Uncategorized

T-Mobile threw down the gauntlet this summer with its new Mobile without Borders plan, pre-empting and expanding on AT&T’s plan to make the US and Mexico one calling area. Within a few weeks the rest of the industry adjusted their price plans, highlighting the very fluid and dynamic competitive situation in the wireless industry.

T-Mobile USA started its amped-up summer by introducing Mobility without Borders, extending its free calling area to Mexico and Canada at no additional cost. The customer-friendly move was made possible when Mexican and Canadian carriers renegotiated their roaming and call termination deals with T-Mobile USA. One reason AT&T purchased Iusacell and Nextel Mexico was to create a USA/Mexico free calling area and it was very public about it. The competition got the message – and got going.

Telcel and Telefonica in Mexico are clearly worried about what AT&T will be up to in their home market, and are eager to make life more difficult for AT&T in Mexico and the USA alike. Canadian carriers are still up in arms about rumors from two years ago that Verizon Wireless could buy a smaller Canadian carrier. When those rumors surfaced, they led to a $15 billion valuation hit. I am pretty sure they didn’t forget that, and were itching to show Verizon Wireless that they can make its life difficult too. By working with T-Mobile, both the Canadian and Mexican carriers made their respective markets less profitable for a US carrier to attack, eliminating the cross-border calling threat and giving a non-threatening (at least to them) US carrier a leg up. A classic the enemy of my enemy is my friend scenario.

The new offer positions T-Mobile very well for the Hispanic customer segment, with about 22 million people living in the United States either born in Mexico or having at least one parent born in Mexico. While companies like AT&T or Sprint provide calling to Mexico for $5 per month or 1 cent per minute, the appeal of free calling – especially free international roaming – cannot be underestimated, especially for businesses (long a segment in which T-Mobile USA has struggled).

How quickly and to what extent the other US carriers can respond largely has to do with whether Mexican and Canadian carriers could agree to reasonable terms with the US carriers. The Mexican and Canadian carriers have little incentive to deal with the Americans, as they view many US carriers as competitors with, in the case of T-Mobile, decent urban and rural coverage. Why give up a high margin business that makes life any easier for competitors?

Of all the US carriers, AT&T is probably the closest to providing a competitive answer to T-Mobile. It would have to accelerate free roaming on its own network in Mexico and eat some margin in order to match T-Mobile’s positioning, but it’s doable. For Verizon Wireless and Sprint, the Mexican problem is more significant as only Iusacell has a CDMA network in Mexico – and Iusacell is now owned by AT&T, which is looking to convert the CDMA network to GSM/LTE.

A week after Mobile without Borders, T-Mobile re-amped its family plan offer with a promotional plan of up to four lines – with 10 GB of data each – $120. (The first two lines are $50 each, the third is $20, and the fourth line – normally $20 – is free during a promotional period ending Labor Day.) The family plan comes with free calling and roaming in Canada and Mexico. For an additional $10, T-Mobile will double the data allowance. This offer eliminates a plan giving customers two lines with unlimited data for $50 per line with additional lines for $40 each. Basically, consumers are trading unlimited data for Mexico and Canada. Doubling the data for $10 only benefits only the heaviest data users.

The main question – is the new deal better? – depends on how often you call and travel to the two countries, versus how much data you use, and whether an unlimited data bucket appeals. The plan and associated rhetoric seem to double down on T-Mobile’s attack on Verizon Wireless that started earlier this year – without significant success, it seems, as T-Mobile’s porting ratio of customers who take their phone number with them actually went down. It’s going to be interesting to see if four times the data will do the trick where unlimited data failed.

Where Mobile without Borders was a real amped-up uncarrier move, the re-amped family plan offer merely rejiggers the puzzle pieces, falling short of the high bar that T-Mobile’s previous uncarrier moves have set. Only a day after T-Mobile announced its new family plan, it made unlimited Mexico calling and roaming available from its prepaid brand Metro PCS for $5 per month, waiving the fee for the remainder of 2015 on plans $40 or higher. If a customer is on the extremely competitive $30 plan, getting the unlimited Mexico ups the price to $45 after the promotional period.

T-Mobile followed this by launching RCS, the next evolution of text and multimedia messaging. T-Mobile plans to make it the default messaging app, starting with initially one device and then rolling out to more. RCS in itself is a solid improvement over regular text messaging: Features like enhanced messaging that allows multimedia sharing during voice calls, emoticons, presence and locations are a significant step forward. However, it is highly doubtful that RCS will make a significant business impact as consumers have moved on to other rich messaging apps. Judging from the lack of impact that RCS had on the messaging fortunes in Europe – where dozens of carriers have rolled out RCS under the Joyn brand – as well as Sprint’s and MetroPCS’s results, this is exactly the solution that was needed ten years ago, before iMessage and Whatsapp took over.  Even when RCS becomes interoperable between Sprint and T-Mobile, and rolls out to more operators and devices, customers long accustomed to other applications are unlikely to abandon their new solution – either due to the network effect or merely due to ingrained preference.. I highly doubt any messaging provider will have a sleepless night over this announcement.

At the end of July, T-Mobile added Apple Music to its free music offerings. This comes hardly as a surprise, considering that T-Mobile wants to differentiate itself in the marketplace by including every music streaming service in its zero-rating plans. T-Mobile also adjusted its iPhone 6 leasing option by guaranteeing customers that they can upgrade to the next iPhone for the same $15 lease when the next iPhone comes out this year. This will protect the important back-to-school sales period – August being the second biggest sales month after December – by taking away customer uncertainty without impacting next generation iPhone sales. Interestingly, the newly announced offer partially addresses the criticism of Sprint CEO Marcelo Claure regarding T-Mobile’s Jump On Demand program calling it Uncarrier bullshit as Claure said that originally T-Mobile didn’t adequately disclose that the low lease price quoted was only for the first device leased. This offer is good as long as customers get the iPhone 6 before Labor Day, and upgrade before the end of the year; customers who are on Jump On Demand with the iPhone 6 are grandfathered. How financially sensible this move is depends on the price T-Mobile gets from its trade-in partner.

In August, Sprint, Verizon Wireless, and AT&T responded to T-Mobile’s competitive salvos. Sprint went first, oddly replacing its 40 GB for $100 promotion with a 20 GB for $100 promotion. How this is going to help to attract more customers is a bit difficult to understand. Sprint’s second announcement was a lot better: Sprint expanded on T-Mobile’s Mobile without Borders plan, offering an Open World plan that added several other Latin American countries. After AT&T closed the DirecTV acquisition, AT&T rolled out several plans making it much cheaper to combine an AT&T wireless plan with a TV and Internet plan, where available. Consumers could save up to $500 by taking AT&T up on the offer.

In early August, Verizon Wireless – which initially had been the most cautious around equipment installment plans – went all in, abolishing contracts and lowering prices again. Verizon Wireless simplified its pricing structure around four buckets (1GB for $30, 3GB for $45, 6G for $60, and 12 GB for $80), while also lowering its device access fees. This price plan restructuring came after a slew of promotions that Verizon ran for most of the year, and sets a new baseline.

Not even a week later, AT&T reacted and adjusted its price plans too. It replaced its old 3GB for $40 plan with 2GB for $30, and its 6GB for $70 plan with 5GB for $50. For plans above $100, AT&T offers now 50 percent more data and unlimited calling and texting to Mexico and Canada, which it normally sells for $5 per month. Since Verizon charges less as access fees for devices, AT&T and Verizon Wireless are very close to price parity again as the two premium providers in the market, with minor variations depending on how many people share the data.

Now as everyone has responded to T-Mobile, we can’t wait for the next round of the wireless boxing match. The competitive pressure in wireless hasn’t been higher and consumers have been the big winners as prices have come down, options have expanded, and borders been eliminated.

On May 10, 2011, Microsoft acquired Skype for $8.5 billion. It is widely seen as another catch-up move by Microsoft in its battle against Google’s and Apple’s increasing dominance of the traditional and mobile internet.

It is interesting to watch because all three companies, Apple, Google and Microsoft, are chasing the same ball. But each is playing a different game, with different rules and the score is 7-4 in the three-way race. Anyway… that’s good topic for a different day.

In 2009, when Skype was on the market the last time, one of the companies that was seriously interested in purchasing Skype was a large wireless providers in the United States. The negotiations ultimately broke down because the wireless provider was unable to do what Ben Horowitz, Mark Andreessen, and Silver Lake were able to do: purchase the operating company Skype from Ebay and end the intellectual property (IP) lawsuit regarding the IP claim of Skype founders Niklas Zennstrom and Janus Friis by bringing them into the organization.

Nevertheless, imagine what it would have meant if a wireless provider had acquired Skype: Instant pandemonium in the board room of every larger telecom provider in the world followed by a global reshaping of the telecom world.

The acquirer would have thrown down the gauntlet to its competitors. Some wireless providers talk about being a global competitor – while they have only customers in a dozen countries. A Skype acquisition would have created an instant global competitor with customers in every country, without a physical network but with customers nevertheless. Right on the deck of virtually every smart phone, on more than 100 million computers, a total of 170 million new customers. Google, Apple, and Microsoft would have become that operator’s involuntary accomplice to fulfill a global vision. From a carrier’s perspective, how do you compete against the competitors voice interface on your phone, especially when the app is often already there? Blocking would create an immediate case for a net neutrality acid test, which would force regulators, legislators, and courts to come clean in ways they never expected. Does net neutrality only apply for non-service providers or do the rules apply for everyone equally. Such a combination would have separated those who are serious about the concept from those for who it is merely a convenient measure to gain advantage or where it just applies to their inner Robin Hood, by changing the traditional battle lines with network operators on one side and content providers on the other.

On a 4G network, only data is transmitted. The distinction between the circuit-switched voice network and the packet-switched data network no longer exists. This acquisition would have accelerated the biggest change in voice communication since the invention of the phone. Voice calls become bits—just as streaming music, video, or application downloads are already today. While operators will probably continue to market voice and data as a bundle for consumer simplicity reasons (consumers have a enough of a hard time understanding what a megabyte is, so imagine the complete bewilderment if you throw voice bandwidth requirements per voice minute into that mix.) Sophisticated customers may actually want to purchase just a data connection and separately choose the VoIP provider, which may or may not be their data provider. This is the wireless equivalent of using your fixed internet connection and then using a VoIP provider to connect the call. Innovation could flourish by allowing customers to choose the voice quality of their call as long as the other caller also supports the same protocol and is willing to pay for the bandwidth. Some may want to use less data and sound like today, some may want to use more data and be able to hear the other party with hi-fi sound quality.

This leads us to the next question: Is net neutrality, especially when applied to VoIP providers, merely a secret sleeper agent that will force service layer disintermediation? Does this inevitably lead to operators becoming even more marginalized or do they have to develop a VoIP client to remain competitive in the future? Can they afford to just ignore the signs of the times and let another upstart just roll over them like the cable companies did with landlines when the ILECs did not have TV service to fight back? Will they just play defense and only let their own VoIP application run on their own phones or will we ultimately see full service disintermediation, where you can purchase your wireless data connectivity separately from your VoIP service? Consumers could have the choices of purchasing their voice connectivity from an operator (that may or may not also provide the physical connectivity), a VoIP provider, or a service provide that may make money through an ad-supported model.

Ultimately, one of the usual suspects, Microsoft, acquired Skype and competition continues along the previously drawn battle lines. But in the back of your head, you can always ask: What could have been if someone would have dared to be bold?

As we approach the House of Representative’s Hearing on the acquisition of T-Mobile USA by AT&T, I have been reflecting on what we heard during and after last week’s Senate Hearing on this topic and am wondering what the House will consider when it is inquiring about the proposed transaction. Here are some questions I would ask:

• How can we most quickly address changing wireless customer demands?
• How competitive is the wireless market?
• Do you think Deutsche Telekom sees a possible future in America considering that Deutsche Telekom has said they are no longer investing in their U.S. business?
• Is there a historical precedent in the U.S. wireless industry that prices increase following mergers?
• What will happen to T-Mobile customers and employees with and without the merger?

If I were a Hill staffer responsible for briefing my boss before the hearing, here’s what I would make sure they knew:

• As time has progressed since Q3 2009, T-Mobile USA’s customer losses have become successively worse. We actually might be seeing the beginning of a carrier in an unrecoverable tailspin with devastating consequences for the entire mobile sector.
  • T-Mobile has been losing more than 1 million post-paid contract customers since Q3 2009. The lone exception was the Father’s Day 2010 “every phone is free” promotion where the sales of a single day lifted an otherwise dreadful quarter to a modest gain for contract customers.
  • Since Q3 2009, T-Mobile has lost almost 350,000 prepaid customers. In most quarters, T-Mobile has only been able to show growth among prepaid customers by combing its T-Mobile-branded prepaid customer numbers with its non-T-Mobile branded wholesale customers.
  • T-Mobile’s positioning in the market has been confusing to customers. In only four years the company has changed its marketing campaigns six times. Nobody knows what the company stands for anymore.
  • If a market is competitive, a company that makes bad decisions gets punished.  They lose customers, revenue and market share to the point where shareholders of and investors in the company will decide to sell the company before it fails in order to recoup some financial value from their investment. If a market is not competitive, companies that make bad decisions are kept alive via artificial life support. Propping up T-Mobile via regulatory fiat is inconsistent with promoting a competitive market.
  • The U.S. wireless industry is very competitive, which means that sufficient consumer demand exists for services, and wireless companies have extra incentive to introduce new innovative services and devices, to keep prices down and grow their customer base. This is a natural, market-driven outcome on which a merger will have very little impact.
  • T-Mobile USA’s parent company Deutsche Telekom has made it clear they plan to exit the U.S. wireless market one way or another.
    • Deutsche Telekom has testified under oath before Congress that is not willing to further invest significantly to make T-Mobile competitive again.
    • If the AT&T acquisition is not approved, Deutsche Telekom will in all likelihood look for another buyer, while customers run to the exits.
    • In the interim, T-Mobile USA will be on life support, with enough money to survive, but not enough money to flourish. It will accelerate to be on a downward path, with insufficient funding to build out its network, and increasingly less competitive devices. A classic self-fulfilling prophecy.
    • Furthermore, T-Mobile USA has enough spectrum for today, but not enough for the customer demands of tomorrow. Without billions of dollars of investment in spectrum the company will not have enough capacity to provide wireless high-speed data to a majority of its current customers.
    • A company whose primary source of financial backing has disappeared and whose parent has decided to sell it operates under a different set of incentives and goals than a growing and successful company.
      • Last year, just as T-Mobile USA rolled out its new 4G network, the company actually reduced its capital investment from $3.6 billion in 2009 to $2.8 billion in 2010. Cutting corners does not make a company successful again.

These questions and facts should be helpful to the Representatives when they are considering the merits of the proposed acquisition.