Extraordinary Business Solutions - Updates

For more:
- see this webcast

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AT&T (NYSE:T) CEO Randall Stephenson said that the model that has prevailed in the U.S. wireless industry for years of customers getting subsidized devices in exchange for signing two-year contracts is radically shifting.

Speaking at the Morgan Stanley Technology, Media & Telecom Conference, Stephenson said that competition ramped dramatically last year. It was sparked mainly by T-Mobile US (NYSE:TMUS), which shifted away from contracts and device subsidies and has since kept up the pressure, offering to pay the early termination fees of customers who switch to T-Mobile and trade in their devices. Other carriers have embraced device financing models in the wake of T-Mobile's actions.

Stephenson said the average customer now "has a lot more transparency" and can more clearly understand the value proposition of what carriers are offering. They can see the cost of devices more clearly and then force carriers to compete more directly on network quality and pricing. Customers are opting to choose lower monthly pricing in exchange for paying for the device up front or in installments, Stephenson said. "The customers are overwhelmingly choosing that equation," he said.

"We actually think the industry is at a place where you can see line of sight to the subsidy equation just fundamentally changing," he said.

The irony, of course, is that carriers used subsidies for years to get smartphone customers onto their networks, even though they paid hundreds of dollars per phone in subsidy costs. Now that operators have all of those smartphone customers, they are looking to reduce subsidy costs and improve their bottom lines.

AT&T said that its "Next" handset upgrade program attracted 10 percent of device sales at the end of the third quarter. For all of the fourth quarter it was 15 percent, but in December it was 20 percent. "We're seeing that number continue to move up," Stephenson said of current trends.

In December AT&T tweaked the pricing of its Mobile Share shared data plans for contract customers, and also introduced new "Mobile Share Value" shared data plans that are less expensive and are targeted at no-contract customers. Customers can get the plans by purchasing a new smartphone for no down payment with Next with monthly installment payments; bringing their own smartphone; buying a smartphone at the full retail price; or switching to the new plan when they are no longer under contract.

Stephenson also touched on AT&T's deal to acquire regional prepaid carrier Leap Wireless (NASDAQ:LEAP), and said he expects the deal will close by the end of the first quarter. Reiterating previous comments, he said that Leap's Cricket brand is a "very, very strong brand down market" and performs well in the prepaid segment. However, he said that people choose not to go to Cricket because of a lack of coverage. Stephenson said that combining the Cricket brand with AT&T's network will strengthen the brand and that AT&T hopes to shake up the prepaid market.

"We're going to be fairly aggressive here," he said, and "see if we can be a little disruptive down at that end of the market."

Interestingly, when asked if AT&T could take the Cricket brand into the postpaid market, Stephenson left open the possibility of doing so. He said an AT&T-owned Cricket will start out as a no-contract service.

"Over time, it will be interesting to see," he said. "Going from prepaid to postpaid is just a credit risk exercise." He said AT&T will evaluate its options but at the start "it's going to be heavily, heavily prepaid."

Read more about: Cricket, AT&T Mobility
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2. T-Mobile's Ray knocks RootMetrics report, lays out LTE vision

By Phil Goldstein

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3. Leap takes hit from T-Mobile, loses 27% of its customers in 18 months

T-Mobile US (NYSE:TMUS) CTO Neville Ray pushed back hard against a recent report from network testing firm RootMetrics that placed T-Mobile last in overall network performance and reliability and third in speed.

Ray

Speaking at the Morgan Stanley Technology, Media & Telecom Conference on Wednesday, Ray said T-Mobile uses crowd-sourced network testing data from firms such as Speedtest.net by Ookla. "T-Mobile is the clear leader and has been for several months in terms of that performance," Ray said. He also said the RootMetrics data is "kind of old news" and that "some of the data is actually seven or eight months old."

Verizon Wireless (NYSE:VZ) topped the overall rankings for network performance, according to the report from RootMetrics, outpacing rival AT&T Mobility (NYSE:T). RootMetrics said it conducted tests in all 50 states, driving nearly 220,000 miles, visiting 6,300 indoor locations, and collecting more than 4.6 million test samples. The tests were conducted in the second half of 2013.

Ray said RootMetrics' study is "funded pretty much by the wireless carriers" and noted that the report came as a surprise to T-Mobile but not to Verizon. "Read into that what you want," he said.

However, Ray acknowledged that T-Mobile has LTE coverage gaps in suburban and rural markets, as highlighted by the RootMetrics report, though Ray said T-Mobile is working to fix the situation. "When we move out into rural areas where we don't serve, obviously we don't have a competitive experience," he added. "But we are working on that. We will be working on that more with what we do with our [700 MHz] A Block deployment. And we look to level the playing field across a broader swath of geography across the coming years."

T-Mobile CEO John Legere, who was not at the conference with Ray, took to Twitter to knock the RootMetrics report. "We've said it before, but I'm happy to say it again. We look at REAL results from REAL people when we make network claims. #uncarrier," he wrote.

At the conference, Ray said that T-Mobile's LTE network, which now covers 209 million POPs, will grow to 230 million covered POPs by mid-year and 250 million POPs by year-end. He said T-Mobile will expand coverage using AWS spectrum and not the 700 MHz A Block spectrum T-Mobile is buying from Verizon. Using that spectrum, T-Mobile could expand LTE coverage beyond 250 million POPs in 2015, Ray said.

Verizon currently covers 305 million POPs with LTE and has begun augmenting its capacity using AWS spectrum. AT&T covers more than 280 million POPs and will complete its LTE network buildout by mid-year. Sprint covers 200 million POPs and aims to hit 250 million POPs with LTE by mid-year.

Ray said that in most markets where T-Mobile has 10x10 MHz LTE deployments, it is delivering average downlink speeds of 15-17 Mbps. In markets where it will deploy 20x20 MHz LTE, as it has done already in Dallas, it is delivering average downlink speeds of 25-30 Mbps, he said. T-Mobile now has LTE service in 94 of the top 100 markets and 10x010 MHz LTE in 40 of the top 50 markets, and plans to eventually cover 90 percent of the top 25 markets with 20x20 MHz LTE.

Ray said he expects the A Block deal to close during the second quarter and T-Mobile aims to light up cell sites and support devices on the band by year-end. Combined with its existing Boston A Block holdings, T-Mobile has said the deal will give it low-band spectrum covering approximately 158 million POPs, including in Atlanta, Dallas, Detroit, Houston, Los Angeles, New York City, Philadelphia and Washington, D.C. T-Mobile said the low-band spectrum covers 70 percent of its existing customer base.

When asked about recent discussions about 5G network technology at the Mobile World Congress trade show in Barcelona, Spain, Ray said there is "a lot of uncertainty" but that there is still plenty of room for LTE to develop. He said "LTE Advanced is just around the corner" and that while other carriers are very focused on using carrier aggregation to enhance network capacity and speeds, that tool will be less important for T-Mobile because of its contiguous spectrum position in the AWS band. Yet he said "other features" of LTE Advanced will "start to come to life" in 2015 and 2016. "The factory that we built is an LTE factory," he said.

"I think the 5G conversation that occurred in Barcelona is cognizant of the fact that, as an industry, we need to start gathering our thoughts and trying to align those so we don't end up with a huge fragmentation on solutions," Ray said.

Ray also appeared at the conference with T-Mobile CFO Braxton Carter, who said that the transition of MetroPCS customers to T-Mobile's network is going better than expected. He said that around 40 percent of MetroPCS customers are now using T-Mobile's GSM/HSPA+/LTE network, and that by the end of the year 80 percent of MetroPCS customers will be on T-Mobile network. T-Mobile has said that it will shut down MetroPCS' legacy CDMA networks in Boston, Las Vegas and Philadelphia by the end of this year, a year earlier than expected. Carter said that the CDMA shutdowns will happen on a market-by-market basis, and that the shutdown of MetroPCS' CDMA network will result in an additional $1 billion in annual cash flows for T-Mobile.

Meanwhile, addressing the speculation that Sprint parent SoftBank wants to combine Sprint with T-Mobile, Carter reiterated that in the long term wireless consolidation in the U.S. is inevitable. However, he said T-Mobile is growing and innovating. "We're running the business for the long term," he said.

Deutsche Telekom CEO Timotheus Hoettges said that T-Mobile will continue to run as a standalone business--for now. "We have a standalone position which is good and which we're building out," Hoettges said at an earnings press conference in Bonn, according to Bloomberg. "You can't build your planning on a potential transaction. It's really difficult to judge." DT still owns 67 percent of T-Mobile.

"All our actions in the U.S. are to add value. At the moment we have no difficulties to run T-Mobile US on a standalone basis," he said, according to Reuters. "If a consolidation in the US mobile market will take place, we will enter that phase with an open mind," he added.

For more:
- see this webcast
- see this GeekWire article
- see this PC Mag article
- see this Reuters article
- see this Bloomberg article

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RootMetrics: Verizon tops overall network performance tests, T-Mobile comes in last
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T-Mobile notches 1.6M new subs in Q4, will shutter 3 MetroPCS CDMA markets this year
T-Mobile's LTE network the nation's fastest at 11.5 Mbps, according to report
T-Mobile buys Verizon's 700 MHz A Block spectrum for $2.4B

Read more about: LTE Advanced, wireless spectrum
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By Phil Goldstein

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4. Report: Microsoft's Nadella, Gates and others initially opposed Nokia deal

Leap Wireless lost nearly 92,000 net customers in the fourth quarter, bringing its total customer base to just 4.55 million at the end of 2013. The prepaid carrier blamed the losses on increasing competition from nationwide operators, particularly T-Mobile US (NYSE:TMUS) and its MetroPCS brand.

Leap is set to be acquired by AT&T (NYSE:T), which announced last July that it would purchase the Cricket provider for $1.2 billion. At the time the deal was announced, Leap had more than 5 million customers.

Leap released its fourth-quarter and full-year 2013 financial and operational results via a securities filing, and did not issue a separate earnings release or conduct an earnings conference call. Leap said it believes the deal with AT&T will close on or before the expiration of the FCC's informal 180-day shot clock on March 14.

AT&T has said that it plans to keep Leap's Cricket prepaid brand and discontinue its own Aio Wireless brand when the deal is complete. "We're convinced that putting the Cricket brand on top of the AT&T network is going to shake things up in this space," AT&T CEO Randall Stephenson said in January.

Stephenson added that AT&T wants to use that brand "to push smartphone penetration in the no-contract space and to be aggressive as it relates to pricing."

Here's a breakdown of Leap's key metrics for the quarter:

Subscribers: Leap lost 745,297 total net customers in all of 2013, compared to 637,229 for all of 2012. When taking out the 653,305 net subscriber losses Leap reported for the first three quarters of 2013, the company lost 91,992 net customers in the fourth quarter.

"Competition in the wireless industry has increased and intensified in recent quarters, particularly from carriers and their affiliated brands with robust nationwide networks and significantly greater deployment of 4G LTE technology. In particular, we have been experiencing increased competition in many of our core Cricket markets from nationwide carriers increasingly targeting the prepaid segment, including from T-Mobile's nationwide expansion of the MetroPCS prepaid brand utilizing the T-Mobile 4G LTE network," Leap said in a filing.

Notably, the carrier added that "this evolving competitive landscape has negatively impacted our financial and operating results in recent years, as evidenced by a 26.5% reduction in customers between March 31, 2012 and December 31, 2013."

Churn: Leap's total churn in the fourth quarter was 3.5 percent, compared to 4 percent in the third quarter and 4.6 percent in the year-ago quarter.

ARPU: Average revenue per user for the third quarter was $45.30, compared to $42.73 in the year-ago period but down from $45.45 in the third quarter.

Muve Music: Leap said Muve Music was available to more than 2.3 million Cricket customers as of the end of 2013, "and is currently among the largest on-demand music subscription services in the U.S. as measured by the number of paid users."

Financials: The company posted a net loss of $177 million, compared to a net loss of $73.8 million in the year-ago period. Total revenues for the fourth quarter fell nearly 10 percent year-over-year to $682.7 million, down from around $756 million in the year-ago period.

For more:
- see this SEC filing

Special Report: Wireless in the fourth quarter of 2013

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Read more about: Leap Wireless, Cricket
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By Phil Goldstein

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5. Facebook drones may take on Google's Project Loon balloons

Microsoft (NASDAQ:MSFT) CEO Satya Nadella, co-founder Bill Gates and other board members and executives initially were against former Steve Ballmer's idea to purchase Nokia's (NYSE:NOK) handset business and licenses its patents for $7.5 billion, according to a Bloomberg BusinessWeek report.

The report, citing unnamed sources, said that Ballmer's relationship with Microsoft's board hit a low point when he shouted at a June 2013 board meeting that if he didn't get his way he couldn't be CEO. Ballmer had pushed heavily for the Nokia deal; he announced in August he would retire and Nadella replaced him a month ago.

According to the report, several Microsoft directors and Gates, Ballmer's longtime friend and until recently Microsoft's chairman, were initially opposed to the Nokia deal. Nadella was as well but then later changed his mind, the report said.

"Nokia brings mobile-first depth across hardware, software, design, global supply chain expertise and deep understanding and connections across the mobile market," Nadella said in a statement to Bloomberg BusinessWeek. "This is the right move for Microsoft." Microsoft expects the deal to close by the end of the first quarter.

Microsoft spokeswoman Dawn Beauparlant said Ballmer declined to comment, according to the report. Ballmer is still a member of the board, as is Gates, who stepped down as chairman to become Nadella's technology adviser.

Last month Microsoft announced a number of new firms are planning to use its Windows Phone software, many of which were initially skeptical about the mobile OS. Nokia made more than 75 percent to 80 percent of the Windows Phones sold last year, so getting more partners, especially for low-end Windows Phones in markets such as China and India, is crucial. Microsoft announced it is now working with Foxconn, Gionee, Lava (Xolo), Lenovo, LG Electronics, Longcheer, JSR, Karbonn and ZTE on Windows Phones.

At the heart of the debate with Ballmer is the future of Microsoft--will it be more of a software company or a company that combines hardware and software? Ballmer was clearly pushing for the latter, as seen in his reorganization of the company's structure last year. Nadella has already undone some of that.

Microsoft earlier this week confirmed that Tony Bates, executive vice president of business development and evangelism, will leave the company, to be replaced on an interim basis by Eric Rudder. Chris Capossela will become executive vice president and CMO, and the company's current marketing chief, Tami Reller, will be leaving after a transition period. Mark Penn, a former Democratic strategist, was named chief strategy officer. Bates had been opposed to the Nokia deal and remained so, the report said.

At the June 2013 board meeting, Ballmer had been told the board didn't back his plan to acquire Nokia's handset and HERE mapping units, according to the report. Ballmer eventually got most of what he wanted, but his pushback on the Nokia deal soured relations with the board that had already been growing weaker. The board was concerned about Microsoft's direction under Ballmer. The board had said the first pass at the deal, which had included the HERE unit, was too expensive and complex.

Speaking this week at the University of Oxford, Ballmer said that Microsoft is a well-capitalized company and that if it does not succeed, "it's about catching the next wave of innovation."

He talked about the opportunity Microsoft had missed. "In the last 10 years, there are things that didn't go so well," Ballmer said. "We would have had a strong position in the phone market. The thing I regret is that we didn't put hardware and software together quicker."

For more:
- see this Bloomberg BusinessWeek article
- see this CNET article

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Former Microsoft CEO Ballmer laments falling behind in mobile
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Nokia unveils X, X+ and XL Android-based phones to draw users to Microsoft services
Microsoft adds Lenovo, LG, Foxconn to list of Windows Phone supporters
Microsoft's Nadella puts focus on mobile and cloud, but Nokia plans remain elusive
Report: Microsoft ponders free versions of Windows Phone, RT to counter Android

Read more about: Windows Phone, Satya Nadella
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By Tammy Parker

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