Note: This past week I posted analysis of the market context for both these mergers here, including a large amount of data and charts. One of those charts is at the bottom of this post.

Additional note: At the time of writing, the AT&T-DirectTV merger is rumored to be announced on Sunday. I don’t work on Sundays, so if you’d like to reach me for comment, you can do so today, ideally via email at jan@jackdawresearch.com. Or wait until Monday. 

The comment below may be attributed to Jan Dawson, Chief Analyst at Jackdaw Research.

There is precious little growth in the consumer wireline market, and the total number of customers for some combination of wireline voice, broadband and TV has stayed stubbornly constant for the last couple of years. The major providers are largely swapping subscribers, and the only way to grow is to steal more subscribers from your competitors than you lose to them. In addition, each of the major providers has a set geographic region within which it operates, and organic expansion out of that region is pretty unattractive because of the cost of building new infrastructure. As such, the only way to grow is to expand inorganically by acquiring a provider with a different footprint and boosting its growth. The Comcast-Time Warner Cable and AT&T-DirecTV mergers are essentially the same in this regard – they’re both attempts to grow by acquiring a presence out of their traditional footprint.

But there’s an important difference between the two mergers: Comcast and Time Warner Cable are essentially identical assets under very different management, while AT&T and DirecTV have very different assets both under similarly good management. Comcast’s bet is that it can apply its successful strategy and backend infrastructure to the TWC assets and get that business growing and adding customers again. In the process it will gain scale and thus negotiating power with content owners. But in acquiring DirecTV, AT&T will be acquiring a very different asset, one that gives it a national footprint in TV services to go with its national wireless footprint, but which doesn’t have any wireline broadband or voice assets. This creates the opportunity for AT&T to provide a new kind of triple play of satellite TV along with wireless voice and broadband outside its traditional wireline footprint, in addition to providing a more traditional triple play inside its footprint, utilizing DirecTV where U-verse doesn’t make sense to provide the TV element of the bundle. This means an opportunity to sell AT&T wireless services to the DirecTV base, but also an opportunity to sell DirecTV services to AT&T wireless customers outside of AT&T’s wireline footprint. And of course, it’ll also offer some of the same benefits in terms of negotiating power as the Comcast-TWC merger.

Given that AT&T has bumped up against the upper limit of its acquisition strategy in both the wireline and wireless telecoms space, it’s been looking overseas for expansion opportunities, and in particular at Vodafone. But cross-border mergers have never performed well because the synergies are small, the duplicated assets in each country large, and because cultural differences usually prevent companies from applying the same strategies in each market. But domestic acquisitions usually fare much better, with significant synergies as well as scale economies. As such, the DirecTV acquisition makes a lot of sense for AT&T as an opportunity to grow domestically while avoiding some of the problems it experienced when it tried to acquire T-Mobile.

However, especially in the context of the Comcast-Time Warner Cable merger, this acquisition raises important questions about scale in the US market. Were both mergers to go through, they would create two dominant providers which would dwarf all other providers – total customer relationships for both companies are shown in the chart below (which takes no account of the divested subscribers at Comcast since it hasn’t provided enough detail to make a full calculation). These two mergers would involve the four companies that already have the largest number of customer relationships, and each would likely end up with around 35 million customers, compared with DISH at under 15 million and Verizon at just over 10 million. The companies will have to work very hard to justify regulatory approval in that context, especially since the wireless market is already dominated in this way by two larger players, one of which happens to be AT&T.

Lastly, it’s worth noting that although the US is by far DirecTV’s biggest business, about a quarter of its revenue comes from its Latin American business, which operates satellite providers in several countries. AT&T already owns a small stake in America Movil, a Latin American mobile operator, and there may be some small complementarity between these assets. But the Latin American business is more likely to be a distraction than a benefit for AT&T, with limited synergies between the domestic and overseas operations. As such, it’s quite possible that it will look to offload rather than keep the Latin American assets either immediately or over time. As mentioned above, the synergies between cross-border activities in this market tend to be very small, although they’re often overestimated by acquirers.

Amazon today announced its entrant in the consumer set top box space, the Fire TV, which will cost $99. The comment below may be attributed to Jan Dawson, Chief Analyst at Jackdaw Research:

Amazon’s Fire TV device brings greater power to the consumer set top box space, at a price. In contrast to its tablet pricing, which has undercut major competitors, Amazon has instead focused on boosting the specs and performance, at a price. The $99 price point means Amazon is going head to head against Apple TV, and will be significantly more expensive than Google’s Chromecast and several of Roku’s offerings. Together with the recent increase in the price of Amazon Prime, this appears to signal a greater conservatism on the part of Amazon on pricing.

The box itself largely takes the approach of doing the same things as other set top boxes, but doing them better. The exceptions are voice search and gaming, where Amazon has gone significantly beyond what other consumer TV boxes offer. Voice search is notoriously fickle, and it’s not an area where Amazon has a lot of experience, so we’ll have to wait for the first reviews to see if it’s any good. If it does work, it’ll be a significant improvement on the text input functions on other major boxes. The games feature mimics Roku’s games features, but goes significantly beyond them, building on its existing relationships with game developers through the Amazon App Store for Android.

The big question is what Apple has up its sleeve for Apple TV. Amazon is embracing the fragmentation that exists in the TV space today, offering an impressive array of third party video apps on the Fire TV while also creating exclusive content on its own channels. But the great opportunity in the TV space is to bring unification rather than fragmentation to consumers, creating a single unified service and interface for video across multiple devices. That’s where Apple has a great opportunity, and if it is able to take advantage of that opportunity, it could provide significantly more value than Amazon has here. (For more on this concept, see this blog post).

Microsoft today announced a full version of Office for the iPad, available later today. The below comment may be attributed to Jan Dawson, Chief Analyst at Jackdaw Research:

You have to think about today’s announcement in several parts. On the one hand, the product Microsoft demoed today looked incredibly impressive, much cleaner and easier to use than any of Microsoft’s other Windows versions. That in itself is a huge step forward, and suggests similar improvements may be coming to touch-based Windows devices like the Surface. But at the same time, Microsoft is coming to this very late, roughly four years after the launch of the iPad, and during those four years people who use iPads have found other ways to get work done, whether third-party apps or Apple’s iWork apps. Many of those apps are free, and at most $15 or so on a one-off basis, while editing documents in Office on the iPad will cost at least $70 a year. The big question is whether people will want to pay that kind of premium for the ability to use a “full” version of Office. So many people whose work lives are iPad-centric have moved away from Office entirely, and Microsoft will now have to win them back. The overlap between the 3.5 million consumer Office 365 subscribers and the 150 million or so iPad users is likely vanishingly small, and Microsoft will have to change that.

The other big challenge for iPad users is how to get documents in and out of Office on the iPad. For anyone who’s used productivity apps on the iPad, they know that in the process of opening, editing and emailing a document, the emailing part can be as painful as the editing. Microsoft is clearly favoring OneDrive as the major way for people to get documents in and out of Office on the iPad, which makes good strategic sense. But it doesn’t necessarily make sense for iPad users, who are much more likely to be invested in iCloud or even Dropbox for document storage.

For all these reasons it’s unlikely that the iPad for Office announcement will make a huge difference either for Microsoft or anyone else. But it does signal a much more significant strategic shift on the part of Satya Nadella. He’s shown a willingness to allow Windows to fade into the background, as demonstrated by both the Office iPad launch and the recent renaming of Azure. That’s critical to Microsoft’s future success, as the obsession with promoting Windows above all else (including its customers’ needs) has been one of the biggest forces holding Microsoft back from success in the mobile space. This recognition, and the change in strategy that have flowed from it, are more significant than any individual product launch Microsoft might announce.

HTC today announced the successor to last year’s HTC One, which is being referred to as the HTC One (M8). The comment below may be attributed to Jan Dawson, Chief Analyst at Jackdaw Research.

The new HTC One builds on the success of the device HTC launched last year. Like previous HTC devices, the new HTC One features premium materials and majors on design. Apple and HTC continue to be the only manufacturers making really premium-feeling and premium-looking devices. The new device should be a great step-up for existing HTC users. The dual cameras give the company a hook to hang their innovation credentials on, but belie the company’s claim that it’s not doing gimmicks. It’s the sort of feature that makes for great demos but hardly anyone uses in practice and almost no-one buys a phone for.

The biggest challenge for HTC is not that last year’s phone was badly reviewed – it wasn’t. It just hasn’t been able to convince consumers that they should buy it. As such, HTC’s problems lie in marketing and brand awareness, not in the phone itself. Launching a successor, even with some innovative features, is far from enough for HTC to turn its performance around. Unless it manages to solve its fundamental problem with marketing, it could launch the best phone in the world and it wouldn’t matter. If you want a premium experience today, you choose an iPhone, and if you really want to use Android, you choose a Samsung Galaxy phone. HTC simply hasn’t carved out more than a tiny niche for itself in the market. In the US, HTC has fallen back into fifth place, as LG and Motorola have climbed the rankings. Less than 10 million people in the US use HTC phones, compared with over 40 million using Samsung phones and over 65 million using iPhones.

Amazon today announced that it will increase the price of its Prime service by $20 to @99 per year, following through on its promise during its Q4 2013 earnings call in January. The following comment may be attributed to Jan Dawson, Chief Analyst at Jackdaw Research:

Amazon attributes the Prime price increase to the increased costs of shipping. However, Amazon’s net cost of shipping has actually stabilized over the last several years, as this blog post details. The real reason for Amazon’s price increase is that it has been giving away a video streaming service roughly equivalent to Netflix for free as part of Prime. Given the rumors about Amazon launching a music streaming service as part of Prime as well, it seems far more likely that Amazon is recognizing that it can’t continue to ignore the high costs of giving away so much content for free any longer. That model has broken Amazon’s usual model of aligning its own interests with those of its customers, as the more users use these services, the more benefit they receive and the higher Amazon’s costs.

Amazon has always been honest about the fact that free shipping was one of its most effective marketing tools, and it spends roughly as much on subsidizing shipping each year as it does on traditional marketing. Prime members buy much more from Amazon and it has always made up the cost of shipping through higher sales. But the big problem is that Amazon likely incurs a cost of around $60-80 per customer for offering Prime Instant Video, with no direct revenue at all, putting the service significantly in the red before it even provides any free shipping. That, and not shipping, is the real reason Amazon has to raise the price of Prime, and it should be honest about that fact. It’s disingenuous to pretend that giving away video streaming has nothing to do with the price hike.

Samsung today announced its latest flagship smartphone, the Galaxy S5, along with a fitness-oriented wearable, the Galaxy Gear Fit, in addition to providing more details about its new Gear smart watch devices, which were announced over the weekend. The following comment may be attributed to Jan Dawson, Chief Analyst, Jackdaw Research:

“Samsung’s announcement was much lower-key than its recent events, which seems to be an acknowledgment that too much of the attention has been focused on the spectacle rather than the content at previous launches. But it also seems to have toned down its attempts at bombarding potential customers with massive numbers of new features, choosing instead to focus on just a few key features for each device. At the same time, Samsung made a big deal about meeting users’ needs rather than necessarily inventing anything itself. Samsung now appears to be focused on innovation by focus group, talking about new features as meeting the top three user demands in a particular area, for example. This is a recognition of the increasing maturity of the smartphone industry in particular, where we no longer see big leaps forward in core features, but instead are seeing the same features already present in other devices showing up on each new flagship from the major vendors. But it’s also disappointing to see Samsung so humbled by the relatively poor performance of the Galaxy S4 that it appears to have given up on inventing its own new ideas.

The fitness devices fix some of the problems that plagued the first Galaxy Gear, but without pricing it’s hard to know how compelling they will be. With the exception of the Pebble, most successful wearables today are in the fitness category, so it makes sense for Samsung to enter that market with the Gear Fit. The Gear Fit looks reasonably compelling, though the screen orientation is a bit odd, as the wearer will have to bend their arm in an unnatural way to get a clear look at it. The curved screen is the latest in a long line of display innovations from Samsung, but it’s not clear anyone is buying wearables for the screen. A simpler screen with better battery life might well have been a better investment from a user point of view. The new Gear watches also look like solid improvements, but they reinforce Samsung’s core strategy. Just as Apple won’t release iTunes for anything but iPhones, it appears Samsung won’t make its wearables compatible with anything but Galaxy devices. That makes sense from a strategic perspective, but limits the addressable market, though it’s now a large base at 200 million.

Samsung needs to prove that it can get back to the sort of growth it experienced in the smartphone space in 2011 and 2012, which means giving people compelling reasons to upgrade but also increasingly to switch from other vendors and platforms. The Galaxy S5 is a nice upgrade for someone with a two-year-old Galaxy S3, but there’s not much here to suggest it’s going to win many converts from other vendors or first-time smartphone users, especially as this is likely to be a premium device. The emphasis on wearables may be an acknowledgment of that fact: that growth will have to come from elsewhere in the future and not just from smartphones.”

AT&T announced today that it would be lowering the price to add a smartphone for customers on its Mobile Share plans using 10GB or more of data from as much as $40 to $15. The offer will also be available to new customers who pay for their own devices, either through Next, bringing their own phones, or paying for a phone outright. The following comments may be attributed to Jan Dawson, Chief Analyst at Jackdaw Research:

AT&T’s change in pricing bucks the recent trend in the mobile industry by offering the best deal to existing customers. With all the effort currently going into getting customers to switch, AT&T’s moves seem to be geared towards keeping existing customers first and foremost. This is clearly a response to the aggressive price moves from competitors, especially T-Mobile, over the last several months. But they also reinforce the fundamental difference in strategy between AT&T and Verizon Wireless on the one hand and Sprint and T-Mobile on the other. AT&T has switched entirely to metered data, and as such the best way to grow revenues over time is to increase the amount of data people include in their plans. The introduction of Mobile Share paved the way, and thirty percent of people on Mobile Share plans already have 10GB or more of data. This move is clearly designed to make 10GB the new starting point for Mobile Share plans over time so that more and more customers are at this level. Sprint and T-Mobile are sticking with unlimited data, and so have to capture new customers to grow, hence their aggressive pricing moves recently. AT&T and Verizon will continue to try to attract new customers, but they can grow strongly by growing usage and growing the number of devices per account without necessarily adding huge numbers of new customers. That becomes all the more important as the market becomes saturated and there are few new customers to go around.

But this move is also part of AT&T’s push to get customers to pay for their devices explicitly. Lowering service plans is a great way to incentivize customers to switch to its Next program, under which customers pay for phones in installments over time, rather than having the cost of the device recouped through service fees. As such, both these moves can be seen as AT&T positioning for the future: shifting to data plans as the focus for growth, and breaking out the cost of devices so that service fees truly reflect the cost of service. Most customers will save significantly on their service plans by switching, but since they will have to start paying for their devices separately, those with expensive devices may end up paying more over time, while those who prefer inexpensive devices will be able to save money overall. (Compare the $25/month cost of an entry-level iPhone 5S on AT&T’s 18-month Next plan to the $25 saving per month under the new Mobile Share plan. Higher end devices will cost more, cheaper devices will cost less. And subscribers will save the up-front fee typical with 2-year contracts).

Overall, this is a continuation of several major trends in the US mobile industry: more intense competition as the market saturates and the two smaller national carriers start to become more aggressive, a shift to data rather than voice and messaging, and a move away from subsidies.

On Wednesday, T-Mobile announced its new Mobile Money service would go nationwide after a trial in the Miami area from November to January. The new service offers a prepaid Visa card with various bank-account-like features behind it. The below comment may be attributed to Jan Dawson, Chief Analyst at Jackdaw Research:

T-Mobile has focused its Un-Carrier efforts on undermining the competition in wireless services, kicking off a mobile price war. But until now, T-Mobile has shown little recognition that it needs to go beyond wireless services to build sustainable growth in the long-term. Mobile Money is the first sign we’ve had that T-Mobile is interested in going beyond the traditional wireless services business. It fits nicely with T-Mobile’s branding as a friend of the consumer and a company that does things differently, and the service should provide significant value to people who struggle to qualify for traditional bank accounts.

Serving the unbanked has been the key to success for mobile money services in the rest of the world, but with most of the US population having a bank account, the unbanked population here has been largely ignored until now. The two major existing mobile money services in the US – ISIS and Google Wallet – are both focused on people who already have bank accounts, and are arguably solutions to a problem that doesn’t exist. On the other hand, T-Mobile’s Mobile Money service isn’t really a mobile money service at all – it’s a banking service that happens to be owned by a mobile carrier. Making purchases still involves a plastic Visa card and not the mobile device. That may be a technicality, but it’s actually somewhat brilliant in that it avoids all the technical issues associated with most mobile money services. And there’s a good-sized target market for these services: the FDIC’s latest estimates showed that 8.2% of US households, representing about 17 million adults, don’t have a bank account, and these customers are prime candidates for T-Mobile’s service. Another 51 million adults live in households that have bank accounts but regularly use check-cashing, payday loan or other non-bank financial transactions which could be eliminated with T-Mobile’s service. T-Mobile has in the past served many customers in the sub-prime credit segment, since it has a high proportion of prepaid customers, although its Un-Carrier strategy has boosted its postpaid base. As such, T-Mobile’s customer base is a better fit with this segment of the population than the big three carriers, which sell mostly contract services to people with good credit.

The challenge with this service is that there is no obvious short-term revenue opportunity for T-Mobile. The services are all free to T-Mobile customers, who are the target market, except for the sort of fees T-Mobile itself has to pay and will pass on to consumers. This has to be seen today as strictly a competitive differentiator and not a revenue opportunity, though I would expect T-Mobile to offer a broader range of financial services over time, and perhaps try to make some money on those. For now, though, this is another marketing effort from T-Mobile that will cost money rather than make money for the company.

AT&T announced today that it will start offering a “Sponsored Data” model for mobile data, allowing third parties to pay for mobile data used by consumers on smartphones, tablets and mobile hotspots. The following comment may be attributed to Jan Dawson, Chief Analyst at Jackdaw Research:

AT&T’s announcement has been rumored for some time, and has generated mixed feelings in the past, raising concerns about net neutrality, consumer transparency and other issues. The announcement itself has positive and negative implications, as outlined below.

Positives:

AT&T’s announcement is a rare sign of real innovation from a carrier in charging for services – the first time a carrier has charged anyone but the end user for mobile data – and that makes this an important milestone. This gives developers a great additional option for engaging users, and especially for lowering the barrier to entry from engaging with their apps. It will have the biggest impact for applications involving video, since that’s the biggest driver of bandwidth consumption, but it will be useful for other services too. It might also help solve the issue of who pays for the data when employees bring their own devices to work – today employees often bear all the costs of using their own devices, even when they’re working, and the solutions on offer have been pretty terrible. This offers a more granular, sophisticated approach to the problem.

Negatives:

Despite all this, concerns will remain. Some have expressed concern that only major content providers will be in a position to afford to sponsor users’ data, creating a two-tier system where smaller content providers can’t compete effectively. There is also potential for fraud, with bandwidth-intensive applications claiming to be providing sponsored data, much as premium rate phone lines once scammed users. The 1-800 number analogy therefore has a 1-900 number counterpart. AT&T will have to work to provide better verification for consumers to avoid this problem in the medium to long term. Educating consumers on this model will be challenging, too, as it’s very different from what’s been done before. The biggest challenge from a developer perspective will be implementing the technology in a way that takes advantage of AT&Ts network without confusing or frustrating users on other networks.

Overall, this is a good bit of innovation from AT&T, but a lot will depend on the early applications that make use of the model. If some applications get out of the gate quickly which show real consumer benefit from using sponsored data, that could help turn this into a real success for AT&T. But if there aren’t good, pro-consumer applications pretty quickly after launch, there’s a real risk that the negative publicity will overwhelm sponsored data before it has a chance to take hold.

BlackBerry announced its earnings for the quarter ended November 30, 2013 today. Among other things, the company announced a move to a new operating structure and a device manufacturing agreement with Foxconn. The following comment may be attributed to Jan Dawson, Chief Analyst at Jackdaw Research:

BlackBerry has struggled greatly over the last couple of years, and the latest results show a worsening in essentially every number the company reports. BlackBerry hasn’t shipped this few devices in a quarter since 2006, and revenues haven’t been this low since the iPhone launched. Importantly, BlackBerry actually sold 4.3 million devices to end users, of which 1.1 million were BlackBerry 10 devices. BlackBerry 10 continues to be a flop, while customers in emerging markets continue to buy older BlackBerry 7 devices.

John Chen announced a new internal operating structure around four major segments: devices, enterprise software and services, BBM and QNX embedded systems. This is an excellent step as it recognizes the three growth areas that are critical to the company’s turnaround and offsetting the declines in the core devices business. However, the company stopped short of reporting revenues in any of these new segments, which is a sign of just how small the revenues there are today. BlackBerry needs to grow these three revenue streams enormously in the near future to make up for the loss in revenues in the handset business (see this post for more details). The company’s BES10 enterprise management system hasn’t generated any revenue yet, BBM won’t generate meaningful revenue until late 2015 at the earliest, and QNX revenue also remains tiny. As such, the company will see continued struggles in core devices and services revenue for some time to come, and won’t become profitable for two years, and will burn cash for much of the interim.

The Foxconn arrangement is an enormous step forward in devices. The company would have found it impossible to turn around its device business if it had kept it in-house, so this is about the only way BlackBerry could have saved it. Foxconn clearly has huge experience in manufacturing devices, and massive scale thanks to partnerships with Apple and others. But this is the first time Foxconn will be taking the lead in designing hardware for a major manufacturer, and that creates uncertainty about the quality of the devices. BlackBerry’s own hardware has not been stellar, so there may be upside here as well as risk, but neglecting the hardware as a core capability suggests BlackBerry may be underestimating its importance. However, it will stop the sort of inventory write-downs we’ve seen the last two quarters, which make the headline profitability numbers look so awful. But it won’t turn around devices revenue (or the service revenue which follows it) for some time to come.

Jan Dawson is available for comment at jan@jackdawresearch.com and (408) 744-6244.