June greetings from Kansas City, North Dakota, and Iowa. The opening picture is from the Lake of the Ozarks in Missouri where we are spending the weekend. Thankful for great connectivity at the lake home from Co-Mo Connect.
We had a record response to the last brief “Fiber Always Wins (until it doesn’t).” As stated in one of the many LinkedIn posts on the topic, a long-term perspective is important for future fiber deployments, and overbuilding other FTTH deployments might not yield the minimum 30% share required for breakeven economics.
This week, we focus on two key quarterly earnings topics – convergence and value. Some of the companies we track have solid recipes for success in one or both areas, while others are searching for solutions. We assess who has the inside track when earnings are reported in a month.
Schedule updates: We will be attending the INDATEL Business Symposium from June 22-24 in Austin and look forward to catching up with Brief readers there. We will also be attending the Midwest Peering Summit in Des Moines on July 8.
The Fortnight That Was
The beginnings of a Fab Five recovery started this week with the group up a collective $218 billion (+1.4%). Gains for 2026 are now approaching $200 billion with Alphabet, Apple and Amazon showing gains with Meta and Microsoft posting losses. We believe that Amazon’s gains are based primarily on continued retail spending strength (latest figures here, +7.5% on retail trade sales y/y, led by a 12.8% increase in non-store retailers).
Meanwhile, the Telco Top Five continue to languish (each company lost value in the last week), with Verizon being the only company to post gains for 2026. We think that this will change in the second half of the year as value investors recognize the cash flow generation of each company.
Apple held their annual WWDC event since our last full Brief, and the biggest news wasn’t announced in the opening keynote. The company describes it very plainly in their post-show news release (here):
“To ensure developing with large language models is as accessible as possible for those just getting started with AI, developers enrolled in the App Store Small Business Program with fewer than 2 million total first-time App Store downloads can access the next generation of Apple Foundation Models running on Private Cloud Compute at no cloud API cost. Developers can also easily leverage models of their choice, like Claude and Gemini, or those from any other provider that implements the new language model protocol.”
We don’t have enough space in this week’s Brief to describe the full impact of this announcement but found this Medium article that lays out the argument that this is one of the best possible strategic moves Apple could have made. Keeping developer interest focused on iOS developing on Apple’s private (on device) compute while still offering an interface to other AI models makes a lot of sense. What applications come from this action could determine the overall success of AI in the next decade.
That was not the only headline Apple has made since the last Brief, however. After the show, outgoing CEO Tim Cook sat down with The Wall Street Journal (here) to recap all the announcements and disclosed that the price of Apple products (including the upcoming iPhone 18) was going to increase thanks to increased memory costs driven by the AI spending boom. A $200 (or more) increase in the price of the upcoming iPhone 18 Pro was projected (article here). This sounds like a lot until the impact to the average Verizon or AT&T customer on an equipment installment plan is calculated: $5.56/ mo.
As the carriers have done in the current iPhone 17 cycle, trade-in amounts (up to $1,300) will be capped with the remainder amortized over the standard EIP period. In Verizon and AT&T’s case, this is currently 36 months – T-Mobile continues to run their EIP program at 24 months. We also think that Apple (and the carriers) will increase the cost to upgrade local memory on devices, currently at $200 per tier, to $300 per tier. This means that the cost of jumping two tiers on the iPhone 18 Pro (from 256 GB of on device storage to 1 TB) would cost $600 instead of $400. The $200 tier structure has not changed for several years and was due for an overhaul.
These cost changes will minimally impact iPhone 18 volume estimates. Price conscious customers (about 25% of US buyers) will look to delay upgrades from previous iPhones until the changes with Siri have been fully implemented. A few will stay on the baseline (non-Pro, non-Pro Max) or downgrade to the “e” model. But most consumers will either purchase the new “like for like” iPhone version (iPhone 18 Pro, iPhone 18 Pro Max) or upgrade. If that occurs, we think that backorder intervals could be 2-3 weeks longer in the upcoming selling cycle.
Finally, some thoughts on SpaceX who went public since the last full Brief (see five-day stock price chart nearby). Most of the post-IPO criticisms have focused on the IPO process and that Elon Musk left money on the table and enriched the offering underwriters – a classic Monday morning quarterback move. Others have focused on the wealth created for thousands of current and former SpaceX employees (as well as for senior executives and Board members). Our take is that SpaceX is a collection of highly innovative and loosely interconnected companies that serve consumers, businesses and governments across the globe with innovative solutions. The IPO proceeds could just as easily fund the next big thing or the next thousand Starlink satellites.
Unlike nearly every other telecom, SpaceX has a global TAM. They do not need to own the entire customer experience but can chip away at portions of the market (e.g., data access in remote regions, or backup data in less remote regions) everywhere. And they will continue to vertically integrate where the market lacks competitive alternatives. What matters most to the company post-IPO is retaining and developing their engineering and product talent. We will have more thoughts on where the company is headed in our Fourth of July Brief.
2Q Earnings Preview – Convergence and Value
In 2Q earnings, telecom service providers are going to emphasize two items: a) the accretive value of converged broadband + mobile offerings, and b) the importance of the “value” (defined as non-family) segment. Charter and T-Mobile have long been the champions of value, and Charter was also an early leader in convergence (their Spectrum One offering debuted in 4Q 2022). They are in the crosshairs of AT&T and Verizon.
We will introduce the themes in this Brief and analyze winners and losers in the July 19 Brief (the July 5 Brief will be a Holiday edition).
Emphasizing convergence helps AT&T (Lumen) and Verizon (Frontier) justify their recent M&A activity. It also provides an avenue for T-Mobile to discuss their selective approach to fiber to the home investment. As a starting point, here is the convergence slide from the Q1 AT&T earnings call:
AT&T will continue to rapidly expand their fiber locations over the next four years (adding more than 20 million homes to AT&T fiber over that period). With the Lumen acquisition completed, they now have a 38% penetration for their fiber offering – this breaks down to 40% for the AT&T organic markets (shown) and 25% for Lumen. Prior to any discussion of the value of converged markets, AT&T has an 800K subscriber opportunity in legacy Lumen markets just to get to the AT&T legacy figure (roughly $600 million annually at a high incremental margin). A narrowing gap would be a very positive sign.
In addition to higher Lumen fiber penetration, AT&T can sell more wireless services to current AT&T fiber customers regardless of when the market was deployed. There is a 2-2.2% gap between the Lumen convergence rate and legacy AT&T markets, and we are certain that most “converged” customers acquired in Lumen markets were not bundled. This leads to several questions:
- How many legacy Lumen fiber market converged customers are on a cross-discounted plan? How has that changed over the quarter? What is AT&T’s target for the end of the year?
- What is the convergence rate in legacy AT&T Fiber markets that have been fully deployed for more than 24 months? By this point, AT&T should be able to provide some aggregated statistics that show wireless and fiber convergence for relatively condensed markets like Miami or Austin. We think that their post-deployment fiber “bounce” is frustratingly limited.
- What percentage of gross additions come from converged customers? What is the 2026 target?
- When a customer leaves AT&T Fiber, how often do they subsequently disconnect their wireless service? What is the monthly rate of voluntary non-mover churn (likely 0.3-0.4% and steady)?
Here’s what we think is happening: The allure of fiber is high but waning as AT&T is expanding their footprint. This is driven by demographics (AT&T, as we documented over the last decade, was an expert in redlining their builds) as well as density (value focus increases as density decreases – if cable is present, that bundle represents a competitive threat). Lumen represents a “quick hit” to boost postpaid subscriber additions and incremental fiber subscribers. AT&T is spending a disproportionate amount of time and money monetizing this value pocket which will largely be complete by the end of 2027.
Verizon will have a similar challenge with the Frontier acquisition. Pre-merger convergence was not due to bundling but to the individual preference for fiber (from Frontier) and Verizon’s wireless service. We think Verizon’s gross margin aperture is larger than upselling Frontier customers but would not be surprised to see them mentioned as a source of increased gross additions.
Meanwhile, Comcast and Charter need to show that they can grow their converged penetrations faster than the past. Nearby are the current net additions from Charter, Comcast and Altice for the last fifteen quarters. Assuming 2.3 subscriptions per home, Comcast and Charter have yet to achieve double-digit mobile convergence. This is disappointing considering that Charter will soon celebrate their eighth year of offering Spectrum Mobile (Comcast has been in market for more than nine years).
Using a ratio of mobile household penetration to broadband subscribers doubles the 7% and 9% figures. Those numbers still trail the 40% in the AT&T figure above but reflect a true bundle. Cable should be winning, but they are not. More on why in the next Brief.
The pursuit of the “value” segment. Verizon’s introduction of their Simplicity and Verizon One plans this week (here) has many asking, “Why pursue the value-conscious segment?” We were as surprised as anyone to discover the following data on income growth for each decile over the last year (data from the US Census here):
Income changes began to shift in 2024, and this trend is continuing today. Younger white and Hispanic men with no high school diploma (and some college) are among the fastest income growers over the last year. To those of us who have been in the blue-collar world over the last couple of years, this comes as no surprise. More overtime in the trades (now tax free) leads to more disposable income. Historically, this has been a “spender” (as opposed to “saver”) segment. Verizon and AT&T are looking at this data and saying, “T-Mobile is going to reap a windfall unless we enter this segment.”
What’s important to note is that this is a heavy “renter” segment which historically has been the exclusive domain of cable companies (because of their bulk bill video pricing). We would not be surprised to see an increased focus on retirees (no tax on Social Security) and these growing segments for years to come. Verizon is also smart to offer many of the attractive myPlan bundles with their new Simplicity plans (Netflix + Disney being the most attractive to this segment).
T-Mobile still dominates the value segment, but each of the Telco Top Five companies are now competing for their quickly growing incomes. How much credit/churn risk Verizon and AT&T will take remains to be seen but T-Mobile will be very difficult to dethrone.
That’s it for this week. We will extend this analysis to include postpaid churn in the next Brief. In the meantime, if you have friends who are interested in being notified each time we publish a Brief, please have them sign up at www.sundaybrief.com.
Go Royals and Sporting KC! And GO TEAM USA!
Important disclosure: The opinions expressed in The Sunday Brief are those of Jim Patterson and Patterson Advisory Group, LLC, and do not reflect those of CellSite Solutions, LLC, or Fort Point Capital.
