Editor’s Note: Welcome to our weekly Reality Check column where C-level executives and advisory firms from across the mobile industry share unique insights and experiences.
Last week we highlighted three metrics (revenue generating accounts per customer; machine-to-machine unit and revenue growth; and capital spending as a percentage of revenues) that will impact performance in the third quarter. Not surprisingly, these metrics will favor AT&T and Verizon Wireless as they have or will shortly complete their LTE networks.
They are not the only companies making news, however. Sprint and T-Mobile US will likely flex some muscle this quarter in the area of the market largely ignored by Verizon Wireless and AT&T’s retail organizations. Prepaid or contract-free customers continue to exhibit some small signs of growth. However, as the name implies, the space can get very volatile.
Since many of you had comments about the Sprint iPhone availability chart, I thought I would update it (as of Sept. 28, 2013):
It is very clear that the iPhone 5S was an upgrade hit for iPhone 4S users. Last week, we showed a wait time for the iPhone 5S in gold of four to six weeks. Now you will have to wait until after “Cyber Monday” to get your hands on the device. For iPhone 5S colors, the previous wait was “up to 3 weeks” and that’s now one to three weeks longer except for the 64 GB in space gray model.
However, as we discussed in a previous iPhone column, the iPhone 5C is not as supply constrained. This may not mean that there is no demand for the product (which new-to-Sprint customers can get for free on a two-year contract if they transfer a phone number to Sprint), but it does mean that the iPhone 5S is in higher demand at Sprint. (Perhaps those would-be users should read the IHS report that basically shows that outside of the plastic back, fingerprint scanner and A7 64-bit chipset the devices are essentially the same).
Speaking of Sprint, I put together a brief chart that summarizes the upcoming activity that Sprint will face over the next four quarters:
It’s important to remember that Q2 2013 brought about the end of the iDEN network. Sprint has been adjusting to life under Japanese ownership since July 10. As we have mentioned in past columns, there is a direct correlation between the success of Sprint and the success of Network Vision.
As the chart shows, Sprint will be engaged with four primary activities. First, they will be deploying voice over the 800 MHz environment, which will improve in-building coverage and reduce in-building roaming expenses. The presence of increased roaming voice and data expenses was acknowledged by Sprint’s CFO during the most recent Goldman Sachs investor conference. In-building is the new battlefield, and the ability to bring handsets that have Sprint’s new 800 MHz capabilities will be important.
In addition to deploying voice over 800 MHz, Sprint will be faced with deploying LTE over the same spectrum swath. As Sprint has publicly stated, improving voice quality is the priority (fewer dropped calls), but having improved in-building data coverage will also be critical. Interestingly, the first tri-mode devices announced are all mobile hotspots. It is doubtful that mobile hotspots will make an impact on Sprint’s Q3 earnings, but understanding how and when new devices will be able to take advantage of Sprint’s tri-band network will be important to estimating profitability.
Then there is 2.5 GHz deployment, which by all indications will happen more quickly than anyone anticipates. Over 5,000 towers will be complete and ready to provide 2.5 GHz LTE to Sprint customers by the end of the year. Theoretically, these towers can provide up to 168 megabits per second (defined by Sprint as “smokin’ hot”). The issue is deployment within areas where towers are more scarce, and the cost to deploy 2.5 GHz where they do exist.
Sprint will spend a lot of time discussing network changes on their third quarter call. However, it’s still safe to say that on a given day, on every floor in every U.S. multi-story office building, a Sprint customer walks into that building and cringes. 1900 MHz is not an in-building spectrum solution, and 2.5 GHz is inadequate unless you are very close to (if not in) the building. In-building Wi-Fi solves some of the data problems, but unlimited voice plans are useless if you cannot receive an important call.
Sprint is taking the right steps, but the path to reduced churn is quarters away. At that point, will Verizon Wireless (with their increased fiber leases) and AT&T Mobility (with project VIP) have moved the goalposts? Sprint’s challenge is execution – they cannot settle for driving as fast as their competitors – they need to catch up. That’s the only path to profitability.
Against the backdrop of Verizon Wireless, AT&T Mobility and Sprint lies T-Mobile US. They have had a fairly busy spring as well:
–March 26: Simple Choice plans introduced.
–April 12: iPhone launched (iPhone made up 29% of branded gross additions in Q2).
–June 12: MetroPCS launched bring-your-own-device SIM card across all markets.
–June 28: T-Mobile US buys US Cellular 1.7/2.1 GHz spectrum for $308 million in cash.
–July 10: JUMP plans launched.
–July 25: Launches MetroPCS brand in 15 additional markets.
That’s a busy four months. While the iPhone launch will be the most important factor for T-Mobile US through the end of the year, the launching of MetroPCS brings additional gross add “doors” which means more SIM-card transitions. The BYOD SIM card program was not only instituted across the 15 new markets, but also was rolled out throughout the early markets.
T-Mobile US did not have a lot of prepaid headlines when they announced Q2 earnings. In fact, it was the first quarter in a while where retail prepaid subscribers fell. The following chart shows the pro forma T-Mobile US/MetroPCS historical customer base trend:
While second quarter earnings highlighted the dramatic swing in branded postpaid net customer additions (887,000 sequentially, 1.25 million year-over-year), there was some deterioration in the prepaid net customer base (397,000 sequentially, 128,000 year-over-year). Branded prepaid churn is as high as it has ever been and likely to be 150 to 175 basis points higher than Sprint’s postpaid base in Q3.
MetroPCS smells Cricket (Leap Wireless) blood. With the BYOD SIM card offering, they have the ability to offer a $10 entry cost for existing iPhone customers (and, with Cricket struggling to sell existing iPhone inventory, it’s very unique in the market). The transition is painless and can be completed in the store in less than 15 minutes. No handset subsidy, a vulnerable opponent and new found refurbished iPhone supplies make the perfect recipe for branded prepaid gains for MetroPCS.
The other point that T-Mobile US executives went to great lengths to emphasize at a recent investor conference was the credit quality of new postpaid subscribers. Many analysts expect that some new customers will struggle to pay the additional $18 to $25 per month per device. This will result in increased receivables write-offs. In their Q2 earnings, T-Mobile US reported $3 billion in accounts receivable on a quarterly revenue base of $6.2 billion. Given our current fragile economic environment, should receivables grow faster than revenues, the investment community will get very nervous.
We will have two distinct sets of wireless service provider reports in the third quarter. Verizon Wireless and AT&T will talk about LTE network completion and increased spending on network augmentation. They will discuss the improved productivity of the “Internet of everything.” They will discuss enterprise spending (and, since this a business-investment led as opposed to a consumer-spending led economic recovery, it is very important). Sprint and T-Mobile US will discuss the future, explain spectrum band integration, and talk about prepaid/wholesale market dynamics.
The discussions are as different as our economy – urban vs. suburban vs. rural; South and West vs. Great Lakes and Northeast; consumer-paid vs. business-paid; retirees vs. millennials, etc. All four carriers are driving on the same track, but each one brings a different skill set.
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 [email protected] and you can follow him on Twitter @pattersonadvice.
