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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 email@example.com and we will include them on the list.
Have a terrific week… and GO CHIEFS!
Greetings from Charlotte, North Carolina (picture is, from left, Frank Cairon, formerly of Verizon Wireless and Ryan Barker, currently with Verizon Wireless enjoying some good Mexican food on Friday in the Queen City with yours truly).
This week’s TSB examines the short-term dynamics that could impact wireless growth in the third quarter and through the end of the year. At the end of this week’s TSB we will also briefly examine the current state of litigations and investigations active and pending (T-Mobile/ Sprint, Facebook, and Google).
Follow-up to Last Week’s CBRS article
Before diving into earnings drivers, a quick shout out to Federated Wireless, who raised $51 million this week in a mammoth C Round financing (full announcement here). Existing investors American Tower, Allied Minds, and GIC (Singapore sovereign wealth fund) all participated in the round, and Pennant Investors (Tim McDonald, formerly of Eagle River (Craig McCaw), will be joining the Federated board) and SBA joined with fresh cash. Kudos to Federated CEO Iyad Tarazi for his continued leadership and perseverance. With $51 million in additional cash, spectrum sharing gets a global boost.
In addition to this news, the FCC also has placed the approval and scheduling of the Private Access License auction (this is the dedicated band that gets priority over the General Authorized Access band) on the docket for June 2020 (FCC Commissioner Pai’s blog post is here). It’s generally assumed that this means a C-Band auction will come at the end of 2020/ beginning of 2021 (although this week’s news that Eutelsat has withdrawn from the C-Band Alliance has some believing that there may be a side deal afoot). The PAL auction timeline is in line with expectations, and it’s likely participants will include some new(ish) entrants.
Third Quarter Earnings – What Could Dislodge Wireless?
Speaking of expectations, there’re not a lot of dramatic changes expected in the wireless arena. Consensus has T-Mobile leading the postpaid phone net additions race (no surprise), with Sprint struggling to keep pace, AT&T in the 0-300K range for postpaid phone thanks in large part to FirstNet gains, and Verizon, excluding cable MVNO revenues, growing their retail postpaid phone base only slightly. With the exception of FirstNet (and a few quarters of decent Verizon growth), this is a pretty consistent story dating back to early 2017. What events could change the equation and dislodge the current structure?
- More rapid AT&T postpaid phone net additions led by FirstNet. Here’s how AT&T CFO John Stephens summarized the relationship between spectrum rollout and FirstNet deployments at an investor conference in early August:
We had some AWS-3 and some WCS spectrum that we had, so to speak, in the warehouse that we hadn’t deployed. We had 700 spectrum, Band 14 from FirstNet, which the government was requiring us to deploy. And then we got a whole new set of technologies that were coming out, 256 QAM and 4-way MIMO and carrier aggregation. They were particularly important to us because of our diverse spectrum portfolio. So we got the FirstNet contract and we had to touch a tower, have to go out on the network. And we decided, with this contract, now is the time to, so to speak, do everything. Put all the spectrum in service, that’s the 60 megahertz. In some towers, it’s 50, some towers, it’s 60, but it’s 60 megahertz of new spectrum that was generally unused that we’re putting in.
This has the effect of increased costs, but also improved network performance. With 350,000 net additions already from FirstNet (Stephens disclosed this in the same conference), it’s entirely possible that they could post a 100K net add surprise due to increased coverage and deployments. In turn, improved wireless bandwidth, while driving up costs, should lower churn in areas like Detroit (RootMetrics overall winner in a tie with Verizon – first since 2012), and Boston (first RootMetrics overall win in Bean Town since 2017).
- Faster cable MVNO growth. While this week’s news was on Altice’s aggressive $20 unlimited price point for existing customers (great analysis on their strategy here), both Charter and Comcast see a lot of mover activity in the third quarter. This would seem to be a very good time to present their wireless offer. Here’s a chart of net additions by both Charter and Comcast for the past two years:
While the two largest cable providers accounted for ~390K growth in 2Q (and over 1.3 million net additions growth over the last four quarters), there’s a strong likelihood that this figure could grow even greater as the attractiveness of the wireless bundle pricing takes effect. Both Spectrum and Comcast are maturing their service assurance processes, and those efforts should lower churn.
Comcast also made a number of changes to their “By the Gig” plans which encourage this option for multi-line plans that use 2-6 Gigabytes per line per month (and therefore use a lot of Xfinity Wi-Fi services). It basically amounts to a prepayment for overage services, but could be attractive for certain segments/ demographics (full details on these offer changes are here). Charter did not follow the Comcast changes described in the link and their “By the Gig” pricing continues to be $2/ mo / gigabyte higher.
Both Comcast and Charter are running into Apple iPhone announcement headwinds if next week’s headlines meet expectations (no 5G, no CBRS, no special financing deals, better camera). If the changes do not increase willingness to upgrade/ change to an iPhone, it’s going to be very difficult to craft a cable plan (even $20/ mo.) that will buck the trend. The upgrade cycle will be extended to 4Q 2020, when both the carriers and Comcast/ Charter will have full access to 5G.
Our prediction is that Charter and Comcast will have 475-500K net additions in the third quarter thanks to a combination of lower churn and higher gross additions (led by increased moving activity). Altice’s offer will add another 70K net additions in September, with those gains coming from Sprint retail and, to a lesser extent, T-Mobile retail and wholesale (Tracfone).
- T-Mobile’s 600 MHz coverage (and gross add) improvements. As T-Mobile, Sprint, and the state Attorneys General try to find a resolution to their quagmire, T-Mobile keeps on deploying 600 MHz spectrum. Here’re their reported (through Q2 2019) and estimated (Q3/Q4) progress:
Every new device on the T-Mobile.com website (and every T-Mobile store) is 600 MHz/ LTE Band 71 capable. Many older devices are not, however, and that is preventing greater market share gains in secondary and tertiary geographies (many/ most BYOD Android devices from AT&T, for example, will have the 700 MHz but not have the 600 MHz band). The expected Apple announcement represents a slight headwind for T-Mobile as well.
There’s a natural gross add/ upgrade path that follows 145 million coverage growth over a 12-month period. Assuming T-Mobile keeps their churn rate at 0.8%/ month over 3Q (2.4% of the ending branded postpaid 2Q base would be ~1.07 million disconnections), they have grown their 600 MHz marketable base by 20 million from Q1 to Q2 and by another 50 million from Q2 to Q3. If they just grew their penetration in the 600 MHz band by 1.5% for Q1-Q3 incremental POPs (or 0.5% penetration for the entire estimated 3Q 2019 footprint), they would negate the entire estimated branded postpaid churn for the rest of the country. This ex-urban/ rural growth opportunity is unique to T-Mobile and would at the expense of AT&T and Verizon.
Offsetting the 600MHz growth is small cell progress. T-Mobile committed at the beginning of the year to deploy 20,000 incremental small cells in 2019, but that guidance was withdrawn in their Q2 Factbook with H1 growth of only 1,000. That leaves a very large backlog of in-process capital (excluding capitalized interest, total capital spending was $3.48 billion vs an estimated spending range at the high end of $5.4 – $5.7 billion). T-Mobile should spend at least $2.2 billion in capital spending in the second half of 2019 on 5G, 600 MHz, and other initiatives and will undoubtedly be left with a lot of in-process small cell deployments.
- Sprint’s prepaid and postpaid churn. There’re a lot of headwinds for Sprint in the third quarter – overall 2Q churn trends are higher than previous year’s, and no one expects the seasonal respite to last long. It’s likely that 3Q postpaid churn could exceed 1.85%, led by postpaid phone churn of a similar level (look for late September promotional activity).
Prepaid churn is a bit tougher to forecast and will also be tracked closely. If the postpaid churn comes in below 2Q levels, check the prepaid recategorizations to postpaid (they were 116K in Q2 and 129K in Q1). Both prepaid and reclassified postpaid accounts will be transferred to Dish assuming the merger goes through, but it makes the postpaid headline number more palatable.
The 30-day guarantee promotion, according to most reports, has been an ineffective switching tool. (Sprint’s 5G rollout success has been much more impactful). Expect Sprint to say very little until there is clarity on the litigation, and to post greater than expected losses in prepaid subscribers as they preserve their marketing dollars for a post-merger world.
Litigation Tracker: Why the Facebook, Google, and T-Mobile/ Sprint cases are not all the same
Speaking of litigation and investigation, we were very dismayed that media sources are choosing to lump the New York-led Facebook investigation announced Friday, the to be announced Texas-led Google investigation, and the on-going T-Mobile/ Sprint (TMUS/S) litigation into one mega-story. While there are some similarities, the upcoming Google action is broader than Facebook and more bipartisan than the TMUS/S complaint.
As most of you who are following the TMUS/S suit know, the states of Oregon and Illinois recently joined the original 14 states and the District of Columbia to block the merger. (As an aside, Fox Business is reporting that the state AG group is focusing on the inexperience and shaky financial condition of Dish Networks as opposed to what would have been an uphill market concentration battle). In fact, in the original TSB concerning the lawsuit (here), we were surprised by the absence of Illinois. The figure below shows who is involved in what (underlined states are named in the Facebook litigation):
To recap, there are 40 states + the District of Columbia named in the National Association of Attorneys General comment letter to the FTC (filing here), and at least 30 of them are joining a Texas-led lawsuit against Google to be announced early this week.
The makeup of the states in the FTC letter is very bipartisan: 14 Republican and 26 Democrat attorneys general. All of the states involved in the TMUS/S litigation are also named in the FTC comment letter. To contrast, of the 17 states in the TMUS/S litigation, only Texas (AT&T HQ) is Republican and the other 16 are Democrat.
As we stated in the TSB on the AG lawsuit, very few sparsely-populated states, regardless of political affiliation, are participating in the T-Mobile/ Sprint litigation. Fourteen of the fifteen least densely populated states in the US (data here) are named in the Google/ FTC letter. However, only two of the fourteen (Colorado, Oregon) are participating in the TMUS/S litigation. The promise of a rural solution outweighs the benefits of a fourth carrier in metropolitan and suburban areas.
The Facebook investigation is also widely bipartisan with five Democrats and four Republican states represented. Florida is involved in the Facebook investigation but none of the other two legal activities. In addition, there are nine states (including New Jersey, a Democrat stronghold) that are not currently participating in any legal activity.
Bottom Line: Concerns about Google’s anti-competitive practices are supported by a large number of state Attorneys General and are very bipartisan. A subsegment of Democrat AGs (and TX) is also a part of the T-Mobile/ Sprint lawsuit. And an even smaller subsegment plus Florida is a part of the recently announced Facebook investigation.
Next week, we will highlight some wireline trends and talk about overall profitability across the telecommunications sector. 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!
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.
Tax Day greetings from Washington DC (where I chaired a terrific discussion at INCOMPAS), Chicago, Charlotte, and Dallas. Thanks to everyone who showed up at the panel and participated – all of the speakers on Monday were great, including Chairman Tom Wheeler (pictured).
This week, we continue to chronicle the developments of the Set Top Box saga as the Obama administration weighed in through the NTIA with comments. We’ll also weigh in on the controversial “Ghettogate” ad. First, however, we’ll look at a study of balance sheets across the telecom industry which was released last week by Craig Moffett.
Redefining Leverage Ratios
With continued densification (smaller cell sites in more places), spectrum acquisition, and competition, many investors turn to leverage ratios to benchmark long-term financial health and viability. These ratios are not the first thing that companies highlight in their press releases, but many calculate and discuss their net debt to EBITDA metric. Here’s that definition according to Investopedia:
The net debt to EBITDA ratio is a measurement of leverage, calculated as a company’s interest-bearing liabilities minus cash or cash equivalents, divided by its EBITDA. The net debt to EBITDA ratio is a debt ratio that shows how many years it would take for a company to pay back its debt if net debt and EBITDA are held constant. If a company has more cash than debt, the ratio can be negative.
Using that standard definition, communications company metrics would look like this:
From a first glance, this looks as expected to most who follow the telecom industry. Verizon and AT&T maintain low leverage ratios and as a result are afforded low interest rates. Cablevision, Dish, Sprint, and Charter have historically been able to use high-yield debt markets to finance operations, spectrum purchases, stock buybacks, and other investments. T-Mobile and Time Warner Cable lie somewhere in between.
Telecom is not a typical industry, however. With Equipment Installment Plans (which entails moving away from subsidy and into subscriber-paid devices) and phone leasing proliferating, more “debt” is being created and sold to third parties at growing rates. Operating leases create pressure on EBITDA but also frequently mean long and non-cancelable commitments for telecommunications carriers. And pension obligations represent a promise to employees that rarely enters into leverage discussion dialogue.
MoffettNathanson’s adjusted leverage ratio schedule is shown to the right. In this view, the relative health of each carrier is different than what was previously reported. Verizon and AT&T look more like Cablevision and Charter thanks to large pension liabilities, even when the undiscounted size of the pension contribution tax credit is considered. Comcast appears to be the healthiest of the industry with Time Warner a distant second. Sprint’s revised ratio is a whopping 7.9x driven in large part by the reversing of the leasing construct. While it should be emphasized that nothing is truly “real” in the accounting world, this analysis provides some insights into the high-yield market’s reluctance to lend the company money at reasonable rates.
Craig Moffett did a Bloomberg interview on the topic (see here) and his detailed analysis is only available to MoffettNathanson clients. However, if you can get a copy of their work, it’s worth digesting and is on par with the seminal analysis on telecom affordability Craig did in his Bernstein days.
President Obama and the Set Top Box Kerfuffle
Since our article analyzing the Notice of Proposed Rulemaking was written (see here), there has been a lot of discussion across many constituencies as to who would benefit and suffer the most. In the Sunday Brief devoted to the topic, we mentioned how this is pitting entrepreneurs against established programmers. It’s also pitting Democrat Congresswoman Anna Eshoo (California), the ranking member of the House Energy and Commerce Subcommittee on Communications and Technology against Democrat Senator Bill Nelson (Florida), the ranking member of the Senate Commerce Committee. Representative Eshoo is a supporter of the FCC’s initiative while Senator Nelson wants to study the implications of opening up the Set Top Box market in greater detail (Nelson is supported by the National Urban League, the National Action Network, and the Rainbow/ PUSH Coalition).
To make matters more complex for policymakers, President Obama decided to weigh in on Friday, devoting his weekly radio address to the set top box issue. Here’s the situation assessment according to the White House (full blog address here):
… the set-top box is the mascot for a new initiative we’re launching today. That box is a stand-in for what happens when you don’t have the choice to go elsewhere—for all the parts of our economy where competition could do more.
Across our economy, too many consumers are dealing with inferior or overpriced products, too many workers aren’t getting the wage increases they deserve, too many entrepreneurs and small businesses are getting squeezed out unfairly by their bigger competitors, and overall we are not seeing the level of innovative growth we would like to see. And a big piece of why that happens is anti-competitive behavior—companies stacking the deck against their competitors and their workers. We’ve got to fix that, by doing everything we can to make sure that consumers, middle-class and working families, and entrepreneurs are getting a fair deal.
If that weren’t enough, the President’s National Telecommunications and Information Administration (NTIA) filed supportive comments with the FCC (read more about them here). For those of you who are new to the process, the NTIA is managed under the Department of Commerce and the administrator of the Broadband Technology Opportunities Program (BTOP), one of the biggest boondoggles of the past decade (see New York Times article on BTOP titled “Waste is Seen in Program to Give Internet Access to Rural U.S.” here).
As we saw with the President’s actions on Net Neutrality (his YouTube message following the 2014 election is here), this administration is not afraid to use the power of the bully pulpit to influence the FCC. Without rehashing the previous article, and to continue in the spirit of problem-solving, here’s a few questions I would suggest the FCC carefully consider:
- Will the ruling require Google to open up the Google TV Box? In other words, could the Xbox connect to a Google Fiber coax cable and allow customers to launch a Bing or Cortana query to pull up the latest in Google TV programming? If not, why not? (Note: while it is substantially less, Google TV charges a $5/ mo. lease for every TV after the first box).
- Will the new Electronic Programming Guide (EPG) providers be required to show consumers what information they are collecting on customers? How will consumers access this information as well as any other sources that are being used to drive channel selection. For example, if I am shown the Kansas City Royals game as my first option and I have a Google EPG, will Google be required to show me that they recommended this because I have the MLB At Bat application on my Google Android phone?
- Can each customer of the new EPG service opt out of data collection? Will this selection process be easy for customers to access and install? See the previous Sunday Brief here for more detail.
- With the replacement of a relatively simple, channel-driven search process (using up and down arrow keys on a specially designed remote control) with a more sophisticated algorithm-driven process as the likely decision, how can the Commission state that the process will not alter advertising rates (see Wired article here)? Won’t customers bid (and Google profit) from paying for higher page rankings on EPG search results? If so, then what will prevent Black Entertainment Television (BET) from outbidding their apparent competition? As Roza Mendoza, the Executive Director of the Hispanic Technology & Telecommunications Partnership stated in the aforementioned Wired article “They’re asking us to trust Google? All of us know about their diversity record. The only people that are going to benefit from this are Silicon Valley companies.”
Let’s keep the recommendation very simple:
- Require all Multichannel Video Programming Distributors (MVPD) to provide the same set top box on-line and through distribution channels such as WalMart, just as they do with cable modems (see Time Warner Cable disclosure above).
- Require all MVPDs publish a list of boxes that they support (according to the Tivo Bolt FAQ page, all of their devices are compatible with every major cable provider in the US as well as FiOS. Chairman Wheeler carefully omits Tivo’s competitive offer in this Washington Post interview when he says “Today there is no competition in set-top boxes, and therefore the incentive to innovate and come up with all kinds of new alternatives is somewhat limited”).
- If the set-top box order is enacted, require opt-in consent and on-demand publication of how search results are being determined. Allow opt-out capabilities at any time and for any reason with no corresponding financial penalty (including termination penalties on the equipment).
- If the set-top box order is enacted, allow cable companies five years to comply with the decision.
No one can defend the current state of the Electronic Programming Guide (with the exception of the Xfinity X1/X2 and the Tivo Bolt). But to state that there is no set-top box competition when Tivo clearly positions itself as an alternative for digital cable providers is deceptive. And to fail to acknowledge that Google will financially benefit from search result rankings, and that entrepreneurs will have to pay up to achieve a top page ranking, is equally deceptive. The transition of value from cable companies to Google, Apple and Microsoft is apparent to anyone who digs deeper, and should receive the same bright spotlight that communications service providers have received throughout the entire Open Internet process.
Sprint’s Controversial (?) Ad
More than a few heads turned when Sprint released (and subsequently retracted) the following ad:
Lead statement: Real questions. Honest answers. Actual Sprint, T-Mobile, Verizon and AT&T customers. No actors.
Sprint CEO Marcelo Claure, talking to focus group but specifically addressing woman sitting to his right: “I’m going to tell you the carrier name, and I want you to basically tell me what comes to your mind. T-Mobile. When I say T-Mobile to you, just a couple of words.”
Woman sitting to Claure’s right: “Oh my God, the first word that came into my head was ghetto (laughter, Claure nods and smiles in approval). That sounds like terrible. Oh my God, I don’t know. Like, I just felt like that there’s always like three carriers. It’s AT&T, Sprint and Verizon. And people who have T-Mobile, it’s like “Why do you have T-Mobile?” I don’t know.
Claure taps her shoulder in approval. Sprint logo appears. End of ad.
For those of you who are struggling with the definition of ghetto, here’s the version from dictionary.com: a section of a city, especially a thickly populated slum area, inhabited predominantly by members of an ethnic or other minority group, often as a result of social or economic restrictions, pressures, or hardships.
Sprint had the sense to pull the ad, and Claure apologized, but his Twitter posts triggered intense reaction from many of Claure’s followers. Interestingly, John Legere, T-Mobile’s CEO, declined to comment other than the exchange nearby.
This is probably an innocent mistake, a miss due to personnel changes occurring within Sprint’s marketing department. Or perhaps Claure did not understand the racial undertones of the word ghetto. Regardless, it provided some unneeded attention this week for the struggling carrier, and Sprint (and Boost) customers can rest assured that it will not occur again.
Thanks for your readership and continued support of this column. Next week, we’ll dive into Verizon’s earnings as well as the Open Internet Order ruling if it is released. Until then, please invite one of your colleagues to become a regular Sunday Brief reader by having them drop a quick note to email@example.com. We’ll subscribe them as soon as we can (and they can go to www.mysundaybrief.com for the full archive). Thanks again for your readership, and Go Royals and Sporting KC!