Reality Check: This summer’s winners and losers

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 Kansas City, where the summer is wrapping up and the Chiefs open their season on Monday Night Football. The hint of a “winners and losers” topic in last week’s column elicited many responses – some sarcastic, others more contemplative. Our industry is changing quickly: Droid is not quite a year old, Norlight/KDL/other middle mile entrants (not to mention Qwest Communications International Inc.) are changing ownership, and tablets were merely rumors at the beginning of 2010.
There are several momentum points, but to summarize the last three months in an easy to remember “ABC” format: a) Apple Inc.; b) Bandwidth; and c) Cash acquisitions – one centered around a single company, one around the growth of a secondary market for data ingress, and the last around business cycle growth through acquisition. Here’s our take on who’s got mojo heading into the last quarter of 2010:
1. Apple. No doubt about it, the antenna issues hurt iPhone4 sales. But “Back to School” equals “Back to Apple” and their iPod promotion (free iPod when purchased with a Mac) has been a tried and true success. iPad sales have exceeded expectations (and helped Netflix along the way), and the iTunes app store has been flying along off of the blockbuster Angry Birds app (although sports apps have been very hot in September). FaceTime, Nano, and iPod Touch add additional momentum. Apple sets the pace for consumer electronics purchases, and will soon have the content management capabilities that will ensure a more uniform, controlled experience. They also have $45 billion in cash and no debt/pension obligations. While iPhone4 sales will be slower than many lofty expectations, they will continue to impress.
2. Backbone Internet providers and server infrastructure. Thanks to network constraints, consumer machine-to-machine providers like the iPad, iPod and Kindle are going driving Wi-Fi utilization. When you disperse the source of data entry (vs. consolidating on a wireless carrier’s macro network), three new revenue sources emerge: 1) IP data connections to homes and businesses (e.g., the last mile or two); 2) regional transport to the nearest IP backbone (a.k.a., the middle mile); and c) hosting or managing the delivery of content across the backbone (e.g., Akamai, switch and data/Equinix). Think about it: If the wireless carriers networks were fast, ubiquitous and free (e.g., one monthly network access fee), would we have Wi-Fi (except for 3G/4G hot spots)? Some will argue that we are on the cusp of a new carrier network wave, driven by LTE. But we just sold all of those Wi-Fi only iPads, iPods and Kindles. My money is with Apple and Amazon.com Inc. As such, I’m siding with the dispersion of IP entry points. This helps the wireline sides of AT&T Inc., Sprint Nextel Corp., Verizon Communications Inc., and Qwest as well as Level3, Akamai and Equinix.
3. M&A. The Dell Inc./Hewlett-Packard Co. 3Par bidding battle (won by HP for $1.15 billion) capped off an extremely acquisitive summer. Intel Corp. bought MacAfee ($7.68 billion), Nokia Corp. bought Motorola Inc.’s wireless unit ($1.2 billion), IBM Corp. acquired BigFix ($400 million), Intel acquired Infineon’s wireless unit ($1.4 billion), and Google Inc.’s pre-fourth of July acquisition of travel software company ITA for $700 million are but a small example of the deal frenzy that made the summer of 2010 a liquidating event for some. On top of this, Overland Park, Kan.-based Q-COMM sold their Kentucky Data Link and their Norlight operations to Windstream for $782 million. And Cablevision bought Bresnan for $1.4 billion. Most of these transactions are cash-based, which unlocks more cash to get reinvested in the next wave of start-ups. With hundreds of billions of cash on corporate balance sheets earning close to 0% interest, the party isn’t over yet. Transactions are back.
I’m sure I will hear from many of you on what I left out. The increasing role of value (starting with AT&T’s bold move with metered plans in June, and capped off by this week’s “Kids Are Free Until 2012” promotion by T-Mobile USA) is definitely an honorable mention, but we’ve had value-oriented plans ever since the market started to collapse in 2007. The smart phone bonanza beyond iPhone4 (Droid X/Droid 2, EVO, Samsung Galaxy, BlackBerry Torch, and many more) also deserves a runner-up spot. These trends will continue into 2011, but didn’t get the summer focus like the three above.
What didn’t work this summer? What tech trends were to telecom what “The Sorcerer’s Apprentice” and “Prince of Persia” were to the U.S. summer movie scene? A couple of notable mentions:
1. Post-paid feature phones and wireless modems (as opposed to portable hot spots). With the increase in demand for smart phones comes a corresponding decrease in the need for the traditional clamshell or candy bar phone, especially in the post-paid environment. This, coupled with new pricing from Chinese manufacturers Huawei and ZTE, impacted the profit picture of Sony Ericsson, Pantech and Nokia (and, to a lesser extent, Samsung and LG). As we discussed in last week’s post, it’s not impossible that the dialer itself could die out within 3-5 years for the smart phone segment. Last September, AT&T offered 11 flip phones in its lineup (including four from Motorola); this year, only six (and none of these are made by Motorola). Verizon currently has 13 feature phones in its lineup, vs. 17 last year. Wireless modems (except Sprint Nextel WiMAX modems) are also being quickly replaced with hot spot-based products, some of which are embedded in new handsets.
2. Net neutrality hysteria. The Federal Communications Commission initiated “talk amongst yourselves” as the way to bring about a framework for net neutrality, only to see Google and Verizon come up with a framework that benefitted few but Google and Verizon (and perhaps AT&T). The world didn’t end this summer because of April’s court ruling. Jurisdictional uncertainty can linger for six or even twelve months while a new House of Representatives and partially new Senate figure out how to push power back to the states and away from the FCC. Aggressive regulation of the last mile will not occur in the next 60 days, and as a result will likely not resurrect itself until 2013 at the earliest. Even with the increase in demand from Wi-Fi equipped devices (and femtocells should they ever take off), bandwidth will be a lower priority than the hysterical few would have us believe. Simply put – the marginal costs to improve the transport infrastructure are low and getting lower. With more competition coming from LTE, the duopoly cannot last forever for the entire market. We should define the rules, but they should be initiated through the legislative and not the executive branch of the government.
Again, many of you will say Facebook had a very rough summer. But that simply means that they grew somewhat less than others expected. Facebook will continue to grow, but likely through a series of sub-brands – some more private and exclusive than others. Many of you will want to tar and feather BlackBerry and Palm – after all, Research in Motion’s stock is performing worse than Nokia. I keep RIM/BlackBerry out of the headline, however, because of their strong embedded base, a subscription model which generates a lot of cash, and a strong balance sheet (over $2 billion cash on hand). They have a logical exit as well, into either IBM or Microsoft. I do not see an equivalent exit for Nokia or Sony Ericsson.
So what are we left with as we head into the fall season? 1) Smarter devices using more bandwidth
and applications from Apple, Google, and Bl
ackberry. 2) Generally, any management of these data streams will largely be self-regulated. 3) Wal-Mart will continue to be stronger as a mass market wireless distribution channel with their Straight Talk and Common Cents products, and build on increasing value demand for voice and text to generate a base of five million customers by July 2011 (it’s second year of operation) . 4) The role of China in the U.S. telecom space will generate rhetoric not seen since Koran burning threats (hint: China wins, and we need them).
I welcome your comments and thoughts. Next week: more on Mobile Symmetry progress and a look at wireline trends.
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 atjim@mobilesymmetry.com.