Connecting the dots on some news stories from Phoneland.
First, the CEO of Ericsson has been sacked:
Kim McLaughlin, Ericsson Ousts Vestberg as CEO After Turnaround Plans Stall
Vestberg’s departure caps a turbulent period for Ericsson, which is cutting jobs while battling fierce competition from from Huawei Technologies Co. and Nokia Oyj. The company said last week it would accelerate cost cuts after reporting four straight quarters disappointing revenue and profit. Vestberg has faced questions on probes into alleged corruption in Asia and Europe, and last week the company rejected a report in Swedish media that it may be inflating sales by booking revenue before some clients are invoiced.
As usual, that’s the proximate cause, but the deep structure is that 4G tech has been rolled out worldwide already, and no one’s buying much these days.
With much of the so-called fourth-generation networks already built in the U.S. and China, Vestberg had vowed to improve profitability, but the stock has declined since reaching a more than seven-year high in April last year.
Vestberg had carved out new business units targeting media and enterprise customers to get back to growth, while investing in a next generation of so-called 5G wireless technology, which represents the next wave of spending at Ericsson’s telecom carrier customers. However, he refrained from big, dramatic moves like Nokia’s purchase of Alcatel-Lucent SA, opting instead for a partnership with Cisco Systems Inc. for Internet products like routers.
So, he’s out for thinking small bore, and we’re seeing the hiccups from the 4G/5G transition in Phoneland.
Second story: Steven Russolillo says that Apple is ripe for a Rally, despite the fact that market watchers are negative on the giant:
Much of the bearish thesis is due to weakening iPhone sales, which account for more than half of revenue. The iPad isn’t selling as well as it used to and the jury is out on the Apple Watch. Tech investors are allergic to anemic growth, which explains why the tech-heavy Nasdaq has lagged behind the Dow industrials and S&P 500.
Still, Apple has been punished more than enough. The iPhone slump appears priced in. And while the next iPhone, expected later this year, likely won’t be a significant upgrade, there is optimism that sales growth will soon bounce back. Analysts forecast iPhone unit sales will rise 5% for fiscal 2017, which ends next September.
The real question is not about stock price (or profits, either, with $10.52 billion in the March quarter), but about consumer buying behavior. Will we have to wait for a new mobile device — like AR/VR goggles? — before there is another huge surge in consumer demand for mobile? Watches aren’t the future, but goggles will be, I bet. Not a 2016 trend, though. Maybe 2017?
The third and last data point for today: Aaron Pressman digs into AT&T’s efforts to convince Wall Street its wireless business is healthy. His argument reviews the standard argument that postpaid subscribers — the ones signed up for monthly accounts — are generally considered to be better sources of reliable revenue than prepaid subscribers, who generally ‘spend less for service, buy cheaper phones, and tend to defect to other carriers more frequently’.
The bottom line is that so far this year, AT&T’s postpaid subscribers grew only 1% while prepaid subscriptions increased 21%. That’s disturbing to Wall Street, based on the ruling assumption that postpaid customers are preferable.
Thus, Stephens has been trying to push some new math on the analysts. In essence, his argument is that the best customers in prepaid are actually a lot better—and more profitable—than the worst customers in postpaid.
The average service revenue AT&T collected from postpaid customers who have left—and who mostly had not upgraded to smartphones yet—was only $35, he said during a conference call with analysts on Thursday afternoon. But the new prepaid customers signing up with Cricket are bringing in “closer to a $41, $42” of average revenue. Additionally, it costs less to acquire a new prepaid customer and less to provide them with customer service, he noted.
“So from that standpoint, the economics are better, and it is being shown in our margins,” Stephens told analysts, pointing out that while total wireless revenue was down slightly, profit margins were at record highs.
So AT&T has landed in a different dimension, where the economics are reversed, with T-Mobile and others screwing up the numbers for postpaid, while the supposedly poor prepaid sector looks good. However, this may be only true for a short transient period.
And the back office transitions around cable and internet, suggest other churn as the world is turning:
The telco is shedding expensive-to-maintain cable TV customers at its U-Verse unit while adding less costly satellite TV customers for DirecTV. AT&T is dropping broadband Internet customers who connect via older DSL lines while trying to add fiber optic broadband customers. And it’s trying to move corporate customers from traditional managed networks to cheaper virtualized networks. If all of the transitions succeed, both revenue and profits should grow.
Putting all the dots together? The consolidation in Phoneland is accelerating. Old technology is maturing, while new technologies and business models are only slowly emerging, which is leading to the downdraft at Ericsson, and financial analyst disdain for Apple and AT&T. The slowing rate of purchasing — by telcos and consumers, both — is leading to consolidation, the classic market maturation that comes right before a new era of breakthroughs and growth. But those breakthroughs won’t be in 2016.
