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We continue to monitor iPhone availability (backorder by model, memory size, and color) in conjunction with our partnership with Wave7 Research. A link to the PDF can be found at the end of the document
As most of you will recall, we had significant shortages of most models in the first weeks of sales (late Sept/ early October). These shortages have continued with T-Mobile for the iPhone 11 and some of the larger memory sizes of the iPhone 11 Pro and iPhone 11 Pro Max. Given T-Mobile’s marketplace attraction, this is not too surprising, although continued shortages of the higher-end models (T-Mobile requires an up front payment on all sizes of the iPhone 11 Pro and iPhone 11 Pro Max) are a bit surprising. We would attribute some of this to supply chain conservativeness, although that should have been alleviated by now. In reality, it’s probably a combination of great sales, a robust economy, and supply chain conservatism.
What is very interesting is the higher likelihood of backorders at AT&T versus Verizon. Both have long histories with Apple (especially AT&T) and neither tends to run a backorder deficit after 6+ weeks of sales (due to sheer size). AT&T seems to be experiencing a larger number of upgrades (and, due to a higher mix of Apple devices vs Verizon, a small change in upgrade rate can impact total device volumes).
Bottom line: T-Mobile’s backlog is primarily iPhone 11 and should be corrected by Thanksgiving. No backlog at Verizon (no surprise given no 5G). AT&T should continue to be watched very closely.
Link to PDF listing all three models is above.
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:
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:
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, broad, 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 Bellevue
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 firstname.lastname@example.org and we will include them on the list.
Have a terrific week… and GO CHIEFS!
Greetings from Lake Norman/ Davidson, North Carolina where everybody is working (including the neighbor kid, Caleb, pictured with the Editor and yours truly). This week, we’ll look at two studies that examine data usage, and try to deftly explain AT&T’s efforts to improve their cost structure and competitive cloud position. But first, a follow up from last week’s column.
Follow-up Idea to the Apple Card TSB
I did not anticipate the overwhelming response the Apple Card TSB would receive (Craig Moffett did a mid-week post on the concept and CNBC picked it up here). I have had about a dozen in-depth conversations on the Apple Card TSB this week with several of you and I think we have come up with the ideal suggestion for Apple: 2x Daily Cash towards your monthly phone payment. So, if you get 2% back from using Apple Pay (say $2 on a $100 grocery purchase), that would become $4 towards your monthly phone installment. There could also be an incentive to pay the phone installment first or sooner.
This promotion would reward existing Apple users with a new phone just from using Apple Pay (or buying other products from the Apple family, or just using the physical card), and would be a way for existing Android users to make the switch to Apple for a discount (or to lessen the blow of being underwater from a low trade-in value). The opportunity to “earn” your way to a free iPhone increases Apple Pay (or card) usage, which increases value, etc. And, customers would have the ability to worry less because their phone is never locked to a wireless carrier. Not that the marketing department at Apple needs any help, but if this ends up being the incentive, you heard about it first in TSB.
There’s a Deeper post on the Apple Card that might be very useful for those tracking the topic closely. Thanks for all of the ideas and please keep them coming.
Two “A Ha” Reports This Week Generate Minimal New Insights
Meanwhile, we had two “a ha” reports come out this week. The first was a supposed “scoop” from the Wall Street Journal that customers were being duped by their internet service provider (AT&T, Comcast, Time Warner Cable, others) into paying more for higher throughput speeds and receiving nothing in return. This was not a passing consumer interest story, but had substantial article placement, a video, and even a podcast to support it. (Both the video and the podcast take more time to analyze the complete array of things that could contribute to slower speeds in the home, such as interference or neighborhood congestion, and, inadvertently, make a very strong yet indirect case for paid prioritization).
At TSB, we seek first to understand, but at the end of the day, it’s very difficult for us to have as much excitement as the Wall Street Journal did about possible overpayment for the following reasons:
- The consequences of paying too much for home broadband are not substantial. Analyzing whether customers are over-insured on their home or auto insurance is likely to have 10x more impact than the $10-20/ month being paid for a premium tier. Consumers should spend their time wisely.
- Pursuing an alternative to your current speed (buying a premium tier) usually carries no contract and can be immediately evaluated. Most ISPs do not have a change fee.
- The sample size used in the article is not large enough to make a national conclusion (34 multi-streaming tests with a majority made in New York City is good to know, but not conclusive that Charlotte or Phoenix or Tampa customers will have the same experience).
Bottom line: There’s nothing wrong with 1Gbps speed even if you don’t need it. There’s also nothing wrong with buying the nearby Dodge Challenger SRT Demon (840 hp – don’t we all need one?) if you can afford that. Faster Internet speeds from your ISP could help, and so could a new Access Point or Cable Modem.
The second study that came out this week deserves more attention because of its sample size and implications to the industry. The University of Massachusetts and Northeastern University used a mobile app called Wehe to track the Internet usage patterns of 126,249 mobile users over several months (over 1 million samples). The summary (which is not surprising to most cellular users) is that average speeds for popular sites such as YouTube and Netflix are slower than expected. Here’s a summary chart of the findings for AT&T and Verizon (June 11, 2018 is the day that Net Neutrality rules were made optional) :
What this shows for Verizon is precisely what we discussed in last week’s TSB: 480p customers get consistent YouTube data throughputs at 1.9 Mbps, and 720p customers receive YouTube data throughputs at 4.0 Mbps. This is consistent with their advertised plans (why NBC Sports and Vimeo are not included in the throttle was probably the topic of several Verizon Wireless staff meetings this week). I am sure if they were to upgrade a device to 1080p throughout, they would have a third tier that shows around 8-9 Mbps. For the record, AT&T has disputed the findings and CTIA in 2018 issued a statement disputing the findings.
Bottom line: If you want video resolution that matches the maximum capabilities of your smartphone, you might have to pay more. To last week’s comment, this could be a differentiation point for one of the challenger carriers (e.g., T-Mobile resuming their un-carrier ways and making 720p or 1080p the new “basic” video viewing tier).
AT&T’s Herculean Lift
Condensing AT&T’s Network and Business strategies into one TSB is a challenge because of the breadth of problems they are attempting to solve. Unlike the AT&T of the 1990s (more focused on communications innovations like the Internet and mobile), this generation’s AT&T is much deeper and comprehensive (focusing on information delivery, relevance, timeliness, analysis, and action).
It’s important to remember that AT&T as we know it today is really a 12+ year-old company. BellSouth was formally acquired at the end of 2006 and with that came the formation of “The new at&t”, replacing Cingular Communications. That was followed by a substantial network integration project which ended in 2009. While we think about AT&T as a legacy brand, the common platform that we see today is only a decade old.
Since 2009, it’s been a wild ride for wireless:
- 4G LTE services have been introduced and run their product life cycle (with network traffic growing 40-60X over the decade)
- Smartphones and tablets have become the primary source for information retrieval and entertainment
- Many-to-many communication has become a global standard thanks to social networks
- Commerce and mobility are inextricably linked
- Wireless Machine-2-Machine (screenless) devices have produced an enormous amount of data and dramatically improved utility and productivity
As we discussed in a TSB a few weeks back, mobile growth contributed to fiber infrastructure growth. More towers and small cells spawned additional conduits, trenches, and pole attachments. All of this data needed to be stored and processed, and server farms led to cloud computing sites and eventually hyperscale data centers. The infrastructure and mobile landscapes changed dramatically with LTE network demand.
What didn’t change as quickly were the network operating systems and business processes that determined the efficiency and profitability of AT&T. Integration was the exception rather than the rule, data needed to solve customer problems was available to some departments and not to others and obtaining merger synergies by negotiating better rates with the same menagerie of vendors (often with extended terms) made breakthrough change harder to achieve. Growth was hindered by incompatible product roadmaps and the quantity of equipment required to accommodate data growth was becoming untenable. Something had to give.
In 2013, AT&T began the painstaking process of separating computer processing from separate software development/ integrations for each of its network vendors with the introduction of Domain 2.0 (see whitepaper here). The picture below from the whitepaper summarizes AT&T’s direction and provides a good roadmap for their recent Microsoft, IBM, and Dell announcements:
Routers (Cisco and Juniper being AT&T’s main providers) and optical infrastructure (Ciena and Cisco) were the first focal points of Domain 2.0, and it manifested itself in the creation of a mobile packet core. Key Domain 2.0 vendors as of the end of 2015 were Cisco (via their Tail-F Systems purchase), Ericsson, Nokia (with Alcatel/ Lucent), MetaSwitch (private UK-based company), Affirmed Networks (Evolved Packet Core or EPC), Amdocs, Juniper, Fujitsu, Brocade, and Ciena. There will be others as this new platform makes it much easier to attract new entrants.
Being able to separate operational instructions (core optical equipment and routing functions – the “do this/ do that”) from monitoring, alerting, and change management functions, and then standardizing the structure of the latter across the vendors mentioned above is no small task. All of that had to be done (or at least close enough to completion) to have the Microsoft/ IBM and Dell announcements. Here’s a brief summary of what each does:
The IBM agreement takes the AT&T Business’ internal application infrastructure and moves it to the IBM cloud (this will be a consolidation from multiple providers). As a reminder, IBM’s acquisition of Red Hat allows it to service hybrid cloud configurations. Much of the NFV Infrastructure Cloud will move to IBM. In turn, IBM runs a very large cloud business for third-party customers (top part of the diagram). This moves the network closer to IBM’s (particularly AI or Artificial Intelligence) software.
It makes a lot of sense moving internal application infrastructure to IBM given the strong network relationship the two companies have had for two decades.
The Microsoft agreement takes non-network infrastructure applications and moves them to the cloud. Microsoft is another very large cloud provider but also the developer of Windows, Bing, Office 365, Skype, and Xbox software (Microsoft’s IPTV platform, Mediaroom, was sold to Ericsson in 2013). It gives Microsoft an easy path to both Mobile Edge Computing (MEC) and low latency network APIs. Unlike the IBM agreement (which appears to have a heavy AT&T Business focus), the Microsoft agreement appears to be more open-ended. Xbox wins in a 5G world that’s also tied to AT&T Fiber homes. So does Skype on mobile, desktop, and tablet applications. More video and less latency demand a different way of thinking about network management. Microsoft will help push the product envelope in the home and in the workplace.
The Dell agreement brings the Austin-based company into Airship (an organization governed by the OpenStack Foundation), described as “a collection of loosely coupled, but interoperable, open source tools that declaratively automate cloud provisioning and life-cycle management utilizing containers as the unit of software delivery.” AT&T needs more network edge capacity flexibility and is engaging Dell to help them (via Airship) improve network server delivery. More details on the agreement can be found in this Fierce Telecom article.
Bottom Line: AT&T’s July and early August announcements show their early hand cloud and edge technology partners. They have been at the leading edge of Network Function Virtualization (NFV) and Software Defined Networking (SDN), and are finally bringing together all of their infrastructure platforms into a common architecture. This is the most efficient (really the only) way to enable rapid, profitable local growth. It will be interesting to see how other carriers (specifically Verizon) follow AT&T’s lead.
Next week, per many requests, we will be discussing the role of Citizens Band Radio Services (CBRS) in the communications landscape. Please note that next week’s TSB may not be delivered until Sunday evening due to the Labor Day holiday.
Until then, if you have friends who would like to be on the email distribution, please have them send an email to email@example.com and we will include them on the list.
Have a terrific week!
The following articles provide a good overview of the Apple Card and the possible role it could play in the disintermediation of traditional wireless carrier phone payments. Please note: This is an emerging trend and not a “done deal” and it’s likely that this thread will be updated several times in the next few months. Look for more when Apple launches their next generation of iPhones, likely in September:
- The Consumer Financial Protection Bureau’s (CFPB) report on the state of the consumer credit market is discussed in this week’s TSB. Very useful information, although it’s a bit dated (2016). Link to full report is in the article and also here.
- Link to the actual announcement of the Apple Card last March is here. Apple Pay/ Apple Card discussion starts at 23:59.
- CNBC article from August 9 describing the fact that Apple was offering the Apple Card to as many current Apple users as possible. Goldman Sachs is applying many learnings from their Marcus (consumer banking) product to make the Apple Card as broad as possible.
- Ken Segall’s blog post “The Ghost of Apple Card Past” that is referenced in TSB is here.
- Bloomberg article that explores Apple Card’s Terms and Conditions and reports that Apple may have additional financing options in mind with this product.
- Wall Street Journal review of the Apple Card (detailed and thorough). A subscription may be required.
- To get an idea of where Apple Card could go, have a look at the current My Best Buy financing options. Remember – Best Buy is not a manufacturer – Apple should be able to provide even better offers.
- Mastercard CEO Craig Vosburg CNBC interview on the Apple/ Goldman Sachs/ Mastercard relationship is here.
- CNBC article quoting yours truly as well as Craig Moffett on the impact the card could have on the carrier community is here.
Greetings from soggy Atlanta, mild St. Louis, and red-hot Dallas. I took this picture Friday morning to remind us all of the value of entrepreneurship. eTrak, a PAG client, was in the process of readying a multiple hundred-site order, and had to move into the Board Room to finish up the process to hit the customer desired due date. “These schools want our product badly,” said the eTrak President Bill Nardiello. The excitement yet exhaustion of the team showed early Friday morning – it’s likely they were there through the night to meet the shipping deadline.
This is why Adam Smith classified entrepreneurship as one of the factors of production (along with land, labor and capital). Someone has to take the first step. In personal and commercial asset tracking, eTrak took the risk and is now beginning to reap the rewards. Many of you are probably remembering a similar time in your business right now – and smiling.
I also led with the picture because we are discussing the value of a good value this week and the possible implications for AT&T. Nowhere else was this more apparent than in Google’s launch of their Chromecast product (more on the product including a cool commercial here). For those of you who missed the announcement and overall hoopla, Google offered Chromecast + three months of Netflix for $35. The Netflix service could be applied to new or existing service. Predictably, many current Netflix customers saw the device as an $11 computer-to-TV connection product as a result.
The results were astounding. Amazon: Out of Stock. Best Buy: Out of Stock. Google Chrome Store: Ships in 3-4 weeks. The sellout happened in days (really hours), not weeks. It happened after all of the Netflix promotional coupons had been used up, so most buyers were paying a full $35 for wireless/ cordless streaming. It was kind of Black Friday meets mid-July doldrums. We needed something (other than Windows RT clearance sales) to get excited about this summer, and Chromecast was it.
On top of this, Apple announced earnings this week. If you read their conference call transcript (as well as that of Verizon Wireless), it’s very apparent that the iPhone4 (free with 2-year contract at Verizon, AT&T, and Sprint) is an important introductory product to new smartphone users. While Apple focused their conference call comments on the value being generated abroad from the pre-paid/ no contract developing world (where 3G networks are the norm and LTE is emerging but not ubiquitous), it’s very evident that even in North America, the value of a good value (free iPhone 4 devices with a corresponding 2-yr contract) is very important.
This concept is not new if you work for Amazon. The Kindle and Whispernet products were based on the value of a good value mantra – just look at all of the price reductions that have occurred on the standard Kindle hardware product. Amazon bundled the cost to the carrier to download a book into its price – this was a radical concept in 2007. The carriers (Sprint and later AT&T) priced services to Amazon at a wholesale or per kilobyte level. If the Kindle had to carry a separate MRC because of the wireless carriers’ historical bias to sell subscriptions, it would never have become the electronic reading standard.
The Amazon model has eluded tablets and laptops. No one appears willing to take the risk and embed a wireless carrier chipset in every new Google Nexus 7 (a stunning device, BTW, and going on my wish list). With the advent of shared plans, wouldn’t this be the time to try one embedded SKU? Maybe with just an LTE as opposed to a 2G/3G/LTE integrated chipset? Would the value of “free” carrier connectivity drive additional postpaid connections and shared plan usage?
With this lingering question, we turn to AT&T’s earnings which were announced Tuesday afternoon. AT&T had a very good quarter with 551,000 postpaid net additions, with nearly 75% of that total being tablets. In addition, they added 484,000 connected devices, the strongest showing since the end of 2011. 884,000 total net additions have no voice or text ARPU.
With the Sprint iDEN network turndown at its last (and heaviest) quarter, it’s highly probable that absent the iDEN network bluebird and tablet additions, AT&T would have posted negative postpaid net adds for the quarter:
AT&T reported retail postpaid net additions: 551,000
AT&T reported postpaid tablet net additions: 400,000
Retail postpaid net additions less tablets: 151,000
Est. iDEN net additions: 300,000
Retail postpaid net adds less tablets and iDEN (151,000)
Based on Verizon Wireless’ comments on the relative insignificance of iDEN to their retail postpaid gross adds picture, the 300,000 iDEN number is probably conservative. In addition, AT&T made comments on the conference call that the second quarter was the “best ever” for business net additions. Overall, it must have been a tough quarter for AT&T’s consumer smartphone business (particularly for the iPhone given T-Mobile’s April launch), even with an aggressive trade-in program that drove up customers under contract but drove down quarterly margins.
AT&T implemented the upgrade program with purpose, however. The LTE network is robust but new (and therefore under-utilized). Rather than run a “double your data” promotion, they chose to allow customers to upgrade their phones at discounted rates while they trade in their old smartphone to AT&T. They did this prior to changing their handset upgrade parameters to 24 months (from 20). As a result, there are millions of new customers who likely own an LTE-capable phone. Assuming the customer uses exactly the same amount of data, AT&T will achieve $2.50-3.00 in additional profitability per Gigabyte consumed (and more if the upgrade triggered conversion to a shared data plan).
All of the benefits of these upgrades will be felt on a full quarter basis in Q3. This will drive up ARPUs and profits. It will also likely accelerate device attachment IF AT&T can create a compelling, Chromecast-like offer. How can AT&T use their market leadership to realize extraordinary gains?
Start with the Kindle Fire HD. We know from this week’s Amazon earnings that Kindle sales are good on a global basis, but could stand to be better in the US. Leveraging the success of the smartphone trade-in program, why not have a Kindle trade-in program that allows all current Kindle owners to trade up to a new 3G (Kindle reader) or a 4G (Kindle Fire) version? The Kindle Fire could then be added to a Mobile Share plan like a Samsung Note or an Apple iPad. Or, if the customer is not an AT&T customer today, a $59 for 10GB annual plan could be offered. Separating the Kindle/ AT&T relationship is less important than it was five years ago, and Amazon and AT&T could benefit from LTE’s ubiquity and speed. It would also be an easy and cost effective way to allow customers to experience AT&T’s new network. This low-cost, low execution risk opportunity is probably worth several hundred thousand retail postpaid conversions over the next six quarters.
After Kindle, move on to HotSpot adoption. Google’s Chromecast success played to two deeply rooted needs: 1) The need to effortlessly connect to the television (“works every time” from YouTube to the TV), and 2) Frustration with the rising costs of content in the cable model. Free(r) and easier access to shared web content on existing in-home devices is now possible with a one-time $35 purchase. Other solutions exist, but not for $35.
AT&T has an even easier model – they have installed a valuable yet widely unused component in every one of their smartphones. It’s called a HotSpot. 73% of AT&T’s postpaid base uses a smartphone, and 35% of them are using an LTE device (thanks to things like 2Q’s aggressive trade-in program).
The HotSpot is a premium service, like HBO or Cinemax or MLB Extra Innings. Why not have a “free weekend” for all (LTE) HotSpot customers? This would certainly be a social media darling; would it be enough incentive to get the 40% or so of smartphone customers who don’t know how to activate an AT&T HotSpot off the couch and learning? Bolder yet, what about in conjunction with U-Verse to increase service bundling (maybe HBO to go)? The possibilities here are endless, and there’s no extra equipment to sell. The data network is largely empty on the weekends (I have speed test history from my AT&T Samsung Galaxy SIII to prove it) and social (and traditional) media will market it for you.
Finally, AT&T needs to leverage the fiber-fed buildings that they are installing as a result of project VIP. They announced that they would have 250,000 business locations covered by these buildings at the end of 2013. This probably equates to 40,000 or so actual physical structures, or about 2x the current footprint of tw Telecom. While strategic business revenues are on the rise (up more than 15% in the second quarter and an $8 billion annualized revenue stream), the rest of the business market is suffering.
With each VIP building added, AT&T achieves a lower unit cost and opens up the door to new integrated revenue opportunities. Wireless coverage (including Wi-Fi) can immediately be addressed through deployment of in-building solutions. Storage and backup solutions can be implemented which never leave the AT&T network (adding new meaning to the term “private” cloud). Location-aware devices can be pinpointed to the room, and not within a large radius, for emergency management services. And the quality of the video surveillance system – it would be best if you stayed away from these buildings as the cameras have 41-Megapixel quality. VIP presents many opportunities to tap into latent business demand beyond faster speeds, provided customers are presented with the value of a good value.
Bringing Amazon devices into the AT&T Postpaid fold, driving HotSpot adoption through HBO-like Free (LTE) Weekends, and maniacal focus on the best possible customer experience (and AT&T market share) for each of the VIP fiber-fed buildings provides the basis for differentiation against Verizon. It sets AT&T above the T-Mobile fray, and drives incremental value without changing pricing plans or new product development. It also establishes AT&T as the price/ performance leader across wireless and wireline.
Positioned correctly, AT&T could drive the same hysteria as Google just accomplished with Chromecast and erase some of the past memories of network failures (worth watching this Daily Show link – caution: Daily Show language). The components are there. Will AT&T take the risk? Stay tuned.
Next week, we’ll add Sprint earnings to the mix and see what that means for T-Mobile. Until then, if you have friends who would like to be added to this email blog, please have them drop a quick note to firstname.lastname@example.org and we’ll add them to the following week’s issue. We will also be posting some additional analysis to the www.mysundybrief.com blog site. Have a terrific week!