Editor’s Note: Welcome to our weekly Reality Check column. We’ve gathered a group of visionaries and veterans in the mobile industry to give their insights into the marketplace.
The end of the third quarter is quickly arriving with surprisingly little fanfare: no last minute sales and very few hints this week about earnings surprises at the Goldman Sachs Communicopia conference. But that doesn’t mean that the boards of directors for these companies aren’t asking questions. This is budget setting time in the telecom world, and October is a busy month for both retail executives and for strategic planners/budget analysts. Here are six questions (three macro, three specific company questions) that we think telecom and cable boards should be asking:
1. What is our company’s short and long-term applications strategy? This applies to companies with and without wireless products and services in their portfolio. There are a myriad of questions below this topic, including ones concerning differentiation/competitive positioning, bandwidth, segmentation, and monetization. “We’re open” is not a strategy. Neither is “We’re your Android experts” (unless you are Google Inc.). And, as senior management had to educate their boards on “dot com” and “e” enabling everything over the past decade, it’s now time to explain how bandwidth enables a more robust services platform for the applications development community. Boards want direction and clarification – a resurgent Skype Ltd. (or their successor) could impact voice revenues, a key cash generator. This is the most important question facing telecom today.
2. How does more wireless bandwidth change our 2011/2012 outlook? Verizon Wireless reiterated last week that their footprint will be 90% LTE by the end of 2012. That’s a lot of new bandwidth supply entering the market, and, assuming Verizon Wireless’ engineers anticipated more bandwidth growth than AT&T Mobility did with Apple Inc.’s iPhone, we should be in for a good experience. Clearwire Corp.’s buildout continues to progress, MetroPCS Communications Inc. is getting started in Las Vegas and LightSquared will be on-line shortly in Chicago. This means a lot of good things for their backhaul suppliers (including cable companies and start-ups such as Zayo), but it begs the question: “Who will pay for mobile bandwidth?” And, if there are not discretionary dollars to cover the costs, will there be some cannibalization of traditional high-speed Internet service revenues?
3. Where is our next long-term growth source? In the past, telecom and cable have always been able to point to a shiny new object that will produce five to ten years of growth. In the early and mid-1990s, it was global diversification. In the mid-1990s, it was the Internet and the emergence of mobile services. In the 2000s, it was the growth of wired bandwidth, business conversion to all IP networks, managed services, and wireless data. The next decade’s growth is an enigma. Machine-2-machine is a part of the long-term solution, but revenue per unit is small – it takes 20 to 30 net additions to make up for one lost post-paid customer. Could we be coming full circle? Does global growth have a home around the board table once again with LTE as the catalyst? The industry has never been without a long-term hope. If everything remaining is a zero-sum game, the prospects for returns will dim and price wars will intensify.
If that isn’t enough, there are three specific questions that specific companies will need to address – quickly.
1. (For AT&T Inc.). If Verizon was able to divest some of their wireline business (and the employee-related expenses of running a wireline business), why don’t we follow suit? Is the environment ripe for property divesting?
Yes. CenturyTel Inc., after the Qwest Communications International Inc. transaction is complete, will be hungry for more. Frontier Communications Co. needs a year or so and they will be ready for more. Windstream Communications could also take on more in 2011. Private equity is also ready for these types of transactions. Why not divest non-critical properties in Kentucky, South Carolina, Alabama, Tennessee, Louisiana, Oklahoma, Kansas, and Mississippi? Specifically, with a price war a possibility, why not have an extra $5 billion in flexibility?
2. (For Verizon). How do we restore the remaining portion of the retail wireline/telecom business to profitability? As we noted in last week’s column, Verizon restated their financials excluding the Frontier property spin. Here’s what the telecom business looks like now:
Without making any assumptions about the contribution of special access revenues, it’s still a grim picture. The Verizon shareholder isn’t earning any value from the remaining wireline asset, using a traditional economic value add/return on invested capital analysis. Where there are no profits, there can be no returns. There is cash flow (nearly $9 billion of trailing four quarters of earnings before interest, taxes and depreciation), but it’s decreasing at a high single digit rate.
When you remove wholesale, the profit picture is less clear. Using very conservative assumptions (25% global operating margin assumes that Verizon still has 35% of their revenue coming from minute-based margin products), the retail business generated nearly $2 billion in losses over the past four quarters. Phone losses are abating, but persist. DSL losses continue, while costs remain in place. If the cable companies decide to get more serious about commercial services beyond very small business, the profit picture could get cloudy in a hurry.
The good news for the Verizon shareholder is that the recent management announcements include individuals who know the underlying issues and problems. Can they be solved, and can alternatives be constructed that would help the Verizon shareholder jettison the wireline anchor?
3. (For the rest of wireless). How do we (legally) grow our response to Verizon Wireless and AT&T Mobility together? There is no doubt that two carriers dominate the wireless industry in the Unites States – look at the growth over the past five years of Verizon Wireless, AT&T Mobility, Sprint Nextel Corp. and the rest of the industry if you doubt this trend. It’s also no secret that size matters in any networking company (handset selection, network footprint, speed to market, getting and retaining Google’s attention, etc.). Could a Sprint Nextel/T-Mobile USA Inc./U.S. Cellular Corp./MetroPCS/Leap Wireless International Inc. coalition change the momentum? Would this merely be for bandwidth sharing (GigE at every cell site with Sprint’s IP backbone available at an attractive rate), or could it go deeper (e.g., M2M solutions with diverse network routing)? Could this even take a re-affiliation approach, with U.S. Cellular owning and operating Sprint Nextel’s network in their service territory?
Absent a yet to be identified shiny new object that is driven by a recovering economy and a return to consumer and business discretionary spending, we are headed for a price war. The ammunition for this price war is cash, which is driven by scale. Relative market share has flowed to AT&T and Verizon over the past five years. They continue to generate cash and have assets available for sale if they need more. Bandwidth is the starting point. More collaboration, oriented around innovation and substitution, could be a catalyst. Business cooperation is the next frontier. Past that, it’s anyone’s guess.
Jim Patterson is CEO & co-founder of Mobile Symmetry, a start-up created for carriers to solve the problems of an increasingly mobile-only society. He was most recently President – Wholesale Services for Sprint and has a career that spans over eighteen y
ears in telecom and technology. He welcomes your commentsatjim
@mobilesymmetry.com.
