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Greetings from Davidson/ Lake Norman/ Charlotte, North Carolina where winter has finally begun its return (picture is from earlier in the week when our dog, Abby, was chasing ~40 ducks into the Lake). Thanks again for the emails and comments on last week’s column – much appreciated and thought provoking. This week, we will have some thoughts on the closing arguments made at this week’s AG v. T-Mobile/Sprint/ Softbank/ DT trial but spend most of our time focused on the earnings outlook for the telecommunications sector. We will conclude with a few TSB follow-ups (although admittedly it reads more like the “Five You May Have Missed” feature of previous Briefs).
For those of you in Charlotte, there are still a few seats left at the table for the inaugural Launch LKN book club. I’ll be leading the discussion on the first book (Tim Wu’s The Master Switch) – we are reading this book (and other lengthy tomes) across two months and splitting our discussion accordingly. Sign up here – only a few spots left – thanks to The Hurt Hub at Davidson for providing the facility and Launch LKN for providing the forum.
Separately, I will also be delivering keynote addresses to a couple forums in the next new months. The first one is the 5th Annual Colorado Wireless Association Education Conference. If you are living in Colorado and not aware of the session, you should check it out. It’s a full day of panels, speakers, and networking. More on the conference here.
Finally, I am pleased to announce that one of the start-ups I am advising (Lucid Drone Technologies) recently won another “Best Charlotte Start-ups” award, this time from CharlotteInno. Read more on their recognition and the other recipients here.
The Unintended Consequences of an Attorneys General Victory
On Wednesday, Judge Marrero heard closing arguments from the states’ attorney, Glenn Pomerantz, and from the defendants’ attorney, David Gelfand. Both made strong cases for their clients, and the judge committed to render a verdict “as promptly as possible.”
Based on our readings of the Findings of Fact (summary: AG Findings of Fact read like a Law School final exam response; Defendants’ Findings of Fact read like a Business School final exam response), this is by no means a slam dunk for either side. The future of M&A transaction second-guessing hangs in the balance, which could be very important for all industries (airlines, energy, insurance, health care, retail specifically come to mind in addition to telecom/ cable). If you don’t like the opinion of the Feds, you could shop the decision to a coalition of like-minded AGs and hold up approvals for months or even years. In a recent article with the Wall Street Journal, Assistant Attorney General Makan Delrahim echoed these points, saying “I think if the states win, it creates major uncertainty in M&A.”
In addition to the practical matter of altering the M&A approval process going forward, there’s the issue of Sprint. In his closing statement, Mr. Pomerantz stated “Let them compete” and there’s an erroneous assumption that an unmerged Sprint would be in a similar position that T-Mobile faced at the end of 2011 when the AT&T merger failed. Let’s correct this faulty assumption with some data. Pictured nearby is the T-Mobile 2011 and 2012 balance sheet from their 2012 news release (the 2011 release was not available). The right column of figures reflects the balance sheet as of December 31, 2011. T-Mobile had just over $1 billion in payables to affiliates (Deutsche Telekom) and slightly more than $15 billion in long-term payables to affiliates. That’s it – $16 billion in debt with one primary debtholder who is also the primary shareholder. As reference, T-Mobile had $5.3 billion in adjusted OIBDA and $2.3 billion in operating income in 2011, and was in the process of collecting a $3 billion break-up fee plus spectrum from AT&T.
Sprint is in a very different situation today, as shown by the following chart from their Investor Relations website:
Paired with this debt schedule is the following quarterly reconciliation to free cash flow:
The economic reality for Sprint is as follows:
- Last four quarters of cash provided by operating activities of $9.9 billion.
- Network spending requirements (using previous 12 months as a proxy) of $5 billion
- An additional $7 billion in cash required to finance leased devices (this assumes no Apple 5G device super-cycle)
- $1.6 billion in debt due within 2 months and another $3.8 billion in the subsequent 14 months (and another $20 billion due in the 36 months after that).
At current trends, Sprint will need $7.5 billion over the next two years to remain solvent. Add in additional 5G expansion to remain market competitive (something CEO Michel Combes mentioned in trial testimony), and that figure easily exceeds $12 billion.
Back to T-Mobile for a moment. Here’s the slide outlining what they were able to do in the 12 months following the AT&T merger dissolution:
T-Mobile entered 2012 with mostly mid-band spectrum (1900 MHz). They picked up AWS spectrum from AT&T as a result of the merger failure (1700 MHz/ 2100 MHz) and added additional spectrum through their Metro PCS acquisition. Then they swapped some additional AWS spectrum with Verizon (announcement here). Then they bought $2.4 billion in 700 MHz spectrum (called the A Block) from Verizon in 2014 (article here) and additional spectrum from other carriers in 2016 (article here). Then they bought $8 billion of 600 MHz and additional $1.8 billion in AWS-3 spectrum. Bottom line: T-Mobile scrambled to fill in low-band spectrum gaps to more effectively compete with AT&T and Verizon. This type of spectrum is not available to Sprint today, hindering their ability to be competitive in suburban and rural locations.
To use a card analogy, Sprint needs the face cards of low-band spectrum, a long-term oriented bondholder ready to finance $10-15 billion over the short-term (the approval process to engage another major shareholder is uncertain thanks to the recent AG action), and a solution to provide another $20 billion in debt restructuring for those redemptions due in 2021-2023. T-Mobile, Verizon, and AT&T are holding those spectrum face cards and don’t plan to sell them to Sprint. An investment from Google or Apple (both very unlikely) would draw extensive scrutiny from the same AGs who objected to the T-Mobile purchase. And another foreign investor, even from Canada or Mexico, would be difficult (but not impossible), if they could afford it.
“Let them compete” under these conditions has clearly defined but unintended consequences: Sprint either a) declares bankruptcy, sending shares to pennies and wiping out Softbank’s investment (and the Japanese banks that helped finance them), and then sells to a cable company (or consortium) if the DOJ, FCC and state AGs allow it; or b) as was stated in the trial, Sprint ceases to be a national provider, which might preserve competition in New York City but will drive up prices in Binghamton, Syracuse, Schenectady, Henrietta, North Chili and Medina. Hopefully the pithy “Let them compete” soundbite is ignored by Judge Marrero and math prevails – that’s why this case is still a coin flip.
Fourth Quarter Earnings Questions
In last week’s TSB, we started to outline the key themes we expected to hear during earnings calls. As a reminder, the earnings season starts next week with Comcast (Thursday, January 23, 8:30 a.m. ET). The remaining calendar (as of Jan 19) is as follows (Neither Sprint nor T-Mobile have indicated times, but, if last year’s schedule is any indication, it’ll be either January 30, January 31, or the week of Feb 3. No info on Windstream):
Apple: January 28 (afternoon)
AT&T: January 29
Verizon: January 30
Spectrum: January 31
Google: February 3
CenturyLink: February 12
US Cellular: week of February 10 (est.)
Altice: week of February 17 (est.)
Frontier: week of February 24 (est.)
Here’s five general questions and five specific-company questions we think should be asked:
- How is the healthy economic picture translating into telecommunications spending? While more agricultural purchases by the Chinese help the overall economy (especially in the Midwest), it does not have a direct tie to telecom spending. But more Roku/ Fire stick/ Chromecast/ Apple TV device sales do drive more residential broadband consumption, more Apple iPhone 11/ 11 Pro/ 11 Pro Max sales drive higher application usage levels (and tonnage if those apps are video-capable), and newly launched Disney + content was likely consumed at an equal or greater rate over mobile devices (call it the American Idol network congestion moment for the 2020s).
Our take is that a strong economy drives device and bandwidth upgrades, but only to a point. Bad debt is going to stay low in 2020 (not only due to economic conditions, but also because of increased relative importance), and all attention is going to be on the wireless and wired broadband tonnage impact of increased content launches as Quibi, Comcast/ NBC/ Peacock, Apple, HBO and others all bring new services to or expand current services in the market.
- How are the overall retail environment struggles impacting wireless carriers? We have written about this extensively, and see the struggles faced by all retailers (in malls, in parking lots near malls, etc.) as a headwind for each carrier, even if it’s not a company-owned store. Couple this with the 6% off all Apple Card/ Apple Store purchases promotion continued through January (as well as Apple Stores being a destination for the hottest product of the Holiday season – AirPods Pro), and there’s a good chance that the lines were shorter at many Verizon, Sprint, T-Mobile and AT&T stores.
- With a possible 5G iPhone launch many months away, will customers continue to upgrade? The initial thought behind slow iPhone 11 sales (which ended up being quite robust) was “Customers will wait for the 5G iPhone.” Then, as reports leaked out that Apple may not have a fully robust 5G version until 2021, customers decided to make the switch (a 3-yr old iPhone upgrade completed in December 2017 would have been from the iPhone 7 which would be a worthy upgrade). AT&T recently reiterated their belief that there could be a 2H 2020 super cycle driven by upgraded 5G device sales (note: this is not publicly shared by any other wireless carrier).
- How quickly will 5G (and specifically mmWave) be deployed? T-Mobile is in the process of deploying 5G over their 600 MHz spectrum band (200 million people; 1 million square miles), giving them 20-25% improved speeds (and really speedy bandwidth in areas not on Verizon’s or AT&T’s 2020 5G deployment radar). AT&T has committed to a nationwide 5G deployment this year (which we interpret to mean that they will have 5G Plus deployed in many areas throughout the country, but that there will still be suburban and rural areas that predominately use 4G LTE). The answer to this question impacts the answer to question #3.
- How quickly are customers cutting their cable cords? Are we moving from OTT as a supplemental content service to being primary? Comcast and Charter lost 313,000 video customers in 3Q 2019 – this could easily go to 400,000 this quarter even with Sony’s PlayStation Vue shutting down (Comcast will set the tone this Thursday, but we expect the greater acceleration at Charter). Revenue concentration is increasing at the cable companies, and some broadband price hikes are holding (for now), but one has to wonder how the long-term health is impacted as others (re)enter the home broadband market.
- For AT&T. What’s the rationale for continuing to hold on to local telephone exchanges, particularly where AT&T is poorly clustered? We have discussed this ad infinitum, but there’s a great opportunity for the larger players in the local telephone industry to swap exchanges (see North Carolina map here). Why AT&T continues to operate in island exchanges such as Lumberton, North Carolina is a mystery (picture of downtown from Wikipedia is nearby). Let CenturyLink serve Lumberton and swap it for a Tennessee or other property that AT&T can serve efficiently. That’s how you compete against cable’s wireline juggernaut.
- Also for AT&T. In-vehicle M2M was enormously successful for AT&T in terms of number of embedded vehicles (24 million cars and 3 million commercial vehicles as of 3Q 2018). But the total annual data consumption from the embedded modems in these vehicles was a scant 45 million GB (3.75 million GB per month or about the equivalent of 450,000 smartphones on unlimited plans). In the link above, AT&T also prominently reveals that they have 1 million retail postpaid subscriptions across the 24 million embedded base – is a slightly more than 4% share something to be proud about? Did AT&T spend a lot of money to get a lot of subpar subscribers, or did the payments from the auto companies (car performance data, which is paid for separately) justify the IT and product development efforts?
- For Verizon. How many Verizon-branded customers left postpaid retail and signed up for Xfinity Mobile and Spectrum mobile? Are any returning? T-Mobile implied at a recent investor conference that many of Xfinity and Spectrum’s gross additions are coming from Verizon retail. We think that their gains are far broader than that, but will see what color is released by Verizon and the cable companies.
- For T-Mobile. How many gross additions remain in 2020 and 2021 from 600 MHz network expansion? As we saw with their 700 MHz deployment, there’s a long runway for T-Mobile in the suburbs and rural markets. If the merger is rejected, we expect T-Mobile to significantly “thicken” these areas (including outdoor CBRS deployments) and aggressively pursue customers.
- For Sprint. How will Sprint “right the network” in Florida? We spend a lot of time looking at network quality for one of our clients, and noticed that Sprint really fell off in all performance areas at the end of 2019. Here’s the RootMetrics RootScore chart for Marcelo Claure’s adopted hometown, Miami:
It’s amazing to think that in the first half of 2018, the spread between Verizon (sole winner in Miami) and Sprint was slightly more than 4 points, at the end of 2017 was 3.7 points, and at the beginning of 2017 was 2.0 points). Regardless of the specific weighting or other quibbling about how RootMetrics conducts their surveys, this is an undoubtedly troubling trend, and it’s not confined to South Florida. Orlando (1.5 pt spread in 1H 2017 has grown to 9.3 pts in 2H 2019), Tampa (2.9 pt spread to 10.1), and Jacksonville (4.6 pt spread to 8.4) have all deteriorated.
Perhaps this is all prepping for the T-Mobile merger, and there’s a plan in place to turn all of Florida into a 5G heaven, but their recent performance signals that they are falling behind – fast.
There are many more questions, but time and space force them to next week’s column. We welcome your thoughts and feedback on which questions you would pose.
Here’s a few of the many follow-ups that we thought would make for additional interesting reading:
- If you have not watched the NBC Universal Peacock unveiling, take the time and view it here. It’s an amazing production. One of you described the day as “beautiful” – that pretty much captures what we saw.
- Verizon introduced a privacy browser called OneSearch that is powered by Bing. Article from The Verge is here and actual website that you can try out is here. Kudos to the company for building it – hope they can effectively market it even with their very strong Google relationship.
- Everyone tried to interpret the latest Goldman Sachs earnings report to figure out how successful the Apple Card has been. It does not appear to have slowed much if at all, but the exact quantities are vague. More here (earnings call transcript) and here (earnings presentation).
- FierceWireless has a great article on Tracfone’s SmartSIM program. According to Jeff Moore of Wave7 research, the largest MVNO in the US appears to be pulling back from the idea for now (we think this could have to do with the overall economics of the program). As the article indicates, the method and algorithm used by Tracfone are unknown at this time (but likely a license of Google Fi which is its own headline).
- One of the best research reports on edge computing is the State of the Edge, a collective research project funded by ARM, Ericsson, Packet (now Equinix), Rafay and Vapor. They updated their 2018 report last month and it’s available for download here (I am about 50% through the 2020 Update and it’s even better than the original).
That’s it for this week. Next week, we’ll comb through Comcast’s release and hit on a few other topics that were raised from our CES article. Until then, if you have friends who would like to be on the email distribution, please have them send an email to email@example.com and we will include them on the list.
Have a great week – and GO CHIEFS!
Greetings from Las Vegas, NV where 170,000 tech-hungry attendees gobbled up products and services from hundreds of exhibitors. Pictured is our motley crew at the first Sunday Brief CES dinner held this year at Gordon Ramsay’s Pub at the Caesar’s Palace. Everyone had a terrific time – no one lacked an opinion and GRs has a diverse menu that accommodated any palate.
This week, we’ll divide our focus between show observations (there are many), and some commentary from Verizon, AT&T, and T-Mobile executives at the Citi TMT conference which was concurrently running in Las Vegas.
CES Observations – Out of the Lab and On to the Production Line
Many CES shows focus on concepts, and this year’s show was full of them (see here for Business Insider’s take on the Mercedes Benz Avatar concept car – one of many futuristic automobiles in Vegas this week). But for every “could be” invention at the show, there were several “in or near production” items that showed how far concepts from the last decade have come.
First up comes from the smart home, where several of us really liked the concept of mixing lighting (which has to have AC power) with air purification. Many of you remember the concept several years ago of mixing lighting and Wi-Fi access (called Li-Fi) which is now available widely online from companies such as Sengled and de.Light – early reviews were mixed, and mesh Wi-Fi extensions from Google and Eero (now owned by Amazon) proved to be a better value.
Now, there’s a new lamp product from Puripot (parent company is dadam Micro – more on them here) that brings air purification to the tabletop (in addition to a wall mounted version). The nearby diagram from the Puripot website shows how it works. The company describes the technology as follows:
“The puripot airLamp is a lamp-type air purifier that applies two innovative and environment [sic] friendly technologies to household lamps that are used universally in most every life: 1) a polyester-based non-woven fabric filter treated with meta-doped TiO2 photocatalyst, and 2) a market proven visible light-based titanium dioxide photocatalyst technology together to removes harmful VOCs viruses, bacteria and fine dust.
The transition meta-doped titanium dioxide non-photocatalyst filter used in the device is an eco-friendly, inorganic material-based fiber filter that is made by coating polyester non-woven fiber with the TiO2 photocatalyst. The filter has strong destructive effect on almost all kinds of virus regardless of the light irradiation. The performance of the filter is not deteriorated even after long hour use and periodic washing to remove dust attached. The filter has more than 50% better dust removal efficiency than the general HEPA filters.”
For people who have allergies or live in polluted areas (or improperly maintained office spaces), this could be a productivity-improving device (less sick time, improved employee psychology, etc.). The company indicated that the solution would be available in 2020 (the precursor air filter is available for preorder here and should ship in Feb).
While an excellent invention in and of itself, the concept of a power + light + ______ elicits some interesting ideas for home and office tech. For example, the ability to attach a CBRS or Wi-Fi access point in the base of this lamp would be a useful addition to many offices. And coupling a terabyte storage option for most commonly used DropBox or Box files would also help performance. As we saw from the addition of IoT devices (including Wi-Fi repeaters) to electrical outlets, the concept is not new, but puripot has moved the functionality from the power outlet and the light socket to the table/ desktop. That’s big, and, with the right modular design, could be a boon for technology adoption.
Another widely discussed theme at this year’s CES was sustainability, specifically water reclamation. Live through one drought (ours was in Dallas, but we have had our share of dry summers in Colorado) and you understand the importance of water availability. A new company called Hydraloop had their debut at CES after very successful alpha and beta trials. Their technology takes water used in everyday tasks (showers, washing machines, tubs), and enables it to be reused again through a patented recycling process (see nearby picture).
In Texas, the water bill can frequently be higher than those of other utilities. Being able to reclaim or reuse a portion of the water without being charged twice is an attractive proposition. Hyrdraloop indicated on their website that most homes could be equipped with the new technology for ~ $4,000 plus shipping and professional installation. Assuming this price comes down with volume (and more affordable with financing, similar to that used for solar projects), this could be a self-financing upgrade for many homes. It’s an “edge” application for another utility – water.
For more on the company, CES’s “Best in Show” for 2020, have a look at their YouTube video from CES.
One additional technology closer to telecom and tech that caught our eye is Wi-Fi based motion sensing. This was on display at CES using Cognitive Systems software on Plume Systems adaptive Wi-Fi system (note – Plume is backed by several corporate venture arms, including Comcast Ventures and Samsung Ventures). This technology has been in testing for a couple of years, and Plume decided to launch their Motion product at this year’s CES. Here’s a video briefly describing the product and a short Forbes article authored by Moor Insights and Strategy on various benefits and use cases.
The bottom line for the Plume Motion product is that when a visual recording of an event is not triggered or desirable (e.g., bathroom motion), Wi-Fi motion detection can be a high-quality, cost-effective alternative. For more on the company and their subscription service, check out www.plume.com.
Each of these three products will broadly launch this year. They combine many of the themes we described in last week’s article (compact or eliminated equipment, tied to remote cloud-based systems, and enabled by faster processors) and bring high-value/ high-utility products to the market.
In case you missed the show (or its coverage), here’s six additional articles you should probably read to get a good take on tech:
- For IoT and CES, read the latest weekly blog from Stacey Higginbotham. I was especially intrigued by her panelist’s take on Virtual Reality (VR) tech for aging adults.
- For Engadget’s take on Samsung’s NEON avatars (apparently a viral topic), read here.
- For a good summary of laptop announcements that will have 5G available as an option, read here.
- The Samsung release on their digital companion product called Ballie is here. (I think the company should revisit their pet friendliness assumption).
- I missed the AMD keynote on Monday, but if you don’t believe that speed is still a theme, check out this condensed presentation.
- Quibi (short-form video service) held their launch announcement at CES (Bloomberg interview is here). T-Mobile is going to be a key partner and will include the service for most of their current customer base.
Lastly, we leave the CES discussion with a picture of the Hyundai Uber drone. About a decade ago, cars started to take over the show, and now we have the S-A1, an Urban Mobility Vehicle prototype developed by Hyundai and Uber:
Fourth Quarter Hints from the Citi Conference in Las Vegas
There were three wireless companies (Verizon, T-Mobile, and AT&T) and one notable Local Telco (CenturyLink) participating in the Citi Global TMT West Conference that paralleled the first two days of CES. While we do not have enough space in this week’s column to fully cover each presentation, here are the high points of the wireless participants:
- Ronan Dunne, EVP at Verizon and Group CEO for the Consumer Division, spoke first. “We have laid the platform for growth… We have all of the assets we need to execute the strategy…. We are not a business that’s waiting on the outcome of someone else’s strategy.” Verizon is aggressively developing an information-led platform that lays the groundwork for large experiences like Disney. While not disclosing any specific numbers, Ronan went on to convey that “the momentum we saw in Q3 continued into Q4.” On personalized base management, he said “We have 100 million consumers, and my ambition is to personalize the experience for every one of them.”
On Disney, Dunne offered no specific numbers, but he did convey that there might be some short-term dilution primarily as a result of higher than expected demand. He was quick to point out that if the Disney relationship could extend the customer/ family account life even one month, it was a terrific investment.
On cable, Dunne talked about his personal investment in the relationship, and the fact that Verizon’s network-as-a-platform strategy lends itself well to a relationship with cable. On 5G, he went on to reiterate their investment in millimeter wave technology, citing that 70% of Verizon’s traffic occurs in metro areas. On devices, he predicted that new models will be introduced that carry millimeter wave technology for under $800 ($33.33/ mo. for 24 months) “soon” with sub-$600 ($25/ mo. for 24 months) devices by the end of the year.
On home broadband, Verizon is likely holding their marketing power until higher-power chipsets are available to expand their reach (likely date = 2H 2020). The most likely deployments of highest-speed networks will be in dense traffic areas that tend to have lower residential concentrations.
On the economy, Dunne commented that that holiday season shifted to more digital than retail storefront (re: Verizon charges less for online conversions than in-store or customer-service assisted transactions). Verizon seems to be seeing a fair amount of pricing optimization as well as some upsells into higher unlimited categories.
On the Verizon relationship with Amazon AWS, Dunne praised the partnership, emphasizing that their new edge relationship was completely built within their (Verizon’s) infrastructure.
The most important “drop mic” comment came from an audience question at the end about Wi-Fi offload. “The thing that we see that may be different from the world of others is that we don’t see the need for Wi-Fi in the future because we have a more secure network environment, we have much higher performance criteria, and we have the ability to hand off sessions… When we are fully deployed, there are entire environments where public Wi-Fi can be eliminated.” We could not find any other statement from Verizon in which it sought to absorb Wi-Fi volumes (a 3x growth given Wi-Fi is ~ 75% of total data traffic for wireless subscribers today).
- T-Mobile released preliminary subscriber figures prior to their participation in the conference, which feature current President and COO (and future CEO) Mike Sievert, President – Technology Neville Ray, and EVP and CFO Braxton Carter. In the press release, the most telling figures were as follows:
- 86 million total subscribers
- 1.0 million branded postpaid net phone additions (on par with Q4 2018)
- Gross postpaid phone additions up 5%, and postpaid churn up to 1.01%. Braxton Carter’s comment was very telling: “I wish churn was a little bit higher [in the industry]. The hallmark was a more competitive environment with more switching going on, reversing a trend from the rest of 2019. We are very excited about a higher switching pool.”
- Prepaid net additions of 77K for the quarter, up from 62K in 3Q but down from 135K in 4Q 2018
- Wholesale net additions of 472K for the quarter, down from 611K in 3Q and 909K in 4Q 2018
- “A beautiful quarter” was Carter’s description of the total operating performance, leading many to believe that the margin pressures from increased gross adds were able to be readily absorbed.
“Our team is focusing on all cylinders” was Mike Sievert’s lead comment. Key objectives for 2020, per Sievert, include a) Get the integration with Sprint underway in a very significant way, b) Get off to the races in building the world’s best 5G network, and c) turn a) and b) into great operating performance for the business and lay a foundation for growth under the context of the new company.
On the Sprint merger, the audience seemed split on the judge’s verdict but Mike Sievert was not worried. “We have to see where it all shakes out.” On the prospects of a settlement, he stated “Through the process… we have been an open book about what we were willing to do. Nothing has changed with that approach. So far there hasn’t been a settlement, but you never say never.”
On 5G, the executives were quick to reference that the current activities were just the beginning. “The breath is coming along nicely, and the breadth will come with the [Sprint] transaction” said Neville Ray. Mike Sievert used the 5G discussion to launch into his confidence in the network synergies from the Sprint transaction, citing T-Mobile’s progress with 600 MHz deployment which is two quarters ahead of the originally announced plan.
“The base business case for 5G is capacity” answered Braxton Carter. “We have been consistently ahead of the cost curve, and 5G is a critical piece.” On a super cycle, it’s clear that nearly every new device will be 5G capable on T-Mobile’s network, although Neville Ray seemed to imply that the momentum would start in 2020 but that 2021 would likely be an even greater year.
Braxton conveyed that the industry is probably at the low point of the upgrade cycle. “We should see higher switching as the 5G cycle accelerates.” On increased competition entering 2020, Sievert talked about cable and it appeared to him that “cable is taking share from Verizon… their share gains are not coming from us.” Mike was also quick to discuss how despite lower promotional activity in the quarter (their advertising focused on their 600 MHz network reach), T-Mobile still delivered healthy net additions with low postpaid churn. “We have not unlocked the potential of having not only a great value but also having the best network.”
“If this transaction does not occur, we would immediately reinstitute a $9 billion board-approved buyback” was Braxton’s response to an audience survey question about T-Mobile’s direction should the transaction be rejected.
On targeting, Mike Sievert commented that T-Mobile has “good network quality for 326 million Americans, including low-band spectrum for over 300 million. We market in just 265 million, and 35 million of that is recent – in the past 2-2.5 years. There remains plenty of opportunity.” On share, Sievert commented “We continue to have disproportionately low share in suburban, rural, small towns and enterprises. While these segments have been feeding our growth over the past couple of years, we continue to have disproportionately low share.”
On the economy, Sievert commented “Things have changed a lot since the last recession. Smartphones weren’t really deeply embedded into scale usage yet – that’s amazing. When you are forced to choose, the smartphone is not going to be the first thing to get downgraded. You will see a lot more optimization, and we are well served for that situation. I think our business is positioned to be resilient regardless of economic circumstances.”
- The following day AT&T CFO John Stephens spoke on a wide variety of topics. After checking off a long list of operating and financial metrics, he concluded with “we did what we said we were going to do, and we have set ourselves up for a bright future.”
On their asset mix, Stephens talked about AT&T’s bundled (content + network) products and distribution capabilities. “We will be best positioned in the future to bundle wireless services because we have owners economics – it’s really important”
On 5G, Stephens noted that for the first time ever, the network is leading device availability. He considers HBO Max to be an unappreciated asset and is very confident in the prospects for the product. $500 million in content was invested in the fourth quarter but was held back for the HBO Max launch.
The AT&T CFO also touted their spectrum capabilities, especially when AT&T “hotwires it all” with the FirstNet buildout. John Stephens was the most bullish of the executives on the wireless upgrade cycle in 2020. He cited several sources of revenue growth, yet also discussed the need to further reduce costs for network and customer service functions. He also signaled that there would be additional product rationalization throughout the business.
On the communications front, Stephens talked about the need to emphasize the breadth and depth of the AT&T fiber asset, and also the expected decreases in legacy declines due to their diminished size and relative importance to the business. John also separated equipment sales from other profitability sources due to their low margins.
On industry structure, Stephens had some of his strongest comments. Because of FirstNet, AT&T deployed more spectrum, and this improved geographic coverage presents a unique competitive advantage for the company. And FirstNet will expand into the hospital which opens up a large incremental population. AT&T has been growing their postpaid base, and Cricket has grown to over 10 million customers. But the most competitive advantage is content ownership, which is manifested through HBO Max.
Stephens clearly stated that any future spectrum purchases were going to need to be self-financed “If I want to buy some spectrum, I need to find some assets to monetize” said the CFO.
On the economy, Stephens cited lower gas prices (“a dividend to consumers”), lower home costs, real wage increases, and lower unemployment as key health indicators. “Our economy has much less risk” because housing has a lower weighting in the economy. “We see a fairly stable, reasonable economic picture.” On the business side, because there are more employees “we are seeing more demand for mobility, both hardware and services.”
The bottom line from these three presentations is that challengers have more fun, wholesale partnerships are becoming more important to Verizon and AT&T, and that HBO is viewed as a strategic asset by AT&T (versus the network platform as the strategic asset by Verizon).
That’s it for this week. Next week, we’ll hit the CenturyLink presentation and discuss specific questions we have for the wireless carriers as we enter the quarterly earnings cycle. Until then, if you have friends who would like to be on the email distribution, please have them send an email to firstname.lastname@example.org and we will include them on the list.
Have a great week – and GO CHIEFS!
Holiday greetings from sunny and mild Lake Norman, North Carolina (sunrise shown – unaltered photo). There are a lot of follow-ups to cover, and, if reports are true, there may even be a settlement between the Attorneys General and T-Mobile/ Deutsche Telekom/ Sprint/ Softbank prior to their trial start on Monday (hope springs eternal).
Many thanks for the multitudinous comments on last week’s Thanksgiving book review article. We are not turning into the New York Times Book Review (won’t even try) but there’s a lot to discover and learn from the activities of our predecessors. We will have a similar article on Steven Coll’s 1986 classic outlining the events that lead up to the breakup of AT&T on December 29. Preceding that, we will have a “Three Companies to Watch” special TSB on December 22.
A final thanks for the many referrals that we have had over the past month – over 250 new readers have been added. If you know someone who could benefit from this column, have them send a request to email@example.com and we will get them on the list. We are also in the process of revamping the website (end of January) and promise more things in 2020 (including a merchandise fundraiser for the Davidson College Jay Hurt Hub for Entrepreneurship and Innovation).
This week, we will lead with a discussion of a deep topic – rethinking the wireless (and wireline) network operating system. As mentioned earlier, we have several TSB Follow-Ups.
Programming Tomorrow’s Network
Within wireless communications networks, there are multiple pieces of hardware, each running its own operating software. Each needs to operate to a given specification (usually a 3GPP or LTE Release standard), and there are likely additional requirements placed on the suppliers by the local operators.
This model worked reasonably well when voice and text (using the SS7 TCAP standard) constituted the majority of activity. However, the interest in pushing applications (e.g., WhatsApp owned by Facebook) deeper into the network has created a gap between legacy product development and entrepreneurs. On top of this, there is a need to cost-effectively provide access to less developed areas. On top of this, data growth continues to drive up costs, which create pressures on carriers (and, as a result their suppliers) to deliver a better experience and greater profitability.
This has forced two things to occur:
- Greater network sharing (predominately radios and transport) between network operators. CBRS is the beginning of this trend in the USA (see TSB on CBRS here); and
- Separation of hardware (e.g., a shared radio) and operating software (which may be custom to the operator).
Doing all of this in a secure environment is a challenge. Developing new operating systems amidst a global shortage of software development talent (and recognition of venture capital and other investors that this can be a value-producing endeavor) is an additional challenge. Integrating any operating system changes into the stream of concurrent innovations (e.g., 5G Standalone equipment development, increased mobile edge computing deployments, etc.) requires coordination. Creating competitive advantage in addition to achieving cost reduction targets adds to the heap. It’s like replacing Windows yet expecting no change in how current and future versions of Excel and PowerPoint will work.
We outlined the AT&T efforts in this space in a previous TSB (link is here) but think there’s a few “no brainer” areas where application developers and carriers should come together to improve experience.
- Voice calling. This experience is essentially the same across carriers:
- There is a non-real time contact list that is invoked through a clumsy, 1990’s dialer scheme (see nearby picture);
- There is no voicemail ubiquity within the carrier community (there is at the app layer, however, for WhatsApp, Google Voice, and others);
- To the best of my understanding, there’s no way of automatically integrating stored voicemails into CRMs such as Salesforce;
- There is no reminder or follow up function on voicemails (think how Gmail does this with emails);
- There are inconsistent methods of identifying spam calling (and any other incoming call for that matter);
- There’s no way of knowing any details or status about the party I am calling (such as whether they are on the phone or whether they have made a call in the past five/ten/fifty minutes or even the last day – think the notification scheme for apps such as Skype, etc.);
- For incoming calls, there’s minimal context and no ability to instantly locate/trace the incoming caller (mobile edge computing could fix this pronto and you could see that the call showing 704/Charlotte area code is really originating from Omaha);
- There’s no ability to interrupt a current call (e.g., spouse calling), a call feature common in contact centers (whisper tone);
- There’s no common messaging portal incorporating LinkedIn, Facebook, carrier, WhatsApp and other sources;
- Integration between conferencing services such as Zoom or Skype and the mobile device have not materially changed in 20 years. Still a phone number plus an access code and an announced name.
Is it any wonder that Google Voice, Facebook, and WhatsApp are succeeding and that carrier voicemail solutions are flat to declining? Customers are communicating more than ever, but they are just not into that 1990’s dialer.
To change voice, the interaction between a customer’s contact list (directory), the universal contact list (macro directory), storage (voicemail), availability (presence/ proximity) and the network needs to change. This can all be done faster within the network and is a prime example of how operating systems can and should be rewritten.
Voice application (the dialer provider) should be a choice. It should be portable and interoperable. It should be driven by a microphone and intelligence, not by typed search strings into contact list applications. And the private directory should have live updates (if allowed by the directory listing). The integration of applications functionality deeper into the network can do this, and advancements will occur a lot faster than we see today from the carriers.
- Predictive Analytics (and Customer Care). One of the eye-opening experiences I had with my Flash Wireless experience concerned troubleshooting device issues (Flash had a heavy Bring Your Own Device base). As an MVNO, we tried when possible to go the extra mile if the issue was device-related as opposed to a network issue. We formed a checklist which could easily be databased in today’s environment. Some of the important topics included:
- IoS or Android version
- Recent activity (e.g., voice over Wi-Fi connectivity issue vs the network, messaging activity, new apps downloaded, Wi-Fi vs network data access, location)
- Port-in provider (experience expectations)
- Phone age (and purchase source if it came from one from a known vendor)
- Customer lifecycle age (pre-first bill; first 90 days; over 180 days; etc.)
The number of possible iterations quickly grew, especially since we were in a 3-carrier MVNO environment (location in section b. above really mattered for some of our network providers).
A system that continually interacts with the network could do a better job of measuring data and device quality. If a customer had a service need, problem identification could be instant and highly accurate. Success would not be determined by the smartest care expert, but by the network (and the collective experience of all previous users who had ever used the network in that location at that specific day/time). The cost of caring for older devices could be calculated with high confidence.
To make predictive analytics work, measurement software needs to be pushed further into the network core. Economics aside, if the problem can be remedied by a carrier sharing partner, that can be done instantly through the operating software (not through a SIM setting). Anomalies can be detected for individual users and alerts can be delivered. If the problem was with the provisioning process, for example, the device could be re-provisioned right away (in a nearby store or over the air) or overnight.
The network can be the service expert if issues can be detected quickly. With the consolidation of device models (e.g., more iPhone 8, X, XR, XS, and 11 models in service than ever before), there’s plenty of correlations to be determined (e.g., Sprint iPhone XR users living in Somerset, Kentucky that have activated service in the last 90 days). The result of greater analytical capabilities built into the core could result in dramatically lower cost for customer care.
These are two of probably ten or more use cases that demonstrate the value of rewriting equipment operating systems. This will be an evolution, but not one that is done simply to lower costs – there are many product and customer experience benefits that could create competitive advantage.
Qualcomm Snapdragon 865 Chipset specifics revealed. Increasingly, what’s contained in Qualcomm’s chipsets finds its way into the subsequent generations of smartphones. If that is true, we should expect to see more camera focus (new chipset accommodates up to 200 MP cameras), 5G networks (full support), and faster displays (supporting up to 144 Hz). It was also interesting to learn that the Snapdragon 855 would also support Dual SIM/ Dual Standby (more details on that finding from this XDA Developers report here). As we discussed in last week’s TSB, the Apple XR/XS/ XS Max was the first lineup to support Dual SIM/ Dual Standby – Android development efforts in this area have been slower to emerge. The Qualcomm 855 should be the turning point and we should see the capability available on new devices in 2020. According to the XDA Developers article referenced above, they worked with Gemalto to enable eSIM support within the Qualcomm Secure Processing Unit.
One additional note about the Snapdragon 865 is its support for the Android 11 IdentityCredential API. This would allow, among other things, the ability to store your driver’s license in Android and it would be accepted as a proper form of identification. The complete video of Day 2 which has the details on the 865 are here – the discussion of Dual SIM/ Dual Standby starts at minute 31. The Snapdragon 865 spec sheet is also available here.
DOJ Calls Out Carriers on Remote SIM Provisioning (RSP) Collusion
The day before Thanksgiving, the New York Times ran an article describing the settlement between the Justice Department, the GSMA (standards body) and some US wireless carriers (presumably including AT&T and Verizon) over possible collusion surrounding the development of eSIM device locking.
The Times article is sparse on details – Assistant Attorney General Delrahim’s letter (here), however is not. Here’s what was found concerning the current RSP process (actual findings – emphasis added):
First, RSPv2 requires consumer-users to express affirmatively their intent to switch profiles each time the eSIM toggles between profiles or networks, thereby preventing the eSIM from automatically switching (or optimizing) between profiles. Dynamic or automatic switching is a potential competitive threat because it could lead to a service where a device efficiently selects, on behalf of the user, which profile to use in any given situation. For example, the eSIM could switch services if it detects stronger network coverage or a lower cost network, providing consumers with better or less expensive service. The prohibition on automatic switching would tend to prevent at least one existing operator from offering a new innovative service using an eSIM. That is, in order to offer the new service, the operator would have to convince smartphone manufacturers to forego complying with the RSP Specification.
Second, RSPv2 prevents an eSIM from actively using profiles from multiple carriers simultaneously. Multiple active profiles is a potential competitive threat because it would allow a user to divide usage across operators. For instance, the user could actively maintain two profiles on one device if he or she wanted to receive work-related phone calls to one profile and personal phone calls to another profile, all while carrying only one phone. The user could also actively operate profiles optimized for different coverage areas or for international travel. Although there appear to be technical challenges to allowing multiple active profiles at present, the single active profile requirement in RSPv2 serves as a roadblock to additional disruptive innovation that could solve these technical challenges.
The DOJ’s issue was not only with these two outcomes (which are unmistakably anti-competitive), but with the entire approval process used by the GSMA. Everyone agreed to comply with new process, and, with the advent of the new Qualcomm 865 chipset described above, it’s likely that switching between networks will be placed as a consumer choice with the opportunity to mute future notifications (similar to the roaming notifications process followed for over two decades) and also to allow multiple networks to be accessed simultaneously (making data network selection easier for cable MVNOs and others while potentially keeping voice on the MNO network).
Adam Koeppe Takes the Stage in Vegas (While His Boss is on a Separate Stage in Vegas)
Given space constraints in this week’s TSB, I am going to keep this excerpt short (perhaps we will cover in another TSB this month), but, if you want to know what Verizon is doing with respect to network deployment, listen to his Well Fargo talk with Jennifer Fritzsche here or read the transcript here. Adam covers the AWS 5G Edge announcement, fiber deployment strategy, CBRS (and Enterprise LTE solutions pairing CBRS and millimeter wave spectrum bands), Broadband to the home and relationship to cable MVNO, and a few other topics. Less spin is good for Verizon, and Adam is a “balls and strikes” interview.
What Markets Will See the Greatest Improvement to Sprint/ Boost if New T-Mobile Actually Occurs?
We had been thinking about this topic for a while, and accessed publicly available RootMetrics data (2H 2019 measures only to be most current in our assessment) to see where the current gap between T-Mobile and Sprint exists.
To no one’s surprise, Sprint tends to solely occupy fourth place in nearly each of the 125 markets that RootMetrics measures every six months. How would that performance improve once that Sprint/Boost customer (current device) could access the T-Mobile network?
To determine the greatest impact, we looked at the difference between Sprint and T-Mobile’s Overall Score (perhaps in a future TSB we will dive into the components). As of Wednesday, RootMetrics had published the results of 96 out of 125 markets (77%). The results break down as follows (100 pt scale):
Overall Score Difference Number of Markets Percentage of Total
Less than 3.0 points 19 20%
3.1 – 5.0 points 13 13%
5.1 – 10.0 points 48 50%
More than 10.0 points 16 17%
While there may be debate about the impact to customers for the first two levels (device age could play a significant role in a market where both T-Mobile and Sprint are relatively strong), there’s little debate when there’s a spread in excess of 10 points and the market is not one of the previously announced 5G markets. Here’s a sampling of where Sprint has fallen behind:
- Oklahoma. Below are the most recent charts for Tulsa and Oklahoma City. ‘Nuf said.
- Florida. These are legacy MetroPCS markets for T-Mobile and have very dense coverage. Miami, which was once a priority market for Sprint (non-executive Chairman Marcelo Claure has close ties to the area), has fallen off considerably and is no longer a competitive market for Sprint. Other markets with more than a 10 point spread to T-Mobile include Port St. Lucie (12.2) and Sarasota (11.1). Orlando, Kissimmee, Tampa, and Jacksonville have a 5.1 – 10.0 spread. The other markets are waiting to report.
The remaining markets are both big and small metro areas:
- Atlanta (fast growing area, large market, 5G market)
- Baton Rouge, LA (been a weak network for Sprint for many years)
- Charlotte, NC (fast growing area and second home to most of the financial services industry)
- Denton, TX (North Dallas suburbs)
- Kansas City, MO (very odd as it’s Sprint’s current HQ and a 5G market)
- Louisville, KY
- Memphis, TN
- Nashville, TN (fast growing area)
- San Antonio, TX (Sprint PCS dominated this market because of its design; large market)
- Wichita, KS
Interestingly, no Northeast, Northwest, Southwest or California markets with large gaps. We will update this list in January once RootMetrics has completed their 2H 2019 metro studies.
That’s it for this week. Next week we will begin our discussion of 2020 trends unless events dictate otherwise. Until then, if you have friends who would like to be on the email distribution, please have them send an email to firstname.lastname@example.org and we will include them on the list.
Have a great week… and GO CHIEFS!
As we indicated in yesterday’s TSB, here’s the last iPhone availability update we will be publishing. All data is taken from the carrier websites as of Nov 10. If there is a range given for a ship date, we chose the latest date. Here are the takeaways from the latest data:
All iPhone issues have cleared up for Verizon. In a handful of instances, Verizon has better availability than Apple’s online site. As you can see from the above slide, it’s generally a good inventory situation for AT&T as well unless you really want the color yellow.
The iPhone Pro availability is a little bit better for T-Mobile and worse overall for AT&T. Silver seems to be the color issue this week (it was previously midnight green).
The iPhone 11 Pro Max continues to be an issue for T-Mobile, except for the 64GB model (which is likely the least ordered model under the logic of “If you are going to buy the iPhone 11 Pro Max, get 256 or 512GB”). Again, Midnight Green colors have been solved, but to have half of the colors out of stock until (as late as) December 10 is pretty severe. In each of the availability cases described above, customers could go to the local Apple store and activate service on T-Mobile in lieu of waiting a month (the Apple site is showing no backorder of any iPhone 11 Pro Max model).
The bottom line here is that both AT&T and T-Mobile are seeing strong demand for the iPhone 11 and most of this is coming from upgrades and promotional offers. Verizon’s availability likely has something to do with their 5G messaging (the iPhone 11 lineup is not compatible with Verizon’s latest network).
Hope that this information is useful. You can download the information here: iPhone availability as of Nov 10
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.
Link to PDF listing all three models is above.