IEEE ComSoc Technology Blog

IHS-Infonetics released excerpts from its NFV Orchestration Software Vendor Leadership Analysis, which profiles and analyzes 10 leading network functions virtualization (NFV) orchestration software vendors: Brocade, Ciena Blue Planet, Cisco, Dell, Ericsson, Hewlett Packard Enterprise, Huawei, Juniper, NEC/Netcracker and Nokia. 

The report examines vendors’ approaches to and overall activities in the NFV orchestration software market to understand how suppliers are approaching this emerging opportunity and gauge the most likely market winners as the market matures. 

“Each of the vendors profiled in our network functions virtualization (NFV) leadership report brings a unique vision to the market, are providing innovation and thought leadership to support their vision, and will play an important role in shaping NFV orchestration with their products, partnerships and contributions to open source initiatives,” said Michael Howard, senior research director and advisor for carrier networks at IHS. 

“The big revenue opportunities in NFV are with big service providers who want a prime vendor or two that can put together all the multi-vendor software, hardware, partners and services to develop and deploy virtualization to help them meet their fairly urgent needs for automation, agility and services differentiation,” Howard said. 

NFV ORCHESTRATION VENDOR HIGHLIGHTS (in alphabetical order):

• Brocade has become a strong contender in the NFV market via acquisitions and has created a portfolio including OpenDaylight software distribution, virtual routers (vRouters) and other virtual network functions (VNFs)
• Thanks to multi-vendor/domain functionality, a standards-based NFV platform and professional services, Blue Planet, a division of Ciena, is gaining visibility with large service providers who’ve traditionally only worked with incumbent suppliers
• Possessing many attributes the new world of NFV requires — including existing customer relationships, data center IT experience, NFV orchestration and enough employees to address many NFV opportunities — is telecom giantCisco
• Dell brings its NFV hardware and software portfolio in combination with a number of partnerships with well-known NFV software suppliers to showcase an open, standards-based NFV platform
• Ericsson is collaborating with other industry players to bring NFV to an industrial scale, providing a full suite of virtualized network applications, network and cloud managers, analytics, consulting and system integration services
• Hewlett Packard Enterprise was one of the earliest large vendors to invest in a major strategic effort to become a significant NFV player and has all the ingredients to be a prime supplier for NFV projects
• A serious contender in the service provider NFV and software-defined networking (SDN) markets, Huawei continues to invest for success and has all the major components to serve as a main vendor for large operators
• Juniper’s use of standard protocols allows it to create third-party partnerships and increase the variety of NFV use cases, boding well as large service providers develop vendor-agnostic networks to avoid vendor lock-in
• With deep operations and business support systems (OSS/BSS),NEC/Netcracker’s NFV software has the operational functionality needed for hybrid networks containing physical and virtual networks
• Nokia is one of the main players for NFV management and orchestration (MANO) and is well suited to be a prime vendor for not just NFV MANO endeavors, but the full range of NFV and SDN projects

For more information about the report, contact the sales department at IHS in the Americas at +1 844 301 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].

Please note that the content manager for this blog website (yours truly) has a different opinion of the NFV market. We’ve outlined in previous posts, that the main issues are: no standard Management & Orchestration functional block, lack of APIs and no implementable standards or backward compatibilty with the installed base of real/physical network appliances.  

We’ve also stated that Open NFV could potentially address those shortcomings, but we’ve not followed that open source consortium’s progress.  Failing to address those NFV shortcomings will result in a fractured market where different vendors sell various “virtual appliances” with APIs to their own Management & Orchestration entity or one created by a partner NFV company.

In an email reply on Feb 18, 2015, Michael Howard of IHS wrote:

Written by David Dixon of FBR Inc; edited by Alan J Weissberger, IEEE ComSoc Content Manager.  

NOTE: Akami March 8th update in II. below.

I. Summary for PDVW:

Pacific Data Vision Wireless (PDVW)’s pending 900 MHz rebanding application is progressing in line with company expectations. Management has requested a meeting with the FCC next week to seek an updated understanding of the current status of the application and to provide details of additional industry support. We believe the timing is fortuitous: We think it coincides with work completed on the application by the FCC. We view the upcoming meeting as a positive step towards a Notice of Proposed Rulemaking (NPRM).

We are not privy to the details of current discussions with industry incumbents, due to non-disclosure agreements in place, but we believe significant progress has been made over the past six months. While a consensus industry position is positive, with so many incumbent users, we do not think the FCC sees this as necessary to move forward with an NPRM. In cases such as PDVW’s, where many parties are involved and consensus is difficult to achieve, we believe the FCC is more likely to weigh the petition’s benefits and make a determination. We have greater confidence in a positive outcome in the short term.

Key Points:

■ Upcoming FCC meeting. PDVW’s management will be meeting with the FCC next week. We believe this is an opportunity for management to showcase positive progress being made with incumbents, as well as to seek an updated view of the FCC’s current thinking, which, we believe, will be positive.

■ New spectrum acquisition. PDVW has acquired additional spectrum (~100 channels) for an average of $0.17/MHz/PoP. The licenses are in markets where PDVW’s channels are fewer than the average of other markets. While the price was higher than the $0.06/MHz/PoP paid to Sprint, these licenses are in 10 of the top markets, which warrant a higher price and are below market value, in our view. Management has been moving cautiously with regards to how much it is willing to pay for spectrum.

■ Slower PTT buildout. Management paused more market launches due to a slower ramp-up in its initial eight markets, similarly to what Nextel experienced early on.

(1.)  Certain site developments are taking longer (zoning, rent negotiations, etc.), but the Chicago/ NYC/ Philadelphia /DC/ Baltimore markets should be fully operational by the end of April.

(2.)  Despite positive customer feedback, third-party dealer sales have lagged; some dealers prefer to wait until the network build is completed and tested. In response, management has encouraged the hiring of dedicated sales reps. While it will take time to work out distribution issues, regulatory developments are the driver of PDVW shares, in our view.

Can Pacific DataVision fast track the FCC approval process to further enhance spectrum value?

Answer: If FCC approval to convert Pacific DataVision Wireless’ narrowband spectrum to 3 MHz x 3 MHz LTE occurs faster than expected (before June 2016), it could be a big positive for the company. Furthermore, if Pacific DataVision is successful in acquiring 80% 90% of the existing spectrum band from incumbent operators, it should provide additional flexibility, which should be accretive to valuation.

We do not believe Pacific DataVision is at risk of changes in the spectrum supply curve for capacity spectrum (>2 GHz), given that its spectrum is in the low band and this remains a scarce asset. We believe extra spectrum capacity can be leased in location-specific pockets in each region to serve corporate demand for private LTE networks. Moreover, if Pacific DataVision raises capital to acquire additional spectrum, this could provide increased synergies, revenue upside, and time-to-market advantages for the existing business and should be accretive to our valuation and price target. Management s past success at Nextel, industry knowledge, reputation, and experience with 800 MHz SMR spectrum rebanding are key.

In contrast to capacity layer spectrum (>2 GHz), we forecast increasing value of coverage layer spectrum (<1 GHz) due to:

(1) the strategic nature of this spectrum as the lowest-cost source of spectrum for wide coverage areas,

(2) the relative scarcity of this spectrum asset, and

(3) attractive comparables.

The recent H block auction won by DISH valued higher-frequency spectrum at $0.61/MHz PoP for 5 MHz x 5 MHz of 1.9 GHz spectrum in the top 20 markets. AT&T Inc. spectrum acquisition from QUALCOMM Incorporated valued low-frequency spectrum at $0.91/MHz PoP.

II. Akamai Techologies Inc.  Solid 4Q15 Results; Weak 1Q Outlook: Secular Challenges Are Growing:

NOTE: Akami March 8th update below the Feb 10th earnings report analysis.

On Feb 10, 2016, Akamai Technologies Inc. (AKAM) announced solid 4Q15 earning/revenue results and a new $1B share repurchase program. Revenue for 4Q was modestly above Wall Street estimates, driven by double-digit growth in the performance and security and the service and support solutions segments. The media delivery solutions revenue decline of 1.8% YOY was better than feared. Weak 1Q16 guidance is driven by aggressive pricing and revenue declines from its top two customers (13% of revenue, heading to 6% by mid 2016) as they migrate to “do it yourself” (DIY) platforms.

We see greater DIY (and repricing) risks in the CDN business as foundational data center and fiber assets are established for more players today than in 2011, providing low incremental cost opportunity. An intense sales focus has the performance and security solutions business ramping nicely, but we see secular challenges with the enterprise segment bifurcating. Specifically, we see more migration to cloud platforms, which is likely to confine AKAM to a reduced (partnership based) role for companies’ CDN, Web security, and enterprise security needs. A major enterprise security acquisition is necessary to mitigate the risk of a value trap, but this appears unlikely with management favoring the benefits of superior cash flow.

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.

Can newer products contribute enough to offset maturing core markets and drive sustained midteens, 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.

Will Akamai s business model be pressured over time by the irreversible mix shift of Internet traffic toward two-way 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., Amazon Web Services aka 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.

AKAM Conclusions:

We believe Akamai Technologies is in transition as its core media delivery business matures. The company has stepped up its diversification efforts, including (1) broadening the product set, (2) ramping sales hiring, and (3) expanding internationally. The long-term impact of these efforts could be a positive, but we see increased pressure on Akamai’s CDN-based business model over time, driven by the irreversible mix shift of Internet traffic toward “two-way” content increasingly distributed on cloud-based architectures that provide compute and storage. We view the risk/reward at current levels to be negative, as near-term positive momentum is more than offset by fundamental challenges in the CDN segment.

March 8, 2016 Update after David Dixon’s attended Akamai’s Annual Investor Conference:

“We saw nothing to allay our concerns regarding greater do it yourself (and repricing) risks in the CDN business as foundational datacenter and fiber assets are established for more players today than in 2011, providing low incremental cost opportunities to deploy distributed compute platforms via technology partnerships with key vendors.

An intense sales focus has the performance and security solutions business ramping nicely, but we see secular challenges with the enterprise segment bifurcating.  Specifically, we see more migration to cloud platforms, which is  likely to confine AKAM to a reduced (partnership based) role for these companies’ CDN, Web security, and enterprise security needs.

A major enterprise security acquisition is necessary to mitigate the risk of a value trap, but this appears unlikely with management favoring the benefits of superior cash flow.”

References:

https://www.akamai.com/us/en/about/

https://en.wikipedia.org/wiki/Akamai_Technologies

http://www.ir.akamai.com/phoenix.zhtml?c=75943&p=quarterlyearnings

III. CDN Competitor Limelight Networks, Inc. (LLNW):

LLNW’s improvement in profitability highlights management’s focus on improving the company’s cost structure, including head-count reductions (down 47 heads sequentially), efficient infrastructure (fewer servers and racks), and software changes to improve server capacity. While 4Q traffic declined sequentially, the average selling price increased due to increased streaming traffic from higher-paying customers who demand higher quality and reliability of service. Holiday season traffic hit another record during the quarter. Management believes revenues will increase in 2016, driven by traffic increases, but partially offset by the expected continued decline in average selling prices. In the face of further commoditization and low barriers to entry, it becomes imperative for LLNW to find ways to grow the top line, as cost cutting may not be sufficient to sustain profitability, in our view. LLNW’s ability to maintain a positive revenue growth trajectory is still unclear.

Downward pricing pressure and competition will continue to be the primary variables in the commoditized high-volume content delivery market. Pricing continues to be an issue in the industry, although there has been more stability in recent quarters.

Will CDN competition and pricing pressure worsen?

Limelight’s decision not to renew some uneconomic contracts has been a headwind for CDN revenue. Should pricing worsen, there could be even more pressure on the CDN business. In general, we believe competitors will maintain price discipline due to rising peering costs and that predatory pricing for market share gains is abating; this should allow pricing to stabilize again at a better level over the long run. We think solid volumes should be able to offset at least some of the headwinds from pricing pressure. 6 to 12 Months

How long will it take Limelight new management team to return the company to growth?

While the company has established a strategy for its turnaround, we believe this will be a multi-quarter process and that shares could be range bound until signs of improved execution or growth appear. The transition has faced some bumps already, and this could continue. We believe the company goal of stabilizing the CDN business and achieving growth through the VAS business could work, but it will take time before we start to see the impact in fundamental results. Management needs to post consistently positive results to combat concerns that pure CDN players are at risk from the combination of:

(1) increased competition for a commoditized service,

(2) higher customer churn,

(3) technology risk from HTTP 2.0 and SPDY (which significantly improves Web site latency),

(4) higher peering interconnection costs, and (5) CDN functions increasingly being deployed by content and end-user networks.

 Will Limelight be acquired?

While the likelihood of a near-term takeout is lower, in our opinion, due to the recent management changes, we still consider Limelight to be a valuable strategic asset for a number of potential suitors. Specifically, we think a large telecom services company, content provider, or peripheral communications company could potentially make a bid for Limelight. At LLNW current valuation, we think the option of buying versus building has become more attractive for a strategic buyer.

With new management on board and a plan to invest for growth in the out years, the near term, we believe, is setting up to be a transition period for the company.  It remains to be seen what will unfold.

Gigabit broadband services will attract at least 100 million global subscribers by 2020, according to a forecast from analyst firm Point Topic.   

Johnson predicts the Asia-Pacific region will generate almost 70% of that broadband subscriber growth.  He said that G.fast is a vital technology for operators with copper in their networks.

The software-defined networking (SDN) market is growing, with more businesses using or planning to use SDN in the future, according to Research & Markets as well as a Quinstreet Enterprise survey.

SDN and other network virtualization technologies (e.g. NFV) have driven the conversation in the industry for the past several years. However, for all the talk about SDN, the hundreds of analyst reports and thousands of news stories written about it, the tech world is still in the early stages of SDN and network-functions virtualization (NFV).

Analysts with Research and Markets expect the market to grow quickly over the next few years—to $11.5 billion between now and 2020. However, enterprises and carriers will continue running pilot programs and early deployments this year and next, with the technology going mainstream between 2019 and 2020.

Quinstreet Enterprise, two years after conducting its first survey on the market, recently released another survey, “SDN Growth Takes IT Infrastructure by Storm.” What Quinstreet Enterprise—the publisher of eWEEK—found was a market that is moving beyond the hype, with real and expected deployments growing and a broadening array of vendor options. 

VLANs have been around for over 30 years with their presence in 43 percent of infrastructures. It’s not surprising that fewer respondents are looking to them down the road. Like SDN, VLANs are configured through software rather than hardware. With the advent of VLANs, computers on different cables could be networked as if they were on the same cable, and a computer physically moved to another location could stay on the same VLAN without requiring hardware reconfiguration. A VLAN offers nowhere near the flexibility of an SDN architecture, however. In an SDN architecture, the ability to configure, manage, secure and optimize network resources via software affords many benefits to enterprises. Chief among them, according to survey respondents, are cost savings, improved network performance, increased productivity and improved security. Figure 2 provides a breakdown of benefits. As beneficial as SDN is, it is not without its challenges. And in some cases they are one and the same as benefits. Cost savings and security are cited as top benefits, but they are also perceived as being among the top challenges.

IHS-Infonetics recently released excerpts from its Data Center and Enterprise SDN Vendor Leadership Analysis report, which profiles and analyzes 10 leading data center and enterprise software-defined networking (SDN) vendors: Broadcom, Brocade, Cisco, Cumulus Networks, Hewlett Packard Enterprise (HPE), Huawei, Juniper, NEC, Nuage Networks from Nokia and VMware.

The report looks at vendors from a number of segments, including Ethernet switch, Ethernet switch silicon, Ethernet switch operating system (OS) and SDN control, examining their approaches to and overall activities in the market to understand how they are approaching this emerging opportunity and gauge the most likely winners as the market matures. 

“The leaders in the data center and enterprise SDN market are emerging for physical network equipment and SDN network virtualization overlay (NVO), but there’s still opportunity. The second and third tiers of the market have yet to be solidified, and perhaps the most innovation-driven part of this market — SDN controllers, orchestration, and applications — is still wide open,” saidCliff Grossner, Ph.D., research director for data center, cloud and SDN at IHS.   

“Many service providers and enterprises will carry out production trials and live deployments in 2016, which IHS expects will solidify the market,” Grossner said. 

DATA CENTER AND ENTERPRISE SDN LEADERSHIP HIGHLIGHTS:

·    Broadcom is a merchant silicon market pioneer providing SDN-aware switching chips and developer tools

·    Brocade is a  data center fabric innovator offering open source SDN controller distribution

·    Cisco, the #1 data center network vendor, is leveraging its experience with silicon to drive innovation in the SDN market with custom chips that gather application traffic flow data

·    First to market with a Linux OS for Ethernet switches, Cumulus Networks is driving transformation in the networking market by disaggregating Ethernet switch hardware from software

·    SDN pioneer Hewlett Packard Enterprise seeded the market with over 30 million OpenFlow-capable switch ports and branded bare metal switches, and was first to launch an SDN app store

·    Huawei provides a comprehensive SDN portfolio that allows the use of 3^rd-party components and is bringing advances to the SDN market via software and silicon programmability

·    A pacesetter in silicon and software, Juniper Networks was one of the first vendors to open source its SDN controller and disaggregate its switch OS and hardware

·    SDN market pioneer NEC has proven large-scale deployments and an open solution that allows choice for customers rather than lock-in

·    Nuage from Nokia is an early SDN market entrant providing a Border Gateway Protocol (BGP)–based SDN network virtualization overlay and SD-WAN solution

·    VMware, the server virtualization and SDN controller forerunner, is innovating by applying software abstraction techniques to network control

For more information about the report, contact the sales department at IHS in the Americas at +1 844 301 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].

As part of an ongoing study into integrated HetNets, a Small Cell Forum/ Wireless Broadband Alliance Task Force has produced the first comprehensive technical documentation, assessment and specification of the architecture and interfaces for integrated small cell and ‘trusted’ Wi-Fi (ISW) networks. The conclusions are captured in a new white paper that considers the architectural options, interfaces and deployment aspects of the TWAN (Trusted Wireless WAN). It also includes a comprehensive industry survey of major operators and vendors addressing the business and technical implications of integration.

This is the first study of its kind to bring clarity to the architecture of the TWAN that connects the access points, controller and gateways of the integrated ISW network, an area that has not been addressed by any standards organizations.

The paper is available FREE here 

Small Cell Forum new & revised documents are here

Last year, the key theme of the WBA annual report was the start of the transition from best effort to carrier-grade Wi-Fi networks. This year, that transition is very visibly under way and the ecosystem is starting to plan for the next five years. In the near term, wider-scale, carrier-grade deployments are enabling new business models such as smart cities and enterprise services. Looking ahead to 2020, the next wave of change is being considered, including the role Wi‑Fi and the WBA will play in shaping 5G.The WBA has developed Vision 2020 to harness its experience of creating seamlessly interconnected wireless services in new and emerging areas.

Global Carrier Wi-Fi Equipment Industry report analyzes the industry and key vendors.  This expensive report is available for purchase here.

AT&T reported largely mixed 4Q results that included one full quarter of Direct TV results. While subscriber metrics were generally in line to modestly better, financial metrics missed the mark.

Given intensifying competition, we think the company has shifted focus on improving profitability over subscriber growth. We believe AT&T has been relegated   to this path given T-Mobile”s continuing net add momentum. Furthermore,   with iPhone 6S supporting Band 12, T-Mobile should see improved coverage using its 700 MHz A Block spectrum.

We also expect AT&T to be affected by the eSIM in the iPhone 7, which will increase churn risk for the wireless carrier  industry. Recent increases to monthly data allowance and free music streaming at T Mobile suggests the company may not be as capacity  constrained as the Street believes; however, our re-seller checks are highlighting significant network coverage-based challenges within the T-Mobile subscriber base.

While T-Mobile is still a net spectrum acquirer, we believe leveraging WiFi-first calling may have been more successful   than the company had expected, resulting in more generous data allowances.

On the wireline front, competition from Google Fiber and cable companies high speed internet services have forced AT&T to continue to build out GigaPower, a negative NPV, but strategically important, asset.

 Key Points:

    * 4Q15 results recap: Including the full month of DTV results (the Direct TV acquisition closed on 7/24/15), consolidated revenues increase 22.3% YOY to $42.1B, below consensus of $42.7B.  

Business Solutions revenue of $18.2B, Entertainment and Internet Services revenue of $13.0B, Consumer Mobility revenue of $8.7B, and International revenue of $1.8B. Adjusted EBITDA of $12.2B were also short of Street expectations of $12.9B. EBITDA margins improved by 160 bps YOY to 29.1%, driven by increased cost efficiencies in Business Solutions and contributions from Direct TV within the Entertainment group. Mobility postpaid net adds of       526,000 and prepaid net adds of 469,000, compared to consensus of 485,000 and 354,000, respectively. Postpaid churn was 1.18%.

    * Potential for spectrum acquisitions and asset sales. While AT&T has not committed an exact amount for the 600 MHz incentive auction, management has been clear that it would like to acquire two 10 MHz blocks.

We believe there is growing urgency to shed less profitable businesses, such as consumer wireline, to fund spectrum       purchases.

    * FY16 guidance maintained. Management maintained prior issued guidance of double-digit consolidated revenue growth, adjusted EPS growth of mid single digits, or better, stable consolidated margins, and $22B in capex.

FBR Comments:

Declining iPhone churn confirmed that the loss of exclusivity and resurgence of T-Mobile were manageable.

Extended upgrade eligibility, upgrade fees, and accelerated upgrade opportunities through AT&T Next have material margin implications, and we expect continued discipline on upgrade eligibility, even in the event of flow share to Verizon and T-Mobile.

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 becomes spectrum challenged, which we think is still one year away and a function of T-Mobile commitment to continue network investment. Timeframe: 6 to 18 Months

How will AT&T fare in the changing wireless landscape in 2016 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 Wi-Fi first network from Comcast, coupled with a wholesale agreement with a carrier, which would enable a competitor and increase pricing pressure. Timeframe: 6 to 18 Months

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 non-standard 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 differentiation through Clearwire spectrum in FY16 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 AT&Ts wireless segment to continue to be challenged by a resurgent T-Mobile US. 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.

Risks:

Outperformance at AT&T, Inc. depends on a sustainable economic recovery. Revenue pressures could accelerate in the event of a further economic slowdown, and cost cutting could be inhibited by increased competitive intensity.

Incremental capital spending remains high within the telecommunications segment, driven by technological and competitive challenges. As a result, the inability to control costs effectively could result in downward pressure on free cash flow and affect the sustainability of the company’s current dividend policy.

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.

Regulatory uncertainty also continues to play a significant role in the valuation outlook for both the wireline and wireless sectors; therefore, the regulatory landscape must be watched carefully.

Sprint’s turnaround story continues with another quarter of positive postpaid net add growth and historically low churn. We believe recent pricing action, coupled with evidence of broader network improvements, bodes well. Positive subscriber momentum confirms that Sprint’s turnaround is beginning to gain traction.  

We are encouraged that roughly the majority of Sprint’s customer base is using tri band devices. Sprint achieved positive net adds with its aggressive 50%-off offer despite recent price increases (unlimited data plan increased to $70/month from $60/ month). This offer appears to be accretive, as many customers are buying additional data for a similar price they paid to Verizon and AT&T.

Lack of Free Cash Flow continues to drive the network strategy, which is getting underway at a lower cost trajectory than expected by the market; Sprint provided more details around the new device lease facility in partnership with SoftBank.

Looking ahead, we see an improved liquidity position as Sprint extends its leasing focus to the financing of cell site installation and equipment on more favorable terms than Sprint’s current, unsecured, high-yield bond rate, which should further improve Sprint’s cost structure.

Key Points:

■ Management raised FY15 and FY16 adjusted EBITDA guidance. As a result of cost savings and revenue growth, the adjusted EBITDA trajectory is improving faster than expected. Management raised fiscal-2015 adjusted EBITDA guidance to $7.7B–$8B. Its preliminary estimate for fiscal-2016 adjusted EBITDA is in the range of $9.5B–$10B, substantially higher than consensus estimates. We are confident management can drive out further network head-count costs as it leans on Google to assist with network planning and backhauls traffic inside 2.5 GHz, instead of through leased fiber backhaul.

■ Network update. Performance is benefiting from optimized NV markets. Planning for the small cell pivot is underway, but equipment orders remain light. The initial focus is outdoor urban, where there is no WiFi option, so customer churn risk is highest and roaming expense can be minimized. The major risk is that Mobilitie, the network financing installation partner, promises Sprint the world at one-third of the cost, gets early wins on easy site locations, but does not get the key sites where Google tells Sprint it needs them. Mobilitie may have to fail before vendors help. This will become clearer by the end of 1Q16.

Sprint Network Performance Improving Due to Network Vision Optimization

Independent network checks and Sprint reseller checks confirm improving network coverage relative to T Mobile US and Sprint is closing the gap with AT&T and Verizon. However relative performance metrics are already declining in Chicago because the company spent too long messing around with the wrong network strategy. Management now appears to be on the right path and should be able to add capacity quickly and cheaply as long as they continue to hold Mobilitie’s feet to the fire. Mobilitie should have good early successes but the key will be its success in the harder to locate but most important dense urban areas in major cities.

LTE is available in all markets and the LTE plus network (i.e. Carrier aggregation 2 x 20MHz of 2.5GHz) is now in 150 markets. Downlink cell edge performance is 10x faster when the company adds 2.5GHz to a 1.9GHz cell site. While there is no change to the uplink performance (due to 2.5GHz having weaker propagation than 1.9GHz) the downlink is served by the wider, high power downlink channel increasing cell edge speed from 500kbps to 5Mbps based on our checks. The company noted peak speeds of 100Mbps are possible and is marketing on this basis. The question is how sustainable can this improved performance be. We believe 2.5GHz is the key to sustainability. Adding capacity is cheap if you have spectrum. The percentage of time customers are on the LTE network at 94% is also very encouraging with respect to VoLTE.

In our view, to achieve network superiority relative to Verizon and AT&T, Sprint will need to establish greater network consistency. This is not possible, in our view, without the consolidation with TMobile, as the company does not have sufficient cash flow to invest in high-cost network coverage in the near to medium term. We believe senior management understands that establishing network superiority in two years will be very difficult (perhaps five years is more realistic) but continues to drive at this lofty goal.

The concern is execution. Engineers are incented to take short cuts on vendor interoperability due to this aggressive target. However 2.5GHz is the jewel in the crown and the company has a terrific head start on the competition which is looking forward to the 3.5GHz band to provide it with a similar low cost spectrum portfolio to address metro capacity challenges. The 2.5GHz band is excellent for indoor coverage, outdoor densification with pico cells, and good as an (initial) wireless backhaul solution.

Clearwire’s established backhaul network is also a viable alternative to fiber backhaul. We believe the company continues to focus on outdoor small cells first, vs. indoor coverage using crowd sourcing data to determine where its pain points are and where the highest roaming expense to VZ occurs. We are encouraged that in region roaming expense continues to fall significantly as many coverage holes have been filled and software solutions have been found to prevent phones from roaming on the high cost Verizon network.

Update on Sprint’s Low-Cost Densification Program:

Outdoor Pico Cells Sprint shares have been volatile following the Re/Code article this month which suggested that Sprint will be decommissioning cell sites as part of the new lower cost network strategy. Management clarified that this is not correct, and we believe that the cost savings reported were against what the company may have spent using established vendors, not what they actually spend. Therefore we believe there is limited revenue risk to the tower segment which extend for the next 5- 7 years, but may lower future revenue streams which we do not believe the market has factored in due to the company’s weak balance sheet and expectations for consolidation over this time frame.

How can Sprint leverage its 2.5 GHz spectrum portfolio to improve network quality?

2.5 GHz spectrum is the basis of Sprint s LTE plus network and makes up the bulk of Sprint’s spectrum portfolio. Sprint controls approximately 120 MHz of 2.5 GHz spectrum in 90% of the top 100 U.S. markets. If Softbank can create low-cost Pico and CPE solutions using 2.5 GHz spectrum to densify its network, Sprint will have the potential to become the lowest-cost and fastest data network among the national carriers that are migrating to a greater dependency on low-cost Wi-Fi spectrum ahead of a migration to low-cost, shared LTE spectrum in the 3.5 GHz band and beyond.

Timeframe: 12 to 24 Months

How can the company shift away from expensive coverage improvement but still improve network quality?

Sprint is shifting away from high-cost macro coverage improvement to less costly surgical capacity improvement. Despite network coverage improvement from Network Vision (NV), substantial coverage gaps still exist, and network congestion is compounding challenges. Network quality remains poor in the eyes of consumers. The good news is that 2.5 GHz deployment will be quick (though now targeted), and in the postpaid segment, management has cleared the decks of 3G devices and is focusing on tri-band devices, which may provide 3G refarming opportunities at 1.9 GHz. LTE is now used by the postpaid segment 94% of the time. Key will be clearing 3G devices in the prepaid and wholesale segments.

Timeframe: 12 to 24 Months

Sprint’s Pricing Promotion:

Aggressive pricing promotion appears to be revenue accretive Sprint offered 50% off the price off most Verizon, AT&T, and T-Mobile rate plans during the biggest switching period of the year. Results exceeded expectations in terms of customer demand and the number of lines per account that were coming in. Sprint has extended the offer for another month. Management calculates the average customer life value of this year’s additions is 33% higher than a year ago. Furthermore, Sprint’s share of industry postpaid phone gross adds increased by 150 basis points year-over-year to the highest level in almost 3 years. Revenue accretion is a function of incoming customers paying similar to what they paid Verizon or AT&T as they are taking more data. Furthermore, Sprint is seeing a lot more multi line customers. As a result average billing per account and per user is increasing. Postpaid average billing per account is up 4% YOY while average billing per user (i.e. service plus handset revenue) is up 3% YOY. Higher installment billings and lease revenues more than offset the lower monthly service charges offered in conjunction with device financing options as well as the fact that average lines per account increased 5% year-over-year. Total service revenues plus installment billings and lease revenues of $7.1B increased 1% year-overyear. In terms of device leasing 65% of postpaid device sales were financed consistent with the prior two quarters and 46% a year ago. Furthermore 55% of postpaid sales selected leasing plans which was up slightly from last quarter.

US telecom network providers can provide voice and broadband service to Cuba without government permission following a Federal Communications Commission announcement that it has removed the island nation from its “Exclusion List.”  The Exclusion List identifies countries and facilities that are not covered by grant of a global facilities-based Section 214 application and require a separate international Section 214 application filed under section 63.18(e)(3) of the Commission’s rules

“Removing Cuba from the Exclusion List benefits the public interest as it will likely alleviate administrative and cost burdens on both” telecom companies and the FCC and fuel more competition among telecom carriers interested in the market, the agency said.  

The FCC order states (see references below):  “We adopt our proposal to remove Cuba from the Commission’s Exclusion List. We agree with the commenters that removing Cuba from the Exclusion List will make it easier for U.S. facilitiesbased carriers to initiate service to Cuba, promote open communications, and help foster bilateral communications between the United States and Cuba.”

The move has been anticipated following the Obama administration’s decision in late 2014 to reopen diplomatic relations with the island nation. At the time of the dramatic announcement, the U.S. government said telecommunications companies will be among the first industries to to set up equipment and other infrastructure projects needed to begin their services.

IDT Telecom, Netflix, Sprint and Verizon began offering services early last year. Cuba’s state-owned and operated telecom ETECSA struck an agreement with IDT to provide direct international long-distance voice calls between the two countries. Verizon and Sprint began offering international mobile services in the country, while Netflix launched its streaming video services in Cuba.

In September, 2015, the U.S  Commerce and Treasury departments followed through by removing a series of restrictions on Americans traveling to and doing business with Cuba. The changes, ranging from investment to banking to joint ventures, enabled American businesses to establish a “physical presence” in Cuba and hire Cubans to work in their offices.

The U.S. economic embargo on Cuba remains in effect since only an act of Congress can lift it and then only if numerous conditions are satisfied.

Reference:

FCC Order Removing Cuba from the Exclusion List

http://transition.fcc.gov/Daily_Releases/Daily_Business/2016/db0115/DA-16-55A1.pdf

http://www.fiercetelecom.com/story/cuba-removed-fcc-exclusion-list-opening-door-more-us-based-csps/2016-01-19

The changeover from the legacy PSTN to All-IP networks may be at the heart of Deutsche Telekom’s (DT’s) decision to own 12% of the entity formed by BT’s merger with mobile operator EE rather than accept additional cash. A DT executive said the transition would help pave the way for the introduction of new IP-based technologies. 

It might not be immediately obvious why DT would prefer 12% of BT to additional cash. Outside the UK, there is little overlap between the two operators’ footprints. While BT is expanding into the TV, mobile and ultra-fast broadband markets in the UK, DT is heavily focused on building a “pan-European” network in central and eastern Europe.

According to Axel Clauberg, Deutsche Telekom’s vice president of aggregation, transport, IP and fixed access, all-IP investments are also laying the foundations for the rollout of New IP technologies like SDN and NFV. 

All-IP and New IP could provide a financial rationale for cross-border takeover activity, according to financial analysts. The scenario is that an operator buys a network in a neighboring country, dispenses with that player’s service platforms (along with some facilities and employees needed to support them) and bolsters its sales and margins accordingly. This could justify a takeover of BT. (See All-IP DT Could Drive Euro M&A, Say Analysts.)

Besides their all-IP ambitions, though, BT and Deutsche Telekom share an interest in expanding their enterprise-sector businesses through the rollout of cloud services, as do many large telcos (e.g. Verizon and AT&T in the U.S.). It remains to be seen if that effort will be at all sucessful.

For more info:

http://www.lightreading.com/services/cloud-services/bt-dt-tie-up-holds-all-ip-cloud-promise/a/d-id/720345