Impacts: DISH & AT&T's Network Services Agreement

What: DISH and AT&T signed a long term network service agreement making AT&T the primary network for its DISH MVNO brand (Boost Mobile, Ting and Republic Wireless) customers.

Though the terms were not disclosed in the DISH SEC 8-K filing, the media reports point to 10 years and worth at least $5 billion. Moreover, the agreement allows AT&T to use a portion of DISH's spectrum in various markets to help support DISH's customers on the AT&T network. Lastly, AT&T is providing transport services to support DISH's 5G network. 

Why: DISH needed to exit/held hostage to an acrimonious T-Mobile relationship prompted by the announced CDMA network sunset by January 2022.   The sunset would require DISH to convert (read handset subsidy) those legacy CDMA subs to newer compatible devices. 

When: That is an unknown on the rollover of these customers. However, it's likely before the end of 2021.

Impact:

• DISH
• Gets out from under the T-Mobile thumb/control despite favorable ostensibly wholesale rates when it took over the Boost branded base 
• Likely to receive an incentive monetary sum to assist DISH move subscribers onto AT&T network  
• Gets out of direct device subsidies of those CDMA subscribers; could use that incentive sum to help offset those devices
• Possibly gets access to AT&T device relationships to drive down DISH's subsidy costs (near term and future) as well helping to pad the device offerings
• Ostensibly, this AT&T wholesale deal would provide better monetary terms/outcome for DISH in order to exit the T-Mobile relationship 
• Allows DISH to bundle wireless service with its own satellite television service (double play) allowing for increased ARPU and growth in rural communities it currently serves

• T-Mobile
• Loses wholesale revenue from '22 onward though the T-Mobile should have factored in DISH's 5G network buildout projections and worse case planning given the increasing symmetrical war of words    
• Loses a customer/partner that is increasing hostile (the T-Mobile Grinch commentary). That could be construed as a good thing.
• With 'renting' some of DISH's 600 MHz spectrum that allows for T-Mobile's vast national 5G claims, DISH could opt to terminate the spectrum leasing and leave T-Mobile with future 600 LTE & 5G coverage holes.  T-Mobile and DISH came away with a 42 month lease arrangement back in late '20.

• AT&T
• Gains future wholesale revenue, presumably for 10 years, and takes it away from arch rival T-Mobile
• Gains access to DISH's spectrum in certain markets
• Though the primary purpose was to support DISH's customers, what's to stop AT&T to also support AT&T customers?
• Markets were not identified but likely in dense urban markets where Boost subscribers consumer service
• Unclear whether this is relegated to just LTE connectivity or future 5G as DISH would logically have its own national 5G owner's economics 
• Gets near term and future transport revenue for DISH's 5G buildout. This would help with some return on investment (CapEx) on the company's big multi-year fiber push and buildout 
• Allows DISH to blunt T-Mobile rural growth as a viable competitor (if DISH can execute)   

T-Mobile’s WFX Enterprise Growth Opportunity

Macroview: WFX is the first major move since the integration of the Sprint’s and T-Mobile’s Business groups.  Perhaps by design, the business activities from the pre-new T-Mobile centered solely on small business growth. This segment wasn’t a stretch as there are overlapping profiles between consumer and small business. Therefore the retail playbooks looked similar.  

As the merger moved positive, T-Mobile was banking on Sprint’s business expertise in complex services and its enterprise accounts as a jumping off point to tackle competitors AT&T and Verizon.  In an analyst call, T-Mobile’s EVP for Business, Mike Katz stated that those competitors controlled 91% of the enterprise market. 

Opportunity: T-Mobile’s aggressive network buildout with Sprint spectrum assets set the table for enterprise conversations that never could have happen as standalone Sprint or legacy T-Mobile. T-Mobile’s marketing messaging of its aggressive 5G geographic footprint and increase capacity is now the calling cards to those premium enterprise accounts and leads, those who favor geographic breadth and reliability over price. Yet the company's consumer and small business price leadership reputation doesn’t hurt either, as cost is a key factor for procurement managers.

The Next Big 5G-Powered Move: There are three components for this WFX business focused announcement.  WFX (work from anywhere) as opposed to WFH (work from home) is a nod to the change in forced work due to the pandemic. The three components offer an opportunity to bundle a sale to those business or government entities who look to shift from an office workforce to a partial or fully remote one.  While competitors may have the same piece parts, a bully baked and coherent portfolio offering helps the perception of corporate focus and credibility.  There is also the unaddressed minor adoption approach - corporate or individual liable.  Ideally, a corporate liable approach alleviates out of the pocket expenses and control for procurement managers and mostly employees.

1. Enterprise Unlimited Plans - unlimited 4G and 5G data is no big deal in the consumer and small business world but in corporate and governments accounts, competitors' plans   centered on pooled data plans. The clear benefit is not worrying and managing data thresholds for managers, employees and intangibly reduce overall internal OpEx. 
    
2. T-Mobile Home Office Internet - While many companies are ok with co-mingling an employee's internet, perhaps with a bolt-on VPN, the pandemic and pandemic era collaboration tools have, in some cases, taxed the up and downlink throughput of a consumer grade internet connection.  T-Mobile claims this offering comes with enterprise grade SLAs where specific work-related data is prioritized. To be clear, this is a fixed wireless access offering with an included router. The big unknown for the subscriber will be T-Mobile's build out, LTE or 5G and what the associated up and downlink expectations may be.               
3. T-Mobile Collaborate -  To round out the offering, a unfiied communications cloud -based platform play is in order. While UC is tablestakes in any enterprise portfolio, bundling it into WFX  is a necessary holistic solution to address competitors’ similar offerings.  With Dialpad (a TMobile Ventures investment), there should be some owner's economics and control in Dialpad's future refinements.   

The Path Forward: With the consumer side launching Magenta Max and WFX launched in 1Q21, the company is positioning itself to be a more premium carrier as articulated in previous earnings calls. Unlike the more transactional nature of the consumer business, every enterprise lead is a give and take to win the business which may include device subsidies or for free, depending on the deal.  

Similar to starting from scratch in the business (read small business segment), T-Mobile had claimed amazing growth. Somewhat the same can be said in the enterprise space as T-Mobile is getting its legs together in these easier to understand WFX connectivity solutions to complement more complex service (e.g., MDM, security, contact center, etc.) sales. It will still come down to the enterprise sales teams to make the case, rebuff competitors and close the deals.

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.   

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.   

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.        

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.  

2Q19 America Movil Prepaid - Still Bleeding but Moving Some KPIs

For eleven quarters now, America Movil USA has been losing subscribers.  For 2Q19, it was 164,0000.  To be sure that is a big number and with a half glass full view, it's better than the same quarter a year ago with 635,000 losses.  As usual, its Safelink brand brought the most headache with 95,000 followed by 42,000 at the other brands. Surprisingly, the positive Straight Talk growth engine lost 30,000. This speaks to the competitive environment within the prepaid segment.

Still, the company's subscriber base is still formidable with 21.4 million subscribers but T-Mobile with 21.3 million will likely surpass America Movil as the largest US prepaid provider next quarter or the following. For those who are keeping track, AT&T is less than 4 million behind T-Mobile. 

One can argue these new losses have shrunk relative to the massive numbers in 2017 and 2018. Yet to the company's credit, there some some positive key performance indicators (KPI), churn and ARPU.  Churn has moved from mid-4% to a decent 3.7% level this quarter. ARPU has risen to $26 now from $20 at EOY '15, $24 at EOY '17 and somewhat stable at $26 at EOY '18.  Overall quarterly revenue has wavered slightly above and below the $2B mark.  

Why It Matters

It's clear that the big, no huge, loss quarters are slowly going away but Safelink continues to be an albatross around the company's neck. Straight Talk growth to offset some loss isn't assured as prepaid competition continues to be a two horse race between T-Mobile and AT&T. Based on trends, America Movil USA will cede its position as the 2nd largest US prepaid player. 

The company may be allowing the shedding of customers to trade for ARPU and revenue lift by focusing on its flagship Straight Talk brand. Looking ahead as a '19 goal, crossing from negative to positive growth would be a momentous milestone. 

2019 SHAPE-ing 5G + Other Things

The annual AT&T Shape event at the Warner Brothers Studio in Burbank, California promised to be one that explored the convergence of technology and entertainment.  This was my second Shape (first write-up here) visit.  There were differences and similarities. My view last year was that AT&T was finally showing off the content side of the acquisition that was approved in June 2018.  

As Shape is open to the public, it is positioned to be a nice public relations event where the AT&T can show off its service and content wares, provide an outlet for hopeful content creators to reallize their dreams and to further its brand. 

The big areas that pervaded in 2018 and this year were: VR/AR (or XR), content and 5G.  Some content and XR demos were complementary (duh) but 5G demos have move a bit closer to reality.  

The longest lines were for the blockbuster franchise Game of Thrones AR demo. The organizers anticipated long lines and displayed a sign indicating a 1.5 hour wait from that point.  Still, people waited for the ~5 minute demo that allowed the Magic Leap gear wearing attendee to dispatch some GOT baddies with weapons.  

And Magic Leap was a big presence in the demos beyond GOT. Magic Leap had their own area demoing several AR possibilities.  I have to say that the graphics and demos weren't overly impressive BUT in '18, there were no public demos.  Magic Leap (with help from AT&T investment) has come a long way to actually producing product and delivering something tangible.

To be fair, tech follows an evolutionary path and there should be no hesitation that future demos will get better and more compact.   And with the AT&T investment, it makes sense that Magic Leap gets a spotlight session. AT&T's Communications CEO John Donovan and Magic Leap CEO Rony Abovitz talked about Abovitz's vision on what he coined as Magicverse. The description is "... a large scale canvas for creatives, with Magic Leap merging the digital and the physical worlds to create a new reality with 5G"

The embedded video should be watched for what this man's ideas are.  It's worth it. I look forward to next year's update.

As previously noted, some of the 5G exhibits (powered by a 39 GHz base station) have some more meat on them. Where in the mainstream press and carrier marketing have been pushing high throughput speeds with every 5G launch, it was refreshing to see AT&T focus on latency as a benefit.  However, it's tough to get this concept across to a consumer audience.  There was a colleague who had an AT&T Samsung Galaxy S10 5G and he showed off some >1 Gbps speeds and everyone who saw this was already conditioned to expect that. AT&T and some other exhibits showed off some simple latency demos, not as any product or service but as more of education.

Ericsson's arcade games provided a reference between 5G and LTE latency.  In my view, the industry is now using speed as a crutch for 5G because it's what the public has been conditioned to over the 8-9 years of LTE usage.  The industry needs to move towards latency education somehow.

The consumer use case is likely AR/VR and cloud gaming but that won't be here for a couple of years.  Lastly, the content and empowerment message was live and well with several sessions. I pick two that stood out for me as excellent. First, it was The Scully Effect - I Want to Believe in STEM that discussed the role that Gillian Anderson's X-File's character, Agent Scully came to inspire a generation of women to enter Science Technology Engineering and Math.

Second, Technology and Future of Sports, though focused on the NBA can extrapolate into other sports with the vision of moving a couch spectator to one that is seemingly immersed is phenomenal.

 

While other carriers have their 5G vision demos here and there, AT&T's Shape sits uniquely to open up a wide stage for the public to see where content and tech are going. Here's to the 2020 Shape where my expectation is that the tech demos will go beyond educational.

AT&T's Prepaid Growth Story

If one looks at the last couple of quarters of net add performance, the prepaid market seems to be flattening. Powerhouses Metro by T-Mobile and Cricket which had dominated with large net additions have dropped from their high go-go growth past days.  Prepaid competition has always been tough and will certainly continue.  The drama in the T-Mobile/Sprint deal where uncertainty and change has brought concern to the dealer networks and employee bases, AT&T is standing out as the stable ship.  

To appreciate the AT&T's prepaid growth story, it began with the Leap acquisition announced in July of '13 and closed in March of '14.  Between the acquisition announcement and the close, Leap's subscriber base shrunk from about 5 million to over 4.5 million.  With Leap, AT&T's prepaid base moved to about 10 million subscribers at the close.  The Leap brand, Cricket, though known was declining and had an impact on AT&T's results in 2014. However, with brand expansion beyond Leap's regional footprint and AT&T's national coverage, the new Cricket began its growth story.   Increasing the 'doors' or distribution was central in this effort. This included expanding its dealer network and big box retail.

From 2015 to 2018, the AT&T prepaid net add annual run tallied over a million subscribers, negating 2014's growing pains which included decommissioning the Leap CDMA network and subscriber device migration.  

As prepaid evolved, it's still attracting a price sensitive segment but low plan price and free/discounted phones are just but several buying considerations. Embedding value is now mirroring postpaid plans. For example, Metro by T-Mobile is including mobile hotspot capability, music, generous Google storage and even Amazon Prime in higher tier plans. For Cricket's part, because of AT&T's Mexican network assets and Canadian roaming agreements, unlimited plan users can roam without charge in those countries.     

Recently, I had the opportunity to chat with John Dwyer, President of AT&T Prepaid on the state of his business.  A couple of Cricket highlights came up namely in the area of customer satisfaction triggered by comments made on the 1Q19 earnings call.  Though these were selected for the best PR, Chairman Stephenson revealed some important data points: 1) churn was under 3% and 2) Cricket subscribers accounted for 10 of the 17 million base, and had more than doubled since the Leap acquisition close.

Low churn is a key indicator of customer satisfaction and John reinforced that notion with JD Power wins in purchasing experience and customer satisfaction. As the former head of customer experience, he said that Cricket's net promoter score (NPS) moved from a -7 to now 43. By the way, NPS ranges from -100 to 100.  The 10 million Cricket subs suggest that there are 7 million prepaid subs to be share between branded prepaid and prepaid IoT.             

Branded prepaid took a shellacking in 4Q18 negating most of Cricket's 240K net adds. Observers checking the AT&T branded plans would note a double data promotion on its $50 ($40 with autopay) that runs until the end of July that suspiciously counters a similar promotion at Verizon, which isn't a surprise as each company have been longtime postpaid rivals for the same demographic.  This should hold true for each's branded prepaid offerings.

Back to the growth story - the last two quarters are shockingly lower than the previous 14 quarters.  The question is has the growth engine stalled because of overall market trends? Indeed, competitors' previous quarter net addition numbers were comparably lower.  One possibility could be on the coat tails of the FirstNet buildout wherein AT&T claims a positive trajectory for postpaid growth.  While they cite promotional activity for FirstNet accounts to include families, FirstNet is also going to rural communities in which AT&T has planned on new distribution. While the focus is on postpaid growth, it's logical that prepaid distribution would also follow. It's unclear whether we'll see 300K+ net additions but at least there is a runway.  A caveat is that with T-Mobile's 600 MHz expansion, their rural coverage will also increase and prepaid could also follow in increasing distribution, if there is commitment from Seattle (the new power center) versus formerly the MetroPCS HQ of Dallas.  In the next year, we'll see how the AT&T prepaid growth engine performs, firing on all cylinders or sputtering.         

CY 1Q19 Sprint Prepaid: Another Down Quarter & Stealing for Postpaid

Sprint prepaid has recovered from the previous quarter's 173,000 net losses with only 14,000 losses in CY1Q19. Statistically, they seem to be on the mend.  Sprint management has continually citing Boost Mobile's performance and doing heavy competitive lifting against stronger competitors Metro by T-Mobile and AT&T's Cricket.  It's no surprise that some T-Mobile and AT&T's net gains came from Sprint prepaid losses.  

However, this is disingenuous as Sprint's prepaid numbers should have formally shown better results.  There has been an on-going assignment of better performing (stable paying) subs to Sprint's non-branded postpaid category, thereby enhancing the postpaid number count. For CY1Q19, prepaid to postpaid migrations totaled 129,000.  On the postpaid side,  the company lost 189,000 phone subs. Without that 'help' from prepaid, the postpaid optics would have worse. Back in CY4Q18, with 173,000 prepaid losses, 107,000 migrated to the postpaid bucket. Then, Sprint posted 26,000 postpaid phone net losses. So the take away is that while prepaid performance is bad, postpaid is in rougher shape without its prepaid unit. 

By no means is Sprint the only carrier using prepaid to postpaid migration accounting to help its postpaid optics. T-Mobile is also expanding its postpaid numbers with this approach, piling onto the string of phenomenal postpaid growth quarters.  For 1Q19, 120,000 prepaid migrated to postpaid. What's important here is that they would have beaten AT&T for the 1Q19 prepaid title if they didn't do the migration. These migrations allowed T-Mobile to report 656,000 net phone adds. In 4Q18, there were 160,000 prepaid to postpaid which allowed T-Mobile to break one million phone net add mark.  Optics is everything in pushing your message.

Looking at churn, Sprints low 4% churn is highest of the big four prepaid competitors. T-Mobile is at 3.85% and America Movil is at 3.7% in the quarter and AT&T's Cricket reported to be sub 3%. On the other end of the spectrum, the non-competitive Verizon prepaid unit has continually lost prepaid subs and doesn't report its churn.  Churn has a lot to do with volatility or stability of the operating unit.   

Why it matters:  Without prepaid to postpaid migration accounting, Sprint prepaid appears to be staying somewhat lockstep against competitors in acquiring customers.  Since this accounting practice has been in place for many quarters, it's likely that prepaid numbers will continue to assist any Sprint postpaid 'recovery.'

There has been continuous talk about T-Mobile and Sprint shedding its prepaid assets as one or one of several conditions of regulatory approval.  It's no surprise, if that is the case, that Boost is the sacrificial lamb with its 8.8 million subs versus the more successful T-Mobile's 21.2 million.  T-Mobile can argue that they can keep its own prepaid unit as a counterweight to America Movil's 21.6 million count.  America Movil management has also publicly stated that they'd be willing to look at adding subs from any merger shedding. However, that would put them squarely ahead as the prepaid giant with close to 30 million subs.  How well would those optics look?  Yet with all this conjecture, we won't know until a decision happens in June or July.

   

1Q19 America Movil USA Prepaid – Recovering and Shifting

America Movil with over 21.6 million subscribers is the largest US prepaid player in 1Q19, closely followed by T-Mobile (21.2M), AT&T (17.2M), Sprint ([CY 4Q18] 8.9M) and finally Verizon (4.48M). With many prepaid operating brands absorbed throughout the years and the backing of its Mexican-based parent, the company is still a prepaid force but has ceded prepaid leadership to AT&T and T-Mobile.   To put it in perspective, America Movil USA reached its corporate high of over 26 million subscribers in 4Q14.

Similar to Sprint, its bet on lifeline services (SafeLink) has punished its subscriber base count with continued losses.  Partially offsetting this downward pressure has been the shift from non-recurring plans, such as pay as you go, to higher ARPU bearing monthly plans.  Chiefly, Straight Talk (available at Walmart  and ~43% of its overall base) has been its growth engine for many quarters while the other brands have declined. To understand the significance of Straight Talk and SafeLink, the two are highlighted in quarterly earnings reports along with an Other Brands category (~44% of the base).  

For the quarter, there seems to be a recovery of sorts, relative to the big losses in 2017 and 1H18.  With only 89,000 net losses, the company contrasts that to 1Q18's 371,000 losses and 1Q17's 1.3 million. The focus on the higher-ARPU bearing Straight Talk with 175,000 additions has helped its ARPU rise for the quarter to $26, contrasting to 1Q18's $24, 1Q17's $23 and 1Q16's $21.  Another provided metric, churn is now at 3.7% where in previous quarters were north of 4%.

Why it Matters: From the above chart, the truly bad days seem to be behind the company but SafeLink will likely continue to contribute to the losses. Though losses are less for the quarter, the US business unit's EBITDA margins is a measly 6.2% compared to the high 20s to low 40s of other America Movil's business units. Also, rewinding four years, the US business unit's 1Q15's EBITDA margin was 11.7%.  This suggests that it's been a truly competitive prepaid environment and the biggest MVNO is just getting by. 

There have been suggestions that America Movil may be in a position to acquire a spun off Sprint prepaid unit as a possible condition of a T-Mobile/Sprint go-ahead. America Movil management has indicated receptiveness to that as buying companies to increase the US opportunity has always been in the playbook. By no means are they the default winner as there are other parties vying for a parted out Sprint prepaid unit, if the occasion arises. We'll know in June/July?