Fritzsche’s Forum

Fritzsche’s Top 10 Themes for 2022

In my old analyst days we always used to start the year with a “Top 10” list which consisted of key themes to watch.  While that consisted of a 20+ page report – and this piece will linger ~ 1000 words – I thought I would give it an attempt!  So here is my shot at Top 10 themes to watch in 2022, in CliffsNote version of course.

  1. WIFI GETS A WHOLE LOT BEEFIER – With the 6GHz spectrum WiFi now has access to, this group should not be underestimated. Recall in 2020, the FCC voted to allow 1,200MHz of spectrum in this band – increasing the spectrum available to WiFi by 5x.   
  1. EXPECT MORE FIXED WIRELESS ACCESS NEWS FLOW – While we believe fiber is always the preferred solution (see Theme # 10), expect FWA to get more airtime in 2022.  Both T-Mobile and Verizon have started to break these sub numbers out.  It is no wonder that carriers would talk about another revenue line as the pressure to find growth in ‘traditional’ wireless only continues to grow.
  1. SMALL CELLS WILL SEE MORE LOVE – 2021 was not the year of the small cell.  There is very little debate here.  Yet recall the spectrum we are now calling mid-band (C-Band; 3.45GHz) used to be called high-band.  Most RF engineers agree this spectrum is best supported through greater densification of small cell infrastructure.  Why has this not happened yet?  Digesting two spectrum auctions in a year put a lot of pressure on the carriers.  The fastest, most expedited way to get the spectrum live was to put equipment on towers. This will continue (see Theme # 9) but if physics still works, densification is key.  And small cells will have their time in the sun.
  1. PRIVATE NETWORKS AT THE BASE OF THE HOCKEY STICK –  We expect the private 5G network size to experience the MOST growth of any silo of communications infrastructure in the next year and decade.  In 2020, the estimated market size of this sector was $1.2B.  Some industry experts expect it to see a CAGR of close to 40% between now and 2028. Industries embracing this concept include: manufacturing, utilities, transportation and logistics and many more.  Our view has always been 5G will be first embraced by the enterprise – not the consumer. Private networks support this view. Key actors to watch are AWS and Microsoft.   How they play in the proverbial sandbox with the carriers (see Theme # 8) will be telling. 
  1. FURTHER BLURRING OF THE COMMUNICATIONS INFRASTRUCTURE SILOS WILL BE SEEN – American Towers’ recent purchase of Coresite was yet another domino to fall in the blurring of the lines between the communications and infrastructure spaces.  We expect many more to fall.  What will be most interesting is to see if the data centers actually take the lead here.   
  1. NEW HORSES WILL STAND ON THEIR OWN IN A MEANINGFUL WAY IN COMMUNICATION INFRASTRUCTURE SPACE  – In the past there was basically just three main “buckets” of digital infrastructure: fiber, towers / small cells, and data centers. But looking at the coming deal flow – it is clear that many new silos will emerge.  Key horses to watch include (but are not limited to): in-building wireless, edge players and the renaissance of the satellites.   In fact, I predict that the 2023 Top 10 list will have themes dedicated to each of these silos! 
  1. MIDBAND SPECTRUM = THE “YUMMIEST” PART OF THE LAYER CAKE – T-Mobile once described the spectrum bands as a beautiful wedding cake – low band being the base layer, midband being the middle and mmwave being the top layer of the cake.   The middle band is key to holding the cake together.  An analogy could be made it will also be key to holding together the 5G plans for many carriers! In 2021, the industry went through two major midband spectrum auctions, freeing up an additional 380 MHz of midband spectrum.  While the US still lags some of its international peers in terms of the amount of midband spectrum, we expect it to become the ‘work horse’ of each of the carriers’ 5G networks.  The $90B paid in C-Band auction offers evidence of this!
     
  2. THE TECH / TELECOM TIES THAT BIND: FRIEND OR FOE?  – Expect more and more cloud / telecom announcements in 2022.  The recent Google and Verizon commitment to bring the ‘power of the cloud’ to mobile could provide interesting clues as to future paths.  However, one has to wonder if telecom must watch their back and if the two groups may actually be “frenemies”.  Recall, in December, AWS announced a service to help enterprises “set up and scale private 5G mobile networks.”   
  1. TOWERS: THAT WONDERFUL MOAT IS ONLY GETTING THICKER – Tower stocks had a great year, up 33 percent in 2022.  While the macro risk of higher interest rates always looms, we expect the continued tailwinds (new spectrum deployments, 5G rollouts and new carrier builds) to offset these risks.  There is much more wood to chop in towerland in 2022.
  1. A ‘FIBER RICH’ DIET IS NOT A FAD – EXPECT IT TO BE HERE FOR MANY (MANY!) YEARS TO COME – Fiber, fiber, fiber.  We have written much about this but it continues to be true in almost every segment of the Communications Infrastructure space.  Simply put, more is needed.  More fiber to the home, more fiber to backhaul and fronthaul wireless connections, more fiber to feed small cells, more fiber deep architecture for cable players and more fiber to support further data center deployment.  With regulatory tailwinds supporting this rollout, fiber enthusiasm will only continue to grow. Now the supply chain just needs to ‘behave’ to allow this!

WISP….to FISP….back to WISP?

With all the debate over the speeds provided by Fixed Wireless Access (FWA), I read with great interest the interview in a recent trade rag with the CEO of Resound Networks and their observations on this technology.  For those who do not know Resound, they were one of the largest winners in the Rural Digital Opportunity Fund (RDOF) which occurred in the Fall of 2020.  Specifically, it is set to receive ~ $310MM which it is still waiting to be allocated from the Commission.  The FCC has not exactly been delving out the capital to the winners as quickly as hoped.  Part of this is due to some winners being overly ambitious with their promise and some of this is due to significant questions about FWA delivering true broadband-like speeds.

Enter Tarana Wireless. This little company has come up in a lot of meetings I have had recently.  According to its own company description on its press releases, Tarana Wireless is “the industry’s performance leader in broadband wireless access network solutions, powered by a number of well-proven breakthroughs in perfect, multidimensional optimization of radio signals.”   In layman’s terms this means they provide the equipment to work with unlicensed spectrum to offer a good, clear and very fast FWA service.  As to be imagined, FWA is the preferred solution in many rural markets where fiber deployment is a heavy lift (in both cost and time to trench).

Using Tarana’s equipment, Resound said it is seeing downstream speeds of 1Gbps (and upstream rates of 500Mbps) over five-mile distances using the 5GHz (unlicensed) spectrum band.  This approach has allowed Resound to move very quickly.  According to the CEO, they are able to open “four to five markets a month” with this equipment, connecting as many as 100 homes to one Tarana access point.  While one of the criticisms about FWA is interference in the unlicensed band of spectrum, Tarana has noise mitigation technology to help limit such interference.  

The timing of this is interesting given there have been other carriers – such as Shentel – who have scrapped all plans to move toward FWA and instead have double downed on its fiber to the home (FTTH) effort. 

This becomes a timely critical debate as the WIA fought awfully hard (and succeeded) in having wireless included in the recently passed Infrastructure Bill.  While most of this was about 5G, Jonathan Adelstein, the President and CEO of the Wireless Infrastructure Association, specifically commented on this following the passing of the bill on November 15th: “I’m especially thrilled the broadband funding explicitly heeds WIA’s call for technological flexibility which allows mobile and fixed wireless to compete for funding.”

How Tarana and other competing devices work and scale will be something to monitor.  It seems to me that many of the WISPs (Wireless Internet Service Providers) have started to change their acronym to FISPs (Fiber Internet Service Providers) as they begin to overbuild and edge out their footprint with fiber.  If Tarana and companies like it begin to really find their sea legs then this acronym change may boomerang back to the “WISPy” side – especially in the all important rural America footprint – the main pillar of any digital divide debate.  An important trend to watch for sure!

Should We Party Like It Is 1999?

Boom!  It is finally done.  On Friday (11/5) night, Congress passed the long- awaited Infrastructure Investment and Jobs Act.  This bill allocates $43 billion for broadband infrastructure, and an incremental $23 billion for “projects and funding bearing upon digital inclusion.” $65 billion earmarked for broadband in total.   No surprise, this represents the largest single federal investment EVER in broadband.  
 
So the question becomes – now what?  A lot it seems.   One of the common threads in our write up has been that the pivot to fiber is happening at tremendous pace.  Giants such as AT&T have more than woken up to the fiber theme (note: the word ‘fiber’ was mentioned 37 times in its Q3’21 earnings call).  The smaller players have showed their fiber enthusiasm as well (note: Shentel’s recent move to ditch FWA in favor of a more ambitious fiber build).  
 
While some of these are recent pivots, the fact is the industry have been moving down this fiber deep broadband path for the past several years.  According to USTelecom’s data, US Broadband Provider Cap-x for the last three years has been in the range of ~ $80B EACH year….even in the face of a pandemic.  By layering on the significant funding coming from this bill, what will the broadband world look like years from now with the pedal-to-the-metal at breakneck speed? 
 
A company CEO recently said to me when observing all this fiber push – “I am saying this because you may be one of the few that remember….we are entering 1999 again.”  It was a curious comment because not only do I remember 1999 but I (vividly) remember the telecom balloon going ‘pop’ two years after.  And it was….ummm…not fun. 
 
For those who don’t remember…the catalyst for the telecom bubble burst was the discovery of Worldcom’s fraud but there really was much more carnage looming about.  During that time it seemed like anyone with a pretty PowerPoint and snazzy marketing campaign could raise capital to build broadband.  Companies such as Covad, PSINet and Rhythms NetConnections were Wall Street darlings in the late 1990s (I remember being an associate analyst following them!).  At the time, these players were perceived to be viable alternatives to the Baby Bells (there were still about six of them at the time) for services like high-speed Internet access.  But all these players (as well as a host of others) ended up filing for bankruptcy protection in 2001.   
 
While the CLEC problem was they had to lease copper lines leased to them by larger carriers, the bigger picture issue was it was somewhat of a cowboy ‘build it and it will come’ mentality.  There are many facts which suggest that this time is much different.  Data from AT&T’s Q3’21 trending schedule shows that the only broadband adds that are in the black are the fiber ones (Non-Fiber and DSL continue to bleed red).    AT&T is not alone in this regard.    The demand for faster broadband speeds is very much there.
 
So can we just calmly say “That was then, and this is now?”  The answer: maybe.  
 
I fully acknowledge the idea of a broadband stimulus is nothing but good.  Who does not want to close the digital and homework divide?  We all know how heartbreaking it was seeing the pictures of kids sitting outside fast food restaurants at the height of COVID to grab on to their WiFi connection.  But the question to watch is how this money gets allocated and does it get into the right hands?
 
In my view, the key horses to watch will be the ones doing ‘think outside the box’ type moves.  Watch the likes of Conexon and other models that partner with the Co-ops (both electric and telecom) to become a more meaningful player in the market.   Another important trend to watch will be open networks.  The Europeans have embraced this model – yet, over on this side of the pond, they have been welcomed with much less fanfare.  But with billions of dollars raining down from the broadband gods….one has to wonder if these type of models finally find their sea legs.    If the capital is allocated in a way which will drive effective broadband builds in both underserved rural and urban (note: I live 14 miles north of Chicago and basically have the choice of one broadband provider!)  then a 2001-like event won’t happen.
 
However, if the ‘horses’ I describe above or ones like it get trampled or don’t get a chance to gallop out of the gates and the capital gets allocated to players who have the ‘broadband white board’ and not much else….then the ghosts of 2001 could come back to roost. 
 
So Washington can have a chest thumping moment for now – but how execution of the plan goes from here will be critical to say the least.

Are the Data Centers Growing Increasingly Edgy?

The edge continues to gain momentum and the industry giants are paying attention. Just last week (on 10/14) we saw Digital Realty (DLR) – the staid “REIT-y” data center company – continue to move on this effort with a strategic investment in AtlasEdge. AtlasEdge came together through a partnership with Liberty Global and DigitalBridge. This is not DLR’s first move into the Edge space. In 2020, DLR teamed up with Vapor IO’s software-defined Kinetic Edge in some of its US facilities (including Atlanta, Chicago and Dallas). Equinix, DigitalBridge, and Switch all have their own version of edge offerings.

This should not come as a surprise as the data center moves are driven by the needs of their largest customers. And for the largest customers – namely the cloud players – the Edge is much more than just a white board concept.

Last week, I had the opportunity to be a guest speaker for a class at NYU to go through the general concept of what a data center is. During my talk, a student asked me what I thought of Microsoft’s underwater data center. I was quite confused, but sure enough I Googled it and it does indeed exist. (It is true – “teachers” often learn from their students.) If you look at the picture of this online, you will see that this ‘underwater data center’ is really more like a small tubular type structure than a true data center, and in reality, is yet another edge point of consumption – albeit two miles deep!

The “smart money” behind some of these edge concepts don’t question the need for the edge; what I have found is they question how to make money from the concept. Perhaps they need to look a bit further down the lines of the income statement to find the real value of the edge – costs savings vs. revenue enhancements.

A 2015 McKinsey & Company study found that an offshore oil rig generated data from 30,000 sensors — but less than one percent of that data was used to make decisions. The question becomes now – many years later – has that changed? It seems to me companies have a tremendous opportunity to use such data to make much smarter decisions from a cost side.

There have been several case studies that show edge deployment can result in tangible cost savings for enterprises deploying such initiatives. One recent case study put out by IBM showed its edge solutions for a manufacturing client resulted in a 5x increase in inspection efficiency, a 20 percent reduction in false-positive defect detections, and a 20 percent savings on software maintenance.

For the cloud players who support these enterprises, such statistics will make any CFO sit up and take notice. Given the fact that cloud companies continue to be the critical and growing customer for the data center companies (note: cloud accounts for 28 percent of DLR’s revenue and seven of EQIX’s top 10 customers), the edge cannot be ignored. But we all know that a heavy lift is needed on the infrastructure side to extract all the benefits of the edge. It is a similar ‘chicken and egg’ scenario as a 5G discussion.

However, although an edge opportunity in isolation is more of a cost savings driver for the end customer, how data centers position this edge to best support their cloud customers could be an important needle mover for their own top-line growth. If cloud companies are able to pitch the ‘realness’ of these cost savings to customers, they (cloud players) will need help from their 3rd party data center partners.

I remember the professor of my Entrepreneurship 101 class in business school started one class with this saying on the chalkboard (yes, it was still really a chalk board!): “Always remember – you can mine for gold or you can sell pickaxes.”

I thought of that quote when thinking about the edge value chain. It seems to me the edge play may be the new pickaxes for the data centers to pick up and run with in a much bigger way right now. Let their customers go hunting for the gold at the end of the rainbow. It is those customers’ customers that seem to finally be waking up to the benefits that the edge can bring.

Is Cable Ready to Spend?

The September conference cycle is never dull and always full of interesting tidbits for those who really listen to the undercurrents of what CEOs and CFOs are saying. I have found that history has shown this time and time again in 20+ years of going into “September listening mode.”

One of the key themes this past month came from the cable sector. In short – cable may be down…but they are sitting back up. Comcast stock has struggled to find its footing since September 14th when its CFO previewed that broadband adds would be less than Street estimates. Specifically he noted they have seen a slowdown since late August in Broadband adds and growth would be down from the (record) Q3’19 levels. ATUS also previewed weaker than expected Q3’21 adds – now guiding to 15K – 20K in broadband losses (with plan to finish flat / slightly up on net adds for FY’21). Its stock has also felt some pain – down approximately 25 percent since September 1st.

The question is what is driving this weakness for cable? The CMCSA CFO acknowledged the times in the competitive front are indeed a changin’. Specifically he noted: “we’ve been mindful that competition’s coming in one of our best and favorite businesses, frankly, for quite some time.”

One of the things we have often discussed in our write-ups is that telecom has very much “woken up” to the need for more fiber. When telecos were not as much focused on broadband and fiber-deep, life was very good for cable. When I was an analyst one of the things I used to say was ‘never underestimate the cable cos’. Two years later, we would continue to say this.

In the September webcasts from the cable cos there seemed to be very purposeful messaging being sent. Perhaps this was best seen by listening to the cable Godfather himself, Brian Roberts (Chairman and CEO of Comcast). When asked about the balance sheet at the Goldman Sachs conference he made a notable point. Specifically, he said: “You’re going to have a lot of free cash flow and your first goal would be to invest in the business.” This tails off some comments from the CFO two weeks prior who noted: “We’re going to step on the gas a little bit….and continue to invest in the network on the path to DOCSIS 4.0 which will give us multi-gig speeds up and down.” This was not surprising, but what was surprising was the follow up to this statement. He went on to say: “no, no, no trigger other than that’s the path we want to get our business on and with the success of trialing 4.0 technologies in the last bunch of months….its for real and we want to get ourselves on the path to doing that.”

The “no other trigger” seems hard to me. The trigger is kind of hiding in plain sight, isn’t it? In the last nine months, AT&T, Frontier, Windstream, Consolidated, Lumen, Apollo and many many other smaller players (too many to list) have been spreading the “fiberized” gospel. And this will only be entering hyper-drive mode as a massive amount of broadband infrastructure capital enters the states’ pockets.

My guess is the history books will show that this past month will indeed be a “September to Remember” because it will mark the point where cable showed they are not backing down. They may have been hit, but they are no shrinking violet and if telecom is moving, cable is saying “game on – we are ready!”

The “Ferrari of Fiber” is Finally Coming out of the Garage

Last week, Lumen made an announcement which likely went unnoticed by many but offers hints as to the company’s purest ambitions.  On August 19th, they introduced Lumen Edge Private Cloud.  The new service includes compute, storage, network and security. It builds on the bare metal Edge Compute platform Lumen launched last year, VMware Cloud Foundation and software-defined data center technology. 


The service is expected to meet 95 percent of US enterprise demand within five milliseconds of latency. Lumen has 44 edge nodes deployed in the U.S.  The service is  also available to 2,200 third party data centers   via VMware Cloud on AWS. In a press call with reporters, CEO Jeff Storey noted this was a “unique opportunity to grow our enterprise business by leveraging our expansive fiber network … utilizing our edge computing network to move critical workloads closer to the source of data.”

In an interview with Fierce Telecom Chris McReynolds, Lumen’s VP of cloud edge product management said this is just the “first layer” of Lumen’s drive to stack up the edge infrastructure and discussed plans to launch a multi-tenant virtual machine and an edge orchestrator in early 2022. 


Why is this important?  Well, it represents a canary in the coal mine of things to come.   Don’t be surprised to see Lumen’s future press releases and talking points to very much center around the edge and their role in enabling it.  These talking points get easier to draft now that it is beyond the announcement it will sell 20 of its states to Apollo Global Management.  While that deal will take one year to close, the messaging as to what Lumen is going to be when it ‘grows up’ is much easier to craft now. 


Why is this important?  Well, it represents a canary in the coal mine of things to come.   Don’t be surprised to see Lumen’s future press releases and talking points to very much center around the edge and their role in enabling it.  These talking points get easier to draft now that it is beyond the announcement it will sell 20 of its states to Apollo Global Management.  While that deal will take one year to close, the messaging as to what Lumen is going to be when it ‘grows up’ is much easier to craft now.


The irony is not lost on me that if Level3 were still standing as a solo company, the press releases that we would have seen from them likely would have been a whole lot like the one we saw just last week.   Simply put, Lumen is boomeranging back to its old Level3 days at the perfect time.  In past reports I used to call Level3 the “Ferrari of Fiber.”  By detaching themselves from a good amount of their copper assets, that engine is poised to rev again!

Importantly, this fiber will be the basis for their enterprise and edge push.  A simple word search of the word “enterprise” in LUMN’s Q2’21 earnings call came up 28 times vs. only nine times for the word “consumer.”  Although Lumen likely will push hard on FTTH initiatives in the remaining states it owns post Apollo (management noted 15MM of the 21MM remaining homes it will keep in its region are investable), the lens in which these consumer projects are viewed will likely have some enterprise “pixie dust” to them.


At the Cowen conference, Maxine Moreau, Lumen’s President of Mass Markets, acknowledged as such when he said: “about 70 percent (of consumer homes) would be considered urban and suburban, which makes it the most attractive areas for investment because of the densification as well as the overlap with our enterprise business. We have a lot of network within Lumen and we can leverage that network as we expand our fiber.”  While it makes total sense, it is a subtle change of tone that should not go unnoticed.  The enterprise hand may be directing the consumer segment….under the “old” CenturyLink model it was quite the opposite.
 
Although many may think Apollo got the Lumen divested assets at an extremely low multiple given that FTTH is all the rage, there is an intangible benefit to Lumen that will pay (proverbial!) dividends overtime.  It gives Lumen nimbleness, removes the copper refrigerator from its back and (most importantly) allows it to be front-footed in its fiber lean in.  These are things it has wanted for a LOONNNGGG time – perhaps maybe even since November 1, 2017 – the day the Level3 merger closed! 

The DigitalBridge Coming Out Party

This is a big week for Analyst Days – with DigitalBridge on June 22nd (the day of its official rebranding) and Equinix (EQIX) on June 23rd.  Both will be important days for each as they both represent companies in significant transition right now.

For EQIX, this will be the first analyst day in three years and a lot of eyes will be watching.  As they do at all their analyst meetings (that typically occur every other year – COVID put a curveball in this schedule), EQIX is expected to put out longer term guidance (both revenue and AFFO / share growth).  In these past three years much has changed: Digital Realty (through the purchase of Interxion) has more than beefed up its interconnection capabilities and assets; QTS will be going private backed by the deep pocketed Blackstone; and EQIX itself has transformed its own stripes bringing in much more hyperscale capabilities through xScale and an edge play through the purchase of Packet.

And – true to form – EQIX is not sitting still during this period of transition.  On June 14th, GIC and EQIX added another $3.9B to expand the xScale Data Center Program.   The xScale portfolio of 32 facilities will provide more than 600 megawatts (MW) of capacity once fully built out.  In a recent Forbes article, EQIX’s CTO, Milind Wagle, was quoted as saying that Equinix is the “engine room of the digital economy.”  We agree completely. But the question becomes are their customers looking with a careful eye closely at the interworkings  of the engine room and does that engine room still have a thick moat around it as it did three years back?

For DigitalBridge (formerly known as Colony Capital as of Tuesday), we almost think of June 22nd as their coming out party in many ways.  Following its recent OED sale, DigitalBridge’s assets are now 80 percent in the digital infrastructure  space.  The only non-digital assets are Wellness Infrastructure and its public stake in CLNC.  DigitalBridge has a significant opportunity which few in the space has right now.  Why?  Because Ganzi and team have their hands in more parts of the digital infrastructure space than anyone.  These include (but are not limited to): small cell (ExteNet); fiber (ZAYO); data centers (Vantage and DataBank); land under the towers (Landmark); and towers (Vertical Bridge).  Importantly, the reach of some of these assets are not only US based.

If DigitalBridge can find a way to communicate how all these ‘children’ can play together  in the 5G infrastructure ‘sandbox’, that will be a message unique to DigitalBridge, given that others lack this breath and depth of asset mix.   Our guess is if any one can communicate that message it is Marc Ganzi! We will be watching!

LUMEN / T-MOBILE – On the Edge of Glory?

As a former analyst, I know that the webcasts which the Street pays the most attention to are the ones where the CFO or CEOs are speaking.  While these are of course very interesting, I often think it may be the ‘under the radar’ executives that may say the most.  Sometimes it are these executives who offer the most commentary about the emerging green shoots of an new revenue streams.    I thought that this week as I listened to the Cowen TMT conference when Lumen’s CMO – Shaun Andrews – was interviewed.

While the transcript is most definitely worth a read, the smoking gun comment to me was in reply to the question:

“When do you really start to see real bookings in edge computing that really start to make a difference?”

The answer: “Now.”

Here is the green shoot…

Mr. Andrews then went on to add:  “We’re going faster with edge computing than anything I can remember in history going with”.   While the cynic may say that Lumen (former CenturyLink) never really went “fast” with anything, so bar is low.  Mr. Andrews himself has over 25 years of experience and was with growth companies of the past, including Level3 and WilTel.    So this statement should not be ignored.

Unlike many of these interviews, Mr. Andrews actually put meat on the bone with specific examples as to edge business models for Lumen.  The most interesting one to me was his commentary about the opportunity with T-Mobile.   He offered tangible models as to how IoT and Fixed Wireless access could represent two significant opportunities of growth for the two companies to work together.  How this relationship grows will be something to watch.

I know I sound like a broken record here – but wireless does most definitely need wires.  If we know one thing about 5G infrastructure, it is that fiber is the connective tissue of this emerging ecosystem.  While T-Mobile has a plethora of spectrum (the full wedding cake of it in low, mid and high-band), it does not have the “wires” (aka fiber and transport) to make this spectrum work most effectively.  Lumen does.  And they have more than anyone, maybe second only to AT&T.  They say a picture is worth 1000 words.   Click here to see the reach of this network:   https://www.lumen.com/en-us/resources/network-maps.html  THIS HIGHLIGHTED PART CAN YOU HYPERLINK IT

These blue lines on this image are significant to T-Mobile and it is hard to find them from anyone else T-Mo does not compete with (ZAYO would be an important exception).  In many ways those lines represent the tracks on which the T-Mo spectrum rich train can ride most effectively. While virtualization and Open RAN are the ways of the wireless future, a large part of the spend to enable this is IN the network itself.  Here is where Lumen comes in.

For Lumen, edge has to be more than just a talking point.  When I was an analyst following Lumen, one of the biggest push backs I got on the name was the higher margin legacy  business was declining at a faster rate than the lower margin “growthier” businesses were growing.  Another knock on it was that the company was continuing to cannibalize its own businesses.   The beauty of edge for Lumen is that there is no cannibalization  – it does not come at the cost of any other revenue line.  Edge represents a greenfield opportunity set. And there are not many of those in telecom land as anyone who has followed the space knows.  The moat around the business is very much there – go back to the image with those blue lines if you need a reminder!

AT&T: When you are in a hole, stop digging

I took a break from this column last week as I think I was a bit of deer in headlights as I digested the big AT&T news.  It almost was personal to me as I vividly remember when AT&T’s CFO announced during a conference at my prior firm that its Time Warner deal was being reviewed by the DoJ.  After he exited the stage that day, there were literally 100+ arbitrage investors that surrounded him (think of a rugby scrum…that is what it looked like!).  Then after that day a hard painful approximately seven months followed until the deal finally closed in 2018.  So my shock and awe when I saw the WSJ story hit that AT&T was reversing course was real.

But now a week out, I have what I think AT&T also  does….strategic clarity.  I understand for AT&T investors, employees, and probably several layers of management, that this is a painful time.  But there is an expression:  “When you are in a hole…stop digging.”  John Stankey put down the shovel.

Of course, much can be said and written about how AT&T could not compete with Netflix’s content budget, DTV was a mess, and that their trouble all started when they did not get T-Mobile deal done in 2011…but that is all rear view mirror stuff.  What happened last Monday was significant because AT&T (some would say finally) is going back to its roots and is now focused on  its pipes.  These (broadband and wireless) pipes were getting rusty.  But now they have the capital to put toward  scraping this rust off.    With a sole focus on fiber expansion (30 million homes by 2025) and 5G and smaller dividend shackles, this could get really interesting.

One thing to me that was noteworthy in listening to all the talking heads on this deal was the discussion about Comcast.  There was a lot of “Can Brian Roberts let this happen?” talk-about.  I mention this because I think most are missing a very obvious point.  If you are Roberts, you may not only be sore because you missed a media asset.  But you may have to have a heart-to-heart conversation with your Board that your broadband competition will  be getting a lot more fierce, and this broadband business is the heart of Comcast’s core profitability.   This is also true for Charter.

Altice can be separated from the conversation given its front-footed approach to fiber.  For Comcast specifically,  NBC and amusement parks are nice and all, but the broadband pipe contributes to  the majority of  its free cash flow.   With Monday’s announcement, AT&T said it plans to grow its fiber connected homes to almost 50 percent of their footprint and will be building out more homes / year than it has in the last 10.   Where AT&T has fiber, it succeeds (check their earnings supplemental if you doubt this).   What AT&T did Monday was simplify.  It used to be a company full of spinning plates – 5G, HBO, legacy Turner, Broadband, Enterprise, etc.  Going forward it won’t be anymore and that is a very good thing.  But others may be…..

In my first six weeks at my new job I have learned much from the international team here.   One of these learnings I did not appreciate as a domestic-only focused analyst in my prior life was that the Europe telecom operators who woke up to fiber gained share from cable.    The same trend is happening in Canada (Bell Canada gaining share from Rogers, etc).    The breadcrumbs for the telecom fiber-love were there before AT&T’s big announcement.  Look at what Frontier, Windstream, Consolidated, etc have all been saying and doing.  It was almost hiding in plain sight, but AT&T’s move is shining the light directly on it.   If one steps back and thinks about this, AT&T’s move may be  a much bigger issue for some of the cable players than a good media asset passing them by.

 

The importance of connectivity-rich data centers to 5G

Equinix (EQIX) recently published its third annual Global Tech Trends Survey (GTTS).  This survey gathers views and insights from 2,600 IT enterprise decision makers in 26 countries across EQIX’s three regions (Americas, Asia-Pacific and EMEA).  It never disappoints!  Given its strong connectivity reach, one could argue that more than any company, Equinix has the most ‘tangible touchpoint’ as to how enterprises are viewing the digital infrastructure space and their future needs.

While this report had many take-aways and learnings, the three most interesting data points in my view were as follows:

  1. Virtual Is Way Of Future– More than half (57%) of companies still plan to expand infrastructure but more importantly, almost two-thirds (63%) of them plan to achieve this virtually rather than investing in physical IT infrastructure.    In reading this stat, it  reminds me of what AT&T once said: ‘we are moving from a hardware company to a software one….vendors that support this will be with us…ones that do not will not be along for the ride’.
  2. The Clouds Will Continue to Get ‘Puffier’  Almost 60% of respondents are planning to invest in technology to make their businesses more agile post-COVID.   While this is not surprising – how much they are bear hugging the cloud to increase this agility is.  Specifically, 68% of enterprise respondents said plan to move more functions to the cloud.  So that runway is still very long.   Put another way, if you are a data center or fiber company, the cloud most definitely will continue to be your friend, not foe.
  3. 5G – The New “Frenemy”? –  This was the point most interesting to me.  50% of the respondents agreed that 5G will have the biggest impact in getting them  access to new technologies, but in the same breath, over one-third are nervous they will need to  “rearchitect infrastructure” to do it.   In some ways this is somewhat contradictory  to point # 1 above. Based on their answer above,  there is a realization by enterprises there is a  need to spend.  However, unlike IT infrastructure (which can bend more virtual), it is hard to get around any 5G infrastructure without a lot of physical hardware behind it.  Virtualization in 5G is happening, but you need a whole lot of physical infrastructure to get there.

It is all ol’ chicken and egg discussion with 5G: Build it and it will come, but it won’t come until it is built.   Those enterprises that sit out on this spending run significant risks of being part of the ‘left behind’.  We think most realize it and if you are a company leveraged to this space (towers, small cell, DAS owners, private network players, edge compute, etc) the roaring 20s may be just beginning!

While we know an author is always biased toward their own work, those companies which are at the center of these themes are the connectivity-rich data center entities.  Equinix and Digital Realty top this list.  A perhaps overused line in the wake of COVID has been “companies need to make a digital pivot.”  Of course this is true.  But there are layers underneath this ‘digital pivot’ that should not be ignored.  While the loud sucking sound of the cloud has been appreciated for a while, the impact of 5G on data centers has not.

In word searching the last EQIX Q1’21 earnings conference call, it is interesting to note that while the word ‘cloud’ came up 18 times, the phrase ‘5G’ came up only once.   Dollars to donuts (to quote my 75 year old mother!) that mention goes up big time this time next year.