Editor’s Note: Welcome to our weekly Reality Check column. We’ve gathered a group of visionaries and veterans in the mobile industry to give their insights into the marketplace.
Happy holidays from Reality Check. Below are the three of the top trends that shaped our industry in 2009:
The focus on market leadership and shift from network to cloud. Top 10 lists are hard – you’re never quite sure if you’ve missed one or two. This one, IMHO, has the greatest ramifications for 2010 and 2011. A simple chart tells the tale:
(More details on the calculations available upon request.)
This is a sobering chart for the networks: even with the dividend offset, the market placed its bets with the “cloud” in 2009. $300 billion represents slightly less than the combined equity value of AT&T, Verizon, and Comcast combined. The networking companies have been “lapped” in one year.
This is not an industry theme; it’s company specific. Compare Amazon to Barnes & Noble (ticker = BKS) or Apple to Nokia (NOK) or even Cisco (CSCO – up but not in the stratosphere).
Why is this value shift occurring? Is it due to the global reach of the companies, which creates currency and economic diversification versus the U.S.-centric nature of the network companies? Is it the “net adds at all costs” mentality that is driving subsidies on netbooks, smartphones, and soon e-readers? Is it growth and innovation management that leverages the venture capital community as a petri dish for projects that the networking companies largely manage in-house? Is it that they can hire smarter people because of their innovative and open cultures? Is it analysts’ failure to value the future cash flows of the network correctly? Is it a momentum trap? The answer lies in g): all of the above.
Several of us were on-line chatting about Comcast/ NBC Universal this past week, and the diversification issue came up. When asked “Why diversify?” a colleague quipped: “Have you looked at their larger infrastructure peer group?” A sobering, $300 billion value shift. All in one year. Along with the cash on hand advantage (#2 event), this improved currency value sets the stage for years to come for the cloud.
Cash. We have a lot – you don’t. The chart below reflects the cash and marketable securities balances of the cloud vs. the network. As reference, I have also shown the debt levels (excluding pension benefit obligations) to complete the net debt equation. The four largest cloud companies hold more than $86 billion in cash with virtually no debt or pension benefit obligations. As a group, this balance has grown over $20 billion (another “lapping” of the network) in nine months. In contrast, largely due to the TWC cash decrease due to the special dividend payment (about $5 billion of the “network” cash decrease), the networkers had a cash decline of over 20%. Despite the talk about net debt levels decreasing for particular companies (most of this is sequential debt reductions), as a “network” segment, the debt level actually rose for the industry in the first 9 months, again, largely due to TWC’s special dividend, but also due to the increase in Verizon’s debt due to the completion of the ALLTEL acquisition.
With cash earning virtually no interest at today’s rates, what will the “cloud” do with all of that money? The Wall Street Journal has a good summary of it in last Thursday’s on-line and paper editions (“Apple, Google Rivalry Heats Up”). According to the WSJ, both were looking at LaLa (Apple purchased for an estimated $85 million) and AdMob (which Google snared for $750 million). Investments in networks, a long-time speculation of many, are rare (except for the Paul Allen case study of Charter). Google wrote down their investment in Clearwire earlier this year (along with a much larger write-off for AOL), and elected not to participate in a subsequent investment round. However, for data to proliferate, local coverage (in-building, middle mile special access, carrier/ telco hotels, etc.) will need to increase. The “business” side of machine-to-machine represents another area where cooperation exists (Steve Pazol is heading up such a JV between Verizon Wireless and Qualcomm called nPhase). If only the cloud could control where the rain falls … . Stay tuned.
The rapid adoption of wireless as a primary/ sole means of communication. “The percentage of households that are wireless-only has been steadily increasing. In fact, the 2.7 percentage-point increase from the first 6 months of 2008 is the largest 6-month increase observed since the NHIS began collecting data on wireless only households in 2003.” That’s one of many findings that the Centers for Disease Control (CDC) wireless substitution report found in May. Other findings include:
–20.2% (of households) did not have a landline telephone but did have at least one wireless telephone.
–41 million adults (18.4% of the population) lived in households with only wireless telephones.
–Among households with both landline and cellular telephones (wireless-mostly households), 24.4% received all or almost all calls on cellular telephones.
–35 million adults (15.4% of the population) lived in wireless-mostly households.
–Full news release found here
Nearly half (and likely more than half in December 2009) of all households use their mobile phone as their primary means to communicate. This weighs on both the long-term prospects for cable providers as well as traditional Local Exchange Carriers (LECs) that depend on Subscriber Line Charges (SLC) and per minute access charges to communicate. Ironically, the data in the CDC study shows that wireless-only is quickly becoming the choice among lower income households, particularly in the Midwest and West regions.
One of the best kept secrets of the early growth of wireless was that it actually grew switched access revenues for the LECs (more calling opportunities led to more terminating minutes). And the carriers got a second bonus – calls from the landline provider to the wireless carrier were not eligible to collect the same charges. These two factors kept revenues steady if not increasing, with minimal increases in costs per access line. However, as the terminating units decreased (less access lines), and the minutes per line also decreased (see point in the CDC findings above), the access revenue source (at 90% profit margins) dried up. A previous Reality Check article conservatively pegged the access loss “hole” for Verizon alone at $500 million just using the last 11 quarters of line loss, although competition from Cox, Time Warner Cable and Cablevision started well before then.
This mass market loss, coupled with increased competition on small business access lines, and accented by increased rollout and acceptance of IP solutions for enterprises, creates uncertainty for the long-term growth prospects of the wired telecom business. The LECs are betting on a business recovery, yet the cost to equip a new “desk” or “seat” over a VoIP solution is likely less than $10 per month for their competitors, usually with minimal or no term requirements. So, even if the business lines come back, they will likely return with much lower ARPUs and margins. Also, the emerging wireless providers (e.g., Metro PCS, Leap) have margin left to compete against the incumbents, where $35-40 unlimited voice plans proliferate today. Unlike the predictions LECs made in earnings announcements in 2007 and 2008, there is no slowing of the wire
less cord-cutting train, especially for voice. There is one R
20;tumbling” event that could accelerate the slope of the access loss line: an in-home/office solution that solves wireless coverage issues (this “cellsite” could come from many power sources such as a DVR or a wireless router). The first carrier to provide that solution for voice and data in conjunction with unlimited plans and applications unlocks disproportionate value.
That’s the first three trends. We welcome your nominations for others (the massive increase in applications and the subsequent wireless data issues they produced, as well as the infrastructure rollout of new cable modem technologies are current contenders). As always, you are welcome to join a more detailed discussion of this through the distribution of the Sunday Brief. Just send an e-mail to the address below and join the party!
Jim Patterson is CEO & co-founder of Mobile Symmetry, a start-up created for carriers to solve the problems of an increasingly mobile-only society. He was most recently President – Wholesale Services for Sprint and has a career that spans over eighteen years in telecom and technology. He welcomes your comments at [email protected].
