T-Mobile’s Business Push, Technology Advantages, and 5G Slicing with Daryl Schoolar

Full Transcript

Don Kellogg 0m10s

Hello, and welcome to the two hundred and thirty ninth episode of The Week with Roger, a conversation between analysts about all things telecom, media, and technology by Recon Analytics. I'm Don Kellogg, and with me as always is Roger Entner. How are doing, Roger?

Roger Entner 0m23s

Considering the circumstances, I am well. Right?

Don Kellogg 0m26s

Yeah. It's been an interesting week, I think is the right way to put it. Right? Yep. So we had a couple things happen.

Don Kellogg 0m33s

I think, you know, the one thing that is on the tip of everybody's tongue is what's going on with tariffs. Who knows by the time this publishes if there might be more shoes that have dropped there. Probably not. But We'll see. Yeah.

Don Kellogg 0m44s

Right? Never know. And then we also heard about some new plans at Verizon. What do you wanna talk about? Let's start with Verizon.

Don Kellogg 0m53s

So Verizon came out with some new a new offer. Right? They have a three year price lock guarantee. They're offering a free phone up to a thousand dollars on any plan. So they're not gating it behind premium plans.

Don Kellogg 1m5s

And they also have a best value guarantee. So I mean, this is a pretty, think, big departure. They've been moving in this direction for a while, but this is a really big move, think. Curious to hear your thoughts.

Roger Entner 1m15s

Well, you always used to say, right, AT&T was best plans for everyone and best phones for everyone. And Verizon was best phones for best customers. Right? That has changed. The way I look at it, this is predominantly a retention tool.

Roger Entner 1m35s

And for AT&T, it has worked really, really well. It has worked less well over the years, and we're now like, what, in year three of this. And as an acquisition tool, it has lost its potency. If I would be in Dallas and I would look at what Verizon says as vindication and a celebration of what we have done, I wouldn't pop champagne bottles and say like, hey, we're so great. Verizon needs something else on top of this, and AT&T also needs something.

Roger Entner 2m8s

Right? The novelty has worn off, and you can look at the net subscriber ads, and you can clearly see that.

Don Kellogg 2m15s

Yeah. I mean, the way the industry has historically worked, right, is that if you're willing to go through the hassle of switching to another provider, you can usually get a better deal. And AT&T's innovation when they came out with Best Deals for Everyone was to say, you know, we really don't want you to leave. And so we're going to

Roger Entner 2m32s

We're gonna treat you well.

Don Kellogg 2m33s

Yeah. We're gonna give you acquisition deals to existing customers. Right? And it really, to your point, turned off the spigot in terms of churn. Right?

Don Kellogg 2m41s

And their churn is at historically low levels.

Roger Entner 2m43s

And in the beginning, it also attracted a lot of new customers because they suddenly were respected and felt the love.

Don Kellogg 2m54s

Mhmm.

Roger Entner 2m55s

It's just that pool of unloved people has gone down. Right? Right.

Don Kellogg 3m0s

The switcher pool in general, I think we get the sense is shrinking. Right? So if AT&T is taking their customers off of the table, now Verizon's taking their customers off the table, You know, it'll be interesting to see what happens. Right?

Roger Entner 3m12s

I like to look much more at the decision pool rather than at the switcher pool per se. Because the decision pool is the switcher pool plus new subscribers. Right? Gross ads, not just the people who switch from one carrier to another.

Don Kellogg 3m29s

Fair. Fair.

Roger Entner 3m30s

That one is a lot more under pressure with immigration, both legal and illegal, having come to a significant slowdown, if not a complete stop, which has turned off one of the sources for new customers. You know, we looked at our data and, you know, the other things are drying up too, you know. One is children under the 18. Not too much has happened there incrementally last year compared to the year before. New business creation has been a significant factor.

Roger Entner 4m6s

You know, when we look at everything and, you know, we also pay attention to what smarter people than us talk about on business television and business radio, we're staring at a recession right now. You know? I listened to the BlackRock CEO this morning, so you know it's Friday. And he's like, The US is in a recession or about to enter one. Right?

Roger Entner 4m29s

And so that business driver and new business creation driver for net ads looks under pressure. Right? And then we're stuck with T Mobile free third lines with cable company. Here, have a free line and other constructs where people are getting either very low or free lines for line generation.

Don Kellogg 4m51s

Well, and the cable operators are doing it as well. Right? Yeah.

Roger Entner 4m54s

And well, that's yeah, that's what I mentioned. Right? It's like you go to Comcast charter and they give you a free line for a year. And a lot of growth has come from that. And so when I look at it, I'm getting flashbacks to 02/2007, 02/2008, 02/2009.

Roger Entner 5m11s

And that's what we're looking at. And with the time delays and everything that's playing out. And then we have the tariffs staring in our face with, right now, 10% tariff from India, which is suspended for ninety days. Who knows what happens there? Right?

Roger Entner 5m27s

And then we have China with a 100 and where are we? A 145. Does it matter anymore?

Don Kellogg 5m34s

As of this recording, it's a 145, but, you know, this will publish on Monday. So who knows? It might be 180 by then. We'll see.

Roger Entner 5m39s

And as the Chinese said, we're no longer responding because this has become ludicrous. Right?

Don Kellogg 5m44s

If that is really taking place, then we actually are looking at the $2,000 iPhones and more. Right? Well, there's an interesting piece to play here for the carriers too. Right? Can you explain how the how the tariff would trickle through?

Don Kellogg 5m59s

Who's paying it? Is it gonna be Apple or the carriers?

Roger Entner 6m2s

It's the carriers. It's the carriers who are paying it because Apple is providing iPhones, in business terms, free onboard. Right? FOB. Which means the carrier is taking possession of the iPhone in China the moment that phone gets put on the pallet of the factory.

Roger Entner 6m25s

And then the carrier is actually importing that device. The only case where Apple would import it is for the iPhones that get sold in the Apple stores unlocked. Right? That's where Apple is the importer. But that's maybe 10% of the devices.

Roger Entner 6m44s

Also, India is not a very good substitute. Yes, there were newspaper reports about Apple flying 600 tons of iPhones to The United States, by 1,500,000 units. But you have to understand, they make in India the baseline iPhones and the iPhone Plus, not the Pro models. And what's selling is Pro models. Right?

Roger Entner 7m10s

And the pro models are only made in China. The reason why they're only made in China is because the workforce there is very skilled. They have really deep understanding of how this works. They have developed over the last twenty years the best expertise in how to do this. They're the world leading people in machine tooling and all of that stuff.

Roger Entner 7m35s

And that can't get exported to India. And we don't have the number of people here. There's a video clip with Tim Cook where he's speaking at an event where he talks about this in detail. He said, like, look, if I look at the number of tooling experts that we need in The United States, we wouldn't get the audience here full at this event with people who have the skill set for the iPhones that we need. In China, we could fill stadiums with that number of people.

Roger Entner 8m7s

And so something got to give. And the thing is, and I'm putting here my politics head off and it's a very small hat, so take it with a grain of salt. China is not gonna give. You can get from the Chinese anything you want as long as they can save face and look as the strong leader. Under the table, you can get anything.

Roger Entner 8m29s

So as long as you have two superpowers and the leaders of superpowers who don't wanna lose face smacking each other, it's not gonna work. On top of it, the economy in China has been slowing down for the last two years, and Xi has become under a lot of pressure. He can now blame all of those internal homemade problems on The United States and has now escaped all accountability. Right? Because it's the evil Americans who did this.

Roger Entner 8m59s

You know? Remember Chinese. And so it's a very difficult protected situation. We might get exemptions. I don't know.

Roger Entner 9m8s

Nobody knows right now. You know? The one thing about this is nobody knows. But we're looking at $2,000 iPhones, $1,500 at least. The carriers don't really have that much room to subsidize this even further.

Roger Entner 9m24s

Right?

Don Kellogg 9m24s

Right. Because the the net effect of giving your current customers a free device so they don't leave is that you're effectively subsidizing. Right?

Roger Entner 9m31s

You're subsidizing this. This iPhone, the Chinese are not paying for the free iPhone, and they're not paying for the tariffs either. It's Verizon, it's AT&T, it's T Mobile. And when you look at it, I just looked at all of them, but like AT&T, which did like free iPhones for everybody, which is like, I think a good benchmark, spent $18,000,000,000 last year on devices. They can't double that.

Roger Entner 9m57s

The profit margin's crater. Right? And so we will see a lot more expensive iPhones and a lot more expensive other phones. And that's very interesting. And how will consumers react?

Don Kellogg 10m10s

Well, if you thought that handset replacement cycle was shortening before, just wait. Right?

Roger Entner 10m14s

Yeah. Well, exactly. And you and I just put questions together on our survey of of how will this all play out. And we're gonna show this to our carrier client in a couple of weeks of how this all will play out. And it's playing out in real time.

Roger Entner 10m31s

Then at the same time, it will become very interesting of how the dominoes will fall further. We also did and are doing a tremendous amount of Bureau of Labor Statistics, the consumer expenditure survey analysis. I just posted on Twitter a couple hours ago one of the charts. And when you look at this, it becomes scary. 2022 was the first year that families making less than $70,000 are spending more money than they're making.

Roger Entner 11m6s

So we're looking at this, And average household income is $80,000 right? So while we have lived for quite some time with the lower income brackets being structurally unsound in their financial foundation, You know, it's pulling it up higher and higher. And you can clearly see, like in the data, how there was a peak in 2020 with all the transfer payments from the pandemic, both combining higher income, a lot of it through government subsidies. The subsidies, I don't know if you wanna call it like

Don Kellogg 11m43s

In debt. Right? Subsidies and debt.

Roger Entner 11m45s

No. No. Subsidies, but in all income brackets. The government has been very generous to every income bracket then.

Don Kellogg 11m52s

Right. Which has driven the debt up, basically, is my point.

Roger Entner 11m54s

The government debt. Yes. The government deficit has been driven up. Yes. And then at the same time, because of the shutdowns, had less opportunity to spend.

Roger Entner 12m4s

And so savings went up and it was briefly healthier. And then you see how for every income bracket, it's like going down over the last four years. Which clearly explains to you why there was a change at the last election. Because people did worse and worse and worse. And people rightfully don't like that.

Roger Entner 12m25s

And so it's going to be very interesting that if we're going to see, you know, 100 and change percent tariffs, how this will impact average Americans. Let's remember Walmart, I think it's like 60%, 70% of the products you buy at Walmart are actually made in China. And also, let's remember, it's the predominant largest retailer in rural America. It's gonna be massive. Right?

Roger Entner 12m54s

And smarter people than me said like, yeah, it's gonna cost the average consumer $34,000. That's gonna put the next income bracket under.

Don Kellogg 13m4s

Well, I mean, Walmart's been leaning on suppliers, but they can only lean so hard.

Roger Entner 13m8s

They can lean on a 140%. Right?

Don Kellogg 13m11s

Right. Exactly.

Roger Entner 13m12s

You can lean 5%. You can lean 10% maybe. Right? But you can't lean a 140%. You know?

Roger Entner 13m18s

Something gotta give, and it's gonna get ugly. Right? And nobody else has enough capacity to sell things to Americans. You know? China for the good and bad is the factory in the world.

Don Kellogg 13m30s

You mean we're not gonna we're not gonna have factories spring up overnight manufacturing all the stuff that we buy from China?

Roger Entner 13m36s

Well, you know, people were ready to do this, and then there was just a hold on the tariff.

Don Kellogg 13m42s

Well, who's gonna spend the capital to build something?

Roger Entner 13m45s

If it goes away.

Don Kellogg 13m46s

Right. Exactly.

Roger Entner 13m47s

It's like in our internal training program, I talked about the hurdle rate and the impact that the WACC, the weighted average cost of capital, times a risk premium gives you the hurdle rate. How the WACC has changed, not to the better, and how the risk premium when things are changing by the day, the risk premium has increased too. And we're seeing that risk premium like when you look at the bond market, right?

Don Kellogg 14m15s

Right. Bond yields are really, really scary right now.

Roger Entner 14m18s

Yeah. And Larry Somerset observed rightfully the US government debt that used to be the safe haven, the safest thing in the world is trading like a third world debt with yields up and the dollar strengthening. Dollar strengthening meaning dollars are leaving the country. I think we're worried much further than we were before in our arch on this conversation, but we are doing a lot of tremendous amount of work on figuring out what the impact will be. It doesn't look it will be all roses.

Roger Entner 14m53s

There will be changes.

Don Kellogg 14m55s

Well, I mean, I I would say that on the bright side, whenever we've asked about where folks plan on cutting back, and granted this is pre tariffs. Right? But wireless and home Internet are one of the last

Roger Entner 15m7s

Things that will cut back. Right? There's a

Don Kellogg 15m10s

lot of discretionary stuff that gets cut first.

Roger Entner 15m12s

And that's where I was going. I go on my knees and thank God every day that we are predominantly working in the telecom industry, which is pretty recession proof. Will there be a shift? Yes. People will probably buy more prepaid, but there is a time delay when you look at what happened at the great financial crisis and the following recession.

Roger Entner 15m36s

But fundamentally, telecom, mobile, home Internet is very safe. It's the cheapest form of entertainment you can find. It's a necessity to find new jobs. You know, will they cut back on buying new phones? Most likely.

Roger Entner 15m52s

Will they cut back on buying new computers? Most likely. Will they buy a new fancy multi $100 Wi Fi seven router set? Probably not. But they will not cut back.

Roger Entner 16m5s

Will they maybe go from a gigabyte to 500 meg? Potentially. But fundamentally, the telecom industry, both wireless and wireline, are very strong and will do quite well in this.

Don Kellogg 16m17s

Well, on that cheery note

Roger Entner 16m19s

Yeah. No. No. I I think we would

Don Kellogg 16m22s

Let's not sugarcoat it, Roger.

Roger Entner 16m23s

No. No. It is what it is. Right?

Don Kellogg 16m26s

Yeah. I know. I know.

Roger Entner 16m27s

But, you know, I've been through this. I was in telecom in 02/2001. I saw, you know, when the .com bubble imploded and the impact it had on the tech sector and the impact it had on an admittedly very young mobile industry, it had none, right? I've been around and did analysis and work during the financial crisis and learned the lessons of what happened there. And we were fine.

Roger Entner 16m56s

And we've been around in COVID and we've been around with this. It's great to have this arch of time to look at the lessons. And we're gonna apply all the knowledge we accumulated over the last twenty five, thirty years, being very intimately involved in this industry.

Don Kellogg 17m13s

Well, we certainly live in interesting times.

Roger Entner 17m16s

Interesting times. Yes. We'll talk a lot more about this topic.

Don Kellogg 17m20s

Yes. Definitely. Alright. Talk next week. Thank you.

Don Kellogg 17m23s

Bye bye.