Best Partners for Sprint, T-Mobile? Not Each Other

Very few informed observers likely believe that T-Mobile US has the assets it needs for sustainability in a market that is moving towards a fusion of access and apps (content, platforms). Sprint is arguably in worse shape, as it is sub-scale even in the access business.

But may observers would argue a merger of Sprint and T-Mobile US, while providing more scale in mobile access, is the “best” possible move, long term. If the market is moving towards some new “content plus communications” structure, then each firm should be merged with some other tier-one app, device, content or platform company.

The proposed merger does not directly move the new company up the stack into more applications revenue, and that arguably is what has to happen.

In other words, the new firm still will have to be reshaped (as a seller or buyer), to achieve long-term sustainability. But the number of potential acquirers shrinks as the asset value increases dramatically.

Of course, some would argue the merged entity would be a strategic buyer of “up the stack” assets, longer term. Whether that is possible, as a financial matter, is the issue. With revenue growth approaching zero in the mobile business, what are the odds the bigger firm would be an effective acquirer of assets that could shift the company “up the stack?”

To be clear, both Sprint and T-Mobile US would benefit from greater scale, but beyond “more mobile subscriptions.” Gaining more scale in a saturated market can help, short term. More scale does not address the “how do we move up the stack” questions.

Comcast and AT&T have their own answers, and Comcast remains the model. Strategically, access providers have to reduce reliance on “access” revenues. Is that not abundantly clear, already?

Few would disagree with the proposition that both Sprint and T-Mobile US need to merge with some other entity. If the market is changing as they claim it is (towards a fusion of access and apps), there are better partners.

The issue is that both firms would be sellers, not buyers, in that case. Both firms need to find new partners, that seems clear. But some of us would argue that the best long-term partners are not “each other.”

Do Sprint T-Mobile Claims Make Sense?

It is not surprising that Sprint and T-Mobile US argue their proposed merger will lead to faster 5G investment, U.S. 5G leadership, lower prices, create jobs, higher economic growth and more competition in the mobile business. What, after all, would they say?

“This combination will create a fierce competitor with the network scale to deliver more for consumers and businesses in the form of lower prices, more innovation, and a second-to-none network experience – and do it all so much faster than either company could on its own,” said John Legere.

No offense; Legere is a brilliant competitor. But many of the claims are questionable, some would argue. “Faster investment?” It is hard to argue that the four facilities-based mobile service providers are not investing in 5G platforms as fast as their capital budgets will allow.

To be sure, a merged Sprint and T-Mobile US could invest more rationally, but likely not faster: they are running as fast as they can, right now. And by “rational,” less. That is why the argument in favor of the merger includes the claim that “neither company standing alone can create a nationwide 5G network.”

For that claim to make sense, one would have to believe T-Mobile could not have done so on its own. I doubt anybody believes that, given T-Mobile’s own recent claims about how fast it is moving, and how much spectrum it has to do so.

Sprint is challenged financially, to be certain. But it never has been clear Sprint would survive as a stand-alone company in any case. Most observers would likely agree “somebody” eventually will buy Sprint.

But is T-Mobile the “best” buyer, if industry lines are blurring, as Legere argues? Would not a tier-one app provider, a major device supplier, a big cable TV company better match the profile of an industry that now fuses content, apps and access? In that sense, the proposed Sprint merger with T-Mobile creates a bigger horizontal mobile company, to be sure.

But the strategic need still remains: ownership of apps, content and access assets are the future. This merger creates scale in access, which is helpful, to be sure. But the move does not address the future moves that then would become necessary: merger again with a big firm in the apps, platform or device area.

In fact, the scale of the new company likely reduces the odds many firms could envision such an acquisition.

Also open to question are the consumer benefits. Virtually all equity analysts have been in favor of consolidation from four to three mobile companies because that would reduce competition and allow all the firms to raise prices.

“The combination of these two dynamic companies can only benefit the U.S.consumer,” Legere says. “This isn’t a case of going from four to three wireless companies.” He notes the existence of other mobile virtual network operators and a few regional providers. But the merger most certainly reduces the number of facilities-based tier one providers from four to three.

Still, some argue this is not an instance of “consolidation.” That is simply untrue. We would move from four facilities-based tier-one suppliers to just three, at least until some time in the future, when one of the three experiences a major business reversal and some tier-one supplier in the internet ecosystem decides it needs such assets.

T-Mobile and Sprint also argue the deal will not lead to layoffs. What merger of this size has not been accompanied by “merger synergies” that reduce headcount?

“This combination will also force AT&T, Charter, Comcast, Verizon, and others to make investments of their own to compete,” T-Mobile US and Sprint say. Those firms already are investing as fast as their capital budgets will allow.

Some might say the proposed deal occurs “under different conditions” than three years ago, when the U.S. Department of Justice signaled its opposition. True, Comcast is an operating MVNO now. Charter is set to enter the market as well, as an MVNO. But market share has not budged much.

Eventually, Dish Network will have to put its spectrum assets into play, to be sure. And the tier-one app and device providers are still out there, loaded with cash and with far-higher growth rates and revenue than Sprint or even T-Mobile.

But those arguably offer more strategic benefit than a horizontal merger that increases scale in a role that must eventually be transcended (move from mobile access only to a broader role up the stack).

“There is no way we were going to build four national 5G networks,” some might argue. Many would argue that is not true. One way or the other, all four facilities-based providers are moving to 5G, as fast as they can.

And there are other ways for either T-Mobile or Sprint to get some assets (backhaul for small cells) they might need, if in fact each requires as much small cell support as do AT&T and Verizon. Those are open questions.

The proposed new company would not--despite the claims--get the country  to 5G any faster. AT&T and Verizon are moving as fast as they can, no matter what.

As for the claim that such a merger improves chances of “competing with China in the global 5G race,” other questions have to be raised. Where is the competition? Access? Or is the competition fundamentally in the platform, apps and infrastructure supply areas? If so, having another big supplier of “access” does not help much.

In fact, a combined new firm will obviously spend less on infrastructure than the stand-alone companies would have. That is why they want to merge, in part.

Also, the new firm does not create new platform, app or content capabilities. It is, by definition, a horizontal merger of like access assets.

The two firms argue their merger will lead to more competition in rural markets, beyond the fixed network providers. That could happen, at the margin. But more competition in rural markets, by wireless substitution, is coming, anyway, and not just from mobile suppliers.

The merger might, as Sprint and T-Mobile US argue, lead to creation of a better competitor in the enterprise mobility area. That also is possible, to an extent.

The main points, though, are that the stated rationales might be quite the opposite of the probable impact in some cases, are neutral in many other instances and helpful at the margin, as the companies claim.

But it seems unlikely that much as changed in terms of likely antitrust opposition. Much, observers say, will hinge on AT&T getting antitrust approval to acquire Time Warner. But that is a vertical merger that absolutely does not reduce competitors in the market, quite unlike a horizontal merger that will reduce competition.

And DoJ resistance even to the vertical merger, after declaring opposition, three years ago, to the same proposed Sprint merger with T-Mobile, does not bode well for the same transaction, three years later.

Regulators Face Big Questions about Sprint Merger with T-Mobile US

The new rumors of an attempted Sprint merger with T-Mobile US inevitably raise the question of what is different now, than was the case three years ago, when U.S. antitrust officials signaled opposition to the merger.

There are glimmers of possibility in the launch of mobile services by Comcast. But Comcast is yet to become a tier-one supplier, so any such changes lie in the future.

Right now, the issue is whether to allow consolidation of the market from four providers to just three. Antitrust regulators did not see that as preferable, within the last three years. It can be argued that nothing yet has changed, over the past two years, in that regard.

In fact, the U.S. Department of Justice is trying to scuttle the proposed AT&T acquisition of Time Warner, which is a vertical merger not reducing competition at all. Logically, one might infer that a horizontal merger that does reduce competition might still, as was the case in the last two years, remain off limits.

The other philosophical question is how to shape merger policy when industry boundaries are being erased, vertical mergers are likely, massive consolidation probably is coming, and when telecom markets will support fewer providers in the future.

As a rule, regulators believe (rightly) that four suppliers means more consumer benefit than a market with three suppliers. What is not so clear is the sustainability of such markets.

At least in principle, it has remained possible that some entity might decide to buy Sprint or T-Mobile US. It is a harder challenge if those two firms are merged, simply because of the increased price of any transaction.

The proposed transaction values Sprint at about $26 billion. Many firms, with the right strategy, might contemplate an acquisition of that size.

The proposed all-stock deal values Sprint at about $59 billion and the combined company at $146 billion. So any would-be acquirer of the new company would have to spend more than $146 billion to buy the merged entity.

Far fewer firms might contemplate a deal of that size, even if it vaults the buyer into the top ranks of the U.S. mobile business.

Regulators are certain to block any move by AT&T or Verizon to acquire those assets. To be sure, Verizon’s acquisition of the 40-percent share of Verizon Wireless that it did not own, from Vodafone, represented a $130 billion deal.

AT&T spent about $49 billion to buy DirecTV.

So the size of such an acquisition by AT&T or Verizon might be deemed theoretically feasible. The size of the debt load probably makes that unrealistic. But there is no possibility of regulatory approval, in any case.

So the practical question is that, even if some other entity purchased the new T-Mobile US asset (assuming that is the surviving entity’s name), market share structure does not change. Only the emergence of a fourth (probably facilities-based) contender would do that. Most likely believe neither Comcast, Charter, or Comcast and Charter working together, actually could envision an effort that large. Some tier-one app providers could afford to do so, but the value of doing so is not clear.

This is going to provide a challenging set of questions for regulators, for some time. Any Sprint merger with T-Mobile US is going to reduce competition in the mobile market, and though it is possible new facilities-based competitors will emerge, that is not a certainty.

In principle, U.S. regulators face the possibility of a permanent reduction in mobile market competition, at least in terms of national footprint, facilities-based contestants. Niche attacks will happen. But niche attacks do not necessarily increase competition in the consumer services market.

At this point, one might argue that Sprint is not sustainable. Whether four national competitors are sustainable is a separate question, in all likelihood.

Global Fixed Wireless Service Revenue to Grow 30% in 2018 to $18 Billion

The global fixed wireless access market will grow 30 percent in 2018 and will generate US$18 billion in service revenue, according to ABI Research, boosted by new use of 5G platforms to supply fixed wireless.

ABI Research forecasts worldwide fixed wireless broadband market to grow at a compound annual rate of 26 percent to generate $45.2 billion worth of revenue globally  in 2022.

Tier-one service providers launching 5G fixed wireless include Verizon plans an initial 5G fixed wireless network covering around 30 million U.S. households.

AT&T and Charter also are carrying out 5G fixed wireless broadband tests in select markets in the United States.

In Europe, Orange, Elisa, and telecom infrastructure company Arqiva are performing 5G fixed wireless trials as well. Australia’s Optus is planning for a 5G fixed wireless service launch in 2019.

Where is 5G in its Hype Cycle?

If you are familiar with the notion of hype cycles, you will not be surprised if a period of hype about 5G is going to be followed by a period of disillusionment, before the actual benefits are reaped commercially.

So you should not be surprised that skepticism about 5G continues to be voiced, especially by service providers who argue they have yet to make money from 4G, from suppliers who may not feel best positioned to profit from 5G infrastructure sales, or from analysts, consultants or journalists who need some amount of controversy to drive readership and attention.

By now, you are accustomed to hearing concerns about the business model for 5G, especially as it compares with 4G use cases. As 4G gets better, the difference between advanced 4G and early 5G, from a consumer or business user of smartphones, is likely to be a bit subtle, at least in some cases.

And, yes, it remains to be seen how big a deal virtual reality, augmented reality, internet of things generally, connected cars and other “exotic” apps are going to be.

The point is that, for consumer users of smartphones, 5G will be an “evolution” from 4G. But 5G will be a discontinuity where it comes to many new applications that require ultra-low latency. As was true for 3G and 4G, promised new apps will develop, or not, as value is able to be reaped and demonstrated.

Those new value propositions are more likely to be found in the enterprise parts of the market (sensor apps, connected car, industrial VR/AR, as well as some consumer apps (4K or 8K TV, AR and VR for gaming).

But it is worth remembering that new platforms have to scale before app developers have addressable markets large enough to serve. That is the way it always is. It remains largely true that, except for supporting multi-user households or businesses, there are few killer apps for gigabit internet access. So far.

To the extent 5G creates or enables big new use cases and revenues, it will take a while, as scale has to be gained before it makes sense for app, device and platform suppliers to charge ahead with commercial offers.

AT&T Launches 5G Evolution in 117 New Markets

AT&T continues to build its 5G foundation by launching our 5G Evolution (4G with  carrier aggregation, 4X4 MIMO, and 256 QAM) technology in parts of 117 new markets, bringing the total number of markets served with that technology to 141.

The 5G Evolution platform can deliver theoretical peak internet access speeds for supported devices of up to 400 megabits per second, but as its name implies, it is a pre-5G platform.

AT&T also is making LTE-LAA available in parts of three new markets (Boston, Sacramento and McAllen, Texas), bringing the total number of markets served with that technology to seven.

AT&T’s LTE-LAA technologies can deliver theoretical peak speeds for capable devices of up to 1 gigabit per second.  

Samsung is among the first suppliers to support LAA and LTE-U capabilities, starting with the Galaxy 8 and other devices equipped with the Qualcomm Snapdragon 835 chipset.

Why New AT&T Streaming Service Matters

It is not always so obvious why new services such as AT&T Watch, a $15-a-month streaming service, is so fundamental for mobile operators and retail- and consumer-focused telecom service providers.

The fundamental problem is that the core business model--connectivity services--is incapable of driving future revenue growth. In fact, we are likely to see an actual erosion of such revenue in developed and developing markets, sometime within the next five to 10 years.

Already, mobile revenue growth in the U.S. market, for example, has dropped from nearly six percent in the 2020 to 2012 period to just 0.3 percent at present, according to GSMA.

source: GSMA Intelligence

Developing markets have a bit more time to respond. Since 2008, service provider revenue growth rates in developing markets dropped from 15 percent to three percent percent this year, while developed market growth dropped from four percent to zero, according to GSMA.

So movement into new value-generating lines of business--beyond connectivity--is essential, to replace lost core revenues. In the consumer services space, video entertainment has been the latest new service to offset declining voice and messaging revenues, and slowing internet access account growth in developed markets.

In developing markets, subscription growth has slowed, but not abated, and mobile internet access growth is nascent and growing. Still, eventually subscription growth will stop, and adoption of mobile internet will saturate. That is how product life cycles work.

Global telecom revenue in the 60 biggest markets will fall by two percent in U.S. dollar terms, to $1.2 trillion, in 2018, according to the Economist Intelligence Unit.

In developed markets, subscription growth has shifted from consumer access for phones, tablets and PCs to growth lead by internet of things devices and sensors.

But one of the few growth areas for consumer services is mobile substitution for internet access. The coming 5G network will be foundational in that respect.

Using 5G, cost per gigabyte will fall 100 times, according to Mobile Experts. That drop in per-gigabyte pricing is essential if mobile alternatives are to be price competitive with fixed internet access services, allowing mobility suppliers to cannibalize the fixed network business.

source: Mobile Experts

There are other issues, such as the growing share of internet ecosystem revenues being claimed by device suppliers, content suppliers, app providers and platforms. 

Since 2010, service provider share of industry profits has dropped from 58 percent to 45 percent, as every other segment has grown its share of profits, according to the World Economic Forum.

source: AT Kearney

In 2008, internet access revenue was 18 percent of ecosystem revenue, dropping to 14 percent in 2015 and headed to seven percent by 2020, according to A.T. Kearney.

Overall, it can be noted that applications, content, devices and platforms represent 97 percent of the value and revenue in the internet ecosystem. By definition, these are the ways value and revenue is created beyond pipes.

And that is why connectivity services providers are compelled to seek growth in apps and platform areas. And that is why services such as AT&T Watch matter.

It is the model for future growth in additional areas, including internet of things, augmented reality, virtual reality, enterprise apps, connected vehicles and smart cities.

Spectrum Sharing has Business Model Implications

It is easy to predict how mobile service providers will use spectrum sharing  to support 4G and 5G mobile services. It is less clear how enterprises might do so, though private enterprise networks (akin to the way enterprises now use Wi-Fi) or third party internet access are oft-mentioned possibilities.

source: Qualcomm

In a 4G context, the clearest example is aggregation of licensed mobile spectrum with 5-GHz Wi-Fi spectrum to boost indoor internet access speeds.

MulteFire creates stand-alone LTE networks (private LTE) and might be used to support industrial applications (sensor and control networks) or to support neutral host infrastructure, where multiple mobile operators can use an enterprise transmission network to boost signal strength and speed inside a building, for example.

Most of the same advantages can be envisioned for 5G networks, including private 5G networks, boosting mobile network speeds indoors and outdoors and neutral host applications.

At a high level, spectrum sharing will have implications for business strategy.  For starters, spectrum prices should fall, partly because so much new spectrum will be  available, and partly because so much unlicensed spectrum will be a viable alternative.

source: Qualcomm

The other key implication is that mobile platforms will, for the first time, be able to compete head to head with fixed networks in the internet access area.

India 4G Speeds Between 5 Mbps and 10 Mbps

Bandwidth nearly always matters. Consider India, which has mobile spectrum arguably below typical global allocations. Since spectrum means capacity, and capacity puts a boundary on internet access potential speed, India’s 4G speeds are slower than you might expect.

Prices for spectrum also have tended to be higher than is typical globally. In recent spectrum auctions, for example, Indian spectrum prices were nine times higher (on a per-MegaHertz basis) than U.S. prices.

source: OpenSignal

If Better In-Building Coverage Happens, What Will Drive It?

It is not yet clear how much change is going to happen in “in-building coverage” as Citizens Broadband Radio Service (CBRS), using shared spectrum in the 3.5-GHz band, and, if so, for what purposes that will happen.

In past decades, mobile signal strength has become a bigger issue as use of 2-GHz frequencies has become essential, since signals in those ranges do not penetrate building walls as well as lower-frequency signals.

Over time, as 2G networks are decommissioned, that better-performing spectrum will be released for use as part of 5G, so some of the current problems will be partially alleviated. In-building repeaters also have become part of the solution.

Perhaps the biggest issue is how valuable CBRS and new in-building transmission approaches (as well as the business models to support them) will become, and what apps and use cases will drive deployment.

source: Signal Boosters

At a high level, as valuable as in-building voice and messaging is, the maturation of voice and messaging revenue streams means there is little service provider incentive to spend more money on indoors infrastructure. Doing so will mean happier customers, but will not likely boost revenues, other than by holding churn at bay.

Users, after all, already shift mobile data access to Wi-Fi on a routine basis, though problems with voice are not directly helped by doing so. A wider shift to IP voice by service providers obviously will help, in that regard.

The point is that, longer term, it is not so clear what incentives might exist to “fix” indoor voice problems, as those problems might already be heading towards resolution as indoor data access improves (using Wi-Fi, signal repeaters or in-building infrastructure), as better-performing spectrum (reclaimed 800 MHz) becomes available and as voice itself simply becomes a data app (VoLTE, VoIP).

A better case might be made for CBRS and other ways of creating in-building data access to support internet of things and sensor applications, where financial incentives might well exist.

All that will take some time to develop, though.

FCC Readies Auction of 1550 MHz of New Mobile Spectrum

The Federal Communications Commission has published proposed auction rules for 24-GHz and 28-GHz spectrum intended to support mobile service. The auctions will represent an additional 1550 MHz of spectrum, more than presently allocated for all mobile operations in the United States, by a wide margin.

Among other implications, the new spectrum means the cost of acquiring spectrum, on a cost-per-MegaHertz basis, is going to fall. That also means the retail cost of using spectrum, on a cost-per-bit basis, is also going to fall.

In principle, those cost reductions also mean the value of spectrum licenses will fall, on a cost-per-MegaHertz basis.

Such cost reductions are necessary if mobile operators are to challenge fixed network services and become full product substitutes for fixed network internet access.

At the same time, all the new spectrum--especially when deployed to support 5G networks--is likely to erode the commercial possibility of “paid prioritization,” the possible offering of quality-assured consumer internet access.

The reason is simply that 5G services will have latency so low, and bandwidth so high, that the value of any “for fee” quality-assured access is going to be nearly zero.

A cynic might well conclude that most of the frenzied concern about network neutrality is political posturing. As was the case with the Telecommunications Act of 1996, policy advocates are essentially living in the past.

In the 5G era, it will be virtually impossible to argue that a quality of service tier of consumer internet access has much value, since the standard offers will be so much better than anything yet seen on mobile networks.

The same sorts of performance improvements on fixed networks likewise will erode the potential value of paid prioritization, in the consumer services realm.

Business services, as in the past, are not covered by network neutrality rules in any case, so enterprise services can take different paths. Still, the consumer grade 5G services will be difficult, if not impossible, to improve upon.

It is the universal vision that 5G, with a move to edge computing, is going to reduce application latency in ways that likewise make paid prioritization a non-viable commercial possibility.

source: Wavelengths

In the 28 GHz band, the Federal Communications Commission plans to auction 425-MHz blocks of spectrum. In the 24-GHz band, licenses will be for 100-MHz blocks of spectrum.

The 28-GHz licenses will be auctioned by county, and two licenses per county will be available. That auction potentially will place 850 MHz of new spectrum into commercial use, on a nationwide basis (850 MHz in every area).

The 24-GHz licenses will be by partial economic areas, which amalgamate numerous counties. Seven licenses will be available in each 24-GHz PEA. That auction potentially will add 700 MHz of additional mobile spectrum in commercial service, on a national basis (700 MHz in each area).

That is only the beginning of the Spectrum Frontiers process that aims to free up 11 GHz of spectrum for mobile and wireless use, including 7-GHz worth of unlicensed spectrum.

source: FCC

new millimeter wave spectrum