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.
The Nexus 6: the best kept secret (not again!)
Given the collaboration that came through their acquisition, it’s no surprise that the Nexus 6 is made by Motorola. And it’s no surprise that while the Nexus 6 packs a six-inch screen (what a coincidence!), it is surprising to see how similar the flagship device is to the Moto X, a 5.2-inch screened smartphone that was highly reviewed, but bombed at the carriers.
What’s most interesting about the previous article is how reviewers gushed about the Moto X. It’s fast, functional and fairly priced. Battery life is concerning, but with Motorola’s Turbo charging system – which is included in the Nexus 6 – and various enhancements to Google’s latest Android operating system (dubbed “Lollipop”) that extend phone life by up to 75 minutes, those concerns are largely addressed. Even with the might of Google’s industrial and software design teams, Motorola barely moved the market share needle. Why?
If the carriers were unsuccessful with the Moto X (either the first or second generation), and Google’s Nexus product hits the shelves against the iPhone 6 Plus and the Samsung Galaxy Note 4 (which will run Android KitKat, but eventually be upgraded to Lollipop), what can Google do to ensure the success of the Nexus 6? Here’s an idea: While the full retail price of the device is $649 ($27 per month for 24 months), give Nexus 6 users a discount on the lease price.
With a $20 promotional monthly lease price across all U.S. carriers (while supplies last), Google will turn heads. The Nexus 6 will move from “nice to compare against in a store” to “nice to hold in my hand.” Buyers of the device will be treated to a “bloatware”-free experience that will allow them to focus on the apps that matter most (and tend to consume bandwidth). Bottom line: If the phone is this good, make it a slam dunk to lease. The cost to Google over 24 months is negligible, and the benefits to the carriers and to Google are enormous. If 2014 is the year of the smartphone trade-in, then 2015 is the year of the lease rate. Let’s get the party started a little earlier.
What a week for Zayo to go public
Rule No. 1 in the investment banking industry is “there is never a perfect time to go public.” That certainly was the case with Zayo Group Holdings last week, with stock market volatility related to a probable European slowdown creating one of the more wild weeks in recent years.
Despite the volatility and a share price at the low end of the desired range ($21 to $24 per share), fiber provider Zayo holdings went public Friday at $19 per share, and closed the day at $22 per share (or a $5.3 billion valuation).
Zayo is a collection of network assets knitted together by the common need for fiber-based (primarily local/metro) infrastructure. Without local/metro fiber, we’ll all get five bars (strong signals) on our smartphones, but have extra long wait times for Web page renderings (reminiscent of AT&T Mobility’s problems with the early iPhone launches). Zayo’s product portfolio has grown from fiber and infrastructure to data center and Ethernet services. They are not a secret to wireless providers, or their Colorado-based competitors (soon to be combined Level3 Communications and TWTelecom), but are a secret to much of the world.
I could detail the myriad of acquisitions that came together to create Zayo, or talk about the rich history of their founder Dan Caruso. The most telling item comes from Caruso’s comment to The Wall Street Journal that while the IPO raised $400 million, the company actually received $280 million because “private equity backers sold fewer shares in the offering.” M/C Ventures, Columbia Capital, Charlesbank and Oak Intestment Partners know the value that Zayo will bring over time. When the original investors are hesitant to sell at $19, that’s a sign there’s more value on the horizon.
Google’s quarterly earnings – spread too thin?
Google announced earnings after the markets closed last Thursday, and the results were impressive: 20% overall revenue growth; 23% of revenues in total acquisition costs; and 23% operating margins. Google added 3,000 new employees in the quarter. Total cash grew $3.4 billion even after $2.4 billion in quarterly capital expenditures. What’s wrong with this picture?
The proliferation of mobile devices is a big crack in Google’s search foundation. Simply put, mobile users click less on Google ads. Total clicks are up, but not as fast as the total devices (and users) who use Google search every day. The prices that advertisers paid Google for clicks fell 6% on an annual basis, which was more than most financial analysts expected.
We have discussed this potential (more with Facebook’s struggles to monetize their mobile presence than Google’s) several times. The application level is a direct challenge to the browser, and if applications get better at solving mobile user’s problems, the need to search through the browser diminishes.
On their quarterly conference call, Google highlighted several new initiatives that they are putting into place to grow their business. One of these new initiatives focuses on combining offline data (e.g., I purchased a gas grill at Sears in 2012, but did not use a Sears credit card) with online data (e.g., I just searched Google for gas grills in 2014). There is a lot of offline data to correlate to online search, and this drives both computing capital expense and storage costs (not to mention a lot of algorithm development). Combining offline and online data to create more meaningful search results stretches the limits of data correlation and contextualization. This is one example of where Google is investing to increase the relevance of search to traditional (retail) businesses.
While there are encouraging signs that Google will be able to monetize these new lines of business, many analysts openly express concern that Google is spreading itself too thin: Android, Android One, AdWords, AdMob and other efforts across the globe are creating an unsustainable company. Google, on the other hand, looks at their hiring (3,000 undergrads from the top computer science schools this quarter); changes in over-the-top video viewing habits; growth of low-end smartphones; and the previously mentioned integration of offline and online content and says “we’ve only just begun.” With more than $62 billion in the bank (or more than $1.1 million per current employee), it’s hard to argue against Google.
HBO, and now CBS, begin the streaming parade
I would be remiss if I did not comment on the HBO and CBS announcements last week. For those of you who missed it, HBO announced that sometime in 2015, it will introduce an “over-the-top” service designed to provide customers who have Internet but do not have cable an opportunity to watch “Game of Thrones” and other series. Given the type of content HBO shows (non-live content such as movies and series), this makes a lot of sense. CBS followed suit the next day with specifics on their digital streaming product. If you live in one of the 14 markets that will feature live streaming of the local CBS affiliate, this is about as close to cord cutting as you can get.
Both of these announcements are bad news for Netflix, which saw its market capitalization decline by 20%, or about $4 billion in two days (mediocre earnings were also released last Wednesday, which didn’t help). Netflix CEO Reed Hastings tried to put a positive spin on the announcements, citing the existence of both providers in an OTT in Nordic countries (customers buy both services, not just HBO), but the prevalence of between 10 and 12 providers by the end of 2015 will drive up Netflix’s marketing costs (and likely drive down rates).
Can Netflix and cable come together to fight the common content enemy? How will Comcast-owned NBC Universal respond? How does this impact the Federal Communications Commission’s decision on the Comcast/Time Warner Cable merger? The answers to these questions will unfold over the next 90 days. Suffice it to say, the need to plane upgrades (capital expenditures) for the telecommunications providers will be accelerated in 2015. Cord cutting will increase for some types of customers, and be surprisingly stable for others. And satellite will suffer the greatest losses because of their inability to offer 100 megabit per second high-speed Internet services that OTT will require (at least for families).
One thing is for sure – this change will come faster than any of the infrastructure providers expected.
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.
