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.
This week, we begin with a quote from the new CEO of Verizon Communications Inc., Lowell McAdam:
“…We have just finished taking the top 300 leaders of Verizon through a class we call leading for shareholder value. Fran and I teach significant sections of the class, which focuses on how we can drive the business to higher returns. I am very pleased by the reaction of the senior team and their commitment to our success. We use the term, there’s always a higher gear, meaning no matter where you are in the business, there are opportunities to improve. That’s what makes being part of Verizon so exciting, and that’s what positions us so well for the future.”
This week, Verizon showed why they are the leader in telecom – they found the higher gear. As we mentioned in the Q2 preview a couple of weeks back, it was going to be a good quarter for Verizon. Recent comments at industry conferences implied that the iPhone was taking off in their stores and that 4G (Android) sales were also brisk. Google Inc. and Apple Inc. both posted strong earnings, and with AT&T Mobility reporting a modest 331,000 postpaid net additions, thanks to Apple iPhone 3GS exclusivity.
The results have shown that for every net addition AT&T Mobility has brought in since the beginning of the year, Verizon Wireless has brought in close to six. That metric for the past four quarters is a mere 2.4, but still impressive. In the past, we have looked at how duopolistic the industry has become, with two carriers consistently grabbing 100% or more of the quarterly net additions. Starting in Q1 (which, admittedly was a unique quarter given the launch of the iPhone 4 at Verizon Wireless), the equation has now shifted to a monopoly – Verizon Wireless represents all of the net postpaid growth in the industry for the past three quarters (and likely four).
We have moved past the discussion of a duopoly – it’s now becoming a monopoly in postpaid. Verizon has spent $8.9 billion this year on network upgrades to keep this advantage ($5.4 billion of this wireless), and their wireless unit has a mere $6 billion of net debt.
Earlier in the week the shot clock on the AT&T and T-Mobile USA Inc. merger stopped. In the note from the Federal Communications Commission to AT&T, the following reason was cited:
Within the past week, AT&T has indicated that, since filing its public interest statement supporting its proposed acquisition of T-Mobile and its opposition comments to various petitions to deny the merger, it has developed new models upon which it now relies. Indeed, AT&T is now expressly relying on these models to bolster its arguments concerning the size of the efficiencies made possible by the merger as weighed against the potential anti-competitive effects. We first learned of the scope of these models on July 13, 2011, during an ex parte meeting on economic issues held at the Commission, and now understand that our first opportunity to access the finalized versions of the new models will be on July 25, 2011.
The model has changed since the beginning of the year. AT&T realizes it, and is using this seismic shift to justify their merger with T-Mobile USA. The gap between the weakest and the strongest grew, and without the combined scale of AT&T Mobility and T-Mobile USA, only Verizon Wireless will get stronger. AT&T’s argument is now that a duopoly is the best outcome, and that we should avoid a monopoly at all costs (the irony of this statement).
On a recent visit to our local Verizon Wireless company store, the ingredients of the “higher gear” were apparent:
–To my left as I walked in the store, 4G Droid robots attacked me with unprecedented processor speeds and bandwidth. Many devices, all of them black.
–To my right, I was greeted by the colorful iPad 2 and the new white iPhone 4G. The contrast could not be more striking.
–Every device worked.
–The store reps knew their product, and swapped in a new SIM card for the Mobile Symmetry BlackBerry Tour test phone in less than three minutes (the retail BlackBerry display of three phones was “around back.” “We don’t sell as many BlackBerries here as they do downtown” was the polite response).
–They confirmed what we’ve been surmising all along – that the iPhone 4GS was selling itself. The apps transition was seamless and the only point of contention was the contact list exchange (hence the store rep’s high degree of interest in Mobile Symmetry).
No feature phones, BlackBerries, Windows, or Palm when you enter the store – just Android and Apple. Applications are the focus and the network is the feature. Simplicity is the higher gear. Contrast this to AT&T’s “something for everyone” strategy which leads to increased training and service expenses.
It’s no wonder, then, that 60% of the postpaid devices sold were smartphones, and that data makes up 40% of total wireless service revenues. Also, it’s also no wonder that 23% of the new LTE and Apple sales are coming from feature phones. The 4G vendor community is rallying around Verizon Wireless for a big Q4, and everyone (and especially Verizon’s new CEO) is looking for the iPhone 5 “in the fall.”
Does Verizon have problems? Sure. Labor negotiations in their wireline unit; small business growth; overall wireline access line growth; extremely low (but slowly growing) operating margins in wireline; keeping capital expenditures in check.
But they are the leader – first, at the beginning of 2010 with their mandatory data minimums for all but feature phones. Then in 4G network deployment (both for handsets but also for machine-to-machine devices). Finally, in the cloud with the Cybertrust and Terremark acquisitions.
More gears present more possibilities – global/ enterprise, applications (no mention of Skype Ltd. anywhere in the earnings announcement), devices and wireline all represent additional miles of opportunity. There’s always a higher gear.
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:jim@mobilesymmetry.com.
