Reality Check: Wireless earnings and Neapolitan ice cream

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.
It’s hard to believe we are six days into April. But we are, and, as most of us who have sales backgrounds know, the year is likely made or lost by now for most of the telecom carriers (note: this cuts both ways – not just accounts won, but accounts saved and not lost).
First quarter earnings are around the corner for the wireless carriers, and I thought that, in the “apps” tradition, it would help to associate elements of earnings with common icons. This week, we’ll cover the Neapolitan ice cream effect, and next week the relationship between earnings and vibrating beds. More information and a fairly robust dialogue can be found on The Sunday Brief.
Nothing says fun like Neapolitan ice cream – three flavors in one half gallon – there’s something for everyone. And watching each of the wireless carriers twist the meaning of a) post-paid, b) pre-paid, and c) wholesale (including machine-to-machine) gross and net additions (including churn) will be nothing short of comedy this quarter.
Verizon, for example, will deftly have to explain their newfound embrace of wholesale net additions after years of sole devotion to retail. Forty-five percent of Verizon’s net adds in 4Q 2009 were from the wholesale channel (3Q was 80%; 2Q was 100%); at least 55% will come from this channel in Q1 as Simple Talk, the Tracfone pre-paid wireless service, takes hold in each Wal-Mart. Explaining the value created by this new, non-retail minute-consuming channel will be a test for the most retail-centric carrier in the U.S.
AT&T will have a slightly different wholesale flavor – this time, it’ll be more of the Kindle/Nook/telemetry and other M2M, which they explained well in 4Q when they had nearly two net adds from the reseller channel for every retail net add (retail pre-paid net adds were negative for AT&T as they shift their strategy in this segment – to Verizon, Leap and Metro PCS). That ratio might be higher than two in the first quarter – not due to lower retail post-paid net additions (which will be much lower due to seasonality), but because of the non-seasonal nature of M2M growth. With more iPad sales in 2Q, the figure will continue to grow throughout the year. AT&T has been vocal in their comfort with more connected devices – as we have discussed in this column previously, M2M makes a lot more sense as an extension of an already strong IP/MPLS/SIP network strategy than as a “handset” or “device” connection strategy. AT&T seems to understand this better than their peers.
Both AT&T and Verizon have plenty to talk about with their primary Neapolitan flavor – post-paid. ARPUs will be up from Verizon with their surcharge intact for all 3G handsets, and AT&T still has the iPhone, which, as we have discussed previously, has helped raise the overall voice post-paid voice yields for the company (and voice yields should continue this trend in Q1).
Unlike AT&T and Verizon, Sprint and T-Mobile will have to talk about the effect of a retail pre-paid strategy on their respective futures. Sprint also has a lot to talk about with “Any Mobile, Anytime,” as well as the expansive Sprint Free Guarantee. They also made a sizeable bet with the Virgin Mobile acquisition, and T-Mobile’s new FlexPay changes look more like what Ford Motor Credit did for selling automobiles (not criticizing the strategy – it might be the right move at the right time – but a financing strategy is a flavor of acquisition cost, and T-Mobile is leading the way).
Bottom line: Careful translation will be needed in Q1 when it comes to “net adds” and the effect on overall profitability. A good rule of thumb is: 1 retail post-paid = 3-4 retail pre-paid = 10-20 wholesale customer net additions from an OIBDA perspective. Focus on the trend, not the number. Finally, one last point: watch the subsidies in pre-paid retail. If they are growing, start worrying.
Next week – what vibrating beds have to do with first quarter earnings. More details and some interesting dialogue on www.thesundaybrief.com.
Now for five you may have missed:
1. Steve Jobs shows up for 30 minutes to see how those iPad sales are going. Woz also showed up at the mall. Hint: Do a month-long stint at the stores and see how the other half lives.
2. Amazon revised their pricing to reflect iPad business model structures. Still waiting for the other shoe to drop here. Hint: Tie Kindle purchases to “prime” status and store credits – please!
3. According to Seeking Alpha, Comcast’s value is increasingly driven by voice. In three years, we’ll swap voice for commercial services. Pedal faster, guys!
4. T-Mobile has sold out of their i-Phone killer, the HTC HD2. Saw it at CTIA – to quote a previous column, it’s a “Man-Sized” Touch Pro 2. No wonder AT&T’s HTC lineup is free on Wal-Mart.com.
5. Google renamed their company Topeka as an April Fool’s Day prank. All roads lead to Google? That’s no joke. Hats off to the motley bunch in Kansas who started the Topeka/Google initiative.
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.