Microsoft Says "Näkemiin" to Value from Nokia

Just before the closing of the Nokia acquisition, we had our doubts about Microsoft's ability to realize value from it. Some comments,

• "Microsoft too, under Steve Ballmer, has said "it's all about services," but the current Nokia platform is poorly positioned to garner anything more than the current 2-3% of all handset sales."
• "When the Nokia deal goes through I will be curious to read the level of charges taken for workforce reductions in Finland and for the allocation of the purchase price to intangibles and to goodwill.  That will tell a lot about this story will work, or not, in the future."

Well, the auditors went along with whatever rosy forecasts Microsoft had for handset sales, and they waited.  CEO Nadella made very bullish comments about understanding how app developers looked at the world; he was very bold in personally engaging with them about the future merits of writing for Windows 10 on multiple platforms, including tablets, combos, and mobile. 

Bulls talk about the fact that a $7.6 billion impairment charge on a less than $8 billion acquisition, net of cash, only enhances shareholder value because losses will be stemmed after the restructuring and the company can get on with its business of being a cloud services and enterprise software company. That is a pretty mechanical, textbook accounting view of the world.

As a shareholder, what if your company continues to trail developments in its industry?  What if it is always the perennial bridesmaid, late for her own wedding?  As a pure play cloud company, MSFT is probably overvalued, or fairly valued at best. 

What is the future for Windows Phone owners?  What if 2% of the handset owners switch over to Android?  

HP recently released a Red for its upcoming creation of HP Enterprise.  Among the reasons for the split, there was nary a single one that had to do with how the company put on a better face or presented a better value proposition to customers.  The rationale had to do with other things: you can guess what they were. 

After announcing the write-off of Nokia, it is very unclear what the Microsoft value creation proposition is going forward.  "One Windows Experience" across all platforms is pretty lame.  What if there is no one on the mobile platform?  Windows 10 has some slick features as far as controlling and working with smart tvs and other devices, but this isn't a big deal.  It's just catch-up....again. 

T-Mobile and the Dish Network: Please Let It Happen!

The corporate merger dance can be a protracted one, with partners eyeing each other and making inviting gestures, before suddenly leaving the dance with another partner; or, it can be a case of eyeing each other and suddenly the suitor aggressively carries off the apple of his eye.

T-Mobile badly needs a merger partner, and more than that it BADLY needs spectrum, more towers and better service for its growing, but often poorly served customers.  Dish Network needs a merger partner, although their mercurial CEO isn't sure what he wants to merge and what industry he wants to dominate, e.g. wireless, home entertainment or content.  It has plenty of spectrum that is essentially sitting around like excess cash, it makes shareholders antsy.

Regulators, for some unknown reason want four strong wireless companies.  Right now the former Bell stepchildren, Verizon and ATT are the giants, and Sprint and T-Mobile the runts of the litter. Absorbing T-Mobile would give them a much stronger third player, and it would satisfy the long-held desire of Deutsche Telekom to divest its investment.

As a long-suffering T-Mobile customer, I am hopeful, but listening to the T-Mobile CFO talk about a potential deal or "partnership," I wonder if anything will come of this.  Watching for my text of the deal being done!

Windows Phone: Still Nobody at Home

I've owned a Windows Phone since they came out, because it was an inexpensive way to own a smart phone without succumbing to the siren song of Apple or to the the peculiarities of Android, where different users got or didn't get OS updates depending on their hardware maker.

I have written about the promise of the phones; because they are Nokia, they work well, and the Windows Phone OS isn't bad at all, and it works well with Outlook, which I have used for a long time.

I was impressed by CEO Nadella's comments when he first came on board about how he understood the needs of the developer community, and Microsoft would meet them where they live (their income statements) and increase the app store and therefore the user base.

Well, it looks like absolutely nothing has happened.  Windows Phone isn't an option for someone who wants to download popular consumer apps in many, many different areas.

I would guess that they are going to have to write-off some of the goodwill attached to the $7 billion plus Nokia acquisition, because surely the cash flows won't be there in the future.

At lease my phone still works, and Microsoft hasn't orphaned me as a user,....yet.

T-Mobile Still Rudderless

T-Mobile's meringue-like offer from a French billionaire evaporated, since it was all spidery sugar and so substance.

The company's network is still woeful compared to its competitors, and it has dead spots in major metros and is often more challenged in buildings than its competitors.  Despite disingenuous promises from its CEO, it's only strategy now amounts to giving away data and grabbing more unprofitable subscribers.

Meanwhile, Deutsche Telekom's ownership of an established carrier in a major market has added no value, and their continuing, failing efforts to divest their stake also drives down TM's value.

Wireless needs to be priced like any other utility: giving away more and more goodies to no-profit customers will do nothing to provide funds for building out the network.  TM seems to be stuck in the worst place now, despite all the CEO preening for the cameras.

Microsoft's Ballmer Turns to Roundball

Former Microsoft CEO and board member Steve Ballmer took the predictably heavily scripted step of resigning from Microsoft's board to devote his energies to running the Los Angeles Clippers.

CEO Satya Nadella must have been assured that he had free rein to put his stamp on the company, without having to feel beholden to the legacy of Mr. Ballmer, including his restructuring plan and appointing his chief strategy officer before the CEO change.  This move is graceful for everybody involved, and it confirms to the outside world what hopefully was know inside, all along. Good news.

The Wall Street Journal has an interesting article about the new HTC phone with Windows.  It confirms what we wrote about recently, namely Windows Phone 8 (forget that my phone hasn't got the upgrade yet) even in the most basic Nokia smartphone works quite well, fairly intuitively, and comes ready to go, not with every social media app in creation, but with LinkedIn and Facebook ready to go.

So, the schizophrenic market of journalists and self-proclaimed pundits, cry for a "third smartphone ecosystem," while at the same time decrying the Windows Phone effort.  I would understand this if, like other Microsoft ventures, Windows Phone was klugey, bloated, and a resource hog with a UI designed by engineers.  However, it is nothing of the kind. I can use it out of the box, and my phone has the barest bones of a resource base, but Windows Phone 8.0 works just fine, and the Nokia Here maps, which are free, are wonderful because they are downloaded to your phone.  So, what's the deal?

"So, why don't more people give Windows Phone a go? At this point it has very little to do with how good of a smartphone platform it has become, and everything to do with the rule of the masses: It's hard to go one way when everybody else is going another."  I've always enjoyed being out of step with the lemmings, whether in the financial markets or personal technology.  It's cheaper, yields better returns, and exerts less wear and tear on the psyche.  

Sharp, meanwhile, has announced that they are going to develop their own operating system.  Microsoft used to have a "late to the party" monopoly, but really a Sharp mobile operating system?  Maybe Microsoft partnership/business development folks are trying to talk them out of this foolish decision.  

Sayonara to T-Mobile

We've always thought that Masayoshi Son was a breath of fresh air for the U.S. wireless industry. However, we had doubts about what he paid for Sprint and about the potential for a disruptive model in domestic wireless.  Then came the announcement of a proposed deal for T-Mobile, which surely had to attract regulatory scrutiny, not so much for its own merits, but probably because of regulatory "regret" about their having let the U.S. industry evolve into a classic duopoly, with higher priced plans than would emerge from more competition.

What Mr. Son hasn't done is to really "white board" the Sprint business model.  Now that our regulators have put the kibosh on the Sprint/T-Mobile deal, this is precisely what he should do.  Putting some billionaire in place as CEO is going to have investors scratching their heads.   Making a face saving announcement about regulators reconsidering won't make his Japanese shareholders happy, since Mr. Son's full time PR blitzkrieg in pursuit of the merger has distracted him from the core business in Japan.

Meanwhile, T-Mobile has attracted another billionaire, this time from France, who has made a merger proposal which looks long on words and short on both money and value-enhancing strategy.  With T-Mobile itself finally starting to grow its postpaid customer base again, the last thing it needs is another distraction for management and employees.

Wireless pricing continues its irrational ways, with T-Mobile recently announcing that it will allow data-hog users to stream music continuously without counting against their plan data limits. Now, it's possible that there's incremental revenue from the streaming services paid to T-Mobile for serving up their customers, but I'd like to understand the economics of this deal.

Until later, sayonara to T-Mobile from SoftBank.

More Thoughts on Windows Phone 8

For all our fuming about Windows Phone 8, it's important I remind readers what could be different this time around.

• The New CEO

Taking Satya Nadella's own words about the future being in software, mobile, and the cloud, then he surely isn't going to accept the dysfunctional culture he inherits from former CEO Steve Ballmer. He had said, it's "renew or die." That's where Microsoft is in mobile and tablets. But, in the words of Lawrence of Arabia, "Nothing is written."

• Stephen Elop

Reportedly returning to Microsoft to run a portfolio which includes Surface, Windows Phone and Xbox, this would be another smart move. He knows both Nokia and Microsoft. It would also free up the CEO to focus on bigger issues, once he has rounded up his senior executive team.  Mr. Elop, like the Microsoft CEO, realizes the amount of value waiting to be created from a transformation of the lumbering Microsoft.

• Nokia's Culture Could Invigorate Microsoft

Here what Nokia says about its cultural aspirations:
• Make it great for the customerEveryone in Nokia has a role to play in making it great for our customers. This involves listening and understanding before making the decisions that will provide a great customer experience. It’s about taking accountability, and holding others accountable, for keeping commitments and getting things done on time.• Challenge and innovateChallenging the status quo is a prerequisite for change and innovation. Innovation is the lifeblood of our future success and the cornerstone of our product making. This is about not accepting “what is”, but being curious and striving for “what could be”.• Achieve togetherResults matter, and we achieve more when we work together. This is about everyone at Nokia taking responsibility for achieving and collaborating across organizational or geographic boundaries to win. It’s about having a diverse and inclusive environment that promotes individual expression.• Act with empathy and integrityEmpathy and integrity are our guides for dealing with our customers and each other. It’s about us being honest, transparent and doing the right thing. We inspire trust by speaking frankly and having the courage to call things out on what matters.

 Consumers need more competition, innovation, and value in mobile: if Microsoft can help bring this about, value creation will follow as surely as day follows night.

Samsung's Mobile Ambitions Getting Squeezed

We posted last week about pressures on Samsung from Google's sale of Motorola Mobility.  Today, the Wall Street Journal carries a story about wireless carrier resistance to rollout of Samsung's proprietary mobile OS called Tizen. 

Again, consumers will wind up paying in terms of price and competitive phone products for all the strategic chess games among Google, Apple, and Microsoft.

Moshi Moshi!: Softbank Calling

More head scratching news from the U.S. cellular industry: Japan's Softbank is apparently close to a $20 billion deal for Sprint.  Despite the Sprint CEO's valiant attempts to make the company more relevant as a major player, Sprint's leadership, if you can call it that, is in the lower margin, prepaid customer base.

In the meantime, it seems that it is holding on to existing post pay customers by giving away unlimited data and calling plans.  It doesn't seem like a good business model for the long term. Softbank's acquisition seems to solve Sprint's problem of how to finance its 4G network build out  which analysts say will require $8 billion.

U.S. regulators, in the short term, should be pleased because nominally, the U.S. industry doesn't become anti-competitive, as Sprint gets life support.  The Wall Street Journal suggests that the end game for Sofbank/Sprint would be a consolidation of T Mobile.  This would seem to be anathema for regulators and seems unlikely.

Perhaps because of our legacy with wired telecom, our wireless industry business model has not delivered a world class service to consumers.  Sprint and T Mobile are devolving into low end players.  Verizon seems to be on the way to becoming like the old ATT, while ATT seems to be looking like the old MCI.

No carrier has spotless national, or even major metro signal coverage.  We pay too little for our phones, and too much for our monthly service.  Ordinary phone customers are subsidizing the "eat all you can" data plan customers.  Phone only consumers are being forced to upgrade to smart phones, with a minimum commitment to a $10 data plan, even if the consumer wants a new phone and no data plan. What happened to consumer choice?  What about listening to your customers?

Sprint's $8 billion investment is being made for the benefit of a relatively small number of users who aren't paying their freight.  It's hard to understand Softbank's motives for making this transaction  unless they are going to tear up Sprint's business model.  This, however, would not be the traditional Japanese style.  I would guess that Softbank analysts downgrade their ratings if this deal goes through.

Are Cell Phone Carriers Stopping A Race to the Bottom?

ATT announced today that it was effectively eliminating unlimited data plans for its customers, and it said that it would allow customers to use a set amount of data services per month before adding penalties.  More downloads at the highest speeds will now hit a limit, generate a text warning, and then slow data download  speeds and generate higher user fees. It remains to be seen if other carriers will seek to obfuscate the issue to take share, but we applaud ATT for trying to introduce some rationality into the pricing of mobile data services.  Ultimately, the current situation is the interest of Apple and its devices, but not in the long-run interest of the carriers or of the broad consumer user base. 

In the investment research literature, behavioral economists and others have identified all kinds of irrational behavior by individual investors, leading to patterns of buying high and selling low, for example. Corporations are not supposed to behave this way.

Sprint and others started a race to the bottom by giving away phones and unlimited data plans.  Sprint further made a huge bet on iPhones and will be limited to operating on life support as a result. Carriers were subsequently forced into a network upgrade arms race and a pursuit of buying spectrum at ridiculous prices.

Water and power utilities have long ago proven the economic value of tiered pricing, with higher prices for those users who force the utility to build for peak loads which are excessively above average demand levels.  Perhaps rationality is coming to the cell phone carriers.  Let's hope so. 

Deutsche Telekom: Still Nobody Home

U.S. markets are in an uproar about the failure of the ATT-DT deal for T-Mobile.  The management of Deutsche Telekom has, in our opinion, bungled its US investment right from the start.  An acquisition of Sprint by one of the U.S. wireless behemoths has already been deemed anti-competitive, as has now the acquisition of T-Mobile.  If maintaining some semblance of competition is important then some sort of partnership between T-Mobile and Sprint would seem to have the best potential for regulatory approval, as well as offering opportunity to add value. 

In all the talk, the fundamental problem is being overlooked: the U.S. wireless industry is killing itself slowly with its irrational pricing paradigms.  New customers are lured in with money-losing deals, while the most profitable customers are left to themselves, with the option of switching to get one of these deals.  Much of the movement to Sprint among people I know was driven by their irrationally priced "all in one" plans with unlimited data access.  Most of these people complained about the phone coverage but suffered it for the data plans.  Not surprisingly, Sprint gained lots of prepaid subscribers, but lost money, which is not a recipe for sustainable value. 

Surely, data plan users should be charged by the volume, time period, speed, and types of data that they are downloading over cellular networks.  Gas and electric utilities charge by the time period and time of year, since everyone accepts that it is the cost of building and sustaining the peak load capacity that has to be paid for at the margin. Cable is different because of the monopoly status of local carriers and the fact that their networks were built with generous subsidies.  Wireless is really just another utility.  Credit Suisse too notes the elephant in the room: "declining profitability of the whole U.S. (wireless) market." 

Sprint's disastrous commitment to buy 30.5 million i-Phones for $20 billion will keep the company in the red until 2014, according to the Wall Street Journal and other sources.  T-Mobile, by contrast, is projected by Credit Suisse to generate $5 billion in EBITDA or better in 2011, which would meet or exceed early 2011 guidance. Credit Suisse, which has recently reinstated coverage of DT, projects 2012 EBITDA of about $5 billion for T-Mobile, despite negative industry fundamentals and economic weakness.  This is pretty good performance in the face of strategic and operational mismanagement from the parent company.  An acquisition of Sprint would not make financial sense nor would it pass regulatory muster. 

Performance of the DT parent is another story altogether.  DT sports a 7.9% dividend yield today, and the German government's large stake in DT precludes management from pursuing any strategies that might add shareholder value but that would require reducing the dividend.  According to Credit Suisse, the ROIC for DT will be in the 5% range for 2012 and 2103.  The stock is rated by Credit Suisse as "Underperform."  All of this complicates the future of T-Mobile and puts its valuable franchise at risk.  U.S. regulators should be working proactively to ensure that corporate inaction or irrationality does not inadvertently make the U.S. wireless industry anti-competitive. 

However, a partnership makes sense, with perhaps Sprint differentiated as the "Wal-Mart of Wireless" and T-Mobile as the preferred brand for price conscious, loyal postpaid customer who wants a global network.  Data hogs should be priced so they either pay their freight or go to Verizon where they will generally pay more for their plans anyway.  A partnership would only work, in my opinion, if (1) it went away from encouraging adverse selection and churn by only talking price; (2) stopped letting the data hogs crowd profitable users out of the trough, and (3) the partnership didn't cut costs to the point where the service culture of T-Mobile disappeared.  Good people are leaving T-Mobile in droves.  This would have to stopped and the company would have to find a way to become a "hipper" organization to work for as opposed to say, ATT. 

Credit Suisse opines that after the failure of the ATT-TMo deal, TMo is left with "more spectrum, less debt, and a bigger range of U.S. options." We have always believed this to be the case, as it certainly is now.