Similar because it ever was (3Q earnings preview—Half 1)?

Mid-September greetings from Missouri, the place fall is starting to interrupt out.  The shut of the Royals season is coming quickly (opening pic), soccer is again (though the Chiefs’ opening recreation left a lot to be desired) in addition to apple cider, pumpkins, and the brand new iPhone 15.  Apple’s new flagship product began pre-orders on Friday and hits most retailer cabinets subsequent weekend.  We’ll contact on how every service is advertising and marketing the brand new gadgets in subsequent week’s Interim Temporary and embody our newest tackle backlogs by mannequin and reminiscence (right here’s our first tackle Apple iPhone 14 availability from September 2022). We expect demand will probably be stronger than expectations, significantly for the Professional and Professional Max. And we predict cable performs an even bigger function than ever within the iPhone 15 launch success.

However Apple’s machine launch was not the one newsworthy merchandise since Labor Day.  We have now inventory buyback and dividend bulletins, spectrum purchases, resolved programming disputes, FTC trial opening arguments, and far, far more.  Now that the Briefer is part-time at Fastwyre, the information cycle explodes – how handy! 

This week, we discover two long-standing assumptions (cable’s perpetual broadband dominance and T-Cell’s perpetual challenger standing) and query whether or not both is appropriate. 

As talked about within the final Temporary, we are going to proceed with our each different week format (interim Temporary format will proceed to be posted on-line) besides throughout earnings season after we can have weekly Briefs and each day posts on the Sunday Temporary web site. 

The fortnight that was

Over the past two weeks, the Fab 5 have misplaced $162 billion in market capitalization whereas the Telco High 5 have gained $7 billion.  The $162 billion loss consists of a $226 billion lower in Apple’s market capitalization offset by small ($64 billion) good points by every of the opposite Fab 5 holdings.  The $7 billion is made up of modest good points from T-Cell, AT&T and Constitution offset by small losses in Verizon and Comcast.

Via the primary 8.5 months of 2023, the Fab 5 have gained $3.05 trillion, offsetting 80% of 2022’s $3.81 trillion loss.  Lengthy-term holders of any of those equities are nonetheless smiling, and the prospects for continued progress are excessive.  As we mentioned in a earlier Temporary, the online debt ranges for every of the Fab 5 firms are nonetheless very wholesome (solely Amazon has a optimistic web debt quantity and it’s a measly $3.2 billion – the opposite 4 have adverse web debt ranges).  The one factor that may dent the long-term prospects of any of those firms is a coordinated world effort to limit their success by way of elevated regulation and authorized scrutiny. 

Google is the present goal of US authorities consideration.  This week, the Division of Justice and 38 states started their trial in opposition to the Mountain View behemoth, alleging that their offers with telephone producers (primarily Apple and Samsung) and telecom carriers to realize outstanding if not unique browser positioning on smartphones was unlawful.  There may be lots of nice protection of the trial right here from The New York Instances. 

Judging from the primary few days of the trial, this argument goes to be troublesome to win, and even when they do, the treatment is even trickier.  The federal government should show that Google prevented Apple from that includes the Safari browser on iPhones (and Samsung from their home-grown browser on their telephones).  Understand that throughout a part of the timeline in query, then Google CEO Eric Schmidt sat on the Apple Board of Administrators (August 2006-August 2009). 

Throughout a Monetary Instances interview in 2013 (captured right here by CNET, an trade publication), Schmidt particularly acknowledged that his resignation from the Apple Board was not as a result of browser competitors (Safari vs. Chrome), however for cell working machine competitors (iOS vs. Android).  Per the article – “Apple didn’t thoughts the Chrome vs Safari points,” recollects Schmidt, “however they actually did thoughts the iOS vs Android points.”

What’s most fascinating to us is that, even with the assertions made by the DOJ within the trial, Google Chrome is just not the dominant browser within the US Cell market per Statcounter: 

Chrome is at the moment #2 in cell browser market share (though they’re #1 by 20%+ factors throughout all platforms).  The argument that “shopping for their approach” into the cell market resulted in monopolistic cell browser market share is just not supported by present knowledge (assuming Statcounter is appropriate).  If something, the information exhibits a duopoly that intently correlates to cell working system market share.  Equally, Apple’s iPad defaults to their Safari browser, and, consequently has a barely increased market share than Chrome. 

The federal government may need a stronger case in different areas reminiscent of promoting, however even there, Fb/ Meta and Amazon are making nice strides in opposition to their bigger competitor (and conventional print and media promoting remains to be going robust) – promoting is extra dynamic than it was a decade in the past as a result of of Google.  Or they may make the argument that Google someway prevented Blackberry, Palm, and Sybmian working platforms from succeeding (which might be one of many biggest items of revisionist historical past ever concocted – Blackberry killed itself by way of it’s closed platform and wanted no assist from Silicon Valley).   Backside line: Whereas there is likely to be an intriguing story and a few extra historic insights revealed over the remaining 9 weeks of the trial, present cell browser market share exhibits that Google is just not the dominant participant and that funds to Verizon, AT&T, T-Cell, Apple, and Samsung didn’t catapult them into dominance. 

In the meantime, we are going to probably see the authorized arguments from the FTC and DOJ pertaining to Amazon’s dominance over third-party sellers on its Market platform.  Per the Wall Avenue Journal (article right here), “The lawsuit will goal plenty of Amazon’s enterprise practices, reminiscent of its Achievement by Amazon logistics program and pricing on Amazon.com by third-party sellers, among the folks mentioned. The lawsuit will counsel that Amazon makes “structural cures” that might result in a break up of the corporate.”

If the DOJ motion in opposition to Google turns up the antitrust warmth to 400 levels, the FTC lawsuit in opposition to Amazon seems to be a full broil.  We’ll withhold commentary on the prognosis of the swimsuit till it’s filed, however it seems that the treatment sought is far more extreme than “lookback” fines and minor course of modifications of the previous.

Similar because it ever was (3Q earnings preview – Half 1)?     

The thesis of third quarter earnings is “Similar because it Ever Was.”  For these of you not attuned to the choice but in style Nineteen Eighties rock band The Speaking Heads, that they had successful referred to as “As soon as in a Lifetime” (hyperlink is to the official video – the phrase “Similar because it Ever Was” permeates the tune).  As they fought typical knowledge by way of their music, we’re going to current a number of unconventional views of trade dynamics, beginning this week with cable and ending with T-Cell.    

Similar because it Ever Was #1:  Cable will proceed to dominate the broadband panorama.  Competitors will probably be fleeting as Comcast, Cox, and Spectrum use promotional pricing to thwart fiber and glued wi-fi.

Cable is in a troublesome spot – they get pleasure from majority (generally dominant) broadband market share of their markets, delivering in opposition to the DOCSIS 3.1 customary, and, utilizing Ookla knowledge as a information, largely successful the pace wars (see close by chart for obtain pace rankings as of September 1).

However there are cracks in cable’s authentic formulation concocted over twenty years in the past.  At the moment, their technique was to eradicate every other wire into the home however the coax cable.  Copper needed to go, and, with video and broadband already traversing the present coax, the triple-play (together with residence telephone) started. 

It was essentially the most profitable market share seize within the historical past of telecom, leading to 20-30% share of whole houses handed in lower than 5 years.  The telcos didn’t know what hit them, and had been compelled to reply with satellite tv for pc alliances (or worse, U-verse TV) and the corresponding reseller economics.  Cable peaked at round 35% of buyer houses on their triple play supply in 2016 (per Constitution’s 2Q earnings launch from that 12 months right here – notice that single play was simply above 38% of the bottom and triple play was at 35%.  Curiously, Comcast’s triple play determine was over 36% in 2Q 2016 with single play at 30% – particulars right here). 

Now the tables are turned.  Cellphone is just not solely not desired, cell service has taken its place.  Video, particularly for Constitution, has turn into a price albatross for the corporate.  The latest settlement with Disney (announcement right here) helps, particularly as they put together to launch Xumo in a month or so (see article from Mild Studying on Xumo’s function with Constitution video right here), however jettisoning eight minor channels gained’t materially assist the gross margin of their product lineup.  And with elevated fragmentation, Constitution will be capable to introduce skinner bundles, however they nonetheless begin with a $23/ mo. broadcast surcharge in lots of markets.  Video is their legacy, however different choices (together with ones supplied over Xumo) are crowding out the set high field. 

With telephone on life help and video transitioning to a brand new distribution enterprise mannequin (though nonetheless leveraging the HFC plant into the house), the place does that go away the corporate with respect to “proudly owning the house?” The corporate line is “Wi-Fi is the first knowledge and voice distribution inside the house for cell, and our Wi-Fi rocks.  We provide competitively priced cell companies that leverage Verizon’s community.” 

Let’s evaluate the scenario to Constitution’s entry into Digital Cellphone.  Competitors for telephone companies was from a) the the incumbent phone and DSL supplier, and b) over-the-top suppliers like Vonage, MagicJack or Ooma.   Wi-fi substitution elevated in recognition as limitless plans had been launched and protection improved all through the 2000s. 

Examine that scenario to the bevy of wi-fi alternatives that exist for $30 for two strains: 

This listing is admittedly small, and there are a lot of extra (together with Easy Cell and Metro by T-Cell) that begin with limitless at $35/ month, however the backside line is that cable doesn’t “personal” the $30 worth level by any stretch.  Given feedback by T-Cell and others at latest analyst conferences, it seems that a lot of cable’s gross additions are coming from the pay as you go (learn: prepared to modify) world. 

That leaves so much on broadband’s shoulders.  Right here’s the economics of Spectrum’s plan with and with out promotion in comparison with AT&T retail (fiber + cell), Verizon retail (fiber + cell), and T-Cell retail (mounted wi-fi + cell):

As a result of the bottom tier accessible for the T-Cell plan is Magenta Max, the $115 consists of Apple TV+ and Netflix customary tier (480p, one TV) in addition to a full 12 months of AAA.  We aren’t fairly certain learn how to make that an apples-to-apples comparability so leaving the bundle package deal as charged. 

General, the pricing is $1,980 over two years for Spectrum One.  For Verizon (Fios + Limitless Plus), that value could be $2,160.  For AT&T, that value could be $2,400 and for T-Cell (with above caveats) that will be $2,760.  After the third 12 months, AT&T and Verizon are practically the identical value. 

Add in MetroNet, a big fiber supplier that competes with Constitution in Ohio, who presents the charges within the close by desk.  For a one-year worth lock, a MetroNet buyer may get greater than 50% extra extra bandwidth (500 Mbps).  MetroNet + Seen could be $75/ mo. for the primary 12 months, after which $85/ mo. after that, barely lower than Spectrum on the 24-month comparable mark. 

Backside line:  Constitution (and Comcast) have an ideal and precious cell product, nevertheless it’s not the “no brainer” in a bundle that the Triple Play was 15-years in the past.  Fiber suppliers reminiscent of Greenlight (upstate NY), Allo (Nebraska), Frontier (New York, Florida, Texas), Fastwyre (Missouri) and AT&T (California, Texas, Florida) have newer plant and compelling stand-alone worth factors. 

Similar because it Ever Was #2:  T-Cell will proceed to develop and dominate worth management, extending their un-carrier conduct for the forseeable future.  This can drive elevated capital wants, decreasing the provision of money for shareholder-friendly inventory buybacks and dividends. 

We utterly missed the magnitude and measurement of T-Cell’s post-Labor Day annoucnement (right here).  It consisted of the next factors:

• The present $14 billion share repurchase settlement has been accomplished;
• The T-Cell Board authorized a brand new $15.25 billion share repurchase settlement that ought to full by the tip of 2024;
• As well as, T-Cell can pay a complete of $3.75 billion in dividends to shareholders (50+% of this to Deutche Telekom, the bulk shareholder of T-Cell USA) beginning with a $750 billion fee in 4Q 2023. 

We weren’t stunned by the second share buyback and practically hit the mark on the general determine (our estimate was $17 billion in sharebuybacks and no dividend).  We’re stunned by T-Cell’s perceived have to have a dividend (albeit lower than a 2% yield), and don’t assume that they acquire a bigger share of progress + revenue consumers consequently. 

As most Sunday Temporary readers are conscious (Temporary right here from February), T-Cell has a really vibrant money circulate future in entrance of it.  Right here is their free present money circulate development (schedule accessible right here): 

Having seen AT&T and Verizon succumb to ever-increasing dividends, and understanding the general tax inefficiencies of dividends versus share repurchases, we that this technique is wrong.  Even with the terrific 600 MHz spectrum buy from Comcast introduced this week (a sensible transfer by each firms – announcement/ weblog put up right here from Tom Nagel at Comcast), in addition to rumors in Bloomberg that T-Cell is about to leap into the residential fiber recreation (one other game-changing transfer we applaud if true), the dedication and expectations created by an ever-increasing dividend feels very very similar to an incumbent service transfer. 

Backside line:  T-Cell is doing lots of nice issues.  Establishing a dividend is just not one among them. 

In two weeks, we’ll conclude the “Similar as is Ever Was” sequence with a have a look at Verizon and AT&T.  Till then, when you’ve got buddies who want to be on the e-mail distribution, please have them ship an e-mail to [email protected] and we are going to embody them on the listing (or they will join instantly by way of the web site).  Go Royals, Sporting Kansas Metropolis, and Tremendous Bowl champion Kansas Metropolis Chiefs!