An Ignoble Experiment

2. T-Mobile took $100M hit in Q1 for paying off ETFs of switching customers

Verizon Wireless (NYSE: VZ) pushed back hard against proposed FCC rules that could restrict how much spectrum it can acquire in next year's incentive auction of 600 MHz broadcast spectrum.

Verizon argued in a filing with the FCC that the commission should not give competitors Sprint (NYSE: S) and T-Mobile US (NYSE:TMUS) a leg up in the auction. The rules, which are not yet final, are likely going to be subject to vigorous lobbying in the next two weeks ahead of the FCC's planned vote on May 15.

In the filing with the FCC, Verizon noted that its executives met on Monday with Commissioners Ajit Pai and Michael O'Rielly, the two Republicans of the five-member FCC panel, as well as with their staff members. As it has in the past, Verizon "stressed that the best way to promote a successful incentive auction is to ensure the widest possible participation from broadcasters and robust competition between wireless carriers."

However, Verizon wrote that "bidding restrictions proposed by competitors would reduce the amount of spectrum made available in the auction and would add to its complexity. Set-asides in general can reduce auction revenues by limiting competition in the auction, and harm consumer welfare."

By potentially restricting Verizon and AT&T (NYSE: T) in bidding on parts of spectrum that would be set aside in many markets, Verizon argues, the FCC would be depressing auction revenue. That could increase "the risk that broadcasters do not relinquish substantial amounts of spectrum." In order for the incentive auction to be a success, enough broadcasters need to give up their spectrum in the "reverse" part of the auction so that carriers can bid on it in the "forward" part of the auction. However, Verizon and AT&T have argued broadcasters will shy away from relinquishing their spectrum if they know that two largest carriers are restricted, because that could lower how much money they will eventually be paid.

The restrictions the FCC is contemplating could potentially benefit Sprint, T-Mobile, U.S. Cellular (NYSE:USM) and other smaller carriers. Verizon wrote that "it would be perverse and unjust" for the FCC to adopt auction rules that "subsidize some large multinational companies at the expense of their competitors. T-Mobile and Sprint are large corporations with established, well-financed corporate parents. They and their parent corporations are more than capable of paying substantial amounts to acquire spectrum in the incentive auction if they choose to do so."

The main takeaway from the proposed rules is that they are designed to ensure that carriers that control a lot of low-band spectrum to "run the table" in the auction. The FCC 's proposed rules would establish a market-based reserve of up to 30 MHz of spectrum for carriers that currently hold less than one-third of available low-band spectrum in a market. The FCC would then establish a spectrum reserve "trigger point" to determine at what point the auction would split into "reserved" and "unreserved" bidding. The FCC hasn't yet defined what that point will be but it could be based on market prices.

When that happens though, the amount of "reserved" spectrum in each market will be established based on demand in that market by eligible bidders, but it will be no more than 30 MHz. If demand for the reserved spectrum is less than 30 MHz at that point, the remaining balance would be available on an unreserved basis.

Any carrier that holds more than one-third of available low-band spectrum in a market would be able to bid on all unreserved spectrum in that market, but would be ineligible to bid on any reserved spectrum, which is likely going to restrict Verizon and AT&T in many markets. The FCC also said that any provider that holds less than one-third of available low-band spectrum in a market would be able to bid on all unreserved spectrum in that market, and all reserved spectrum in that market.

For more:
- see this FCC filing
- see this Reuters article

Related Articles:
With 2.5 GHz, Sprint won't have much wiggle room in FCC's new spectrum screen
FCC to add Sprint, Dish spectrum to spectrum screen
AT&T warns it might skip 600 MHz incentive auction due to FCC's proposed restrictions
Report: FCC's planned incentive auction rules would set aside spectrum for smaller carriers
Wooing TV broadcasters is FCC's next big job for 600 MHz incentive auction
Verizon says FCC can't ignore Sprint's 2.5 GHz licenses in spectrum screen

Read more about: wireless spectrum, AT&T Mobility
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By Phil Goldstein

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3. U.S. Cellular loses 80K subs in Q1, says it is moving beyond billing system errors

T-Mobile US (NYSE:TMUS) acquired the most new subscribers among Tier 1 carriers during the first quarter, partly on the back of the carrier's offer to pay up to $650 in Early Termination Fees to customers who switched to T-Mobile. But the offering clearly cut into T-Mobile's bottom line--the carrier said in a filing that its ETF offer cost it around $100 million in the first quarter.

T-Mobile launched its ETF offer in January. In a recent Securities and Exchange Commission filing, the carrier said the offer was recorded as a reduction in its equipment sales revenues, and had a negative impact on both its revenue and adjusted EBITDA of around $100 million in the quarter.

T-Mobile said around 21 percent of its 1.32 million branded postpaid customer additions in the quarter took advantage of its ETF offer.

Overall, the carrier swung to a net loss of $151 million for the first quarter, down from a profit of $107 million in the year-ago period. The company reported adjusted EBITDA of $1.09 billion for the first quarter, down 26 percent from $1.47 billion a year earlier, including earnings from MetroPCS before the companies merged last year.

T-Mobile executives shrugged off the cost of the ETF offer though during the company's earnings conference call. CFO Braxton Carter said by launching the ETF offering at the beginning of the year, "part of the calculus there is that enhancing growth in the front end of the year will…be accretive to the overall results."

According to a Seeking Alpha transcript of the event, Carter said the ETF offer "will pay massive dividends in the future, given the quality of customers that we're bringing on--remember, we previously talked about two-thirds, roughly two-thirds, of the flow that we're getting on the ETF offer are the very highest credit quality customers that have the longest tenure with us."

Similarly, CMO Mike Sievert said "there are plenty of cynics out there, including our competitors, that would try to convince you that what we're doing is buying growth in an uneconomic way."

Sievert said what the ETF offer is really doing is "bringing in the highest-quality customers in our history at a marginal cost from the Uncarrier 4.0 that's a little bit higher as well but far outweighed by things like superior credit class, superior data attach, higher ARPUs, a more Prime credit--higher EIP attach on these customers as well, which forecasts better churn profiles on them. So we're really, really pleased with the economic system that we have going right now from the uncarrier moves. These are high-quality customers, so they're going to have great returns."

Sprint (NYSE:S) in early April followed T-Mobile's lead and launched its own ETF payoff promotion. Like T-Mobile, Sprint will pay up to $650 to subscribers who switch from another carrier to one of Sprint's new Framily family calling plans.

While Sprint's ETF payoff promotion is set to end May 8, Sievert made clear that T-Mobile's ETF offer is not a promotion. "When we launch something with an Uncarrier label on it, that's a commitment to a structural change in the value proposition," he said.

T-Mobile CEO John Legere added that "this was not ETF payments for us. This was Contract Freedom. So when you take no contracts and the ability for people at the time to make decisions to move over, we have determined that's it. We will do it forever."

Legere said most competitors' responses "are still time-based, one-off responses to us as opposed to structural changes in the way they serve their customers." He said "it's a strange period where they can't believe that they can't just switch and change the environment. And a temporary ETF that's pulled off the table is going to hurt more in their statement to customers. And it also says that they can't figure out structurally the economics of how to make it work. So these are very positive signs for us, but ours will continue."

For more:
- see this SEC filing
- see this Seeking Alpha transcript

Read more about: ETFs, ETF
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By Phil Goldstein

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4. Rumor Mill: AT&T to launch VoLTE on May 23 in Chicago, Minneapolis

U.S. Cellular (NYSE:USM) in the first quarter continued to lose postpaid customers, but the carrier insisted that it is making progress in reducing churn and getting over the billing system errors that plagued it during the second half of 2013.

The carrier, the fifth-largest facilities-based U.S. operator, reported higher churn for the period--but U.S. Cellular CEO Ken Meyers said the company is "currently seeing improvements in both voluntary and involuntary churn from peak levels back in 2013 and early 2014."

Meyers said that the company has "made significant progress to return service levels to our normally high standards following the billing system conversion." Meyers also said the new billing system, for which Amdocs is the main vendor, has allowed U.S. Cellular to "deliver more products and services that meet our customers' needs" like its Shared Connect shared data plan, new no-contract Simple Connect Plans and device financing services.

Meyers said on the company's earnings conference call that U.S. Cellular's strategy for returning to subscriber growth is simple: higher gross additions and lower churn. He said that before U.S. Cellular started selling Apple's (NASDAQ: AAPL) iPhone in November 2013, U.S. Cellular customers cited device selection as the No. 2 reason they left the carrier. Without providing specific figures, Meyers said that metric has since dropped by 75 percent.

In addition to getting back to subscriber growth, Meyers said the company needs to drive revenue growth. He said adding the iPhone has accelerated smartphone penetration and that its shared data plans are being "well received" and "should let us capitalize on skyrocketing data consumption."

The carrier also announced in April that it will be adding more than 1,200 LTE cell sites in 2014 and expanding its existing LTE service in 13 states. By the end of 2014, the company has said more than 93 percent of U.S. Cellular customers will have access to LTE. The network expansion will add LTE coverage in Kansas, Missouri, Nebraska, Oklahoma and North Carolina and also bring additional LTE service to areas in Iowa, Illinois, Maine, South Carolina, Tennessee, Texas, Virginia and Wisconsin. Some of the new cities that will receive LTE speeds are Oklahoma City, Emporia, Kan., and areas of Door County, Wis.

Interestingly, Meyers also said he expects U.S. Cellular to participate in both the AWS-3 spectrum auction scheduled for this fall and the incentive auction of 600 MHz broadcast TV spectrum set for mid-2015. While the draft rules for the incentive auction could potentially benefit U.S. Cellular by limiting how much low-band spectrum Verizon Wireless (NYSE: VZ) and AT&T (NYSE: T) can bid on, Meyers noted that the rules are not yet final. "It's really difficult right now, while the rules are still evolving, to have any specificity about where we'll play and how," he said.

Here is a breakdown of U.S. Cellular's key quarterly metrics:

Subscribers: In total, for all its markets, U.S. Cellular lost 93,000 postpaid subscribers in the first quarter, more than the 33,000 it lost in the year-ago period or the 71,000 it lost in the fourth quarter of 2013. The company gained a net total of 13,000 prepaid customers in the quarter, weaker than the 31,000 prepaid customers it gained in the year-ago period but an improvement from the 26,000 prepaid customers it lost in the fourth quarter of 2013.

U.S. Cellular ended the first quarter with a total of 4.68 million total customers.

Smartphones: U.S. Cellular sold 467,000 smartphones in the first quarter, which represented 73 percent of all devices U.S. Cellular sold in the first quarter, compared to 79.6 percent of all devices sold in the fourth quarter, and 61.7 percent in the year-ago period. U.S. Cellular said 53.1 percent of its postpaid customers carried a smartphone at the end of the first quarter, compared to 50.8 percent at the end of the fourth quarter and 43.5 percent at the end of the first quarter of 2013.

The company said that LTE smartphones made up 85 percent of its smartphone sales in the first quarter and that 82 percent of the smartphones on its network are now LTE devices.

Churn: U.S. Cellular's postpaid churn rate was 2.3 percent, up from 1.7 percent in the year-ago period and 1.9 percent in the fourth quarter of 2013.

Meyers said that voluntary churn, or customers leaving of their own accord, appears to have peaked in the fourth quarter. He said billing issues still remain with some customers but that is also improving. Involuntary churn, in which U.S. Cellular is shutting off service of non-paying customers, increased in late 2013 and early 2014.

CFO Steve Campbell said that U.S. Cellular has returned to enforcing normal billing collections and at this point has worked through the majority of its collections backlog. He said the carrier is seeing involuntary churn steadily decline from a peak in February.

ARPU: U.S. Cellular's postpaid average revenue per user was $57.59, up from $54.85 in the year-ago period.

Financials: The carrier's total revenue for the quarter was $925.8 million, down 14 percent from $1.08 billion in the year-ago period. Service revenues were $853.6 million, also down 14 percent year-over-year from $996.3 million. The company's net income was $19.48 million in the quarter, compared to $4.91 million in the year-ago period.

For more:
- see this release
- see these slides (PDF)

Special Report: Wireless in the first quarter of 2014

Read more about: Kenneth Meyers, U.S. Cellular
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By Phil Goldstein

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5. M2M Spectrum Networks aims to steal M2M biz from Tier 1 carriers

AT&T Mobility (NYSE: T) is primed to launch Voice over LTE service in two markets, Chicago and Minneapolis, on May 23, likely becoming the first Tier 1 carrier to do so, according to Engadget.

AT&T has said it will launch the PadFone X with VoLTE.

The blog, citing unnamed sources, said that details on the VoLTE deployments are still scarce but that AT&T is testing VoLTE in a limited number of markets. "We're wrapping up our initial VoLTE market trials and our initial markets will be VoLTE ready this year," AT&T spokesman Mark Siegel told FierceWireless in response to questions about the report.

AT&T is expected to roll out HD Voice alongside VoLTE, but has delayed its VoLTE rollout from its initial plans to launch VoLTE by the end of 2013. Thus far, AT&T has not provided a specific VoLTE target date, but it is working to seed the market with VoLTE-capable devices, such as the PadFone X from Asus.

As Engadget notes, the PadFone X was announced in January at the Consumer Electronics Show with support for VoLTE and LTE Advanced features such as carrier aggregation. The report indicated the device is likely going to go on sale soon after May 23 if not on that date. Other AT&T smartphones could potentially get support for VoLTE via an over-the-air update.

The benefits to deploying VoLTE and HD Voice include improved voice quality and more efficient use of spectrum. VoLTE is also likely going to lead to the introduction of new native calling features such as video calling that could help carriers catch up to services provided by over-the-top players.

Verizon Wireless (NYSE: VZ) recently confirmed that it expects to introduce VoLTE this year and will simultaneously roll out HD Voice using the W-AMR speech compression algorithm. Verizon spokeswoman Debi Lewis told FierceWirelessTech that the carrier will launch VoLTE sometime in 2014. She declined to confirm or deny a report from Credit Suisse analyst Joseph Mastrogiovanni that VoLTE will launch in the second half of the year, but she acknowledged that Verizon is focused on making sure VoLTE technology is fully ready before commercially launching it.

"This is complicated technology. We like to test, make sure everything's good before we do any kind of rollout. And 2014 is what we're focused on," Lewis said.

Lewis said that the flavor of HD Voice Verizon intends to introduce alongside VoLTE service will be based upon the Adaptive Multi Rate Wideband (W-AMR) speech compression algorithm. W-AMR was standardized in 3GPP Release 5, and the first service launch using the technology occurred in 2009.

Sprint (NYSE: S) introduced EVRC-NW HD Voice about two years ago on the HTC Evo 4G LTE smartphone. Earlier this week Sprint CEO Dan Hesse announced that HD Voice is now available over its CDMA network in 100 Sprint markets and will expand nationwide in mid-summer. The operator intends to have some 20 million HD Voice-capable devices in use by its customer base by the end of 2014. T-Mobile US (NYSE:TMUS) turned up W-AMR HD Voice on HSPA in January 2013.

For more:
- see this Engadget article

Related Articles:
Verizon committed to VoLTE with HD Voice in 2014
Ericsson exec: VoLTE deployment delays not surprising due to network complications
AT&T admits to VoLTE delay, won't offer new launch date
AT&T: 2015 will be the year of mass market VoLTE

Read more about: VoLTE, HD Voice
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By Phil Goldstein

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