Fast Five from the Valley: Edition 36
Third time lucky – T-mobile and Sprint Announce Merger
On Sunday, our phones started buzzing with the news that T-mobile US ($55bn) and Sprint ($26bn) were finally ready to announce the merger to create a New T-Mobile, able to roll out 5G and position the US as the undisputed leader in 5G innovation. The new entity would result in Deutsche Telekom (T-Mobile’s parent) owning 42%, and Softbank Group (Sprint’s parent) owning 27%. The remaining 31% will be held by the public. In addition, Deutsche Telekom will appoint 9 out of the 14 directors and have 69% of the voting rights. The new deal has a number of significant impacts:
- This combines the customer bases of T-Mobile (59m) and Sprint (41m) to form a combined customer base of 100m, making them competitive with Verizon (116m) and AT&T (93m)
- The combined entity will enable the firm to leverage the increasing value of Sprint’s 2.5 GHz spectrum holdings (and T-Mobile’s 5G 600MHZ spectrum) as the 5G rollout accelerates, while Sprint will gain access to T-Mobile’s marketing machine. This is welcome news for Nokia and Ericsson which are the preferred suppliers of 5G equipment, given the national security concerns that are surrounding ZTE and Huawei
- This also enables the company to expand into rural areas providing 5G as an alternative to fixed-line broadband. It’s worth noting that AT&T’s CFO has questioned the value of 5G fixed services, arguing that where its FirstNet infrastructure provides backhaul, it may be a better outcome to connect the premises of customers with fiber directly. However, fixed 5G services still remains a key use case for Verizon
- The merger is likely to have an impact of tower companies such as Crown Castle and American Towers, reducing the number of towers by 35k. However, American Towers argues that the required integration work will boost revenues for them, at least in the short term. In the longer term, it is likely that tower companies will use the freed up space to develop their edge computing capabilities. “So while there may ultimately be less total transmission sites in the merged network, each site is likely to have more spectrum bands, more data traffic, and more equipment installed, which would result in offsetting amendment benefits from American Tower”
Both companies still need to get regulatory approval in Washington where regulators are currently examining the Vertical AT&T-Time Warner merger (AT&T needs content to retain its customers and Time Warner needs to lock in a customer base to compete against tech firms like Google, Facebook, and Netflix). Together, AT&T can marry its data with Time Warner’s content to create more targeted adds which can be sold at a higher price. The DOJ has sued to stop the merger going ahead, but in an unexpected statement in closing arguments, the DOJ urged the judge consider “alternative remedies” such as requiring AT&T to make a partial divestiture of assets if the Judge decides to approve the merger – indicating that AT&T Time Warner may have made progress on their argument that the merger won’t adversely impact consumers. However, unlike the AT&T Time-Warner vertical merger, it is likely that this horizontal merger will be approved as the FCC chairman hasn’t talked about an ideal number of national providers and there is a growing number of competitors in the market as the lines between cellphone, cable and technology firms blur – resulting in 7 to 8 competitors in the converging market.
Uber just got ubered by the law – California’s ruling on Monday that subcontractors are employees
While the ruling concerned a courier company called Dynamex which converted all its employees to independent contractors in 2004, the decision has much wider implications. The workers sued, arguing that Dynamex had considerable control over the tasks that the independent contractors performed. The court imposed an “ABC” test which requires that
- The contractor provides the service free from the company’s control;
- The service provided is outside the company’s core business, such as a janitor at a law firm;
- The contractor is an independent professional engaged in providing their service to companies other than the one in question.
It sounds very difficult that Uber, Lyft and other gig economy companies are likely to feel the pain as they heavily rely on classifying their workers as independent contractors which enables them to lower their wage bill as they are not required to pay rights that employees enjoy such as overtime, minimum wage, workers’ compensation, paid sick leave, health insurance.
The real deal – the movements on and off Wall Street
Earnings: T-Mobile reported earnings 78c (71c expected due to low customer turnover rates and netting 1m customers), Apple performed better than expected (underlying iPhone sales better than expected), Spotify missed revenue targets and was punished with an 8% drop after close trading, Microsft had a strong quarter with revenue increasing 16% due to strong cloud products and Intel’s revenue was up 13% due to its data center business performing well. Tesla’s earnings called rattled investors with Tesla burning through cash and likely to run out of money by the end of the year unless it does another capital raise (which Elon says it won’t do).
Interesting adjacent moves: Tesla is getting into ride-hailing this year. Facebook is getting into dating with a new product to be released later this year. Whilst this news will certainly garner the attention of many single users, the timing of this announcement (being so soon after Facebook’s data privacy mess) does raise some eyebrows. Is this simply coincidental timing, or a move to divert attention away from Facebook’s recent troubles? Only Facebook knows. However, Match.com definitely knows that its stock has declined post the announcement
Deals: Square acquires Weebly. We assume this is to flesh out Square’s e-commerce ability and ability to build its small and medium business customer base.
Raises: Softbank has been the firm to beat since it announced its $100bn vision fund. Sequoia has responded with its $8bn fund. Flexport, the provider of software for logistics companies raised $100m.
IPOs: Docusign ipoed with a 3% pop and Smartsheet, an online cloud collaboration software raised $150m.
Retail: In face of Amazon‘s profit and sales surge (albeit that some of this comes from its AWS cloud unit), Mattel sales fell partially due to a loss in the Toys R Us distribution channel. Also Sears, GNC, JC Penny and Office Depot have been highlighted by Credit Risk Monitor as being at risk of bankruptcy. However, it’s not just the established players that are feeling pain – Birchbox a company where users could subscribe for $10/months to get samples of products, found it difficult to get the business model right – with subscriber acquisition costs significant, reliance of selling brands from other companies which puts pressure on margins and also competition from rival firms like Ipsy. It also struggled to find a buyer, struggling to get over the line with QVC and ending up selling to one of its investors, the hedge fund Viking Global Investors. However, despite the gloom, one startup, Appear Here sees the shopping market changing with greater demand for temporary stores and space. It provides users with the ability to rent space by the day. It has experienced a 50% increase in growth and is expected to open in California later this year.
Buffet or Bacon Bitcoin – Warren Buffett explains one thing people still don’t understand about bitcoin
Warren Buffet, renowned investor, and the world’s 3rd wealthiest person, has long been skeptical of Bitcoin, claiming earlier this year that cryptocurrencies “will come to a bad ending”. Now, Buffet has likened bitcoin to gambling, “If you buy something like bitcoin or some cryptocurrency, you don’t really have anything that has produced anything. You’re just hoping the next guy pays more… That is not investing.” Conversely, Venture Capital firm, Andra Capital, has secured $500 million in investment commitments by leveraging Blockchain technology through its Silicon Valley Coin (SVC). However, with the release by Oscar Mayer of Bacoin which is backed by Kraft Heinz’s bacon, where you can cash out for packs of bacon – one really must wonder if this will really bring home the bacon.
Prison break – the man who hacked his way into prison systems to bust out an associate is now behind bars
Konrads Voits had a really smart idea…not. He wanted to hack the prison system, XJail, and alter the release date for an inmate. He first tried to talk prison employees into visiting a fake sit ewashtenavv.org (changing the w in the ewashtenaw.org) to steal their credentials. However, no-one fell for it.
Not to be disheartened, Konrads decided to call and email the prison, pretending to be county IT staff, which were attempting to upgrade the prison system. He asked prison employees to visit the fake domain and download files which contained malware. This time, he managed to not only to break into the prison system but also get the login creds, emails and personal information of 1.6k employees.
Unfortunately, as soon as he altered the release date, the tampering was detected, with the FBI Forensics called in to identify the hacker. He ended up with a 7-year prison sentence and is also required to pay the $235k in investigation costs to check that no other release dates were altered – but at least he might get to share the cell with his inmate.