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.
Before jumping into the results, here are several themes we predicted would mark the first quarter:
–The disruptor role of T-Mobile US in the wireless marketplace (leading to healthy gross and net additions for them, as well as for AT&T Mobility, but weaker additions for Verizon Wireless and Sprint).
–Improvements in the economy, but particularly in the housing sector (and particularly in the Southeast and Midwest) driving additional broadband speeds and penetration.
–Continued low interest rates fostering additional consolidation/acquisition from companies who are generating cash.
AT&T earnings: Finally … something worked!
An absolutely giddy CFO usually worries me on conference calls, especially when it’s the CFO of a company the size of AT&T. John Stephens’ ebullience showed throughout AT&T’s earnings call and on interviews the following day. He probably wanted to say “Finally, something worked!” but instead led off the call with “the shift to Mobile Share plans was nothing short of incredible.” That’s giddiness for a CFO, and there were plenty of reasons for it.
The Mobile Share plan changes announced in February were in response to T-Mobile US’ aggressive early-termination fee buyout plan. As Stephens hinted on the AT&T earnings call, January’s churn and net porting numbers must have been worrisome, not only for T-Mobile US but for Sprint (who introduced Framily) and Verizon Wireless. But the new Mobile Share plan introduction had an even greater impact: AT&T Mobility beat Verizon Wireless in the first quarter.
February’s Mobile Share for Families announcement drove the number of Mobile Share plans up by more than 50% (really in the last two-thirds of the quarter). This, combined with the announcement that AT&T will allow any customer who has been a postpaid customer for more than six months to switch to a Mobile Share plan free of charge (see here for analysis) resulted in 40% of all smartphone gross adds and upgrades to be on Next (compared to 15% in Q4 2013).
The end result was nothing short of incredible for AT&T as the following table shows (note – Verizon Wireless started selling the iPhone in Q1 2011):
For years, the best AT&T Mobility could hope to achieve against its larger rival was a 60/40 net add split. This occurred, in part, because AT&T Mobility lagged Verizon Wireless in LTE deployment (Verizon Wireless now has 304 million potential customers covered; AT&T Mobility just under 280 million), but also because AT&T Mobility lacked a first-mover advantage. In an extremely ironic twist, it’s the “noisy competitive environment” (Stephens’ term used throughout the earnings conference call) that caused AT&T Mobility to move into a leadership position.
AT&T Mobility can maintain this leadership position by taking a play out of the T-Mobile US playbook and following them into the “no additional up-charge” for tablets that are equipped for the AT&T Mobility network (these charges currently run $100 to $130 more).
This would drive an entirely new growth curve for AT&T Mobility and the entire industry. Verizon Wireless and the rest of the industry would likely follow suit, at least with LTE-only iPads and Kindles.
There are plenty of things at AT&T that are not working: Transport (down 12.2% year-over-year) and non-strategic IP services (down 9.7%) continue to collapse, and voice compression continues in both business and consumer (down 10.4% year-over-year which represents an improvement). AT&T’s wireless reseller division has lost more than one million subscribers over the past year (a lot of this very high margin 2G machine-to-machine traffic). And wireless SMS and voice traffic growth is non-existent and in secular decline.
But for now, AT&T Mobility is the leader of the pack, thanks to More Everything for Families and their Next pricing plan.
Verizon: Rational and disciplined, but also responsive
Verizon Communications announced earnings after AT&T’s earnings had a full day to sink in. Verizon CFO Fran Shammo was very matter of fact in his description of the quarter and of Verizon’s strategy in general:
“The ingredients for success are unchanged: solid operational execution and a disciplined focus on meeting our financial objectives and creating value for our shareholders. With an eventful first quarter behind us, I would say we are off to a strong start.”
Verizon Wireless reported very strong EBITDA margins (with or without the effect of incremental Edge sales) on service revenue growth of 7.5%. But their ability to keep the basic phone and 3G smartphone customers weakened in the quarter, and it likely came as a benefit to T-Mobile US (and, at a smaller level, to Sprint). Verizon Wireless lost visibility to the “edge cases” (pun intended), and some of the core base also went along with these customers for the ride.
As a result, as the following table shows, Verizon Wireless lost accounts in the first quarter:
Twenty-two thousand retail postpaid accounts is a small number, but with Verizon Wireless reporting the first phone net loss in the company’s recent history (539,000 total retail postpaid net additions less 639,000 net tablet additions equals 100,000 net phone loss), it’s worth remembering. Contrasted with the 114,000 account loss in the first quarter 2013 (which was termed an “account clean-up effort” to improve overall credit quality), it shows the increasing dependency on data-only devices to support growth.
On top of this, Verizon had bad weather which impacted FiOS installations. They posted 98,000 net additions in FiOS Internet (down 48% from Q1 2013) and a mere 16,000 total broadband increase when DSL losses are considered, compared to 269,000 high-speed Internet additions for Time Warner Cable (New York City, Maine, Ohio, Kentucky, Wisconsin, upstate New York), and 383,000 for Comcast (Chicago, Vermont, New Hampshire, Atlanta, Boston, Philadelphia, Washington, D.C). Shammo responded to a question on the weak FiOS numbers in the following manner:
”First off, we did a price increase in the fourth quarter and every time we do a price increase we always see some pressure in the churn in the following quarter. But also we had probably one of the worst winters on record here and people did not want us in their houses to install FiOS … competitive pressure did increase in the first quarter. We did not respond immediately because of the environment that we are dealing in with the weather. So we waited. We became more aggressive in March. And I would tell you that exiting the quarter our pipeline has grown and I have a viewpoint that the second quarter will be back on track from a net add perspective.”
The winter was bad, but was it really that different from Comcast’s (where high-speed Internet net additions were down 12%) and Time Warner Cable’s (who had their best high-speed Internet net additions since Q4 2012)? There is more going on here than meets the eye on the FiOS vs. Xfinity/Optimum/Roadrunner matchups. FiOS is losing on price/value below the 50 megabit-per-second speed tier and cable knows it.
There’s a lot more to say about Verizon’s wireline earnings (they continue to be sick, and not in a good way). We’ll get to that in next week’s column. For now, Verizon must consider two very important decisions:
1. How to prepare for a resurgent AT&T and a disruptive T-Mobile US.
2. How to regain price/value consideration versus Comcast and other cable competition below 50 Mbps.
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.
