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.
Greetings from the ice-crusted prairie where we celebrate mid-30 degree temperatures. The mercury wasn’t the only thing that rose this past week as Cablevision, T-Mobile, Metro PCS, CenturyLink, Leap Wireless, Frontier and a host of others reported earnings. Rather than delving into the specifics, here’s the earnings Reality Check:
1. T-Mobile and Sprint continue to lose post-paid customers to Verizon and AT&T.
2. Verizon’s wholesale customer, Tracfone (d.b.a. StraightTalk), drove more 4Q pre-paid net adds (1.226 million) than Sprint (435K), Leap (298K), AT&T (-58K), Verizon retail pre-paid (55K est.) and T-Mobile (488K) combined. Including MetroPCS (317K net adds), Tracfone represented over 44% of the pre-paid net adds in 4Q.
3. Customers are still continuing to cut the cord, although there’s “less loss.” Qwest lost 295K, Verizon lost 808K, AT&T lost about 900K (766K consumer and 128K est. business), and CenturyLink about 220K, while Comcast gained 243K, Time Warner gained 84K, and Cablevision gained 51K, where voice penetration is up to 42.5% of homes passed. Other smaller cable providers like Mediacom continue to gain share (13K net phone additions).
4. High-speed data growth share is going to the cable companies, especially in areas not covered by LEC fiber deployments. Comparison: Even with FiOS competition and an already whopping 53% penetration, Cablevision added 46K high speed Internet customers while CenturyLink added 47K DSL customers over a footprint at least 3x larger than Cablevision.
5. “Fiber to the cell site” (a wholesale service) was highlighted by Qwest and Frontier as a primary growth engine, heightening their dependence on wholesale special access as a profit source.
2010 hasn’t started well for telecom. Excluding dividends, the investors in Verizon and AT&T have lost nearly $30 billion in equity value since the beginning of the year (and this on the back of $5 billion in market capitalization lost in the “bounce back” 2009 year that was). The only solace in that statement is that Google shareholders have lost about $30 billion in the first two months of 2010 as well (however, unlike VZ and AT&T, they created $99 billion in equity value in 2009). Overall, only two stocks in the “ground vs. cloud” battle have actually gained value this year – Qwest and Time Warner Cable (full chart available on request).
But enough about earnings and value destruction. We have dinosaurs to deal with. According to Wikipedia, the term “dinosaur” refers to a “terrible, powerful, or wondrous lizard.” Let’s think about three such lizards in the telecom industry: 1) a POP/ LATA structure left over from the 1983 AT&T break-up ruling; 2) a phone-numbering structure that continues to run nearly every telecom database in the world; and 3) the view, especially among the largest wireless carriers, of national distribution and marketing.
1. The Apatosaurus: Local access and transport areas. Let Wikipedia do the talking:
“LATAs contribute to an often confusing aspect of long distance telephone service. Due to the various and overlapping regulatory limitations and inter-business arrangements, phone companies typically provide differing types of “long distance” service, each with potentially different rates:
–within same LATA, within same state
–within same LATA, between different states
–between different LATAs, within same state
–between different LATAs, between different states
Given the complexity of the legal and financial issues involved in each distinction, many long distance companies tend to not explain the details of these different rates, which can lead to billing questions from surprised customers.”
As telecom historians recall, the concept of LATAs was to set up service boundaries beyond which the Local Exchange Companies would not provide certain services. These were removed 10 years ago when the carriers applied for and received Long Distance relief. But did intraLATA go away? Nope. If the FCC Chairman wants some low-hanging fruit, removing LATA boundary restrictions would be a good start. IntraLATA access is diminished thanks to wireless anyway, which uses a Metropolitan Trading Area boundary system.
Exhibit 1: The United States, by LATA
Because of the LATA distinction, inter-LATA carriers (the good ol’ name of those long-distance companies like MCI and Sprint) had to locate a point of presence within each LATA. Remove the LATA distinction, and allow the carriers and the nationwide/global IP providers to negotiate more cost efficient deals. Have a look at the Sprint map, for example, and I think you’ll see what I mean (MCI and Qwest have the same issues).
2. The Brontosaurus: North American numbering plans
You want to rock the world of telecom? Change the North American Numbering Plan. It was formed to make it easier to dial long-distance and first implemented in 1947 – when Truman was president. It’s now left us with area code maps that look like the following:
Exhibit 2: Area codes – The definitive dinosaur
Here’s the issue – all of those Comcast and Time Warner Cable phones – they have a phone number for the purposes of convenience only – they complete all of their routing through IP addresses until they need to get off-net (meaning the non-IP phone number they are calling). To facilitate off-net calling, special pieces of equipment called media gateways are needed that convert the call from IP to traditional Time Division (TDM) circuit switching. They cost a lot of money. Facilitate something like a common directory of names with unique identification that is number-less (yes, still pitching the idea of a name-based directory), and you’ll put the industry back on hyperdrive. Skype has a directory that allows me to connect with another individual without “dialing them up” – my Gmail account can contact other users without a TDM connection. This dinosaur takes time to phase out, for sure, but could you imagine if a new “number” had to be assigned for every Facebook or LinkedIn account? Or if the associated directory resembled the state or LATA maps above? Now we see why the Internet and telecom worlds mix about as well as oil and water.
Give me an IP address – for life. Don’t publish it – ever – but make it available in a name-based directory that users maintain and control. Make it as easy as a Skype on-net connection. Eliminate all charges between any two IP addresses. What a concept.
3. The Pterodactyl – national marketing and carrier-owned distribution
Admittedly, this dinosaur is in its infancy, but one thing that is becoming very apparent with carriers like Leap and Metro PCS is that “all telecom is local.” However, with the collapse of smartphone pricing, if you are willing to switch carriers (both AT&T and T-Mobile had their top of the line HTC phone, the Tilt 2, for free through Wal-Mart and Amazon.com), the main issues to consider are network quality and price. Network quality is truly a local issue (just ask AT&T in San Francisco and New York City), and, thanks to Cricket and Metro PCS, price competitiveness and marketing is becoming more local than ever. It needs to be balanced with simplicity (not like the early days
of mobile or long-distance services), but better local man
agement and flexibility has been proven to enhance profitability. This is one reason why wireless companies struggle with femtocells (the ultimate local application).
With simplified unlimited rate plans, and flat-rate text and data plans, service calls come down. With on-line distribution proliferating and “fun to sell products” like the iPhone actually attracting customers to stores, the allure of a company-branded store is diminishing. And with many phones starting to look alike (see comparison below), distinguishing one phone from another is becoming harder by the day.
Stores are becoming expensive class-A service centers. Margins are getting harder to defend as subsidies rise. MRC pressures, which began in voice in 2009, will begin to mount on text messaging by the summer/end of year. Data pricing pressures are not far behind. Why have (as many) stores? As we’ve stated in earlier Sunday Briefs, no one buys Verizon because they are a better retailer than Target or Wal-Mart. Why not apply the “division of labor” rule to wireless retailing?
Exhibit 3: Look smashing in black with or without a keyboard! (Verizon Wireless phones for sale at Amazonwireless.com)
That’s all for now. I welcome your comments, and stay tuned to www.thesundaybrief.com for updates throughout the week.
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 jim@mobilesymmetry.com.
