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.
One of the great things about summer, especially this year’s Midwest rainfest, is watching things grow. Trees, bulbs, our overflowing patch of garden. If only the postpaid wireless market were showing equal growth in the second quarter. With the exception of Verizon Wireless (VZ), who is running the table on the high end of the market with “switchers” thanks to the Thunderbolt/Revolution/Charge 4G handset trio, and AT&T Mobility’s (T) iPhone 3GS $49 offer, which is driving the entry point in the market for advanced smartphone services, it’s a quarter marked by experiments, projections and pressure.
Experiments: With Verizon Wireless’ handset lineup and the loss of the iPhone 4 exclusivity, AT&T Mobility has no choice but to respond with broad-based variety.
Since June 12, AT&T Mobility has lowered the price of the Atrix, HTC Corp. Inspire and Hewlett-Packard Co. Veer to $100, and slashed the Samsung Electronics Co. Ltd. Captivate to $50. Similar or greater reductions can be found on-line at Walmart.com, Best Buy, or RadioShack. Simply put, there’s a lot of non-iPhone inventory at AT&T Mobility right now. The diversification test (“Can AT&T Mobility thrive without iPhone exclusivity?”) is failing.
Fortunately for AT&T Mobility, there’s the iPhone 3GS, which has been attractively priced at $49 for the entire quarter. Customers who are renewing (and June is a big renewal month for AT&T Mobility – recall the iPhone 3GS hype in 2009?) their iPhone services are likely receiving compelling if not free offers (we’ve been offered a free iPhone at Mobile Symmetry to keep our test phone unit on AT&T Mobility).
Then there’s Sprint Nextel Corp. (S), who has experimented with dual screens on a 3G device (Kyocera Wireless Corp.’s Echo), 3D on 4G (HTC Evo 3D), a Wi-Fi only BlackBerry Playbook, and a (now) free Samsung Replenish with an monthly-recurring revenue discount. Like AT&T Mobility, Sprint Nextel has slashed prices on the Evo and Evo Shift, which are now available through Walmart.com for $10 (not a misprint) with a new 2-yr agreement. Sprint Nextel, like Verizon Wireless and T-Mobile USA Inc., also experimented with the introduction of a Windows 7 phone this quarter to mixed results. They also took a very bold move in March with their Google Inc. Voice integration announcement (allowing a Sprint Nextel user to port his Sprint Nextel wireless phone number to Google Voice). Both Sprint Nextel and Google have been quiet on the results. Sprint Nextel is throwing the book at 3G.
Despite multiple experiments, however, broadband saves Sprint Nextel in the second quarter. Without the Evo 4G launch a year ago, Sprint Nextel would be in dire straits. Sprint Nextel’s dependence on 4G (and the handsets that power them) is significant. A $10 Evo pulls in gross additions from Q3 to Q2, and the Replenish becomes a secondary feel good headline.
That leaves T-Mobile USA, the wild card of the industry.
When we left T-Mobile USA in early May, its results were deteriorating rapidly, but the focus was on the AT&T Inc. merger. Assuming AT&T does not attract a significant amount of gross additions in the second quarter, and 4G and the iPhone 4 continue to propel switchers toward Verizon Wireless, the picture likely stays the same or weakens for T-Mobile USA in post-paid. Even with Sprint Nextel’s newly implemented data surcharge, the rate difference is not compelling enough to lure Sprint Nextel 3G switchers to T-Mobile USA.
Assuming Sprint Nextel’s net add/loss continues to be in the +/- 200,000 range, and Verizon Wireless grabs a disproportionate portion of the higher spending 4G additions, the combined AT&T Mobility/T-Mobile USA entity will likely lose between 300,000 and 400,000 subscribers in the quarter. While this does not call into question the value of T-Mobile USA to AT&T Mobility (network synergies more than cover that), it does call into question their combined long-term growth rate in an all-LTE world.
Projections: This will be the most important part of the earnings results. Given Verizon Wireless’ undisputed strength in 4G, the following questions will arise:
–To Verizon Wireless: How quickly can you improve your 4G coverage and reduce the load on the 3G network?
–To Verizon Wireless: How soon to a 4G-only device for consumers, and for the machine-to-machine marketplace?
–To Verizon Wireless and AT&T Mobility: When will the 4G version of the iPhone be available? (Maybe Verizon Wireless will respond, but then again, maybe not).
–To AT&T Mobility: When will you equal Verizon Wireless’ 4G speeds on a similar footprint?
–To Sprint Nextel: How soon can the LightSquared network get deployed? Where will the money come from? How does Clearwire fit into this equation?
–To Sprint Nextel: Can you really build out Network Vision (the new LTE network) for less than $5 billion in 2012 capital spending?
–To Sprint Nextel: How quickly can you transition away from the high-cost iDEN network?
–To Sprint Nextel and T-Mobile USA: How soon to the iPhone 4S launch? Is it really September, as some news organizations have speculated?
–To T-Mobile USA: How quickly can the merger close? If it’s Q3 or Q4 of 2012, what are your customer/dealer retention strategies?
There are many more questions, but analysts’ eyes will be on improving performance throughout the year amid the backdrop of a fragile economy and an uncertain job market. New devices (iPhone 4S), new networks (4G), and increased/changed pricing plans provide clarity.
Pressure: The largest wireless carriers face many pressures, none of which is as great as the pressure to generate increasing cash flow and margins. This is difficult to do solely on the back of a data price increase. Voice profitability continues to rise as younger demographics use fewer minutes and more messaging/social media. Texting cash flow will remain strong, but push SMS services abound in the applications world and are proving to be a viable substitute for many cash-conscious consumers and families. And subsidy pressures will continue for several more quarters as smart phone adoption curves continue.
These pressures hit each of the carriers hard. Data usage, as we reported last week, is growing at high double digit percentage rates. The need to carry a fast processor on a fast network with Wi-Fi availability to run Netflix Inc. applications is not going to diminish. The pressure to offer sexier applications that require more data consumption across Apple and Android platforms is not going to diminish. Free smartphone pressure will also continue to proliferate, particularly at the end of each quarter. And, as we have discussed several times, the closer we get to “free” the greater the appeal of MetroPCS Communications Inc., Leap Wireless International Inc., Virgin Mobile USA, and Boost Mobile pricing plans.
Bottom line: The second quarter postpaid wireless performance will be marked by Verizon Wireless’ dual successes in iPhone and 4G, as well as the staying power of AT&T Mobility’s iPhone 3GS. Sprint Nextel and T-Mobile USA will continue their trends (Sprint Nextel flat to up, T-Mobile USA flat to down), and margin pressures will increase despite data rate price increases. MetroPCS, Leap and others will take more share than expected due to attractive handsets and 3G pricing. Everyone
will make a lot of projections, primarily about network rollout and new handset launches, and the believability of these
projections will drive stock price targets.
This will be the quietest second quarter for wireless in five years. That means plenty of fireworks throughout the rest of 2011.
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 comments at:[email protected].
