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

Full Transcript

0m10s Speaker 0

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 Antner. How are doing, Roger?

0m23s Speaker 1

Considering the circumstances, I am well. Right?

0m26s Speaker 0

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.

0m33s Speaker 0

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.

0m44s Speaker 0

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.

0m53s Speaker 0

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.

1m5s Speaker 0

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.

1m15s Speaker 1

Well, you always used to say, right, AT and 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.

1m35s Speaker 1

And for AT and 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 and T also needs something.

2m8s Speaker 1

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

2m15s Speaker 0

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 and 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

2m32s Speaker 1

We're gonna treat you well.

2m33s Speaker 0

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?

2m41s Speaker 0

And their churn is at historically low levels.

2m43s Speaker 1

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

2m54s Speaker 0

Mhmm.

2m55s Speaker 1

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

3m0s Speaker 0

The switcher pool in general, I think we get the sense is shrinking. Right? So if AT and 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?

3m12s Speaker 1

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.

3m29s Speaker 0

Fair. Fair.

3m30s Speaker 1

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.

4m6s Speaker 1

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?

4m29s Speaker 1

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.

4m51s Speaker 0

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

4m54s Speaker 1

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.

5m11s Speaker 1

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?

5m27s Speaker 1

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

5m34s Speaker 0

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.

5m39s Speaker 1

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

5m44s Speaker 0

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?

5m59s Speaker 0

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

6m2s Speaker 1

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.

6m25s Speaker 1

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.

6m44s Speaker 1

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?

7m10s Speaker 1

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.

7m35s Speaker 1

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.

8m7s Speaker 1

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.

8m29s Speaker 1

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.

8m59s Speaker 1

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

9m8s Speaker 1

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.

9m24s Speaker 1

Right?

9m24s Speaker 0

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?

9m31s Speaker 1

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 and T, it's T Mobile. And when you look at it, I just looked at all of them, but like AT and 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.

9m57s Speaker 1

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?

10m10s Speaker 0

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

10m14s Speaker 1

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.

10m31s Speaker 1

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.

11m6s Speaker 1

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

11m43s Speaker 0

In debt. Right? Subsidies and debt.

11m45s Speaker 1

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

11m52s Speaker 0

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

11m54s Speaker 1

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.

12m4s Speaker 1

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.

12m25s Speaker 1

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?

12m54s Speaker 1

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.

13m4s Speaker 0

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

13m8s Speaker 1

They can lean on a 140%. Right?

13m11s Speaker 0

Right. Exactly.

13m12s Speaker 1

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

13m18s Speaker 1

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.

13m30s Speaker 0

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

13m36s Speaker 1

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

13m42s Speaker 0

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

13m45s Speaker 1

If it goes away.

13m46s Speaker 0

Right. Exactly.

13m47s Speaker 1

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?

14m15s Speaker 0

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

14m18s Speaker 1

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.

14m53s Speaker 1

There will be changes.

14m55s Speaker 0

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

15m7s Speaker 1

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

15m10s Speaker 0

lot of discretionary stuff that gets cut first.

15m12s Speaker 1

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.

15m36s Speaker 1

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.

15m52s Speaker 1

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.

16m5s Speaker 1

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.

16m17s Speaker 0

Well, on that cheery note

16m19s Speaker 1

Yeah. No. No. I I think we would

16m22s Speaker 0

Let's not sugarcoat it, Roger.

16m23s Speaker 1

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

16m26s Speaker 0

Yeah. I know. I know.

16m27s Speaker 1

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.

16m56s Speaker 1

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.

17m13s Speaker 0

Well, we certainly live in interesting times.

17m16s Speaker 1

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

17m20s Speaker 0

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

17m23s Speaker 0

Bye bye.