Moffett

I spend my days listening to Big Telecom company earnings conference calls so you don’t have to. On this morning’s call with Time Warner Cable investors, Sanford Bernstein’s Craig Moffett raised his hand yet again for another round of questioning Time Warner Cable executives for news on when the company will begin gouging their customers with Internet Overcharging schemes like usage-based billing. It is rare when Moffett does not ask Time Warner about when it plans to get the Money Party started with even higher prices for the company’s broadband customers.

Both Rob Marcus (chief operating officer) and Irene Esteves (chief financial officer) do their best to assuage Moffett his dreams of usage pricing may still someday come true (we’ve underlined some important points):

Craig Moffett – Sanford C. Bernstein & Co., LLC., Research Division: Rob or Irene, maybe you could just update us a little bit on your latest thinking with usage-based pricing, what’s been happening in Texas? And with the cable modem fee, which is obviously not a step in usage-based pricing, does that put off anything that you would otherwise do in moving toward usage-based pricing over the next couple of months? How should we think about that?

Robert D. Marcus – president and chief operating officer: So we’re now in Texas, the Carolinas and the Midwest with usage-based pricing. [We’re planning to introduce it] in the Northeast [in] the next month or so. And I think by year-end, we’ll be 100% across the footprint with [usage pricing] available [on] Internet Essentials, as we call it. I think that although the customer uptake of Internet Essentials is still small, it’s a very important principle that we’ve established, one that usage and price relate to one another. And secondly, we think it’s very important that we give customers who use less a choice to pay less. And whether or not there is a significant uptake of the service, we think those are very important principles to have established. So we’re in no way reducing the emphasis on that product because the numbers are still relatively small.

Irene M. Esteves – chief financial officer and executive vice president: And as far as the modem fee, we’re looking at that as part of our overall pricing strategy on [High Speed Internet]. We shouldn’t think about it as separate and apart from what our customers are paying us for the overall service. We think  it makes sense given what the competition is charging.

With a declining number of Americans willing to pay AT&T’s prices for smartphones and wireless service plans, AT&T’s future revenue growth will increasingly depend on getting the company’s current customers to pay more for data and adopt new types of wireless communications services.

After a quarterly earnings report found AT&T subscriber growth falling far behind its larger rival Verizon Wireless, AT&T appears ready to concede there is a finite number of new customers to be won from endless battles for market share.

AT&T was expected to add 358,000 new customers in the previous quarter, but only managed to attract 151,000. Demand for the latest Apple iPhone has yet to meet available supply, with most iPhones obtained by AT&T allocated to existing customers. AT&T exclusively launched the iPhone in the United States in 2007 and retains the largest share of iPhone owners, even after the phone became available from other carriers. Verizon Wireless had fewer problems adding new customers because it is not nearly as dependent on Apple.

de la Vega

Despite lackluster subscriber growth, AT&T reported stellar revenue during the quarter, partly from rate increases and the launch of usage-limited, family share plans. AT&T also continued to benefit from  tax savings, share buybacks, and refinancing debt at lower interest rates. With fewer customers adding subsidized phones, AT&T also paid fewer subsidies.

AT&T’s profit rose to $3.64 billion, or 63 cents per share, up from $3.62 billion, or 61 cents per share — $.03 ahead of Wall Street expectations.

AT&T can thank its wireless data services for a significant chunk of their earnings, with more to come.

The company reported more than 2/3rd’s of their customers (28+ million) are now on usage-based pricing plans. That is 10 million more than a year ago. The company’s new mobile share plans have attracted almost two million subscribers during the first five weeks they were on offer. More than one-third of those customers are choosing the company’s 10GB data allowance, which costs the customer $150 a month with unlimited talk and texting ($30 a month for each additional smartphone on the account.) Around 15% of new mobile share customers are choosing to abandon their grandfathered unlimited data plans.

AT&T’s forthcoming strategic redirection, to be announced Nov. 7, is likely to center around increasing revenue from the company’s wireless data network.

The average AT&T customer’s wireless broadband data bill is on the increase.

Ralph de la Vega, president and CEO of AT&T Mobility and Consumer Markets, told investors it is taking “this massive data growth and building products and services on top of that.”

“One of the best examples I can give you is our launch of Digitize that will happen next year,” de la Vega said. “It leverages this huge smartphone database and adds services on top of it and not just data access, but services that differentiate us from the competition. So you’re talking about connecting the home with service automation and security monitoring. We’re talking about connecting your car with all kinds of entertainment services.”

That means AT&T sees its future revenue coming mostly from existing customers paying more.

“Those services are not dependent on adding more customers per se, but connecting more houses, connecting more cars and connecting more things that drive significant revenue streams with good margins for us,” de la Vega said. “In terms of what we see happening with others in the industry, I don’t think anything we have seen changes our plan. We’re going to execute [and] let others react to our plan, instead of us reacting to them.”

AT&T seemed unconcerned by competition in the current marketplace, especially from those offering cheaper plans. de la Vega predicted other carriers will come around to AT&T and Verizon’s way of thinking about mobile plan pricing.

“I think these mobile share plans are very compelling to customers,” de la Vega told investors. “And I think those that don’t put them in, in the industry will probably have to rethink down the road because I think the reception has been exceptional.”

John Stephens, AT&T’s chief financial officer, called AT&T’s data growth important, as long as those customers are on tiered data plans. With three-quarters of their customers buying “higher-priced plans,” AT&T can grow revenue by encouraging data usage that forces customers into ever-higher allowance plans that deliver revenue boosts indefinitely.

“I think some of the things driving our pricing and the price moves we made almost a year ago where we increased our data pricing are driving our revenue growth,” de la Vega admitted. “But we’re also seeing people sign up for more data. And the fact is, as you sell more smartphones or more tablets, people need more data. Usage-based data pricing means as usage goes up, we can see some of that lift also coming from additional average revenue per customer. So not only do we feel good where we are, but I feel really good about where we’re going, because you have to have that base of usage base in order to be able to monetize the data growth that we foresee in the future.”

AT&T continues to depend primarily on its wireless division for most of its revenue, but as growth slows, the demand for ever-increasing average revenue from each customer will have to come from increasing prices or finding new services to sell that customers want.

Applications that wireless carriers seek to monetize

Some other highlights:

• AT&T was questioned by Wall Street about its decision to voluntarily contribute a $9.5 billion preferred equity interest in AT&T Mobility into the Pension Plan Trust. Some analysts consider that amount unnecessary and above the amount required by law, despite the company’s assertion this would help protect the long-term health of AT&T’s pension fund. But some retirees note AT&T’s generosity benefits itself — the company’s contribution to the pension plan is invested entirely in AT&T’s wireless business;
• AT&T now has 7.4 million U-verse subscribers, driving wireline revenue growth to levels not seen in more than four years. But AT&T still only averages less than a 15% market share in the cities where U-verse is available, suggesting cable operators are maintaining their market dominance;
• AT&T’s new upgrade policy, which curtails early upgrades and imposes new upgrade fees, is having a dramatic impact on discouraging customers from upgrading their phones. That has kept AT&T’s upgrade rate at a steady 7%, even with the introduction of the wildly popular new iPhone. AT&T has effectively cut their subsidy costs and took a 28% increase in equipment revenue from new upgrade fees to the bank;
• Capital expenditures are on target at $13.8 billion, with more than half of that invested in the wireless business. Landlines and U-verse upgrades took a back seat.
• AT&T receives enough iPhones to activate 5,000-10,000 new iPhone customers a day and still that is insufficient to meet demand;

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/ATT Quarterly Earnings 10-24-12.flv[/flv]

AT&T’s Ralph de la Vega explores the company’s latest quarterly earnings, focused on its profitable wireless business.  (3 minutes)

[flv]http://www.phillipdampier.com/video/CNBC Verizon Wants More Consolidation 10-18-12.flv[/flv]

Lowell McAdam, chairman & CEO of Verizon Communications, is back on CNBC in this exclusive interview calling for additional wireless industry consolidation. McAdam also discusses Verizon’s huge earnings after its wireless plan changes, Verizon’s latest union contract, and the current state of the U.S. economy. (8 minutes)

Apple’s newest iPhone is proving to be a mixed blessing for wireless carriers and their Wall Street investors as company margins suffer from the subsidies paid to woo customers with discounted phones.

The biggest winner remains Apple, which charges between $649-849 for an iPhone 5 that IHSiSuppli estimates costs between $207-238 to manufacture, depending on the amount of memory included. Regardless of how much you pay for your next iPhone with a 2-year contract, Apple gets a much larger wholesale price, upfront.

Barclays analyst James Ratcliffe estimates AT&T, Verizon Wireless, and Sprint are providing nearly $400 in advance subsidies to reduce the contract price of the iPhone to between $199 and $399. That subsidy is 60 percent higher than comparable Android smartphones.

“We always say an Apple a day keeps the profits away,” Neil Montefiore, chief executive of Singapore wireless carrier Starhub said during an August earnings conference call.

Wireless carriers have to report the subsidy on balance sheets as a drop in earnings before interest, tax, depreciation and amortization (called EBIDTA on Wall Street). AT&T and Verizon typically don’t see profits from Android smartphone customers until 5-6 months after selling them a new phone. Apple iPhone customers are unprofitable for up to nine months.

According to Reuters, profit margins will fall for America’s two largest cell phone companies because of the newest iPhone.

AT&T’s margin is expected to fall from 45 percent in the second quarter to 40.8 percent in the third quarter and 35.7 percent in the fourth quarter. Verizon’s margin is expected to fall from 49 percent in the second quarter to 47.4 percent in the third quarter and 43.6 percent in the fourth quarter.

Sprint CEO Dan Hesse

Under pressure from investors, wireless carriers are trying harder than ever to reduce the financial hit from the endless two-year upgrade cycle most North Americans have gotten used to over more than a decade.

For most, changing data pricing has been the key to earlier profits. Both AT&T and Verizon Wireless have eliminated unlimited data plans for new customers, and Verizon has taken away subsidies for customers holding onto a grandfathered unlimited plan. As contracts expire, customers seeking upgrades must either purchase their next phone at the unsubsidized price or give up their unlimited plan for good.

Sprint continues to bank on its unlimited data offer bundled with Apple’s iPhone 5 as an important marketing tool to attract new customers. It has worked for them, but the company may eventually capitalize on that growth with increased prices, but not before Sprint completes an ambitious upgrade to a 4G LTE nationwide network.

“We have a competitive disadvantage in terms of LTE footprint,” CEO Dan Hesse told investors. “You don’t increase your price when you have a network footprint disadvantage. You want to wait and think of that until you get to that point.”

The foundation for future profits come from data usage.

Verizon’s chief financial officer Fran Shammo believes Verizon Wireless’ foundation for higher profits will come from their new family shared data plans.

“When you think about revenue growth into the future, the shared revenue plan and what I’ll call revenue per account if you will, is really the critical piece because there are two functions,” Shammo told investors last week. “One is get people to share so that data becomes the most significant piece of the plan and the more data they consume the more they will have to buy up in bundles.”

“And the second one is make it easier for customers to attach more devices. So when you think about that future of the car, the home, medical devices, and anything else that you want to attach to that wireless network, […] I get incremental dollars for each device that’s attached and that is really what drives the future revenue growth.”

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/CBS Sprint CEO talks iPhone 5 and unlimited data strategy 9-20-12.flv[/flv]

Sprint CEO Dan Hesse last week appeared on CBS’ “This Morning” to discuss the arrival of Apple’s newest iPhone and the company’s unlimited wireless data plan.  (4 minutes)

Time Warner Cable executives told investors on a morning conference call the cable company has embarked on a gradual transition to an all-IP-based distribution platform which could eventually mean the end of today’s set top boxes and radically increase the amount of bandwidth available for its broadband and video networks.

“Whatever the merits of that from an engineering sense, all things IP are the standards that the world is building devices to,” said Time Warner Cable CEO Glenn Britt. “So that’s the standard we’re going to end up migrating to until something better comes along.”

The transition will help Time Warner Cable support additional customer-owned equipment, including video game consoles, streaming online video boxes, and televisions with built-in support for cable-delivered channels.

“If you look at the cable in 1980s, there weren’t a lot of set-tops, and I think we’re going back to that over time,” Britt said.

Britt has repeatedly criticized set top box equipment as cumbersome, expensive, outdated, and disliked from the perspective of customers. He noted the only reason Time Warner uses the boxes is to support traditional televisions that cannot handle all of the services the cable company offers today, including video-on-demand and encrypted premium channels. Moving to a different technology platform can result in significant savings if cable operators adopt open standard devices and technology.

Later this year, Time Warner will also be launching a nationwide channel realignment, affecting virtually every subscriber around the country. The cable company is adopting a unified, genre-based, national channel lineup, putting popular cable networks on identical channel numbers in every city.

Time Warner’s reported results found the company losing an additional 169,000 video subscribers during the quarter, a new record loss for the cable operator. Despite that, the company still booked an 8% increase in profits, thanks to higher prices for service and increases in the number of broadband customers. Time Warner blamed the video subscriber drop on seasonal losses from departing college students and those heading to vacation properties, as well as the downturned economy.

But the nation’s second biggest cable operator reports it has several initiatives under way for subscribers which they feel will boost earnings and subscriber numbers:

• Over the last 60 days, Time Warner deployed a new set-top box guide throughout the eastern region. After the Olympics conclude, the company will introduce the new guide across the western half of the country. The new guide features a new color scheme and better graphics, and is supposed to make navigation and search easier to use;

• The company will introduce IP-based set top boxes and home gateway devices by next year. The newest gateway is a combination DVR, DOCSIS 3.0 cable modem, and a video transcoder that can convert QAM-based video to IP for devices including game consoles and new IP set top boxes. Time Warner’s newest DVR will include the capability of recording five shows at the same time while watching another and 1TB of storage.

Install it yourself.

• Time Warner Cable’s TV Everywhere service will expand to include video on demand and the possibility of watching certain networks while outside of the home. The current service only works when you watch over your home Wi-Fi network.

• The cable operator’s Internet Essentials offer, which includes a 5GB monthly usage cap, will move beyond Texas and reach everywhere the cable operator serves by the second half of next year. When a usage meter shows up on your My Services page on Time Warner Cable’s website, you will know this new, optional plan is on the way.

• Time Warner is revamping their website to let customers shop, order, and buy more services online.

• Self-install kits will become increasingly common for customers comfortable installing their own services. The Easy Connect packages are available in stores or by mail, and are free of charge with no installation fee.

• Service call windows will continue to be refined. In most cities, two hour windows are currently offered, but the company is now moving to one-hour windows in many markets. In some cities, 15-minute windows for the first appointment of each shift are now available to customers who don’t want to sit at home and wait all day for the cable guy. The company is now also including an estimate of how long it typically takes to complete the type of service call requested.

• Customers continue to gravitate towards faster broadband service plans. The company’s Turbo, Extreme and Ultimate tiers together garnered 157,000 new adds in the second quarter and now comprise over 21% of high-speed data customers, up from 17% a year ago and 9% three years ago.

Britt also took questions about the impact Google Fiber will have on Time Warner Cable’s operations in Kansas City.

“There’s a lot of effort going on around the country to see what we could do as a society with more bandwidth in kind of a laboratory sense,” Britt said. “I view the Google effort as that. […] And I think that’s good for our business. We have a wonderful infrastructure, we have bandwidth, we have a way to go much faster with DOCSIS 3.0 by adding [higher speeds] to the offering. And the more the people figure out how to use broadband, the better off we’re going to be. So I think this is a good thing, not a bad thing, that people are trying to figure out how to use this technology.”