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Dish Networks Gets a Bone in Sprint, T-Mobile Merger OK
As you’ve no doubt heard, the U.S. Department of Justice (DoJ) late last week finally cleared the way for T-Mobile’s $26 billion acquisition of Sprint. The decision will save Sprint from almost certain bankruptcy and offer businesses and consumers a third, and notably different, option for 5G services in the U.S. The biggest concessions involved Charles Ergen, executive chairman of Dish Networks, and his long-held ambitions in the wireless field and a curtsy to the unfounded notion that four nationwide wireless carriers is somehow a necessity (see my previous No Jitter post on this, “One Way or Another, Sprint Needs Out of Purgatory”).
The merger could be a major boon for enterprises in that they’ll now have a viable third option, and one with a different technology solution and more aggressive attitude toward innovation than “the majors” -- i.e., Verizon and AT&T -- assuming that T-Mobile’s management can competently execute the combination.
What The “New T-Mobile” Brings to The Table
A number of factors lay the foundation for a positive combination of Sprint and T-Mobile.
First is the combination of spectrum assets. T-Mobile has recently invested $7 billion in spectrum licenses in the 600-MHz band, frequencies that travel greater distances than available on the Sprint network and provide superior building penetration characteristics key for indoor coverage.
For its part, Sprint originally built its network on 1.9-GHz Personal Communications Service spectrum, but has extensive holdings in the 2.5-GHz band (Band 41) that it is only now working into its infrastructure. Those Sprint 2.5 GHz holdings average 90 MHz-to-100 MHz in all major markets- that’s a lot of good mid-band spectrum.
In the proposed merger plans, T-Mobile’s 600-MHz holding could provide an overall coverage blanket, hopefully extending farther into underserved rural areas, and Sprint’s 2.5 GHz could then be used for denser coverage in urban areas and potentially for indoor coverage. With its combination of spectrum holdings, the new T-Mobile would be able to achieve the 5G goal of network densification without having to rely on the as-yet largely untested millimeter wave bands (i.e., frequencies above 20 or 30 GHz).
Second, the merger is good news when it comes to the Internet of Things (IoT) and the low-power WAN (LPWAN) technologies. With its financially challenged outlook, Sprint hadn’t gotten beyond talking about deploying technologies like LTE Cat M1 or Narrowband IoT, or NB-IoT (see my related post, “IoT Starts with ‘Network’”). T-Mobile, on the other hand, has been rolling out both and has been in the forefront pushing those technologies.
Third, both companies have long track records of driving technological innovation in the cellular market. On the services front, Sprint deployed its unique (though not overly successful) Sprint Mobile Integration service almost a decade ago. The company also offers hosted Cisco and Microsoft UC&C services as well as innovative offerings like Business Wi-Fi.
To make hay on the consumer side, T-Mobile has unabashedly identified itself as the “un-carrier,” and pioneered integrated Wi-Fi/cellular voice services using Universal Mobile Access almost a decade ago. While unlimited talk and text plans have rendered that idea obsolete, T-Mobile keeps pushing the limits with network-based services like its DIGITS offering.
Lastly, Sprint has a wireline division, something T-Mobile sorely lacks. That division houses the hosted UC&C and other business-oriented offerings. From an integrated wired/wireless strategy standpoint, that would put the new T-Mobile on an equal footing with the majors.
As I noted in my piece a few weeks back, without the T-Mobile hook-up, Sprint was likely on its way to bankruptcy and, possibly, dissolution -- not a good prospect for capital appreciation. As it stands, the regulators are stuck on the idea that the country needs four nationwide wireless carriers to encourage competition. However, there’s no basis in economics for this, and the only justification they presented was that four was a number greater than three. Despite its questionable foundation, a number of state attorneys general have adopted this view, vowing to fight the combination even if the deal were to receive DoJ approval (which it has).
The initial concession proposed that Sprint divest its two prepaid brands, Boost Mobile and Virgin Mobile. That idea has carried on as part of the deal, and Dish Networks will acquire the two operators for $1.4 billion.
Nonetheless, we’d still only have three nationwide carriers. Unfortunately, you can’t simply spin up a nationwide wireless carrier, with tens of thousands of cell towers, mobile switching centers in each major operating area, backhaul facilities, retail locations, billing systems, and a customer service complex, out of thin air. The solution? Make believe you can!
A new plan started to form in May. As it became clear that the merger was in trouble, T-Mobile CEO John Legere made a call to Dish’s Ergen, according to The Wall Street Journal.
Ergen is quite a story himself. A former professional poker player, Ergen founded Dish against all odds and pioneered a number of interesting developments in the pay TV business. However, Ergen has long held ambitions and over the years had even attempted to acquire T-Mobile and Sprint (twice), as well as MetroPCS and Clearwire.
Ergen has amassed a minor spectrum trove, mostly in the 1.7-GHz/2.1-GHz AWS-4 band, valued at more than $20 billion. In 2018, Dish announced a $1 billion plan to build a 5G NB-IoT network by 2020, as it faced the potential that the Federal Communications Commission (FCC) would take the spectrum back -- via the “use ‘em or lose ‘em” provision -- if they remained fallow. The deal between Sprint and T-Mobile opened the door for Ergen to take his wireless ambitions into the big time.
Now, why someone would want to get into the “low margin” end of the cellular business is something of a mystery. I guess Apple wasn’t available for the right price? Cellular is an infrastructure business in which the primary consumer market has reached saturation and competition has degraded to a virtual knife fight over who can give away the most service for the least money -- a structure that was driving Sprint into bankruptcy. That prospect had AT&T grab Time Warner and Verizon buy Yahoo. The only utility that might have worse prospects is, you guessed it, pay TV, particularly the satellite variety.
And Dish Makes Four
So the other key provision of the merger agreement mandates that Sprint will have to sell its 14 MHz of spectrum holdings in the 800-MHz band (i.e., the Nextel spectrum) to Dish for $3.6 billion. The idea is that Dish could use that spectrum, along with its existing AWS-4 spectrum holdings, to build a network and become the fourth nationwide cellular carrier. With this scenario, Dish summarily terminated its NB-IoT plans.
The DoJ requires that this new network cover 20% of the U.S. population by 2020 and 70% by 2023 -- I guess 2022 will be a busy year for Dish as it rolls out a network to cover 50% of the U.S. population. To smooth the transition, Dish will start as a T-Mobile mobile virtual network operator, or MVNO, with a guarantee of access to the new T-Mobile’s network for seven years.
To hit that first 20%, Dish will clearly have to target major metro areas, which will gain it coverage of a lot of population with a minimal number of cell sites. Of course, Dish has no staff, no expertise, no army of workers, no support systems, or anything else you’d need to build a cellular network, so clearly it’ll be leaning on outside contractors to get this built. And all of that assumes that Dish can come up with the billions in capital it will require to pull this off.
However, even with outside help, the prospect of actually delivering on the promise to cover 70% of the U.S. population with a cellular network in that timeframe is about as realistic as saying we’ll do a manned mission to Mars the week after next.
The great thing is that Ergen has an easy out: Dish’s penalty for walking away is only $2.2 billion. That means Dish could get to acquire that 800-MHz Sprint spectrum for what amounts to total of $5.8 billion, not build anything, and maybe it could even get the FCC to reset that use ‘em or lose ‘em clock on its spectrum holdings.
Can DoJ Sell the Sham?
While the infeasibility of the Dish proposal was obvious to anyone who’s worked in the cellular business, apparently the hope was that no one else, particularly those pesky AGs, would notice. Unfortunately, the opposition may have caught wind of the ruse.
Last Friday, shortly after the DoJ made its decision public, I listened in on a conference call sponsored by Public Knowledge, the Rural Wireless Association, the Communications Workers of America, and the Consumer’s Union, all of which are still pushing for the AGs to continue their actions against the merger. In short, they still support the fallacy that four carriers are necessary, and Dish doesn’t measure up. In other words, they haven’t fallen for the ruse of Dish as a viable fourth carrier option.
While I do agree with the opponents that the whole Dish scheme is a sham, I see the benefit of a strong, viable third carrier as vastly superior to the prospect of driving Sprint out of business. Let’s face it, cellular has turned into a crappy utility business. The carriers are facing a saturated primary market (smartphones) and new revenue streams like IoT are still speculative and will likely not achieve the rosiness projected. In the meantime, the picture for the cellular carriers looks like continued price wars (among either three or four carriers), diversification outside the cellular business by the majors, and industry consolidation among the rest.
Can T-Mobile Win Out?
Assuming T-Mobile can sell the sham about Dish’s prospects as a viable fourth carrier, the new venture still isn’t out of the woods. As I noted at the outset, on paper the Sprint, T-Mobile combination has a lot going for it, and would allow the two smaller operators to amass a subscriber base of roughly 90 million customers. This would put the combined company in the same class as Verizon and AT&T, with about 100 million subscribers each.
Further, while the cutthroat pricing competition will undoubtedly continue, the energy created by the new combination and the industry-wide excitement surrounding the migration to 5G could spur a resurgence in the wireless industry. However, the new T-Mobile’s management will have to perform.
The first question will be leadership, and when it comes to defining the post-merger management team, it’s typically “to the victor belongs the spoils.” That could spell a big problem and a major culture clash.
T-Mobile has been primarily a consumer provider; up until a few years ago, T-Mobile wasn’t even an option business buyers would consider. Sprint has far more impressive credentials in the business market, as well as a wireline network on which to build a next-generation set of enterprise offerings. Of course, T-Mobile has never had a wireline operation, and might not recognize the potential synergies to be exploited, although it has gone on record with its intent of keeping the wireline operation post-merger.
From my own dealings with the two companies, I find significant differences in culture. Sprint is far more influenced by its “traditional carrier” underpinnings in the face of T-Mobile’s aggressive un-carrier philosophy.
Other challenges will come in integrating the two radio access networks, mobile switching centers/central offices, backhaul facilities, back-office systems, retail locations, and lord knows what else. You might recall that Sprint’s abysmal attempt to integrate its Nextel acquisition was one of the key failures that put it on the road to ruin.
So even as the merger moves forward tentatively, the new T-Mobile still has to clear a gauntlet of challenges.
After all the BS and posturing, there is one very simple reason the Sprint, T-Mobile combination should go through: A reliable wireless infrastructure is critically important to the future of our country. This isn’t about shaving a few more nickels off my unlimited data plan but rather about calling the cops and the fire department.
The wireline telephone is a vestige of another era. According to the FCC, 70% to 80% of 911 calls originate on cell phones -- that’s probably why the CTIA reports that 80% of American consumers think wireless service is indispensable. In natural disasters, particularly when people are displaced from their homes, cell phones are now the only way we have to communicate.
What the critics have failed to recognize is that while the “wireless industry” is thriving, the vast majority of those profits are going to the devices and applications, not the carriers. Yeah, Apple, Google, Facebook, Amazon, etc. are rolling in dough, but that doesn’t trickle down to the boring (well, not boring to me) infrastructure stuff that makes this whole new way of living feasible.
However, the country has passed the point of no return with wireless. We need it, and it has to work reliably because people’s lives now depend on it. We’re in an international battle with regard to wireless, and a crippled Sprint isn’t an asset in that competition. So if someone wants to have a philosophical discussion about the optimal number of competitors, please do it in an area where your mistakes won’t do as much harm.