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.
“Palm’s innovative operating system provides an ideal platform to expand HP’s mobility strategy and create a unique HP experience spanning multiple mobile connected devices,” said Todd Bradley, executive vice president, Personal Systems Group, HP. “And, Palm possesses significant IP assets and has a highly skilled team. The smartphone market is large, profitable and rapidly growing, and companies that can provide an integrated device and experience command a higher share. Advances in mobility are offering significant opportunities, and HP intends to be a leader in this market.”
The preceding quotation is from Hewlett-Packard Co.’s acquisition announcement less than 16 months ago. Last week, with the completion of the Palm Inc. acquisition little more than a year old, HP killed Palm and put its computer division up for sale or spinoff. The journey from desired to dead in record time.
Where did HP go wrong, and what does this tell us about the state of other merger assumptions in the wireless and technology industries? First, HP failed to realize the speed with which others were moving in the handset industry. They assumed that if they met their timelines, their competitive breakthrough would be near. It wasn’t – others moved faster.
Second, HP underestimated the costs to build an expansive developer community. Offering thousands of applications might work for first-time smartphone buyers, but to the Apple 3G customer who purchased her first smartphone in 2009, the Pre 3 or Veer is a downgrade. On launch, HP needed at least 75,000 applications including all of the top 50 apps. They had a fraction of that. Time moved on, but Palm’s app store could not keep up.
Third, HP misread the role of phone operating systems within the wireless carrier’s distribution networks. They had a view of the world that was (at least) two years old, where smartphone devices were the product, and not the Android, Apple and BlackBerry brands. HP assumed that Verizon Wireless and Sprint Nextel Corp. would eventually move the same way AT&T Mobility did – as broad-based carriers. As we discussed in the “Android Nation” series of articles, reducing the benefits of the Veer vs. the iPhone4 or BlackBerry Torch is a multi-minute experience. Aside from devoted customers, the Veer was not going to attract disproportionate “new to category” users against the in-store messaging of Android, Apple and BlackBerry. Palm’s best case was a few seats from the back of the bus, and, when their product roadmap failed to keep pace, they finally were asked to leave.
Lastly, when they had the chance to be the technology leader and take a risk with an early 4G device, Palm deferred. They failed to realize that, within two years of the launch of the Palm Pre and only one year after the launch of the HTC Corp. Evo 4G, over 20% of Sprint Nextel’s postpaid retail CDMA base would be on a Clearwire Corp. 4G plan (6 million out of 28 million). Assuming that Palm (prior to the HP purchase) had the chance to be a secondary phone launched alongside the Evo, not leading with 4G might have been the biggest mistake of all.
Competitive speed, applications adoption/migration, distribution strategy changes and technology improvements. All of these reasons share a common Y-axis: time. As an entrepreneur, time is what wakes you up in the morning. It’s the 15-hour energy throughout endless days. It’s what drives development, product prioritization and funding decisions. “Wait for me!” is a futile cry. Time is a factor in everything we do at Mobile Symmetry. There’s never enough of it, and it’s our most precious and perishable resource.
Time is usually your friend. It’s a coach, a motivator (“beat the other guy to market”), a source of pride, a common bond. That is, until you run out of time. Then it devours. It prevents clear thinking. It destroys teamwork. It leads to distracting arguments and discussions. “How do I make the next quarter?”replaces “How do I fulfill my customer and product objectives?” Or even “How do I win?” as the sole discussion topic. Everything becomes a crisis, and nothing gets done easily.
Against this backdrop of time we have AT&T Inc. pending acquisition of T-Mobile USA Inc. Announced five months ago, we’re nearly at the halfway point to the expected completion of the deal. Here’s a brief snapshot of T-Mobile’s business through June.
There’s a lot to sort through in the categorization of a postpaid customer when you look at T-Mobile USA’s earnings trends. First, they re-categorized plans sold through Wal-Mart Stores Inc. from prepaid to postpaid. Secondly, as many analysts have noted in articles and analysis, T-Mobile USA is making some headway in their connected devices segment through both consumer electronics and machine-to-machine channels.
Excluding changes in connected devices as well as the Wal-Mart Family Plan re-categorization, T-Mobile USA’s situation got slightly worse, with losses of 665,000 to 670,000 retail postpaid customers in the second quarter versus losses of 663,000 retail customers in the first quarter. At $52 per user per month, that’s $415 million in annualized revenue left to be made up by two-for-$70 unlimited text and talk plans as well as $2 to $10 ARPU connected device plans.
This is why revenues will fall for T-Mobile USA throughout 2011 (total revenues were down 2% sequentially and 6% year over year) – there aren’t enough $35 customers to make up for the loss of $52 customers. The $52 per month customers they are gaining or retaining carry handset subsidies (smartphones for nearly free), which accounts for the stunning 35% decrease in equipment revenues from Q2 2010. AT&T’s hopes of generating revenue synergies from the deal are perishing with postpaid churn running at 2.4% (about 3-times higher than Verizon Wireless’ postpaid retail churn) and total churn at 3.3%.
Meanwhile, T-Mobile USA has begun to launch HSPA+ 42 megabit per second capabilities, which is their even faster network. In order to gain the full effect of the 42 Mbps network, however, you need to have devices with radios that can receive that specific signal. Today, only one connection device (a laptop connection card) can access the full effect of the network, and a smartphone capable of using the increased speeds is not expected until October. This network upgrade is needed just to keep up with Verizon Wireless and to maintain a competitive lead on Sprint Nextel/Clearwire.
More network capital ($2.5 to $3 billion this year at current pace), increased free smartphones/devices ($2 billion this year at current pace), and decreasing revenues (6% or more at current pace) – what does AT&T see in T-Mobile USA that justifies a $39 billion purchase price or nearly $1,200 per customer?
Simply put, AT&T wants scale in 2012. They want a deeper presence with Android. They want HSPA+ 42 Mbps faster. Time is of the essence. Without quick action, Sprint Nextel plus Clearwire plus funding will figure it out. If the calculations above are correct, Sprint Nextel’s dependence on Clearwire’s network will increase before it eventually decreases (and one could surmise that the 20% of Sprint Nextel’s post-paid CDMA customer base on 4G are likely their highest value customers). Verizon Wireless will complete its LTE build and drive its LTE customer base to 20 million (20%) by the end of 2012. And a Huawei Technolog
ies Co. Ltd. or ZTE Corp. $199 (pre-subsidy) 4G phone mi
ght disrupt the equation.
Could time devour AT&T as it did HP? It’s out of AT&T’s control. That should give us all pause.
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.
