Reality Check: The Apple effect – it's everywhere

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.
Several companies provided earnings and further guidance last week. Interestingly enough, all of these earnings results were shaped by one company – Apple Inc. (AAPL) Many of you remember one of my first columns for RCR Wireless News called “The question every board member and shareholder wants you to answer,” which detailed the sprawling effect of Google Inc.’s (GOOG) strategy. For 2011, however, the questions (and answers) now circulate around Apple.
The Apple effect is far flung. As we will see, it impacts Microsoft Corp.’s (MSFT) outlook for PC market growth. Verizon Wireless’ (VZ) iPhone launch certainly impacted AT&T Mobility’s (T) results (as we saw last week). Sprint Nextel Corp. (S) even attributed the fact that they would likely have had positive postpaid net additions had it not been for the Verizon Wireless iPhone launch and AT&T Mobility’s subsequent $49 Apple iPhone 3GS 8GB offer. Time Warner Cable trumpeted 360,000 iPad app downloads in the first minute of their earnings conference call. And Research In Motion Ltd. had a not-so-shocking announcement to that their shipments in the current quarter would be down, and that their phones shipped would be at the lower end of the range (meaning, less Torches and more Curves).
And, as we discussed in last week’s column, the industry influence is clearly translating into shareholder sentiment. Even with the increased press coverage over the iPhone’s location data storage, Apple has created $21 billion in value for their shareholders over the past two weeks. Others have gained (and, surprisingly, improved their year-to-date gains) but Apple has set the standard.
Let’s see how Apple impacted Sprint Nextel’s earnings. Overall, Sprint Nextel reported good earnings, and, while they did not improve their post-paid retail gains over 4Q 2010, they certainly showed that they could pass through a usage-based data price increase to their customers. Sprint Nextel still has a ways to go in their earnings before interest, taxes and depreciation margins (there’s a good chance that T-Mobile USA Inc.’s absolute EBITDA will actually be higher than Sprint Nextel’s, as it was throughout 2010; Sprint Nextel’s margin as a percentage of service revenues is still 1,300 to 1,500 basis points below T-Mobile USA). Many analysts struggle with the sustainability of Sprint Nextel’s prepaid play, which just received a new entrant, Verizon Wireless, last week.
But one of the biggest questions for Sprint Nextel was “can you grow without the iPhone?” Dan Hesse, Sprint Nextel’s CEO, responded as follows:
“… we do we typically see a significant impact upon the launch of a new device or in this case, the iPhone 4 on a new carrier Verizon. But it continues to be – the iPhone does continue to be a significant, if you will, competitive threat to us. First, in the hands of AT&T and then in the hands of Verizon. The additional impact of the iPhone has had on us recently and continues to have it is, AT&T is pricing the iPhone 3GS at $49. So you have to think about both Verizon’s iPhone 4 and of course, AT&T’s response to that, which I alluded to in my opening comments, not only continuing to offer the iPhone 4 but offering a lower-priced 3Gs. So the iPhone continues to be, quarter after quarter, a successful device and one that provides very strong competition to Sprint. But needless to say, Verizon’s introduction of their new iPhone in Q1 this past quarter did have a notable impact on our net add performance for the quarter.”
Some will claim that Sprint Nextel reached their high mark at 4Q 2010, and that the post-paid losses will continue at 2010 levels for the foreseeable future. Had Sprint Nextel not taken the steps to shore up their Clearwire Corp. relationship and coordinate network planning with other companies, I think that would have been the case. But with post-paid churn at 1.84% (an incredible number in light of Sprint Nextel’s historical churn levels), 4G LTE launches starting in late 2011, and a decent non-iPhone lineup, we should see more positive net add figures than negative ones.
Others will claim that Sprint Nextel is on the verge of overtaking AT&T Mobility in the net additions race in 2Q, which I think could happen if the new Evo device launches are as successful as last year. The first quarter has traditionally not been Sprint Nextel’s strongest and the second quarter tends to be very strong for post-paid churn. Sprint Nextel is investing in 3G data (with little need to invest in voice as usage continues to drop for both post-paid and pre-paid users), and the Clearwire commitment should help bolster existing market bandwidth augments.
But no iPhone? iPad2? Even into 2012? I can’t see it. Apple hinted strongly in their conference call that they are open to additional carriers. Here’s Tim Cook’s quote on the topic:
“On the carrier side, I don’t want to get into specifics about the CDMA or GSM for that matter. But we are constantly looking at where we should bring on incremental partners. And as we have said earlier, we brought on 3 this quarter, 3 large ones with Verizon, SKT and Saudi Telecom. That’s on top of the ones that we brought on in December where we added O2 and Vodafone in Germany. And so we are constantly looking and adding where it makes sense, and you can keep confidence that we’ll continue to do that.”
We also know from some recently published reports that some within Apple see an opportunity to extend the life of the 3GS through the prepaid segment. This would have been unthinkable just a few years ago and is indicative of how far we have come in the past two years with the introduction of smartphone operating systems into MetroPCS Communications Inc., Leap Wireless International Inc., Boost Mobile, Virgin Mobile USA and others. Frankly, the idea of Wal-Mart selling the iPhone 3GS as part of their Straight Talk plan should send shivers down the back of Samsung Electronics Co. Ltd. and LG Electronics Co. Ltd. Could Wal-Mart, one of the largest distributors of the iPod and iPad, sell the iPhone as a wholesale product? You bet.
And Microsoft? According to a recent presentation from Microsoft, the Windows/Windows Live division is about 25% of Microsoft’s total revenues and a driver of cash for the company. In its presentation Microsoft notes that consumer PCs are tanking and about to get worse, and netbooks within the consumer PC segment have nearly vanished (remember when netbooks were the rage?). Microsoft benefitted from netbooks (as did Intel Corp. and others), but that benefit eroded quickly. The latest quarter shows how the iPad 2 momentum clearly changed consumer buying habits. The question now becomes “(When)
will iPad users ever return to Microsoft?”
Microsoft is not going any
where – they just crossed $50 billion in cash and marketable securities. A strong Nokia Corp. (and hopefully stronger RIM/BlackBerry) relationship can provide an alternative if Microsoft gets their act together on applications. But a full year of iPad sales is starting to impact Microsoft’s growth outlook. What a change a decade makes.
Jim Patterson is CEO and co-founder of Mobile Symmetry, a start-up created for carriers to solve the problems of an increasingly mobile-only society. Patterson was most recently President – Wholesale Services for Sprint and has a career that spans over eighteen years in telecom and technology. Patterson welcomes your commentsatjim@mobilesymmetry.com.