Fall greetings from Lake Norman and Charlotte, where COVID-19 growth (as measured by our Rt score) is very steady. As shown by the opening picture (link here), the state has managed to keep the retransmission rate between 0.94 and 1.06 for the last seven months (“flattening the curve” could not be better defined). Cases are rising along with test capacity, and, until a few days ago (when its definition changed), hospitalizations were flat. While life in The Tar Heel state is still not “back to normal,” the most likely place to spot a spike in November is on the football field, not in the Health Department.
This week, we will wrap up earnings with an analysis of Verizon’s sell-side Analyst Day (held on 11/11). There’s also some interesting initial news below on Apple iPhone 12 Pro Max sales, as well as commentary on the increasing drumbeat of antitrust actions against Apple, Amazon, Google and Facebook.
The Week That Was
“Pfizer Vaccine Trial Successful” was the headline that drove many stocks through the roof Monday. The Telco Top 5 managed to hold those gains throughout the week. While it makes sense that Comcast (+$21 billion wk/wk market cap increase) and AT&T (+$11 billion) would rise (WarnerMedia and NBC Universal, along with Comcast’s theme parks business, benefit from increased normalcy), T-Mobile (+$6 billion) and Verizon (+$11 billion) also joined the party. Overall, the Telco Top 5 have added $96 billion in market capitalization over the past two weeks, their best fortnight performance thus far in 2020.
The Fab 5 had another mixed week, losing $175 billion (a little more than one T-Mobile of capitalization). Apple and Google both gained in value this week, while the remainder of the Fab 5 fell. This is no time to weep for the big guys, however, as they are knocking on the door of $4 trillion in additional market capitalization added since the beginning of 2019. Google, the worst performing of the Fab 5 is up a mere 33% year to date.
Last Tuesday, European Union regulators filed antitrust charges against Amazon, charging that they used non-public information to unfairly compete against their third-party Marketplace merchants (more in this New York Times summary). The article also indicates that the Commission is looking into Amazon’s “buy box” practices, specifically whether the company gives “preferential treatment to its own products and those of other sellers that pay to use Amazon’s logistics services.” This is the first we have heard of the buy box (a.k.a. “Amazon One Click”) allegations and think that regulation of specific e-commerce real estate represents a new frontier (we are sure that those of you who are more expert in this area will let us know of case history).
For Facebook, the pressure is likely to come from the Federal Trade Commission. This November 6 article from Politico summarizes two possible antitrust paths: 1) An FTC-internal path, which could result in action prior to the end of November but leave the state attorneys general to file separately, or 2) A coordinated “FTC + states” path which would be driven by the incoming Biden administration (and current New York AG Letitia James). The ultimate impact to Facebook, according to Politico, could involve an unwinding of both the Instagram (acquired in 2012 for $1 billion) and WhatsApp (acquired in 2014 for $19 billion) purchases. How this will occur is anyone’s guess. As a reminder, the current market cap of Facebook is $790 billion.
The biggest Telco-related news came from Disney this week, who reported 73.7 million total Disney+ subscribers (earnings announcement here and chart comparison to Netflix from CNBC nearby). Even with heavy promotion (including Verizon’s partnership which was addressed during their analyst day last week), to build a base of 74 million of anything over 12 months is amazing. To put this in context, HBO + HBO Max has a total of 38 million subscribers (for both options, no “free” or ad-supported alternative exists and both are being heavily promoted by two of the top three wireless carriers). With season 2 of The Mandalorian debuting later this month, and a continued $6.99 monthly price point (and inclusion in Verizon’s premium 5G pricing plans), it’s hard to see the Disney train pausing. If anything, increased economic growth might cause Disney to create a premium version of their product (a “plus plus”) that might feature earlier access to first run movies. Disney’s results make us wonder what a $7.99 or $9.99/ mo. price point might have created for HBO Max and AT&T. We will never know.
For those of you who need a good “long form” article to read over Thanksgiving, Bloomberg published this Quibi chronicle last week (we find it ironic that most articles on the demise of Quibi are lengthy). Producer and content creator superstar Evan Shapiro summarized Quibi in the article as follows: “Take the worst parts of Hollywood, bake it into a phone, and that’s what you got.” We couldn’t have said it better ourselves.
Apple iPhone 12 Pro Backlog Continues – Will the Pro Max Follow?
Our regular Sunday Brief readers have been tracking the progress of the iPhone 12 sales in hopes of understanding market share changes. As a reminder, AT&T was alone in their initial iPhone 12 aggressiveness with equally attractive device trade-in promotions both to new customers and their base.
Conventional wisdom surrounding the iPhone 12 is that 1) iPhone 12 sales will track the path of the iPhone 11; 2) iPhone 12 Pro sales will be strong through the end of the year, and 3) iPhone Pro Max and Mini sales will take time to develop but will both be strong in 2021 as both the category (super-premium, small form factor) and 5G networks grow.
There have also been increasingly stronger suggestions in the last month that there are COVID-related supply chain issues affecting the availability of the iPhone. We have not heard this concern from any carriers and do not ascribe any availability issues to anything other than “normal” iPhone backlogs (our posts from 2019 clearly showed backlog issues for at least six weeks after in-store availability, particularly for several storage/ color combinations
The first and second conventional wisdom points appear to be holding. iPhone 12 supplies are plentiful, even at AT&T, in all storages and colors. The iPhone 12 Pro, however, continues to see very high demand, as shown in this week’s update (PDF available above):
Eleven of twelve make models are on backorder from T-Mobile through mid-December. At T-Mobile and AT&T, the supply situation worsened (availabilities were generally pushed back a week, even with a week of iPhone 12 Pro Max pre-orders). Verizon saw specific color shortages but is the only major carrier (including Xfinity Mobile and Spectrum Mobile) that has immediate iPhone 12 Pro availability. This is interesting considering that one of the major features of this iPhone series is millimeter wave network compatibility (something far less prevalent today with AT&T and T-Mobile).
If taken alone, this chart would clearly show T-Mobile (which now includes Sprint) taking iPhone share. It’s important to note, however, that phones coming off lease might be seeing higher upgrade rates because of T-Mobile’s current or planned 5G network deployment (as we discussed last week, T-Mobile has committed to 100 million POPs with their expanded 2.5 GHz + 600 MHz network by the end of 2020).
There is a counterargument, however, that the purchasing cycle for both Verizon and AT&T (and, to a lesser extent, T-Mobile), is just starting. While the iPhone 12 Pro Max just went on sale yesterday, supply constraints are beginning to show up. Per our on-line checks on Nov 14, Verizon’s iPhone 12 Pro Max availability is constrained for 128 GB models (December ship dates for all colors), and less constrained for 256 GB models (late November ship dates for all colors). This trend also holds with AT&T. Availability is higher at T-Mobile although there are some supply constraints at the higher 512 GB level (which could be driven by Business/ Corporate Liable orders). We will include an accompanying slide in next week’s Brief.
Bottom line: The conventional wisdom described above is generally holding, although the availability of 30-month financing for the iPhone 12 Pro seems to be driving more demand (and larger backlogs) at T-Mobile. The iPhone Mini appears to have limited demand, and iPhone 12 Pro Max backlogs are manageable. The apprehension over a COVID-19 iPhone launch seems to have been overblown, and, with a recovering economy in 2021, looks more likely that sales momentum will continue.
On Wednesday, Verizon held a virtual sell-side analyst “day” with CEO Hans Vestberg, CTO Kyle Malady, and Consumer Group lead Ronan Dunne all presenting (full webcast here). These types of presentations are very difficult to manage and control, especially with nearly an hour of Q&A to end the session. After both watching the presentation live and reviewing over the past weekend we were left with the same impression: This is going to be a very different network than LTE or 3G. It is truly going to resemble the nearby picture (snapshot taken from Verizon’s video) where coverage will be exceptional in densely-populated areas and not so robust in other areas (less elevated areas in the picture).
Previous network deployments (and, we would argue, for Verizon’s competitors) were headlined by coverage – e.g., T-Mobile’s commitment to 100 million POPs covered by 5G by the end of 2020 with the 2.5 GHz + 600 MHz enhanced network. Network densification accompanies increased data usage. Verizon’s approach is more focused – align capacity with specific business opportunities and product requirements today, and build out more coverage, when needed, tomorrow.
Ronan Dunne had an interesting response to David Barden’s (Bank of America analyst) question that addressed capacity versus customer experience. Without taking up the rest of the Brief with his monologue, here’s a synopsis (emphasis added):
“… One of the premium components for people to go to the higher tiers in unlimited, is, of course, things like Apple Music, Disney and other things, but it’s access to 5G Ultra Wideband in those higher tiers where 5G nationwide is available across all of the tiers…. If we’re building where the traffic is, then actually, what happens is that’s because more of our customers use those areas… more of those customers get the benefit of where we’re building the 5G Ultra Wideband. And it’s true to say that they won’t be seeing it in 100% of the footprint they use on a daily basis, but that was never the plan.
“But any customer who’s using any of the areas that are high-traffic areas gets the benefit of the 5G Ultra Wideband being built. That coupled with areas like transport hubs and termini and other things, means that the experience of 5G Ultra Wideband is that I walk across the concourse in an airport or in a bus station or a train station, and I download 10 gigs of data so that I can consume 4K streaming as I go on my journey…
“So there’s a lot of the use cases that are consistent with enhancing everyday experiences of a wide number of customers as opposed to because what we said is the capacity and experiential layer, not a coverage layer. And so I think our customers increasingly understand that, and that’s what enhances the ability of us to deliver a high-quality experience to our customers wherever they are.”
This makes sense – deliver speeds where customers will be most likely to use them – but it makes the job of aligning application performance (particularly future versions of Zoom, Microsoft, and other software that will be written for high performance environments) to network capacity very tricky. This is why Apple introduced their Smart Data mode (see our Brief on this feature here): iOS applications will need to change their parameters based on the type of network accessed.
To use a Thanksgiving 2021 (non-COVID) example, a backseat smartphone user who is playing their friends in the latest version of League of Legends will curse the day that the family SUV turns north from Dover (NJ) to Milford (PA) which is 70 miles from Manhattan. Coverage goes from 5G Nationwide to LTE in short order. Game performance changes (compared to other participants). Verizon’s coverage is still good (and perhaps better than any other carrier on NJ-15), but it’s not good enough to win League of Legends. It’s the 2021 version of what many of us experienced during the advent of 3G networks in 2003, except real-time multi-player gaming has a much smaller buffer.
The impact of Verizon’s approach to application development (and particularly monetization of these “super 5G apps”) could be material. Most application developers will tune their software to operate at a “minimum acceptable” level, which could hurt the overall value proposition of Verizon’s 5G network proposition.
As Kyle Malady indicated “It’s a work in process. We keep rolling. And we keep adding people to the possibilities as we go.” We point this out because it appears to be different from the near-term 5G network approach communicated by T-Mobile and AT&T. It creates a lot of focus on improving revenues and utilization in those areas where Ultra Wideband is being deployed (using a “street-by-street” message versus one national branding strategy), and praying that the minimum acceptable level for 5G super apps is less than 100 Mbps.
Bottom line: Verizon’s analyst day was chock full of information and strategy. Big Red is dead serious about home broadband (which makes the cable MVNO relationship all the more intriguing). But they are also deploying a network quite differently than their competitors. What we see today is incomplete, and comprehensive “customer experiential” coverage may be a decade away. Only time will tell.
Next week, we’ll have our fall edition of “Three Up and Comers” (for the U&C June Brief, click here). 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.
Stay safe, keep your social distance, and Go Chiefs (even during their bye week)!