TC2's David Rohde on Telecom
By David Rohde Posted October 31, 2014
Sprint’s third quarter earnings report is coming up next Monday, and frankly I’m a little scared for them.
Really the issue here is how much mid-market consumer momentum T-Mobile continues to drive and what could possibly be left over for its rejected suitor back in Overland Park. (Okay, T-Mobile didn’t reject Sprint, the government did by refusing to officiate at the wedding. But do you think T-Mobile’s John Legere missed a beat? After all he started using the #SprintLikeHell hashtag while they were dating.)
During the third quarter T-Mobile added a record 1.4 million postpaid subscribers. Remember, that’s net of any people who left them. Not only that, but T-Mobile now projects a total gain for 2014 of 4.3 million to 4.7 million postpaid subscribers.
At the low end of the consumer market, prepaid customers were also up over 400,000 nationally for the quarter. Granted, that market is several degrees of separation from enterprise concerns. But there’s something of a share-of-mind issue here. In telecom, the IT consumerization phenomenon begins with wireless plans and handsets, and T-Mobile is on pace to gain 10 million total customers over the course of a year and a half. All this time Sprint has stood in place and its brand value as measured by marketing scores and surveys has cratered.
Now over to the enterprise. The issue we discuss a lot among our professional team – tested daily against our continuous experience in the arena – is what kind of performance either Sprint or T-Mobile can actually put up in serving the corporate market. As a starting assumption, it’s fair to assert that Sprint is enterprise-relevant and T-Mobile has been at the margins. After all, T-Mobile has never been a wireline company, and that deprives it of core relationships for services that are historically thought of as mission-critical.
Usually T-Mobile comes into play in an RFP for one of two reasons. Either there’s already some T-Mobile subscriber base in the company, or company managers feel that they need to test whether T-Mobile’s consumer disruption practices have any kind of carryover to corporate deals.
Most often in these situations T-Mobile either maintains its position but with no large increase in the portion of the enterprise’s wireless business, or it falters during the process in ways roughly analogous to the old model of CLECs in wireline telecom. What a newbie corporate carrier in any given market tends to think is hot stuff is often simply table stakes in the corporate market. After all, a cutesy offer to purportedly eliminate or offset early termination fees is something that enterprises already largely expect via waiver pools and other mechanisms, whether a supplier calls itself an “Uncarrier” or not.
But now look at Sprint’s challenge. Its rip-and-replace 4G changeout, difficult enough as it was, also came at a time of changing expectations for coverage and network performance. During this period it no longer became feasible to accept coverage holes, dropped connections, and subpar broadband throughput just because the connection was “wireless.” What’s irritating to people in the consumer market is deadly in the business market, especially for network and telecom managers with appropriate ears-to-the-ground to their user base from senior executives on down.
And think about it: Sprint ain’t much of a wireline carrier either anymore, with its entire remaining wireline business almost certainly being informally shopped around, given directives from new CEO Marcelo Claure installed by SoftBank. Its own sensitivity to corporate-grade business terms and conditions now can be slipshod and there tends to be no great clamor from end-user bases to keep them based on brand value, perceived performance or “coolness.”
Finally, our global experience at TC2 introduces another factor: in the U.K. and elsewhere it’s not unknown for a consumer-grade wireless carrier, once it’s made a splash in the mass market, to make the leap over to the enterprise once it gets some learning under its belt.
No one’s ready to call the enterprise wireless market a duopoly yet, and in every discrete enterprise RFP situation we can advise good reasons that one or another carrier may be a particularly good bid participant vs. Verizon and AT&T. But for the nearly $22 billion that SoftBank originally sunk into its Sprint acquisition and the billions more it’s taking to make a go of it, it has to watch out whether T-Mobile could in some ways supplant it. The incredible and ongoing change in pure “mojo” that has seen T-Mobile power up against what everyone still calls the No. 3, Sprint, is just the framework for discussion of real, tangible shifts. It’s a fascinating story to continue to watch. Lord knows we’re on it.
By David Rohde Posted October 27, 2014
Here’s a tidbit from third-quarter carrier earnings that kind of startles everyone who sees it: While AT&T sold 434,000 tablets with their plans during the quarter, Verizon sold 1.1 million tablets. What’s that all about?
At both carriers, tablet growth exceeded smartphone growth in toting up net new postpaid subscribers. So that clearly left AT&T behind in growth, but much further on tablets than smartphones.
Certainly both carriers posted robust profits – $3.7 billion for Verizon, $3.0 billion for AT&T. But it’s a little disorienting for telecom veterans to see Verizon now outpace AT&T at all, no matter how well both of them are doing.
And while I don’t want to make too much of this because Wall Street expectations games can be misleading, it’s a fact that AT&T’s stock went down after earnings while Verizon’s held its own. Those tablet numbers were very much in the discussion. Once upon a time you could say that smartphone users were power users, but now that’s far too much of a generalization. It’s tablet users who are presumed to be high-spenders who are relatively impervious to wireless bill shock. And for all the noise that T-Mobile has made this year, it’s obvious that the “Uncarrier’s” greatest impact is in the middle ranges of the market.
While I’m laying this out from the perspective of the broad mass market, another news story late last week starts to bring it closer to home for enterprises. The FCC has let the industry know that it’s delaying its so-called “incentive auction” of 600 MHz spectrum being repurposed from UHF TV from 2015 to 2016. The rules for this auction are complicated enough whenever it happens. But the basic idea is that it’s meant to give Sprint and T-Mobile in particular the ability to get more low-frequency, high-propagation spectrum that they need to end the outdated excuse that they’re not reachable in smaller markets with broadband coverage.
Court challenges of the rules by the broadcasters whose spectrum is being given up – or who are being given purported “incentives” to move elsewhere – forced the FCC to push back the date. The concern is that the delay causes the wireless market to start locking in the relative positions of the players with little outlet to break out of their molds.
Certainly Sprint is trying to break out of its mold by playing in T-Mobile’s “value” territory. But at least there was a perceived hipness to T-Mobile’s breakout campaigns that has netted them 2 million or more new subscribers. Meanwhile AT&T continues to pump out ads that emphasize their offer details. Not that there’s anything wrong with that, but notice that Verizon in a lot of its marketing is actually moving away from telecom-plan specifics and basically insinuating that Verizon (and the devices they sell with their plans) are part of your upscale lifestyle.
Just look at many of the ads on this page and you’ll see. Of course many of those “users” (i.e., actors) are using tablets and do not seem to be overly worried about the size of their bill at the end of the month.
You probably see where this is going for enterprises: Verizon is already letting its “wireless culture” with its barely disguised disdain for price competition take over the company – either because of the heavy debt load that they think they have to offset with the highest-margin products, or because they think that other carriers can’t catch up to them. Those fissures are now starting to show up in earnings reports.
It’s another reminder to check out what we’ve observed here about the changing patterns in the path of competitive wireless and wireline RFPs. These very successful RFPs still have to navigate the new and disorienting ways that one company vs. another may start out responding.
Meanwhile, watch for more news about when the FCC can get some new spectrum out on the auction block. Heaven knows demand for spectrum isn’t drying up soon, and any more delays could freeze the U.S. carriers into the positions they seem to be assuming for a longer time than otherwise.
By David Rohde Posted October 21, 2014
Somehow there seems to be plenty of room for all the carriers in the U.S. wireless market, despite the industry’s occasional whining that the market is getting saturated.
Verizon’s third-quarter earnings released today demonstrate its ability to maintain momentum on both the subscriber growth it craves and the premium pricing it likes. No amount of “Uncarrier” success by T-Mobile US picking off purportedly disaffected customers seems to stop Verizon’s ability to do something T-Mobile can also do (grow) and something it can’t (make money).
Verizon’s third-quarter numbers tell the story:
- Smartphone “postpaid” (i.e. contractually committed with a monthly bill) subscribers may have grown a moderate 450,000 during the quarter. But watch this: Tablet postpaid subscribers grew by 1.1 million. Don’t expect tablet plan growth to slow down until, well, it does.
- Verizon now has more than 106 million wireless subscribers. With a churn rate sitting consistently at or below 1%, think about what this does in terms of “baking in” the Verizon brand among any subset of consumers, including your employee base.
- Verizon’s average – average! – revenue per postpaid wireless account is now $161.24. As I’ve pointed out before, regulators from the immediate post-1996 Telecom Act era (a bill that was supposed to reduce people’s spending on telecommunications) would be turning over in their graves if any of them were dead yet. While the ARPA figure is of course a bit tricky due to share plans and other inputs, it still clearly demonstrates Verizon’s ability to take only a glancing blow from wireless “price wars.”
- Total profits for the quarter rose from $2.2 billion in the third quarter of 2013 to $3.7 billion in 2014. And there’s your bottom line: Whatever healthy single-digit growth is found in the raw subscriber and account metrics, it translates into disproportionately high earnings growth.
And really, that’s the concern with watching Verizon. Although it’s certainly there in Verizon’s earnings announcement, you won’t find its enterprise wireline revenues and earnings in the headline bullets. If anything, Verizon is back to touting financial growth in FiOS – its purportedly “consumer” landline broadband product, although it sneaks into businesses too – before it mentions boring old enterprise transport. (The first enterprise transport service mentioned in Verizon’s earnings is machine-to-machine or telematics, and of course Verizon loves all managed services.)
And there’s no chance of knocking wireless off the very top rung. Consider that Verizon gives this eye-popping figure for its wireless segment where I have to include the gobbledygook part – “49.5% segment EBITDA margin on service revenues (non-GAAP)”. If you must have that translated, drop me a note, or just trust your instincts that a product that makes 50% margins in any kind of way that counts (if it didn’t count, the SEC wouldn’t allow Verizon to publish the number) is exactly as striking as it sounds.
Last week I noted how Verizon’s tilt toward its highest-margin services is growing heavier, driven by the shadow cast by its $130 billion mountain of debt. We see this in the changing composition of Verizon’s account teams, product emphasis, RFP response patterns, and (now shared with AT&T) senior executive appointments. It’s also reflected within the wireline segment in Verizon’s strong drive to cast aside TDM including the venerable T1 regime, or at least so far in the NxT1 arena where Ethernet is lying in wait. Remember, the latter is not necessarily a bad thing – although a strong knowledge base of the world of “special construction” is in order before Ethernet proposals hit your desk. And the whole phenomenon in no way means worse results in your competitive RFP, just a far different pattern of managing the process and handling expectations.
All that’s happened now is that Verizon’s latest quarterly earnings reinforce all of these trends. Keep an eye out for its impacts everywhere from Wall Street to, far more importantly, the individual account team.
By Mark Sheard Posted October 17, 2014
The following is a guest post by Mark Sheard, Managing Director of TC2 UK.
For some time in European mobile deals, the availability of smartphone daily roaming plans for mobile data services was a novel and often cost-effective differentiator for Vodafone. Daily plans began by providing an inclusive daily data allowance for a one-off daily fee while roaming in the EU. They may have started out at often only a few Euros a day, but now to analyze them you need to understand many new variables. These include variances among regions of the world, how daily roaming is bundled or not in various overall plans, and whether we’re talking voice or data or both.
These plans were particularly suited to the occasional user, for many were more cost- effective than relatively expensive monthly plans, and provided an excellent way to minimize “bill shock” for the unwary traveler. Vodafone’s competitors lagged behind and didn’t provide comparable alternatives.
Now the market is changing. First there has been a rise in the number of different types of daily plans available. They are extending across other regions (such as the US), being offered by more suppliers, and are coming in more flavors than data only.
Second, the “sticker” price per megabit has fallen even further. Simple – more choice and more for your Euro! Well not quite. With the increased choice comes greater complexity in assessing what is right for your business.
Beyond the headline rate for a daily bundle, you need to consider the scope across voice, data and messaging, the regional coverage for different plans, monthly or multiple-days capping, inclusive allowances, what happens when exceeded, what usage alerts users get, what limits and blocks might be applied, and what the activation requirements are. Sounds more challenging, and it is. In essence, you need to be able to assess the utility and total cost of the daily roaming products from different suppliers against your own usage profiles and user needs.
To do an effective assessment can be difficult. It can be hard to get the data in terms of: quantity of “roaming days”; what the average monthly consumption is; what is happening with the top users; and where the roaming is occurring. Traditional review of total megabytes of roaming data consumption is not good enough given the potential contribution of such plans to total costs. More creative modeling and sensitivity analysis are often required to overcome ambiguity in data.
However, the increased availability of daily plans and their apparent attractiveness makes the assessment of their contribution to total costs more important than ever.
By David Rohde Posted October 16, 2014
If I say “telecom debt,” what comes to mind? CLECs? Junk bonds? Venture capital? Chapter 11? 2002?
All that and more is associated with the pile-up of borrowed money that telecom seems to require. But the biggest telecom debtor in the country is in many people’s books the assumed safest carrier because it has the perceived best wireless position – Verizon.
Verizon dramatically outstrips the industry with $130 billion of debt in its books. Remember all that money it had to ship to Vodafone to buy out the 45% of Verizon Wireless it didn’t own? That pushed the pile way over $100 billion. And imagine if the old WorldCom, a.k.a. MCI, hadn’t gone through debt-cancelling bankruptcy – think of where Verizon (the buyer/savior of WorldCom) would be then!
Is there a “Big 2” of debt? AT&T holds a tidy $84 billion of the stuff. But the difference here between Verizon and AT&T counts for something.
Of course both carriers can hold high debt levels because they have something nobody else has – the perception of virtually guaranteed revenue streams. At one time that was considered ILEC territories, with their perpetual payments for landline residential primary lines. Those of course are going away, although broadband triple-play connections aren’t a bad replacement if the telco holds its own with the cableco.
But now wireless subscriptions basically play the same role. For all of T-Mobile’s “Uncarrier” noise and the consumer wireless price “war” (which I might call a skirmish), both Verizon’s and AT&T’s churn rate per quarter is under 1%. Multi-year wireless contracts with loyal customers are a sweet deal in the world of evaluating even a debt-laden vendor’s financial sustainability.
But Verizon’s extraordinary $130 billion puts it in a special category. Basically it cannot go out and do another big acquisition right now. It can’t match AT&T’s pending acquisition of DirecTV (although that is going to require $7.5 billion debt issuance at AT&T), and it can’t compete for what everyone knows is AT&T’s desire for a global acquisition, like today’s Vodafone.
And Verizon’s debt service kind of “addicts” it to the highest-margin services. Already in the investment community Verizon is referred to as a “wireless carrier” with a little wireline on the side. Enterprises have to watch wireless account executives take over and then sometimes perform poorly in wireline RFPs, at least in the first round, if not subsequently. (Unless of course they are for high-margin managed services. SIP Trunking is another story, where Verizon also can step up right from the beginning, although that depends.)
Now Verizon certainly wants to reduce or stretch out its debt. It’s expected to fetch about $6 billion in a sale of 12,000 cell phone towers to American Tower Corporation. It’s working on a replacement of its 2016 and 2018 debt maturities with new debt maturing in 2020, taking advantage of the same near-zero short-term interest rate environment (in which bond investors salivate to lock in real yields for longer terms) that Level 3 has used to push off billions in near-term maturities to 2020 and beyond.
Verizon also has an advantage that no second-tier carrier has with its debt – the ability to issue bonds that compete with 30-year or longer Treasury bonds. About $23 billion of its total debt actually matures in 2037 or beyond. Many of these were originally denominated in the name of its subsidiary LEC operating companies and are considered a kind of “widows and orphans” income stream to their holders.
Speaking of which, the other way in which Verizon conserves a little investment capital is through its shareholder dividend, which equates to 4.5% of its current stock price, compared to AT&T at 5.4%. (Wall Street considers this justified because of Verizon’s perceived greater “pricing power” on wireless and thus potential higher growth. We’ll see about that.)
But all this starts to play around the margins. For enterprises, the overall concern here is not some financial house-of-cards issue as it would be with another type of supplier. It’s the pressure on the supplier’s operational decision-making process. We’ve discussed, and will continue to discuss, the phenomena where 1) Verizon wants to maintain its own pricing premium on wireless; 2) is aching to turn off legacy TDM/POTS networks; 3) likes to replace requested TDM access above T-1 with Ethernet access in proposal responses – not necessarily a bad thing but definitely an RFP wrinkle to deal with, and 4) has developed squirrelly new patterns in RFP behavior overall, putting renewed importance on getting the best account teams who can muscle through the organization.
All of this tracks back to Verizon’s debt pressures. Knowing this helps anticipate the paths through procurements that you will see in your big wireless and IP transformation projects.
By David Rohde Posted October 7, 2014
Sprint’s first official layoff announcement following new CEO Marcelo Claure’s clear orders to slim down only gave the required financial disclosure: $160 million in severance costs. Talk about begging the question – the number of actual people laid off went unmentioned.
But Sprint’s hometown business publication, the Kansas City Business Journal, has been sniffing around the headcount since long before Claure showed up in Overland Park. Yesterday the publication reported that the reality is that Sprint “has quietly shed about 5,000 employees since December.”
The startling impact is that across the U.S., Sprint now has fewer people working for it than T-Mobile.
Basically what’s happening at Sprint is a rolling cost purge meant to enable Sprint to offer broadband wireless plans at much lower prices. Of course that is what many industry observers and even the regulators who blocked AT&T’s takeover of T-Mobile in 2011 were hoping for in recent years from Sprint. But they didn’t get it as Sprint’s model evaporated in a miasma of crushing equipment-subsidy contract commitments, a customer-unfriendly 4G network changeout, and an asinine marketing campaign for which Sprint’s new majority owner, Japan’s SoftBank, can take a lot of the blame.
The rolling purge has targeted the familiar areas of call center headcount and retail store closures, and is now proceeding to technical positions, according to the KC Business Journal. Some of that is caught up in the innards of Sprint’s own internal deals, such as acquisitions of spectrum holder (and one-time WiMax partner) Clearwire, which is basically going to shed three-quarters of its workforce.
But part of the ongoing story of the technical-position slimdown is clearly related to the brain drain of wireline product and account managers, who for some time have been quite logically offloading themselves to other carriers in such Sprint employment centers as Northern Virginia as well as in Kansas City and around the country.
If and when Sprint sells its wireline network and customer accounts outright, the deal almost certainly will fit much more into this “dramatic reduction of the cost base” model than provide any great windfall for Sprint, given the low offers Sprint is likely getting for the wireline business.
What’s key to watch in the enterprise wireless market is the pecking order. Low prices are great, of course, but typically carriers in any field of enterprise networking have a hard time meeting rigorous enterprise expectations when their focus is on slimming down and valuable expertise invariably flies out the door. And it’s a bit of a shock to the market to see T-Mobile, whose enterprise experience and presence is historically very thin, move into third place in U.S. on everything from the touchy-feely notion of “brand value” to the hard facts of employee headcount.
But hey, market shocks are part of the topsy-turvy arena of telecom, and Sprint’s slide to its new, lesser industry status is just the latest one.
By David Rohde Posted September 19, 2014
Sprint never did issue a press release announcing their attempt to buy T-Mobile under terms agreeable to both SoftBank and Deutsche Telekom. They didn’t have to – everyone knew the deal was in the works. Announcing the proposed deal would have just provoked the regulators, who behind the scenes told them no anyway.
The same is now true of Sprint’s sale of its wireline business to formalize the reality that Sprint is only interested in the wireless market. No announcement is needed – the words and actions of new CEO Marcelo Claure in his first month speak loudly enough. Already Wall Street bankers and analysts are leaking information as part of the bargaining over the bidders and the price, which could be shockingly low for such a venerable supplier.
One big difference between the two situations: There’s no reason for the U.S. government to turn down a deal to move Sprint wireline somewhere else. If anything, it could restore at least the sense of a No. 3 carrier in the first tier of the wireline market. Sprint will clearly require the buyer to lease back its network to Sprint for wireless backhaul purposes, but will almost certainly offload the customers.
The game began last week when, at a Goldman Sachs investment conference, Claure all but hung a “for sale” sign on Sprint’s wireline division. “There are a lot of businesses that we shouldn’t be in,” Claure flatly declared. “I am a believer that you have got to be in the businesses where you have a chance to win.”
Claure then explained that Sprint had “accumulated” a lot of excess businesses. You could consider that disrespectful of the many fine people who enabled consumers to “hear a pin drop” on their Sprint long distance calls in the 1980s and made Sprint the disruptive player in the 1990s-2000s frame relay market with its clean and cheap zero-CIR service. That is, if anybody cared about that stuff anymore, which I’m sure Claure’s boss Masayoshi Son at SoftBank doesn’t.
(Fun side note: The original MCI alternative long distance service in the 1970s and early 1980s really was atrocious – almost worse in quality than a cell phone call between the side of a mountain and the underpass of a bridge in the early 2000s. That was the target of Sprint’s “pin drop” jab.)
Claure then doubled down in a Wall Street Journal interview published last weekend. He repeated that Sprint should only be in businesses where it’s likely to win (I’d say Sprint’s recent habit of non-response or bad responses to SIP trunking RFPs is not even trying, much less winning) and said he’d inform employees before revealing what he’d sell. The WSJ reporter didn’t even care enough about wireline networks to ask the obvious follow-up question.
A couple of days ago the first trial balloon from a prospective buyer went up when Investors Business Daily reported that an Oppenheimer analyst was speculating that Level 3 could pay $4 billion for Sprint wireline. If that sounds like a lot of possibles and maybes, it is. Keep in mind that IBD is a stock traders’ publication where the mere possibility of a rumor moves the needle on stock prices, and many of its readers have no real interest in the long-term outcome for the industry. But the report, however sketchy, caused the more focused Telecom Ramblings to start handicapping the odds among possible buyers CenturyLink and Windstream as well as Level 3.
As the story unfolds, keep in mind these three factors of key import for enterprise users:
Claure is the very definition of an eager seller. One reason that the sale price is likely to be nominal – even Level 3’s acquisition of the previously low-profile TW Telecom is higher, at $5.7 billion – is that the sale price probably isn’t really the point for Claure. Instead, he’s laser-focused on dropping Sprint’s operating expenditures – headcount, first and foremost – to create a new cost base for his rapid conversion of Sprint to an Uncarrier-like consumer wireless disruptor. Speed may be more important than billions, believe it or not. Some analysts believe Sprint may actually be sold for essentially zero if the buyer assumes a healthy bunch of Sprint’s debt instead.
What’s on everybody’s plate is obviously a factor. Level 3 of course already has an acquisition to digest, although once again the jigsaw puzzle works in its favor – Sprint completely failed at TWT’s specialty, metro buildouts, while Sprint wireline would bring at least some of the Fortune 500 customers that TWT on its own couldn’t win. Windstream also has a big debt pile but acquiring Sprint would also give it the national customer base it’s been a little behind in acquiring (although some of Windstream’s recent SIP and other bids are very encouraging). CenturyLink has the cleanest shot at tucking Sprint in financially, although it may judge it doesn’t need the headache since it has good enterprise name recognition and major accounts already.
Culture and experience will count, as always. Sprint has been bleeding wireline business but leaves behind an echo of professional enterprise experience embodied in its contractual paper trail. You can see this in its business terms and conditions, where Sprint understood how to provide term commitment structures and rate reviews while avoiding pernicious per-circuit terms for standard bandwidths – exactly the kind of accommodation to the serious enterprise market that second-tier carriers have a hard time learning. Will the resulting sale therefore be easier than it looks to integrate? Of course not – a bloody mess of integration is quite possible. But one can hope any new holder of Sprint’s wireline accounts will learn how to compete better on both prices and terms.
So let the whispers and jockeying for position commence. When it comes to the end of the wireline enterprise effort under the Sprint name, the inevitability of it all suggests that it’s better sooner than later.
By David Rohde Posted September 2, 2014
Just because the U.S. government basically forced Sprint to go it alone in the wireless market doesn’t mean that T-Mobile can’t still be sold to somebody else.
A successful buyout of T-Mobile US would mean the third time’s the charm. AT&T failed in 2011 and Sprint for all intents and purposes failed this year (since the deal was never going to be announced unless Sprint parent SoftBank had the regulatory politics lined up in its favor).
Here’s my bet: T-Mobile’s principal owner Deutsche Telekom will only sell out if it gets north of the $39 billion AT&T originally offered in 2011. Why not? T-Mobile’s a hotter brand now than it was then.
There’s no sense for DT in reverting back to the $32 billion that SoftBank and Sprint put on the table. No other prospective buyer would have Sprint’s and AT&T’s ultimately disqualifying problem from an antitrust standpoint – that they’re one of the other national U.S. carriers. Not unless Verizon’s planning a T-Mobile takeover (I’ll call an ambulance if you just had a heart attack).
Now here’s the problem in all this: What it would take any other acquirer to get to $40 billion might require slicing and dicing T-Mobile’s finances to such an extent that it would render T-Mobile even less of an enterprise factor than it is now.
Today’s post-Labor Day news tidbits demonstrate the challenge. You remember that a French carrier named Iliad SA put a slightly laughable offer for T-Mobile on the table (well, on the world financial markets rumor mill) a month ago. Iliad only got to a bit more than SoftBank’s offer for T-Mobile through a financial sleight-of-hand with little more heft than a PowerPoint bullet: the promise to “count” $10 billion of “synergies” in the value of the deal to the seller.
I get that two merged companies don’t need two human resources departments, but the only way to get to anything remotely near $10 billion in synergies is to cut network investments – the last thing T-Mobile, or any U.S. wireless carrier, needs right now.
As if to acknowledge the credibility issue, Iliad clearly leaked over the holiday weekend that it has prospective partners among name-brand global companies with interests in the IT communications markets talking about a joint bid. Stories in outlets like London’s Financial Times and Reuters imply that these partners could include other diversified conglomerates like SoftBank, and there’s always the cash hordes stashed at U.S.-based tech giants.
Our friend Rob Powell at Telecom Ramblings astutely notes that the prospective partner in Iliad’s next bid could be none other than Dish Network, the ostensible “loser” when SoftBank “won” the bidding for Sprint (although at a higher price than SoftBank wanted to pay). With AT&T on track to get its acquisition of DirecTV approved and sealed, Dish is almost universally assumed to be poised to go after its own blockbuster merger deal.
But reviewing this speculation basically redoubles the synergy concern rather than alleviates it. In the Financial Times’ telling, T-Mobile comes across as practically a plaything for global captains of finance. An Iliad official who promotes a joint bid with a partner then talks about raising T-Mobile’s operating margins from the 20s to the 30s in percentage terms. How? By “better managing call center costs.” Maybe some ex-Sprint customer service executives might want to relate their experience on that (better yet, their customers might). In the enterprise you can read that as cutting “account team costs” in an era where bad or reduced account teams spell nightmares for business users.
There’s also the “successful business guru” trap in U.S. wireless that we’ve already discussed. Rob Powell notes the likely ambition of Dish’s Charlie Ergen in the T-Mobile partner-bid speculation. Iliad itself features yet another of these “disruptive business heroes” in the figure of Xavier Niel, who has beaten down French consumer wireless pricing. What has so far defeated the hubris of this archetype in the U.S. wireless market is geographic size and cultural challenges. It bears repeating that the U.S. is neither the European Union nor a Pacific Rim archipelago.
I doubt that any of these guys will put a hamster in their TV commercials as Softbank basically forced Sprint to do. But unless they’re prepared to stream NFL games starting this weekend to a tablet in Anywhere USA as Verizon repeatedly brags it can, they’re not likely to be able to grab subscribers at much of any profitable price point.
U.S. regulators played their part by holding firm on four national carriers in the face of SoftBank’s Washington public policy spin. But that’s only half the game. More will have to happen to prevent wireless as well as wireline from effective duopoly status, especially in the face of AT&T’s new unification moves among its divisions. Of course there’s always the quarter trillion or so in cash stashed at the five biggest tech companies that could change the game instantly. Buying into wireless devices has been enough of a challenge, but could the margins in wireless carriers attract them? Stranger things have happened.