Sprint Gambles on Price Attack

T-Mobile US has proven one thing: an aggressive price attack can grow market share, add subscribers, gross revenue and cash flow. What has not yet happened is a longer term shift to actual operating profits.

Sprint seems to be gearing up for a similar strategy test, attempting to wrest price leadership away from T-Mobile US as it gambles on a pricing attack. Whether the strategy "works" in the short term is the issue, to say nothing of the longer-term merits.

Sprint reported a quarterly loss in the third quarter of 2014 of $765 million, compared to net income of $23 million in the second quarter of 2014 and net income of $383 million in the third quarter of 2013.

Now the issue what happens as Sprint has launched an aggressive price attack, offering new customers a permanent discount of half the monthly rates they now pay to Verizon Wireless or AT&T Mobility customers who switch to Sprint beginning Dec. 5, 2014.

The “Cut Your Bill in Half” offer provides unlimited talk and text to anywhere in the United States while customers are on the Sprint network, and the same mobile data allowance new customers now have at AT&T or Verizon, while permanently charging 50 percent of what new customers now are paying to AT&T or Verizon for mobile data service.

At this point, it seems impossible to figure out whether Sprint’s operating cash flow get worse, stabilizes or even improves, in the near term as a result of the new promotion, and other actions Sprint is taking, or might take.

Sprint obviously is banking on something similar to T-Mobile US experience after it launched its price attack. After bleeding customers for years, T-Mobile US began growing fast after it began its “Uncarrier” price war.

In its own third quarter 2014 earnings report, T-Mobile US reported a net gain of 1.2 million branded postpaid phone accounts, and mobile broadband net additions of 200,000. T-Mobile US also added wholesale and prepaid customers, for a total 2.3 million net adds for the quarter.

So gross revenue grew.  Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA, or cash flow), declined to $1.35 billion, down 7.2 percent sequentially and flat, year over year. And there lies the potential problem for both T-Mobile US  and Sprint: revenue, cash flow and subscriber gains at the expense of profit.

If Sprint can, over the next quarter, start to replicate that performance, it is conceivable revenue and cash flow grows, although profit margins could worsen, and Sprint could lose money.

Some might call that a race to the bottom. We will find out soon enough whether Sprint can emulate T-Mobile US and start adding customers, instead of losing them. The longer term issue--whether either firm can eventually shift to profitability--remains the bigger issue.

Customer Retention Drives Mobile Operator Interest in Carrier Wi-Fi

Customer retention likely is more important than traffic offload as a motivation for deploying carrier-owned Wi-Fi hotspots, a survey sponsored by the  Wireless Broadband Alliance, and conducted by Maravedis-Rethink has found.

Fully 70 percent of respondents said a key motivation for deploying carrier Wi-Fi was to improve customer experience, seen in turn as a way to increase subscriber retention.

Some 41 percent of respondents said improved customer experience was the single most important driver to invest in next generation hotspots, ahead of the value of offload.

In both 2013 and 2014, large venues such as stadiums and shopping malls were among the biggest drivers of traffic growth said over 50 percent of respondents, followed by travel hubs such as airports (cited by 48 percent) and connectivity on board transportation (41 percent).

The survey also found that Wi-Fi roaming will continue to be an important way to extend coverage, especially internationally.

In the 2013 survey, 30 percent of the hotspot operators also had roaming deals to supplement their networks, while in 2014, that percentage has risen to just over 50 percent.

Among those surveyed, there was a total base of over 2.8 million directly owned and managed hotspots, and an average of 42,000 locations. When roaming was included, the carriers could provide a total of 8.85 million locations between them, or an average of 193,000 each.

With regards to “next generation hotspot” (the WBA program for seamless authentication between Wi-Fi and carrier networks) deployments, about 44 percent of respondents expected to have deployed at least parts of the platform by the end of 2015.

By the end of 2016, another 31 percent of those with active plans for NGH expect to have NGH deployed.

Some 35 percent of respondents are charging for roaming access, or providing tools and platforms to enable such roaming.

The study included 210 respondents, or which 45 percent were mobile service providers.

The majority of the responses came from North America (39 percent) and Europe (26 percent), followed by Asia-Pacific (19 percent).

U.S. Consumer Spending on Mobility Up 49%, High Speed Access Up 80% Since 2007

Spending on mobile phone service has grown 49 percent since 2007, an analysis by the Wall Street Journal of U.S. Labor Department data shows.

The analysis of 2013 out-of-pocket spending for the middle 60 percent of the population by income (households earning between about $18,000 and $95,000 a year, before taxes) also shows that spending on high speed access has grown by more than 80 percent since 2007.

In 2013, high speed access spending by the studied households made up about 0.8 percent of spending for middle income households, up from 0.4 percent in 2007. It is worth noting that the cost of high speed access in the United States represents less than one percent of income.

In other countries in the Americas, mobile service costs between five percent and 15 percent of income. Of course, much depends on what sorts of plans are compared, as prepaid accounts and postpaid accounts are not comparable, within or between nations, in terms of price or performance.

Prices per person in developed regions might represent half a percent to two percent of income, depending on the type of plan analyzed.  

Globally, mobile service costs can be as high as 15 percent per person in developing regions, while a bit less than five percent per person in developed regions.  

Over that same period, spending on fixed network phone service declined 31 percent.

Spending on cable and satellite television is up 24 percent from 2007, the study also found.

South, Southeast Asia Mobile Profits Challenged in 2015

South and Southeast Asia might be among the world's fastest-growing mobile markets, but profit and free cash flow pressures will be significant in 2015.

Fitch Ratings expects most South Asia and Southeast Asia telecommunications operators will face a generally challenging environment in 2015, although its sector outlooks will remain broadly stable.

Minimal or negative free cash flow will result from high capital investment in mobile networks (3G and 4G),  while profit margins will decline because of  competition, Fitch Ratings said.

“Revenue growth will be limited to low-to-mid single digit percentages as fast-growing data services offset declines in traditional voice and SMS revenues,” Fitch Ratings said.

Philippine, Sri-Lankan and Thai telcos might invest 25 percent to 30 percent of their revenue either to expand networks or acquire new spectrum.

Singaporean telco free cash flow also will be low despite reduced capex at 10 percent  to 11 percent of revenue, down from the 2014 level of 13 percent of revenue. Also, Singapore firms  will continue to distribute 80 percent to 100 percent of their net income in dividends.

India, Indonesia, Sri-Lanka, and Philippines mobile operator 2015 revenue was likely to grow by mid-single-digits due to growing data usage arising from the greater availability of cheaper smartphones and more-affordable data tariffs, Fitch Ratings said.

Singapore mobile service provider revenue will grow by low single digits because of continuing cannibalization of voice, text messaging and international revenues. Higher data revenues will offset most of the losses.

Malaysian and Thai service provider revenue is likely to grow by low single digits due to intense competition,” Fitch Ratings said.

Fitch also said Philippines, Malaysian and Indonesian telcos' 2015 profit margins would decline due to competition, higher marketing expenses and data-to-voice/text substitution.

Philippine telcos, it said, were most exposed to margin declines as their most profitable text messaging revenue is replaced by data services. Text messaging revenue contribution for Philippines operators is as much as 30 percent of total revenue.

Indian mobile service provider profit margins are likely to remain stable, as voice prices gradually rise.

Privately-owned Thai service provider profitability could improve by three percentage points in 2015.

Weaker telcos in India, Indonesia and Sri-Lanka may consolidate or exit the industry.

Sprint Customer Satisfaction Plumments in One Year

Sprint is the lowest-rated mobile service provider in Consumer Reports’ latest mobile service ratings, based on a survey of 58,399 subscribers by the Consumer Reports National Research Center.

While Sprint trailed only Verizon in overall customer satisfaction among the major carriers in 2013 ratings, Sprint received “dismal marks” in 2014, in terms of  value, voice, text and 4G reliability, Consumer Reports says.

Verizon Wireless was “once again” the highest-ranked major mobile service provider, receiving high marks for data service and some aspects of customer support.

AT&T and T-Mobile got mostly neutral rankings, though AT&T was the sole carrier to receive the top rating for the reliability of its 4G service.

As in previous surveys, no-contract and prepaid service from smaller companies such as Consumer Cellular and TracFone rated better than the major standard providers for customer satisfaction.

“Our latest cell service satisfaction survey revealed a somewhat precipitous decline by Sprint that shuffled the rankings of the major standard service providers,” said Glenn Derene, Electronics Content Development Team Leader for Consumer Reports. “And smaller, no-frills, no-contract and prepaid service providers continue to do a better job of satisfying customers, and provide an increasingly viable alternative to some of the expensive, long-term contracts that many consumers find themselves locked into.”

Will Western Europe Telecom Revenue Slide Reverse in 2015?

An improving regulatory environment and growing demand for high speed data should ease the pressure on Western European telecoms and cable companies in 2015, Fitch Ratings  says.

That said, revenue pressure is likely to remain in place, as many analysts believe revenue will continue to shrink through 2018. Some estimates suggest the rate of decline is accelerating, in fact, though perhaps a consensus forecast is for slow declines  in the one percent to perhaps two percent range.  

Still, Fitch Ratings believes reduced competitive pressures, the result of a shift in the European Commission's approach to telecom regulation, will help.

Policy increasingly is focused on encouraging revenue growth, part of an effort to entice service providers to increase investment in next generation networks.

Fitch Ratings believes the new policies could contribute to a gradual improvement in profit margins and cash flows in 2015. Whether that will happen or not is the issue. Through 2014, revenue trends have shown a slower rate of decline, but not yet positive growth.

Why Eliminating Mobile Coverage "Not Spots" Might Backfire

Infrastructure investment incentives are a tricky business. Policymakers must balance social objectives such as universal service and quality of service with incentives for service providers, and that sometimes is not easy. Consider the issue of coverage.

In nearly all cases, there are some places within any country where mobile service is not available (complete not-spots), or available only from some of the providers (partial not-spots).

Partial not-spots affect three percent of U.K. premises and 21 percent of land mass, as well as significant coverage gaps on major roads (10 percent to 16 percent).

A partial “not-spot” is any area where mobile phone service is provided by one or two of the four leading U.K. mobile operators. The U.K. government estimates that as much as 21 percent of the U.K. land mass is affected by partial not-spots.

Such coverage issues affect a greater proportion of the country than complete not-spots, where no mobile service is available from any carrier. The problems arguably are more difficult the bigger the country.

Providing 4G Long Term Evolution coverage to an extra 17 percent of the population would require nearly tripling the land mass covered by the network, AT&T has estimated.

An original AT&T plan reached 80 percent of the United States potential user base by covering just 20 percent of the country's land mass.

Providing LTE to 97 percent of Americans would require covering 55 percent of the U.S. land mass, for example.

The point is that inability to earn a market rate financial return is a good reason for not making an investment. And mobile operators argue that is precisely the problem with a proposed national roaming plan that would mandate network access by any mobile customer in any area where mobile not-spots  exist, no matter which firm operates the infrastructure in such areas.

An EE-funded study by Capital Economics estimates that national roaming as proposed by the U.K. government could lead to a reduction in industry capital expenditure of £360 to £440 million each year, delay the rollout of 4G by 18 months to 24 months, and reduce GDP by 0.1 to 0.2 per cent.

The report finds that national roaming would only increase coverage by two percent to four percent of the U.K. geography. Furthermore, any benefit would be wiped out by “signal locking” that would negatively impact a much larger number of people than would benefit from coverage.

Signal locking occurs when mobile devices unnecessarily connect to another network for voice and cannot access data services.

Contrary to the government’s intentions, thinly-covered rural areas could see significant reductions in investment, since mobile operators now compete, in part, on coverage.

That provides an incentive for mobile operators to build new towers in rural areas, sometimes even when the incremental revenue earned from such installations is not necessarily commensurate with investment. The value comes from the ability to provide service at all, in rural areas. That is why mobile operators tout their degree of coverage.

The proposed national roaming plan actually eliminates the ability to differentiate on coverage, since all mobile services could claim the same degree of coverage.

That illustrates the policy challenge. Universal access goals conflict with investment goals. Ironically, mobile operators argue, widespread mandatory roaming actually reduces incentives for any specific mobile operator to make additional investments in not-spot areas, as no marketing advantage results.