valuable enough to be a part of Verizon’s licensed portfolio (e.g., they buy 20 or 30 MHz worth of private CBRS licenses, or whether they use the GAA portion in the same License Assisted Access (LAA) manner as they use 5.0 GHz Wi-Fi).  It’s likely that if CBRS is important, they will be at the auction table.

 

It appears that the C-Band (3.7-4.2 GHz) license quantity and auction schedule is in flux, if the latest report from Light Reading (and the corresponding New Street Research analysis references in the article) is true.  This also impacts Verizon’s near-term interest in CBRS PALs.

 

Verizon’s interest is important as they can drive manufacturers to quickly include Band 48 in devices.

 

  1. CBRS as an indoor and/or private LTE solution for wireline. One lesser-discussed option for CBRS is as a private LTE indoor solution for enterprises and building owners.  While we touched on this option for cable companies (who will undoubtedly drive business ecosystem development), this could also have ruckus cbrs routerinteresting implications for companies like CenturyLink (Level3), Masergy, and Windstream.  Ruckus, a traditional Wi-Fi solutions provider now owned by CommScope, already has an indoor unit for sale here (picture nearby).  The implications for in-building coverage are significant because 3.5 GHz does not overlap with existing deployed frequencies (including existing 2.4 GHz and 5.2 GHz Wi-Fi solutions), and, as a result, will not increase interference that deploying an AWS (1.7/ 2.1 GHz) or EBS/BRS (2.5 GHz) might create.  With solutions as cheap as industrial Wi-Fi and minimal interference concerns, there might be more value created with CBRS indoors than outdoors.

 

Bottom line:  CBRS is a real solution for rural broadband deployments and will attract the interest of large and small rural providers.  CBRS will be important to wireless carriers when Samsung and Apple join Google and Facebook in building a robust ecosystem.  This is a good/great but not an industry-changing technology.  If the first commercial applications are successful in 2019 (the odds are good), demand for Private Licenses will be significant (if not, expect more pressure to resolve C-Band spectrum allocation issues quickly).

 

What makes CBRS great is dynamic spectrum sharing among carriers.  Should that continue with all new frequencies auctioned (including C-Band), you should expect to see competitive pressures grow in the sector, particularly with private LTE/ indoor applications.

 

Next week we will provide the first of two third quarter earnings previews, focusing on wireless service providers ahead of the Apple event.  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!

 

Everyone Gets a Headline This Week

dallas weatherGreetings from Dallas, where the traditional summer heat is breaking for two days (Minneapolis is forecasted to be 10 degrees warmer today and 15 degrees warmer tomorrow than Dallas).  However, there is no break from the blistering pace of telecom news that occurred this week.

On Friday, AT&T announced that they were acquiring Leap Wireless for $15 per share in cash.  The transaction, including the acquisition of $2.8 billion in net debt as well as proceeds from the sale of the Chicago “A Block” 700MHz spectrum, is valued at just under $4.2 billion.  While this transaction represents an impressive premium to Leap’s closing share price on Friday, it’s one fifth of the amount MetroPCS was willing to pay for Leap’s assets just six years ago (see the Fierce Wireless article here.  It’s a “What were you thinking?” moment for the Leap Board).

Leap Wireless (a.k.a, Cricket) has a lot of spectrum, particularly in the AWS band, that AT&T can pair with its spectrum portfolio to produce a large LTE coverage area.  Here’s the AWS coverage areas for Leap (the hashed area is the result of Denali Holdings’ win of the Great Lakes spectrum band) as well as for Cingular:

leap wireless aws licenses including denali

cingular wireless aws licenses

While is important to note that the large swaths of blue above are not in the same AWS block, they are in the same band.  This improves AT&T’s coverage in the Great Lakes area, and complements AT&T’s 700MHz LTE coverage in the Eastern US.  For a good spectrum band chart, click here for Phone Scoop’s tutorial.

That announcement dropped late Friday, and it’s nearly certain that there will be another bidder for the Leap Wireless asset.  Regardless, this transaction will drive up spectrum values for remaining holders of 700MHz, 1900MHz, and AWS spectrum bands.  C-Spire, US Cellular, Ntelos and other smaller (private) companies will be receiving phone calls.  It’s a good day to be an asset owner.

It’s not a good day, however, to be a smartphone provider.  This week, we learned just how bad sales of the Blackberry Z10 were in the second quarter as AT&T commenced a fire sale on the newly released Blackberry.  Here’s the listing on Amazon – $49.99 (down from $199.99).  Best Buy has the Blackberry Z10 listed at FREE.

blackberry z10This does not appear to be because the phone itself is defective.  Over 225 people have reviewed the device on www.verizonwireless.com and it is clear that those who own the phone adore it (4.4 stars out of 5.0; 85% or reviewers recommend the phone).  However, it lacks enthusiasm from shartphone switchers, at least compared to the other new phone entrant, the Nokia Lumia 928.  It’s one of the highest rated devices on Verizon Wireless with 4.8 stars and a 95% recommendation level.

Blackberry’s CEO, Thorsten Heins, referred to “lessons learned” at Blackberry’s annual shareholder meeting this week.  One of those lessons learned is that the bar for switching phone manufacturers and operating systems is very high.  Blackberry has a real price point problem on its hands as they ready the US rollout of the Q5 in a few months.  Not much room for a “scaled down” version of the Z10 or the Q10 with pricing for the Z10 at or nearly free.  There are many chapters left to unfold with Blackberry, but the Z10 launch will be remembered as one of the most taxing times in the Canadian company’s history.

On the opposite end of the spectrum comes the super-premium Nokia 1020.  As one reviewer put it, “You can sum up Nokia’s just-unveiled Lumia 1020 in three words:  41, mexapixel, camera.”  Nokia held a pretty well attended launch in New York City this week, where reactions to the camera were generally positive.  C|Net proclaimed, “The Lumia 1020 puts the mega back in megapixels.”  However, there are concerns that there is too much camera focus in this model, and more than one analyst worried that it could relegate Nokia to the “niche” market.

nokia lumia 1020

I think there is a much larger market for image capture than many expect, especially with the social media-focused crowd.  This is a phone that consumes LOTS of data (even with a 5 MP “shrunk for social” version of the picture, there’s the potential for many more uploads), and with the blogosphere continuing to demand higher resolution photography, there are many who will want this device.  The accessories are fantastic.

Admittedly, this is not a device for everyone, and Nokia will need to balance this with a lineup that satisfies a palate of diverse smartphone budgets and interests.  Without a doubt, Blackberry owns the keyboard phone.  And now, without a doubt, Nokia owns the picture phone.  They are both feet in the very large and unforgiving doors of smartphone incumbency.  If Nokia can turn the corner on (business) applications, and then offer free Gigabytes of wireless data usage over AT&T for new 1020 buyers, we could have a challenger to the Galaxy S4 in the making.

In case you missed the significance of the last statement, let me reiterate:  Smartphone differentiation, particularly for challengers, can be achieved with a) more storage (Microsoft Drive) and also b) application-driven subsidy (e.g., first 500MB of data charges to and from Microsoft Drive are free for the first year).  AT&T can accommodate these changes today, and I would not be surprised if a “limited time offer” is extended to new Lumia 1020 users to allay fears about the increased data usage a 41MP/ 5 MP phone can drive.

As Nokia moves to change its position in the US phone market, their chief partner, Microsoft, announced a substantial restructuring on Thursday.  The chief outcome of the reorganization was a functional structure, led by four engineering-focused groups:  OS, Apps, Cloud, and Devices.  This change should help Nokia as they integrate the Lumia product line into the Xbox2 and other products Microsoft will introduce.

There have been many debates about Separate Business Units (SBU) versus functional organizational models.  Clearly, Microsoft sees a more integrated software/ hardware future (which seems to be the trend), and the change from traditional PC to Mobile/ Tablet computing is occurring at a very rapid rate.  However, the SBU function allowed Microsoft to be competitively focused in the Enterprise space against business-oriented companies like Oracle and Cisco.  This is not impossible in a functionally-aligned organization, but it’s certainly a lot harder to hear the voice of the customer when there is no division “lead” with P&L authority and responsibility.

microsoft org leads

The New Functional Leads at Microsoft

Also, Windows 8 has not been wildly embraced, which goes to show that too much change can backfire.  At the end of June, Microsoft announced Windows 8.1, which contains a host of features specifically designed to ease the transition from Windows 7 to Windows 8.  A full recap of the Windows 8.1 features is here.  Any reorganization should be able to definitely answer the question “How will Microsoft’s customers benefit?”  I’m not sure that the Windows user community benefits from this reorganization.  If anything, it’ll result in more changes with less regard to the velocity of the user impact which could backfire on Microsoft’s PC-based business.

Microsoft’s reorganization helps apps.  It definitely helps their consumer business, especially Microsoft Drive integration.  But will it improve customer interest in Windows, and will it create a more competitive Enterprise presence?  That appears to be seen.

If spectrum-driven acquisitions, super-premium smartphone announcements, and the reorganization of one of the most important forces in technology aren’t enough, we had individual and family pricing plan changes announced from two of the four largest US wireless carriers this week.  Given the length of this week’s article, we’ll devote the entirety of next week’s Sunday Brief to an economic analysis of T-Mobile’s JUMP (Just Upgrade My Phone) and Sprint’s Unlimited, My Way plans.

Until then, if you have friends who would like to be added to this email blog, please have them drop a quick note to sundaybrief@gmail.com and we’ll add them to the following week’s issue.  Have a terrific week!

Earnings Drivers for the Second Quarter (Part 2)

softbank sprint

Greetings from Dallas.  This is the first time in 17 weeks I have not included a list of cities before or after Dallas.  A week without travel – very sweet indeed!  However, this was no time for a vacation, as news was busting out all over.  With the vast majority of shareholders approving Softbank’s revised offer for Sprint, and with Dish deciding not to counter Sprint’s latest $5/ share offer for Clearwire, the path has been cleared for Sprint’s resurgence.  More control does not equate to a higher probability of success, however.  I’ll be speaking more on this and other telecom topics on Bloomberg Business News Monday morning at ~ 8:30 or so CT.  (Here’s the link to the last interview.  I was a little rusty).   UPDATE:  The new interview has been posted.  Thanks, Bloomberg News, for having me on!

But Sprint was not the only telecom company making news this week.  On Tuesday, Mary Dillon abruptly left her role as CEO of US Cellular and went to Ulta, a Chicago-based cosmetics producer.  Here’s the chart comparing the two-year performance of USM and ULTA:

us cellular vs ulta

Clearly, there was some friction that led to the departure.  After Mary’s excellent panel facilitation at CTIA, as well as her brilliant sale of non-performing properties to Sprint (which raised $480 million), it was hard to see anything but long-term tenure for the former McDonald’s executive.  Best wishes to incoming CEO Kenneth Meyers.

US Cellular made news on Friday as well, selling AWS spectrum to T-Mobile for $308 million.  The price of 95 cents per MHz pop is 37% more than Verizon Wireless paid for the Spectrum Co (cable company consortium) spectrum last year.  The $788 million in cash from this and the Sprint transaction will help US Cellular accelerate its LTE deployments and make the carrier more attractive in the future to Sprint and others.

Blackberry reported earnings that even disappointed and surprised skeptics of the stock.  As a result of a 16% decline in service revenues, and the failure to report any separate sales statistics on the Z10, shareholders went running for the exits on Friday.  As a result, the stock gave back all of its 2013 gains plus $1.25 in one day.  As we have noted in several previous columns, Blackberry has no foothold in the US – they are an afterthought in 2014 strategic planning, even in their enterprise and government sweet spot.  More details below.  Tough times for the smartphone pioneer.

With this week’s focus on the handset makers and Verizon, it’s completely appropriate to end the weekly news with a discussion of Verizon’s rumored bid for Canadian operator Wind Mobile.  This article from Canada’s Globe and Mail outlines a three pronged strategy:  a) buy and consolidate Wind and Mobilicity; b) leverage handset and network scale; and c) participate in Canada’s upcoming 700MHz auctions.  Here’s Verizon’s coverage from Buffalo to Detroit – it’s not hard to see from this map Verizon extending its reach into southern Ontario:

What this does indicate is that despite all Vodaphone buyout hype, Verizon Wireless has other options, including an aggressive Canada deployment strategy.

verizon LTE coverage canada

What should we expect from Verizon when they report earnings on July 18?  Here are a few things we know are on their list from recent investor presentations:

  1. Average Revenue per Account.  This figure is rising (from $146.80 to $150.26), even as overall postpaid accounts fell in Q1 by a nominal 114K or 0.3%.  This means that the customers who are most connected are growing their business with Verizon Wireless (from 2.64 to 3.67 connections per account).
  2. Customers who subscribe to an LTE device (and the traffic they drive).  As of the end of Q1, nearly seven out of ten Verizon postpaid smartphone and Internet connection (Mifi, other postpaid device) subscribers were confined to 3G speeds.  Driving this figure to 33/35/37% and the corresponding tonnage to 60% or more is going to be critical to increased profitability.
  3. 3G network utilization/ Wholesale strategy.  Verizon has a reputation of being an inconsistent wholesale provider, but they are coming off the back of an incredible first quarter as a result of supplying data to TracFone for the WalMart Straight Talk iPhone.   If the 3G network is being drained of retail megabytes, it’s going to be important to keep it full through the TracFone relationship.
  4. Cost reductions.  This is not confined to improved gross margins (which greater 4G usage will naturally drive), but covers sales/ marketing and customer service improvements as well.  With Share Everything plans including unlimited voice and data, the ability to grow the customer base and close additional call centers is inevitable.
  5. Cash flow/ overall capital expenditures.   AWS deployment costs money to deploy.  But it does not have the same backhaul and backbone effort that was required with the initial LTE rollout.  Verizon Wireless has capital opportunities through the second half of 2013.

As we discussed in last week’s Sunday Brief, it’s likely that Verizon adds a few hundred thousand post-paid retail subscribers this quarter due to Sprint’s iDEN transition, and that they add an additional several hundred thousand data-focused connections to existing accounts.  Given no significant handset dilution from a blockbuster smartphone launch (although the Samsung Galaxy S4 has been at Verizon since late May), it should be an extremely profitable quarter, well above Q1’s 50.4% EBITDA margin.

Many analysts will try to plot linear growth trends for Verizon from second quarter results, particularly for data growth.  However, it’s important to understand that there is an upper bound for the Share Everything model.  We were reminded of this with the release of the latest Bankrate.com survey, which showed that only 50% of Americans have saved enough to cover three months of savings, and that 27% of Americans have no savings at all.   There is a spending ceiling, even for LTE.

Also, it’s not hard to see Sprint or T-Mobile really taking aim at the unlimited voice and text part of Share Everything prior to the completion of their LTE networks.  With average minutes used decreasing for most smartphones, Verizon’s $40 charge for unlimited voice and data is $10 higher than many MVNOs (network resellers) are charging for the same coverage.  When there’s $25 or more (depending on usage) of operating profit per account each month generated through breakage, it’s likely that competitors will devise plans to curtail that profit stream.

BlackBerry-Q10 imageMany of you sent me thoughts on Blackberry’s earnings.  It’s easy to pile on Blackberry, and, as an applications software developer, I have no sympathy as the pain Blackberry put applications developers through during 2009-2011 was immense.  They are in the first innings of a double-header transition period with no stable base or geographic stronghold from which to position a comeback.  Here’s their US results to date (using a blend of online “most popular” results from several sites as well as discussions with Dallas store reps):

  • Verizon:  Blackberry does not register as a retail option. The store rep I talked to put it perfectly:  “If I am asked about Blackberry, I will show them the Z10 or Q10.  If I am asked about a smartphone, I show them Samsung and Apple.”   On Amazon Wireless, Blackberry Z10 and Q10 models rank 7th and 8th (Amazon figures exclude Apple products).  Most importantly, Blackberry trails HTC and Nokia at Verizon.
  • AT&T:  Blackberry scores better, but still lags behind HTC and ties with the Nokia Lumia brand.  Resuming a leadership role at AT&T is going to be very difficult given the stronghold Apple has in the consumer/ prosumer (professional consumer) segment.  “It’s easy to upsell an iPhone5, especially when the customers see the speeds.  The trade-in bonus is accelerating the change.”  This leaves the enterprise segment at AT&T, which is going to sell a lot of Blackberry Q10 devices, but also a lot of Galaxy S4 with SAFE/ KNOX capabilities.
  • Sprint:  Sprint does not offer the Q10 or the Z10 at this time.  It required real sleuthing to even find the Blackberry Bold in the store.  The store rep put it in succinct terms when he said “I have yet to sell a Blackberry to an individual user that is under 40, and I’ve been at this store for over a year.”  Rumor has it that launch date will be either the weekend of July 27th or August 3rd.

With service revenues languishing (even with adjustments, a 10% quarterly decline is alarming), Blackberry has a limited window to reinvigorate its US presence, particularly with LTE subscribers.  For HTC, Apple, Nokia and Samsung, this means more opportunities to pick away at their lucrative base.  It’s possible yet hard to see a scenario where Blackberry succeeds globally without first being successful in the US.  And it’s even harder to see Apple iPhone users returning to Blackberry under any circumstances, especially with Blackberry’s PlayBook aspirations on hold.

Next week, we’ll look at the quarter from the perspective of wireline and enterprise sectors.  Until then, if you have friends who would like to be added to this email blog, please have them drop a quick note to sundaybrief@gmail.com and we’ll add them to the following week’s issue.  Have a terrific week!