Greetings from Charlotte, where the Holiday spirit is in full swing (picture courtesy of Alex Gerrard, a Davidson friend). We are focusing this week’s TSB on three foundational trends: a) Increased home broadband competition, b) Increased “channelization” of content thanks to Verizon and AT&T launchpads, and c) Increased commercial-focused connectivity. Between these trends wind the threads of increased fiber deployments, decreasing overall capital expenditures, and industry consolidation (assuming T-Mobile wins the current case pending with the attorneys general). There are many ways for each telecommunications provider to increase its value in 2020, with the greatest opportunities awaiting Verizon and AT&T.
Because of the depth of this week’s TSB, we will not have a TSB Follow-ups section. This will resume on the 22nd when we will reveal three additional “Up and Comers” in 2020 (you can read about the previous three – Starry, Cologix, and Helium – here).
Trend #1: Increased Home Broadband Competition
The telecommunications landscape is about to be jolted, and this will start in 2020. Driven by the deployment of significant amounts of fiber by both AT&T and Verizon (perhaps CenturyLink or Zayo will aid the new T-Mobile in their efforts), connectivity options will be opening for the carriers. This will drive two new models in 2020:
a. An entry-level model consisting of at least 300 Mbps per home (perhaps with a 1 Terabyte monthly cap) for $50 per month. No contracts, and, if Verizon’s Chicago rollout is duplicated, customers will receive a Wi-Fi access point equipped with the latest version (802.11ax, aka Wi-Fi 6). See nearby coverage map (or link here) for an idea of their development progress.
b. Full fiber capabilities consisting of 1 Gbps or more. These services tend to cost ~$70-80/ month and may require a 1-2 year contract. Frequently, additional charges are assessed for broadband modems (AT&T charges $10/ mo.). Many times, full fiber offerings include content or security software in their product offerings (see AT&T offering here and Comcast’s Xfinity Flex offering here. Verizon also is offering a free year of Disney+ to all 5G Home subscribers).
These offerings serve two different family segments: Internet connected (1-2 residents, some streaming to 1-2 TVs, no home office), and Internet needy (3-5 residents, significant streaming to 3-6 devices including 4K TVs, at least one teleworker). Within these segments, there are unique needs (teens, international content, etc.), but the key product drivers are the capabilities of the TVs and computers connected to the home broadband service. Budget is the most important driver, but right behind it is service quality (and uptime), as well as the installation experience and any contract terms (including early termination fees).
What’s most intriguing about the Verizon offer is that it can be tested side-by-side with existing cable services (the only change is in the Wi-Fi SSID or which Ethernet cable is connected to the back of the TV). Also, the 5G Home offering does not require broadband customers to own a 5G-capable device. For example, the latest iPhone 11 (specs here) offers 802.11ax (Wi-Fi 6) but is not equipped with 5G (note: the resolution displayed on most iPhone screens does not require more than a 15 Mbps constant stream per device. TVs are a different story). Given the fact that Verizon is offering three months of free service, side-by-side could be a relatively pain-free experience.
By the end of the year, there will likely be four separate and distinct offers in Chicagoland for home broadband from established telecommunications providers:
- Comcast Xfinity – the broadband market share leader and wireless services challenger
- AT&T Fiber (where available) – the non-wireless challenger
- Verizon 5G Home (wireless only – as a 5G offering, speeds expected to be ~ 350 Mbps). Bundling opportunities with YouTube TV and 12 months of Disney+ included
- T-Home Internet (wireless only – as an LTE-based offering, speeds are expected to be ~ 50 Mbps)
As T-Mobile did with smartphone and low-end family plans, they will likely target smaller, less Internet needy households until they have an offering that can be built incorporating Sprint’s 2.5 GHz (Clearwire) network as well as 5G standalone network equipment. That lower-cost offer will be available no sooner than the end of 2020. Until then, expect Verizon to get very targeted even as AT&T continues to ramp off their fiber marketing efforts.
The expectations game could not be higher for AT&T. At an investor conference this week, Jeff McElfresh, the new CEO of AT&T Communications unit stated:
“In the fiber business and the fiber product line, where we have fiber, we win, and we win handedly. As you mentioned, we’ve guided to driving penetration of our 14.5 million households to our fiber network to a 50% mark over the 3-year period. And we have proof of how we do this historically. As you look at the fiber that we built out in the ground in 2016, at the 3-year mark, we roughly approach about a 50% share gain in that territory. And so, for 2020, with the bulk of our investments behind us in this fiber plan, our tactics are to drive penetration with the fiber that we’ve built.
One would expect Verizon and T-Mobile to have a slightly different take on AT&T’s market share goals (AT&T does not seem to think that 5G wireless will be a threat to fiber-based systems, presumably at any price). As we documented in the November 3rd TSB here, AT&T will need to acquire an additional 5.0-5.5 million residential home broadband customers to hit a 50% milestone.
Where this leaves Comcast’s broadband net additions growth is unknown. More competition reduces the chances of a blowout quarter (and also the likelihood that Comcast will automatically gain share at the expense of legacy Digital Subscriber Line technology in non-fibered areas), but, they will be the first carrier customers return to if something goes wrong with a challenger. Out prediction is that Comcast’s growth could be dented by as much as 50% (from 300K net additions per quarter to as low as 150K) but it’s unlikely that the 26 million residential subscriber base will be materially impacted in 2020 or 2021 unless AT&T begins to aggressively market their service with contract buyouts (which rarely result in long-term market share gains).
Bottom line: Watch the home broadband space carefully, especially in the second half of 2020 (starting with “movers”).
Trend #2: Increased “Channelization” of Content Thanks to Verizon and AT&T Launchpads
One of the great debates through the AT&T/ Elliott Memo crisis was whether AT&T should be a content provider and an infrastructure provider. AT&T clearly believes that it’s best economic return occurs when they do both – the worst case, they argue, is that owned Time Warner content is used as a “bargaining chip” in larger programming negotiations.
Verizon is following a markedly different “best of breed” strategy and, from Hans Vestberg’s comments at the UBS conference this week, the Disney+ launch has exceeded their already high expectations. In short, mobile data usage is exploding thanks to Disney+, and that means that the half of Verizon customers who are not already on Unlimited plans have a reason to upgrade to higher ARPUs. At the margin, Disney+ also attracts new families who are carrier indifferent. Now that Verizon has a winner with Disney+ (which, as we shall see in January, will have had a big impact on the Verizon brand and churn), the question becomes “What’s Verizon’s follow-up offer as HBO Max gets ready to launch?”
Unlike the Apple Music promotion at the end of 2018/ beginning of 2019 (Apple Music was launched in 2015), Disney+ is days/weeks old. Verizon’s brand is heavily tied to Disney+ (a good thing for Verizon), and, to a lesser extent, the Hulu/Disney+/ESPN+ larger bundle. Verizon’s home broadband service is promoting a competitive product to Hulu Live (YouTube TV), albeit a free month compared to a free year of Disney+. With 35.4 million retail postpaid accounts (and 115 million retail postpaid subscribers), Verizon has become tomorrow’s broadcaster – a content kingmaker.
This time, the content structure is a bit different. Unlike Verizon’s failed content creation service Go90 (how quickly we forget), Disney+ current content is less episodic/ more long-form – good for the multi-hour car trips/plane rides and not as good for in-town pick-up/drop-off. Long-form content is not as conducive to ad placement as episodic content, which likely means less monetization opportunities until Disney+ revamps it’s lineup. Long-form content also needs a larger buffer (Disney+ allows subscribers to download entire movies over Wi-Fi) – Verizon will be an enthusiastic supporter.
Assuming launch momentum continues throughout 2019 (there’s little reason to think that customers would disconnect a “free for the year” service), how do Verizon and Disney use 5G network deployments to counter next May’s HBO Max launch? How can recently viewed content be personalized? What digital merchandising can Verizon enable through future promotions? Can long-form content products be extended into live sports?
There’s a new Disney channel that will be consuming hours of time this Holiday season (the fact that Disney+ is Google’s most searched term for 2019 is a very good indicator of what’s to come – see nearby chart) at the expense of traditional broadcast viewing. Well-organized content bookshelves are slowly replacing Electronic Programming Guides (EPGs). Content snacking has been replaced with entire all-you-can-eat banquets.
Each of these trends are good for AT&T – if they can execute a late spring/ early summer launch (a less attractive period than the Holidays). If Verizon and AT&T become the new launch pads for channels, where does that leave traditional cable providers and broadcasters? We have had many predictions of broadcasting’s demise – is it different this time?
There’s a lot to track here, but for those 5G naysayers who bemoan the lack of use cases, look no further than the creative genius of Disney and HBO. I’m sure they have a few ideas. Bottom line: Verizon and, to a lesser extent, AT&T have found a way to help digital content launch new products. Disney+ is the best co-branding association in telecom since the Apple iPhone and AT&T. Verizon needs to extend this association into increased 5G adoption.
Trend #3: Increased Commercial-Focused Connectivity
In an interview at the Wells Fargo conference we referenced in last week’s TSB, Adam Koeppe touched on the overall fiber deployment strategy (also known as the One Fiber initiative):
“When we pursue our fiber build on a market-by-market basis, we’re looking for the sweet spot of a really strong case that allows us to leverage our owners’ economics. And what I mean by that is when we look at the 4G and 5G node expectations that we have for the coming years, we can very carefully calculate what it would cost to spend money with a third party, if you will, in a market to launch 5G or increase the 4G density. We then look at the cost to build in that market. And it’s a fairly simple case to say, listen, it’s much more cost-effective for us to build our own fiber in this market because not only can we serve our own needs on the wireless network, we can then open up incremental use cases. So, whether it’s small, medium business, enterprise, wholesale opportunities that comes from having the owner’s economics of our fiber deployment. So that’s the key determining factor, basically, in how we look at each market where we’re building fiber.
If one pairs the likely deployment of fiber for 5G with commercial real estate locations, there’s a high correlation between “near-net” fiber and key tenant locations. This is what Adam is referring to as an “incremental use case.” Let’s look at a market example (5G deployment in downtown/ Centennial Park areas of Atlanta with the large red area to the left being the Georgia Dome):
Here’s what that same area looks like with Google Earth:
An educated guess is that the red lines in the Verizon map above pass near (but not necessarily in) 150 commercial office buildings of various sizes and shapes likely totaling 40 million square feet or more (270,000 square feet per building or about 13-14 stories on average with a large variance). Assuming 200 square feet per worker per building (a generous assumption), that equates to ~ 200,000 smartphones in this radius alone (game day figures would be higher). The in-building wireless coverage improvement opportunities from this deployment alone are significant – and this is just the beginning.
However, it’s also safe to assume that Verizon’s out of region play with the lower half of the Fortune 1000 could use improvement. They have been hindered by their inability to create differentiated product bundles, as well as the continued high cost of connecting to customer sites. In an era where Wi-Fi delivers 5-8 Mbps on a good day, could Verizon (with CBRS deployed) deliver 40 Mbps, and have full integration with mobility (see last week’s article)? The answer is undoubtedly yes, and, in a capital environment in search of incremental use cases, the risk appetite is higher. Add in the Amazon AWS edge deployment announced earlier this month, and one can see the pieces of a low-latency secure cloud coming into place in 2020 and 2021.
Verizon is relatively weaker in the enterprise segment as organizations get smaller and farther away from their Northeastern home field. One of the great opportunities facing Big Red is maximizing the incremental opportunity with commercial customers. Integrated voice solutions is an easy first choice (see last week’s TSB), but there are many others.
Bottom line: 5G deployments require more in-city fiber, and that presents a terrific opportunity for Verizon Business. A clear channel strategy needs to be developed that fuses in-building and mobile solutions. CBRS can play a role, and, to the extent it does, Verizon can minimize spectrum interference. If Verizon can walk the incremental talk here, they will quickly turn their network organization into a profit center and create a competitive differentiator, especially against T-Mobile.
That’s it for this week. We will be publishing a short presentation incorporating these and other ideas prior to CES (January 6) for distribution to your teams. Next week, we’ll capitalize on our previous “Up and Comers” column (with an initial take on the AG/ T-Mobile trial outcome) and will close the year with another book review (Steve Coll’s Deal of the Century: The Breakup of AT&T). 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.
Have a great week… and GO CHIEFS!