Believe The Seller. What Vodafone is Telling Us…

There are win-win M&A transactions – but not many.  Usually the seller gets the gains and the buyer gets the remorse.  So what is Vodafone’s exit from Verizon Wireless telling us?.

The US Wireless market is going to get tougher.  Vodafone in Europe understands the challenge of a genuinely competitive market.   The US had been well on its way to a duopoly until the DoJ stopped the AT&T T-Mobile deal.  It still remains pretty comfortable for Verizon and AT&T.

  • It will remain a three or four player market;  ie. a “real” competitive one.  Sprint and T-Mobile might be able to get a merger through, but I don’t see VZ or T getting one done even under a Republican administration.  It would just be too nakedly anti-consumer.
  • Softbank’s Sprint just needs to be moderately less incompetent to make the market a whole lot tougher.  The one constant in the market has been Sprint’s uncanny ability to f**k up every new thing they touch.  To succeed, Verizon and AT&T just had to be less incompetent than Sprint.  A very low bar.  More like a furrow really.  Sprint’s truly massive spectrum holdings (after the Clearwire buy) give them multiple paths to disruption.  
  • T-Mobile is back.  They were doing a good job before they pulled back to a “please someone buy us” defensive crouch.  Now they are back to innovative marketing (with predictably clumsy and over-priced responses from the big two).  And since DT can’t sell anytime soon, they might actually invest T-Mo (who CAN do deals without DoJ action).

There is no more subscriber growth.

  • Yes, there is huge latent demand to connect other devices.  But there are no “extra” consumer dollars to pay for those extra connections.  Unless incomes jumps.   Or you further cannibalize the landline business.  Or you expect people to go hungry to fund higher phone bills?    Connecting a tablet or car as an add-on can help you keep ARPU’s constant, but they aren’t going to grow them
  • Machine-to-machine could be huge, but it will require a drastically different, lower-price offering.
    • There is a clear opportunity to sell low-priority,  low-throughput, “burst-only” preempt-able data transmission for machine communications.  It would have to be priced in micro-pennies, but it would monetize airtime that currently goes unsold.
    • Enabling that only requires some creative marketing and network design, but telcos are where creativity goes to die (or to be murdered).  The likely innovator here is going to be a spectrum-rich, creative disruptor like Softbank, not VZ.
    • After machine-to-machine takes off, its only a matter of time before someone figures out how to take advantage of that new class of service for consumer applications.  ARPUs probably fall further after that.
    • It is also worth noting the absence of any meaningful machine-to-machine market development in other saturated wireless markets worldwide.

The “Hero” Handset Days Are Over: The iPhone and then the Android era gave the wireless services market a 5+ year reprieve from maturity.  But the smartphone itself is increasingly mature.  One shiny rectangle-with-a-screen is starting to look a whole lot like another.    And don’t even try to pitch me on Smartwatches.   Or Google Glass.  Or a guy wearing a smartwatch and Google Glass – at least a guy who’s had a date recently…

Wireline May Be The Next Big Thing:  The irony that Vodafone is using the proceeds to invest in wireline has gone oddly unremarked.   It is true that Vodafone is in a much different starting position than Verizon, but still….

  • US telcos aren’t going to be able to avoid Capex on the legacy copper network (and its high Opex) forever.  It costs about as much to run a ragged, low penetration, declining-revenue network as it does to run a healthy one.  Actually, it costs a LOT less to run a healthy fiber-based network versus a copper one (water doesn’t short out fiber links).  If you follow Verizon or AT&T’s earnings calls, it almost seems like they aren’t in the wireline business.  But they are getting to the point where they are going to have to cut the best deal they can with the government and start upgrading in earnest.  They are losing too many DSL subs and the likes of Google fiber and Seattle’s fiber build are highlighting how easy and cheap a “Gigabit” really is.
  • It is true that wireline is a tough business for both, but they made it tough for themselves.  Just stop and think about the fact that the telcos are STILL running (brand new) copper to most new home construction.  A steady, fiber-deep investment program over the last decade or two would have given them a network the beat cable.  Instead, they make excuses.  Its like the guy who shoots his parents and then begs for mercy because he’s an orphan…
  • Most interesting is that the business wireline market seems to be under increasing threat.  The most salient example is Starbucks giving up on AT&T’s 1.5 megabit T1’s for Google/Level 3’s 1,000 megabit (Gigabit) links.  But cable’s business services and alternative providers are chipping away at the T1 business across the board.  Most importantly, those copper T1’s aren’t enough for the (landline) backhaul links to the wireless towers that sustain the business Verizon and AT&T do want to talk about.  That is at least partly what’s  driving Vodafone’s investment calculus.
  • Verizon has done better than AT&T – steadily extending FIOS coverage even to non-FIOS subscribers.  This will fill out that fiber network and eventually lead to a low-maintenance-cost, high-performance network in their high-revenue states.  AT&T is still waiting for a miracle (or massive buildout subsidies more likely). In the meantime, the world moves on.

FYI a good NYTimes review of Verizon’s missed chances on this deal.  “Waiting to Woo Vodafone, and Paying the Price”

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