June greetings from my 25th college reunion in Davidson, NC. Pictured with me is a terrific friend and mentor (but not a Davidson grad) Bob Guth who now lives on Lake Norman just north of Charlotte (as do several other current and former entrepreneurs and telecomunications executives). Bob is a veteran of the telecom industry and recently helped restructure RDA Holding Co., the parent company of Reader’s Digest Magazine. In between events, Bob and I had a chance to catch up on work and life.
This week, we begin part one of a three part strategic planning series. The first part will highlight the gap the industry faces versus other investment alternatives. The last two parts will highlight how companies are creating (or can create) competitive advantage in the broadband and wireless telecommunications subsegments.
Palm webOS – One Million New Customers (?)
Before diving into the analysis, a couple of quick news items. First, LG announced that they have sold more than one million webOS-enabled TVs since the launch of their new lineup in March. This is no small feat for the electronics market, and LG predicted that there would be more than 10 million TVs running on the card-based platform by the first half of 2015.
From a quick glance of the Amazon store reviews of the webOS-enabled LG smart TVs (see here for reviews of the LG 55LB7200), reaction to the interface is very positive. The biggest hurdle, it seems, is getting the webOS app developer community on board to populate the app store.
While the resurrection of Palm’s operating system is nostalgic (it was five years ago that Palm released the Palm Pre to heavy acclaim), it also goes to show the value of connectivity platforms to multiple types of devices. Could LG have the ultimate OTT OS on its hands ? Stay tuned.
Meanwhile, Samsung Announces the First Tizen Phone
In case you missed it, this week the Tizen faithful gathered in San Francisco for the third annual Tizen Developers Summit (the timing with Apple’s WWDC is no coincidence). Ever since Samsung’s announcement that their Gear wearables lineup would run on the Tizen operating system, many analysts have been wondering if Samsung would announce an expansion into the smartphone community.
This week, Samsung made the move, announcing the 3Q 2014 availability of the Samsung Z… in Russia. The device appears to look like a more angular version of the Galaxy S5, with many similar features (including fingerprint recognition on the home key and heartbeat recognition near the rear-facing camera lens). However, Samsung promises to take full advantage fo Tizen’s superior memory management and optimal performance.
What’s most interesting about Samsung’s approach is that Tizen has more interoperability with Android than any other operating system. This is the first time that inter-OSS functionality has been widely deployed (in this case, from the Android-powered Galaxy platform to the Tizen-powered Gear platform). If there is proximity-based interoperability between Android and Gear, what’s to prevent interoperability between Android and the Samsung Z? This seems like a very stealth way to systematically lure away Android developers – make it easy to interoperate, and then drive up the base through efficiency/ ease of use. Google is not worried, yet, but they should be. As we described in last week’s post, it was a mere two years ago that Samsung introduced the device that vaulted Samsung into the smartphone lead – the Galaxy SIII. If they can sell 50 million units in nine months, imagine what a low-price, developer-supported Tizen can do in 2015.
The Value Creation Gap
June begins the strategic planning session for much of the telecommunications industry. For some companies, this serves as a mid-year checkpoint on 2014’s plans. For example, AT&T will be examining how much fuel to put on the U-Verse fire in light of their announcement to purchase DirecTV. In fact, AT&T provided an excellent mid-point review this week, projecting 800,000 net postpaid additions, low (< 0.95%) monthly postpaid churn, “solid” U-Verse brodband performance, and 5% consolidated revenue growth.
While AT&T’s performance continued to be strong compared to expectations (and likely VZW’s followed suit as they matched AT&T’s plans in early April), the question usually posed during executive planning sessions is “as compared to what?”
Let’s take AT&T’s and Verizon’s performance since the beginning of 2013 (roughly 18 months). For AT&T, excluding dividends, investors have enjoyed a 3.9% equity return over the 18 months, roughly a 2.6% return per year. Tack on a 5.2% dividend, and the result is a nearly 8% total annual return to investors since the beginning of 2013.
Verizon’s figures are higher than AT&T’s – 9.3% annualized equity return (14.2% total over 18 months) plus a 4.3% annual dividend yield driving a 13.6% total annual return since the beginning of 2013.
Both of these numbers are very healthy… until you compare them to Microsoft, Google, Apple, Amazon and Facebook. Here’s how VZ and AT&T stack up against them:
Table 1: Annualized Shareholder Return (including Dividends) from Jan 1, 2013 to June 6, 2014
This chart clearly shows that there is a value/ return gap between large traditional communications services providers and their challengers. Amazon’s return over the past 18 months is 50% higher than Verizon’s and more than double that of AT&T’s. Microsoft’s resurgence shows the difference between Steve Ballmer’s divisive Jack Welch-esque “lowest 10%” policy that pitted employees and divisions against each other, and Satya Nadella’s rallying cries that unite teams and produce more functional and integrated products.
Without a doubt, there is a gap. This column has highlighted the total value created by the “Four Horsemen” (Microsoft, Amazon, Facebook, and Google) over the past five years (Facebook was private until mid-2012). Excluding gains from Facebook (which has a market cap of $160 billion), but including dividends, the Four Horsemen have created more than $280 billion over the past 1.5 and $340 billion in value over the past 2.5 years ($58.33 billion in 2012, $219.44 billion in 2013, and $62.25 billion thus far in 2014 – complete analyses available upon request). Including Facebook’s market capitalization, that number is a staggering $500 billion. Add in Netflix, and… you get the point: There’s more value in disruptive content than there is in building bandwidth.
These are sobering numbers for the Board room. But it gets worse from there. Here are the cash-less-total debt balances for each of the Four Horsemen as of March 31, 2014:
Table 2: Net Cash (Cash and Marketable Securities less Total Debt) for Four Horsemen + Facebook as of March 31, 2014
Company Cash/ MS Minus Total Debt
Apple $113.6 billion
Microsoft $ 65.7 billion
Google $ 53.1 billion
Facebook $ 12.6 billion
Amazon $ 5.5 billion
Total $250.5 billion
Again, these numbers are for high-level comparative purposes only. For example, there are a lot of funds being held abroad that cannot be expatriated to the U.S. without paying taxes. And there are other restrictions and comparisons that might drive the $250.5 billion figure above to something closer to $240 billion of useful cash. But the bottom line is unchanged: A decade of disruption has birthed a (nearly) debt-free, cash-rich, multi-headed challenger to incumbents. Regardless of the FCC’s stance toward a particular merger, spectrum caps, or net neutrality, software has won.
As many of you start the conversations with your teams about investments, improvements, and offers, ask three questions:
- If we could change three things about our company’s position within the industry, what would they be? (Size, scope, etc.)
- What’s our company’s Google defensive strategy? (For those of you who are very long-term Sunday Brief readers, you can find the first Sunday Brief article on that here in the RCR Wireless Reality Check archives).
- Where will we need to beat Microsoft/ Google/ Amazon/ Facebook/ Apple to remain a viable investment? How will we do this?
The current (June 6) market value of Google + Apple + Microsoft + Facebook + Amazon exceeds $1.4 trillion. Nearly 20% of this is cash. How will your company play to win?
Next week, we’ll continue this discussion with a look at how the broadband industry can re-energize itself to relatively meaningful returns. If you have friends who would like to be added to The Sunday Brief, please have them drop a quick note to email@example.com and we’ll subscribe them as soon as we can (and they can go to www.sundaybrief.com for the full archive).
Thanks again for your support, and have a terrific week!