IEEE ComSoc Technology Blog

by David Dixon & Mike He of FBR &Co.

Introduction:

The surprise Republican election victory and Congressional control of both Houses have significant policy implications for the telecom services sector. We provide our initial thoughts below.

For the last two terms, the Obama presidency and the FCC, currently led by Chairman Tom Wheeler, have been in favor of content companies working against telecom service providers, contributing to telecom service providers generally not earning their cost of capital. We think this reverses under a Republican administration that will be anti-regulation and pro-business. Key areas in play include net neutrality, wholesale interconnection, regulation of business data services, cable set top box reform, broadband deployment, and M&A.

We expect Wheeler to resign before inauguration day on January 20, 2017, consistent with prior FCC chairman decisions after a change in administration. Below, we discuss these key areas in play including business implications.

Discussion:

■ Net neutrality.

Carriers, generally, are not earning their cost of capital as outsized economic value creation continues to move up the stack to the innovative asset-light application layer. Republicans may allow traditional distribution channels to recover a greater portion of costly network upgrades from content companies going forward. Specifically, Republicans may kill Title 2 price-based regulation and endorse zero-rated content, which has been leveraged by T-Mobile, Verizon, and AT&T to help mitigate churn. We think companies that own distribution and content will still not be allowed to discriminate against new media and OTT players, but we expect OTT players to share in the network cost burdens to a greater extent. Positive for AT&T and VZ. Positive for RLECs CTL/LVLT, WIN.

■ Wholesale interconnection.

The Internet’s impact on traditional distribution channels is a major industry issue. Republicans may reverse the FCC’s recent decision to apply more oversight on wholesale interconnection. This has restricted the ability for telecom service providers to charge content providers and share the cost of expensive network upgrades. We expect higher costs for third-party intermediary Internet networks and content companies. Negative implications for CCOI, AKAM, and LLNW.

■ Spectrum auctions.

We think the incentive auction will remain on track. However, the Democrat administration has been guided by Silicon Valley to shift toward an incumbent spectrum-sharing policy platform. We think this may continue, but instead of agreeing to convert narrowband spectrum bands for broadband spectrum use, a Republican administration may instead auction spectrum that has the potential for higher valuation. Separately, Google has driven momentum on the 3.5 GHz “shared spectrum” (CBRS) band, and opposition to the FCC’s April CBRS Report and Order may impact the auction timing and process in 2017. A slower path on the 3.5 GHz spectrum band has positive implications for DISH. For PDVW, we think we still get an NOI, but there is increased probability that a Republican-led FCC administration auctions this spectrum, which is positive for PDVW as the majority owner of this spectrum. Consistent with our published research, we think PDVW is well positioned in all three possible NOI scenarios, including a spectrum auction.

Regulation of business data services. The Wheeler administration has signaled major regulatory price cap pressure coming for an important wireline access segment. There is an attempt to implement this by year-end. A Republican administration may reverse pricing restrictions to be imposed on the $60 billion business data services market, which has been particularly disruptive for incumbent and rural wireline telecom providers. Positive implications for CTL/LVLT, WIN, and AT&T.

■ Cable set top box reform.

A Republican administration may reverse cable set top box reform that favors application service providers by opening this market up to competition. Application service providers are seeking to establish alternative access into the home. Positive implications for cable companies.

■ Broadband deployment.

The National Broadband Plan was a major Obama initiative, driven in part by content company laments regarding the state of fiber deployment across the U.S. Implementation has been costly and slow, and we think NPV remains negative but necessary for telecom service providers to improve their strategic competitive positioning with cable companies. We think a Republican administration may help accelerate the migration to a less costly blend of fiber and fixed wireless, which is at a nascent stage. Fiber deployments have picked up recently, and we think this continues with less Federal pressure on pricing going forward. A lighter touch on net neutrality and wholesale interconnection may stimulate the pace of fiber deployment. Positive implications for DY.

■ M&A.

The FCC and DoJ have opposed major horizontal consolidation in mobile and broadband under a Democrat administration (AT&T/T-Mobile, Sprint/T-Mobile, Comcast-Time Warner Cable) as the industry reaches peak penetration, T-Mobile approaches capacity challenges, and additional capacity spending is hard to justify given industry ARPU pressures. The risk for Sprint is that a cable company buys a soon to be capacity constrained T-Mobile, but we think it is more likely that a cable company buys Sprint (which has a substantial spectrum advantage) or a merged Sprint and T-Mobile compete on a sustainable basis with AT&T and Verizon. The administration change may benefit DISH Networks in that potential combinations may be looked at more favorably. We believe AT&T and VZ could gain approval to buy the company under a Republican administration, though we maintain our reservations that both companies would be interested as they face capacity challenges with an industry at peak penetration, ARPU pricing pressure, and negative NPV associated with investment in additional 4G and 5G-based capacity. Positive for the prospect of a Sprint and T-Mobile merger and the AT&T and TWX merger despite negative election rhetoric.

■ FCC transition timing.

The FCC is directed by five commissioners appointed by the President and confirmed by the Senate for five-year terms, except when filling an unexpired term. The President designates one of the commissioners to serve as chairman. Only three commissioners may be members of the same political party. The President has the power to designate a new chairman from among the five-member commissioners without the need for Senate approval, i.e., Commissioner Ajit Pai or Commissioner Michael O’Reilly. Both Republican Commissioners have been actively opposed on most major issues before the Democrat-led Commission.

–>We expect Wheeler to resign before inauguration day on January 20, 2017, consistent with prior FCC chairman decisions after a change in administration.

Standards for the 5G era ITU membership gathered at the quadrennial World Telecommunication Standardization Assembly (WTSA-16) have accelerated support for standards work on 5G, IoT, smart cities, fintech – and more.

ITU membership has called for ITU’s standardization arm to expand its study of the wireline networking innovations required to achieve the ambitious performance targets of smart 5G systems. This call has come in parallel with ITU members’ reaffirmation of the importance of ITU’s standardization work to drive the coordinated development of ultra-high-speed transport networks, the Internet of Things, future video technologies, and smart cities and communities.

The Assembly also revised two of the A series ITU-T Recommendations that guide ITU-T’s work, and in addition approved five ITU standards on subjects including international mobile roaming and Internet Exchange Points.

“The new standardization strategies to be decided at this Assembly will provide the foundation for ICT development and the creation of a knowledge society,” said Youssef Chahed, head of Tunisia’s government. “Standards are important to success in innovation and creativity, for example in 5G communication and Smart Cities.”

ITU Secretary-General Houlin Zhao said: “The WTSA process continues to be the world’s foremost platform for multi-stakeholder collaboration in the interests of leveraging ICTs to drive sustainable development. ITU’s unique public-private partnership of members from government, industry and academia is essential to its value proposition. Our Member States ensure that ITU is globally represented, and this gives great strength to our standardization work. We work with our members to strengthen ITU and the task of this Assembly is to ensure that standardization remains well-positioned to support the development of the global ICT ecosystem.”

The decisions of the WTSA-16 will shape ITU-T into a form optimized to assist government, industry and academia in achieving their ambitions for year 2020 and beyond, in fields including IMT-2020 (5G), the Internet of Things, Smart Cities, and the ICT sector’s contribution to the pursuit of the United Nations’ Sustainable Development Goals.

Key takeaways from a 3GPP presentation on 5G:

• widely varying use cases

• widely varying performance requirements

• is not really about connecting people, but more about connecting things

• No single technology will satisfy all of these requirements

–>These requirements will not all be met at the same point in time

3 High Level 5G Use Cases:

• Enhanced Mobile Broadband
• Massive Machine Type Communications
• Ultra Reliable and Low Latency Communications

More consolidation and cost cutting in telco land.  Last week, it was Century Link and Level 3.  Today, Windstream and EarthLink.  Apparently, it’s all about scale. The $1.1 billion (€993.82 million) all-stock deal is a move designed to boost the network service providers ability to compete with larger rivals -both telco’s and MSOs/cablecos.

Under the terms of the deal, Earthlink shareholders will receive 0.818 shares of Windstream for each Earthlink share. The new entity, which will retain the Windstream name, plans to shed $125 million in costs while holding 145,000 route miles of fiber in the Northeast and Southeast.

Windstream serves 1.06 million residential broadband customers, 138,500 small businesses, and 26,600 larger enterprise customers.

“The combination with EarthLink further advances Windstream’s strategy by creating a stronger, more competitive business to serve our customers while increasing free cash flow and reducing leverage,” said Tony Thomas, CEO of Windstream, in a statement. “With this transaction, we are combining two highly complementary organisations with closely aligned operating strategies and business unit structures,” he added.

“We are pleased to join forces with a company that shares our core values and operating philosophies, and whose strategy complements our own,” said EarthLink chief executive Joe Eazor.  “In our work with Tony and his team, it’s become clear that we are two companies on parallel paths,” he said. “Now is the right time for us to come together.”

EarthLink currently operates two divisions:  Business and Consumer.

• EarthLink Business sells communications, IT and virtualization, cloud computing, IT security, colocation, hosted applications and support services. The company owns and operates a U.S. network including 29,421 route miles of fiber, 90 metro fiber rings, and eight data centers. EarthLink Business has more than 150,000 customers.^[4]
• EarthLink’s Consumer division sells broadband (DSL/freestanding DSL, cable internet, 4G Internet, Satellite Internet) dial-up Internet, Web hosting and commerce, and related services. It also sells spamBlocker, Anti-virus and Online Back-up. Earthlink internet services claims to have over 1 million customers.

The merger is expected to generate annual synergies of $125 million within 36 months of the deal’s completion, which is expected to happen in the first half of 2017, subject to approval by the Federal Communications Commission (FCC), and customary closing conditions.

References:

https://www.earthlink.com/about-us/news-center/merger

http://www.reuters.com/article/us-earthlink-hldgs-m-a-windstream-hldgs-idUSKBN1321HF

http://www.totaltele.com/view.aspx?ID=495469

A joint presentation will be available at:

 www.windstream.com/investors and ir.earthlink.net

Editor’s Note: We remain SD-WAN skeptics due to no standards and hence no vendor or carrier interoperability.

The three primary drivers fo the ONUG Fall 2016 conference:  Silo organization structure has run its course.  It’s in our best interest to create a market for next generation analytics.  Cloudification of technology is the tool to allow organization transformation.

SD-WAN grew out of the needs of attendees from the first ONUG meeting in 2012.  Co-founder and ONUG Co-Chair Nick Lippis predicted that 2017 will be the year of SD-WAN.

Results of an ONUG Fall poll indicated that 50% of the ONUG Community are in limited to large-scale SDN deployment. In addition, 64% of the ONUG Community are already in the SD-WAN deployment stage. Of those piloting, 97% said they will move to the deployment phase within the coming year.

With the support of ONUG and others, the use case for SDN in the WAN evolved into its own industry. Led by companies like CloudGenix, Viptela, and VeloCloud, new opportunities arose to simplify the management of WAN connections between branches. Central controllers orchestrated the task of deployment to the point where anyone could connect the device via phone call instead of a plane ticket. Circuit configuration was no longer the stuff of days gone by and instead became something handled remotely by the best people.

SD-WAN also allowed more services to be built on top of traditional WANs. Now, traffic could be encrypted end-to-end. Analytics could provide solid numbers about traffic patterns, which could then be used to provide intelligent decisions about application routing patterns. And even the metrics collected could be used with service providers to ensure service level agreements (SLAs) were being met.

The conversations about SD-WAN on Day 1 weren’t so much about explaining how it works as they were about providing justification to start the proof-of-concept trials. ONUG constituents like Kindred Healthcare and Gap are quickly rolling out massive SD-WAN deployments to reduce costs and simplify management. The success stories of SD-WAN are highlighting the next wave of adoption in enterprises down the food chain.

More at:  http://gestaltit.com/tech-talks/tom/onug-day-1-wrap-sd-wan-spotlight/

References:

http://gestaltit.com/tech-talks/tom/onug-live-blog-day-1/

http://gestaltit.com/tech-talks/tom/onug-live-blog-day-2/

https://opennetworkingusergroup.com/onug-spring-2014-use-cases/software-defined-wide-area-network-sd-wan/

The Internet of Things (IoT) industry is on track to see nearly $3.7B in funding this year as connectivity and software are injected into sensor-laden objects and appliances. An increasing proportion of these dollars are being allocated to startups working specifically on the industrial IoT.

Five of the top 12 IoT investors are now corporate venture arms, including Intel Capital, GE Ventures, and Cisco Investments. Please refer to this chart from CBInsights:

Intel Capital still tops the list as the most active investor in IoT startups, with more than 40 unique IoT companies since 2012. GE Ventures wasn’t far behind (and is new to the ranking of top IoT investors) with recent investments in industrial-focused IoT startups like industrial analytics developer Sight Machine, fog computing platform Foghorn Systems, and commercial 3D printing startup Desktop Metal.

Following Andreessen Horowitz, the fourth-most active IoT investor is another CVC, Qualcomm Ventures. As CBInsights noted in  prior investor roundups, Intel and Qualcomm are involved in designing and/or manufacturing ever-smaller chips to power mobile devices, and IoT likely offers them strategic value.

According to Wing VC (see reference& postcript below), Industrial/Enterprise IoT accounts for the largest number of funding deals over the past few years, followed by Wearables.

“When we ranked various sectors by total number of funding deals over the past three-and-a-half years, the Industrial/Enterprise category came out on top with almost 600 deals. We’re entering what’s been called the “Factory 4.0” era, in which a combination of sensors, software and backend cloud compute and storage is giving companies new insights into the performance of their physical assets. Quite a few deals in the manufacturing sub-category of Industrial/Enterprise IoT were of this nature. These startups can demonstrate swift “RoIoT”—or return on investment in IoT—to customers, who use the data and predictive analytics provided to minimize unplanned downtime and outages. On the Enterprise front, we saw a reasonable amount of activity in sub-categories such as building management services, healthcare and retailing.”

References on State of the IoT Market:

https://www.verizon.com/about/sites/default/files/state-of-the-internet-of-things-market-report-2016.pdf

http://wing.vc/blog/iot-startup-state-of-the-union-2016

Postscript/Comment based on email from IEEE Member Discussion Group:

by David Dixon & Mike He of FBR & Co.

Summary:

An elegant Ericsson and Nokia driven network upgrade plan that from inception created a 10X increase in capacity continues to bear fruit for TMUS, as seen in strong 3Q financial and preannounced subscriber results. The recent launch of the T-Mobile One unlimited plan and market perception of T-Mobile as a value leader are resonating well with consumers, as both net add and churn were well ahead of Street estimates. After more than three years of continuous share taking, we believe TMUS is close to full network capacity.

We expect Sprint to build momentum from here, and even though heightened competition has forced both VZ and T to diverge their businesses away from wireless while undergoing a network topology shift that favors edge application processing, storage, and content, we think margin pressure is likely needed for TMUS to gain more market share. As more of the device base are seeded with 700 MHz, this will accelerate the capacity crunch that could stymie momentum.

Key Points:

■ 3Q16 results recap. Consolidated revenue of $9.2B (+17.8% YOY) was modestly ahead of our $9.1B estimate but below the consensus $9.5B estimate, consisting of 13.2% YOY growth in service revenues, +37.6% YOY growth in equipment revenues, and 26.0% YOY growth in “other” revenues. Adjusted EBITDA of $2.6B were meaningfully ahead of our Street-comparable estimate of $2.4B, driven by strong cost discipline and a strong top line that benefited from strong market acceptance of T-Mobile One plans. Postpaid net adds were 969,000 with churn of 1.32%, and prepaid net adds were 684,000 with churn of 3.82%.

■ Capacity expansion going well—capacity crunch ahead? May improve M&A approval chances. Management recently lit AWS-3 spectrum and plans to leverage unlicensed 5 GHz spectrum in 2017 using LTE-U and LAA, followed by unlicensed 3.5 GHz LTE spectrum in 2018. Covered PoPs under extended-range LTE on 700 MHz A-block increased by 25M during the quarter to 225M, with overall covered PoPs of 312M almost in line with VZ. Coverage improvements drive a 4x increase in capacity. A spectrum-constrained T-Mobile may increase the probability of regulatory approval of a Sprint merger.

■ T-Mobile raised FY16 guidance. Management raised full-year branded postpaid net adds and adjusted EBITDA guidance following 3Q results. Brand postpaid net adds are now expected to be in a range of 3.7M–3.9M, up from 3.4M–3.8M. Adjusted EBITDA guidance has been raised to $10.2B–$10.4B from $9.8–$10.1B.

Q & A: 

1. Can T-Mobile continue to take market share?

We believe Ericsson and Nokia in 2012 provided an elegant blueprint for T-Mobile to add capacity at low cost for three to four years under the current capex envelope. Today, our industry checks suggest that T-Mobile is facing capacity challenges and that adding 700 MHz coverage spectrum (although only used 17% of the time, according to the latest Root Metrics results) will increase demand for capacity spectrum by 4x, exacerbating performance challenges. We also believe that capacity demand elasticity for BingeOn will prove challenging as a broader set of customers sign up for free video service. Indoor coverage is still the differentiator, and T-Mobile faces variable performance in this area due to its reliance on voice over Wi-Fi, but this should improve with 700 MHz spectrum and the ability to add 600 MHz ahead of the 39-month clearing time frame.

2.  What is the outlook for Sprint’s ability to improve its momentum in the market?

We believe Sprint is starting to leverage its 2.5 GHz spectrum portfolio to greater effect and should be able to improve its performance in multiple markets across the U.S. going forward. Indoor coverage improvement from small cells, increasing device power, and higher-power 2.5 GHz transmitters could drive market share gains going forward at the potential expense of T-Mobile US.

3.  What is the outlook for M&A in the wireless segment?

We believe T-Mobile US lack of new spectrum capacity, coupled with inferior coverage from both T-Mobile and Sprint, suggests a merger could be revisited under a new FCC administration in 2017. Given our contrarian outlook for capacity spectrum valuation one of the three valuation components for a wireless company (spectrum, network, and customers) we believe Comcast is less likely to seek to acquire T-Mobile but may instead enter the wireless segment through a low-cost coverage network and lowcost indoor capacity network. Lastly, we believe there is greater synergy for a deal with Sprint relative to DISH Network.

Risks:

• T-Mobile holds a smaller amount of absolute spectrum than its larger competitors. As T-Mobile expands and adds more customers to its LTE network, the company’s smaller spectrum holdings will require higher capex (cell-splitting) and higher variable operating costs (larger amount of leased back-haul).
• T-Mobile does not own a substantial spectrum position below 1 GHz. T-Mobile’s network operates primarily in the AWS (1700 MHz) and PCS (1900 MHz) bands with roaming on AT&T at 850 MHz. The lack of lower-frequency spectrum for data impedes in-building coverage, which could lead to higher churn. The company could compensate by adding more cell towers or by winning the upcoming incentive spectrum auction for 600 MHz spectrum.
• Overall industry risks continue to center on pricing pressure, particularly in the business segment and accelerated wireless substitution in the consumer segment. Economic recovery factors continue to play key roles in a sector where growth in wireless subscribers, growth in revenue from existing subscribers, and enhanced wireline services are large determinants of growth.
• Deutsche Telekom AG owns a majority stake in T-Mobile US. Deutsche Telekom AG owns roughly 65% of TMUS common stock. The low float could potentially impede the stock from achieving our price target and create difficulties for institutions that may want to build positions.

Company Profile:

Based in Bellevue, Washington, T-Mobile US, Inc. is a wireless communications services operator that provides wireless voice, messaging, and data services in the U.S., Puerto Rico, and the U.S. Virgin Islands. T-Mobile’s network covers 96% of the U.S. population through its EDGE 2G/HSPA 3G/HSPA+, 4G/4GLTE LTE networks. T-Mobile operates its business under three brands, including T-Mobile, MetroPCS, and Go Smart Mobile.

Conclusions:

While T-Mobile has benefited in earnings growth, lower churn, and subscriber growth from its network overhaul, we see limited organic growth opportunities beyond the next two years due to growing network capacity challenges.

Competition: 

Sprint’s earnings report released today (Oct 25, 2016):

Sprint Reports Year-over-Year Growth in Net Operating Revenues for the First Time in over Two Years

David Dixon’s comments on Sprint’s earnings, outlook & possible M&A:

Sprint’s strong fiscal 2Q results highlight that the turn around is on track. We e material improvements ahead, and believe Sprint is close to cash flow inflection by sustaining low capex spending and progressive interest expense reductions. Relative to TMUS, we believe  Sprint is better positioned for long-term sustainable growth due to ample excess spectrum capacity.

* Management achievements have been significant. Leveraging network vision upgrade tailwinds, management has done well to enhance franchise value through effective re pricing, marketing and distribution improvements, while slimming down beyond expectations. As it pivots to a (still poorly understood) new network coverage and capacity model with 5 G attributes, management is demonstrating it can spend less on the network while maintaining performance by garnering greater-than-expected utility from its 2.5 GHz spectrum asset.

* Much more to come in 2017. We think management can maintain low capex spending as it ramps low-cost indoor voice and tri-band LTE data small cells to improve indoor coverage; achieve 3GPP approval for high-power UE in December, which will increase network coverage area by 40%. Vendor checks highlight that prototype testing shows a link budget in line with the 1.9 GHz grid, which suggests less high-cost densification will be required. Checks with power amplifier and filter companies indicate high-power devices will be available in 2017.

*  M&A potential still exists. Vendor checks suggesting TMUS is close to full capacity and in need of expensive densification may increase the chances of regulatory approval for a merger with Sprint. Cable companies are also a potential buyer but we discount this as we think cable is more of a strategic threat to wireless via an organic WiFi box upgrade cycle to include cellular on spectrum bands offered free to customers.

by David Dixon and Mike He of FBR & Co.

Summary:

On October 22, 2016 AT&T (T) entered into an agreement to acquire Time Warner (TWX) for cash and stock valued at $107.50/share. AT&T trades at 6.5x EBITDA and despite expecting $1B in cost and revenue synergies over three years is paying an unprecedented high 13.5x EBITDA multiple to enter the programmed content business.

However, we believe this is a necessary defensive decision driven by:

(1) greater regulatory pricing pressure that restricts management’s ability to raise wholesale interconnection and business data service prices in the wireline segment,

(2) a constrained capex budget that limits AT&T’s ability to roll fiber fast enough to address a competitively disadvantaged broadband product relative to cable,

(3) a strategic 5G wireless threat from cable, and

(4) higher programming costs.

Management hopes this expensive acquisition can help defend its wireline and wireless franchise value to a greater extent than it can organically. While we see significant regulatory scrutiny, it is hard to see how this deal could be blocked following approval (with remedies) of the Comcast/NBC deal.

Bottom line, we view this as modestly negative for AT&T because absent this deal management faces an even greater strategic threat to its core business.

Key Points:

■ A hedge against streaming risks as the market moves away from programmed media. Over time, streaming bills may match cable bills as customers sign up for multiple streaming subscriptions. We think AT&T is likely planning to morph HBO into a streaming competitor to Netflix, combining DC Comics/Warner Bros/Cartoon Network/HBO’s content. We see a network and strategic advantage owning in content deployed closer to edge at low cost versus interconnection with third-party content. Benefits include ad insertion, more effective content distribution to the network edge, and the ability to package content that does not count against data caps.

■ High (but achievable) regulatory hurdle. We expect the deal to face significant regulatory scrutiny from the DOJ, though a lack of jurisdiction means the deal may not be reviewed by the FCC. CMCSA’s 2009 acquisition of NBC Universal will likely serve as the relevant precedent through which regulatory officials will assess the proposed merger amid a new era of media consolidation. While we see significant regulatory scrutiny, it is hard to see how this deal could be blocked by the DOJ following approval (with appropriate remedies to ensure nondiscriminatory content access) of the Comcast/NBC deal.

■ Acquisition details: TWX shareholders will receive $107.50/share under the terms of the merger, comprised of $53.75/share in cash and $53.75/share in T stock. The stock portion will be subject to a collar such that TWX shareholders will receive 1.437 T shares if T’s average stock price is below $37.411 at closing and 1.3 T shares if T’s average stock price is above $41.349 at closing. This purchase price implies a total equity value of $85.4B and a total transaction value of $108.7B, including TWX’s net debt.

■ Debt leverage a short-term concern. AT&T plans to issue $40B in new debt to fund the cash portion of the deal, which would increase its total debt to $175B. However, management plans to reduce debt to EBITDA to 2.5x one year after closing, which is slightly higher than current levels. While rates remain close to zero, interest rate risk is high, and AT&T will need to refinance $9B per year.

■ Sector implications of a successful transaction. We see this as a modest negative for AT&T, but absent this deal, we think management would face an even greater strategic threat to its core business. We view this deal as neutral for Verizon, Sprint, T-Mobile, and cable companies, as equal economic rights to content will likely be mandated by regulators as one of the key remedies. We see a potential negative outcome for LVLT and CCOI as Time Warner content migrates from third parties to AT&T. Lastly, aside from our negative (spectrum supply shock based) investment thesis for DISH, we view a successful outcome as negative for DISH, as an AT&T/DISH deal would be less likely.

■ Conference call:  AT&T hosted a conference call on October 24 at 8:30 a.m. ET to provide further details on the merger announcement and 3Q16 results.

Editor’s Note:

WSJ reported on Monday Oct 24th print edition:

Buying Time Warner Inc. will make AT&T Inc. among the most heavily indebted companies on earth.

• AT&T’s acquisition of TWX overshadowed soft 3Q16 results including weakness in wireless subscriber growth.
• Postpaid net adds were 21,000, and prepaid net adds were 304,000, compared to 23,000 and 466,000 in the year-ago period, respectively.
• Overall video connections declined a modest 0.5% year over year, but U-verse connections declined a whopping 22.9% year over year, which was partially offset by 6.2% year-over-year increase in DIRECTV. Weak 3Q video subscriber results underscore the competitive headwinds AT&T is facing in all facets of business in the U.S. market.
• While AT&T is at the forefront of IoT (Internet of Things) and should be the first to reap benefits, some of the potential upside could be offset as its core subscriber base continues to weaken. While management touts TWX as a content and distribution play, we believe it is largely a defensive decision driven by: (1) greater regulatory pricing pressure on wholesale interconnection and business data service prices in the wireline segment, (2) a constrained capex budget that limits AT&T’s ability to roll fiber fast enough to address a competitively disadvantaged broadband product relative to cable, (3) a strategic 5G wireless threat from cable, and (4) higher programming costs.
• Management banking on vertical integration as key to deal approval: While the deal will certainly face significant regulatory scrutiny, we believe regulatory approval is achievable given the precedence set by CMCSA’s acquisition of NBC Universal. Management appears confident given the distinction of vertical integration of premium content versus horizontal integration of the failed TMUS acquisition in 2011.
• Possibly other suitors for TWX: We believe AT&T’s rushed attempt to announce the TWX acquisition, only two weeks ahead of the presidential election, suggests there might be additional suitors for TWX. We think management agreed to a premium multiple to mitigate interest from other, less-capitalized bidders.

References:

AT&T Faces Political Barrage Over Time Warner Deal

Don’t Bring Time Warner Cable Into This AT&T Deal!

AT&T and Time Warner Seek to Mollify Deal’s Critics

Making Sense of AT&T’s Bid for Time Warner

by David Dixon and Mike He of FBR & Co.

Summary:

Weaker macroeconomic conditions and an increasingly competitive market chipped away at VZ’s results this quarter. The shift to a lower-priced, unsubsidized device model should continue to weigh on wireless revenues, exacerbated by declining net add growth due to heightened competition. Management vows to protect its highquality subscriber base, but competitive network quality is converging.

VZ still leads the market but may need to use the pricing lever to a greater extent to maintain market share, as all other national competitors are offering unlimited data plans at attractive price points. Strategically, VZ will seek to differentiate through accelerated 5G deployment, relying on 3.5 GHz unlicensed spectrum as its indoor play and spectrum refarming, which should yield cost savings and expedite launch due to a growing ecosystem around 3.5 GHz.

We think AT&T is leading in IoT, but this is a growth segment with network standards finally set.

Editors Note:  We don’t believe IoT network standards are set, particularly for LPWA networks:

A weak macro environment in all verticals is driving lower capex; we see a capacity spectrum supply shock driving less dependency for licensed spectrum for 5G. M&A and weaker expected growth due to capacity challenges at T Mobile are potential 2017 catalysts.

Key Points:

■ Consistent with our previous publications on network topology shifts toward distributed datacenters in the metro network, management affirmed it is in advanced talks to sell its less strategic, centralized data center assets, which could be announced in early 4Q.

■ 5G heavy lifting using unlicensed spectrum. With VZ (and AT&T) barred from the 30 MHz of spectrum set aside in the broadcast incentive auction due to its large cache of existing low band spectrum, we believe the prospect of paying a premium valuation for 600 MHz spectrum may not be as appealing at a time of heightened industry competition and low industry demand. The 3.5 GHz ecosystem is moving ahead faster than expected and could be leveraged by VZ to do more of the heavy lifting for 5G, which would also suggest less dependence on new licensed spectrum.

■ Lower capex across the industry. Our industry checks indicate a weak capex environment across the industry, which drove VZ’s lower-than-expected 3Q capex spending of $4.1B, versus Street expectations of $4.8B. We believe this is driven by a combination of network architecture shifts and macro economic conditions across all sectors.

Q & A:

Aside from being well positioned on spectrum for the macro network and densification, how should investors assess the small cell opportunity as an alternative to more macro network spectrum going forward?

A change in the industry network engineering business model is under way. Software-centric small cells on dedicated spectrum provide the opportunity for greater spectrum reuse and will manage more of the heavy lifting associated with data congestion.

Verizon demonstrated this shift during the AWS3 auction: It modeled a lower-cost small cell network for Chicago and New York. We expect CEO Lowell McAdam to manage this shift from the top down to mitigate execution risk due to cultural resistance from legacy outdoor RF design engineers, whose roles are at risk as the macro network is de-emphasized. Enablers include LTE and increased spectrum supply across multiple spectrum bands, including licensed, unlicensed (500 MHz of 5 GHz spectrum), and shared frequencies (150 MHz of 3.5 GHz spectrum), amid a fundamental FCC spectrum policy shift from exclusive spectrum rights to usage-based spectrum rights, which should dramatically increase LTE spectrum utilization (similarly to WiFi).

Previously, outdoor small cells co-channeled with the macro network proved challenging. While they can carry substantial loads, they also destroy equivalent capacity on the macro network due to miscoordination and interference, so the macro network carried less traffic but still looked fully loaded. AT&T discovered this in its St. Louis trials that, in part, steered it toward buying $20B of AWS3 spectrum. However, the industry trend is toward LTE underlay networks, where small cells are put into other shared or unlicensed spectrum with supervision from (and/or) carrier aggregation with the macro network. It still requires good coordination across all cells for this to work; while Verizon s initial proposals for 5 GHz are downlink only, we think uplink will also be used longer term because uplink needs more spectrum resources for a given throughput. We see higher uplink usage trends in the Asian enterprise segment and from Internet of Things (e.g. security cameras).

Does Verizon have sufficient spectrum depth to drive revenue growth longer term? Or does it need to aggressively acquire spectrum in future spectrum auctions or in the secondary market (DISH)?

The short answer is yes. Verizon carries 90% of data traffic on 40% of its spectrum portfolio; its combined nationwide CDMA and LTE spectrum depth is 115 MHz, ranging from 88 MHz (Denver) to 127 MHz (NYC). We expect AWS3 capacity spectrum to be deployed in 2017/18. Investors may not be crediting Verizon with potential to source more LTE spectrum from refarming of CDMA to LTE (22 MHz to 25 MHz) used today for CDMA data (22 MHz to 25 MHz). Critically, network performance data show Verizon s network close to the required performance threshold for a VoLTE-only service, suggesting additional refarming potential for the 850 MHz band (25 MHz) used today for CDMA voice and text. This band is likely to be transitioned in 5 MHz x 5 MHz LTE slivers to run parallel with the expected linear (voluntary) ramp, versus exponential (forced) ramp in VoLTE service. More low-band spectrum is key for surging IoT and M2M segments, which are proving to be more thirsty than bursty.

Conclusions:

Verizon is a high-quality defensive name and significant long-term wireless growth opportunities as mobile video and over-the-top Internet app business models evolve.

Editor’s Note:  

We’re surprised that Mr Dixon didn’t discuss VZ’s acquisition of content companies like aol, Huffington Post and most recently Yahoo’s Internet portal.  Will the Yahoo hack or their cooperation with the feds on reading incoming emails effect Verizon’s price for Yahoo or even cause the deal to be cancelled?

by Amy Larsen DeCarlo, Current Analysis

Overview:

AT&T and Amazon Web Services (AWS) signed a multi-year, strategic alliance agreement focused on the delivery of integrated solutions built on the companies’ respective cloud and networking capabilities. The collaboration is designed to help both existing and new customers more efficiently migrate to and utilize the AWS Cloud with the AT&T network. The solutions are intended to span cloud networking, mobility, Internet of Things (IoT), security, and analytics.

Press Release: 

http://about.att.com/story/att_announces_new_strategic_relationship_with_amazon_web_services.html

By Richard Webb, research director, mobile backhaul and small cells, IHS Markit

Bottom Line:

• Worldwide Ethernet access device (EAD) revenue reached $516 million in the first half of 2016 (H1 2016), 4 percent higher than the second half of 2015 (H2 2015)
• Spending in the Ethernet over time-division multiplexing (EoTDM) segment declined in H1 2016, but both fiber and Ethernet in the first mile (EFM) increased
• In H1 2016, ADVA was the market leader for EAD revenue, based on the combined market shares of ADVA and Overture, which it acquired early in 2016

IHS Analysis:

Globally, EAD revenue reached $516 million in H1 2016, owing to the continued adoption of Ethernet connections in mobile backhaul, broadband, business and carrier wholesale applications. Segment-wise, EoTDM declined by 3 percent, but fiber grew 4 percent and EFM increased 4 percent.

Although fiber is the future of the EAD market, copper continues to play an important but limited role for Ethernet services. But the use of copper is declining in lower-speed segments; for example, 100M copper EAD ports dipped 12 percent in H1 2016 from H2 2015.

In H1 2016, ADVA became the new EAD revenue market share leader, boosted by its acquisition of Overture. Previous market leader Ciena was number-two, followed by RAD, Actelis and MRV.

North America remains the largest market for EADs, garnering 58 percent of EAD revenue in H1 2016, trailed by EMEA, Asia Pacific and CALA.

The EAD market is projected to grow through 2020, when it will hit $1.35 billion—achieving a 2015 to 2020 compound annual growth rate (CAGR) of
7 percent, largely driven by business, broadband and building applications, the largest market segment by that point, overtaking mobile backhaul.

EAD Report Synopsis:

The biannual IHS Markit Ethernet Access Devices (EADs) report tracks fiber and copper (EFM bonded and EoTDM bonded) EADs by port speed, form factor and application. The report provides worldwide and regional market size, vendor market share, forecasts through 2020, analysis and trends.

For information about purchasing this report, contact the sales department at IHS Markit in the Americas at (844) 301-7334 or[email protected]; in Europe, Middle East and Africa (EMEA) at +44 1344 328 300 or [email protected]; or Asia-Pacific (APAC) at +604 291 3600 or [email protected]

Related presentation at 2016 ECOC on 100G DWDM markets (including edge/access):

http://www.ecocexhibition.com/sites/default/files/files/A_Schmitt_Cignal_ECOC2016%20Market%20Focus%20Disti.pdf