Sprint: Subs Up, Costs Down, Operating Profit Within Sight

Subscribers up, costs down, operational profit within sight. That’s the good story for Sprint.

As a result of accelerated cost reductions, Sprint has raised its guidance for fiscal year 2015 adjusted earnings from its previous expectation of $6.8 billion to $7.1 billion to a range of $7.7 billion to $8 billion.

Sprint also is raising its guidance for fiscal year 2015 operating income from its previous expectation of an operating loss of $50 million to $250 million to operating income of $100 million to $300 million.

Sprint’s preliminary estimate for fiscal year 2016 adjusted earnings is $9.5 billion to $10 billion.

For its third fiscal quarter of 2015, Sprint reported growth in postpaid phone customers for the second consecutive quarter with the highest net additions in three years at 366,000, the lowest-ever postpaid churn for a third quarter at 1.62 percent, and the highest postpaid net ports on record.

The company also reported net operating revenue of $8.1 billion, an operating loss of $197 million, and adjusted EBITDA of $1.9 billion

Net operating revenues of $8.1 billion decreased 10 percent year-over-year, but stabilized over the last three quarters, and grew two percent sequentially, said Sprint.

Consolidated adjusted EBITDA of $1.9 billion improved from the prior year period, as expense reductions more than offset the decline in operating revenues.

Total expenses improved primarily because of lower cost of product expenses related to device leasing options for which the associated cost is recorded as depreciation expense, and $500 million of lower selling, general, and administrative expenses.

Big Shift in Technology Thinking at AT&T

The AT&T system used to develop and deploy its own technology (Bell Laboratories and Western Union). That began to change with the AT&T breakup in 1984, and today the tier one providers source their core technology from third-party suppliers.

That might change in the future, as virtualized networks are developed, running on common and commodity hardware, using more open approaches, and with a core commitment to develop strategic systems in a way that allows AT&T to survive even the bankruptcy of any key suppliers.

There are any number of implications for suppliers. An equally-important change is a shift back towards service provider knowledge of, creation of, and maintenance of, core technology services and systems.

We haven’t seen that since before 1984.

There are some logical shifts. Since all computing now is shifting to open, Internet Protocol based and cloud based delivery, so will AT&T evolve.

“AT&T services will increasingly become cloud-centric workloads,” the AT&T Domain 2.0 vision indicates. That means both infrastructure and services that are “used, provisioned, and orchestrated as is typical of cloud services in data centers.”

That implies virtualized networks, using white box equipment (merchant silicon) and services will increasingly become cloud-centric workloads.

That also requires “architecturally decoupling the network function, based in software,from the support infrastructure, based in hardware.” In other words, AT&T will use the same loose coupling also typical of the entire software ecosystem and application architecture.

Domain 2.0 seeks to follow agile development processes, and will avoid locking-in to a specific system architecture.

“To mitigate business risk, the company has developed business rules for second suppliers and evaluates the risk of doing business with suppliers should they go out of business,” AT&T says.

“AT&T expects to increase the depth of understanding of our core technologies held by our staff to the point that they can integrate, and even design the systems from scratch,” AT&T’s white paper says. “AT&T expects to develop key software resources in a way that they can be openly used, and cannot be lost through the acquisition or insolvency of a vendor partner.”

Those are big changes, indeed.

Good Intentions Not Enough for Satellite, Mobile, SMB Internet Access

Where it comes to subsidized Internet access by satellite, good intentions apparently are not enough. The U.K. government has spent The £60 million scheme to provide satellite Internet access to 300,000 locations.

So far, just 24 people have signed up for the service, provided by Avanti and BT, where the government pays for a arge part of the installation cost. Users pay the recurring service costs.

Apparently, just £8,000 of the subsidy funds have been spent,

The contract was between satellite company Avanti and BT.

The apparent lack of consumer interest in the program apparently is not unusual.

The government encountered similar problems with its SME broadband voucher scheme, intended to provide grants for faster web access of up to £3,000 in 2013, and with a mobile infrastructure program.

The government allocated £150 million to add new cell towers, but managed to erect just eight towers, out of a projected 600.

Is Openreach a "Natural Monopoly?"

A study group anchored by U.K. members of Parliament wants full separation of BT Openreach, arguing that the current “functional” separation has not worked.

Since the functional separation from BT, Openreach “claimed in 2009 that 2.5 million homes would be connected to ultra-fast Fiber to the Premises (FTTP) services by 2012, which is 25% of the country,” the report says. “Yet by September 2015 they had only managed to reach around 0.7 percent of homes,” despite receiving £1.7billion in taxpayer subsidies.

That is perhaps not an uncommon problem. The report uses the term “natural monopoly” to describe Openreach, which is an accurate way to describe the supply of wholesale “telco access” capacity to retail partners for about half the U.K.’s homes.

What the report does not address at all is the face that cable TV operators are successfully taking market share and upgrading access speeds, using their own facilities, and able to reach about half the U.K. homes.

So Openreach is not, perhaps, actually a “natural monopoly” everywhere, where it comes to the supply of Internet access and other services. In fact, Openreach has a monopoly across perhaps half of all U.K. homes.

As early as 2006, the U.K. Internet access market was dominated by six companies, with the top two taking 51 percent. Virgin Media with a 28% share, while BT had 23 percent.

At the end of 2010 48 percent of U.K. homes were passed by Virgin Media’s cable broadband network, largely in the urban areas.

Virgin Media’s cable services are available to 30 percent of UK television homes, the company now says.

Virgin Media passes 12.7 million homes out of a total of 25 million homes. So Virgin Media can reach a bit more than half of all U.K. homes.

So Openreach functionally is a monopoly for access to about half of U.K. homes.

Making good policy always is difficult under such circumstances, where facilities-based competition already is a reality for half of U.K. homes, but the other half have no facilities-based choices.

Rapid SMB Cloud SaaS Adoption Since 2011

How has small and medium-sized business adoption of cloud services changed over the last several years? By some estimates, the answer is rapid adoption, with annual adoption rates as high as 40 percent.

In 2011, a Spiceworks survey of cloud adoption among SMBs found that smaller SMBs were more aggressive when it comes to cloud adoption than their larger SMB counterparts.

At least in terms of expectations, 38 percent of SMBs with fewer than 20 employees used or planned to use cloud solutions within six months.

Some 17 percent of organizations with between 20 and 99 and 22 percent of organizations with more than 100 employees planned to use cloud services over the same time period.

SMBs in emerging markets were especially active. Some 41 percent of small and medium businesses in Latin America/South America (LASA) and 35 percent of SMBs in the Asia/Pacific region are adopting cloud services.

That  was well ahead of the 24 percent of SMBs in North America and 19 percent in Europe that are adopting cloud services.

In 2015, North American cloud services adoption had grown to perhaps 37 percent, growing at about 40 percent annually. At such rates, by 2020 about 78 percent of U.S. small businesses will be using cloud computing.

Some other surveys suggest 64 percent of U.S. SMBs are already using cloud-based software, using an average of three apps. As you likely would guess, software as a service is what small businesses tend to buy.

source: Rackspace

Eliminating Digital Divide: 1/2 of the Gap Will be Closed in India and China

Some problems--ensuring that every human being has access to communications, clean water and sanitation, freedom from violence or hunger or disease often seem intractable.

The difficulties sometimes can obscure genuine progress. Fewer people than ever can remember when “people unable to make a phone call” was a major problem. That remains a problem in some population segments, but largely has been solved.

The new problem is how to give everyone access to the Internet. The barriers are formidable, but there is every reason to believe that problem also will be solved, and in relatively short order. Major advances in access technology, costs of access, value of Internet apps and device costs all are helping set the stage for a prodigious advance.

For example, rates of mobile broadband, which virtually everyone assumes will be the way most humans get access to the Internet, globally, have the fastest rates of growth precisely in the areas that need access most.

Also, adoption rates are increasing non-linearly. In part, that is because smartphone prices are dropping fast, allowing more people access to mobile devices they can afford. In part, the prices of mobile Internet access are plummeting fastest in the areas where the need is greatest.

Significantly, Internet adoption increasingly is at an inflection point, promising rapid adoption in the near future. Granted, at the moment perhaps 60 percent of humans remain unconnected. But change is coming fast.

India and China are important, since they represent such a large percentage of the unconnected. Those two countries represent 54 percent of all the people remaining to be connected.

Given the expected growth rates in China and India, half the world's Internet access gap will be closed quickly, as the adoption curves in those countries now have the same rate of change as earlier was the case in the United States and many other developed countries.

source: Mary Meeker, Hillhouse Capital

McKinsey

Singtel Moves Up the Stack, and it Still is Very Hard

You would be hard pressed to identify any single "telco" that is having more success in the application realm than Singtel, even if app success is arguably still dwarfed by success in the "access provider" realm.

Long term, app success will prove crucial for "access" providers, for the simple reason that access revenues and profit margins will continue to face pressure. It will not be easy.

It always is harder to move "up the stack" than "down the stack." And as we already are seeing, many app providers are proving they can successfully move down the stack. 

Google is the single biggest brand to demonstrate that trend (Google Fiber, Wi-Fi and other access initiatives; as well as a big role in "transport, data centers and cloud computing." But there are others. Facebook, Amazon and Microsoft have shown they can master key skills lower in the stack.

Moving up the stack is much harder. If you are looking for some evidence that can be successful, one almost always finds oneself looking at Singtel or Softbank. Singtel might be the better example, as Softbank started as an app company and then become a big communications services provider.

Singtel remains primarily a "communications" company, though it is pushing aggressively to create competence and scale in digital apps.

Singtel has business advantages and disadvantages based on its small domestic market. Larger service providers might rationally build growth strategies on capturing more of a large domestic market.

Singtel cannot do that, as its domestic market is limited. But inability to grow domestically also means the strategy of expanding internationally makes fundamental sense.

So it is that Singtel owns 100 percent of Optus in Australia, 47 percent of Globe in the Philippines, 35 percent of Telkomsel in Indonesia, 23 percent of AIS in Thailand, 32 percent of Bharti Airtel in India, as well as minority stakes in a number of mobile firms in Africa.

More significantly is Singtel’s strategy of investing both in “access” assets (mobile service providers) but also digital content and app assets.

Singtel’s digital life division focuses on its Amobee digital marketing business, HOOQ regional premium video, and DataSpark advanced analytics and intelligence capabilities.

Singtel also makes investments in many firms through its Innov8 corporate venture capital fund.

Singtel also owns digital lifestyle services AMPed, Dash, HungryGoWhere, Insing.com, and NewsLoop in Singapore.

Though it is true that scale matters for most telecom business opportunities, Singtel has proven that even a relatively small operator can create scale. Singtel also is among global leaders in trying to leverage related applications that build on its core telecommunications assets.

That is among the most-difficult challenges any telecom services company faces. Now that nearly all applications are created “over the top,” telecom service providers have limited ability to influence, control or own the application layer.

And yet, strategically, nothing might be more important than creating a viable role in the application layer, for at least some leading apps.