If I were an AT&T shareholder, then, I’m not sure how much money I’d want my company to spend on beefing up 3G wireless in New York and San Francisco, especially when there’s little obvious return on such an enormous investment. Sometimes you make more money with cheaper unhappy customers than with more expensive happy customers. And this could well be one of those times.
Firstly, let Baruch share his amusement at being cited as an expert in the physics of radio networks; he is at heart a poncy arts student, and is more likely to think an Erlang is a seminal German film director than the measure of network whatever-it-is that it is.
Secondly, and more importantly, western telco operators are in fact hapless, scrooge-like con-men, who have consistently misled their investors and customers about the extent of their next generation network investment. They have scrimped on 3G spending for years, preferring instead to provide investors improbably fat, 10% plus, free cash flow yields, and 5-8% dividend yields. As of this point, 10 years after getting the spectrum, they have still not properly built out their 3G capacity; and now the chickens, in the form of iPhones, have come home to roost.
There’s a lot of spin about this. Operators say they have spent what they need to build out robust networks. They say that 3G equipment is cheap, and they haven’t had to spend lots of money to get decent capacity. Given that they control all the data, it’s hard to refute this claim, except for the fact we iPhone users know it’s not true. Here are some key facts: China has just started its 3G rollout. In 2009 Chinese operators installed more 3G base stations in one year than western European operators have, ever. Other than trials, the Chinese haven’t had any 3G subscribers to speak of. I used to think that spoke of a certain extravangance on the part of the Chinese; now it looks like the weird ones are the western operators. NTT Docomo’s (the largest wireless carrier in Japan) capex to sales ratios have consistently been 30-50% higher than Vodafone’s (the biggest European wireless operator), which have hovered around 10-12%. And Vodafone has been the least sinful European operator, the one that built out more 3G than any other.
It’s difficult to know exactly how much AT&T has been spending on wireless capex in the past few years; they did a big merger with Bell South a couple years ago, and also have a big fibre project going on where they are rewiring many of their fixed line properties. It’s much easier to compare 100% wireless players like DoCoMo and Vodafone. For what it’s worth, AT&T’s capex-sales ratio was weirdly high 17% in 2008, but was 13.3% last quarter, and closer to that for most of this decade. Verizon has tended to spend much more, consistently about 18% since 2006 as well as last quarter, but again, the waters are muddied by a big fixed line project.
What IS clear, however, is that last Q AT&T gave me, their investor, a whopping 15% FCF margin and FCF yield in 2008, and pays me 6% in dividends every year. Now 6% for AT&T is pretty decent when the 10 year pays me 3.8%. You, dear iPhone user, are giving me that by paying full whack and suffering a craptastic service. Ask the call centre about this next time you ring up to complain.
Now, in their defence, operators like AT&T and Vodafone haven’t needed to have extensive 3G networks for most of the decade because no-one was using 3G for data, unlike in Japan. Rather 3G was an overlay on networks for voice, relieving presure on 2G networks that were getting full in dense urban areas like London and New York. It was great for this, you only needed a limited amount of 3G for a lot of voice capacity. Remember also that for most of this decade, operators were strapped for cash. They had massively overpaid for spectrum and ill-fated forays into internet businesses during the bubble, and needed to recapitalise.
The other factor leading to underspend was that the period when 3G data usage really took off, the past 2 years, coincided with Our Recent Difficulties. During the credit crunch companies stopped spending on almost everything, telcos included. As their revenues fell, operators had to cut back on capex to keep their FCF and dividend yields up, and be the defensive stocks all the analysts and investors told them they should be. Given the wireless broadband revolution that was underway, this was precisely the opposite of what they should have been doing; in a normal economic environment it would have been a time of increased capex.
This only goes to understand the telco operators, not to forgive them. However you want to look at it, they have failed to future proof their networks, which is of course, all they have to sell. They screwed themselves; they peed their own pants. They fully deserve the PR disasters which have befallen them. And for some, it’s not just going to be a PR issue.
Not all operators have messed up as bad as others. CDMA-EVDO networks like Verizon’s are broadly more efficient than GSM-WCDMA networks, like AT&T’s, and Verizon’s network isn’t chockfull of iPhone facebook app users downloading high bandwidth photos of each other. At some point this year Verizon is going to get a CDMA iPhone; suddenly all the frustrated iPhone users on AT&T will have an alternative, and there are likely a lot of 2-year contracts coming up for renewal this summer. Indeed, I’d guess lots of potential customers have been waiting for a Verizon iPhone precisely because they didn’t want to deal with the AT&T network. It’s likely to be another big jump in iPhone penetration.
So here’s a case where starving your network really IS bad for business. It is true, as Felix writes, that “sometimes you make more money with cheaper unhappy customers than with more expensive happy customers”; but in a competitive market that window of opportunity doesn’t last very long. AT&T, and probably every other western operator, is probably going to be spending a lot more on wireless capacity in the next few years.