Dish Network, the satellite television company controlled by billionaire Charles Ergen, is in talks to acquire wireless telco T-Mobile US, according to people briefed on the matter. T-Mobile US has a market value of $31 billion, while Dish Network is worth nearly $35 billion. Details of the price, and the cash and stock mix, were still being worked out. Both Dish and T-Mobile declined to comment.
A merger of Dish and T-Mobile US would provide a definitive answer to what Dish plans to do with its huge wireless spectrum holdings, which Mr. Ergen has been adding to for years without revealing any clear plan for how Dish would use it. Speculation has persisted that DIsh would either build its own LTE or (true) 4G-LTE Advanced network - either on its own, or by acquiring a wireless network operator that had LTE/mobile broadband engineering expertise.
According to a Wells Fargo report, Dish's full spectrum license collection is likely worth a total of between $40 billion and $44 billion. That figure includes Dish's 700 MHz, AWS-4 and H Block licenses, as well as the AWS-3 licenses the company won in the FCC's recent spectrum auction. (However, those AWS-3 licenses are somewhat in question because they are tied to Dish via the company's two designated entities (DEs)--Northstar Wireless and SNR Wireless--which could pay around $10 billion in the auction for 702 licenses. Both regulators and Dish's rivals have blasted Dish's use of DEs--and the 25 percent small business discount they are to receive--as unfair). It's also worth noting that Dish's spectrum portfolio could be worth as little as $28.1 billion or as much as $56.7 billion, Wells Fargo said, depending on buyers' eagerness.
Following the close of the recent FCC AWS-3 auction, Dish commands an average of around 80 MHz of licensed spectrum nationwide, putting it just behind T-Mobile in terms of spectrum depth. Sprint leads in overall spectrum owned due to its extensive 2.5 GHz licenses, while AT&T comes in second place, Verizon comes in third, and T-Mobile comes in fourth (even though it acquired all of MetroPCS' spectrum in May 2013).
NOTE: Low-band spectrum can cover large geographic areas, while high-band spectrum can transmit larger amounts of data. Therefore, buyers of licensed spectrum might only be looking for spectrum licenses that fit in with their overall network rollout strategy. The value of spectrum is directly tied to demand from actual mobile broadband users, and demand is a hard metric to calculate. But the rising value of spectrum was clearly on display during the FCC's recent AWS-3 spectrum auction, which raised almost $45 billion in total gross bids--double even the highest forecasts before the event.
A merger would also give T-Mobile US a clear path to grow and continue its role as a market disrupter ("the uncarrier"), giving it both the spectrum and financial resources it needs to build out its mobile broadband network to cover more of the U.S. T-Mobile would be able to use Dish's accumulated spectrum, adding more and faster broadband wireless service across the U.S. That, combined with the continuation of its industry-disruption pricing strategy, could turn T-Mobile into a real threat for Verizon and AT&T for the first time. As the proposed deal wouldn't reduce the number of wireless carriers, regulators are likely to approve it.
Braxton Carter, T-Mobile’s chief financial officer, in March complimented Mr. Ergen’s push to accumulate unused licensed spectrum. “You look at what he is doing with some of his technologies, and that type of marriage could be very, very, very interesting, or partnership,” he said.
Implications for Real Time Mobile Video:
Finally, a merged entity would be a serious competitive threat to the combined AT&T-DirecTV merged company, because it would sell both satellite TV as well as mobile broadband/wireless voice service. It would probably accelerate the trend toward delivery of REAL TIME MOBILE VIDEO, which both merged entities will likely pursue aggressively.
Here's what DirecTV said about its acquisition by AT&T in a press release:
Creates Content Distribution Leader Across Mobile, Video & Broadband Platforms
- The premier pay TV brand with the best content relationships now poised to deliver video to multiple screens – mobile, TV, laptops and more – to meet consumers’ future viewing and programming preferences
- Unparalleled video content distribution scale in U.S. – nationwide mobile and video networks; broadband to cover 70 million customer locations with our broadband expansion
"DIRECTV is the premier pay TV provider in the United States and Latin America, with a high-quality customer base, the best selection of programming, the best technology for delivering and viewing high-quality video on any device and the best customer satisfaction among major U.S. cable and satellite TV providers. AT&T has a best-in-class nationwide mobile network and a high-speed broadband network that will cover 70 million customer locations with the broadband expansion enabled by this transaction."
We can expect a very similar press release if and when the Dish/T-Mobile US deal is completed and announced.
In summary, a new Dish/T-Mobile, would be able to offer customers a full array of mobile Internet-based services along with its fast-growing "skinny-bundle" service called Sling TV. The combined entity could provide mobile Internet, pay-TV and cell phone services resulting in a "poor man's triple play." That's because faster and more reliable wire-line broadband Internet wouldn't be available from the new entity. So it couldn't justifiably compete with AT&T's U-verse, Verizon's FiOS, or Comcast's Xfinity triple play. However, we see tremendous competition in wireless only triple plays between Dish/T-Mobile and AT&T/DirecTV entities.
“We have seen a slowdown in top buying (economic) growth rates. So one of your options to at least generate growth on the bottom line is to do accretive deals..... This deal could mark the start of a new string of mega-mergers in the tech industry,” said Christopher Rolland of FBR &Co. Of course, he was referring to Avago Technologies proposed $37 billion buyout of semiconductor heavy weight Broadcom. "Money is still cheap. So those dynamics are sort of coming together to cause this consolidation," Rolland added.
The value of a combined Avago-Broadcom would be approximately $77 billion. The new company (which is to be called Broadcom Ltd) will have annual revenue of approximately $15 billion.
Broadcom, based in Irvine, Calif., was founded in 1991 by Henry Samueli, PhD - an electrical engineering professor at the University of California, Los Angeles (UCLA) and Henry Nicholas III (Samueli'sPhD student) who left the company in 2003. Mr. Samueli, the owner of the Anaheim Ducks hockey team, is Broadcom’s chairman and chief technology officer.
Broadcom's revenues last year were nearly twice the size of Avago’s. The acquisition would take Avago into new semiconductor markets, including cable modems, TV set-top boxes, Wi-Fi and data center switching systems. Broadcom is by far and away the leader in Ethernet switch chips for equipment in both premises and cloud based data centers as well as telco and campus networks.
The mainstream media, including the NY Times and WSJ, incorrectly reported that Broadcom has a very large share of the mobile communications chip market. In fact they have zero percent share of that market. The company does have a very large market share in WiFi chips, but Qualcomm's Atheros Communications Division is closing in fast.
Broadcom acquired WiMAX chip leader Beceem Communications in 2010 for $316M, believing Beceem could transition it's OFDMA based WiMAX technology to LTE, but that didn't happen. Renesas Mobile was then acquired which gave Broadcom a fully qualified LTE modem, and products. However, facing very tough competition, Broadcom ultimately shut down its cellular efforts leaving it with 0% market share in the "mobile communications" chip market. [The leader in wireless chips, especially cellular, is Qualcomm. Three are no close competitors.]
Furthermore, Broadcom took an impairment charge of $501 million related to the NetLogic acquisition in 2013. Not every deal works out!
Where are the Synergies?
Junko Yoshida, Chief International Correspondent for EE times wrote:
"I need to be enlightened on how this (deal) advances the companies’ technologies. How will this deal make it better for engineers at the two companies working on new products and technologies? Am I cynical in suspecting that Avago wanted Broadcom purely for the sake of getting bigger?
Where is the affinity – or any apparent good vibe – connecting Avago to Broadcom? Aren’t the “soft” factors of corporate culture at least as important for successful mergers as a momentary splash on the stock market?"
Continuing, Yoshida wrote:
"Avago’s big appetite for acquisitions is well known. But this sort of abrupt switch from one target to another suggests recklessness. Or maybe I’m not cynical at all, but naïve. After all, company M&As aren’t personal. It’s not like Avago and Broadcom are engaged to be married.
I’ve always felt a great respect for Broadcom. I’ve admired savvy business strategy, and more significantly, a technology vision led by Henry Samueli, Broadcom’s co-founder, chairman of the board, and chief technology officer.
Without Broadcom, we might well be bereft of all the Ethernet, broadband connections the company has enabled. Broadcom, like a well-oiled machine, has stayed true to its motto – “integration, integration, integration” – to dominate the digital SoC world.
I don’t think I’m alone in viewing Broadcom as the best of the best among U.S. fabless chip companies. But this merger begs a big question: Where will Broadcom integration vision turn? Will Broadcom’s team be allowed to sustain its discipline in execution? Most important, will Henry Samueli stay?"
Quotes from Broadcom & Avago CEOs:
"This is a landmark day in the history of the industry,” said Scott McGregor, Broadcom’s 58-year-old CEO, during a conference call after the deal was announced last Thursday.
"Today's announcement marks the combination of the unparalleled engineering prowess of Broadcom with Avago's heritage of technology from HP, AT&T (Microelectronics), and LSI Logic in a landmark transaction for the semiconductor industry," Avago CEO Hock Tan (62 years old) said in a statement. "Together with Broadcom, we intend to bring the combined company to a level of profitability consistent with Avago's long-term target model."
Financing the Deal:
Avago Technologies plans to finance its $37 billion purchase of Broadcom, with $15.5 billion of new syndicated term loans. Financing will come from Bank of America Merrill Lynch, Credit Suisse, Deutsche Bank, Barclays, and Citigroup, sources said. The issuer expects to refinance $6.5 billion of existing debt facilities and raise $9 billion of new money. A $500 million revolver would be undrawn at closing. The transaction would leverage Avago at roughly 2.7x, giving full credit for $750 million of synergies. Net of $1.3 billion of cash on hand, adjusted leverage would fall to 2.5x, according to an investor presentation.
Avago Built on Debt Fueled Takeovers:
Avago has used takeovers and mergers as an engine for economic growth and increased market capitalization. Some analysts have compared the company to Valeant Pharmaceuticals, a drug maker whose meteoric growth has been powered by serial acquisitions. Avago's relatively short company history is truly amazing and one for the record books.
- In 2005, private equity firms KKR and Silver Lake Partners acquired Agilent’s Semiconductor Products Group (SPG) for $2.66 billion. (Agilent was spun off by HP). In December of that year, Avago Technologies was established, creating the world’s largest privately held independent semiconductor company.
- From 2007 to its IPO on August 6. 2009, Avago acquired the fiber optic component and Bulk Acoustic Wave businesses from Infineon (formerly Siemens Microelectronics) and then Nemicon to complement its motion control product line. When AVGO went public in 2009, it seemed like a modest player in the semiconductor industry with a market value of just $3.5 billion. But few anticipated its future growth through debt funded deal making.
- Since Avago became a public company in 2009, its management team has pursued a half-dozen acquisitions. The biggest of which was its $6.6 billion takeover of the LSI Corporation (formerly LSI Logic), a networking and storage chip manufacturer, in late 2013. It was funded by a $4.6 billion leveraged loan which was ~70% of the price paid for LSI. The purchase price for LSI was more than six times Avago’s cash on hand at the time.
- Note that LSI had previously acquired Agere (formerly AT&T Microelectronics, then part of Lucent Technologies, IPO in March 2001) which at one time had a market cap of > $10 billion!
- Early this year, Avago struck a $606 million takeover deal for Emulex.
- Aiding Avago’s acquisitions are several rare factors, including a roughly 5% tax rate that comes from being based in Singapore and ready access to low-cost debt financing. Note that Singapore is the company's headquarters ONLY for tax reasons. Neither the original company nor any of its acquisitions were ever based there.
Meteoric Rise in Avago Stock Price:
AVGO went public August 6, 2009 at $15 a share. The stock closed Friday at $148.07. That's an increase of 987.13% and triple its value of December 2013. Evidently, Avago's aggressive acquisition strategy has paid off big time for its shareholders.
For more financial implications of this merger, please read this blog post by the Curmudgeon and Victor Sperandeo.
Addendum: Intel Buys Altera for close to $17B
On Monday, June 1st, Intel announced it would buy FPGA chip maker Altera Corp. for $16.7B - the costliest in the Santa Clara, CA, company’s 47-year history. Some Wall Street analysts question whether Intel paid too much.
The latest IHS Infonetics Service Provider Capex, Revenue, and Capex by Equipment Type report notes that worldwide telecom service provider capital expenditures (CAPEX) grew 2.9% year-over-year in 2014, to US$352 billion.
CAPEX REPORT HIGHLIGHTS:
- In 2014, expenditures for every type of equipment except TDM voice slowly grew or stayed flat from the year prior.
- Europe posted 3.3% year-over-year growth in carrier CAPEX, mainly fueled by Deutsche Telekom and Vodafone.
- China more than offset spending declines in Japan and South Korea to drive Asia Pacific's capex growth to 4.2 percent year-over-year in 2014.
- Meanwhile, a World Cup hangover slowed telecom spending in Latin America.
- IHS forecasts worldwide telecom capex to total a cumulative US$1.8 trillion in the 5 years from 2015 to 2019.
"We're entering a new era of desynchronized cycles in telecom spending. Regions and economic powers have their own investment agendas and pace, and this will result in overall flat-to-low-single-digit capex growth through 2019 unless a major event occurs," said Stéphane Téral, research director for mobile infrastructure and carrier economics at IHS.
CAPEX REPORT SYNOPSIS:
IHS Infonetics' biannual service provider CAPEX report provides worldwide and regional market size, forecasts through 2019, analysis, and trends for revenue and capex by service provider type (incumbent, competitive, cable operators, independent wireless, satellite) and CAPEX by equipment type (broadband aggregation equipment; wireless infrastructure; IP routers and CES; optical equipment; IP and TDM voice infrastructure; video infrastructure; all other telecom/datacom network equipment; and CPE non-telecom/datacom network equipment).
To purchase the report, please visit: www.infonetics.com/contact.asp
- Europe Exiting Optical Network Spending Slump
- Hotspot 2.0 and Virtualization Key to New Revenue for WiFi Carriers
- Carrier Voice-over-IP Market Off to Strong Start in 2015, Led by U.S.
- Mobile Operators Using EDGE, HSPA+ to Improve User Experience on Road to LTE
- Big Jump in Carrier WiFi Gear Expected as 802.11ac and Hotspot 2.0 Accelerate
From Dell'Oro Group's Carrier Economics report: Dollar Strength to Wipe Out $20 B in Telecom Capex During 2015:
“We have not made any major changes to our constant currency Capex projections for 2015 and continue to expect the market will grow at a low-single-digit pace in 2015 driven primarily by China and Europe,” said Stefan Pongratz, Dell’Oro Group Carrier Analyst. “But in U.S. Dollar terms, assuming rates remain at current levels, the strengthening U.S. Dollar will unequivocally impact Telecom Capex, and we have revised our 2015 Capex in U.S. Dollar terms downward rather significantly to adjust for currency fluctuations,” continued Pongratz.
AT&T says by 2020, 75% of its network will be software-centric, with the use of network functions virtualization and software defined networking (SDN) technologies. Note however, that AT&T's definition of SDN has nothing to do with the original definition which includes strict separation of data & control planes, centralized controller with a global view of the network (not just adjacent network elements), use of Open Flow API/protocol as the Southbound API from the control to data planes. AT&T is NOT a member of the Open Network Foundation that is specifying SDN architectures and protocols.
As part of AT&T's ongoing Domain 2.0 effort, about 40% of its strategic IT applications have been migrated to the cloud, with an ongoing process of one application to be migrated a day. According to the company, that move has enabled greater operational efficiencies over applications running on dedicated hardware. In addition, about 400,000 processor cores are running the cloud IT apps and operating 50% more efficiently than on dedicated hardware, the company claims.
AT&T expects future networking deployments to further reduce capex over the next five years. "This is a big opportunity for change and will allow us to look at our network model in a different way," said Susan Johnson, senior vice president of global supply chain at AT&T.
IHS Infonetics just reported that global optical network hardware spending was up 5% in the first quarter of 2015 (1Q15) from year ago as signs of improvement continued to emerge in EMEA (Europe, the Middle East and Africa) and as Japan prepares for a large-scale 100G rollout.
OPTICAL NETWORK MARKET HIGHLIGHTS:
- The worldwide optical network equipment market, including WDM and SONET/SDH, totaled $2.7 billion in 1Q15.
- With 2 consecutive quarters of year-over-year growth under its belt, Europe appears to be exiting an optical slump; results in the region are better than the headline numbers due to the strengthening dollar.
- The company outperforming in Europe is Alcatel-Lucent, with a steady trend of rising revenue.
- WDM revenue rose 9 percent globally in 1Q15 from the previous quarter, putting up an 11th consecutive quarter of growth.
- 100G spending is rapidly increasing worldwide and comprises around a quarter of total WDM revenue, which is flowing primarily into the hands of Alcatel Lucent, Ciena, Cisco, Huawei and Infinera.
- Internet content providers (ICPs) continue to surge and presently account for roughly one-tenth of North American optical spending, though volatility in future expenditures is likely.
"The focus in optical networking is now shifting to the metro as new products targeted specifically at this market are announced and scheduled for production. This will allow datacenters and traditional service providers to more rapidly adopt metro 100G in a significant way," said Andrew Schmitt, research director for carrier transport networking at IHS.
"Meanwhile, the service provider market is fracturing into two factions-the telcos and webcos-each with specific optical transport needs and requirements. Webco spending is growing faster right now, so vendors are repositioning to align roadmaps and marketing with their needs," Schmitt said.
OPTICAL NETWORK REPORT SYNOPSIS:
The quarterly IHS Infonetics Optical Network Hardware market research report tracks and forecasts the global optical equipment market. The research service provides worldwide and regional market size, vendor market share, forecasts through 2019, analysis and trends for metro and long haul SONET/SDH and WDM equipment, Ethernet optical ports, SONET/SDH/POS ports and WDM ports. Vendors tracked include Adtran, Adva, Alcatel-Lucent, Ciena, Cisco, Coriant, Cyan, ECI, Fujitsu, Huawei, Infinera, NEC, Padtec, Transmode, TE Connectivity, Tyco Telecom, ZTE, others.
To purchase the report, please visit: www.infonetics.com/contact.asp
Packet-Optical Transport Deployments Slower Than Anticipated:
In Data Center Optics Market, 40G Transceivers Ubiquitous, 100G Accelerating:
In Telecom Optics Market, 100G Transceiver Growth Suppressed Until 2016:
OTN Switch Spending Up 40 Percent from a Year Ago:
About IHS (www.ihs.com):
IHS (NYSE: IHS) is the leading source of insight, analytics and expertise in critical areas that shape today’s business landscape. Businesses and governments in more than 150 countries around the globe rely on the comprehensive content, expert independent analysis and flexible delivery methods of IHS to make high-impact decisions and develop strategies with speed and confidence. IHS has been in business since 1959 and became a publicly traded company on the New York Stock Exchange in 2005. Headquartered in Englewood, Colorado, USA, IHS is committed to sustainable, profitable growth and employs about 8,800 people in 32 countries around the world.
In a related report, Dell'Oro Group said the Optical Transport equipment market reached $2.8 billion in the first quarter of 2015. The majority of the optical market's growth was due to the continuous need for more wavelength division multiplexers (WDM). In the quarter, the total WDM market, which comprises 76 percent of the optical market's revenue, grew five percent year-over-year.
"One of the main drivers for WDM equipment demand is the interconnection of data centers, which are on the rise as users increase their consumption of content such as video," said Jimmy Yu, Vice President of Optical Transport research at Dell'Oro Group. "Of greater interest in the optical market is the changing customer type, as more of these data center interconnects (DCI) are purchased directly by the enterprise rather than as a service from an operator. We believe approximately 12 percent of WDM revenues in the first quarter were generated from data center interconnection, purchased directly by enterprise customers," added Mr. Yu.
About the Report
The Dell'Oro Group Optical Transport Quarterly Report offers complete, in-depth coverage of the market with tables covering manufacturers' revenue, average selling prices, unit shipments (by speed including 40 Gbps, 100 Gbps, and >100 Gbps). The report tracks DWDM long haul terrestrial, WDM metro, multiservice multiplexers (SONET/SDH), optical switch, and optical packet platforms.
To purchase this report, call Matt Dear at +1.650.622.9400 x233 or email Matt@DellOro.com.
CenturyLink will tap dark fiber in 17 states to expand gigabit broadband, benefiting approximately 500,000 small and midsize businesses (SMBs). The fiber-to-the-premises expansion will enable CenturyLink to broaden service options for SMBs and will involve the introduction of cloud-based business services from Microsoft such as Office 365.
CenturyLink's symmetrical gigabit fiber service will now reach nearly 490,000 small to medium-size business (SMB) locations in 17 states with the availability of IT solutions including IP networking, voice over IP (VoIP) and cloud capabilities. The 3rd largest U.S. telco is launching service to SMB customers in parts of Iowa, Idaho, North Carolina, Ohio and Wisconsin and expanding its availability in nine of the 12 states where CenturyLink initially deployed gigabit fiber for business customers in 16 cities, which it announced in August of last year.
The nine states include Arizona, Colorado, Florida, Minnesota, Nevada, New Mexico, Oregon, Utah and Washington, and the company also provides 1G-bps speeds in parts of Missouri, Nebraska and South Dakota.
In addition to its 1G-bps business service, CenturyLink offers 1G-bps speeds to residential customers in 11 cities.
"Our consultative sales team invests in understanding a customer's business priorities in order to tailor IT recommendations that will address the customer's needs while alleviating technology pain points," Shirish Lal, CenturyLink's chief marketing officer, told eWEEK. "Our local service and support is also welcomed by SMB customers who don't always have the option of working with technology providers that have feet on the ground in their communities." Lal noted CenturyLink is not making pricing details available due to the vast range of options and features available within the bundled solutions the company designed for SMB customers using gigabit fiber.
"Pricing is convenient and predictable as a low monthly price per employee user, which for CenturyLink's managed solutions includes providing, managing and maintaining all equipment, hardware and software," Lal said.
"We're really trying to gain market share and we're trying to build bandwidth capabilities," said Valerie Dodd, vice president and general manager of Century Link in New Mexico. "There is fiber here. There already is fiber."
Ahmen! Hello Google Fiber and AT&T GigaFiber- you've got competition now!
"We have to do more transformation," he said. "Technology is changing so rapidly. Customers expectations are changing. They want anytime, anywhere information. They want it now and they want it simple and easy. And they're looking for value."
Post said he feels confident in the progress the company made over the past year.
"We made a lot of progress this last year," he told The News-Star. "We've made some key acquisitions for our company. We advanced and expanded our sales force. We rolled out a number of new products that are really driving a lot of interest from our … customers.
"We expanded our high-speed Internet abilities significantly this year. We expanded our video abilities and our cloud and hosting business. We are excited for our future. We believe we have a lot of potential to drive value for our customers in months and years ahead."
Separately, CenturyLink recently opened a Technology Center of Excellence in Monroe, Louisiana
CenturyLink's 1 Gbps service is now available to more than 64,000 business locations in the state of WashingtonMay 18, 2015 – Company expands gigabit broadband service for business customers in the South Puget Sound region and surrounding areas
CenturyLink's 1 Gbps service is now available to an additional 8,200 business locations in MinnesotaMay 18, 2015 – Company expands gigabit broadband service for business customers in Rochester, Twin Cities and surrounding areas
CenturyLink's 1 Gbps fiber service now reaches more than 49,000 Southern Nevada business locationsMay 18, 2015 – Company's gigabit broadband service launches to 4,000 additional business locations
CenturyLink's 1 Gbps service is now available to more than 19,700 business locations in Utah
Read my coverage of the May 15th TiECon 2015 Grand Keynote with 2 representatives of CenturyLink:
->Gary Gauba and Aamir Hussein (EVP &CTO)
View on viodi.com/category/weissberger
by David Dixon of FBR Inc (edited by Alan J Weissberger):
Verizon (VZ) announced today that it has entered into agreement to acquire AOL Inc. for $50 per share(17.4% premium to yesterday's closing price of $42.59) for total transaction price of $4.4 billion. The transaction will take form of a tender offer followed a merger, with AOL becoming a wholly owned subsidiary of Verizon upon completion. The acquisition will be financed through a combination of commercial paper and cash on hand. Management expects the deal to close in summer 2015. (More details on the deal in the WSJ article below)
While we (FBR) do not believe the deal itself is significant, it does show a growing emphasis by VZ to attempt to gain a disproportionate share of millennial viewership which is trending increasingly to over-the-top (OTT) biased and mobile away from linear TV.
- VZ expects to leverage its Internet of Things (IoT) platform to deliver AOL content.
- AOL's primary assets include subscription business, a portfolio of global content brands (Huffington Post, TechCrunch, Engadget, MAKERS, MapQuest, Moviefone, and AOL.com), programmatic advertising platforms, and millennial-focused OTT original video content.
- Content remains king but is shifting from Public Internet to Private Networks.
- As recent industry trend suggests, it is becoming increasingly important for telcos to expand beyond traditional businesses and leverage their differentiated platforms, including mobile and distributed compute platforms (a net new build well underway).
- Architecture shifts toward deeply distributed datacenter nodes leveraging docker technology and Broadcom's 100Gbps merchant silicon are key.
- Simplifying the metro network allows for a superior class of service platform relative to CDNbased public internet traffic because access networks can now tap directly into the content serverin regional datacenters.
- Taking a page from AT&T and DIRECTV, an AOL acquisition will provide VZ with end-to-end content distribution across VZ's mobile, video, and broadband platforms.
- Furthermore, it provides VZ with cross selling opportunities including bundling of AOL's contentwith VZ's wireless, broadband and TV services.
WSJ Article: http://www.wsj.com/articles/verizon-to-buy-aol-for-4-4-billion-1431428458
The all-cash deal values AOL at $50 a share, a 23% premium over the company’s three-month volume-weighted average price. AOL shares rose 18% in morning trading to $50.18. Verizon shares fell 1.7% to $48.98.
The acquisition would give Verizon, which has set its sights on entering the crowded online video marketplace, access to advanced technology AOL has developed for selling ads and delivering high-quality Web video.
“Certainly the subscription business and the content businesses are very noteworthy. For us, the principal interest was around the ad tech platform,” said Verizon’s president of operations, John Stratton, at a Jefferies investor conference early Tuesday.
Offering digital video-over-wireless connections represents a growth avenue in coming years for Verizon, which last year brought in $127 billion in revenue and profit of $12 billion.
Verizon has said it plans to launch a video service focused on mobile devices this summer. The company has offered few details, but last month Chief Financial Officer Fran Shammo said the service would offer a mix of paid, free and ad-supported content and wouldn’t try to replicate traditional TV.
The service will feature shorter snippets rather than 30 or 60 minute shows. It also could include multicast programming—a sort of broadcast service that uses cellular airwaves—for delivering live content like sports and concerts, along with on-demand viewing.
That description has left a lot of room for interpretation, and some analysts briefed on the service recently by the company said they came away unimpressed. Verizon, however, like rival AT&T, believes video will be a primary driver of demand for its wireless network in the years ahead.
“This will have nothing to do with what you do in your house,” Mr. Shammo said in an interview on April 22. “Millennials consume news in ways you can’t even see on the TV.”
Verizon already has relationships with many media providers because of its FiOS TV service, which is available in 5.6 million U.S. households. And it has shown prowess in mobile video already, including through a partnership with the NFL that allows it to stream some games over phones.
A year ago, Verizon agreed to pay what people familiar with the matter said was around $200 million to buy Intel Corp.’s fledgling OnCue Internet video service—an asset that underpins the telecom company’s upcoming offering.
For AOL, the sale is the latest chapter for a company that has redefined itself in recent years as a significant player in digital media and marketing, after originating as a pioneer in the dial-up Web access business and being involved in one of the most disastrous corporate mergers ever.
AOL eventually grew to more than 20 million dial-up subscribers and consummated a $183 billion megamerger with Time Warner Inc.in 2000. The company’s value dissipated quickly after the dot-com bust and ultimatelyTime Warner spun out AOL in 2009.
Under the leadership of Tim Armstrong, a former Google Inc. executive who took over as chief executive of AOL in 2009, the company has invested heavily in ad technology—including an automated, or “programmatic” platform that allows marketers to bid for inventory electronically. In 2013, AOL purchased Adap.tv, an “exchange” that connects buyers and sellers of online video advertising. Mr. Armstrong will continue to lead AOL’s operations, the companies said.
AOL also built a stable of content including online news sites such as Huffington Post, TechCrunch and Engadget. And it has even produced original Web series. It recently launched “Connected,” a documentary-style series in which the subjects film themselves.
In an interview, Mr. Armstrong said the combination of Verizon and AOL would “create what I think is the largest mobile and video business in the United States.” Mr. Armstrong said he believed that AOL would now not only be able to compete with digital advertising giants Google and Facebook Inc., but it also will be able to play in the rapidly emerging connected TV and mobile media and advertising sectors.
“This gives us a real seat at the table for the future of media and technology,” he said.
The deal is expected to close this summer, pending regulatory approvals. Verizon expects to finance the acquisition through cash on hand and commercial paper.
Verizon Takes on Heavyweights in Online Ad Sales. So…why AOL? Verizon’s news release runs through an alphabet soup of acronyms--LTE, OTT, IoT (seriously, Internet of things?). None of which sounds very convincing, especially after Wall Street analysts came away from a recent briefing by the company about its video strategy pretty skeptical. One thing is clear, though. AOL has a really good advertising platform. That means VZ will effectively be competing with tech heavyweights like Google, Facebook and Yahoo in the fast-growing online video-ad market. (firstname.lastname@example.org)
Verizon Aiming for Younger Eyes with AOL Deal. Everyone’s into video now. AT&T is on the cusp of a $49B deal for DirecTV that will make it the country’s biggest pay-TV distributor. Verizon is taking a different—and cheaper—tack with its $4.4 billion deal for AOL. The diverging strategies of the two telcos seem pretty clear at first glance. Verizon is going after millennials. AT&T has its eye on their parents. (email@example.com)
Market Talk is a stream of real-time news and market analysis that is available on Dow Jones Newswires
Verizon's $4.4 billion acquisition plans for AOL will help the prospective parent company gain additional online advertising tools as well as a stream of fresh and varied content, both of which can help attract more users in the face of growing online advertising competition from Google, Facebook and others.
That's the take of four industry analysts who shared their insights with eWEEK about Verizon's May 12 announcement that it is buying AOL to bolster its content and online advertising capabilities.
"Overall, I think it will be a good deal for both companies," said Charles King, principal analyst of Pund-IT. "My feeling is that the premise everyone is following these days is that mobile technology is going to represent the path of future business opportunities" and that online advertising acquisitions like the Verizon AOL deal can help strengthen such ties.
"We're seeing a lot of companies, like the recent Yahoo-Microsoft search deal, as a good example, creating opportunities to allow them to become alternatives to Google," said King. "Google and Facebook are the two big players here. There are other players who want a piece of that action, and if they don't move soon, there's a good chance that they will be frozen out."
The Verizon AOL deal is a good example of such synergies, he said. "And the relatively modest cost for the deal is indicative that this may not be the only such deal that Verizon does." For AOL, "it's hard to think of a stronger, better parent for AOL to have," King explained. "Verizon is certainly the 700-pound gorilla of the wireless world."
For Verizon, the key benefit of the purchase is acquiring AOL's established online advertising platform, even more than the company's content, Andrew Frank, an analyst with Gartner, told eWEEK in an email reply.
"I believe this signals a significant shift in the structure of the entertainment and advertising distribution market—it's clear that digital distribution is the future of all media, and that carriers seek to be more than just 'dumb pipes' in this new order of things," wrote Frank.
A key benefit from the deal for Verizon is that the company "has an opportunity to re-energize its local marketing value proposition, which has flagged with the decline of the Yellow Pages business," by offering a range of advertising services alongside its communication services, wrote Frank. And at the same time, AOL's video platforms could help Verizon "take a leadership position in providing the next generation of automated, targeted TV and online video advertising services," while also further leveraging its mobile footprint "to become a significant player in the fast-growing market for mobile advertising and content services," he explained.
Frank said he also believes that AOL's ONE ad tech services, which allow marketers to build their ad campaigns one time across all screen sizes and device types, "have at least as much potential value to Verizon as its content business, even though AOL's market penetration in this area has not been as significant as its competitors," he wrote. "Verizon has an opportunity to create more separation between AOL's content and advertising businesses, which could benefit its ad tech offerings, which are substantial, by removing any appearance of being too close to its publishing business."
One thing that could interfere with the deal, he said, is if government regulators see the proposed acquisition "as a call for more rules or reforms around the role distributors can play, especially when it comes to data and privacy."
Patrick Moorhead, principal analyst of Moor Insights & Strategy, told eWEEK he sees the merger "reflecting the challenges that carriers are having in differentiating themselves through their 'pipes,'" which are becoming more and more a commodity rather than unique delivery mechanisms to their customers. That means that "carriers need something else to provide stickiness" so that their customers and prospective customers keep coming back to them online, he said. "The benefits to this could be that it gives customers more reasons to stick with Verizon, which could result in improved margins."
On the other hand, said Moorhead, "I'm a bit skeptical right now, given the kind of content AOL has. They have assembled some interesting Web news content, but outside of that, I'm not seeing popular, exclusive movie, TV show or music content."
In addition, the AOL brand today "is nowhere even near as relevant as they were in 1995," when it was a huge online player, he said. "AOL [back then] was a bit like Google and Facebook are today."
Another analyst, Rob Enderle, principal of Enderle Group, is more skeptical of Verizon's move and isn't so sure that the carrier will get as much out of the deal as the company thinks it will.
"With Google entering the carrier space as a [mobile virtual network operator] and T-Mobile getting ever more aggressive in their moves to take [market] share, Verizon is looking for an edge and thinks content is that edge," said Enderle. But to make it all work, "they need a critical mass of content and AOL alone won't get them there, suggesting other acquisitions in the future or that this will fail."
At the same time, if Verizon uses the AOL content providers to heavily promote Verizon, "these publications run the risk of becoming annoying, or worse, untrusted and will lose whatever value they started with," said Enderle. "I think this showcases that Verizon is scared to death of what Google and T-Mobile are doing but really have no good idea what to do about it so they are rolling the dice and hoping content can change the battlefield."
AOL Fits Verizon's Over-the-Top Content Streaming Future
John Stratton, president of operations for Verizon Communications Inc., spoke at a Jefferies global investment banking conference in Miami on May 12, shortly after the deal was announced and said that the merger with AOL "is a very beautiful complement to the foundation that we've been building for several years in digital media services," according to a transcript of the event.
One area where the merger will show promise is in Verizon's transition to over-the-top delivery of curated video services to users over existing channels, said Stratton. "For us, the principal interest was around the ad tech platform that [AOL chairman and CEO] Tim Armstrong and his team has done a really terrific job building. We really like the technology a lot and we think of it as a key enabler for us as we begin to generate revenue and value above the network layer. So we've talked a lot about our over-the-top video ambitions and this is for us a very important cornerstone enabler as part of that broader strategy," he said.
For AOL, which merged in 2001 with cable company Time Warner, the latest Verizon acquisition proposal has similar risks to the earlier merger, which was slated at the time to reinvigorate both AOL and Time Warner, but left both sides wanting, said Enderle. "The Time Warner merger comes to mind here in that it failed because the cultures of the two entities were just too different," he said. "Verizon is more like Time Warner than it is like AOL, suggesting that problem will recur."
The Verizon AOL deal, which had been rumored earlier this year, will bring together the largest U.S. mobile carrier and the AOL video and print content network, including the AOL Huffington Post Media Group.
"Verizon's vision is to provide customers with a premium digital experience based on a global multi-screen network platform," Lowell McAdam, Verizon's chairman and CEO, said in a May 12 statement. "This acquisition supports our strategy to provide a cross-screen connection for consumers, creators and advertisers to deliver that premium customer experience."
The deal allows Verizon to buy AOL for $50 per share, with AOL becoming a wholly owned subsidiary of Verizon when it is completed, the companies said. The transaction, which is expected to close this summer, is subject to customary regulatory approvals and closing conditions.
AOL began originally in 1985 as an online communications service called Q-Link, when the company was originally known as Quantum Computer Services. Quantum launched its first instant messaging service in 1989 and introduced the "You've got mail!" announcement that became a core identity of the company, which was renamed AOL, or America Online, in 1991.
Large media acquisitions like this one are increasingly common today as companies seek more ways of attracting new customers with increased content that users find valuable. Competitors, including Facebook, are also on the move constantly to find new sources of content that can help them stay one step ahead of competing content and advertising networks.
In March, a report surfaced saying that The New York Times, BuzzFeed and National Geographic, among others, are planning to launch a test program to host their content on Facebook, allowing users to read the latest news and feature articles without leaving the social network. Such moves help content sites such as Facebook remain "sticky" and important for users.
Web portals, including AOL, Yahoo, Google and others, have been following similar strategies to remain relevant in a fast-changing online and mobile-centric world so they can grow and sustain their audiences.
by David Dixon of FBR Telecom Services (edited by Alan J Weissberger)
Level 3 delivered solid 1Q15 results in its first quarter with full TWTC (tw telecom inc. which they acquired last year) results. Management is executing well and should continue to leverage the global asset platform this year.
Looking into 2016, we believe the advent of a shift to 25G/100G metro networks will reduce the number of optical network elements, lower costs, and be and enabler for direct private networking relationships between content owners and access networks as an alternative to peering and IP transit services on the public Internet.
We think this will create greater pricing pressure for transport services in 2016 and increase disintermediation risk. For the quarter, we were pleased with:
(1) EBITDA (earnings before interest, taxes and amortization) beat analyst estimates,
(2) increase in FY15 adjusted EBITDA and free cash flow guidance, and
(3) achievement of $95M of annualized run-rate adjusted EBITDA synergies since the close of the tw telecom transaction.
Overall company revenue continues to be driven by IP and data services (~45.7% of total CNS revenues), which grew 9.0% Year over Year in constant currency.
Management believes CDN (Content Delivery Network) will see further growth later this year as more capacity is added. Although we welcome continued margin expansion and CDN momentum, we believe these may be affected by the current shift to a paid peering model1 and further architecture shifts from 2016. We think the FCC believes that the paid interconnection model from a decade ago (where voice traffic was 96% versus data traffic of 4%) worked well then and could provide a roadmap for today's data-biased traffic. Therefore, content companies and intermediary network providers such as LVLT may see higher interconnection rates going forward, provided that rates are "just and reasonable." The argument today is in terms of which party should set the interconnection rate.
Note 1. Paid Peering is the business relationship whereby service providers (Internet Service Providers (ISPs), Content Distribution Networks (CDNs), Large Scale Network Savvy Content Providers) reciprocally provide access to each others' customers, but with some form of compensation or settlement fee.
Internet traffic flows between different networks generally in one of two ways, through transit, in which a smaller network passes its traffic through a larger one to connect to the broader Internet; and peering, in which large networks connect with each other. Traditionally, smaller networks paid larger ones for transit services, but peering didn’t require any kind of payment from one company to another. Instead, both networks are responsible for their own costs of interconnecting.
■ 1Q15 results recap. Consolidated revenue of $2.05B was just shy of the consensus estimate of $2.06B. The adjusted EBITDA margin expanded by 130 bps YOY on a pro forma basis to 30.9%, compared with the consensus of 30.4%, and adjusted EBITDA were $635.0M, versus the consensus of $626.1M. Margins benefited from increased synergies associated with the TWTC acquisition.
■ FY15 adjusted EBITDA and Free Cash Flow guidance raised. Management raised full-year 2015 adjusted EBITDA growth guidance to a range of 14% to 17% from 12% to 16% previously. Free cash flow is now anticipated to be in a range of $600M to $650M, up from $550M to $600M.
■ Adjusting estimates: We are lowering our FY15 revenue estimate to $8.6B from $8.7B to account for U.S. dollar strength. Our FY15 adjusted EBITDA estimate increases to $2.6B from $2.5B, as the company should achieve further cost synergies. Our FY15 EPS estimate declines modestly to $1.57 from $1.59. Our estimates remain conservative given the unclear longer-term impact from the likely shift in the peering model, greater price compression from the move in 2016 to 25 GB/100 GB transport services, and adverse demand implications from a shift toward simpler, lower-cost metro networks (a net new build for the industry in 2016) that could raise disintermediation risks for Level 3.
1. What is the real benefit of the tw telecom merger?
CDN services are becoming commoditized, but the LVLT/TWTC combination will allow LVLT to improve scale and scope by leveraging the domestic and global long-haul footprint and TWTC s dense urban fiber network. TWTC s higher-margin enterprisecentric business should benefit from greater scale. LVLT has a network backbone that includes 180,000 miles of fiber across 60 countries. A long-haul and metro network provider makes sense against a backdrop of increasing competitive pressures, but the move by access networks to create their own distributed datacenters and connect directly to regional agnostic datacenters suggests that the outlook for CDN providers is unclear. We think online content relationships will continue to evolve. 12 to 18 Months time frame.
2. Will network changes amid heavy traffic demands trigger greater disintermediation risk for Level 3?
The Internet architecture, traffic flows, and content relationships are changing fast. Many application service providers are leveraging Level 3 utility services to capture network ownership economics as the value continues to move higher up the stack from the networking layer to the application layer.
The telecom industry is migrating to improved utilization through:
(1) SDN and NFV (following Google's lead) and
(2) application development with Docker that enables coding and linux containers (i.e., applications, storage resources) to work together more easily and be extracted out to a virtual linux container edge.
Utilization is much improved on common processing platforms with simplified routing protocols, thus shifting the demand curve for network traffic as application flows move on private networks from source origination to destination.
The migration to 25 GB/100 GB metro networks could be the enabler for direct private networking agreements in regional datacenters offering greater security and performance attributes relative to public Internet traffic interconnections.
We believe the migration to paid peering agreements and a rationalization of peering agreements is well underway and should continue to affect Level 3 cost structure.
The key driver is mature broadband penetration that has operators focused on incremental costs. We expect this transition to be implemented methodically as the industry migrates to major private interfaces over the next few years.
Today, traffic ratios increasingly determine the nature of the interconnection relationship to a greater extent than traffic volumes. We believe de-peering risk is significant and/or could create a higher cost structure as the eyeball network operators become more disciplined with traffic ratio imbalances above 2:1. 12 to 24 Months time frame.
Nokia CEO defends Alcatel-Lucent merger after disappointing earnings report; Infonetics: It's the "Airbus of telecom"Thu, 04/30/2015 - 20:21 — Alan Weissberger
Nokia Corp. said that its mainstay network business delivered "unsatisfactory profits" during the first quarter. Nokia’s network division saw its quarterly revenue rise 15% over the year to €2.67 billion ($2.94 billion), the unit’s underlying operating profit for the first quarter fell to €85 million from €216 million, Nokia said in a statement.
The network division's quarterly underlying operating profit margin fell to 3.2% from 9.3% a year earlier and was well below the company’s long-term target of between 8% and 11%.
Nokia also said that its network unit is now expected to post a full-year 2015 underlying operating profit margin around the midpoint of the long-term target between 8% and 11%.
The networking unit’s “unsatisfactory” profitability was due to higher expenses and more revenue coming from lower-margin hardware sales instead of more lucrative software deals, Chief Executive Rajeev Suri said in a telephone conference call. Suri claimed that every single customer he has spoken to since the Alcatel-Lucent deal was announced has expressed support for the move.
"They see it as a way to ensure there are three strong global competitors and not as a reduction in competition," Suri said. "It's a way to protect investments of the past while enabling the innovation of the future," he added
Suri also sought to address the worry that another merger between two huge equipment makers could run into the same problems as earlier tie-ups.
"It's not a joint venture but an acquisition and there is clarity in terms of leadership and governance," he said. "Both the companies have learned from recent transformation and restructuring, and so we can ensure that history does not repeat itself."
Nokia says it has already appointed an "integration leader" to ensure that integration planning is kept separate from ordinary day-to-day business activities.
Suri also believes that recent technology shifts will aid the merger process. "We've been transitioning away from customized hardware and towards open interfaces that can mitigate the pain of expensive swaps," he said.
"We are confident we can execute as discussed and expect no change in planned cost reductions from the transaction," said Timo Ihamuotila, Nokia's CFO.
Suri's defense of Nokia's bid for Alcatel-Lucent came just a day after Odey Asset Management, the French company's second-biggest shareholder, was reported by the Financial Times (subscription required) to have described the deal as "unacceptable."
The investment group, which owns around 5% of Alcatel-Lucent's stock, is said to have complained that Nokia's bid massively undervalues Alcatel-Lucent and is really a merger "dressed up as a takeover."
Last week, ratings agency Fitch Ratings Ltd. weighed in with its own downbeat assessment of the deal, arguing it would do little to ease competition.
"Other major vendors will use the time it takes for the deal to complete to try and strengthen their own position," said Fitch in a published statement. "In some markets, such as the US, competition should ease in the longer term, but in others the picture is less clear."
Read more at: http://www.lightreading.com/business-employment/business-transformation/nokias-suri-defends-alcalu-deal-against-critics/d/d-id/715417?itc=lrnewsletter_lrweekly
In a note to Infonetics clients, Stéphane Téral, Research Director, Mobile Infrastructure and Carrier Economics wrote:
"The problem is that we’ve reached the end of the (mobile infrastructure) cycle—2015 is a peak year (see our November 2014 Service Provider Capex, Revenue, and Capex by Equipment Type market size and forecasts)—and the next one will require scale and scope, including a new type of software-based networking equipment that combines telecoms, media, and IT. Alcatel-Lucent and Nokia both lack end-to-end capabilities as well as the scale of their most direct competitors, Ericsson and Huawei, so they can’t fully embrace the new ICT era that is bringing the likes of Cisco, IBM, Oracle, and HP to their traditional service provider turf. Now was the right time for Europe to create its telecom champion, the same way as the European Aeronautic Defense and Space Company N.V. (EADS) was created in July 2000 (reorganized and renamed Airbus Group in January 2014)."
"The Finnish-French tie-up (Nokia-Alcatel-Lucent) recorded sales of €25.9B last year and has a market cap of more than €45B, directly rivaling Ericsson (€25B), which was passed by Huawei last year. Put another way, the Airbus of telecoms will become the world’s second-largest vendor by revenue, neck and neck with Ericsson."
"Regarding the scale and viability of the deal, make no mistake, this definitely is the Airbus of telecoms that is about to take off and fly for the next decade or so. The size of this Airbus is now on par with Ericsson’s and directly comparable with Huawei’s. And finally, this deal will arm the 2 companies with tremendous R&D capabilities (e.g., Bell Labs) to build an arsenal of technologies to fight Huawei. Now it’s all about execution as usual, so let’s see after the deal is closed in a year."
To buy Infonetics reports: Infonetics Research - Contact
Anders Bylund wrote:
The core networking division that accounts for 84% of Nokia's overall sales saw strong sales growth, but its operating profits took a 61% year-over-year haircut. Nokia offered many detailed explanations for this swooning profitability, but it all boils down to one thing: The company just isn't executing like it used to.
This first-quarter report is actually weaker than it looks, because the Nokia technologies boost won't last. Will it be enough to scuttle the pending deal? Maybe not, but maybe it would be for the best. Like I said when the merger was announced, Nokia is underpaying for Alcatel-Lucent, but I'm not sure why the Finns want to own it in the first place.
Nothing has changed, except the road to Mergerville suddenly gained a few additional roadblocks. I'm not at all convinced that this deal will happen, and Nokia may have damaged its own operations beyond repair by reaching for this strange combination."
AT&T Q1 earnings fall, revenue flat as U-verse & wireless subs increase; DirectTV deal to close 2Q2015Thu, 04/23/2015 - 16:28 — Alan Weissberger
Note: See below for comments from noted FBR analyst David Dixon.
AT&T Earnings Report Review & Analysis:
AT&T reported a first-quarter profit of $3.2 billion, which topped analysts' predictions. That was compared with a profit of $3.65 billion a year earlier. Revenue edged up 0.3% to $32.6 billion.
AT&T expanded its U-verse Pay TV base by 50,000 subscribers in the first quarter, while adding 440,000 broadband Internet customers, the company said Wednesday. U-verse TV penetration at the end of Q1 was 22%, while U-verse broadband Internet penetration was 21%. AT&T had U-verse residential revenues of $5.7 billion in Q1, noting that U-verse triple play services (high speed Internet, TV and voice over IP) now represents 69% of the company’s wireline consumer revenues, up from 59 percent in the year-ago period.
The Dallas, TX telecom giant added 441,000 mainstream wireless subscribers in the quarter, down from 625,000 a year earlier. But that total appeared to mask the loss of about 270,000 phone customers. The number was driven by the addition of 711,000 new 3G/4G tablet subscribers (free tablets with a data plan), which are less lucrative than phones.
AT&T encouraged customer loyalty by offering free tablets and data rollover plans. The moves were in response to T-Mobile US Inc.’s series of promotions as well as Sprint Corp.’s half-price offer. AT&T added a net 441,000 monthly wireless subscribers, compared with its “400,000 range” forecast on March 10.
The user gain “suggests that the company is performing well in a market characterized by low organic growth and promotion pricing,” said John Butler, a senior telecommunications analyst with Bloomberg Intelligence.
[Rival Verizon Communications Inc. reported that in the quarter Tuesday, it added 565,000 mainstream customers while losing 138,000 phone subscribers.]
AT&T Chief Financial Officer John Stephens said the company expects to close its DIRECTV purchase in the current quarter, and California Gov. Jerry Brown endorsed the deal in a letter to the Federal Communications Commission.
“We expect the DirecTV transaction will close this quarter,” John Stephens, AT&T’s CFO and SVP, said on Wednesday’s earnings call. He expressed confidence that the combo of AT&T and DirecTV will exceed their original $1.6 billion in expected cost synergies, now seeing them exceed a $2.5 billion run rate by year three.
Stephens appeared unworried about competition posed by Google’s new Project Fi, which will use WiFi and Sprint’s and T-Mobile’s 4G networks to deliver services initially to one device, the Motorola Nexus 6, and start at $20 per month. “It’s got a very limited number of devices,” Stephens said. “That's not generally the way we like to present options to customers. We like to provide a lot…My understanding also is that there's going to be very limited distribution and customer care.”
http://uk.reuters.com/article/2015/04/22/usa-att-directv-idUKL1N0XJ1FB20... (CA governor backs AT&T-DirecTV merger to FCC)
Comments from FBR analyst David Dixon:
While the competitive environment is intense, AT&T achieved solid subscriber metrics with wireless postpaid net adds of 441,000 and prepaid net adds of 98,000, modestly outpacing Wall Street estimates of 418,000 and (35,000), respectively. Postpaid churn declined to a record low of 1.02%. Although 1Q's impressive subscriber and churn results are testaments to AT&T's improving network, we believe it will take time to fully eliminate consumer perception of an inferior network to Verizon, which is tracking significantly better in terms of consistency of service according to third party results.
With the Iusacell transaction closed and Nextel Mexico closing in 2Q15, we think there now may be greater impetus for AT&T to again attempt to sell consumer wireline assets because the "maintain and harvest for cash" versus "maintain and invest in fiber upgrades" are both negative NPV decisions in our view.
Selling AT&T's 38 data centers also makes sense but for a different reason, namely that the advent of 25G/100G metro optical gear that enables direct connections to servers (the application layer) in regional datacenters enables more direct non-public Internet connections with reliable classes of service.
DTV transaction update:
Management anticipates DTV acquisition will receive regulatory approval and should be complete in 2Q15. Cost synergies are expected to reach $2.5 billion (up from $1.6 billion prior) including savings in the supply chain, installation, customer care, and combined billing. We believe this was well received by investors as there could be additional revenue opportunities from a combined entity (i.e. bundling). It appears a CMCSA/TWC merger would likely be struck by regulatory authorities, but we do not believe an AT&T/DTV merger will face the same challenge due to the lack of coverage overlap and monopolistic fears.
Wireline Access Line Sales back on the table?
We believe management is exploring consumer access line sales given the decision to maintain and upgrade copper plant to fiber is significantly NPV negative in our view. We continue to watch these developments closely.
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 in the 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 FY15, so this will prove difficult absent consolidation or until T Mobile US becomes spectrum challenged, which we think is still years away (following vendor checks at MWC 2015).
How will AT&T fare in the changing wireless landscape in 2015 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 additional 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.
How do we assess AT&T s spectrum position, compared with other carriers?
AT&T made a decisive move to regain sweet spot spectrum in the AWS3 auction. 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 2300 MHz) spectrum and will focus on LTE and LTE Advanced, as well as refarming 850 MHz/1,900 MHz spectrum for additional coverage and capacity. Yet, this nonstandard LTE band will cost more capex and take longer to implement. In the short run, aggressive cell splitting is expected, and metro Wi-Fi and small-cell solutions with economic backhaul solutions are becoming available, allowing for greater surgical reuse of existing spectrum assuming AT&T (like Verizon) can make the necessary business model shift to LTE underlay networks using dedicated spectrum (e.g. 3.5GHz). AT&T s 3G small cell tests steered it to instead buy $20B in the AWS3 auction, but the industry has moved through the challenge of outdoor small cells that are co-channeled with macro networks these carried substantial load, but also destroy equivalent capacity on the macro network due to mis-coordination and interference. As a result macro networks carried less traffic, but still looked fully loaded. Putting small cells in other shared or unlicensed spectrum with supervision from and/or carrier aggregation with the macro is the way forward and AT&T needs to regain its early industry leadership in this area.
Verizon Top U.S. Wireless Carrier: No DISH Deal Expected - VZ to benefit from Refarming & Capacity Spectrum SupplyThu, 04/23/2015 - 14:12 — Alan Weissberger
By David Dixon of FBR Captial Markets &Co. (edited by Alan J Weissberger):
Note: As everyone knows, Verizon acquired all of Verizon WIreless from Vodafone and has sold off a good part of its wireline business to Frontier Communications. Hence, it's more of a wireless carrier than ever before!
David Dixon's Commentary:
First, we think competitive intensity should stabilize this year as T-Mobile US increasingly focuses on EBITDA relative to net subscriber add growth and Softbank substantially reduces capital investment to stabilize free cash flow amid a spectrum business model shift.
Second, we do not believe the market appreciates how close the Verizon network is to being ready to deploy a quality VoLTE network nationwide. This opens up the path to lower cost and spectrally efficient LTE-only devices, providing additional CDMA spectrum refarming opportunities in the 850MHz band (in addition to its plans to refarm 1900MHz spectrum) and flexibility in how it chooses to participate in the 2016 broadcast incentive auction. Third, 150MHz of 3.5GHz spectrum should be auctioned in 2016. This changes the capacity spectrum supply curve amid an industry business model shift underway to use small cells to manage capacity challenges versus macro network spectrum.
During 2015, we think VZ will maintain price discipline while continuing to explore divestiture opportunities, which could potentially include the MCI backhaul n
etwork and Terremark given the shift to a virtualized distributed data center network platform.
Better-than-expected underlying spectrum position. We do not believe Verizon needs a spectrum deal with DISH or to aggressively participate in the broadcast incentive auction. This is due to the combination of
(1) spectrum refarming opportunities in both the 1900MHz and 850MHz spectrum bands (as VoLTE ramps);
(2) increased managed capacity spectrum supply with 500MHz of 5GHz spectrum (which bonds to licensed spectrum adding downlink capacity) and following FCC approval last Friday of 150MHz of shared 3.5GHz spectrum; and
(3) the industry business model shift underway from macro to small cell LTE underlay networks, where small cells on dedicated capacity spectrum will increasingly manage network congestion.
Small Cell opportunity for VZ:
A change in the industry network engineering business model is underway toward using small cells on dedicated spectrum to manage more of the heavy lifting associated with data congestion. Verizon demonstrated this shift during the AWS3 auction when it modeled a lower cost small cell network for Chicago and New York. We expect CEO Lowell McAdam to manage this shift from the top down to mitigate execution risk due to cultural resistance from legacy outdoor RF design engineers whose roles are at risk as the macro network is de-emphasized. Enablers include the advent of LTE, increased spectrum supply across multiple spectrum bands including LTE licensed, unlicensed (e.g., 500MHz of 5GHz spectrum), and shared frequencies (e.g., 150MHz of 3.5GHz spectrum) amid a fundamental FCC spectrum policy shift from exclusive spectrum rights to usage-based spectrum rights, which should dramatically increase LTE spectrum utilization similar to Wi-Fi. Previously, outdoor small cells co-channeled with the macro network proved challenging. While they can carry substantial load, they also destroy equivalent capacity on the macro network due to miscoordination and interference, so the macro network carries less traffic but still looks fully loaded. AT&T discovered this in its St Louis trials that in part steered it toward buying $20 billion of AWS3 spectrum. However, the industry trend is toward LTE underlay networks where small cells are put in other shared or unlicensed spectrum with supervision from and/or carrier aggregation with the macro network. Coordination across all cells is still required for this to work, and while Verizon s initial proposals for 5GHz are downlink only, we think uplink will also be used in the longer term. This is because the uplink needs more spectrum resources for a given throughput and we are seeing higher uplink usage trends in the Asian enterprise segment and from Internet of Things (e.g., security cameras)
Does Verizon have sufficient spectrum depth to drive revenue growth longer term, or does it need to aggressively acquire spectrum in future auctions or in the secondary market (e.g., DISH)?
The short answer is yes, we believe it does. Verizon s combined nationwide CDMA and LTE spectrum depth is 115MHz ranging from 88MHz in Denver to 127MHz in New York City. We expect AWS3 capacity spectrum to be deployed in 2017/2018. Investors may not be crediting Verizon with the potential to source more LTE spectrum from the refarming of CDMA to LTE (22MHz to 25MHz) used today for CDMA data (22MHz to 25MHz). Network performance data shows that Verizon s network could be close to the required performance threshold for a VoLTE-only service, which suggests there is additional refarming potential for the 850MHz band (25MHz) used today for CDMA voice and text. This band is likely to be transitioned in 5MHzx5MHz LTE slivers to run parallel with the expected linear (voluntary) ramp versus exponential (forced) ramp in VoLTE service.