Welcome to 2021 – COVID style. As we put the lid on 2020 and look forward to a less restrictive new year, we found a way to celebrate with a few neighbors while observing distancing guidelines. Hopefully each of you were able to pop some bubbly and proclaim an end to a most unusual year.
Since many of you asked for our thoughts on 2020, we’ll spend this week’s Brief recapping four of the largest non-COVID events, preview CES and preview our outlook for private wireless networks in 2021 in the January 10th edition.
For those of you who do not use LinkedIn and might have missed our post, we published both the Apple iPhone availability through Sunday, December 27 as well as the market capitalization changes through Thursday, December 24 on www.sundaybrief.com. We will not have an Apple iPhone update this week other than to say that we are glad that many analysts (JP Morgan and Wedbush) are finally coming around to the fact that iPhone 12 Pro shortages are not temporary supply shortages but driven by “continued robust demand.”
Since our last Brief, we lost one of the pioneers of telecommunications competition. J. Sherman Henderson, the former six-term Chairman of COMPTEL, and CEO of Unidial/ Lightyear Network Solutions, passed away at the age of 78. A full obituary is here and his dramatic testimony of his heartattack survival and recovery is here – his persistent optimism and entrepreneurial spirit will be missed by many.
Before we analyze market cap values , a quick correction to our Dec 20 Brief – the Verizon LTE Home Internet service (new equipment) is now completely self-install. We had erroneously indicated that it had a professional installation option and were reminded that customers are turning up their own Internet service with the help of an app. Also, the modem cost is currently being credited back on each bill ($10/ month charge, but a $10 credit applied for every month). Just like a standard Equipment Installment Plan (EIP), if the customer cancels service within 24 months, the balance of the $240 cost is due. Verizon is also discounting the service cost by $20/ month if the account also has a Verizon phone plan of $30/ month or higher. Sorry if this created any confusion – the LTE product seems to be working pretty well for most customers (5G Home Internet reviews are few and far between, but this Nov 5 review by reviews.org is fairly comprehensive).
The Week That Was
There are many ways to describe the last week of the year – Santa Claus rally, end-of-year stocking-stuffing, shutdown-related portfolio shifting, etc. Over the last three weeks, however, the Fab Five have added around $285 billion in market capitalization and end the year with over $2.7 trillion in value accretion. Apple alone generated more value in 2020 than the entire Telco Top 5 has generated in their entire corporate existence. The fact that the equity of each company represented in the Fab Five (except Facebook) is now worth more than the entire telecom industry should give us pause.
It has not always been this way. Here’s a link to the Jan 3, 2016 Brief where we discussed the gains and losses for 2014 and 2015. At that time, AT&T had an equity market cap of about $212 billion. It now has an equity market cap of about $205 billion. Amazon’s market cap at that time was about $316 billion (2015 was a very good year for the company thanks to the realization that AWS was going to meaningfully contribute to long-term earnings; prior to 2015, Amazon was smaller than AT&T). Amazon’s market cap today is over $1.6 trillion. What once was a $100 billion difference (or, at the end of 2004, no difference) has now become a $1.4 trillion difference. The gap is even worse with Microsoft ($1.5 trillion) and Apple ($2 trillion). It begs the questions “How did an e-tailer with a maniacal focus on logistical excellence extract so much value from the rest of the market?” and “How will increasing (debt) investments in spectrum change the Telco Top 5 valuation trajectory?”
We will spend a lot of future Briefs discussing these questions in light of the most recent auctions. Assuming a weighted average cost of capital of 8% (which adjusts for changes in the debt/equity mix driven by lower interest rates), every additional $10 billion in debt will require $800 million in annual incremental after-tax profits (roughly $1.04 billion pre-tax) to generate value. If Verizon spends $50 billion (spectrum + clearing costs + other obligations + equipment) to stand up C-Band, it will need to generate $5.2 billion in additional annual pre-tax profitability to cover the expectations of both shareholders and bondholders (roughly an extra 20% using pre-COVID total Verizon pre-tax income). This equates to ~$3.60 in additional profitability per existing wireless subscriber per month. Gulp.
2020 in Review: Top Four Non-COVID Events
Several of you requested our take on 2020. We don’t like doing these reviews as a rule, and are not going to devote an entire Brief to recapping the year, but here’re some general thoughts on some major non-COVID stories (including those that did not make it into others’ lists):
AT&T prioritizes HBO Max. In April, AT&T announced that John Stankey would be replacing Randall Stephenson as CEO. At the end of May, AT&T rolled out HBO Max, which has grown to over 12 million subscribers in 2020. AT&T also included HBO Max in their flagship Unlimited Elite wireless plan. HBO Max even got prime billing with Lily (ad here, and Facebook post here). In mid-November, AT&T announced that they would be releasing Wonder Woman 1984 (WW1984) through HBO Max on the same day it is launched in movie theaters (and later announced that this title could be streamed in 4K).
That’s a lot, but AT&T saved it’s biggest headline for December 3, when it announced that each WarnerMedia movie released in 2021 would be available on HBO Max on the same day it was debuted in theaters. The WW1984 strategy appears to have paid off, with Bloomberg reporting that 554,000 new downloads of the HBO Max app occurred in the three days following the film’s Christmas Day release.
Expect AT&T, HBO Max, and entertainment starts to be coordinated into a consistent (“cool?”) marketing message throughout 2021. For two terrific articles that foreshadowed recent events, look at this early 2018 New York Times article here and last October’s Wall Street Journal article here.
T-Mobile and Sprint merged. When 2020 started, many analysts interpreted questions by Judge Marrero (the presiding judge for the Southern District of New York overseeing a lawsuit brought by several state Attorneys General to block the merger) as negative indicators. Paul Gallant, a regulatory/ legislative analyst for Cowen, made headlines by lowering his odds of approval to 40%. Blair Levin, a former FCC commissioner now working for New Street Capital, also lowered his outlook for approval (his comments are summarized in the above link). Sprint’s stock languished on the news, and many in the telecom community began to think about “Plan B” for Sprint.
Then came February 11 (this CNBC article here summarizes the ruling). Judge Marrero ruled that the states had failed to make their case that the merged companies “would pursue anticompetitive behavior that, soon after the merger, directly or indirectly, will yield higher prices or lower quality for wireless telecommunications services.” Sprint’s stock shot up 77.7% on the 11th, which followed a 60% gain on Feb 10th after the Wall Street Journal reported on the judge’s intentions.
Creating combined momentum since the April 1 close has not been easy, but, as we have noted in several Briefs, the company is focused on broadening its territory (600 MHz expansion), building a new 5G network that incorporates Sprint’s 2.5 GHz spectrum (~100 million POPs covered with this new network today and 200 million expected by the end of 2021), accelerating their transition from Sprint to the new T-Mobile network (15% complete as of the last report – we expect that number to improve significantly with the Apple iPhone 12 launch), and decommissioning/ transitioning any legacy towers and network required.
While COVID-19 created hurdles (just ask T-Mobile’s Treasury department as they scrambled during late March to finalize financing), it also created opportunities to accelerate sales and distribution synergies. T-Mobile’s postpaid phone churn remained flat through 3Q results (see nearby graphic), a remarkable achievement considering pre-merger churn that was significantly higher than T-Mobile’s.
Through these changes, T-Mobile’s equity value has risen. Sprint shareholders, who lived through a lot of share price volatility while owned by Softbank, have enjoyed a 58% return since the transaction closed last April. T-Mobile is not burdened by a dividend expectation, leaving additional cash flows for new business opportunities (T-Mobile Home Internet and TVision are new product launches that might receive more funding). As we mused last week in a post, paying $26.5 billion for Sprint, even with $37 billion in additional debt, might seem like a bargain after the C-Band auctions are finished.
As long-time Sunday Brief readers know, we occasionally share the market capitalization difference between T-Mobile and AT&T (currently slightly less than $37 billion). Below is a Yahoo Finance chart showing T-Mobile (TMUS) and AT&T’s (T) stock performance since April 1. Our not so bold prediction is that T-Mobile’s equity market cap will exceed AT&T’s at some point in 2021 – whether T-Mobile’s lead is sustained depends on both companies’ performance. If T-Mobile’s network execution exceeds HBO Max penetration, then the capitalization lines could cross far sooner. But it’s also a distinct possibility that HBO Max (coupled with aggressive device-driven base marketing efforts) leads AT&T out of a post-COVID stalemate and both companies end up higher this year.
Microsoft’s aggressive move into telecom operating software. Microsoft gained nearly $500 billion in equity market value this year (or AT&T + Verizon), so it would seem ludicrous to focus on two relatively small transactions (our estimate is the sum of the two was likely less than $2 billion). If you work for Ericsson or Nokia (or Huawei outside of the US), however, their acquisition of Affirmed Networks (announced late March; closed a month later) and Metaswitch Networks (announced mid-May; closed mid-July) was seismic.
As we will discuss next week, the rollout of the next generation 5G model (called 5G Stand Alone, because it is not integrated into the LTE network standards) allows enterprises to rethink the economics of dedicated, private networks. CIOs have been operating Wi-Fi networks for years, and many of them long for integration between connectivity and application.
“It starts with the ability to interconnect deeply with the operator’s network around the globe. We have one of the largest networks that connect with operators at more than 170 points of presence and over 20,000 peering connections around the globe, putting direct connectivity within 25 miles of 85 percent of the world’s GDP. More than 200 operators have already chosen to integrate with the Azure network through our ExpressRoute service, enabling enterprises and partners to link their corporate networks privately and securely to Azure services. We also provide additional routes to connect to the service through options as varied as satellite connectivity and TV White Space spectrum.”
This seems revolutionary until you consider the traffic Microsoft is already carrying today: a) Microsoft Teams (voice, video); b) Xbox; and c) Skype. Affirmed and Metaswitch extend the standardization, coordination, and scale disciplines to wireless that are already needed for Microsoft’s existing traffic.
A decade ago, Microsoft might have had different lines of demarcation. Now, with Windows moving to the cloud and the need for faster (and better) decisions, why should CIOs not make the pitch for more control? More on Microsoft’s ambitions next week (and a good Brief on the topic from last May is here) … the implications to service providers as well as traditional hardware manufacturers are greater than you think.
The changing of the guard. John Legere, Braxton Carter, Randall Stephenson, John Stephens, Michel Combes, and Andrew Davies all left their jobs this year. That’s a lot of change for any industry, let alone telecom. Mike Sievert (8+ years at T-Mobile), Peter Osvladik (5 years at T-Mobile), John Stankey (35 years at AT&T) and Pascal Desroches (15+ years at WarnerMedia or their predecessor companies) are now leading T-Mobile/Sprint and AT&T. All of these transitions happened relatively smoothly in the middle of a pandemic.
Each of these leaders approaches value creation from a different perspective. John Stankey oversaw DirecTV and WarnerMedia acquisitions – he is transforming a telecommunications service provider into an entertainment brand. Mike Sievert is singularly focused on taking market share which entails a) holding on to the Sprint base; b) growing share of gross additions because through new 5G networks; c) committing to enterprise services (which implies more wireline partnerships); and d) selectively entering adjacent market segments to build more broadband + content bundles as cable becomes more aggressive about wireless. Hans Vestberg at Verizon is going to have to fight off T-Mobile as they reclaim “#1 network” awards in many markets in 2021, build the case for expanded fiber deployments (and execute their One Fiber strategy), and justify to a skeptical Department of Justice why buying Tracfone is great for competition. COVID-19’s headaches are replaced by increased competition and shareholder expectations.
Consolidation aside, cable’s leadership has remained stable through all of these changes. Brian Roberts and Dave Watson at Comcast have lived through investments in Comcast Cellular (late 1980s/ early 1990s, followed by a sale to SBC for $400 million + $1.27 billion in debt assumption in 1999), Sprint PCS (1994), the acquisition of AT&T Broadband (2001) and the failed Pivot and Clearwire transactions (2005 and 2008). Recently, Comcast launched an MVNO with Verizon (Xfinity Mobile), and also won many CBRS Priority Access Licenses. Their historical understanding of the economics (driven in part by their recently acquired expertise as a cell site backhaul provider) places them in a position to make very good decisions.
Comcast isn’t the only operator with extensive understanding of wireless. Cox, a Sprint partner on the 1994 venture and 2005 Pivot initiatives, has many executives including Dallas Clement who understand wireless as well as their Verizon or AT&T peers. Charter has hired many from the industry, including Danny Bowman (Nextel, Sprint) and Craig Cowden (Sprint).
Bottom line: Creating shareholder value begins with leaders who can effectively manage investment risks. Each company has a unique set of assets, and each leadership team has different experience sets. While leadership change is not always accompanied by strategy shifts, we think that what’s happening at AT&T and T-Mobile will reshape their respective companies starting in 2021.
That’s it for this week’s Brief. Next week, we will preview CES and tackle last big trend – enterprise 5G. Until then, if you have friends who would like to be on the email distribution, please have them send an email to firstname.lastname@example.org and we will include them on the list (or they can sign up directly through the new website). Thanks again for the referrals.
Stay safe, keep your social distance, and Go Chiefs!