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.
As we head into the holiday season, I thought it would be good to look back on five key themes that framed a momentous year. These events are really in no particular order, but we grouped them into themes to keep this week’s column true to its name.
Two (and a half) major consolidating events: After the Department of Justice put the kibosh on the AT&T/T-Mobile USA merger, everyone knew it was only a matter of time before new partners paired. After a dramatic period of negotiations outlined in a recent MetroPCS Securities Exchange Commission filing, T-Mobile USA and MetroPCS announced their merger on Oct. 3. Not to be outdone, Sprint Nextel announced their investment from Softbank on Oct. 13, and in turn agreed to purchase several markets of spectrum from US Cellular in November.
These events will create stronger competitors to Verizon Wireless and AT&T Mobility, although both companies combined will not outpace AT&T’s announced level of capital spending over the next three years.
The theme of these new entities will be “regenesis.” Both companies are furiously deploying LTE networks, but both companies have also had recent periods of “marking time.” T-Mobile USA has an enterprise business to start. Sprint Nextel has a wireline business to restart. Both companies face coverage and capacity issues within the metro and neither have announced a roaming strategy. How these common needs translate into future partnership opportunities remains to be seen. Both companies have the capability to challenge AT&T Mobility and Verizon Wireless, but to do so they will need to compel customers to switch (and that allure is getting harder thanks to the pricing plan changes discussed below).
U.S. consolidation could not have occurred without help from abroad: Germany and Japan – thanks for being the catalysts.
(At least) seven iconic device launches: This year we saw the launch of faster mobile computing devices, including the Samsung Galaxy S III, the Samsung Galaxy Note II, the iPhone 5, the iPad Mini, the Nokia Lumia 800 and the Nokia Lumia 920. Conservatively, these seven devices will account for over 50 million U.S. activations in 2012 (supply chain issues kept this number from being even higher).
Given increasing subsidies on smart devices, carriers pulled in the reins on upgrade policies. This spread out the financial effect of a device launch and also resulted in many customers keeping their previous devices for more than 24 months (postponing the next subsidy). While this had a temporary positive effect on quarterly profitability, it also resulted in a growing secondary market for pre-owned phones. The establishment of a “CarMax” (and potentially “CarFax”) for smart devices is sorely needed.
And as devices changed, so did the associated operating systems. The quality of applications is now impacting the parent brands: Apple’s brand gets stronger as the impression of Siri gets stronger (and a weak Apple Maps app pulls the other way).
In addition to this, Google has been actively working to cure some of the application effects of different versions of Android (this problem is affectionately mentioned as “fragmentation). Having used Ice Cream Sandwich (Android 4.0) for several weeks, the visual appearance of applications is strikingly different, and Google’s increasing coordination (now with Motorola) will be fodder for a future column.
Honorable non-mention goes to Research In Motion. After many months of management and product turmoil, the Canadian has-been announced that they would be launching BlackBerry 10 devices in late January, causing many to speculate that actual product would not hit U.S. store shelves until late March. The unspoken “Leave black and never go back” trend from this year continues what we already knew to be the case: E-mail and global messaging are good, but others can do it much better (and historically others have been a lot nicer and flexible than RIM).
Big pipes and metered bills: Two great tastes that taste great together: Sometimes two elements combine to create a mega trend. In telecom, this veritable “Reese’s” is the combination of LTE networks and metered/shared bills. Taken separately, either event would have had a “ho hum” to mildly negative effect on Verizon Wireless and AT&T Mobility. But together, they create a kinder and gentler way to equitably raise rates. And, as we will see in Q4 results, voice/data average revenue per users (or average revenues per accounts) will stay steady and data ARPUs will show healthy growth.
Will this ARPU rise eventually be capped? Absolutely, but, as we saw in the early days of premium cable services that ceiling may be higher than many expect. Will third-party billing alleviate customer-paid data growth? It will, and, if the carriers explain it in terms of customer savings, the net neutrality “boo birds” who love to spread fear, uncertainty and doubt over any change to the current system will be silenced.
This trend also exposes a divergence in network and marketing strategies between the two largest carriers (Verizon Wireless and AT&T Mobility) and their smaller competitors (Sprint Nextel, T-Mobile USA, Leap/Cricket and MetroPCS). Given the big guys’ focus on metered billing and shared family plans, their objective is to “load up” the network (as Lay’s potato chips famously told customers to “Crunch all you want – we’ll make more”). That’s not the objective of the unlimited providers, who constantly seek to offload packets that could traverse the LTE network. (If you have not contemplated the effect of this trend on sales and marketing strategies, have another cup of coffee and let this one sink in. It’s very big).
Low interest rates: The great telecom (and Internet) mulligan: We have written frequently on this topic since June. Treasury departments were refinancing their balance sheets this year with gusto. This led to lower coupon rates, extended maturities and, in many cases, little to no 2013 or 2014 debt reissuance.
Restructuring balance sheets is one thing, but at the end of November, Amazon took the rare step to actually issue $3 billion in new debt (many of you remember Google took the same action in 2011). According to The Wall Street Journal, the 3-, 5- and 10-year bonds yielded “.742%, 1.301% and 2.601%, or .38, .63 and .93 percentage points, respectively, over comparable Treasury rates.” Ten year money at 2.6% – that’s a recipe for long-term disruption.
How Amazon is translating this into disruption started this week with the introduction of their kid’s “Free Time” packages. Have a look here and think about how this changes viewing habits.
Where 2010 and 2011 were the years to build the cash fortress, 2012-2014 appear to be the years to begin to spend or distribute cash. As tax policy uncertainty subsides, companies can begin to build acquisition strategies. This is very good news for start-ups who increasingly serve as research and development arms for many of the larger carriers.
The re-election of President Barak Obama: To everyone’s (including Mr. Romney’s) surprise, it wasn’t much of a race and long before the clock struck midnight we had our winner. The Obama second term is a very good thing for challengers, net neutrality advocates and rural broadband (a.k.a. BTOP) providers. It’s a negative event for large incumbents across the board (as one of you e-mailed me last week “I bet the Federal Trade Commission opens an office in San Jose in 2013, right down the street from Google, Apple and Facebook. It’ll save on travel expenses.”).
President Obama will be focused on longer-term, legacy-leaving items in his second term: immigration reform, a more efficient energy grid, cyber-security, broadband infrastructure and education to name a few. Technology objectives are advanced with legislative reforms in each of these areas. On the foreign policy front, United States-Chinese relations will be critical to keeping technology supply chains intact.
Against this is the backdrop of increased regulation and other barriers that inhibit innovation. Google and Apple will likely be targets of multiple Federal Trade Commission investigations, diverting management focus from inventing future technologies. Potential breaches of consumer privacy, particularly on mobile devices, will also be the topic of much debate and likely face greater regulation. When big data meets big government, things get very interesting.
Pre-arranged (and likely pre-approved) wireless carrier consolidation. Insatiable demand for the latest devices. Metered billing with shared data. Low interest rates to restructure current indebtedness and fuel disruption. An administration that is emboldened and willing to use the executive branch to drive change. Each of these items is substantial, but the truly interesting thing to watch is how they will unite/mix/blend with each other to build a stronger American economy. How and when this will happen is still an enigma, but 2012 set the table for a cornucopia of activity in 2013.
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 twenty years in telecom and technology. Patterson welcomes your comments at [email protected] and you can follow him on Twitter @pattersonadvice.