3Q13 U.S. Tier 1 Carrier Results - A Conversation

I had a chance to talk to RCR Wireless' Dan Meyer on Tier 1 third quarter carrier results.

Read it at RCR Wireless here:: AT&T & Verizon Wireless

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Read it at RCR Wireless here: Sprint and T-Mobile 

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Spectrum Win-Win for Two Giants

Today AT&T agreed to acquire spectrum in the 700 MHz B band from Verizon Wireless for $1.9 billion in cash and Advanced Wireless Services (AWS) spectrum licenses in several markets, including Phoenix, Ariz., Los Angeles and Fresno, Calif. and Portland, Ore.

The 700 MHz licenses to be acquired by AT&T cover 42 million people in 18 states — California, Colorado, Florida, Idaho, Illinois, Louisiana, Montana, New Mexico, New York, Ohio, Oklahoma, South Dakota, Tennessee, Texas, Utah, Virginia, Washington and Wyoming.  Here are the following CMAs (Cellular Market Areas):

·         California: Los Angeles

·         Colorado: Park, Fort Collins-Loveland, Pueblo,

·         Florida: Miami, West Palm Beach, Bradenton

·         Idaho: Butte

·         Illinois: Chicago

·         Louisiana: De Soto, Claiborne, Morehouse, Lake Charles, Alexandria

·         Montana: Billings, Beaverhead, Great Falls, Carbon

·         New Mexico: Grant

·         New York: Rochester

·         Ohio: Cincinnati, Youngstown

·         Oklahoma: Oklahoma City

·         South Dakota: Rapid City, Harding

·         Tennessee: Memphis

·         Texas: Texarkana, Edwards, Waco, Tyler, Longview-Marshall

·         Utah: Box-Elder, Carbon, Beaver, Piute

·         Virginia: Frederick

·         Washington: Okanogan

·         Wyoming: Sheridan, Casper

Yet another interesting sideline is the involvement of a Sarasota, FL private equity firm, Grain Management.  Verizon is selling spectrum in several North Carolina markets to Grain Management. Grain is also acquiring an AWS license covering Dallas from AT&T—and Verizon will lease that license from Grain.

Recall in Auction 73, the Lower 700 Band was up for grabs.  

How did Verizon do?

• Block A – Verizon Wireless and U.S. Cellular both bought 25 licenses each. In this block, Verizon targeted urban areas, while U.S. Cellular bought licenses primarily in the northern portion of the U.S. 

• Block B – AT&T Mobility was the biggest buyer in the B block, with 227 licenses totaling $6.6 billion. U.S. Cellular and Verizon bought 127 and 77 licenses, respectively. AT&T Mobility and Verizon Wireless bought licenses around the country, while U.S. Cellular continued with its strategy to buy licenses in northern regions. 

• Block C – Of the 10 licenses in the C Block, Verizon Wireless bought the 7 that cover the contiguous 48 states (and Hawaii). Those seven licenses cost Verizon roughly $4.7 Billion. 

Why? It's a win-win because Verizon Wireless wanted to unload the 700 MHz bands (A and B Block) as its C Block and its recent AWS spectrum acquired from Cable Company partners gave a sufficient footprint nationally.  AT&T needed it to fill B Block holes nationally.  It was almost a given that AT&T would be the buyer. As an aside, earlier this month,  Verizon sold some A Block licenses to US Cellular. 

The interesting go-between of a private equity firm is notable.  It's clear that PE firms do not operate networks but a licensing/leasing arrangement from these big carriers will bring in recurring revenue.

  

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T-Mobile -Thoughts Ahead of the Q3 2012 Earnings Release

T-Mobile USA is set to release its Q3 earnings and performance metrics on Thursday , November 8th as part of its overall parent's (Deutsche Telekom) Q3 2012 release.  DT's US unit is fresh off an merger/acquisition announcement of MetroPCS in October  and that had grabbed much of the news around the carrier but the Q3 earnings numbers should reveal whether T-Mobile would continue key trends or reverse them.  The company has provided five focus areas throughout previous quarters and many of its Q3 progress points will fit again in these areas.

Under Amazing 4G Services, we should expect to hear about network progress (LTE buildout) and new halo devices. Under the Value Leader, we should expect to hear about any new services or marketing initiatives. In furthering the Trusted Brand, T-Mobile has been talking about expanding their distribution. For the last two quarters, the company has been putting a lot of effort into opening new 'doors', the first fruits of this may show up in Q3.  With the Multi-Segment Player focus, this is mostly about expanding wholesale (machine to machine/MVNOs) and ramping up the B2B efforts.   Finally the Challenger thrust should roll up cost control and churn containment.  Maybe there will be light shed on acquiring iPhone switchers. However, some performance metrics continue the bellwether of corporate direction. 

Net Additions:  The trend doesn't look good for the company as its postpaid base continues on a negative trajectory since Q3 2010. On the other hand, T-Mobile's prepaid business is the bright spot in preventing a totally bleak story. The fact that the company has been able to post positive net prepaid additions in an ultra competitive prepaid segment is notable. Throughout the years, prepaid has been on the rise and makes up more of T-Mobile's customer base. In Q2 2010, the prepaid business accounted for about 20% of the base. By Q2 2012, that percentage increased to over 27%.  Q3 looks to increase that percentage.  Switching over to postpaid, the company still needs to reverse the slide.  The unlimited data and plan value story should resonate and pits the company against Sprint's own unlimited data proposition.  How well the company markets to iPhone switching will be a key element in increasing its postpaid pool.

  

Any increase should signal somewhat to the traction of its expanded distribution strategy.

Churn:  Looking at prepaid churn, the company is doing a good job in stabilizing that base.  Q3 should continue the downward direction. However, the churn number currently at 6% is very high relative to rivals.  In contrast, Sprint's multi-branded prepaid group posted 3.37% for Q3 while dedicated prepaid plays MetroPCS and Leap are in mid-3% and mid-4%, respectively.  On the postpaid side, the magic threshold for Q3 should be sub 2%. Rival Sprint crossed that mark two quarters ago. T-Mobile remains the only national carrier to be above the 2% postpaid churn mark.

ARPU: The carrier is also behind in these metrics relative to its national rivals. The downward postpaid ARPU trend is in stark contrast to AT&T, Sprint and Verizon Wireless which has been sloping positively nicely. While AT&T is the postpaid ARPU leader at over $65, Verizon Wireless is T-Mobile's closest ARPU neighbor at $56 in Q2 before they moved to the new ARPA stat. On the prepaid side Sprint remained over the $26 mark in Q3 while regional Leap and MetroPCS are in the 40s.  To move the mark in prepaid, T-Mobile needs to focus on the high-value users. Of course this will be moot in 2013/2014 once MetroPCS starts to get integrated.

Finally Network: There will undoubtedly be discussion on how well the LTE buildout is progressing. T-Mobile while it pushes its 4G speed (AWS=based HSPA+), it should be stating how the well the PCS refarming is going. This refarming is central to moving ahead with its AWS LTE plans.  The PCS HSPA+ network also serves as the honeypot for additional unlocked GSM iPhone users. Given the jump that other national carriers have in LTE, there should be a mention or reiteration of when T-Mobile expects to launch LTE markets. 

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A Clearwire Graphic

While looking for some Clearwire Q3 Earnings material, this graphic nicely popped up.  It's clear that Clearwire is punctuating its vast national spectrum versus the tier one carriers.

For those who are curious:

• Operator A is Verizon Wireless
• Operator B is AT&T
• Operator C is T-Mobile 
• Operator D is Sprint

Looking ahead for roaming:

• AWS LTE stands to be a major roaming frequency with Verizon Wireless and T-Mobile in control.
• PCS LTE roaming should eventually happen. Sprint is the early adopter out of the gate.
• Cellular 800/850 LTE - big question mark on what will be when AT&T and Verizon Wireless refarms.

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Carrier WiFi Offload - Some Thoughts - Part 1

It's well known that WiFi plays an important role in mobile data consumption.  From the consumer view, it's faster than 3G (and maybe 4G in some cases), it's usually free, and it's seemingly ubiquitous.  

From the carrier view, any subscriber getting off the cellular data network helps capacity and saves on the customer's data caps, if any.  Some carriers can argue that open WiFi is not secure and worried about possible liabilities of customers throwing their data 'in the clear' on unsecured networks.

Given the differing carrier stances, here is where I see carriers' WiFi strategies. 

AT&T: Before the company bought Wayport in 2008,  it boosted its hotspot count.  Since then, AT&T has been reinforcing its national leadership in WiFi hotspots. AT&T smartphone and mobile broadband customers get the benefit of automatically connecting into AT&T hotspots or HotZones.  Their nice (and proprietary) smartphone client does this seamlessly without the customer needing to hunt for the correct SSID.  In this instance, it's a win-win. Customers get a seamless fast experience and AT&T offloads the data traffic.  It continues to invest in this technology with more and more hotspots deployed monthly, quarterly, annually.  So AT&T's WiFi strategy is to own the assets and in directly monetize through customer subscriptions.   

Verizon Wireless/Verizon: Verizon has never really warmed up to WiFi in the cellular network. These statements were made in the 3G deployment era and have continued as the corporate position when executives are asked about their WiFi strategy.  On the surface, it appears Verizon Wireless' WiFi strategy is not to have one.  However, a little known fact is that they indeed have a relationship with Boingo albeit a white label one.  Boingo powers both Verizon fixed line as well as the wireless business unit.   Unlink AT&T, only mobile broadband and specific fixed hi-speed internet (e.g., FiOS) customers are eligible.  Smartphone customers cannot take advantage.  But that may soon change with the introduction of CableWiFi in May 2012.

Cable is my Frenemy:

Cable companies have always been aligned with Sprint but with missteps on Clearwire, cable wireless retail strategy (Pivot), the relationship ended.  In 2006, cable companies' AWS spectrum foray (a.k.a. SpectrumCo) also included Sprint. But Sprint got out of SpectrumCo in 2007 cashing out its share. Fast forward to August 2012.  The FCC approved the sale of the former SpectrumCo AWS portfolio to Verizon Wireless.  Verizon Wireless and the cable companies are friends. Verizon Communications (fixed line) are enemies. All this closeness opens up the possibility that Verizon Wireless will use CableWiFi coverage to address data offload and will be Verizon Wireless' WiFi strategy.  

If so, Boingo is left without a dance partner.  To its credit, Boingo saw the writing on the wall and going to court members of the Competitive Carrier Association in September.  In fact, Boingo became CCA's strategic WiFi partner.

 More on other companies in the next post!

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Carrier Q3 2012 Earnings Releases

The following are the US carrier Q3 2012 earnings release dates:

Carrier	Date	Time (ET)
Verizon	Thu, October 18	8:30 AM
AT&T	Wed, October 24	9:00 AM
Sprint	Thu, October 25	8:00 AM
Clearwire	Thu, October 25	4:40 PM
MetroPCS	Tues, October 30	9:00 AM
Leap	Wed, November 7	11:00 AM
T-Mobile	Thu, November 8	4:00 AM

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Verizon Wireless - Q3 2012 - The Network Fill Story

As many in the industry know, Verizon Wireless was the first company out of the block with an aggressive LTE buildout schedule. The overall thrust was to mirror its vast 3G geographic footprint by the end of 2013. Now as it has done in the past, its rollout execution has accelerated that timeline and now the company states that it should be done by mid 2013.  

Why?  The faster it can get a full LTE network, the ability to implement VoLTE advances.  There is an operational cost benefit to this.  Why mirror? There isn't an elegant handoff from LTE to CDMA. And of course, the ability to deliver a data byte is cheaper/more efficient on LTE than EV-DO. Of course that's old news.

Onto Q3 and what some of the data tells us.  Since LTE is established as the most efficient data platform, the carrier wants its customers to consume data on that network versus 3G.  The question of how many subscribers are actually on the network comes up. In certain circles, the answer will point to return on investment... 

"You spent so many billions on the LTE network and you only have X% of the base on it?! What are you doing to change that?"   

In Q3, Verizon has admitted that they've spent substantial marketing into moving people onto the LTE network. Its most reliable network messaging has been supplemented with the largest LTE network and speed messaging to the consumer base.  On top of this, the carrier (like the majority of carriers) are pushing LTE smartphones at various price points marrying that effort with the new shared data plan.

To that end, Q3 had paid off as highlighted in their earnings slide below.  Most notable is the smartphone penetration hitting 80%.  In previous quarters, mid 70% were good.  Crossing 80% is the goal and the carrier seems at this point to have good momentum going into Q4. The upsell is decent - migrating subs from featurephones to smartphones. Again with only 53% of the base in smartphones, the carrier has a nice upside.

3G Smartphones Still?! Out of 6.8M smartphones sold, the company doesn't quite provide the LTE smartphone count since 4.5M were LTE devices (which also includes smartphones and modems, tablets & hotspots). Still a clue was divulged when the CFO revealed that 3.1 M iPhones were sold an of those 650K were iPhone 5s (LTE) suggesting the remaining iPhones were 3G - roughly 2.4M. So we can safely say that the iPhone 4/4s though helping out in ARPU/ARPA, those aren't helping to fill the new and shiny LTE network.  These  3G users will likely transition in 2 years unless Verizon entices with an upgrade promotion. By the way, the company is trying to minimize their upgrade percentages to help margins.     

So the takeaway, 14.9M LTE devices of the 95 M retail sub base on the network -  roughly 16%. Is that good? It depends on internal Verizon Wireless planners and financial types' expectations.  For certain, this is an important metric to pay attention to in subsequent quarters for every carrier deploying LTE.

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Verizon Wireless - Q3 2012 Highlights Impressive Adds

Quarterly earnings releases are always greatly anticipated and with Verizon coming out of the gate as the first carrier in Q3, the company has always stood as a reference bar for performance metrics, particularly in subscriber growth.  

Net additions were impressive - the best performance in 4 years. The metric is always an indicator of organic growth/switching and how the company is performing in postpaid and prepaid.  Verizon specifically uses the term retail to pull out any wholesale component. 

What stands out is the monster net addition count.  

Postpaid: This is the shining beacon for Verizon Wireless with 94% of the retail base in this category.  The 1.5+M postpaid is the highest ever. As a gauge, Q2 2011 yielded 1.25+M net adds.  Of course part of the strong addition growth comes the shared data plan platform in which tablets (there is even a bullet point on tablets) and data devices (mobile hotspots) are contributing. 

Additional notable call highlights supporting the segment's performance:

• Highest gross additions in 4 years at 6.8 million
• Sold: 3.4 M Android smartphones, 3.1 M iPhones (650K iPhone 5s - hampered by supply constraints) - this punctuates the power of Apple. The iPhone sold also show the carrier's switching and upgrade strength - 4/4s iPhones are still desired.
• 78.8% of smartphones sold were postpaid vs. YoY of 59.6% - yes, they're successful partly because of admitted marketing ramp up.
• 53% of the base postpaid base is smartphones and ~9% is internet (devices) so there is room for smartphone growth which suggests average revenue per account has upside potential.
• Switchers: 31% of adds were new to Verizon Wireless. This shows the the network 4G LTE messaging is resonating and helping.
• Smartphone Upsell: 44% of the gross adds were new to smartphones

Prepaid: From a quarterly trend view, this quarter dipped below Q4 2011's 250K and less than last quarter's 299K net adds.  Though the segment is positive, we have to watch for its trajectory as the company exits Q4. A consideration may be that the company is putting a great effort in the seemingly more profitable postpaid segment.     

Churn: While this looks alarming relative to the previous quarter, this quarter's .091% betters YoY's .094%. Besides, historically, Q2 churn has always been lower so the trend continues. Honestly, this is a boring (albeit great story) every quarter.  

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Verizon Wireless Thoughts Ahead of the Earnings

Verizon Wireless is set to release its earnings and performance metrics tomorrow, October 18th at 8:30 AM. The wireless group has been a rock steady performer as evidenced by many quarters of impressive net additions and churn.    

What to hope for this year's Q3? 

Net Additions: Wholesale net additions have been helping out many carriers' numbers. This is a trend that should continue given emphasis on M2M.  The true test is how many new postpaid customers the carrier will bring on board. As Verizon Wireless is mainly a postpaid company and the postpaid market penetration increases, there are high expectations for the carrier to continue to crank out more customers.    

Verizon Wireless has never gone below 500,000 postpaid net adds since Q1 2010.  With Q2 2012 delivering 888,0000 postpaid, the expectations are high. Yet a shining light has emerged since Q2 2011 for the prepaid group, turning the ship from losing subs to greatly contribute to the overall numbers.

  
There are equally high expectations for Q3 from the prepaid side given the momentum over the previous quarters.

Churn: It's like a broken record. Verizon Wireless can do no wrong in terms of churn.  Their subscriber loyalty and network messaging has proven out quarter after quarter. Any spike would be alarming. Any drop only strengthens their operations.

ARPU (Rather - Postpaid ARPU):    Postpaid ARPU is likely to going up but the largest US carrier has a lot of catching up to AT&T and Sprint.

  

This could be the quarter that Average Revenue Per Account (ARPA) gets introduced.  Executives have been on the media and investor circuit arguing that ARPU would be dated and the true indicator should be by account, given its thrust into shared data plans. 

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SoftBank & Sprint Deal - Speed Expectations & Implications

In the October 15, 2012 Japanese Strategic Partnership announcement, SoftBank's CEO Masayoshi Son cited slow US network speed compared to Japan.  Though the chart reflects 2011 data and may change as the US builds out LTE in the coming years, the point is that Japan leads the way. Conspicuously absent, by the way, are know speed-forward countries South Korea and Singapore.

Reading between the lines, SoftBank has lofty speed ambitions based on the Japanese market. While LTE will be the great speed equalizer in the US market stands now, competitors cannot claim overall speed dominance.  Sure AT&T and Verizon Wireless go back and forth citing 3rd parties (here and here), the reality is that carriers cannot officially state that their LTE is faster than competitors.  Part of the speed equation is capacity.  While speed brings in the early adopter speed geeks, the bigger carrier thrust is to make the data service available to everyone.  This means having sufficient capacity within spectrum constraints.

US carriers have been providing operating expectations though. Some more specific than others.

Verizon Wireless' latest LTE market expansion announcement alludes to speed ranges:

"In real-world, fully loaded network environments, 4G LTE users should experience average data rates of 5 to 12 megabits per second (Mbps) on the downlink and 2 to 5 Mbps on the uplink. When customers travel outside of 4G LTE coverage areas, devices automatically connect to the Verizon Wireless 3G network, where available, enabling customers to stay connected from coast to coast."

AT&T positions its LTE speed in comparison to 3G in its latest LTE market expansion in Dallas-Fort Worth release. 

" Faster speeds. LTE technology is capable of delivering mobile Internet speeds up to 10 times faster than 3G. Customers can stream, download, upload and game faster than ever before."

Interestingly, rather than stating a range, it pits it has superior LTE speed against Verizon Wireless citing a PC World comparison (here). 

Now back to Sprint.  As it builds out its Network Vision strategy, its LTE implementation is a rather small 5X5 MHz channel implementation. Smaller channels and balancing capacity may yield slower speeds but that doesn't stop its marketing.

Looking ahead when Clearwire comes into the picture with their TD-LTE technology, the current Sprint view is for data offload in 'heavy data tonnage' markets. This suggests a capacity approach given Sprint's unlimited data proposition.  Yet Clearwire's spectrum depth also allows Sprint to add the additional speed component, thereby realizing Son's vision of blowing the doors off competitors (in Japan and the US).  If speed (along with unlimited) is going to be a market differentiation, Clearwire and network expansion and tweaks will be necessary in the coming years.  This means more capital is necessary for Clearwire to do so.  Direction and commitment will be necessary from the 'new' Sprint.

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