Editor’s Note: Welcome to our weekly Reality Check column where we let C-level executives and advisory firms from across the mobile industry to provide their unique insights into the marketplace.
We are getting very close to the end of the quarter in the telecommunications industry. This quarter has been marked by many significant events, including:
–T-Mobile US’ launch of new pricing plan structures.
–T-Mobile US’ launch of the iPhone (specifically the iPhone 5 at a $99 “down payment” price point).
–T-Mobile US’ completion of the MetroPCS acquisition.
–AT&T’s launch of an unbranded (yet wholly-owned) All-In-One (AIO) Wireless mobile virtual network operator.
–AT&T’s aggressive use of phone “trade-ins” to drive lower post-paid entry points.
–Sprint Nextel’s significant progress in completing their LTE rollout (called Network Vision).
–Sprint Nextel’s completion of the U.S. Cellular spectrum purchase.
–Sprint Nextel’s turndown of the iDEN network (which officially goes “lights off” next weekend).
–Sprint Nextel’s resolution of their (but not necessarily Clearwire’s) ownership structure.
–The launch of the Samsung Galaxy S4 (and the HTC One X).
–All of the “big 4” pursuits of voice-less connections (machine-to-machine, tablets, Kindles, etc.) and the branded prepaid/no-contract segment to bolster net additions.
This is by no means an exhaustive list, but indicative of the many moving pieces that will be seen as each of these carriers announce their earnings in late July. A few highlights and themes to follow would be:
John Legere’s imprint on T-Mobile US: One of my most read Reality Check columns was the “Dear John” article from late last year that outlines the things that I/we thought should occur prior to enable T-Mobile USA’s survival. One of the critical elements of this plan is the restoration of T-Mobile USA as the undisputed value leader in wireless data. T-Mobile US has done precisely this with their wireless smartphone “payment plans.”
Take the relatively simple “hot spot” change that T-Mobile US made with their smartphone plans. Yes, even with their 500 MB plan, hot spot usage is included in the 500 megabyte allocation (AT&T Mobility requires you to purchase a 5 gigabyte plan before including hot spot functionality on a smartphone, and Sprint Nextel’s unlimited data plans by nature include hot spot usage for an additional fee).
Super smartphones (including the iPhone 5) improve the customer experience and substitute high up-front pricing with affordable monthly payments. Fixing the annoying things like tethering and “add-a-line” pricing that drove up costs (and consequently drove down adoption, especially for the occasional user). Internally, it is rumored that T-Mobile US has taken out free soft drinks in the corporate offices and also significantly curtailed many free phone plans extended to long-time employees.
On top of all of this, T-Mobile US now has their own currency. It’s done fairly well since its May 1 debut: Investments in Sprint Nextel or AT&T on May 1 would have netted little change in value over the past two months (Sprint Nextel is up 16% over the past three months thanks to the Dish Network bid). T-Mobile US on the other hand has risen nearly 40% in less than eight weeks – approximately $900 million in market value created.
Look for cost reductions and signs of a quick MetroPCS integration. I think many will be surprised at T-Mobile US’ and MetroPCS’ growth (e.g., that one did not come at the expense of the other). Also, while there will be a definite handset subsidy impact, I think many will be surprised at the effect of the new pricing plans on overall churn.
Note: The changes described above have a disproportionate effect on residential and family plan gross additions. Legere’s background is in small business. There is another shoe to drop, one that leverages his Global Crossing experience.
AT&T’s rebound – is it for real? Maybe: It seems counter-intuitive to be positive on both AT&T and T-Mobile US in the same quarter. T-Mobile US is aggressively attacking “Ma Bell” with every new TV ad (see some examples here and here), and their “Bring Your Own Phone” plan is clearly aimed at AT&T Mobility iPhone users. How is AT&T surviving the onslaught? Well, according to a recent investor relations briefing, they are doing just fine. According to the release (click here for the disclosure), AT&T Mobility expects approximately 500,000 net postpaid additions in the quarter.
What is driving this growth? It’s a combination of several things. First, according to recent LTE tests, AT&T Mobility’s LTE network is consistently faster than its peers. In a recent study by PC Magazine of network speeds, AT&T Mobility clearly demonstrated consistently fast throughput, although Verizon Wireless “typically triumphed” with their reliability gauges. Verizon Wireless also continues to dominate with suburban and rural networks.
On top of very fast networks, AT&T Mobility is also benefiting from the shutdown of Sprint Nextel’s iDEN network. My guess is that’s at least 60% (300,000) of the net postpaid additions this quarter (see math in the Sprint Nextel section below). Add to this AT&T’s recent push-to-talk iPhone app, which takes advantage of the LTE network described earlier, and you can see why the second quarter is going to be very good for the “blue network.”
One final item to remember with AT&T (and Verizon Wireless): As the economy improves, and as business spending picks up (resulting in more tablet connections for enterprise customers), AT&T continues to have a short-term advantage with HSPA/LTE chipset costs. This is very important.
AT&T’s second quarter will likely result in the best postpaid second half performance since 2010 (that also happens to be the last year AT&T Mobility had iPhone exclusivity). As we have discussed many times in this column, the story only gets better for AT&T as project Velocity IP takes full effect.
Sprint Nextel – Closure, finally: One word can be used to describe the second-quarter earnings for Sprint Nextel: closure. The iDEN network is closed, and there are many operating costs that go away. The U.S. Cellular spectrum and customer acquisition is now closed, and Network Vision, while not closed, is a heck of a lot closer to closure than it was entering the year.
In addition, Sprint Nextel (and likely Clearwire) will be under new ownership after a battle for control of the company with Dish Network. Many uncertainties have been removed from Sprint Nextel’s future.
To retain bullishness on Sprint Nextel, investors will need to continue to have “high hopes” because it’s a bit too early to sing “Happy Days are Here Again.” First of all, as Sprint Nextel confirmed in their Q1 2013 earnings call, it’s going to be a very bleak postpaid picture, at least temporarily, as AT&T Mobility and Verizon Wireless scoop up the last of the iDEN subscribers. Per Sprint Nextel’s disclosure, there were approximately 1 million postpaid iDEN subscribers at the end of the first quarter, and Sprint Nextel estimated that only 30% to 40% of these subscribers would be retained. That leaves 650,000 customers for AT&T Mobility and Verizon Wireless. Assuming Verizon Wireless receives a slightly higher share (350,000 customers), and that T-Mobile US receives none (due to the enterprise nature of the accounts), that leaves 300,000 customers for AT&T Mobility. It’s the last of a six-year postpaid gift-giving spree from Sprint Nextel to their two largest competitors. R.I.P. iDEN.
But that’s not all. Sprint Nextel will finally shed 1.4 million (retail) Assurance Wireless (a.k.a. Obama Phone) accounts thanks to a vigorous one-time recertification process. This will pull Sprint Nextel’s prepaid base down to levels not seen since the beginning of 2012 – six quarters of prepaid subscriber gains will be wiped out.
Admittedly, there is no revenue associated with these accounts, but, when they were active they were enormously profitable (80%-plus margins). Replacing this margin will require a lot of changes to the structure of the prepaid business.
One of the most aggressive actions in the second quarter was Virgin Mobile USA’s new iPhone pricing (r = reconditioned; iPhone 4 model is 8 GB; iPhone 4S and 5 models are 16 GB):
This will certainly help Virgin Mobile USA’s prepaid net additions, but at what cost? By selling a new iPhone 4 at $140 to $150 less than their competitors (and $50 less than a reconditioned model from AIO), Virgin Mobile USA has certainly left money on the table. There is a point where disruption crosses the line into foolishness, and a $140 to $170 difference for Virgin Mobile USA versus the competition may have actually crossed that mark.
Jim Patterson is CEO of Patterson Advisory Group, a tactical consulting and advisory services firm dedicated to the telecommunications industry. Previously, he was EVP – Business Development for Infotel Broadband Services Ltd., the 4G service provider for Reliance Industries Ltd. Patterson also co-founded Mobile Symmetry, an identity-focused applications platform for wireless broadband carriers that was acquired by Infotel in 2011. Prior to Mobile Symmetry, Patterson was President – Wholesale Services for Sprint and has a career that spans over twenty years in telecom and technology. Patterson welcomes your comments at jim@pattersonadvice.com and you can follow him on Twitter @pattersonadvice.
