GLG News by Gregg Kail, MBA

Implications: The iPhone potential to become the leading business handset is constrained by enterprises allowing employees to choose the carrier with the best network coverage for their work.

Analysis:

The iPhone’s functionality presses the issue of businesses having standardized smartphones and mobile device management (MDM).  Ubiquitous coverage from one carrier is unlikely through dense downtown areas and across countrysides.  The key factor is network coverage for all employees in work territories, conference traveling, and home telecommuting. 

Research studies continue to show that about half of enterprise employees choose their own device and seek reimbursement.  For SMBs, about three-quarters select their own device.  And despite IT managers being concerned security and costs, less than half of organizations have adopted a system for procuring devices and carriers.  As on-demand mobile CRM applications improve employee productivity, standardized security is important while network coverage is essential.  Salesforce.com with channel partners is a compelling application, but the business connection depends on network availability. 

The new iPhone’s contention for 3G network undermined the reliability of AT&T Mobility.  T-Mobile is a fourth place carrier in the US market, and still has business users in the areas of better GSM coverage.  Sprint eroded a loyal base of business customers in trying to merge the CDMA and Nextel iDEN networks.  RIM’s advantage has been a wide range of Blackberry devices across the major carriers accessible through a secure server.  Nokia is strongly promoting its MDM for standardization, and also has the benefit of a extensive products and carrier networks.  Apple might find its leadership in the business space will depend on diverse handsets, multiple carriers in a market, and a device management platform.

Implications: Nokia’s announcement of a music pre-pay phone stands out by designating a country, but not specifying carrier partners or distribution channels

Analysis:

Nokia’s “Comes With Music” phone is testing the device manufacturer’s brand strength and services capability.  Nokia has selected a specific market of the UK, but is not disclosing carrier alliances or distribution channels.  By choosing the UK market, Nokia is measuring its brand power and Ovi appeal against five operators and specialized MVNOs like ad-supported Blyk.  Nokia is challenging the model of launches through an exclusive carrier.  Examples of the device and carrier alliances include the Apple iPhone with AT&T, LG Dare through Verizon, Samsung Instinct with Sprint Nextel, Motorola Slider on AT&T, and the rumored Google Android through HTC on T-Mobile.

At the same time, device vendors are designating distribution channels such as Apple selecting Best Buy for the 3G iPhone and the Samsung Instinct being offered at Radio Shack after launching at Best Buy.  Best Buy’s 50% investment in the UK’s Carphone Warehouse could be a distribution alternative for Nokia to test the UK market.  And the next phase would be advancing into the US with the new store-within-a-store Best Buy Mobile.  Apple’s response could be a lower end iPod-like phone that is direct to the consumer and accepts an inserted SIM like Nokia’s music pre-pay phone.  Nokia also announced five mid-to-high priced smartphones of its N and E series for the US market without carrier commitments.  Nokia’s 40% global market share has the scale of a wide product line to push open channels and a direct consumer approach.       

Implications: Boingo’s increased hotspot usage from WiFi-enabled devices indicates that VoIP-over-WiFi could impact mobile revenue for carriers.  

Analysis:

Boingo’s increase from 1% to 15% for hotspot access from WiFi-enabled devices could change the carrier strategies for driving 3G network usage.  AT&T Mobility’s President had introduced the new 3G iPhone with its lower price point as reaching out for the “mass market” and to “drive more volume”.  He had further commented that the $199 handset price is “an almost magical price point where customers buy in big numbers”.  The question becomes if the “big numbers” are driven by using the iPhone for VoIP-over-WiFi to lower voice costs. 

Apple is allowing the Global IP Solutions for VoIP at the App Store for WiFi but not on AT&T’s 3G network.  With Boingo’s increased device access, the question becomes the threat to mobile revenue.  Sprint Nextel strategically offered the Samsung Instinct handset with a $99 Simply Everything plan for unlimited voice and data, but the Instinct is not WiFi-capable.  Verizon has restrained from WiFi-capable handsets in trying to protect the high ARPU from its unlimited domestic plans that range from $99-$139.  And AT&T originally announced that its 17,000 WiFi hotspots would be available to iPhone customers, but later withdrew the offer without comment.  The risk is that the projection of iPhone user having double the average $50 ARPU reverts to the lowest $70 iPhone rate plan instead of the $130 unlimited anytime.  The carriers will be evaluating the type of user at WiFi hotspots and the overall value for features and content beyond network usage.   

Implications: Best Buy Mobile could face a challenge to consistently earn both handset margins and carrier compensation from competing device manufacturers and wireless providers.

Analysis:

Best Buy’s focus on wireless with the new unit of Best Buy Mobile is trying to capture exclusive offers, and still promote multiple brands of carriers and devices.  Best Buy hopes to earn both handset margins and carrier commissions.  Because of handset subsidies by carriers in the U.S. market, the wireless distribution model has been agents that primarily earn activation commissions from the carriers.  Depending on whether the agent is exclusive or non-exclusive, there are other incentives such as residuals for the net growth of the agent’s subscriber base, participation in co-op advertising, and site location funding. 

Best Buy gained the exclusive on the Samsung Instinct model from Sprint Nextel despite selling the key competitors of AT&T and Verizon.  With the start of selling the iPhone, Best Buy gets the third-party exclusive outside of Apple and AT&T company-owned stores.  However, does AT&T want Best Buy to acquire new subscribers and pay an activation commission in which there is already a significant subsidy cost?  Or will AT&T strongly advertise for new subscribers to come to AT&T company-owned stores to save the activation commission?  On the other hand, the iPhone pricing of $399-$499 for existing upgrade customers and $599-$699 for non-contract subscribers has the potential for handset margins.  But Best Buy will be foregoing the new customer activation commissions and not improving its subscriber base count for residual compensation. 

Implications: Best Buy and the iPhone has three factors: 1) Shows the power of the Apple brand and product line; 2) Relegates AT&T to the traditional carrier role; 3) Tests the store-within-a store model.  

Analysis:

Best Buy’s selling the iPhone as the first independent retailer signifies the strength of the Apple brand with other products in a time of slowing consumer sales.  Apple could have negotiated with AT&T to expand the distribution beyond the 190 Apple stores and 2,000 AT&T carrier-owned stores to the 5,000 agent-owned locations.  But rather than pull customers into stand-alone wireless stores with uncertain marketing, Apple decided to push the iPhone through the 970 Best Buy stores with the track record of selling Macs and iPods.  Apple gains the control of promoting the iPhone with uniform merchandising instead of many independent agents. 

The deal was helped by Best Buy’s announcement of record sales since the Motorola RAZR from the Samsung Instinct.  Best Buy appeared to be pulling business to the Sprint Nextel network despite the high customer defections.  Generally Best Buy’s message in wireless has been price-based by advertising older versions of handsets at lower prices such as the RIM Curve for $50 on Verizon or the Palm Centro for free on AT&T.  The exclusive for the Samsung Instinct at $130 and now the 3G iPhone differentiates Best Buy along with its “Walk Out Working” set-up help.          

While Best Buy was announcing its iPhone engagement with Apple, AT&T had no comment about other distribution such as the vast 6,000 Radio Shack locations.  AT&T’s traction in mobile media, content and applications is being compromised.  Apple is perhaps showing that the carrier role as a communications provider does not imply controlling the customer relationship.  And Best Buy Mobile “store-within-a-store” could challenge the model of carrier-owned and agent-operated locations.  Apple could provide co-op marketing funds for Best Buy Mobile to differentiate itself in advertising and merchandising.  Best Buy Mobile has developed an in-store carrier activation process and could become the new model for OEM and carrier relationships.

Implications: AT&T’s speech recognition was designed to speak to a computer from a telephone.  Mobile devices differ because of the efficient and reliable delivery by smart keypads and touch-screen menus.   

Analysis:

AT&T’s Watson Speech Mashups is questionable for being a compelling tool in the mobile lifestyle of texting and clicking to communicate.  The Speech Mashups is an attempt to revitalize the Watson ASAP (Applications Speech Application Program) and Watson ASR (Automatic Speech Recognition) that were developed decades ago.  The former Bell Labs had envisioned how the user could talk to a computer like being on the telephone.  The new AT&T Research Labs is trying to apply the speech process technology to network-hosted and Web-based services.

The difference is that mobile users are being attracted to smart keypads and touch-screen menus.  The proliferation of texting has initiated deftness with the keypad to communicate and search.  And a smart keypad might deliver faster conversion speed and greater accuracy.  Nuance has approached mobile applications differently than the speech recognition in its Dragon dictation software and ACD routing such as the licensing with Intervoice.  Nuance is embedding speech recognition with device OEMs, but also exploiting the acquisition of Tegic for predictive text.  Nuance launched its T9Nav search for India that reduces the key presses for features, applications and content.

With the Watson Speech Mashups, AT&T is trying to play its Thomas Watson legacy and appear revolutionary in the virtual space of SOA, SaaS and cloud computing.  The attempt is also to revive AT&T’s subsidiary of YELLOWPAGES.com.  Despite the high visitor count to Yellowpages.com, AT&T will have a challenge accelerating into Web services and competing against Apple’s MobileMe, Google Apps, and Microsoft’s Live Mesh.

Implications: Convergys’s acquisition of Intervoice is an opportunity to penetrate call center solutions on the front end of IVR platforms instead of just outsourced staffing and information management.

Analysis:

Convergys’s core business has been billing systems and call center outsourcing that is threatened by the economic slowdown.  Convergys holds major billing system contracts with Verizon for wireless and Cox in cable VoIP, but has lost deals such as the Sprint Nextel integration to Amdocs.  Amdocs will probably also win the billing outsource for the new Clearwire WiMAX venture.  AT&T is outsourced to Amdocs for billing, but Convergys has been able to contract for customer information management in call centers.  And Convergys is a global player with deals in the India call center market.

The acquisition of Intervoice allows Convergys to increase traction in the call center space with Intervoice’s platforms in ACD, self-service IVRs, and Web Chat requests.  The payback might be protracted if the  margins decrease as enterprises control capital expenditures in the slumping economy.  For the future, Convergys can exploit Intervoice’s use of Nuance speech recognition.  Nuance has been successful with directory assistance (DA) applications to carriers and free mobile DA with ads like Jingle and SayHello.  Nuance has also launched handset solutions for voice-enabled search across the OEM vendors like RIM, Nokia, LG,  Samsung and Garmin. 
Most recently, Nuance announced its Mobile Care solution for mobile users to access their carrier’s customer care center with a data application instead of calling a live agent.  Convergys, Intervoice and Nuance applications can be part of the mobilization of call centers, initially for carriers and later in other industries.  The competition will be keen in packaged speech applications from Microsoft acquiring Tellme Networks and Google buying Grand Central Communications.  And AT&T is testing its web-based portal of voice search called AT&T WATSON Speech Mashups.  The competitive differentiator for Convergys is their diverse global scale of service engagements for contact centers.     

Implications: TracFone’s entry into unlimited plans indicates a crowded space for non-contract mobile customers and perhaps the end of rechargeable prepaid as a stand-alone service.

Analysis:

TracFone is advancing from rechargeable prepaid with the introduction of the new Net10 Plan at $80 monthly for unlimited calling and texting.  TracFone has the largest non-contract base of almost 10 million subscribers and the strongest presence in the major retailers of the U.S. market.  TracFone is even promoted at Circuit City despite Verizon’s exclusive for postpaid.  And Radio Shack advertises TracFone along side its contracted carrier offers of AT&T’s GoPhone and Sprint’s Boost prepaid.  Being owned by America Movil, TracFone has the scale to refurbish handsets and position a low priced SKU on retail displays.  But at an $11 ARPU, TracFone has to migrate from rechargeable prepaid to unlimited plans.  Virgin Mobile USA had introduced its $80 unlimited to bolster the $19.93 ARPU and lower the 5.1% churn during the first quarter.

The challenge is finding customers that can use a credit card but also willing to pay about $40 more per month than Leap Wireless and MetroPCS because of no credit check.  Leap Wireless aggressively complemented its rechargeable Jump prepaid with the unlimited pay-as-you-go Cricket plan.  Leap maintained the Jump offer for the youth segment without credit history.  A concern for TracFone is the wholesale pricing from the major carriers focused on high value, low churn postpaid customers.  Sprint Nextel still has about 13 million subscribers on prepaid or through resellers, and AT&T had prepaid net adds as high as 1.5 million for the last quarter of 2007.  But Verizon Wireless recently reported having only 2.9 million prepaid and 2.0 million reseller subscribers on its 68.7 million base.  Virgin Mobile USA has the MVNO approach of promoting peer communication and social networking.  TracFone as a traditional wireless reseller will need favorable wholesale pricing and a targeted market segment. 

Implications: Qwest’s 2nd quarter results show increased business and broadband revenues, but wireless subscribers would have to reach 2.6 million to match the prior year’s total revenues.

Analysis:

For the 2^nd quarter results, Qwest exceeded or matched Verizon and AT&T for increases in business and broadband revenues.  Qwest’s business revenue had increased by 5% from the year-earlier quarter.  In comparison, Verizon had a 1% decrease and AT&T reported a 1.4% decline in enterprise revenue and 1.6% increase for SMBs partly due to tariff increases.  Allowing for a smaller local-service base, Qwest’s net broadband subscriber growth of 31,000 customers matches Verizon’s and AT&T’s net additions across DSL, FiOS and U-verse.  Qwest’s total data, Internet and video services are 40% of operating revenue to help offset the 9% decrease in voice services from the prior year.  The difference of AT&T and Verizon growth is wireless revenue that is 39% of AT&T’s total revenue and about 50% for Verizon.

Qwest’s operating revenue for this second quarter was $3.382 billion compared to $3.463 billion for the same quarter in 2007.  To replace the $81 million revenue shortfall through wireless, Qwest would need about 2.6 million subscribers instead of its current 894,000 base on the Sprint Nextel network.  Assuming a successful Verizon transition and applying Verizon’s $51.53 ARPU, the 2.6 million subscribers would generate $402 million in wireless revenue.  Verizon reported a 45.6% margin for the last quarter.  If Qwest can earn a 20% margin from reselling Verizon network, the $402 million wireless revenue would replace this quarter’s $81 million revenue decline over last year. 

The first challenge for Qwest is the migrating of the current customers from Sprint to Verizon’s network.  For past mergers and take-over of wireless customers, the success has been based on aggressively providing better handsets and rate incentives.  And Qwest will have a significant challenge to activate another 2 million new wireless subs with a customer base of only 12.2 million access lines and the saturated U.S. market of 85% penetration. 

Implications: AT&T withholding the iPhone from indirect channels has three considerations: 1) Some locations gaining traffic; 2) Other distribution losing business; 3) Customer service at agent stores.

Analysis:

AT&T not offering the iPhone through the indirect distribution of agent-operated stores and major retailers has trade-offs for sales, margins, and channel relationships.  AT&T controls the pricing by offering the iPhone only in company-owned stores and preventing indirect stores from using their activation commissions to provide additional discounts.  And using its own direct stores, AT&T saves the cost of paying the commissions to agents and retailers.  In announcing the new 3G iPhone, AT&T Mobility’s CEO Ralph de la Vega emphasized the goals of more volume and mass market penetration.  AT&T also appears to believe that indirect distribution is unnecessary if the iPhone creates demand that goes to the AT&T and Apple company-owned stores.

The problem for AT&T is the overall relationship with indirect channels.  The agents incur the costs of employees and storefronts that would be burdensome for a carrier.  Some agents are benefiting with the increased AT&T exposure from the iPhone and are selling other handsets.  Other agents, particularly large retailers, feel that they are losing store traffic for all devices and services by not having the iPhone.  Depending on the market, AT&T has provided store build-out funds in return for exclusivity and service commitments.  The intent was that exclusive stores would be full service to demo, customize and sell handsets for advanced network features.  But the relationship becomes strained when you service what you didn’t sell.  For other industries like consumer packaged goods, the supplier strives for strong collaboration with indirect distribution.  In mature wireless markets, the distribution is being complicated by more handsets and price points.  Verizon Wireless recently changed from in-house handset warehousing to contracting with Brightpoint for distribution to its indirect channels of authorized agents and retailers. 

The direct vs. indirect distribution might be resolved by future products from Apple such as the rumored nono-sized iPhone for the holiday season.  As Best Buy launches its Best Buy Mobile and makes a 50% investment in Carphone Warehouse, Apple might want the brand synergy of iPods and Macs in major retailers.  An issue could be cannabilizing iPod Touch sales if consumers cannot afford or do not want two devices.  When the 3G iPhone was launched, Best Buy pitched the success of the $130 Samsung Instinct with Sprint Nextel’s low $70 rate plan of 450 voice minutes and unlimited data.  And Radio Shack in its 2^nd quarter results attributed its 6.9% sales increase to postpaid activations from AT&T’s popularity.  Circuit City has the exclusive at Circuit City for postpaid, but Best Buy and Radio Shack want to attract wireless traffic to offset the slowing electronics sales.  Both retailers are advertising older models of RIM’s Blackberry Curve and Palm’s Centro at lower prices than the carrier stores.  AT&T’s recent announcement was that the Apple is exclusive with AT&T into 2010.  However, the distribution of iPhones could change with varying models and prices across distribution channels as major retailers focus on mobile handsets.    

Implications: Sprint Nextel’s 2nd quarter loss of 776,000 postpaid subs questions Best Buy’s record sales of the Samsung Instinct from Sprint while Radio Shack reports disappointment with Sprint compared to AT&T.

Analysis:

Sprint Nextel’s CEO tried to counter the 2^nd quarter 776,000 subscriber loss with statements about the positive impact of the Simply Everything plans, the Now Network campaign, and the Samsung Instinct $130 price point.  But Best Buy and Radio Shack differ about Sprint mobile sales.  In early July, Best Buy had pitched the record sales of the Samsung Instinct at the $130 price point and the appeal of the Sprint Simply Everything plan for voice and unlimited data.  In comparison, Radio Shack at its 2^nd quarter presentation expressed disappointment about Sprint and complemented the strength of AT&T.  Perhaps, during this third quarter Radio Shack will realize the effects of Sprint’s price cutting.  Or the difference could be that Best Buy is advertising the Samsung Instinct on the front page of its Sunday newspaper inserts whereas Radio Shack does not show the Instinct.  Radio Shack appears to be focused on phones under $100 and promotes its four alternatives for prepaid services.  Sprint’s CEO commented at the 2^nd quarter results about the “company-wide retention efforts” and the importance of retaining versus adding customers.  Sprint’s commitment from distribution channels, such as Radio Shack selling both AT&T and Sprint, could impact the retention efforts for the second half of 2008.      

Implications: AT&T’s future results might be impacted by comments in the 2Q2008 presentation that the iPhone subsidy could reach $720 million and that 13 million or 18% of total subscribers had 3G devices.

Analysis:

For the second quarter results, AT&T emphasized the growth of 3G-capable handsets in its subscriber  base to 13 million from 11 million in the previous quarter.  The challenge for AT&T with its 72.9 million subscribers is catching up to Verizon that reported 40.5 million 3G-capable handsets or 59% of its 68.7 million base.  Without greater 3G handset capability across the subscriber base, AT&T cannot continue the pace of 52% data ARPU growth for the second quarter over the prior year’s same quarter.

During the quarterly results presentation a couple weeks ago, AT&T had also warned that the new 3G iPhone subsidy could cost up to $720 million.  Later in an interview with USA Today, AT&T’s CEO tried to justify the $300 subsidy cost of the 3G iPhone.  He pointed out how the iPhone enabled AT&T to pursue the “cool factor”, assert strong branding and build global leadership.  Perhaps to divert from the problems of landline and DSL losses, the CEO emphasized that “We’re all about wireless” and the transformation to “mobilization”. 

Besides the iPhone subsidy, what will it cost to subsidize other devices to close the gap between AT&T’s 13 million and Verizon’s almost 41 million 3G-capable handsets?  To upgrade 25 million handsets at subsidies of $100 to $300 would cost AT&T between $2.5 and $7.5 billion.  And to earn the payback in data ARPU, AT&T would probably have to increase the network CAPEX for better broadband coverage than the criticism expressed by some 3G iPhone customers.  AT&T’s iPhone advertisement pitches the message of “Twice as Fast. Half the Price. On the nation’s fastest 3G network.”  On the other hand, Verizon’s advertising theme includes “America’s largest 3G network”.  Also, the price war of handset prices and subsidies could be starting with Verizon’s back-to-school advertising message of “Lowest prices ever!…Our best 3G phones.”  AT&T’s next several quarterly results will show how handset subsidies and 3G coverage accelerates data revenues.

Implications: The AT&T and Verizon 2nd quarter results point to five problem areas: 1) High DSL disconnects; 2) Increasing wire-line losses; 3)Flat business revenues; 4) Wireless ARPU increases of only 1% to 2%; 5) Competition for high-value wireless subscribers.  The high DSL disconnects make AT&T and Verizon dependent on wireless services to compensate for increased wire-line losses and flat business revenues. 

Analysis:

Both AT&T and Verizon reported strong 2^nd quarter wireless growth in subscribers as well as revenues.  But AT&T had net DSL adds of only 46,000 with 900,000 disconnects.  Verizon had 133,000 DSL disconnects, and attained 54,000 net broadband adds from 187,000 new FiOS Internet Fiber customers.  The wire-line losses of 8.7% for AT&T and 8.5% for Verizon since the end of last year’s second quarter outweigh the TV customer growth of AT&T’s 170,000 U-verse and Verizon’s 176,000 FiOS.  Verizon’s CFO commented about the blended ARPU for FiOS being $130 ARPU and even higher for triple-play customers.  The CFO emphasized the increasing traction with 20-25% penetration in the footprint.  Yet the scale of FiOS is still only 2.0 million Internet customers and 1.4 million TV subscribers. 

For AT&T, the overall impact is shown in the 2.1% decline of consumer revenue from the same quarter last year.  The article includes AT&T’s CFO remark that non-paid disconnects only increased by 2% and the weakness is inward orders.  The CFO also alluded to the economic slowdown effect on the “value segment”, and implied that competition is not necessarily the critical factor.  However, Comcast’s second quarter added 278,000 broadband Internet and 555,000 VoIP Digital Voice.  Comcast’s 12.9 million broadband Internet customers nearly match AT&T’s 14.7 million DSL sub base.  And Comcast commented about their competitive and bundling success with two-thirds of new broadband customers switching from DSL and about one-fifth of customers choosing the triple-play package.       

For business revenue, Verizon increased by just 1% for the same quarter of 2007.  AT&T declined 1.4% for enterprise revenue and increased 1.6% in the SMB segment.  The economic constraints in the enterprise segment is seen with broadband data provider Paetec that did not meet 2^nd quarter expectations and is revising its full year forecast.  Paetec also noted the pricing pressure and increased customer turnover.  AT&T’s SMB revenue might have increased by obtaining tariff relief whereas the enterprise sales are controlled by contract pricing. 

With both consumer and business revenues being challenged, AT&T and Verizon are dependent on wireless growth.  AT&T’s record low postpaid 1.1% churn and Verizon’s .83%  show that they are holding wireless customers.  AT&T had previously stated for the first quarter that 30% of the 491,000 net DSL adds were “naked DSL” without wire-line and about half were bundled with wireless.  These 100% mobile users might be disconnecting DSL, but retaining AT&T wireless services.  Their mobile lifestyle perhaps has replaced home computer use with handset messaging and free Wi-Fi locations for notebooks.  AT&T’s mere 3,000 satellite adds could imply that the 100% mobile user might have gone to cable triple-plays.  Also, the lower adds and high churn replacement costs of DISH and DirecTV suggest the strong cable competition of Time Warner and Comcast. 

An alternative to AT&T and Verizon for the retention of home services is femtocells, such as AT&T’s $500 million deal with ip.access for 7 million femtocells over 5 years.  The femtocell shortcoming is the possibility of reducing mobile voice revenue more than the benefits of backhaul savings and improved data coverage.  The femtocell deployment becomes more justified if it is bundled to sell TV and broadband services. 

Both carriers have only about 1-2% total wireless ARPU increases year-over-year.  In contrast, the 2^nd quarter data ARPU increases are 31% for Verizon and 52% for AT&T.  The difference implies that new rate plans are discounting voice and offsetting with data revenue.   At the same time, wireless revenue increased 15% and 11% respectively for AT&T and Verizon compared to the same quarter last year.  The wireless revenue growth is subscriber additions, probably mostly from Sprint Nextel defections.  Verizon attracted higher-value subscribers with the net adds being almost 97% postpaid compared to 67% for AT&T despite Apple’s iPhone.  The future challenge will be how AT&T and Verizon can further add subscribers in a fully saturated U.S. wireless market.  And will Sprint’s market share continue to decline to provide prospective subscribers?  AT&T is trying to focus on the wireless data user with offers such as the NetReach plan that searches for access from 3G, Wi-Fi or home broadband.  With declining consumer and flat business revenues, the future quarterly results of AT&T and Verizon depend on wireless growth.  If the opportunity for subscriber growth is limited, then the challenge is increasing ARPU with high margin data usage to offset declining voice prices.

Implications: AT&T first terminating DirecTV and now Dish might not be intended to drop satellite-television from bundled marketing, but instead to adopt mutual-selling roles in the relationship.

Analysis:

AT&T’s follow-up to terminating DirectTV with the six-month cancellation notice to Dish indicates that satellite-television is being reviewed for the overall positioning with wireline, mobile, Internet and TV.  AT&T has to resolve how a satellite partner can help offset the 5 million access lines lost last year and also retain the 15 million DSL connections.  Similarly, Qwest terminated Sprint Nextel and selected Verizon as a better partner to cross-sell high speed Internet. 

For AT&T, the challenge is solving the problem of penetration in the home market.  T-Mobile USA just upgraded its dual-mode Wi-Fi home service to an Internet-calling capability through a broadband router.  T-Mobile is porting existing wireline numbers and includes voice mail.  T-Mobile claimed that 97% customers in the test markets who selected @Home had canceled their wireline.  And instead of waiting for a femtocell standard, Sprint Nextel is going nationwide on July 15^th with the home Airwave gateway from Samsung.  The MSOs also continue to advance the triple-play with IP Democracy reporting that the top three MSOs of Comcast, Time Warner and Cox added about 3.4 million cable telephony subscribers during 2007.

AT&T’s 2007 U-verse goal of 1 million subscribers will not be significant in the immediate competition for home penetration of services.  To react quickly, AT&T needs to exploit the strength of mobile demand from cellphone-only users and the multi-cell households.  The National Center for Health Statistics shows that wireless substitution for wireline is running at 3 out of 10 households.  The satellite providers Dish and DirecTV have gained subscribers from the cellphone-only users that do not need the VoIP capability of the cable triple-plays.  AT&T needs a satellite partner that promotes DSL as well as mobile services.  But this mutual-selling relationship could be difficult to negotiate.  For the last quarter, Dish’s high subscriber acquisition costs were caused by 95% of the acquisition being churn replacement.  DirecTV’s superior HDTV might make a difference.  AT&T has to penetrate the home with multiple services, including TV.  AT&T’s next satellite deal could be more of a mutual-selling relationship of mobile, Internet and TV.        

Implications: Verizon Wireless’s announced agreement with Brightpoint to support handsets for indirect retail channels appears to be an attempt to separate company-owned direct distribution.

Analysis:

Verizon announcing the agreement with Brightpoint for handset distribution is a turnabout from the previous trends of taking in-house.  AT&T also had originally used the distributor CellStar before developing its own distribution and logistics.  CellStar was acquired by Brightpoint after losing the major accounts of Lock/Line insurance to Asurion and Motorola to Cinram.  Verizon’s agreement is only for indirect channels of agents and retailers.  Verizon continues to distribute for its company-owned stores and direct sales channels.  While announcing open access, Verizon stated that handset sales and servicing had become more varied than a carrier could support.  But by withholding the direct distribution from Brightpoint, Verizon appears to be focused on its own channels to use wireless for promoting DSL and FiOS bundles.

Brightpoint’s CEO commented about his company’s growth because carriers are backing off from subsidized handsets and bundles for the alternative of indirect channels.  On the other hand, it might appear that Verizon wants to differentiate selling standalone wireless through indirect channels versus servicing the higher value customer that bundles wireless, home broadband, and TV through FiOS.  The new focus on selling and servicing the multimedia customer is shown in Verizon’s launch of Evolution stores and AT&T’s rollout of Experience stores with the Microsoft Surface touch-based display.  Sprint Nextel and T-Mobile USA both use Brightpoint, but are more dependent on indirect channels than Verizon and AT&T each having about 2,000 company-owned stores.  

For Brightpoint’s results, the issue is how strong indirect channels will be with the U.S. market close to full mobile penetration. Research studies indicate the global slowdown in handset shipments, with Sony Ericsson showing the difficulty in the mid-to-high priced models.  And Brightpoint is adjusting with its just-announced 10% workforce reduction in the European markets from the Dangaard acquisition last year.  The challenge will be how Brightpoint can support indirect channels for carriers, and maximize fee-based logistics services to offset the slowdown in residual-compensated handset shipments.         

Implications: Virgin Mobile USA’s acquisition of Helio is favorable for platform efficiencies, handset inventories and cash infusion, but the saturated teen market trends are questionable for retention and growth.

Analysis:

With the acquisition of Helio, Virgin Mobile USA gains scale in the youth market or millennial generation. The article’s research by MultiMedia Intelligence analyzes the growth of the youth segment.  MultiMedia research implies the saturation of the teen market providing 16 million subscribers in 2007, but only growing to 17 million by 2012.  Virgin Mobile’s CEO has pointed out the attractive return on the $39 million buyout of Helio with the $17 million of handset inventory, $25 million in platform savings, and the $50 million cash infusion from the Virgin Group and SK Telecom.  At the same time, the CEO commented about the problem of postpaid migration with 20% of Virgin Mobile disconnects choosing postpaid.  The Helio acquisition provides the cash and systems for Virgin to improve on the current 30% postpaid of total subscribers.  And Virgin’s margins on the recently announced $80 unlimited plan are improved by the new deal with Sprint Nextel that reduces the reseller rate by 8%.

The CEO also described the “sweet spot of prepaid in the $40-$70 range” for ARPU.  For 1Q2008, the ARPU was only $19.93 while the previous year’s same quarter was higher at $22.41.  And the churn ran 5.1% compared to other non-contract carriers like Leap and MetroPCS at 3.6% and 4.0%.  Virgin Mobile USA has the challenge of acquiring higher value subscribers through cost-efficient distribution channels.  Helio previously announced closing its own retail stores, and the MVNO Kajeet is foregoing retail distribution for online marketing except for the major retailers of Best Buy, Target and Toys R Us.  MultiMedia Intelligence research also shows the seasonality of teen mobile sales being strong in the third and fourth quarters.  Virgin Mobile will need competitive handsets and pricing to develop retailer loyalty for consistent year-round distribution.  The $39 million acquisition of Helio was cheap considering that EarthLink and SK Telecom had invested $600 million.  But Virgin’s MVNO model might take more than a shrinking youth market to control churn replacement costs and find high ARPU customers.   

Implications: The strong initial sales of the $130 Samsung Instinct indicate that Sprint Nextel can thwart churn with handset upgrades and that there could be a price war of smartphones and unlimited data.

Analysis:

Sprint Nextel’s sales records with the $130 Samsung Instinct smartphone could be the start of reversing seven quarters of negative postpaid adds.  The article’s research of 100 stores shows record high sales of 600 Instincts at one store, another location selling 25 units in an hour, and a store having a 20-customer waiting list.  Sprint lost 1.1 million postpaid customers for the last quarter, following a quarter of 683,000 postpaid losses and five previous quarters totaling to 1.03 million postpaid defections.  The handset upgrade becomes an effective retention tactic, particularly with a $130 price point available with rate plans as low as $70 month for 450 voice minutes and unlimited data. 

Verizon has aggressively upgraded handsets with 58% of its customer base using 3G handsets.  And Verizon’s churn for retail postpaid has been below 1% since 2006.  AT&T lags in upgrades with about 15% of the customer base on 3G handsets, and has averaged retail postpaid churn about 20 basis points higher than Verizon.  For the same seven quarters that Sprint has lost a total of about 2.5 million customers, Verizon and AT&T each have added at least one million postpaid subscribers per quarter.  The question is whether Verizon and AT&T will increase subsidies for smartphones to compete with Sprint’s Instinct price.  Will Verizon lower its iPhone-like LG Dare below $199 to continue attracting Sprint customers?  And will AT&T back off the increase of unlimited data from $20 to $30 on the Apple iPhone to compete for Sprint’s low rate plan of unlimited data and 450 voice minutes?  The high sales of the Instinct could not only improve Sprint’s second quarter results, but also start a price war of the best deal on a smartphone and unlimited data.  

Implications: Different from healthcare dictation and call center IVRs, Nuance faces the challenge of the fragmented mobile market of device manufacturers, mobile carriers and application developers.

Analysis:

Nuance seeks to dominate speech recognition in the mobile space similar to its history as ScanSoft and a Xerox start-up that controlled imaging software and healthcare dictation.  The article raises the question of Nuance being a “monopolist” by stifling competition and limiting progress.  Nuance has expanded through acquisitions that had specific applications.  The entry in speech recognition was the acquisition of SpeechWorks that had Amtrak reservations and E-Trade transactions.  The buyout of Viecore focused on the CTI and IVR applications of call center platforms for CRM efficiencies.  And the recently acquired eScription concentrates on medical transcription and voice-driven records software.  These applications can be cost justified by businesses for streamlining resources and improving service. 

The mobile space is different in the array of end-users, providers, and applications.  The end users are a wide range of consumers, business persons, and “prosumers”.  And the providers are fragmented across device manufacturers, mobile carriers, and application developers.  Despite the Vlingo patent lawsuit, Nuance is unlikely to control speech recognition across the mobile competitive landscape.  There are too many platforms such as Nokia’s Ovi, Sony Ericsson’s Play Station, Samsung’s Omnia, and Qualcomm’s Plaza.  The carriers promote their on-deck services like Verizon’s V CAST services.  Microsoft has its TellMe acquisition for speech recognition that is available on RIM’s Blackberry models.  Vlingo won the deal for Yahoo! One Search competing against Nuance.  Vlingo has just been announced as a free download on Blackberry smartphones. 

Nuance’s challenge is whether speech recognition can be monetized or is dependent on license patent royalties.  Nuance is the provider for free directory assistance (DA) of Jingle and SayHello.  Both DAs are ad-based, and Jingle Networks claims to have 5% of the yearly 411 calls with users willing to listen to ads for the call savings.  And Nuance’s Dragon Naturally Speaking is embedded in Garmin’s Nuvi device for the Personal Travel Assistant.  But speech recognition for mobile DA and navigation might diminish as the mobile Web emerges with text input solutions for local search.  Nuance seems to want to foster innovation with its recent showing of the open voice search (OVS) on an Apple iPhone that links to any search engine.  Nuance appears to strive to be a full competitor in voice, text and video.

Nuance’s future might be what it calls “mobile discovery solutions” that assist or eliminate typing to access the Web.  Nuance is introducing the T9 Nav derived from the Tegic acquisition.  The T9 Nav will launch in India as a search tool that reduces key presses and adapts intelligently for the user.  Besides the fragmentation across devices, carriers and applications, Nuance is confronted with disparity of marketplaces.  Instead of trying to monopolize speech recognition with patent litigation in mature saturated markets, Nuance might compete for the technology advancement in emerging markets with applications that can be monetized.    

Implications: The AT&T CEO’s keynote at the NXTcomm2008 reminiscing about railroads and telephones could imply that AT&T is not going to be an agile, speedy player for multimedia communications.

Analysis: The keynote address of AT&T’s CEO at the kick off of the NXTcomm2008 conference referred to the history-setting advancements of the railroad and the telephone.  The remarks link AT&T to being more like a locomotive than a speedy player.  AT&T’s enhancing copper for FTTN compared to Verizon’s building FiOS with FTTH could be compared to a locomotive still carrying freight on old railroad tracks. 
The original AT&T before the 1980’s divesture was a product developer, manufacturer, as well as network operator.  AT&T split into regional Bell companies focused on generating revenue from billing incumbent customers.  A slogan in the sales channels of the regional Bells was “load’em and bill’em”.  AT&T’s CEO keynote address also included the analogy of mobile applications by Indian fisherman.  The new AT&T from SBC acquisitions might be similar to fishing in that the consolidations did not become “hunting” for new markets but instead the “catching” of existing business. 
In this economic slowdown, even Fedex struggled with quarterly losses for less cargo and higher costs.  Will the locomotive-like AT&T have enough fuel to invest in new technologies?  Can AT&T keep pace with application developers and device manufacturers in the emerging mobile applications?  The competition is vast with the following examples:  Nokia took over Navteq, T-Mobile invests in deCarta, Qualcomm bought Firethorn and advances BREW with Adobe and Nuance applications, and SK Telecom joint ventures with Citigroup.  As Verizon and Sprint Nextel pitched faster broadband and expanded coverage at NXTcomm, AT&T also needs some speed. 

Implications: Apple adding 12 Latin American countries to the Telefonica agreement after contracting America Movil will test the carrier influence on device pricing, distribution channels and network quality.

Analysis:

Regarding the 3G iPhone launch, AT&T Mobility’s CEO discussed driving more volume and pursuing a mass market.  He also commented about exploiting the “magical price point” and alluded to the RIM Blackberry, Palm Treo and Samsung BlackJack at $199.  For Apple, the U.S. market will probably not be significantly different because AT&T raised the unlimited data plan from $20 to $30 month to cover the $200 device subsidy over a 2-year customer contract.  There could be price competition for the lowest unlimited data plan as Verizon adds the Palm Centro and Sprint Nextel promotes Samsung’s new Insight model.

More significantly, Apple contracting both Telefonica and America Movil for the Latin America affects the iPhone market space.  The controlled iPhone distribution by exclusive country changes from Telefonica’s O2 in the UK, Deutsche Telecom in Germany and Orange in France.  Telefonica and America Movil can compete for custom