SoftBank could be interested in relinquishing control of Sprint and retaining a minority stake if that’s what it takes to merge the US carrier with T-Mobile US, Reuters reports, adding that the parties might enter talks after the spectrum auction ends. Deutsche Telekom has said it wants to keep its stake in T-Mobile.
SoftBank has not yet approached Deutsche Telekom to discuss any deal because the U.S. Federal Communications Commission (FCC) has imposed strict anti-collusion rules that ban discussions between rivals during an ongoing auction of airwaves.
After the auction ends in April, the two parties are expected to begin negotiations, the sources told Reuters this week.
Two and a half years ago, SoftBank abandoned talks to acquire T-Mobile for Sprint amid opposition from U.S. antitrust regulators. That deal would have put SoftBank in control of the merged company, with Deutsche Telekom becoming a minority shareholder.
T-Mobile was worth around $30 billion at the time, but its market value has since risen to more than $50 billion as it overtook Sprint as the No. 3 wireless carrier by subscribers. Sprint’s market value is around $36 billion, roughly the same as in 2014.
Deutsche Telekom Chief Executive Tim Hoettges has said in recent months that the German company is no longer willing to part with T-Mobile, prompting SoftBank to explore a new strategy towards a potential combination, the people said. Deutsche Telekom owns about 65 percent of T-Mobile.
SoftBank, which owns about 83% of Sprint, has been frustrated with its inability to grow significantly on its own in the U.S market, which is dominated by Verizon Communications Inc and AT&T, the two largest U.S. carriers.
While SoftBank is still open to discussing other options, it is now willing to surrender control of Sprint and retain a minority stake in a merger with T-Mobile, the sources said. They asked not to be identified because the deliberations are confidential.
The Reuters report sent shares of T-Mobile surging as much as 7.9% before they eased back to close up 5.5% at $63.92. Shares of Sprint ended 3.3 percent higher at $9.30.
Investors have said a merger between T-Mobile and Sprint, ranked third and fourth respectively, would still face antitrust challenges, but made strategic sense as the industry moves to fifth-generation wireless technology.
Carriers will need to spend billions of dollars to upgrade to 5G networks that promise to be 10 times to 100 times faster than current speeds.
“We may buy, we may sell. Maybe a simple merger, we may be dealing with T-Mobile, we may be dealing with totally different people, different company,” SoftBank Chief Executive Masayoshi Son told analysts on the company’s latest quarterly earnings call earlier this month.
With the advent of 5G, Deutsche Telekom may receive offers for T-Mobile from other U.S. companies, such as DISH Network Corp and Comcast Corp. Sprint could also be an acquisition target for other companies, the sources said.
Dish declined to comment and Comcast did not immediately respond to a request for comment.
Under CEO John Legere, T-Mobile has rolled out unlimited data plans and international roaming packages. Combined with aggressive marketing, this has boosted T-Mobile customer base at the expense of its rivals.
T-Mobile said it had 71.5 million total customers while Sprint had 59.5 million at the end of 2016.
T-Mobile is now almost as big as Deutsche Telekom’s German business. “We are not in the mood of selling the business,” Hoettges told investors last November.
While Sprint’s customer base has also grown under CEO Marcelo Claure and financials have improved, the growth was primarily driven by heavy price discounts. Despite new investment, the company’s network is still viewed by many consumers as weaker than its rivals.
Reuters could not determine how much of a premium SoftBank may want Deutsche Telekom to pay for control of Sprint.
Barclays analysts wrote in a note in December that a merger of T-Mobile and Sprint could result in $25 billion to $30 billion in synergies but said, “it is not imminently clear to us that the various regulatory agencies would reverse course having already blessed the outcome of a four-player market.”
The FCC and the U.S. Department of Justice sent strong messages in 2014 that they did not want Verizon, AT&T, Sprint and T-Mobile to merge among themselves.
Since then, AT&T acquired satellite television provider DirecTV and signed an agreement to buy media giant Time Warner Inc, though that deal is still under regulatory review and has attracted criticism from U.S. President Donald Trump. Verizon has also been exploring other acquisitions.
Antitrust experts said it was difficult to predict how the Trump administration would view a T-Mobile-Sprint merger since key antitrust appointments at the Justice Department have not been made. It is also not clear how such a combination would be viewed by the FCC, whose new chairman Ajit Pai is viewed as more business-friendly than his predecessor.
“I am of the camp that that will not happen even in a Trump administration,” Christopher Marangi, co-chief investment officer at GAMCO Investors Inc, said on the prospects of a T-Mobile-Sprint combination. “That kind of merger means lots of job cuts in the U.S.”
Craig Moffett, an analyst at MoffettNathanson, said price wars between Sprint and T-Mobile have driven down overall wireless prices for consumers.
“Antitrust regulators could well argue that this is precisely the dynamic they would want to preserve,” Moffett added.
Son has said he expects his company to benefit from Trump’s promised deregulation of the U.S. economy. After meeting Trump in early December, Son pledged to invest $50 billion and create 50,000 jobs in the United States.
FBR Comment & Analysis:
Regarding the above Reuters article citing Softbank’s plans to make an offer to Deutsche Telekom for a merger between S and TMUS, in which Softbank will give up control of S for a minority stake in the combined company.
Current FCC anti-collusion rules bar carrier discussions during the broadcast incentive auction. The auction will enter the last stage (the assignment phase) on March 6 and is anticipated to conclude in April, when Softbank could approach Deutsche Telekom. Despite a solid set of data on the record at the FCC and DOJ endorsing a four-player market, and in contrast to 2014, we believe a merger in 2017 would pass regulatory muster due to:
(1) a political and regulatory Administration change,
(2) less spectrum capacity at T-Mobile, and
(3) commitments to increase coverage and competition in rural areas.
■ Déjà vu. In 2014, Softbank failed to convince the Democratic-led FCC commission that a merger would strengthen sustainable competition. Sprint argued that the wireless carrier market would move from a two-player dominant market to a more viable three-player market. Since then, while cutting capital spending, S has made solid strides in improving its network performance, stabilizing its subscriber base, innovating around its spectrum assets, growing EBITDA, and improving liquidity. While the industry remains in a negative Net Present Value (NPV) situation for incremental capital spending, we think that Sprint, with High Performance User Equipment (HPUE), can maintain low capex spending and is on a path toward positive free cash flow, despite a more fierce-than-ever competitive backdrop.
We believe a deal also makes sense to T-Mobile, due to its ability to tap Sprint’s treasure trove of more valuable HPUE-based spectrum, which should help maintain subscriber momentum.
■ Strategic timing makes sense. An M&A announcement is slightly ahead of our expectations—but makes sense. We never believed a DISH/TMUS combination made sense, due to a lack of synergies/ wireless experience and declining spectrum value; many DISH bulls believe its approaching spectrum buildout milestones would force the company to sell or make a carrier acquisition. Softbank is wise to move now, with both CMCSA and CHTR looking to launch their MVNOs later this year and next, respectively. Moving later risks Sprint being left in the cold with major downside risk if a cable company, having learned more about the wireless disruptive opportunity through its own assets and an MVNO model, subsequently moved to acquire T-Mobile.
■ Market is undervaluing synergies. We see substantial upside to the $3B in synergies being priced in by the market today. (Applying a 7x EV/EBITDA multiple on the EV of the combined entity and deducting the combined EBITDA of both companies would yield the $3B in opex synergies.) However, we believe there is major capex synergy upside, which we do not think the market anticipates, as it does not appear to be pricing in major capex saving benefits from high-power spectrum for the combined S/TMUS entity.
■ Positive implications for Shenandoah Telecommunications Company (SHEN), negative for United States Cellular Corp (USM). We believe a combined S/TMUS would provide a stronger partner network for SHEN. However, given TMUS’s growing focus on rural coverage, a merger would lessen the likelihood of TMUS acquiring USM, and its buildout poses significant risk to USM’s high-margin roaming revenues from Sprint. USM acquired 700 MHz spectrum in the Midwest region in recent years, likely as a hedge against declining roaming revenues and to better position itself as a takeout candidate, in our view. This spectrum is compatible with TMUS, which is rapidly rolling out coverage in Chicago on 700 MHz A-Block. However, if an S/TMUS does materialize, the potential for a USM acquisition will greatly diminish.
By Benny Evangelista, San Francisco Chronicle
Pushing beyond mobile phones, AT&T is expanding its cellular network to connect commercial smart devices, from water meters that detect excess toilet flushes to soda dispensers that learn what people prefer to drink.
The company has tested the technology in San Ramon, CA and this week it announced plans to expand its upgraded network throughout the United States by this summer and into Mexico by the end of 2017.
With the Gartner research group projecting as many as 20 billion Internet-connected devices of all types installed around the world by 2020, the potential revenue stakes are high for AT&T and its wireless rivals Verizon, Sprint and T-Mobile, which are locked in price wars to retain mobile-phone customers as the market reaches saturation.
“They see this as a real pathway to growth over the next decade or more,” said Bill Menezes, Gartner principal research analyst for wireless services.
That compares to the mobile wireless business, which is “flattening,” Menezes said. “What you see there is a lot of customers moving from one carrier to another. That’s a business where you’re not going to see a ton of growth.”
AT&T Labs began testing its upgraded network, called LTE-M, in October, with its first commercial pilot project in and around its San Ramon facility. That includes special testing rooms lined with a foam-composite material to isolate radio signals. The company has opened a second test area in Columbus, Ohio.
The low-power, wide-area network uses the same transmission equipment needed for AT&T’s standard LTE wireless phone network. But adding the new capabilities requires only a software upgrade, which will speed the introduction of the technology, said David Allen, director of advanced product development for the company’s Internet of Things division.
“One of the goals is that we can scale this for the Internet of Things,” he said.
One test partner is Capstone Metering, a Plano, Texas, firm that makes smart water meters for public utilities. The upgraded network is designed to connect devices that use small amounts of power, which applies to products like underground water meters with batteries that are supposed to last up to 10 years.
Capstone tested a meter on a San Ramon home this week and immediately reported the signature of a toilet leak — precisely 1.6 to 1.9 gallons of water used every 27 minutes, meaning the toilet kept refilling itself.
“We couldn’t do that two years ago,” said Capstone CEO Scott Williamson. “We have the ability with the technology to tell you when you’re washing your hands. It’s data that you need to know if you’re trying to manage and conserve water.”
AT&T also worked with shipping pallet company RM2, which plans to use the network to track some of its latest products, and with PepsiCo, which has a smart soft drink dispenser called Pepsi Spire.
The dispenser can tell Pepsi what the more popular drinks are in different regions or countries, acting as “its own focus group no matter where it is,” said Darren Koenig, Pepsico’s senior director of digital innovation and Internet of Things.
Verizon operates a downtown San Francisco innovation center that’s working on a similar program, called ThingSpace.
Menezes said AT&T, Verizon and wireless networking companies like Sigfox see potential in connecting a wide universe of inanimate devices that don’t need to transmit a lot of data and,
unlike human customers, “are not going to move from carrier to carrier in order to grab an extra 10 percent in savings.”
Qualcomm (Atheros Division) plans to sample chips using the IEEE 802.11ax specification this year. They will provide faster wireless transmission of data while consuming less power.
The company’s QCA6290 system-on-a-chip device for Wi-Fi access points is expected to be released this June. It can use both the 2.4GHz and the 5GHz bands at the same time for peak speeds up to 1.8Gbps, the company said. It’s designed for uses that include 4K Ultra HD video streaming and videoconferencing and in-car Wi-Fi with multiple video streams.
The IEEE 802.11ax standard isn’t expected to be signed off until late next year, but it’s common for some components using a new standard to ship before that step takes place.
802.11ax is particularly aimed at high-density Wi-Fi deployments, improving not only speed, but the ability of connections to stay active even when interfered with heavily. If you’ve been to a technology convention or trade show lately, you’ll know that the existing co-existence features built into Wi-Fi aren’t really sufficient to particularly dense environments.
The specification includes using multiple antennas to send as many as 12 streams of data at the same time. But it also uses technologies from the cellular world, including traffic scheduling, which gets devices on and off the network efficiently so they don’t have to contend with each other as much.
This can help cut the power consumption of Wi-Fi by as much as two-thirds, Qualcomm says. Even users with current 11ac and older 11n devices should see better performance when they use an 11ax network, according to the company.
IEEE 802.11ax is the next generation of Wi-Fi after 802.11ac, which is already capable of gigabit speeds with the right features and conditions. That technology is still finding its way into consumers’ devices and corporate and service-provider networks. This author has an an AT&T Uverse Residential Gateway which has a built in 802.11ac WiFi AP/Router.
For more information:
by David Dixon and Mike He of FBR & Co. (edited by Alan J Weissberger)
Shares of the four US national wireless carriers are under pressure following Verizon’s announcement this morning of the return of an unlimited data plan. Verizon (VZ) eliminated unlimited plans following the launch of its 4G LTE network due to higher data usage challenges from early adopters but has resurrected this plan against a backdrop of a higher-than-ever competitive landscape.
We are in a mature environment with four major players where incremental pricing cuts and capex expenditures are NPV  negative. Following several quarters of subscriber net add weakness and elevated churn associated with competitive pricing from T-Mobile and Sprint that was capped by Sprint’s free third to fifth line pricing plan announcement on Friday, February 10th, it seems Verizon has accelerated plans to reintroduce its Verizon unlimited plan as a retention tool, in our view.
Note 1. Net present value is a calculation that compares the amount invested today to the present value of the future cash receipts from the investment.
Why now? In contrast to the first unlimited plan iteration back in 2011, Verizon now has the ability to monitor data consumption and manage abuse. But the primary driver is elevated churn as T-Mobile US (TMUS) and Sprint (S) have become more price aggressive. In particular, TMUS has been drawing more quality postpaid customers from Verizon of late.
■Verizon unlimited plan details: The plan includes $80 for one line, $120 for two lines, $160 for three lines, or $180 for four lines of unlimited data/talk/text and 10 GB/month of LTE tethering with e-billing and autopay. While the plan had been under wraps for a few weeks, we believe Sprint’s announcement of the “$90 for two lines with lines three to five for free” promotion tipped Verizon’s hand. To control abuse, after 22 GB/month has been reached, VZ reserves the right to de-prioritize traffic during network congestion.
■ Likely limited financial impact to VZ. Today, VZ has a very evenly distributed data usage base thanks to its reluctance to embrace unlimited plans. This compares to Sprint and TMUS, where their highest 20% of data users generate 80% of data traffic. VZ introduced a more simplified plan structure last year followed by a self-provisioning capability (Safety Mode) under the My Verizon app. The app allowed customers to completely turn off data access for the remainder of the billing period if the monthly data cap had been reached, thereby avoiding data overages. While VZ took a financial hit, it also saw customer satisfaction increase as it right-sized its data consumption. As a result, we do not believe Verizon unlimited will have a material negative impact as most customers have already right-sized. Reception has been positive thus far, so it should be an effective retention tool. Furthermore, Verizon unlimited is a promotional offer; Verizon can change the time and pricing at any time, which will be a function of its success.
■ Market implications: We expect VZ’s new plan to have more negative implications for TMUS than S. Recently, the bulk of VZ’s customer defections has been to TMUS. We believe today’s unlimited plan announcement could slow the loss of customers to TMUS to a greater extent. However, this could also constrain gross add momentum at Sprint as it ramps up distribution this year.
by David Dixon, FBR & Co.
Facing lofty expectations, CDN leader Akamai (AKAM) delivered solid 4Q16 results that beat consensus’ estimates. The performance and security solutions segment again achieved double-digit growth: 16.7% YoY. Consolidated revenues were $616.1M (+6.44% YoY).
However, guidance for elevated CAPEX and an EBITDA (Earnings Before Interest, Taxes, Depreciation, Amortization) margin contraction in the securities products segment was a surprise.
AKAM management is in a race to gain market share as quickly as possible in this fast moving, but high-growth, segment. The bulk of securities growth has come from the installed base. As the largest Internet platform customers’ revenue contributions diminish, management needs to expand the securities base to replace lost media delivery revenues.
1. Will sales force investments and international expansion pay off?
Akamai continues to accelerate investment in its sales force. Most of the company hiring will be done with a focus on international, where the company believes the revenue opportunity could one day equal North America. We think that the growth seen in international revenue supports the company decision to aggressively expand sales capacity and that the move could ultimately pay off.
2. Can newer products contribute enough to offset maturing core markets and drive sustained mid-teens, or better, growth?
Akamai s focus over the past few years has been to increasingly diversify its business beyond media delivery and Web performance. Through acquisitions and investments, the company entered new end markets and doubled its addressable market. Akamai s newer product groups Web security, carrier products, and hybrid cloud optimization are growing well, but overall growth is still determined by performance in Akamai s slowing core markets. These businesses are achieving scale, but the rate of slowing in the core CDN business is occurring faster than expected, and the magnitude and timing of OTT opportunities are unclear.
3. Will Akamai s business model be pressured over time by the irreversible mix shift of Internet traffic toward twoway increasingly distributed on cloud-based architectures that provide compute and storage?
While the amount of Internet traffic is growing, there is an increase in DIY CDN business, and the amount of static, Akamaicacheable data on the Web is falling as a percentage of the total amount of data with which customers interact. In 1999, the Web was a read-only medium with very little user-generated content, customization, etc. Today, the flow is much more bidirectional (and therefore uncacheable). We do not see that Akamai has a play here; it may resist this architecture shift, as moving into these growth areas would likely cannibalize the CDN revenue base. More acquisitions to enhance the enterprise security portfolio in the interim are likely as the company continues to diversify away from the commodity CDN business segment. Yet the market has responded to the unification of software accessing three types of storage by moving toward distributed, layered IaaS/PaaS systems (e.g., AWS) using HTTPS APIs (versus FTP), providing compute and storage (versus caching of object storage). Improved performance, reliability, and scale are occurring fast, and we expect many cloud customers that are not scaled up will still require a CDN for performance enhancement.
Chinese Internet giant Alibaba’s UCWeb is currently negotiating with telecom service providers (SP’s) and Wi-Fi providers to provide free Internet service in India, Jack Huang, President of Overseas Business, Alibaba Mobile Business told Business Insider India.
“We will definitely look at the opportunity to work together with service providers or even some Wi-Fi providers. We are trying to offer lower cost data to users and better connectivity, even free of cost connectivity. Wi-Fi providers and other players can be potentials and we are in talk (stage).”
The Chinese company is considering providing free Internet services to states that have connectivity problems. “We actually think in geographic way because in India not every state is suffering from connectivity problem so we will focus more on providing this kind of services to states that are suffering more and also we will have comprehensive analysis on already existing consumers who will actually need this kind of service,” added Huang.
This will not be the first time an international Internet behemoth has tried to provide free internet in India.
- Social networking leader Facebook had launched its internet.org and then Free Basic initiatives in India but both failed to get past the regulations in the country. There were only a limited amount of sites that the users could access for free with Facebook’s initiative. The plans hit a major roadblock with Indian telecom regulator TRAI. Techcrunch reported:
Facebook discovered that scaling in India is not so simple. While most of the debate around Free Basics, and its subsequent defeat, centered around net neutrality, the saga is really the result of a set of larger, incorrect assumptions by Facebook on how to reach and on-ramp rural customers.
However, Facebook’s Internet initiatives met with heavy backlash in India from “net neutrality” advocates, who claimed that Free Basics only allowed access to selected websites thus violating the principle that the entire Internet should be available to everyone on equal terms. Current rules in India do not allow anyone to connect content with usage and the telecom regulator is in the process of defining Net Neutrality for the country. If Alibaba is looking at connecting its own content to the free usage it will inevitably have issues with the telecom regulator as was seen in Facebook’s Free Basics.
- Google’s (free for now) managed WiFi service was available in 100 railway stations in India at year end 2016. Google collaborated with RailTel, the communication arm of the Indian Railways to provide the free WiFi service.
Last September, Google CEO Sundar Pichai announced a fairly ambition plan to bring free WiFi to 400 railway stations across India, a goal that would cover 10 million passengers a day by the company’s count. That would make a relatively small, but meaningful impact on the estimated one billion-plus people in the country who aren’t connected to the Internet.
Alibaba is reportedly still working on the plans around its free Internet service in India and is still in talks with “potential partners.” The company has not stated what wireless technologies might be used for Internet access, but WiFi is probably the top choice. Also, nothing has been said about whether wire-line Internet access for business or homes would also be included in Alibaba’s free Internet plans for India.
Verizon has completed its $1.8 billion acquisition of XO Communications’ fiber business in a deal announced almost one year ago. The company expects to achieve synergies by incorporating XO’s fiber assets as part of its current network operations, with the total operating and expense savings estimated at over $1.5 billion. The XO takeover is expected to help boost Verizon’s enterprise and wholesale business, as well as improve backhaul for its mobile network. Integration of all XO operations and facilities is expected to commence immediately, Verizon said.
Verizon also says it will lease wireless frequencies from NextLink Wireless, a former XO affiliate, in a deal that gives the carrier an option to buy NextLink. That might help the mega telco with its plan to offer high speed wireless broadband (4G or 5G).
In September, Verizon’s CFO Fran Shammo told the audience at a Goldman Sachs & Co. conference that Verizon’s fixed wireless 5G, with 1 Gbit/s connections to the home, will take on cable, “or any broadband connection for that matter,” and that deploying 5G will be much cheaper than deploying FiOS. (See Verizon CFO: Eat Our (Fixed) 5G Dust!)
Shammo also said that the company’s key advantage in deploying 5G is the rights to lease 28GHz bandwidth from NextLink. “That covers 40% of the US,” he said then, adding “That’s all licensed for fixed wireless use for the time being, as per the Federal Communications Commission (FCC) rules. We’re hoping that’ll become mobile at some point down the road.”
AT&T has entered “advanced discussions” with electric utilities to test its Project AirGig wireless technology in two places by the fourth quarter, the telco said in a press release. The high-speed broadband technology relies on antennas placed on power lines to transmit wireless signals. One of the locations will be in the US. The others will be determined in the coming months, according to the company.
AT&T Chief Strategy Officer John Donovan told USA Today that an announcement about the power companies involved would come soon, in a matter of “days to weeks.” It will likely be in the south to avoid the variable of winter, Donovan added.
AT&T has said that Project Airgig as a new way to deliver fast Internet service with high-speed connections at a lower cost by delivering over (but not through) existing power lines. The infrastructure associated with it is cheaper and easier to deploy than fiber, the company says. Whereas fiber internet requires digging up dirt to run wires, Airgig delivers through relatively inexpensive plastic antennas on top of power lines.
Preliminary Model of AirGig Antenna- side view, Photo Courtesy of AT&T
“We are looking forward to begin testing the possibilities of AT&T Labs’ invention for customers and utility companies,” said Andre Fuetsch, president of AT&T Labs and chief technology officer. “AT&T is focused on delivering a gigabit-per-second speed everywhere we can with our wired and wireless technologies. Project AirGig represents a key invention in our 5G Evolution approach. AT&T Labs is ‘writing the textbook’ for a new technology approach that has the potential to deliver benefits to utility companies and bring this multi-gigabit, low-cost internet connectivity anywhere there are power lines – big urban market, small rural town, globally.”
AT&T says it has been working on the technology for more than 10 years and has more than 200 patents associated with it. The potential that other companies would start sniffing around the patents prompted the public disclosure in September, Donovan said at the time.
“AT&T Labs engineers and scientists invented low-cost plastic antennas, a Radio Distributed Antenna System (RDAS), mmWave surface wave launchers and inductive power devices,” the press release noted.
In almost 50 years of observing tech trends and markets, the most hyped of all time is 5G. It’s a market that doesn’t exist and won’t until 2021 at the earliest. That didn’t stop Verizon, AT&T, Telia and numerous other wireless telcos announcing 5G trials this year!
The latest 5G partnership (whatever that means) is network equipment behemoth Nokia (a combo of Nokia-Siemens, Lucent and Alcatel) combining with Orange (formerly France Telecom) to progress 5G. Does that mean that Nokia will be the exclusive 5G network equipment provider to Orange? We doubt that!
As part of the agreement, the pair will focus on making the transition from 4G to 5G network connectivity a pain free job, to pave the way for such innovations as smarter cities, connected vehicles and remote healthcare. This work will also include the application of ultra-broadband leveraging new frequency bands, cloud RAN and massive MIMO, IoT, end-to-end network slicing techniques and energy efficiency.
“In line with the Orange Essentials 2020 strategy, Orange places innovation at the heart of its drive to deliver an unmatched customer experience,” said Alain Maloberti, Senior Vice President, Orange Labs Networks
“Working with Nokia, we are preparing the evolution of our networks from 4G to 5G, with multiple services on a single infrastructure to deliver a quality tailored for each service requirement. Our new services will enhance people’s lives and accelerate the digitization of vertical industries.”
“With our breadth of Radio, IP and Optics technologies, and the expertise of Bell Labs, Nokia is proud to be assisting Orange in the introduction of 5G and the application of the Future X Network paradigm,” said Marc Rouanne, chief Innovation and Operating Officer at Nokia, said:
“Through this collaboration, we will test 5G applications for different industry segments and measure the benefits of extremely short latency and very high speeds. We are also delighted to be applying our world-class R&D expertise in Paris and Lannion in this project.”
THE 5 KEYS TO 5G according to Nokia:
by David Dixon and Mike He, FBR & Co. (edited by Alan J Weissberger)
Summary and Recommendation:
AT&T reported largely mixed 4Q16 results, with both top-line and adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) misses driven by fewer upgrades and continued legacy service weakness. Lower depreciation expenses helped lift adjusted EPS to $0.66. Strong international and entertainment revenues were key to offsetting ongoing weakness in consumer mobility and an anemic business solutions segment, which continues to be handicapped by weak legacy service demand. Promotional pricing of DIRECTV NOW (Internet TV package), with zero-rating , saw strong initial adoption, helping to offset churn from the 2G network shutdown.
With Ajit Pai recently named as chairman of the FCC, net neutrality is likely to be overturned; and zero-rating will likely be endorsed, paving the way for AT&T’s bundling strategy. Potential tax and regulatory reform should help the telcos attack cable’s historic advantage through a fiber-lead investment uptick amid consolidation. So, while tax reform is accretive to cash flow, we believe much of this benefit will be absorbed from a higher capex trajectory.
Note 1. Zero-rating (also called toll-free data or sponsored data) is the practice of mobile network operators (MNO), mobile virtual network operators (MVNO), and Internet service providers (ISP) not to charge end customers for data used by specific applications or internet services through their network, in limited or metered mobile data plans.
■ 4Q16 results recap. Consolidated revenues declined 0.7% YOY, to $41.8B, in line with our estimate but below consensus’ estimate of $42.0B. By segment: Business solutions delivered revenues of $18.0B, entertainment and Internet services had revenues of $13.2B, consumer mobility had revenues of $8.4B, and international had revenues of $1.9B. Adjusted EBITDA was $12.2B, versus consensus’ estimate of $12.8B and our estimate of $13.1B. EBITDA margins expanded by a modest 6 bps YOY, to 29.1%. Consumer mobility postpaid net adds were 270,000, prepaid net adds were 406,000, and postpaid churn was 1.25%.
■ In-line FY17 guidance. Management provided FY17 revenue guidance of low single-digit growth, in line with consensus’ estimate of +1.6% YOY, with adjusted EPS growth in the mid-single-digit range, adjusted operating margin expansion, capex of $22B, and free cash flow of $18B.
■ Stay tuned for a fiber-induced investment uptick. Management would not take the bait on plans to extend fiber investment, but we think this is inevitable. Beyond the in-region Boston fiber deployment, our checks indicate that Verizon has issued fiber construction RFPs for the two-year buildout of an additional 20 to 30 cities. Not only would this likely invoke a competitive response from cable companies, it may also drive an acceleration and expansion in T’s fiber plans to deploy to 12.5 million homes (aside from any tax reform and the extension of bonus depreciation, which could both accelerate deployment).
Can AT&T drive earnings growth?
With the LTE network buildout complete and AT&T diversifying into Mexico to alleviate churn pressures, further changes to upgrade eligibility are likely. 6 to 12 Months Can AT&T drive earnings growth? Smartphone activations remain significant. Strategic initiatives with Samsung and Google, coupled with support of the Windows Phone ecosystem by MSFT, NOK, and other OEMs, are key to lower wireless subsidy pressure but it is early days. We think AT&T will continue to consider pricing action to augment growth once the LTE network build is complete. But competitive intensity is likely to increase in FY16, so this will prove difficult absent consolidation or until T-Mobile US becomes spectrum challenged, which we think is still one year away and a function of T-Mobile’s commitment to continue network investment.
How will AT&T fare in the changing wireless landscape in 2017 and beyond?
Our strategic concerns for AT&T include:
(1) the Apple eSIM impact, should Apple be successful in striking wholesale agreements;
(2) the Google MVNO impact, which could strip the company of the last bastion of connectivity revenue; and
(3) a WiFi first network from Comcast, coupled with a wholesale agreement with a carrier, which would enable a competitor and increase pricing pressure.
Does AT&T have a sustainable spectrum advantage compared with other carriers?
AT&T is behind Verizon in spectrum and out of spectrum in numerous major markets, according to our vendor checks. However, with additional density investment, it is reasonably well positioned to benefit from the combination of coverage layer (700 MHz and 850 MHz) and capacity layer (1,700 MHz and 1,900 MHz and soon-to-be-confirmed 2,300 MHz) spectrum and will focus on LTE and LTE Advanced, as well as refarming 850 MHz/1,900 MHz spectrum for additional coverage and capacity. Yet this nonstandard LTE band will cost more capex and take longer to implement. In the short run, aggressive cell splitting is expected, and metro Wi-Fi and small-cell solutions with economic backhaul solutions are becoming available, allowing for greater surgical reuse of existing spectrum. Sprint s differentiation through Clearwire spectrum is only likely to modestly affect AT&T relative to Verizon. Furthermore, with 70% 80% of wireless data traffic on Wi-Fi and only 20% of capacity utilized, this suggests a focus in this area to manage data usage growth.
We expect the wireless segment to continue to be challenged by T-Mobile US and a resurgent Sprint. We are less bullish on near-term improvements in capex intensity due to cultural challenges associated with the much-needed migration to software centric networks, coupled with the need to upgrade its fiber plant aggressively to improve its competitive positioning and lay the foundation for efficiency improvement.
“2016 was a transformational year for AT&T, one in which we made tremendous progress toward our goal of becoming the global leader in telecom, media and technology,” said Randall Stephenson, AT&T Chairman and CEO. “We launched DIRECTV NOW, our innovative over-the-top streaming service. Our 5G evolution plans and improved spectrum position are paving the way for the next-generation of super-fast mobile and fixed networks. And we shook-up the industry with our landscape-changing deal to acquire Time Warner, the logical next step in our strategy to bring together world-class content with best-in-class distribution which will drive innovation and more choice for consumers.”
“At the same time, we performed at a high level in 2016 with growing revenues, expanding adjusted consolidated operating margins and solid adjusted earnings growth, and we hit our $1.5 billion DIRECTV cost-synergy target. We also delivered record cash from operations, which allowed us to return substantial value to investors and invest more in the U.S. economy.”