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About This Thing Called 5G

opening picture

Greetings from Willard, Missouri!  It’s been a busy independence week on the farm mowing with the brush hog, clearing trees left by recent flooding (Jimmy and yours truly in the picture), and installing a Wilson WeBoost 4G amplifier to improve cell phone coverage for my in-laws.

What is 5G and Why Should I Care? 

I was recently asked to help a large, global conglomerate think about the effects of 5G on their business.  After studying the company for some time, I came to the unsatisfying conclusion that one of two things could occur:  a) The effects of 5G would be minimal to their business (some transaction/process efficiencies), or b) The company would have to change their entire structure, purpose and meaning because of 5G.  The key variable was defining 5G.

Here’s what technology advancements and activities have been associated with 5G:

  1. New spectrum purchases, auctions, and deployments, particularly 24GHz and 28GHz frequencies (Fierce Wireless summary of recent auction results and spectrum here)
  2. Technologies which improve data experiences in certain locations (beamformingmassive MiMOfull duplex, etc.)
  3. Mobile edge computing which places servers closer to wireless customers and enables Cloud Radio Access Networks (which obviate the need to deploy cell site base stations at the cell site in many metropolitan and suburban areas)
  4. New devices that access the new radio frequencies in #1 and could use the new technologies defined in #2 with better computing defined in #3 (an example is the new LG V50 spec for their Sprint device here)
  5. LTE private networks for enterprises (which augment and eventually replace the use of in-building Wi-Fi)
  6. Pricing changes which set a cap on maximum speeds, such as those introduced by the fourth-largest wireless company in the United Kingdom (Vodaphone).  A 5G network with a 2 Mbps throttle – intriguing to say the least
Qualcomm view of 5G

Figure 1: Qualcomm’s view of 5G 

As you read down the list, the trend becomes clear:  5G can represent anything that you (or your agency/marketing arm) want it to be.  It’s the dot.com and e-whatever 20 years ago and the cloud of 10 years ago.  This is not a criticism of the use of 5G as an umbrella term for all things good (and the business justification of new); nonetheless, the examples above highlight the fact that 5G is a multi-faceted, multi-dimensional marketing term as well as a series of technological innovations.

5G can be the justification for wireless carrier or device manufacturer pricing changes (see Sprint’s rule that 5G devices must take a premium plan type, and Verizon’s statements that 5G pricing freezes will only be temporary).  It can be used to reignite/redefine previous business plans (e.g., smart cities, Private LTE, Narrowband Internet of Things).  5G can also be the cure for long-standing regulatory/ social ills (availability throughout rural America, or in underserved urban areas, or net neutrality considerations, etc.).

Confused yet?

The Future of 5G Depends on

After considerable thought, here’s a pretty good summary of what 5G will mean in five years:

More software

Doing more things

Faster/better

I know that the lack of traditional telecom lingo may come as a surprise to many of you who see 5G as an industry project, but let’s explore what low-latency/ high-frequency networks create:

  1. Faster decisions, driven by
  2. Decision making structures (algorithms), powered by
  3. Faster microprocessors, located in
  4. Proximity-based data centers and transmitted through
  5. Concentrated wireless networks

Faster transmission of today’s content just grazes the surface.  Replacing an existing at-scale coaxial broadband service with a wireless variant is not a value-adding strategic cornerstone.  The network is only one component of the experience, and, while immensely valuable, is not the drum major leading the 5G parade.  Software is at the front, supported by hardware which accesses the network.

algebra imageFor example, consider the student who is having difficulty grasping algebraic concepts.  What if tomorrow’s networks and software could detect a pattern of errors (via online homework responses, (lack of) notes or page turns in an electronic notepad/textbook, or other means), match it with a different presentation of the concept, which then allows the child to overcome frustrations and master the material right away?  Even the longest-tenured, best-educated human instructor cannot be trained on every possible array of learning styles.

What’s changed from today’s world?  Nothing, if the student has instant access an instructor who has expert skills to quickly diagnose learning styles and associated remedies.  But that’s a tiny sliver of the population.  The effects of better diagnosis could create tens of thousands of new mathematicians, software developers, analysts, technicians, and scientists.  It could change the global balance of knowledge.

Did a 5G network enable this breakthrough? Maybe (Wi-Fi 6 is equally fast). Without activity monitoring and diagnosis, however, that student might have just given up, or decided her strengths lie elsewhere, or …  Software leads the parade, enabled by hardware which accesses the network.

Upskill Microsoft Hololens pic

Another example is this video from Upskill, a company I got to know several years ago under their previous name (Apex Labs).  They have built software into devices like the Microsoft HoloLens (see last week’s TSB) to ensure a perfect build.  And every rivet, fastener, and connection can be recorded to prove it was built to spec. Entirely possible with Wi-Fi 6, but impossible without the right software.

While written to reflect an earlier network generation, Mark Andreessen summarizes it best in his seminal 2011 article called “Why Software is Eating the World” when he states:

In some industries, particularly those with a heavy real-world component such as oil and gas, the software revolution is primarily an opportunity for incumbents. But in many industries, new software ideas will result in the rise of new Silicon Valley-style start-ups that invade existing industries with impunity. Over the next 10 years, the battles between incumbents and software-powered insurgents will be epic. Joseph Schumpeter, the economist who coined the term “creative destruction,” would be proud.

We are living in that innovative tornado today, and the wind speeds are about to double thanks to lower latency and proximity-based processing.  The winner is not necessarily the fastest or even the broadest network, but the one that increases consistent software performance.

AT&T’s recent blogpost outlining their recent tests with Microsoft Azure cloud and an Israeli-based software company (Vorpal) shows that they get it (an excellent use case).  Verizon’s drone software and advisory company, Skyward (acquired in 2017), has partnered with Unleash live to quickly identify infrastructure defects (more in this Medium blog post).  A slightly different strategy, but Big Red also gets it.

More software…  doing more things… faster/better.  That’s the result of 5G.  That’s what it’s all about.

Next week, we’ll untangle the Dish/T-Mobile/Sprint ball of yarn (assuming CNBC’s reporting is accurate).  Until then, if you know of someone who would be interested in receiving TSB, have them drop a quick note to sundaybrief@gmail.com and we will add them to the distribution (or they can go to www.mysundaybrief.com for the archive and a new feature called Deeper which will have a complete listing of all cited sources).

Thanks again for your readership, advice, and recommendations.  Have a terrific week!

Looking for Meaning in Verizon’s Quarterly Earnings

thunder over louisvilleApril greetings from Louisville (last night’s Thunder Over Louisville pictured), Dallas, and, by the time most of you read this, Paris.  There has been no verdict yet from the Appeals Court on the Open Internet Order (kind of surprising), so this week’s column will focus on Verizon’s earnings.  However, to get started, we’ll talk about the latest foray from Comcast in the set top box kerfuffle.

 

Comcast’s Xfinity Partner Program Announcement and the FCC’s Reaction

This week, Comcast announced an alternative to the FCC’s set top box mandate: the development of the Xfinity TV Partner Program (and App).  This enables Comcast subscribers to access their programming from Roku boxes, Samsung Smart TVs, and other devices that enable access (Comcast even committed to customizing their app for devices that do not support HTML5).

 

In the aforementioned blog post, Comcast has an interesting reference to its search feature:

 

As part of the Xfinity TV Partner Program, Comcast is prepared to provide consumers with a capability to search through Comcast’s video assets from a device’s user interface with playback of a selected asset via the Xfinity TV Partner app.  However, in order to provide a cohesive customer experience, such integrated search needs to include more than just this app; it must also include similar data from other video apps as well.

 

Comcast appears from this paragraph to not only be providing an alternative to the $230/ yr annual expense many pay for set top boxes, but also appears very open to allowing other video content to be shown alongside their app.

roku-4_colorcorrectedIn a related announcement, Comcast and Roku (see nearby picture) have joined forces to bring the Xfinity TV app to the Roku player and Roku TV.  As we discussed in our first column on the topic, Roku has a meaningful market share in the streaming device market alongside Amazon, Apple, and Google (see nearby chart).  Enabling each of their devices with Comcast’s app will reduce the number of Xfinity set-top box rentals that are needed.  This also might allow expansion of existing video services to rooms where set-top boxes do not exist (Time Warner Cable used this tactic when launching their Roku partnership in 2013 and has a very unique trial going on with Roku in the NYC area described here).

 

Comcast enabling Xfinity without a cable box; Time Warner trialing plans that include free Roku equipment instead of a traditional cable box; Suddenlink actively offering TiVo in lieu of their cable boxes.  All of these innovations should make the FCC happy, right?  Their regulatory initiative forced Comcast’s hand and now consumers will have a choice between a cable box and more innovative solutions.  Here was the FCC’c comment on the Comcast announcement to electronics publisher CNET:

 

While we do not know all of the details of this announcement, it appears to offer only a proprietary, Comcast-controlled user interface and seems to allow only Comcast content on different devices, rather than allowing those devices to integrate or search across Comcast content as well as other content consumers subscribe to.

 

moving goalpostsThis seems to indicate a “goal post move” by the FCC.  President Obama clearly stated that the FCC was trying to solve the $230/ yr set top box rental problem in last week’s weekly radio address (device competition is the basis of section 629 of the 1996 Communications Act which gives the FCC the authority to issue the NPRM).  Now that Comcast has announced their willingness to allow Xfinity content in a manner that is not tied to owning/renting a Comcast box, but the FCC has redefined the problem to be unintegrated content and the lack of comingled choices.  Simply put, the FCC does not believe that Comcast, Time Warner Cable, Charter, or their partners Tivo or Roku solve the content organization problem, which has replaced the set top box affordability problem.

 

Bottom line:  Comcast’s actions are a step in the right direction.  The FCC is wrong to move the goalposts, and it’s highly unlikely that they have the authority to define how Electronic Programming Guide content is organized.  They should let the market determine how channels are presented (if you do not have a Roku or Tivo box, I would urge you to find a friend who does, look at their experience and imagine a Comcast TV channel alongside the current pay and free choices).

 

Looking for Meaning in Verizon’s Quarterly Earnings

verizon_2015_logo_detailVerizon reported earnings (link here) that generally met expectations on Thursday.  They have already completed several items on their 2016 “To Do” list.  Here’re some takeaways on their earnings release:

 

  1. The Frontier transaction is closed. As a result, debt is being reduced, and cost structure rationalization is continuing for the remaining wireline unit (Verizon reported that the EBITDA margin for the wireline unit without the divested properties is 19% – see nearby chart).  Realizing a lower cost structure has been a long-time initiative for Verizon, but the divestiture of a more profitable unit clearly brings the labor cost challenge into focus.  Less debt, but more sales required in a geography that is growing more slowly than in the South and West.  Reducing the cost structure is going to be a big challenge, and the cost attribution to wireless/ 5G is likely how they will achieve it (see point #2 below).
  2. The XO acquisition is going to provide Verizon with a lot of intra-city fiber. In discussing the Boston FiOS buildout, CFO Fran Shammo stated that $300 million of incremental capital expenditures would be needed over the next 5-6 years to complete the footprint expansion.  That’s a rounding error to Verizon’s overall annual expenditures, likely attributable to both 5G and FiOS, which should help Verizon’s ability to competitively price services in Boston (building out Baltimore and Virginia will likely require more new capital due to XO’s lack of fiber in these markets).
  3. Wireless customers are holding on to their smart devices longer than they did during previous years. Verizon’s postpaid upgrade rate was 5.8%, down from 6.5% in Q1 2015 and lower than most analysts expected.  This had a mixed benefit:  Fewer upgrades helps churn (0.96%, a strong figure), but fewer Equipment Installment Plan upgrades lowers in-quarter revenue.  Verizon also commented that more wireless subscribers renewed their devices on traditional subsidy-based plans than they expected.
  4. “The Tracfone brand is our prepaid product.” That’s a huge admission from Verizon and perhaps the first time they have been that bold and clear.  Here’s the full quote from Fran Shammo in response to a question about AT&T and T-Mobile’s prepaid gains:

 

Our retail prepaid is above market. We’re really not competitive in that environment for a whole host of reasons and it’s because we have to make sure that we don’t migrate our high-quality postpaid base over to a prepaid product.  If you look at the competitive nature, they are doing it with sub brands. They are not really doing it with their brands. And quite honestly, we use the Tracfone brand as our prepaid product.  Tracfone has been extremely successful for us. It’s not something that we disclose any more on reseller, but it continues to increase on the high-quality base of Tracfone, so that’s really where we use and go after the prepaid market. More to come on this during the year, but currently that’s how we operate under the prepaid model.

 

This alliance makes a lot of sense.  AT&T is likely to bundle Cricket with DirecTV in the (near) future, and T-Mobile is using MetroPCS to take share from Boost/ Virgin (Sprint) and Tracfone, so the opportunity to have a strong relationship with any particular carrier is limited.  While not surprising to those who follow the wholesale wireless industry, it was a pretty big statement from Verizon.  It will be interesting to see if America Movil, the parent company of Tracfone (and a direct competitor to AT&T Mexico), views the relationship in the same manner.

 

  1. Verizon is aggressively pursuing new content acquisition. Their strategy, which involves investing in content creation companies with well-known media outlets such as Hearst (see announcement here), is in its infancy.  But Verizon is not playing for second place.  On the conference call, they announced that they were focusing on leading mobile-first content that did not originate in the home.  Awesomeness TV (Verizon now a 25% owner) is the #1 digital brand for females ages 12-24 with 160 million views and 53% growth, and Complex TV (acquired with Hearst – see announcement link above) is the #1 digital brand for males aged 18-24 with monthly unique viewers of 54 million and 300 million total views per month.

 

Since many teens do not watch content in the den or family room, this is a different but wise strategy nonetheless.  For most in this demographic, the screen in their pocket is their TV.

 

Here’s the rub:  While available to all wireless subscribers, Go90 isn’t zero-rated unless you are a Verizon postpaid wireless customer.  Perhaps the announcement to which Verizon was alluding in the quote above with Tracfone was a deal that zero-rates Go90 content.  That would be a game changer.

verizon lead slideVerizon is changing.  They led off their investor presentation with the chart to the right.  While this may seem like déjà vu for those of us who remember the AOL/ Time Warner merger, it is different.  Mobile advertising and targeting did not exist, and Time Warner Cable did not have a national wireless footprint capable of distributing zero-rated content to 100 million existing customers.  Verizon has the unique opportunity to create a vertically integrated entertainment company, and, unlike AT&T, will emerge as a focused challenger.

 

History is not kind to transformations like the one Verizon is pursuing.  Regulations change (although Title II freedom from the anticipated Court ruling would be a plus to this strategy), organizational catharsis sets in, and cost challenges tend to take these ambitious efforts off track.  As soon as Verizon shows signs that their content strategy is impacting their wireless gross additions, we at the Sunday Brief will become believers.  There are many risks to this strategy, however, and we remain skeptical.

 

Thanks for your readership and continued support of this column.  Next week, we’ll compare AT&T and Verizon’s wireless and broadband results as well as examine the implications of the Open Internet Order ruling if it is released.  Until then, please invite one of your colleagues to become a regular Sunday Brief reader by having them drop a quick note to sundaybrief@gmail.com.  We’ll subscribe them as soon as we can (and they can go to www.mysundaybrief.com for the full archive).  Thanks again for your readership, and Go Royals and Sporting KC!

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

 

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

 

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

 

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

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

 

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

sprint morningstar debt maturity picture

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

Three Headlines that will Impact First Quarter Earnings

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

 

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

 

Value Tracker 2016: Dividends Are Back in Fashion

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

YTD gains.emf

 

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

 

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

 

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

 

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

 

Three Headlines That Will Impact First Quarter Earnings (Wireless)

 

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

 

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

 

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

t-mobie churn history

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 


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

 

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

 

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

 

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

 

Bloomberg interview – In the Loop with Betty Liu (August 11)

patterson picture

 

This morning’s interview with Betty Liu on Bloomberg’s “In the Loop with Betty Liu” is here.  Many of the same points emphasized in the Sunday Brief are in the interview.  Marcelo, you have your work cut out for you.  Best of luck!

Also, don’t post here, but if you have tips on how I could have a better interview presence, I’m all ears.

 

 

The Value Creation Gap, Part 3 – Four Wireless Industry Trends

dallas weather June 22

** Editor’s Note:  This was originally sent to SB readers on June 22, 2014 **

June greetings from Dallas, where, as the picture shows, we are enjoying needed rain.  Thanks for the many comments on last week’s column.  Many of you shared your experiences with Google Fiber (those of you who have it in Kansas City don’t appear to be going back to cable or U-Verse in the near future), while others accused me of oversimpifying in-building wireless efforts (admittedly, I did leave the concept of obtaining Building Authorization Agreements out of the Brief.  They are hard to get and involve specialized real estate/ legal expertise).  Thanks for your readership, and please keep the comments coming!

Over the past two weeks, we have written about major changes in the telecom industry, including:

  1. The half trillion dollar value and multi-hundred billion dollar capital shift from network to software providers
  2. The threat of Google as a new entrant to the residential and small business markets
  3. Fundamental architecture changes that will take place as content is pushed to the edge
  4. In-building data capacity needs will accelerate fibered metro building deployments (which drove Level3 to offer to buy tw telecom this week for 12.5x EBITDA).

The last three points are “take it to the bank” certainties that will impact some parts of the telecommunications industry more than others.  Amid the hype, remember this:  If one carrier can deliver consistent experiences while outside, en route, near building, and in-building, all of the other carriers will need to follow suit.  The top three carriers (Verizon, AT&T, and Sprint) are driven to do this because most of their current data pricing plans are capped.  Not only is third-party Wi-Fi offloading viewed as inferior and inconsistent when compared to the increasing affordability of in-building small cell solutions, in-building Wi-Fi now has become a revenue threat to the carriers.

There are many drivers of change in the wireless industry, but four deserve special mention:

  1. The ripples of T-Mobile’s Uncarrier strategy are beginning to be seen throughout the industry.  First, it was the introduction of Equipment Installment Plans (EIP), and the separation it has driven between equipment sale and service revenue quality.  As AT&T, Verizon, and Sprint transition their bases from traditional subsidy (which, at the end of the two-year term and beyond, can have attractive economics) to EIP models, the pressure on service revenues (particularly data ARPA/ ARPU growth) becomes greater.  As we covered in Sunday Brief Q1 earnings reviews, the transition of T-Mobile’s base will be nearly complete by the end of 2014.

The most important thing to remember with these shifts, however, is the increased flexibility it provides the incumbent providers’ base of customers.  Under the traditional $325-350 subsidy model termination penalty scheme, the perception among the base was that they were “locked” until the end of the two years.  None of the new plans carry two-year contract terms, and, as Sprint and T-Mobile have shown, they are willing to pay multi-hundred dollar termination fees to drive up gross additions .  A more unstable base should have AT&T and Verizon on edge.

To add fuel to the fire, T-Mobile will launch a new program  to the AT&T/ Verizon base this week.  For a $700 hold on your creditt-mobile test drive picture
card, T-Mobile will send you a new iPhone 5s for a free one week test drive (I have confirmed with T-Mobile that the one week starts upon iPhone receipt – something to consider when you sign up).  This is not a plan that is aimed at the traditional T-Mobile base, but one that gets current (Sprint/AT&T/Verizon) iPhone 5s users into a T-Mobile store to have a conversation.  (If the customer is a current iPhone 4s user, they will receive a double benefit due to the 64bit processing and LTE capabilities inherent in the 5s – a very clever move on the part of T-Mobile).

Will this plan have the same effect as equalizing the cost of an Android Wi-Fi only tablet?  Likely not.  But it could erase perceptions of poor network coverage for some.  While many see this move as more “Carrier” than “Uncarrier”, I see this as Part 1 of a multi-part plan to reintroduce the T-Mobile network (voice, text, data) to millions of skeptical AT&T and Verizon customers (some of whom may have previously been T-Mobile customers).  At worst, this program will provide real-time feedback on their network improvements and identify coverage gaps (and hopefully reiterate the need to begin a substantial in-building coverage initiative for T-Mobile hopefuls who are captive to multi-story living/ working environments).  At best, it will propel 2-3 million gross additions through the end of 2014.

 

  1. The drive for spectrum outside of the FCC auction process will continue.  There have been a lot of discussions this week about Verizon’s interest in Dish network spectrum (this article places a $17 billion value on the asset, and it’s very likely that Verizon’s interest is focused on Dish’s AWS-4 holdings as opposed to the 700MHz spectrum band), and also T-Mobile’s interest in acquiring additional 700 MHz A-Block (a.k.a., “low band”) spectrum from the likes of Paul Allen’s Vulcan Ventures (who holds the Seattle and Portland licenses) and spectrum management companies King Street LLC and Cavalier Wireless (the full list of original A-Block winners can be found here).

We have already seen AT&T actively pursuing spectrum purchases since 2012 in the 2.3 GHz/ WCS band (see here for their Sprint spectrum purchase that escaped most media headlines), and this week Sprint announced their first wave of rural partnerships which will leverage their Tri-Band capabilities.

With the frequency-sharing rules of the upcoming AWS-3 auction, and the “reserved/ unreserved” designation for the 600 MHz auction discussed in a previous Sunday Brief, is anyone surprised that unrestrained and adjacent spectrum would be interesting to larger carriers?  Absolutely not.  Announcements serve to entice more broadcasters to participate in the 600 MHz auction process, and hopefully keep additional regulations to a minimum.

Interestingly, if there are a wave of spectrum sale transactions prior to the end of the year, look for new categories of bidders (e.g., non-traditional wireless providers) to emerge for the licensed spectrum.

 

  1. Consolidation efforts will fail, not because of Sprint’s lackluster efforts, but because of T-Mobile’s unbelievable success.   In second quarter earnings, we will see the full fruits of T-Mobile’s Early Termination Fee buyout initiative announced in January.  Surprisingly to most (although not all), T-Mobile’s results will equally impact Sprint and AT&T (given the process ease of SIM-card swapping between AT&T and T-Mobile, this might be viewed as a slight victory for AT&T).
sprint vs tmobile postpaid sub comparison

T-Mobile Closing the Postpaid Gap Vs Sprint

As we have shown in previous Sunday Briefs (see picture), the retail postpaid gap between T-Mobile and Sprint is shrinking (if one exists in retail prepaid after 2014  I’ll be very surprised).  The eleven million subscriber gap at the beginning of 2013 could be as small as four million as we exit 2014.  And, considering the composition of T-Mobile’s (smartphones) vs. Sprint’s (tablet) net additions, the revenue gap will be even smaller.

While there will be many traditional regulatory concerns (link to the Herfindahl index definition is here), the trends beg the question “Why should T-Mobile take on Sprint?”  Does Sprint’s base of customers provide unique differentiation (and, given a large portion of the base is still on unlimited and unthrottled LTE data plans, can the value of the customer base increase)?  Does Sprint’s base allow T-Mobile to build unique capabilities in the enterprise segment (which Sprint largely abandoned in 2013 to focus on small and medium customers)?  Can Sprint out-innovate T-Mobile with a new management team (or, as one of you wrote recently, “Where is the Sprint problem – with the quality of the clay or with the potter?”).

Time is not on Sprint’s side:  Service revenues are shrinking, management is leaving, and customers (particularly Corporate Liable enterprise customers) are questioning.  No doubt, there is a value to scale, but T-Mobile is worth much more than $40/ share in a couple of years without Sprint.  Could a cash infusion from Comcast/ Time Warner or a cable consortium be a viable alternative?  Does T-Mobile even need cable as a strategic investor?

Consolidation makes good headlines, but every month that goes by without an announcement opens up better alternatives for T-Mobile than Sprint (and makes the “Why?” question more difficult to answer).  Remember – at the beginning of 2006, Sprint Nextel, AT&T Wireless, and Verizon were basically the same size.  One non-traditional strategic partner/ investor could reset the equation for T-Mobile and the industry.

 

 4. The cable industry (as opposed to FiOS or U-Verse) will unveil Wi-Fi capabilities in 2015 that will be easier to use and intensify the battle for data in the home and office.  The blind spot in wireless carrier strategic plans is cable.  Their Wi-Fi efforts are very close to tackling the issue of in-home (and in-office) data usage.  The rollout of an additional 100MHz of 5GHz Wi-Fi capacity will also fuel the bandwidth fire.  More to come on this in a future Sunday Brief, but, given the arguments presented above and in previous analyses, cable would easily eliminate 10-20% of the data upside from the wireless carriers in 2015.  (Editor’s note:  for a view of the extra expansion from the cable industry’s point of view, check out this CableLabs blog post).

 

These are a few of the issues wireless service providers face, but they cover nearly every aspect of the business environment:  non-traditional competitors presenting real substitutes, traditional competitors redefining the buying process, increases in supply, new regulations, and the increasing sophistication of smartphones and tablets are but a few of the dynamics that will be discussed around the strategic planning table.  Who wins is anyone’s guess.  But every carrier will attempt to move the needle.

In other important news this week, we do not have space to do a full analysis of the new Amazon smartphone (we will try to tackle the new Fire Phone in depth next week).  In the meantime, check out two in-depth reviews here and here, and an excellent interview with Ian Freed from Amazon here.

Have a terrific week!