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The Long, Long Run

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

 

 

The Long, Long Run

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

AT&T architecture slide 2002

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

 

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

TSB Follow Ups

M Claure and J Legere pic

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

 

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

 

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

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

 

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

 

Disney+ Success:  10 Million Customers Day One

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

 

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

 

CBA Breakthrough?  We Should Know Very Soon

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

 

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

$0.01-$0.35                             30%                                     70%

$0.36-$0.70                             50%                                     50%

Over $0.70                               70%                                    30%

 

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

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

 

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

 

Have a terrific week… and GO CHIEFS!

AT&T’s Big Week

opening pic

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

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

 

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

 

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

at&t waterfall chart

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

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

 

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

 

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

AT&T Mobility Results 3Q 2019

 

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

 

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

 

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

 

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

 

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

 

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

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Have a terrific week… and GO CHIEFS!

Verizon, Comcast and Charter 3Q Earnings Review

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

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

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

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

 

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

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

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

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

verizon q3 earnings schedule

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

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

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

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

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

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

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

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

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

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

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

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

 

 

Comcast:  Residential Broadband Dominates – Now What About Wireless?

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

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

comcast q3 earnings schedule

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

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

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

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

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

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

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

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

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

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

 

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

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

charter adjusted EBITDA 3Q 2019

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

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

Next week, we will incorporate AT&T’s Time Warner Cable analyst day, AT&T quarterly earnings, and T-Mobile earnings into the discussion.  Until then, if you have friends who would like to be on the email distribution, please have them send an email to sundaybrief@gmail.com and we will include them on the list.

 

Have a terrific week… and GO CHIEFS!

 

 

 

 

 

 

 

What Matters in Wireline – Enterprise, Expense Management and Extinction

opening pic sept 22Greetings from the Queen City, where the IT scene is red hot even though cooler fall temperatures have finally arrived. I was pleased to be the guest of San Mateo-based Aryaka Networks at the 2019 Orbie (CIO of the Year) awards on Friday.  It was great to catch up with many folks in attendance including Karen Freitag (pictured), a Sprint Wholesale alum and the Chief Revenue Officer at Aryaka.

This week, we will dive into drivers of wireline earnings.  At the end of this week’s TSB, we will comment on several previous briefs (including the AT&T Elliott Memo fallout) in a new standing section called “TSB Follow Ups.” We close this week’s TSB with a special opportunity for reader participation.

Wireline Earnings:  Enterprise, Expense Management, and Extinction

One of my favorite things to write about in the TSB is wireline – that forgotten side of telecom and infrastructure that serves as the foundation for nearly all wireless services.  Wireline is a case study in competition, regulation, cannibalization, innovation, and a few other “-tions” that you can fill in as we explore the following dynamics:

  1. Residential broadband market share (measured by net additions). Before the Sunday Brief went off the air in June 2016, cable was taking more than 100% share of net additions.  This means that customers were leaving incumbent telco DSL (and possibly FiOS) faster than new customers were signing up.  At the end of 2018, cable continued its dominance with 2.9 million net adds compared to 400 thousand net losses for telcos (see nearby chart.  Source is Leichtman Research – their news release is here).  If this trend holds through the end of the month, it will mark 18 straight quarters where cable has accounted for more than 95% of net additions (Source: MoffettNathanson research).

leichtman broadband end of 2018 estimates

To be fair to the telcos, all of 2018’s losses can be attributed to two carriers: CenturyLink and Frontier.  We have been through the Frontier debacle twice in the last three months and will not retrace our steps in this week’s TSB (read up on it here).

But CenturyLink is a different story, with losses coming in areas like Phoenix (where Cox is lower priced), Las Vegas (Cox lower priced except for 1Gbps tier), and legacy US West areas like Denver/ Minneapolis/ Seattle/ Portland (Comcast has lower promotional pricing).  Even as new movers are considering traditional SVOD alternatives like Roku and AppleTV in droves, there’s a perception that the new CenturyLink fiber product is not worth the extra cost.

A good example of the perception vs reality dichotomy comes from the latest J.D. Power rankings for the South Region:

J D Power South ISP ratingsWhile these ratings reflect overall satisfaction with the Internet service, it’s very hard for new products to overcome old product overhang (and DSL experiences can create long memories).

But superior customer satisfaction (749 is a decent score for telecom or wireless providers regardless of product) does not guarantee market share gains.  AT&T (Bell South) has continued to improve its fiber footprint, invested heavily in retail presence, and improved the (self-install) service delivery experience.  Even with that, it’s highly likely that AT&T’s South region lost market share to Comcast (2nd place) and Spectrum (4th place).  Why is a three-circle product outperforming a five-circle product?

The answer lies in several factors:  Value (see comments above about promotional pricing and go to www.broadband.now for additional information), Bundled products (which links back to value – bundle cost may be significantly cheaper), and Legacy perceptions (DSL overhang mentioned above, tech support overhang, install overhang).

For more details, let’s look at two very fast-growing areas:  Dallas, TX and Hollywood at&t pricing vs cable in dallas and miami(Miami), FL.  Nearby is a chart showing online promotional pricing for AT&T, Spectrum (Charter) and Comcast.  There are some differences on contract term (AT&T has contracts in Dallas; Spectrum does not.  Comcast has a 2-yr term with early termination fees to get the $80/ mo. rate for their triple play in Miami).  Both zip codes selected above have over 50% served by AT&T fiber.  AT&T is more competitively priced than Spectrum in Dallas, and extremely competitive with Comcast especially at the mid-tier Internet only level (promotional rate gigabit speeds are $70/ month with no data caps).

With superior overall customer satisfaction and competitive pricing, why does AT&T continue to tread water on broadband and lose TV customers?  Are cable companies out-marketing Ma Bell?  Is there a previous AT&T experience overhang?  Are AT&T retail stores creating differentiation for AT&T Fiber (compared to minimal showcase store presence for Spectrum or Comcast)?

Bottom line:  Cable will still win a majority of net adds despite lower customer satisfaction and higher prices.  Why AT&T cannot beat cable especially in new home (AT&T fiber) construction areas is a function of marketing, operations and brand mismanagement.

  1. Enterprise spending – Did it return to cable instead of AT&T/ Verizon/CenturyLink? We commented last week on AT&T’s expected gains in wireless enterprise spending thanks to the FirstNet deal.  How that translates into wireline gains is an entirely different story.  Here’s the AT&T Business Wireline picture through 2Q 2019:

 

at&t 2q business wireline financials

While these trends are not as robust as wireless and operating income includes a $150 million intellectual property settlement, AT&T management described Business Wireline operating metrics as “the best they have seen in years.”  What this likely indicates is that AT&T’s legacy voice and data service revenue losses (high margin) are beginning to decelerate (at 14.6% annual decline, that’s saying a lot – Q1 2019 decline was 19.2% and the 2Q 2017 to 2Q 2018 decline was 22.0%!).

Meanwhile, Comcast Business grew 2Q 2019 revenues by 9.8% year over year and is now running an $8 billion run rate (still a fraction of AT&T Business Wireline’s $26.5 billion run rate but a significant change from Comcast’s run rate in 2Q 2016 of $5.4 billion).  Spectrum Business is also seeing good annualized growth of 4.7% and achieved a $6.5 billion annualized revenue run rate.   Altice Business grew 6.5% and is now over a $1.4 billion annualized revenue run rate.  Including Cox, Mediacom, CableOne and others, it’s safe to say that cable’s small and medium business run rate is close to $13 billion (assuming 33% of total business revenues come from enterprise or wholesale).  That leaves a consolidated enterprise and wholesale revenue stream of ~ $5.5 billion which is more than twice Zayo’s current ARR.

The business services divisions of cable companies are repeating the success of their residential brethren.  They are aggressively pricing business services, using their programming scale to grab triple play products in selected segments such as food and beverage establishments and retail/ professional offices.  And, as Tom Rutledge indicated in last week’s Bank of America Communacopia conference, they are starting to sign up small business customers for wireless as well.  I would not want to be selling for Frontier, CenturyLink or Windstream in an environment where cable had favorable wireless pricing and the ability to use growing cash flows to build a competitive overlay network.

Enterprise and wholesale gains are important for several reasons.  In major metropolitan areas, segment expansion gets cable out of the first floor (think in-building deli or coffee shop) and on to the 21st floor.  To be able to get there, cable needed to have a more robust offering.   Comcast bought Cincinnati-based Contingent services in 2015, and Spectrum also improved its large business offerings.  They are not fully ready to go toe-to-toe with Verizon and AT&T yet, but with some help from the new T-Mobile (all kidding and previous John Legere lambasting aside, a new T-Mobile + cable business JV would make perfect sense), things could get very difficult for the incumbents.

Moving up in the building is important, but there’s another reason to expand from the coffee shop:  CBRS (if you are new to TSB, the link to the “Share and Share Alike” column is here).  Given that 2-3 Gigabytes/ subscriber of licensed spectrum (non-Wi-Fi) capacity are consumed within commercial offices per month, there’s a ready case for MVNO cost savings as Comcast, Altice, and Spectrum Mobile continue to grow their wireless subscriber bases.

Further, since many enterprises are going to be introduced to LTE Private Networks soon, there’s a threat that Verizon and AT&T (and Sprint if the T-Mobile merger closes) stop provisioning cable last mile access out of their regions and only provision wireless access.  As we have discussed in this column previously, the single greatest benefit of 5G LTE networks is the ability to control the service equation on an end-to-end basis for branch/franchise locations.  It represents a compelling reason to move to SD-WAN, and allows cable to deepen its fiber reach and build more CBRS (and future spectrum) coverage.

Bottom line:  Cable continues to grab share in small, medium, and enterprise business segments as they move from connecting to the building to wirelessly enabling each building.  CBRS presents a very good opportunity to do that.  Even with cable’s entre into the enterprise segment, it will still be dominated by AT&T (with Microsoft and IBM as partners) and Verizon for years to come.

  1. Expense Management and Productivity Improvement. Flat to slowly declining operating costs in an environment where revenues are declining more precipitously is a recipe for increased losses.   Even with some of the capital and operating expense being shared with 5G/ One Fiber initiatives, the reality is that lower market share is leading to diseconomies of scale and both are going up a cost curve right now.

 

That’s why reducing operating expenses is not a spreadsheet exercise – operating in a territory originally engineered for 80-90% market share that is now at 30-40% share requires increased efficiency.  Connecting to neighborhoods is hard and connecting through neighborhoods to individual homes is even harder.  Combine this with a change in technology (fiber vs twisted copper) ratchets the degree of difficulty ever higher.

 

One of the great opportunities for all communications providers is using increased computing (big data) capabilities to quickly troubleshoot issues and recommend remedies.  For example, customers who go online or contact care and are “day of install” should have a different customer service page than someone who has been a 4-month regular paying customer or a 2+ year customer who is shopping around.

 

There’s no doubt that the online environment has been improved for every telco, and also no doubt that many more issues in the local service environment require physical inspection and troubleshooting.  But when telcos move to correctly predicting customer needs through online help 95+% of the time, the call center agent will go the way of the bank teller and the gas pumper:  Convenience and correct diagnosis will trump in-person service.

For those of you who are regular followers of TSB and read last week’s column, there’s also the issue of territory dispersion.  Without retreading the information discussed last week, one has to ask if there are trades to be made in the telco world (or spinoffs) that make sense to do immediately (Wilmington, North Carolina, a legacy Bell South and current AT&T property would be a good example using last week’s map).

Bottom line:  There won’t be any dramatic changes to the wireline trends – yet.  But, as 5G connectivity replaces cable modems and legacy DSL (particularly to branch locations) and as cable expands its fiber footprint to include in-building and near-building wireless solutions (starting with CBRS), the landscape will change.  And there will be a lot of stranded line extensions if wireless efforts are successful.

 

TSB Follow-Ups

  1. Randall Stephenson met with Elliott Management this week, according to the Wall Street Journal. At an analyst conference prior to the meeting, Stephenson offered somewhat of a hat tip to Elliott Management, saying “These are smart guys.” The AT&T CEO also stuck by his decision to move John Stankey into the COO role, noting “if you’re going to go find somebody who can do both, right, take a media company that has transitioned to a digital distribution company and pairing it with the distribution of a major communication company, and you want to try to bring these two closer and closer together and monetize the advertising revenues, all of a sudden, that list gets really, really short.”  If Elliott’s decision to go public with its criticism is based on the Stankey announcement, I wonder how that logic was received in New York last Tuesday.

 

  1. Apple iOS 13 fails again, this time failing to display the “Verified Caller” STIR/SHAKEN (robocall identifier standards) on Apple devices until after the called party has answered. Kind of defeats the point, right?  More in this short but sweet article from Chaim Gartenberg at The Verge – we agree with the T-Mobile quote in the article “I sure hope they get this fixed soon.”  Don’t hold your breath, as Apple is running on its 12th year of not allowing developers to access the incoming phone number.

 

  1. The Light Reading folks have a very good chronicle of what’s going on with CBRS trials here. Sharing can work, but it takes a lot to do it.  The value has to be clearly present to increase carrier attention and participation.

 

  1. Eutelsat can’t seem to make up its mind. On September 3, they dropped out of the C-Band Consortium (Bloomberg article here) and last week they seemed to backpedal based on this FCC memo.  Time for Commissioner Pai to save the day!

 

Next week, we will cover some additional earnings drivers.  Until then, if you have friends who would like to be on the email distribution, please have them send an email to sundaybrief@gmail.com and we will include them on the list.

 

One last request – we are currently on the hunt for some of your favorite titles that chronicle telecom/ tech history.  No title is off limits.  Currently, we have three that have made the cut:

 

Have a terrific week… and GO CHIEFS!

CBRS – Share and Share Alike

opening pic

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

 

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

 

Follow-up to last week’s AT&T article

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

 

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

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

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

 

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

 

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

 

CBRS – Share and Share Alike

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

 

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

 

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

cbrs top 10 slide

 

 

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

 

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

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

 

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

 

CBRS Use Cases:  Not Everyone is Waiting for Private Licenses

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Next week we will provide the first of two third quarter earnings previews, focusing on wireless service providers ahead of the Apple event.  Until then, if you have friends who would like to be on the email distribution, please have them send an email to sundaybrief@gmail.com and we will include them on the list.

 

Have a terrific week!

 

Deeper – Fiber Always Wins (Until it Doesn’t)

Mission Hills notice on Google Fiber

The following articles provide a good overview of the role fiber plays in the telecommunications ecosystem today (there’s some good details on Google Kansas City and Louisville setbacks as well):

  1. An RCR Wireless article that details Verizon’s “integrated engineering process.” It also has some details on the fiber deal with Corning.
  2. Corning (Bob Whitman) and Verizon (Glenn Wellbrock) conversations from YouTube part 1 and part 2.
  3. Altice press release announcing first homes on Long Island to receive 960 Mbps symmetrical speeds for $80/ month.
  4. Google missing their deployment goals for Kansas City, KS and Mission Hills, KS
  5. Telecompetitor AT&T Fiber penetration article in which they talk about doubling market share. The map see in the article (AT&T Fiber cities) is here.
  6. Cincinnati Bell 2Q investor penetration showing that AT&T’s goal of achieving 50% market share is entirely possible with the right content bundles (they are at 44% without the content – see page 7).
  7. Blair Levin’s and Larry Downs Harvard Business Review article on Why Google Fiber failed and how it’s really a success in disguise. Rationalization gone awry.  This might have been the case if their more recent deployments had not damaged their brand.
  8. Local (Louisville Courier-Journal) coverage of Google’s decision to pull out of the Louisville market is here.
  9. Google’s plans to expand their Webpass (60 GHz wireless hub and spoke) service for Multi-Dwelling Units Austin is outlined here.
  10. The Dallas Morning News rant on Frontier’s failures is a classic and outlined here.