Jim Patterson looks at his top 10 events across the telecom space in 2015
To aid in brevity, we have split the top 10 list into two groups of five (the second part will be published tomorrow). They are in no priority order, and I am sure that I missed some you might have added to your list (it’s hard to believe, for example, Sling TV is less than one year old and the Comcast/Time Warner Cable merger remained a possibility at the end of 2014). Each of these events, however, impacted (and will likely continue to impact) the communications landscape.
FCC approves the Open Internet Order
In a partisan 3-2 vote, the Federal Communications Commission approved the Open Internet Order, which classifies wireline and wireless providers as utilities and makes them subject to Title II regulations. (An excellent summary from Kelly Drye & Warren is here).
We commented extensively on the impact this will have on carriers as they face “unjust and unreasonable” charges from Internet service providers as well as customers. One positive effect of the FCC’s ruling was an increased focus on carrier-to-carrier interconnection. Thanks to the efforts of CompTel and others, there’s more certainty about terms and the escalation policies. It is not known if the FCC has had to mediate any of the negotiations to date, but there have not been the showcases that many anticipated.
As we discussed in last week’s column, Judge Tatel is interested in the dynamics leading up to the FCC’s decision. It’s unlikely this motivation results in the entire order being overturned and it’s not clear if there is enough momentum even to take out wireless restrictions. What is clear is legislative change is needed and that’s very unlikely in an election year.
Verizon buys AOL and launches Go90
While a $4.4 billion acquisition seems small compared to some of the other transactions regularly discussed in this column, Verizon Communication’s May announcement signaled something bigger: we will do whatever it takes to shake up the content and cable worlds.
That strategy seems to be headed in right direction, albeit slowly. According to the analytics site App Annie, Go90 is currently (as of Dec. 19) ranked as the No. 275 most downloaded application for iPhones overall and ranks No. 23 in the “entertainment” subcategory. It has reached as high as No. 110 and No. 10 for these categories, respectively. Go90 is not faring well for iPad, which is understandable given Verizon’s current marketing messages. While Netflix, Hulu, HBO, PlayStation, Amazon.com and Chromecast apps are currently beating Go90 in the entertainment subcategory, they are currently leading Xfinity, Xbox One, Roku, DirecTV, CBS, ABC, Redbox and Crackle.
Interestingly, Go90 is performing much better on the Google Play store, scoring No. 68 for overall applications and No. 6 overall in the entertainment subcategory (both figures as of Dec. 19). Hulu and Netflix still beat out Go90, but it is faring much better on Google Play than iOS.
Verizon’s foray into media distribution costs less than many infrastructure initiatives, but requires constant refreshing. The verdict is still out on Verizon’s ability to change into a “content culture,” but the initial results are encouraging. As we will highlight in the next section, their strategy is markedly different from AT&T.
AT&T expands into Mexico
Even by AT&T’s high internal standards, their entry into Mexico has been a success (and, if Mexican billionaire Carlos Slim’s net worth is any indication, things don’t look bright for the incumbent operator). As AT&T announced this month, they are going to achieve positive postpaid and prepaid net additions in the fourth quarter.
Glenn Lurie (AT&T Mobility president) and Randall Stephenson (AT&T CEO) talked about their success at separate investor conferences in December. From a customer experience perspective, the goal to “make it as seamless for mobile customers to travel from New York to Mexico as it is today to travel to New Mexico” is very ambitious. Adding a Mexican resident to an AT&T Mobile Share Value plan sounds easy, but you have taxation, real time rating and notification issues. Business plan seamlessness, which is barely seamless between AT&T broadband and wireless today and grows in complexity with business size, is even more challenging.
One additional indication of the impact of AT&T’s entry into Mexico was T-Mobile US’ preemptive “Mobile without Borders” campaign, which launched in July 2015 (announcement here). This solved the pain of travel to Mexico, but does not solve the issue for Mexican wireless customers traveling from Mexico. That’s where we’ll see AT&T’s growth in the fourth quarter, and why their Mexico investment should be one of Ma Bell’s best.
T-Mobile US’ unstoppable success
If we were to summarize 2013, it would be the year of “T-Mobile US gets the iPhone.” For 2014, it would be “T-Mobile US challenges the industry – and wins.” For 2015, it would be “T-Mobile US remains unstoppable.” Let’s look at a few figures using the last four quarters (Q4 2014 – Q3 2015):
–3.6 million branded postpaid phone customer net additions.
–4.5 million total branded postpaid net additions.
–1.1 million branded prepaid net additions (nearly all are phones).
–1.45% average monthly postpaid churn.
–4.76% average monthly prepaid churn.
–$6.9 billion in adjusted earnings before interest, taxes, depreciation and amortization.
–$4.6 billion in capital expenditures.
–Total debt increase of $200 million (0.8%).
In 2015, T-Mobile US extended 2014’s gains and overtook Sprint as the No. 3 U.S. wireless carrier as measured by subscribers. Interestingly, most of these gains have come through phone additions (a lot of new iPhones and Samsung Galaxy S6 devices in the fourth quarter alone). T-Mobile US focused on phones because that’s where they can earn the greatest value for their marketing dollars. Would their Mobile without Borders campaign have been successful if it had been diluted with a cross-border tablet offer? Concentrating on phone-based plans made their marketing more effective and broadened their appeal.
2015 is probably the last year T-Mobile US will be able to be laser-focused. As we have written in the past, the next five to 10 million of net addition growth is going to be harder for many reasons: Sprint’s network is finally achieving data parity in many markets; AT&T is grabbing more share through their Cricket brand than anyone expected; and Verizon is on a brand advertising binge that will be accompanied by some sort of Go90/sponsored/prioritized data in 2016. T-Mobile US also achieved gains from LTE expansion. This “new market” effect (similar to the “new store” vs. “same store” sales argument in retail) will be markedly less in 2016.
T-Mobile US’ next great opportunity is business. They are the market leader in Wi-Fi calling (We urge you to try it – the staff has been using it at our Colorado headquarters and the call quality is exceptional) and this alone could disrupt the small and medium business landscape. Their first year of business offerings could best be described as “meh.” A partnership with Comcast or Level 3 (specifically the unit formerly known as Time Warner Telecom) would vault T-Mobile US into a leadership role.
Nokia buys Alcatel-Lucent for $16.6 billion
We do not spend a lot of time analyzing equipment providers, except when it relates to their ability to further technology (such as digital subscriber line vectoring capabilities for AT&T U-verse), or the bigger transformation occurring as carriers such as AT&T seek to separate equipment operating software from their underlying hardware (called software-defined networking). However, when Nokia announced the acquisition of Alcatel-Lucent in April, nearly everyone in the telecom community took notice.
Nokia is betting their broad base of solutions (read: leveraging of lots of research and development and patent portfolios) will increase their penetration with U.S. wireless and wireline carriers. There appears to be enough merit to this argument to cause Cisco Systems to forge their own strategic alliance in November (announcement here). This also led to speculation that Samsung was going to exit the U.S. market for networking services – a rumor that was quickly denied by the South Korean conglomerate.
Equipment manufacturers have struggled to find a source of sustainable value creation over the past decade. The logical result, especially in a low global interest rate environment, is increased merger and acquisition activity. As SDN and its closely related cousin network functions virtualization begin to be broadly adopted, the value proposition of intelligent hardware is at risk.
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 20 years in telecom and technology. Patterson welcomes your comments at jim@pattersonadvice.com and you can follow him on Twitter @pattersonadvice. Also, check out more columns and insight from Jim Patterson at mysundaybrief.com.
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