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.
Greetings from Kansas City, home of the Veterans of Foreign Wars and the only World War I museum in the United States (we do Veterans’ Day right in K.C.). Many comments on last week’s column reflected the diversity of the Reality Check readership. The majority were concentrated into two areas: a) the economics of high-speed Internet; and b) simply put, “Why are you glossing over the tempest going on between Clearwire and Sprint?” When it comes to high-speed Internet, it’s important to understand that most cable providers (not all) think about data as an incremental revenue generating unit, not as the reason for installation in the first place.
Because of their legacy as a cable (video) providers and their marketing approach to both high-speed Internet and voice (market to the base first; sell an aggressive triple play to new customers; no stand alone sales promotions), they can make a strong economic argument that high-speed Internet is an incremental cash flow. The telcos had this luxury with a large local voice base, but have been less successful in capitalizing on it, and, as we will see below, the local voice base is shrinking rapidly.
On the Clearwire Corp. vs. Sprint Nextel Corp. drama that continues to unfold through parsed sentences from CEO speeches, I can offer no comments. Part of this is that I am prohibited from doing so due to my role in helping form Clearwire in May 2008, but also because what is occurring between Sprint Nextel, Comcast Corp., Google Inc., Intel Corp., Time Warner Cable, Brighthouse Networks, Trilogy Partners and Craig McCaw is common in business. I am confident that they will sort through the issues, but there will be storm damage through the process. It does not seem to have hurt Clearwire sales in New York City or any of their recently launched markets. A prolonged fight will hurt the shareholders and employees of both Sprint Nextel and Clearwire. Enough said.
On to more discussion of industry changes. Last week, we discussed the increasing concentration of wireless industry profits (reflecting the accumulating results of the entry-level data plans and wholesale revenues), and also discussed the continued shift to cable and wireless as the net add source for high-speed Internet. This week, we round out the discussion with an evaluation of the local voice and business/enterprise spending. We’ll also revisit the smart phone lineups of the wireless carriers.
Local voice revenue decreases rarely get the mention they deserve in earnings announcements. They are a given. The telcos planned on double-digit decreases, and that’s what is happening.
This chart is full of insights. First, predictions of an access line loss slowdown did not come to pass. We have not hit a “normalized” line as most of the telcos predicted. Over ten million access lines have been shed since the beginning of last year for Verizon Communications Inc., AT&T Inc., and Qwest Communications International Inc. alone. That number represents over $4.3 billion in annualized revenues, and over $1 billion in free cash flow. Note that this is reflective of losses since Jan. 1, 2009, which was when cable net adds started to stabilize.
Equally surprising is that cable voice over Internet Protocol is not even a significant minority of the gains. Since Q1 2009, Time Warner Cable and Comcast’s net add gain has only amounted to 20% of the total big three access line loss. Even when you include Brighthouse (Verizon and CenturyLink territories), Cox, and Charter, the total gains wouldn’t amount to more than 25% to 30% of the total loss. Also, in the most recent quarter, voice net adds for Time Warner and Comcast were down 43% from Q3 2009, but telco line losses were only down 15%.
Going into 2011, both the telcos and the cable companies face increased competition from smart phones. For the cash-constrained consumer, the question becomes “Why pay $30 for a phone line when I can use that money for a family texting plan or for wireless data?” This poses a dilemma for the wired industry, who cannot generate cash growth if phone losses continue at double digit rates. Time Warner Cable’s residential phone additions are headed into negative growth territory (which means some regions are not growing at all), precisely at the time they are beginning their migration to company-owned facilities. Comcast’s net additions are down 65% over Q3 2009 and definitely headed lower without more aggressive promotions. Charter Communications has new life after a restructured balance sheet. Why not lower prices 25% to 30% to gain a few more million net subscribers? Look for this lightning strike as early as next month.
The effect on scale is devastating for telcos. Qwest’s Q3 report provides some useful insights in this area (this chart compares network engineering expenses for the mass market segment to the access lines for that segment as well as total employees):
Admittedly, this is an oversimplification (Qwest’s total employee base is working on things other than local phone service), but the trend line is unmistakable – you can shed 8,000 employees, but if access line loss is larger than the 22% employee reduction (it was, at 27%), the ratio of employees to lines in service will continue to rise. Fewer lines supporting more expenses leads to more network (and service) expense per access line. Lower yield by 10%, 15% or 20%, or lose another 27% of the base over the next 11 quarters, and the picture gets very bleak. As variable as some might want to make the wired telco industry, it’s extremely scale intensive.
Will this storm end? Not soon, even with needed consolidation.
Lastly, let’s shift back to wireless, where the retail selling season is getting into full swing this week with the launch of the Windows 7 mobile phone throughout the AT&T Mobility franchise. As most of you recall, we wrote “Android Nation” in August and I have updated the chart we developed then below:
More on what’s going here in upcoming weeks, but suffice it to say, there’s a lot more “smarts” in those stores this fall. Outside of AT&T Mobility (who is pushing a broad-based phone strategy), Android gained ground across all price segments with all of the remaining carriers. Of particular importance is the development of the “Android middle” at Verizon Wireless and the “Android low end” at T-Mobile USA Inc. Most surprisingly, here’s what we found last Friday at Walmart.com (this is for someone switching, not upgrading, to Verizon Wireless):
Android 2.2, Adobe flash, slide-out keyboard, 1 GHz support, a 5-megapixel camera, and the right price. Windows 7 ($199 phone, less apps) launch be damned – let the phone wars begin!
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 years in telecom and technology. He welcomes your comments atjim@mobilesymmetry.com.
