Thursday, October 29, 2020

AT&T Handset Supercycle and Retaining the iPhone base?

AT&T has veered from its long time conservative promotional activity, relative to its peers.  With so many M&A and then integration irons in the fire, the gross add wireless business seemed to take a back seat. However with the Apple iPhone 12 launch, AT&T has made its most aggressive move to date.  That is an iPhone 12 can be obtained for free, a $800 value. Of course the conditional unlimited plan, minimum trade-in and 30 month installments apply. Moreover, the $800 can be applied against the 12 Pro and likely the 12 Pro Max model. To be sure, in a switcher world, the best promotions are reserved for those who jump carriers, or existing users adding a new line.

What's different this year is that this promotion is opened to existing subscribers without a new line condition. Though this seemed to be widely noted with the iPhone 12 launch,  a similar flagship device promotion happened in September with the Samsung Note 20 5G where a subscriber may get that device for free with similar conditions. Still, it wasn't an iPhone.


Why It Matters

AT&T's multi-year iPhone exclusivity deal allowed it to build a large high-value base. Despite losing that exclusivity in 2011 and 2013 to competitors, iPhone customer accounts generate higher ARPA bearing revenue. Yet despite formidable switching attacks from T-Mobile over the years, AT&T has determined 4Q20 as its time to fight back.  Why?

The device "supercycle" moniker speaks to the 5G rollouts across the domestic landscape in that carriers needed to move their older device base to upgrade. In doing so, they would realize a better user experience from all the network improvements in the past and future year(s).  AT&T's tangible benefits include reduced postpaid churn (i.e., 30 month installment) and higher ARPU/ARPA (i.e., requisite unlimited plan). 

In terms of timing, AT&T has been a leader(?) in with the lowest postpaid upgrade rate for over 20 quarters. This speaks to its conservative promotional activity. By contrast, its conservative peer, Verizon reported higher upgrade rates.  To be sure, the combination of AT&T conservative approach and competitors' aggressive promotions resulted in poor gross/net add performance and even net losses in some quarters.   










On its 3Q20 earnings call, AT&T CEO Stankey noted that the iPhone promotion is a means to reward the longtime iPhone customer base.  It's clear that Apple jumping on the 5G bandwagon was a key factor in the promotion calculation.  If all goes well, Stankey stated with HBO Max adoption, new mobile unlimited plans coupled with a 5G handset cycle would be a key wireless service revenue driver for the backhalf of 2020.  My own retail and customer care checks suggest this iPhone promotion is incredibly popular with desired color variants backlogged until December. 

It's unclear when the promotion will end as reps didn't have any end date in their systems.  If successful, we can expect to see AT&T's device upgrade rate for 4Q20 spike higher than many previous 4Qs. Promotions are of course a part of the business and it will be interesting to see when the promotion ends, traditionally before Black Friday or keep the momentum throughout to the end of the year.  There are likely AT&T business case people who have gamed the right threshold of promotion tied to new and existing subscribers counts, expected plan upsell and device subsidy levels.  Looking ahead, it appears AT&T has a lot of retention momentum for 4Q20.   





Monday, September 14, 2020

A New Verizon - Embracing Prepaid with a Tracfone Acquisition

Verizon announced its intention to acquire America Movil's US Tracfone property which includes not only the Tracfone brand but also nine other prepaid brands.  The Tracfone property brings ~21M subscribers, 90K distribution doors and 850 employees.  



The transaction will include $3.125 billion in cash and $3.125 billion in Verizon common stock and also includes up to an additional $650 million in future cash consideration related to the achievement of certain performance measures and other commercial arrangements.  Expected deal close is 2H21.


Why It Matters

The old Verizon of old is gone in which it eschewed or minimized its prepaid operations for the chase of higher ARPU bearing postpaid users.  Surprisingly after 10 quarters of net prepaid losses, 2Q20 showed a positive net adds. 


As of 2Q20, prepaid only accounted for ~4M users (~4%) of the ~94M retail base. Tracfone by far has been the largest prepaid player and (if closed by 2H21), Verizon will be the largest prepaid player with ~25M subs. As of 2Q20, competitors' prepaid bases:
  • AT&T (~18M)  
  • T-Mobile (~11+M) 
  • DISH (~9M)   
Moreover, the Tracfone unit reported >$8B in revenue which helps to provide a purely wireless growth story even when the other strategic bets didn't pan out (e.g., Yahoo/AOL, Oath, Terremark, etc). But Verizon could be in the driver's seat as Tracfone's America Movil parent has been absorbing years of net losses with the only bright spot in 2Q20 in which the unit beat out its competitors in net adds with 214K.


Looking Ahead

Verizon could work the new acquisition in ARPU to drive greater revenue as Tracfone's ARPU has been steadily increasing to $28 partly due to the strength of Straight Talk. There is room to grow with peers' prepaid ARPU in the mid to high $30s.  Going forward, it remains to be seen in 2H21 what Verizon will do with the multitude of value brands, whether to shrink and focus or leave under the notion that each value segment is important.  My bet is consolidation as 10 brands on to of Verizon Prepaid, Visible and Yahoo Mobile is quite the stuffed portfolio.   





Friday, July 24, 2020

AT&T 5G Nationwide Milestone & Then Some

At the 2Q20 AT&T earnings call, CFO Stephens quickly stated that AT&T had achieved nationwide 5G capability.  None of the financial analysts caught it or asked follow-ups. At the call’s end, the press release came out. 

Key highlights for the people who are TLDR:

-       It’s nationwide
-       AT&T Unlimited Starter (entry plan) is 5G enabled
-       Cricket’s premium Unlimited Plus plan is 5G enabled



I was fortunate to share a subject call other analyst colleagues and former boater and possibly future RV king AT&T’er Gordon Mansfield to get more detail. Here are some relevant points:

-       Nationwide = 205 million POPs covered with dedicated 850 MHz & future sub-6 spectrum where it makes sense; doesn’t count its commercial mmW
-       DSS is active in pockets of Florida & Texas
-       DSS & mmW are commercial already but isn’t a factor in this announcement
-       Current 5G implementation is Non-standalone (NSA) but feverishly testing Standalone (SA)   

Why it Matters

-       The national coverage marketing milestone is a large part of the ‘5G Race’ as hyped and billed by industry and the government.  While the full nationwide POP coverage is ~320M POPs, 200 may seem like a shortfall.  For reference, LTE introduced in late ’10 and early ’11 started with a phased approach. BUT when DSS comes in, theoretically, a true 300M+ target may be realized as 5G will include existing LTE bands/coverage.
-       Every carrier seems to be fast tracking to 5G SA with announced trials. Of course there are services/revenues to unlock when that day comes. T-Mobile and Verizon have discussed using SA in 2020 and with peer pressure, it’s likely AT&T will also have 2020 rollout. SA makes everything better and will be the trigger for a broader DSS rollout.
-       As an aside - AT&T tells me that they’re ready to deploy standalone 5G to its customers in Argentina and Colombia this summer.  Wow! South Americans are ahead of North America.   
-       5G enabled plans are an important consideration for the future as to take advantage of the technology, you not only need a 5G device, you need the right 5G plan.  This means that legacy plans will access 5G tech even if a subscriber BYOD a 5G capable device.  There’s no forced migration per se but certainly a way to move early adopters to the new plan portfolio.
-       The 5G network has to be there for carriers to sell devices and every carrier is in the same boat. Everyone is looking to Apple to determine whether it will support 5G in its traditional Fall iPhone debut.  Given that the AT&T subscriber base is well north of 50%, you’d think they (and other peers) are pushing Apple.  For AT&T and Verizon, it’s also about mmW in addition to sub-6GHz support.        

Tuesday, February 11, 2020

T-Mobile Sprint Deal Done – Integration

Now that the T-Mobile acquisition of Sprint has been blessed, when will integration start? As we all know it’s been a lengthy journey since the $26B deal’s announcement in April 2018.  In September 2018, T-Mobile announced Sunit Patel to head merger and integration efforts.




Flash forward to February 2020, while T-Mobile and Sprint could not work closely on integration efforts, they’ve had a long runway in planning. Here are the key integration areas in my view:

1.     Executives and employees:  Like in most mergers and acquisitions, people are the first to come to mind. It’s almost certain that the acquiring company will win out in the executive suites. Overlapping areas such as human resources, marketing, engineering, operations and retail are likely to have been gamed out already, with few refinements.   The big if is making good on the promise that the acquisition/merger will be job accretive.
2.     Physical headquarters: It’s no secret that T-Mobile has expanded and updated their Bellevue spaces while Sprint’s offices, including the Overland Park campus has contracted.  Similar to competitors AT&T and Verizon, key executives will be expected to relocate to the Bellevue power center.
3.     Suppliers: Mergers always take a toll on suppliers. That is if they sold to two, now they’ll sell to one.  Invariably, that is part of the synergies calculation – suppliers may see reduced revenue because the new company will have better buying scale (on top of Softbank and DT added to the equation). However, since Sprint was cost cutting, there could be some spending bumps down the line.
4.     Infrastructure: T-Mobile has always highlighted the faster than usual of MetroPCS.  That is the decommissioning of their CDMA, repurposing the spectrum and lowering overlapping operational costs.   Indeed, Sprint is still on CDMA and it’s a strategic imperative to move those users (direct subs & wholesale partners) off so they may take advantage of PCS and move the 800 to DISH. 
5.     Distribution: While Sprint has been contracting their distribution, T-Mobile made commitment to expanding its doors.  Where there is overlap (i.e., T-Mobile and Sprint retail within a block or two), those retail shops could be sold to DISH as they will need to have postpaid retail presence beyond its prepaid Boost locations.   

I’m going to go out on a limb and guess the new T-Mobile integration will hit the ground running this week as the plans have already been put in place.  I’d expect some of the areas I touched on above (e.g., headcount/org chart/exit packages) will be announced within a week or week and a half, if not sooner.