April greetings from Davidson and Charlotte, NC where spring buds (and storms) are popping up all over. This week we will analyze the events of the past two weeks with a particular focus on T-Mobile’s Home Internet Uncarrier announcement last Thursday.
Before diving into the rest of the Brief, congratulations to two companies who have been good friends over the last decade. Regional data center company DC Blox, headed by Cbeyond veterans Jeff Uphues, Mark Masi, and Chris Gatch, reported on March 29 that they had raised $187 million from Post Road Group and Bain Capital to continue their Southeast expansion. We will cover more on their progress in next week’s “Up and Comers” post. We like to think of DC Blox in the same manner as we thought about regional, middle-mile fiber providers in the 2000s – making long-term investments with a commercial real estate/ telecom balance.
Also, longtime friend and Kansas City-based entrepreneur Rob Oyler announced last Friday that WANRack would be purchased by the investment arm of real estate giant CBRE (press release here). Having known Rob and most of the WANrack team since they formed the company in 2012 (including many meetings at Broadway Coffee in Kansas City that year), it has been terrific seeing them grow and invest. WANRack now has over 68 school networks covering 23 states, with many more in construction thanks to a strong 2020. Kudos to all involved.
The Week That Was
“POP!” is the best word to describe last week’s Fab Five market activity. Over the last two weeks, their market capitalization has risen $757 billion and the cumulative market capitalization is just shy of $8.3 trillion. As we disclosed on Friday, all of this gain happened the week of April 5 ($785 billion gain from 4/5-4/9 vs $28 billion loss from 3/29-4/2). As best we can tell, this is the best single weekly performance ever for the Fab Five. Even Apple, who for the 1st quarter of 2021 seemed content to hold on to 2020 gains, is now in positive territory. What happened?
As our economy recovers from the COVID-induced recession, those companies with healthy balance sheets will accelerate hiring, product development, marketing, and capital investments to improve their competitiveness. The Fab Five had $607 billion in cash and marketable securities entering 2021 with a collective $218 billion in short and long-term debt (a figure that is within $30 billion of AT&T’s projected Q1 debt) . They refused to choke on cheap debt and made most if not all of their 2020 acquisitions in cash (it also didn’t hurt that they weren’t bidders in the C-Band auction). Google, Amazon, and Microsoft stand to gain from their growing cloud computing businesses, while Google and Facebook should also benefit from an improved advertising outlook.
A good case in point is the HoloLens contract awarded to Microsoft by the Department of Defense (announcement here). According to Ars Technica, The total value over the next ten years could approach $22 billion (which makes all the fighting over the $10 billion Jedi contract look small). Applying low latency, augmented/ mixed reality, and instant feedback to prepare for the net war would seem to be something Verizon, perhaps in collaboration with Lockheed, would trumpet. Did Microsoft just scoop a key 5G use case and steal someone’s thunder? As a matter of fact, they did.
To recap, Apple gained $198 billion in the last two weeks (the equivalent of 1.2 T-Mobiles in value in a fortnight), Google gained $169 billion, Amazon gained $161 billion, Microsoft gained $146 billion and Facebook $84 billion. They are on pace to exceed last year’s $2.5 trillion of incremental market cap gains. And, if that weren’t enough, Amazon fought off an intense effort to unionize their Bessemer, Alabama, facility (why it failed in a landslide is covered quite well in this New York Times article as well as this Wall Street Journal article).
Meanwhile, the Telco Top Five continue to hold on to their 2020 gains. T-Mobile erased half of their 2021 losses (+$8 billion) while Comcast lost $8 billion (inexplicable, in our view) and the rest largely marked time. One bright spot for AT&T was the release of Godzilla vs. Kong which has grossed $48 million in domestic box office sales (plus and additional $237 million globally) according to BoxOfficeMojo.com. While the latest blockbuster will not be reflected until 2Q 2021 earnings, WarnerMedia’s “day and date” change appears to have been a wise move (in addition to the numbers above, Deadline estimates that over 3.6 million households watched at least five minutes of Godzilla vs. Kong over the Easter holiday weekend, making it the most watched debut in HBO Max’s short history). As we have mentioned in other Briefs, AT&T is going to increasingly use their content to transform their customer relationships and brand. As we emerge from the pandemic this summer, it would not be surprising to see AT&T reinforce moviegoing traditions with some promotion (free or discounted tickets for all new AT&T/ HBO Max customers to selected titles would be innovative and profitable).
Network quality metrics also were updated over the last two weeks. T-Mobile trumpeted their latest results from global testing firm umlaut (results here) which found T-Mobile had the largest, fastest, and most accessible 5G network in 44 of 50 states (Alaska, Arkansas, Nebraska, Rhode Island, South Dakota and Vermont were split between Verizon and AT&T). While this is indicative of the significant progress T-Mobile has made since the merger closed a year ago, our tracking of RootMetrics Metro RootScore reports (here) shows that they still have a ways to go.
As the nearby table shows, RootMetrics has published the results of 55 out of 125 metro areas (measured every six months). Unlike other testing agencies, RootMetrics uses the same device across all carriers (a Samsung S20+ or Note 20 5G device). The results continue a trend we have discussed in previous Briefs: AT&T is challenging Verizon’s long-held pole position at RootMetrics, with over half of the markets categorized as a two or three-way tie. These include larger metro areas such as St. Louis (19th largest MSA in the USA), Denver (#20), San Antonio (#24) and Austin (#29). While T-Mobile has also improved, they are not showing up in the winner column with the same frequency as AT&T. We expect to see outright T-Mobile wins beginning in 2H 2021 as they complete their upgraded network rollouts to more MSAs. For a good indication of T-Mobile’s progress, check out the Philadelphia RootScore results released last week here. The City of Brotherly Love was one of T-Mobile’s first 5G markets, and their progress shows with wins in Network Speed and Data Performance.
Is T-Mobile a Credible Home Internet Provider?
T-Mobile dominated the communications sector news flow over the past two weeks, announcing:
- The shutdown of TVision (March 29)
- An expansion of their relationship with Google, including an aggressive YouTube TV promotion to all T-Mobile subscribers (March 29)
- A enterprise-focused partnership with Level(3)/ Lumen (April 6)
- Free Samsung Galaxy A32 5G phones to new and existing customers (April 7). Link for items d-f is here
- A compelling switching offer to AT&T and Verizon customers subscribing to legacy “bucket” rate plans
- The rollout of Home Internet service to 30 million homes (April 7)
We could fill many Briefs discussing these topics (especially the cozier relationship with Level(3)/ Lumen) but will focus this week on the Home Internet proposition. Below, we compare T-Mobile to the incumbent telco (CenturyLink/ Lumen, Verizon DSL, and AT&T) as well as the incumbent cable company (Comcast and Spectrum) for both stand-alone Internet as well as an Internet + TV double play. There’s a lot of information below and we are glad to share our analysis upon request.
To test the value of T-Mobile’s Home Internet service, we randomly pulled three addresses from Greeley, CO (80634) and Reading, PA (19601) and used our former home address in Dallas, TX (75244). The first location in Greeley is on the southwest side of town (zip code population = 66,043 and grew 25% over the last decade. Average home value according to Zillow is ~$380,000 and grew at 6.7% last year). Below is the serviceability result we received from CenturyLink.
This result is anything but great. A community growing population at 25% with an average home value at $380,000 and mid-single digit growth deserves a corresponding bandwidth choice. 1.5 Mbps for $64/ mo is a dismal alternative.
Comcast had a much more compelling alternative, with 200 Mbps downstream service available for $49.99/ mo. on a 12-month contract. But the XFi device is an additional $14.99/ mo. bringing the total cost to $64.99 for stand-alone Internet. And the renewal cost is $70/ mo. ($85/ mo. with modem).
Here’s the service map for the particular address in question (by LTE service band). You can see from this map that the address would receive excellent low-band service and good mid-band. (2.5 GHz may not have been deployed in Greeley yet). On T-Mobile’s 5G map, coverage is listed as “fair” so it’s more likely that data would be provided through the LTE network.
T-Mobile’s service includes also the option to purchase YouTube TV for $54.99 (+ taxes). So the double play package would come in at $60 for Internet (modem, taxes & fees included) and $54.99 for TV – roughly $115/ mo. plus the cost to pick up a Roku, Apple TV or Amazon Fire TV if you don’t already own a smart TV (full compatibility here).
The $115/ mo. is slightly less expensive than Comcast’s new customer pricing once local broadcast fees and regional sports fees are baked in – their double play runs $80.00/mo. for the first year (+$14.99/ mo. cable modem + $14.99/ mo. to connect two TVs + $9 regional broadcast fees + $8 regional sports fee). So $12/ more for Comcast in the first year but $22/ mo. more after the new customer promotions have expired.
The bottom line for T-Mobile’s prospects for Greeley: Much better than Lumen, and slightly better than Comcast (unless the family needs the extra 100 Mbps download speeds).
In a more populated area like Reading, PA (city with 89,000 population and a high percentage living below the poverty line), T-Mobile offers a very compelling alternative to Verizon (this is a non-FiOS area). Using a downtown residential location, we were able to easily locate both excellent 5G and very strong LTE coverage. Verizon’s 1.1-3.0 Mbps service costs $40/ mo. but includes a free modem. No other services are offered. A nonstarter for sure.
Like we saw with Greeley, Comcast is the provider for Reading and their offer is essentially the same, but the added TV fees are slightly higher. The result is $13 more for a TV + Internet bundle versus YouTube TV + T-Mobile Home Internet in the first year of Comcast’s promotion and $23 more for the second year and beyond.
Finally, we look at the Preston Hollow area of Dallas, Texas (zip code 75224; 18% population growth over the last decade; average home value $524K with 7.4% growth in 2020). Like the Reading address, coverage could not be better for T-Mobile Home Internet service.
This is not the case for AT&T Fiber. While AT&T covers much of the zip code with their latest technology (~72%), the specific address we checked (our former address) did not have AT&T Fiber offered. But they did offer an “up to” 75 Mbps service for $55/ mo. including modem cost. Again, very disappointing results for a great neighborhood where homes recently sold for $850K and up to have subpar broadband options.
Fortunately, Spectrum services this area with cable, and their double play is attractive for the first two years of service (existing customers will be more likely to consider T-Mobile Home Internet as an alternative than new movers). Spectrum’s costs are shown nearby. Note the Broadcast TV surcharge of $16.45 per month. That masks a relatively attractive price for a 400 Mbps service (the lowest offered online) and a generous TV offer.
Bottom line: T-Mobile’s offering is going to be much more attractive than folks think particularly for double play. Where AT&T does not offer fiber (which we have discussed above is more parts of town than most realize), costs are high and speeds are lower then Home Internet. Cable TV costs carry broadcast and equipment rental fees that easily add $25-30/ month to the headline rate. After introductory pricing expires, T-Mobile’s offer becomes even more attractive. Dropping TVision for YouTube TV was a difficult yet smart move as the examples show. Unlike cable, T-Mobile would not be able to follow the “surcharge” model that Comcast and Spectrum regularly use.
The question then becomes “If T-Mobile intended Home Internet to be a user of excess capacity and demand is far greater than expected, will they ration or limit the number of customers the service is available to after they have hit their fill rate?” Home Internet will definitely generate excess cash flow (especially at $60/ mo.), but eventually it will trigger new transport circuit orders (10 Gbps becomes multiple 10 Gbps). Can Home Internet scale? Will T-Mobile be able to directly connect YouTube TV servers in a given geographic area directly to the tower to minimize any latency? How will network redundancy minimize the impact of transport outages?
Most importantly, will a positive Home Internet experience bring new families into the T-Mobile prepaid and postpaid fold? We remember Mike Sievert’s disclosure that 35% of the Home Internet pilot customers were new to T-Mobile. While we were originally skeptical that a $60 price point would fly, it’s now looking competitive in markets where cable has little incentive to extend renewal incentives and the telco option is subpar. And the Netflix bundling options have yet to be tested.
That’s it for this week. We will add three new “Up and Comers” (one of them DC Blox) and also provide a summary of carrier earnings expectations in next week’s Brief. Until then, if you have friends who would like to be on the email distribution, please have them send an email to email@example.com and we will include them on the list (or they can sign up directly through the new website). Thanks again for the referrals.
Have a great week and Go Davidson Wildcats!