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.
Sprint Nextel was not the only telecom company making news over the past week, as early last week, Mary Dillon abruptly left her role as CEO of U.S. Cellular and went to Ulta, a Chicago-based cosmetics producer. Here’s the chart comparing the two-year performance of U.S. Cellular (USM) and Ultra (ULTA):
Clearly, there was some friction that led to the departure. After Mary’s excellent panel facilitation at CTIA, as well as her brilliant sale of non-performing properties to Sprint Nextel (which raised $480 million), it was hard to see anything but long-term tenure for the former McDonald’s executive. Best wishes to incoming CEO Kenneth Meyers.
U.S. Cellular made news on Friday as well, selling 1.7/2.1 GHz spectrum to T-Mobile US for $308 million.
The price of 95 cents/megahertz pop is 37% more than Verizon Wireless paid for the Spectrum Co (cable company consortium) spectrum last year. The $788 million in cash from this and the Sprint Nextel transaction will help U.S. Cellular accelerate its LTE deployments and make the carrier more attractive in the future to Sprint Nextel and others.
BlackBerry reported earnings that even disappointed and surprised skeptics of the stock. As a result of a 16% decline in service revenues, and the failure to report any separate sales statistics on the Z10, shareholders went running for the exits on Friday. As a result, the stock gave back all of its 2013 gains plus $1.25 in one day. As we have noted in several previous columns, BlackBerry has no foothold in the United States – they are an afterthought in 2014 strategic planning, even in their enterprise and government sweet spot. More details below. Tough times for the smartphone pioneer.
With this week’s focus on the handset makers and Verizon Communications, it’s completely appropriate to end the weekly news with a discussion of Verizon’s rumored bid for Canadian operator Wind Mobile. This article from Canada’s The Globe and Mail outlines a three pronged strategy: 1) buy and consolidate Wind and Mobilicity; 2) leverage handset and network scale; and 3) participate in Canada’s upcoming 700 MHz auctions. Here’s Verizon Wireless’ coverage from Buffalo to Detroit – it’s not hard to see from this map Verizon Wireless extending its reach into southern Ontario:
What this does indicate is that despite all Vodafone buyout hype, Verizon has other options, including an aggressive Canada deployment strategy.
What should we expect from Verizon when they report earnings on July 18? Here are a few things we know are on their list from recent investor presentations:
–Average revenue per account. This figure is rising (from $146.80 to $150.26), even as overall postpaid accounts fell in Q1 by a nominal 114,000, or .3%. This means that the customers who are most connected are growing their business with Verizon Wireless (from 2.64 to 3.67 connections per account).
–Customers who subscribe to an LTE device (and the traffic they drive). As of the end of Q1, nearly seven out of 10 Verizon Wireless postpaid smartphone and Internet connection (mobile hotspot, other postpaid device) subscribers were confined to 3G speeds. Driving this figure to 33%/35%/37% and the corresponding tonnage to 60% or more is going to be critical to increased profitability.
–3G network utilization/wholesale strategy. Verizon Wireless has a reputation of being an inconsistent wholesale provider, but they are coming off the back of an incredible first quarter as a result of supplying data to Tracfone Wireless for the Walmart Straight Talk iPhone. If the 3G network is being drained of retail megabytes, it’s going to be important to keep it full through the Tracfone relationship.
–Cost reductions. This is not confined to improved gross margins (which greater LTE usage will naturally drive), but covers sales/marketing and customer service improvements as well. With Share Everything plans including unlimited voice and data, the ability to grow the customer base and close additional call centers is inevitable.
–Cash flow/overall capital expenditures. Deployment of LTE across the 1.7/2.1 GHz band costs money. But it does not have the same backhaul and backbone effort that was required with the initial LTE rollout. Verizon Wireless has capital opportunities through the second half of 2013.
As we discussed last week, it’s likely that Verizon Wireless adds a few hundred thousand postpaid retail subscribers this quarter due to Sprint Nextel’s iDEN transition, and that they add an additional several hundred thousand data-focused connections to existing accounts. Given no significant handset dilution from a blockbuster smartphone launch (although the Samsung Galaxy S4 has been at Verizon Wireless since late May), it should be an extremely profitable quarter, well above Q1’s 50.4% earnings before interest, taxes, depreciation and amortization margin.
Many analysts will try to plot linear growth trends for Verizon Wireless from second quarter results, particularly for data growth. However, it’s important to understand that there is an upper bound for the Share Everything model. We were reminded of this with the release of the latest Bankrate.com survey, which showed that only 50% of Americans have saved enough to cover three months of savings, and that 27% of Americans have no savings at all. There is a spending ceiling, even for LTE.
Also, it’s not hard to see Sprint Nextel or T-Mobile US really taking aim at the unlimited voice and text part of Share Everything prior to the completion of their LTE networks. With average minutes used decreasing for most smartphones, Verizon Wireless’ $40 charge for unlimited voice and data is $10 higher than many mobile virtual network operators (network resellers) are charging for the same coverage. When there’s $25 or more (depending on usage) of operating profit per account each month generated through breakage, it’s likely that competitors will devise plans to curtail that profit stream.
Many of you sent me thoughts on BlackBerry’s earnings. It’s easy to pile on BlackBerry, and, as an applications software developer, I have no sympathy as the pain BlackBerry put applications developers through during 2009-2011 was immense. They are in the first innings of a double-header transition period with no stable base or geographic stronghold from which to position a comeback. Here’s their U.S. results to date (using a blend of online “most popular” results from several sites as well as discussions with Dallas store reps):
–Verizon Wireless: BlackBerry does not register as a retail option. The store rep I talked to put it perfectly: “If I am asked about BlackBerry, I will show them the Z10 or Q10. If I am asked about a smartphone, I show them Samsung and Apple.” On Amazon Wireless, Blackberry Z10 and Q10 models rank No. 7 and No. 8 (Amazon.com figures exclude Apple products). Most importantly, BlackBerry trails HTC and Nokia at Verizon Wireless.
–AT&T Mobility: BlackBerry scores better, but still lags behind HTC and ties with the Nokia Lumia brand. Resuming a leadership role at AT&T Mobility is going to be very difficult given the stronghold Apple has in the consumer/prosumer (professional consumer) segment. “It’s easy to upsell an iPhone 5, especially when the customers see the speeds. The trade-in bonus is accelerating the change.” This leaves the enterprise segment at AT&T Mobility, which is going to sell a lot of BlackBerry Q10 devices, but also a lot of Galaxy S4 with SAFE/ KNOX capabilities.
–Sprint Nextel: Sprint Nextel does not offer the Q10 or the Z10 at this time. It required real sleuthing to even find the BlackBerry Bold in the store. The store rep put it in succinct terms when he said “I have yet to sell a BlackBerry to an individual user that is under 40, and I’ve been at this store for over a year.” Rumor has it that launch date will be either the weekend of July 27 or Aug. 3.
With service revenues languishing (even with adjustments, a 10% quarterly decline is alarming), BlackBerry has a limited window to reinvigorate its U.S. presence, particularly with LTE subscribers. For HTC, Apple, Nokia and Samsung, this means more opportunities to pick away at their lucrative base. It’s possible yet hard to see a scenario where BlackBerry succeeds globally without first being successful in the United States. And it’s even harder to see Apple iPhone users returning to BlackBerry under any circumstances, especially with BlackBerry’s PlayBook aspirations on hold.
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.
