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.
Many telecommunication providers reported earnings last week, and their stocks largely flowed with good news. AT&T started the parade, with Sprint Nextel and MetroPCS following. Amazon had a mixed quarter. Facebook, Netflix and Zynga also reported earnings, which generally missed lofty expectations. It was a very busy week.
Last week was good to be a wireless network operator. Price increases and upgrade policy changes aren’t causing anyone to change providers, and there was no mass event to disrupt earnings. Fewer people switched, and Sprint Nextel even reported that they spent less on advertising. All of these activities can only mean one thing: This was the quarter for generating cash, and lots of it.
Unlike past models in the telecommunications industry, there was no “but” or “offset” in this quarter’s wireless earnings. Every part of the business generated cash. Voice average revenue per user was down, but voice activity was down as well, especially in the postpaid/contract business. Messaging growth was slow, but the profits from unlimited messaging, on average, are very healthy. (As one of my Southern-drawled colleagues used to say about switched access revenues, “That’s good money.”)
Even data looked like it was generating cash, although it’s clear from the reported conversion rates that metered data is not popular with many customers. AT&T announced their shared family plans on July 18 to limited fanfare, but, unlike Verizon Wireless, provided the opportunity for existing customers to keep their current rate plan. With 88% of the AT&T Mobility postpaid subscriber base on family or business plans, they could have a lot of short-term exposure to plan changes. However, data networking is carrier-controlled, meaning that there are none of the carrier-to-carrier payments found with voice services. Scale and optimize the network, and cash flow follows. The effects of scale (more users with more bandwidth driving higher bandwidth and lower unit costs) were clearly seen in second quarter results.
While the industry appears to be growing revenues and achieving scale efficiencies in total, the overall postpaid picture continues to reflect an increasing concentration among the top two providers. Over the last four quarters, Verizon Wireless has grown postpaid subscribers by more than 3.4 million customers, AT&T Mobility by more than 1.5 million customers, while Sprint Nextel and T-Mobile USA have lost customers. While everyone has sought to raise ARPU through smartphone conversions, the overall growth of the postpaid market is paltry. This helps near-term profitability (lower total cost per gross addition), but casts a shadow on long-term growth prospects (unless there’s some crazy belief that metered rates will stay steady and not fall prey to the traditional telecom practice of significant price compression due to increased capacity and competition).
This quarter, and perhaps Q3 as well, will be viewed as the “golden quarters” of wireless. Margins will continue to improve, and Sprint Nextel and T-Mobile USA will receive enough financial oxygen to launch their LTE networks. Every provider basically signaled a late year (meaning October) iPhone launch, and 2012 will be a year when, with an LTE iPhone, LTE adoption will skyrocket. Margins will be steady as incremental profits from higher data rate tiers produce equal or greater margins. Emboldened by their cash-producing networks, the carriers might even force Apple to pay a surcharge for FaceTime usage (see the article on AT&T Mobility’s curious message that appeared to users who tried to use FaceTime over 3G).
The benefits of increased broadband usage will not be confined to wireless carriers, however. Next year will be a great year to be an incumbent bandwidth supplier as incremental (augment) orders will pour in, helping the likes of Zayo, Fiberlight, Lightower, Windstream and each of the cable companies who aggressively pursued cell tower/backhaul business in 2010 and 2011.
Does anyone lose out in this scenario, at least in 2013? Unfortunately, it’s the telco side of Verizon Communications and AT&T, who failed to win much of the incremental backhaul business. The DSL network is already moving the wrong direction (up the cost curve as customers migrate from copper to hybrid/fiber home solutions). Over 5,000 migrations to U-verse and FiOS from DSL are happening every day.
Compounding DSL platform profitability issues is the movement away from HDSL and HDSL2 as preferred access and backhaul speeds for cell site and enterprise connectivity. This trend has been occurring for the past four years, but events like the decommissioning of all Sprint Nextel iDEN cell sites hastens the slope of the line. Take away profitable HDSL/HDSL2 growth that offsets consumer usage and overall platform profitability is in jeopardy. This is the same platform that now has to compete against DOCSIS 3.0 from the cable companies and other solutions.
It’s a good time to be cable company – we’ll see how good when Comcast and Time Warner Cable announce earnings this week. It’s not clear that we can draw any long-term trends from this quarter’s earnings, except that with less aggressive marketing and without an iPhone launch, profits can look pretty darn good. We also clearly see that the network transition from low bandwidth to high bandwidth leaves the telco side of AT&T and Verizon with a less of an advantage, and potentially drives further tertiary/rural market spinoffs.
But for now, we celebrate the cash cow that wireless has become. Let the good times roll!
