Telecoms.com

Telecoms.com periodically invites expert third parties to share their views on the industry’s most pressing issues. In this piece strategic advisor Whitey Bluestein explores how recent developments on the other side of the pond are redefining the mobile landscape and blurring lines between telecoms and entertainment.

Hope you’re not waiting for a summer slowdown, at least in telecoms. In the last three months, several developments are redefining the mobile landscape and blurring lines between telecoms and entertainment. These include:

• The AT&T-Time Warner merger was approved by a federal judge over the opposition of the Justice Department in mid-June, and the deal closed a few days later. AT&T’s $85 billion acquisition includes HBO, Cinemax, Turner Entertainment, CNN, Warner Brothers and much more. AT&T acquired DirecTV less than three years ago. (A few weeks after the trial court’s decision and merger closing, the Justice Department appealed, but most observers expect the deal to stand.)
• Shortly after acquiring Time-Warner (now WarnerMedia), AT&T made a deal to buy AppNexus, an ad tech platform that will give advertisers an alternative to Google and Facebook for ad spending and data analytics;
• T-Mobile and Sprint announced plans in late-April to merge the #3 and #4 wireless carriers, respectively, in a $26 billion deal which, if approved, would make the merged company the second largest U.S. wireless operator, behind Verizon;
• 21st Century Fox accepted Disney’s $71.3 billion cash and stock acquisition offer over Comcast’s $65 billion offer in late June. Disney, which owns ABC and ESPN, among other assets, would acquire Fox’s film and production assets (but not Fox Broadcasting, Fox News or Fox Sports), global TV channels such as National Geographic and two major satellite distributors, Sky in Europe and Star in India.

The latter two deals still must be approved by regulators, but the AT&T green light increased confidence that the other deals will clear. Telecoms and entertainment are clearly converging, and mobile is increasingly the preferred viewing device.

Consolidation

The recent federal court approval of the AT&T-Time Warner merger without conditions means market consolidation is likely to continue or even intensify. Now all eyes are turned to the T-Mobile and Sprint deal. T-Mobile (including MetroPCS) and Sprint (with Virgin and Boost) have attacked the U.S. market with aggressive pricing and promotions, particularly in the no contract space.

With these two companies merging, many project a more stable, less cut-throat market; any price stability would presumably be good for MVNOs, who still buy data by the megabyte and must closely manage users’ data consumption in order to compete with unlimited carrier plans. The merger is also good for the industry; Morgan Stanley sees the “return to wireless industry service revenue growth for the first time since 2014, as competitive intensity has moderated.”

On the down side, since Sprint and T-Mobile both have hosted traditional (voice, data and messaging) MVNOs over the years, there will be one less operator offering traditional wholesale services and thus fewer carrier options for MVNOs going forward. (All four of the big operators have moved aggressively in the IoT space and have robust wholesale programs for IoT/M2M/connected devices; this is where the market is going and growing. Further, all of the operators are aggressively pursuing new business in the IoT/M2M and connected device segment.)

The Justice Department, which can ask the courts to block acquisitions and mergers deemed anticompetitive, nixed a merger of the same companies less than four years ago — and an earlier AT&T/T-Mobile deal as well. Much has now changed. Then, Sprint and T-Mobile were near equals. In the last four years though, T-Mobile’s “Un-Carrier” campaign has made it the industry’s fastest growing player, while Sprint has continued to struggle. The T-Mobile/Sprint deal is a merger of two direct competitors, thus raising very different issues than AT&T’s acquisitions of Time-Warner or DirecTV, both of which were “vertical” diversification into the entertainment space.

Still, traditional antitrust criteria for mergers suggest that a “3-4” merger in a concentrated market is not sustainable, due to risks of tacit collusion and decreased price competition post-closing. In the aftermath of their embarrassing AT&T-Time Warner loss, the Justice Department could challenge the proposed merger. T-Mobile and Sprint are keenly aware of this risk. In their application to the FCC, which also must sign off on the deal under a more government-favorable “public interest” test, the companies said, “T-Mobile and Sprint are merging to beat Verizon and AT&T, not to be like them.” Given the success of the Un-Carrier campaign, this is smart (and credible) positioning. AT&T, Verizon and T-Mobile are each pursuing different business strategies, and three strong competitors each moving in their own direction bring a growing range of choices and services. Some believe that the merger is critical just to keep up with AT&T and Verizon from a spectrum and technology standpoint. For all of these reasons, especially after the AT&T/Time-Warner approval, odds are up that in today’s changing wireless market, the T-Mobile-Sprint merger will go through, although there may be some conditions.

Enter the MSOs.

The two largest U.S. cable companies – Comcast and Charter – each launched MVNOs. Comcast’s Xfinity Mobile launched last May, and Charter’s Spectrum Mobile launched this month.

Xfinity’s first year of operations have gone well. With two pricing options – $45 per line for unlimited monthly LTE data or $12/GB for shared LTE – these two plans can be mixed and matched based on each user’s data consumption, allowing a family or group to average down per-line pricing to well below $45/line. Comcast, which has 22.5 million video subscribers, now has more than a half million mobile customers. New Street Research predicted that Xfinity Mobile could soon add two million customers per year. Although Charter just launched Spectrum Mobile, New Street predicted similar growth for Spectrum. Spectrum’s service, also on the Verizon network, is priced similarly to Xfinity on the unlimited plan, at $45/line, but at $14/GB for LTE data. Interestingly, New Street also concluded that Comcast pays Verizon $5/GB, the lowest reported wholesale LTE data rate in the U.S. This makes for a very good margin on per GB data customers but very thin margins on unlimited users, who reportedly use 15 percent more data than average customers. Much of the data is offloaded on Wi-Fi, which helps.

Comcast and Charter together cover about two-thirds of the U.S. population. Each has the key attributes of a successful virtual operator – a large existing customer base, deep pockets and the ability to bundle services in a single bill. Because these companies offer pay TV, Internet, phone service, and now mobile, they can cross-promote and discount other services to attract customers to their mobile offering. Coupled with a growing willingness among consumers to try lower-priced options like cable companies, this makes the analysts’ multi-million subscriber projections credible.

In April, Comcast and Charter announced a 50/50 operating platform partnership focused on development and design of backend systems to support their mobile services. They appear to be in it for the long run. Whether or not it makes sense to invest in and build all of the backend systems that they need (versus buying an existing solution) is the big question. Both launched with and are hosted by Arterra Mobility today. My experience informs me that in a build-or-buy scenario, companies often underestimate the costs, staffing and time-to-market required to build robust and scalable backend systems from the ground up. Further, integrating multiple vendors, even those with best-in-class components, always takes more time and money than expected. The risk is that they build a gold-plated backend that actually hampers their ability to compete.

Getting to market is one thing. Finding and retaining the specialized and operational talent it takes to be fast, flexible and smart enough to remain competitive in the fast-moving wireless world is extraordinarily challenging. It goes beyond retail wireless products and into IoT, campus/facility/building-based networks which could enable and may be necessary to serve the lucrative enterprise market, which will be more important as cord-cutters impact their residential base.

The more strategic question is whether and how Altice, a new Sprint-hosted full MVNO, and other MSOs become some part of that partnership, despite the fact that Comcast and Charter are on different mobile networks. The deals are strategic in that they involve some asset- and technology-sharing with their respective host operators, but the possibilities of expanding or creating a separate marketing partnership with a nationally branded mobile service could reduce marketing costs and result in a seamless mobile product nationwide, with the scale to keep carrier and other costs low. This makes the operating platform partnership more strategic and potentially far-reaching, if done right. The front-end marketing play to extend overall reach is far more important strategically than focusing on the back-end. Of course, it takes both, but effective marketing is key.

In the no-contract (prepaid) segment of the market, AT&T has Prepaid (formerly GoPhone) and Cricket, T-Mobile has its MetroPCS unit, and Sprint, through Boost and Virgin, all have very competitive prepaid offerings that are compelling from a price and value standpoint. But wait, there’s more.

Now there’s a new entrant to the operators’ branded plays. Verizon has entered the fray with Visible, a no-contract brand priced at $40/month for unlimited data, messages and minutes. While there’s no data cap for this low-priced option, there is a speed limit – up to 5 Mbps on the network, enough to stream video at 480p resolution. Verizon tag line is, “Exactly what you need. No fluff.” For now, while Verizon is “working a few things out,” it’s invitation only.

The MVNO space has been very active, too. Some interesting developments include:

• Comcast and Charter launched, as described above, and have been successful by any measure, with Comcast now at more than half million subscribers and most expecting both to be multimillion subscriber players.
• Multiplay is getting to be a “thing,” with one UK player, Smart, recognizing that there is strong interest in buying services from a single provider as a bundle, offering energy and insurance along with mobile. With the high cost of energy and insurance, they can package fantastic offers to attract subscribers without discounting mobile. Their “all in one” mobile App underpins a differentiated quint-play experience putting customers in control of their essential needs, allowing them to view bills, order services, obtain care and submit meter readings among other things.
• Tracfone, the largest U.S. MVNO, with 22.1 million subs, lost SafeLink subscribers because of Lifeline rule changes, while its main brand, StraightTalk grew to nearly 9 million subs. The change in mix resulted in an ARPU increase to $25.
• Ultra Mobile, one of the fastest growing MVNOs, launched Mint Mobile two years ago, positioning itself as the direct-to-consumer disruptor in the wireless category. Much like what Dollar Shave Club did to razors, Mint Mobile combines the direct-to-consumer business approach with warehouse pricing, where customers buy in bulk and save. Subscribers purchase service up-front, including data (2, 5 or 10GB) in bulk for 3, 6 or 12 months of service, with commensurate bulk savings, starting at $15/month. It’s no surprise that Mint has been growing dramatically, surpassing 200 percent growth year-over-year.
• Kajeet, once an MVNO serving kids with sophisticated parental controls, has morphed into a six-carrier national mobility solution provider for the education market. With nearly 700 school district customers, including libraries, and expanding into school vehicle connectivity with its SmartBus™ offering, has expanded to Canada with Bell Mobility. Their parental controls now help schools, teachers, administrators and parents keep kids on task economically, and manage and analyse usage. Google recently hired them for their Rolling Study Hall project.
• Newcomer Wing is focused on the higher end of the market, offering “stress-free” care, ease and value. As a result, nearly three-quarters of their customers come from a Big 4 carrier. Wing has digitalized the carrier experience similar to Amazon vs. Walmart. Customers are onboarded via text or call. Wing offers flexible plans that credit subs for unused data. Users track data, manage/change plans, and pay their bills via an app. Wing offers the same premium features as the Big 4 carriers, including international data roaming across 135+ countries at just $13/GB.
• Lycamobile, with 15 million subs in 23 countries including the U.S., just launched Lycarewards in the UK. The loyalty program offers customers free data bundles and gift cards for viewing ads and special offers on the lock screen of their Android phone. The free service, delivered by app, uses an ad-funded model from U.S.-based AdFone, whose platform generates incremental monthly ARPU of up to $3 per user for its customers.

These are just a few of the more high-profile MVNOs. Of course, the IoT and connected device space includes many players providing value added services for which connectivity is an enabler rather than the raison d’etre. Many MVNOs and MVNEs are taking their connectivity experience and business relationships and extending them into the IoT space. This is the most exciting, innovative and fast-growing space in mobility.

Whitey Bluestein advises young technology companies on mobile strategies and helping them win deals, as an advisor and as interim corporate development executive. His business is all referrals from clients, colleagues and the strong network of business and personal relationships built over his 35-year telecoms career. He works with young companies – mostly A and B Round startups – helping them navigate the mobile ecosystem and developing strategic relationships with mobile operators in North America, UK/Europe and AsiaPac. He’s also worked for big companies, including Disney, Google and Cisco, on new mobile initiatives. Current clients include Orion Labs and Payfone, among others. Recent clients are based in San Francisco, New York, Montreal, London and Paris. Whitey Bluestein is a regular speaker at the MVNOs Series events – including the MVNOs North America and MVNOs World Congress.