Sprint and T-Mobile US Both Want to Grow, But Similarity Ends There

It often seems as if Sprint reports financial results that reflect a transition of some sort. And there is no question but that T-Mobile US has dramatically changed its operating performance over the last year or so.

But there is a fundamental difference in Sprint and T-Mobile US strategies, though both firms are attacking the market with a “value” approach.

Sprint’s new direction is based on long term organic growth. “ I am here to run Sprint for long-term value creation,” said CEO Marcelo Claure.

And even if T-Mobile US CEO John Legere points out that T-Mobile US has many options, T-Mobile US is a firm that almost everyone believes will be sold, relatively soon.

Often, that shorter-term approach can lead to a strategy of adding customer and revenue volume as rapidly as possible, the reasoning being that if the asset is to be sold at a multiple of revenue, then the value of the asset is higher if the revenue figure is higher.

A longer-term approach based on sustainable growth tends to value profit margin (bottom line) more than the revenue top line. Sprint wants more scale, and therefore more revenue and customer account growth.

But it also now has to be concerned with the bottom line, which is why cost reduction and efficiency moves also are underway.

The difference in strategic thinking also might explain why T-Mobile US reporting on its third quarter focused entirely on top-line growth, rather than bottom-line results.

T-Mobile US touted its “best quarter ever of branded postpaid net adds,” as T-Mobile US added 1.4 million net postpaid accounts.

Branded postpaid phone net adds more than doubled quarter-over-quarter to 1.2 million and branded prepaid net adds up more than four times quarter-over-quarter to 411,000, T-Mobile US said.

T-Mobile US has added 10 million total customers added over the last six quarters, and 2.3 million in the third quarter alone.

T-Mobile US service revenues grew 10.6 percent year-over-year to $5.7 billion, on the strength of the “best ever average billings per user of $61.59 a month,  up 4.2 percent year-over-year.

Adjusted T-Mobile US EBITDA of $1.35 billion was “flat” year-over-year, but declined sequentially, T-Mobile US said.

Adjusted EBITDA of $1.35 billion was down 7.2 percent sequentially from $1.45 billion in the second quarter.

In the third quarter, T-Mobile US generated a loss of $0.12 per share, compared to estimates for a $0.02 per share profit.

At least momentarily, it appears T-Mobile US is being run for growth, even at the expense of the bottom line, while Sprint will try to grow while maintaining profit margins.

Sprint reported net operating revenue of $8.5 billion in its second quarter of 2014, representing an operating loss of $192 million, with adjusted EBITDA of nearly $1.4 billion (EBITDA is operating income/(loss) before depreciation and amortization. Adjusted EBITDA is EBITDA excluding severance, exit costs, and other special items)

Consolidated adjusted EBITDA of nearly $1.4 billion grew three percent over the prior year period.

Total Sprint net subscriber additions of 590,000 were lead by wholesale net additions of 827,000, balanced by postpaid net losses of 272,000 and prepaid net additions of 35,000.

Tablet net additions were 261,000 in the quarter, up 207,000 year-over-year but down 274,000 sequentially, as Sprint refocused sales efforts on postpaid phone accounts, Sprint CFO Joe Euteneuer said.

Sprint expects increased selling costs associated with significantly higher gross additions and upgrade volumes in the fiscal third quarter of 2014; part of Sprint’s new effort to become the price leader in the U.S. mobile market.

Sprint also warned that “the significant loss of postpaid phone customers over the last few quarters has pressured wireless service revenue, and this trend is expected to continue into the next quarter.”

As has so often seemed to be the case, Sprint is once more in a transition, with a new strategy and new leadership. So it is too early to take measure of the prospects for future success.

But new CEO Marcelo Claure pointed out gains after just a few short months of his tenure. “We have seen a notable turnaround in our postpaid phone addition trends.”

In September 2014 Sprint achieved its highest monthly postpaid phone gross adds since December of 2012, a 40 percent increase over the August run rate. In October, Sprint grew another seven percent sequentially.

September represented the first month in 2014 where Sprint achieved year-over-year growth in phone net adds, as well.  

And Sprint says it also is doing better at adding customers who pose lower credit risk.

“Our top priority now is to get back to postpaid customer growth and given the trends we are seeing in the market today, we are optimistic we will be able to deliver positive postpaid net additions in Q4,” Euteneuer said.

Smartphones represented 95 percent of Sprint postpaid phone sales in the quarter and now account for over 86 percent of the Sprint postpaid phone base. About 62 percent of the Sprint platform postpaid base is on LTE devices, including 73 percent of the Sprint platform postpaid smartphone base.

Sprint announced another 2,000 cuts in staffing levels, as well as "targeting $1.5 billion of annualized cost reductions compared to 2014 spending levels."

Sprint also cut its full-year capex guidance by about $1 billion to less than $6 billion, after a similar reduction a quarter ago.

All those moves make sense if Sprint is committed to becoming a price leader. That implies a lower cost structure than it has at present.

T-Mobile US, on the other hand, says it already was the most-efficient operator among the top four, and therefore arguably has less room for cost-cutting initiatives. wan

"Keep Copper Network and TDM," Some Argue

Creating good public policy in the communications realm is never easy, as regulators constantly are balancing. But it does seem as though “balancing” has become more precarious recently. Consider the whole matter of what to do about the legacy copper network, the “transition to Internet Protocol networks” and support for legacy services.

To be sure, the Federal Communications Commission has multiple goals. For example, the FCC says its mission includes “promoting competition, innovation and investment in broadband services and facilities, and “supporting the nation's economy by ensuring an appropriate competitive framework for the unfolding of the communications revolution.”

To some extent, of course, the goals of promoting competition and promoting investment are contradictory. As both U.S. and European regulators have discovered, promoting competition by expanding wholesale access to incumbent facilities often succeeds quite well.

But that same success also discourages further investment in facilities, since the owner of the scarce access network automatically enables robust competition when it invests in next generation facilities.

Likewise, the transition to the next generation of broadband networks would seem to require creating and maintaining incentives for facilities investment, balanced with the goal of promoting competition.

Sometimes that translates into rules that specifically require maintaining legacy facilities and services, even if that conflicts with the goal of supporting next generation network investment.

Ironically, we now see support both for expanded optical fiber access to support gigabit networks, and talk of preserving the life of copper networks to preserve competition.

The problem, of course, is that the copper network and legacy services are serving fewer and fewer customers, meaning the costs of serving each remaining customer are growing. at the same time the legacy services are being replaced by next generation services.

It isn’t easy, all might agree. But neither are matters helped when waffling occurs, as tough as firm policies might be. Granted, there are constituencies for keeping the copper network, and legacy services, alive.

But few seem to think it would be better if Internet service providers slowed their migration to fiber access networks, slowed the rate of speed increases or put obstacles in the way of faster Ethernet and IP services.

It is a balancing act, to be sure. But some methods of protecting competition actually are harmful to the goals of expedited investment in next generation infrastructure.

Making matters worse are asymmetrical regulatory frameworks that do not treat all providers of access and other services the same way.

The biggest U.S. high speed service providers (and Internet access is the strategic service)  are AT&T, Verizon, Comcast and Time Warner Cable. But they play under different rules.

In fact, in terms of subscriber share, Comcast is the biggest, followed by AT&T, then Time Warner Cable, then Verizon, according to Leichtman Research Group.  

High Speed Internet Access Subscribers	Subscribers 2Q 2014	Net Adds 2Q 2014
Cable Companies
Comcast	21,271,000	203,000
Time Warner	11,965,000	86,000
Charter	4,850,000	62,000
Cablevision	2,779,000	(9,000)
Suddenlink	1,103,300	200
Mediacom	987,000	3,000
WOW (WideOpenWest)	769,600	12,900
Cable ONE	482,725	(1,443)
Other Major Private Cable Companies	6,475,000	25,000
Total Top Cable	50,682,625	381,657
Telephone Companies
AT&T	16,448,000	(55,000)
Verizon	9,077,000	46,000
CenturyLink	6,055,000	(2,000)
Frontier	1,900,500	27,500
Windstream	1,153,800	(16,600)
FairPoint	333,421	1,883
Cincinnati Bell	270,300	300
Total Top Telephone Companies	35,238,021	2,083
Total Broadband	85,920,646	383,740

source:  Leichtman Research Group

True, Comcast and Time Warner Cable are not yet in the mobile business. But that will come, meaning all the largest telcos and cable companies will compete across the full range of anchor products and customer segments.

And one might also argue that asymmetrical financial returns--that underpin investment--now flow to app providers and device providers in the ecosystem, not to access providers.

Granted, it is not the business of the FCC to oversee the financial health of the device and app industries that all agree contribute to the nation’s economy. On the other hand, if there were obvious shifts in business model that directly affected the health of all contestants in the access business, one would think that would inform decision making.

In Europe, communications regulators have discovered that decades of successful promotion of competition have also lead to decades of lessened investment, and that the “pro-competition” policies are directly related to those outcomes.

It’s a balance; a tough balance. But both investment and competition must be supported.

Is Wi-Fi a ¨Power Shift¨ in Telecommunications?

There has been a long-simmering debate about whether public Wi-Fi hotspots can become a competitor to mobile networks. As with many such debates, actual practice suggests the choice is false.

These days, mobile operators consider Wi-Fi access an integral part of the overall access resources picture. And even mobile operators that might like to base all their access operations on Wi-Fi acknowledge that a combination works best.

EE has argued LTE users use Wi-Fi less. But those users do not stop using Wi-Fi. Still, the questions might grow as the footprint offered by public Wi-Fi hotspots grows.

Maravedis Rethink estimates there will be 47.7 million public Wi-Fi hotspots deployed worldwide by the end of 2014.

By 2018, the number of global hotspots will grow to over 340 million, Maravedis Rethink estimates.

France, the United States and China will have the biggest public Wi-Fi footprints. Already, China has five times more commercial Wi-Fi hotspots than any other country.

And many of those locations are networked so that roaming is possible. Some 22.7 million Wi-Fi hotspots are enabled for roaming between different provider networks in 2014, and will grow to 289.3 million in 2018.

Some questions might remain about how prevalent ¨homespot” networks will become. Homespots leverage private end user Wi-Fi locations to create public Wi-Fi hotspots.

There are perhaps 40 million such homespots in operation in 2014, growing to over 325 million in 2018. The big question is potential demand for homespot connections in suburban and less-dense areas.

Executives at iPass argue (perhaps understandably) that Wi-Fi is changing the power structures of the telecommunications industry.

Perhaps 50 percent of all commercial hotspots are controlled by brands whose core business isn't telecommunications, argues Evan Kaplan, iPass CEO. ¨We are witnessing a power shift from traditional telcos to business owners, such as cafes, hoteliers and retailers who are all getting in on the Wi-Fi game.¨

There is plenty of room for debate about the future role of Wi-Fi as an access medium, and in most cases, the debate will center on how much each network--mobile and Wi-Fi) is used, where, when, by whom, for what devices and application scenarios, and what the business models might be.

But it might already be clear that pricing of mobile Internet access plays a role.

In France, for example, despite high levels of smartphone ownership (60 percent, according to a recent survey by Deloitte, up from about 53 percent in 2013 ), only 11 percent of respondents had a 4G phone.

Many respondents apparently were put off by the high costs of both 4G handsets and data plans, although there are indications this is a misperception, as perhaps 81 percent also report they pay no additional fees for 4G access.

On the other hand, Wi-Fi hotspot availability might have something to do with lagging interest, as France has the most public hotspots of any nation, according to iPass. "Most of the devices we use are Wi-Fi only and even on the most advanced 4G handsets, 78 percent of data goes over Wi-Fi,” said Kaplan.

LTE service pricing tends to reflect a desire by most operators to price Long Term Evolution as a premium service, a tack that generally has not been taken by U.S. mobile operators, which might explain high adoption rates in the U.S. market.

To be sure, as mobile revenue shifts from voice to Internet access, it is understandable that service providers would look to price at a premium.

Mobile data has emerged as the single most important driver of telecom revenue growth, according to Pyramid Research, which forecasts that mobile data revenue will reach $633 billion globally in 2018, increasing from 40 percent of overall mobile revenue in 2013 to 52 percent in 2018.

Asia-Pacific, the world's most populous region, which accounted for nearly 38 percent of the world's mobile data revenue in 2013, should lead the growth.

Pyramid Research expects the global 4G subscription base to grow at a 52-percent compound annual growth rate, from 211 million users in 2013 to 1,750 million users in 2018.

But that growth will still be conditioned by device costs and retail service pricing.

And then there is Wi-Fi. It remains unclear how much reliance users will continue to place on Wi-Fi access even when they have Long Term Evolution access.

WiFi is the connectivity of choice among LTE subscribers. According to a study by Mobidia Technology, a provider of mobile analytics, Wi-Fi accounted for an enormous 75 percent to 90 percent of all mobile data consumed in “leading LTE markets,”according to a study by Mobidia.

Is there a danger that Wi-Fi cannibalizes some mobile data revenue? Probably. But is Wi-Fi also necessary to keep customers happy by allowing them to use lots of data without stressing trhe mobile network? That also likely is necessary.

So pricing will play a huge role as consumers make decisions about which networks to use, and whether LTE makes good sense. Price LTE too high, and adoption will fall; price it too low and the mobile networks could crash.

Mandatory U.K. Roaming Would Eliminate “Not Spots” and Differentiation

“Not spots” are a major mobile customer irritant, therefore a major problem for most mobile service providers, as well as a problem for capital budgets, as “not spots,” places where signal coverage is weak to non-existent, typically exist because the cost of installing new infrastructure does not allow for recovery of costs.

Usually, mobile operators try to remedy those sorts of problems by striking roaming agreements with other networks that do have coverage in the areas of weak to non-existent signal. But that doesn’t always seem to work.

The U.K. government has asked U.K. carriers to come up with a voluntary and universal plan, and apparently they have failed to do so.

So mandatory network access now might be on the agenda in the United Kingdom.

The idea is that a mobile operator whose own network fails, in a specific area, would have mandatory access rights on other networks serving that area that can provide service. In essence, that creates a mandatory and enforceable roaming agreement.

It might not be hard to figure out why the leading mobile service providers have rejected the idea so far. Competition on the basis of network coverage often can be a major marketing weapon.

Mandatory roaming eliminates a source of differentiation in the market.

If coverage, normally a key component of “quality” (“we have the best network, with the best coverage”) goes away, what are the key parameters on which operators can differentiate?

What mostly is left is the variable they dislike the most: price (more precisely, value related to price).

Under a mandatory roaming plan, incentives for building new infrastructure would change.

Where there is universally poor coverage, such as in a rural area, there is an incentive for at least one mobile operator to build, and then claim the “best coverage” in that area.

If mandatory roaming is required, then the firm that made the investment incurs cost with no advantage: the rivals will be able to use the network as well. That makes the investment unwise.

Up to this point, suppliers have done so on a limited basis. Vodafone and O2, for example, allow roaming across their networks, while EE and Three likewise allow roaming across their networks.

Under some circumstances, the existence of “not spots” might call out for some sort of voluntary sharing of infrastructure, which mobile operators have agreed to in other instances globally (sharing towers and sometimes radios).

Under the arrangements already in place, however, each consortium can claim advantage in some areas, if not all. All that would go away in the event of mandatory sharing across all networks.

Differentation might be eliminated in other ways, as well. Some studies show Vodafone has the best voice coverage in some areas, while EE has the best 4G Long Term Evolution coverage in some areas. All of that would be leveled, with no advantage for any provider, in the event of mandatory roaming.

The issue illustrates how hard it can be to both protect the public interest by ensuring universally good service, and yet also provide incentives for mobile operators to invest in providing that service. 

Mexico's LTE Wholesale Network: Opportunity and Risk

Mexico is creating a big Long Term Evolution wholesale network using the entire 90 MHz spectrum in the digital dividend (700 MHz band), and hopes to have the network activated by 2018, and soon will begin taking financing bids.

The new network might cost $10 billion, and require construction of 8,000 to 15,000 cell sites.

The wholesale Long Term Evolution network is viewed as a way to bring the benefits of more competition to the Mexican mobile market.

Existing mobile service providers have not been entirely sure they want to operate under such a structure.

Others say the incumbents may boycott the network. There is good reason to believe Telcel, the largest mobile provider, which has its own network, will simply continue to use its own facilities.

Telefónica likely also might believe it has enough scale to justify its own network. Telcel (America Móvil) has 69 percent market share, but will divest assets to get its share down below 50 percent.

Movistar (Telefónica) has 19 percent market share. Assuming the divested Telcel assets go to a third party, not to Telefónica, but that the new buyer acquires the cell tower networks in its serving areas, it is conceivable that providers of about 12 percent of Mexican mobile service are the primary candidates to buy service from the wholesale network.

That might not be sufficient volume to justify building and operating the new network. In a more-optimistic scenario, Telefónica would eventually switch some of its leased access to the new network, and the owner of the divested Telcel assets might do so as well.

That could create a potential opportunity representing 30 percent or more of the Mexican market, eventually.

Incumbent service providers will be able to buy capacity on the wholesale network, with one key trade-off. If they do so, such incumbents also must open up their existing networks to third party wholesale as well, on conditions similar to wholesale access terms on the new 700-MHz wholesale network.

That is another reason either Telcel or Telefónica might not want to source capacity from the new wholesale network.

Others think there are additional risks. The business model is a concern, given that the Mexican government has promised lower prices and mobile communications “as a human right.”

All that means the government will be under pressure to keep prices on its network low. So regulated prices that are too low could endanger the wholesale network’s viability, or create a need for continuing subsidies.

Wholesale prices too low might mean the wholesale network is not profitable. But if prices are too high, potential customers will conclude there is not a viable business case for their retail operations, and they will not buy.

The other hard to assess issue is whether the existence of a state-subsidized network would discourage private investment because other networks can simply buy from the state network, rather than building their own facilities.

Worse, some competitors might simply decide not to compete in the market.

The wholesale-only network will sell capacity to retailers, according to Ernesto Flores-Roux, Associate Researcher, Centro de Investigación y Docencia Económicas - CIDE, Mexico.

That is similar to the situation in Rwanda, where 4G spectrum was donated--not auctioned--to a an entity charged with building a national LTE network. In Rwanda, KT Corp. was selected by the Rwandan government to build a national LTE network, known as olleh Rwanda Networks, (oRn).

The new infrastructure company oRn will operate exclusively in a wholesale capacity, providing services to retail service providers. And it appears that as many as nine other African nations are considering doing something similar.

Nigeria also appears to have taken the wholesale-only LTE approach.

Kenya likely also is interested in a wholesale LTE network approach.

The decision to build a wholesale-only network was driven by the belief that this is the best way to assure lowest-possible cost for consumers, said Flores-Roux.

It remains unclear how investment in the wholesale network will be made. At the moment, “any conceivable structure can be used for the ownership and financing of the network,” said Flores-Roux.