Quick Thoughts: TMUS/S – Finally!

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SEE LAST PAGE OF THIS REPORT Paul Sagawa / Tejas Raut Dessai

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February 12, 2020

Quick Thoughts: TMUS/S – Finally!

  • Judge Victor Marrero unequivocally rejected arguments by 13 state AGs that the merger would hurt consumers requiring no further conditions for approval. TMUS believes it will clear remaining procedural hurdles and close as early as April 1.
  • We do not expect a successful appeal, with the burden on the states to prove improper trial procedure or misinterpretation of the law rather than mere dissatisfaction with the judgement.
  • The deal will vault TMUS to leadership in 5G given the superiority of its combined spectrum and its competitive degrees of freedom. We have written of this extensively (5G: Why TMUS Will Win, Three Phases of 5G: Coverage, Density, and Applications).
  • DISH will be a far more viable competitor than S would have been going forward. It will deploy a capex-lite cloud-native architecture being pioneered by Jio in India and Rakuten in Japan that could give it huge cost advantages vs. traditional carriers once it gains scale.
  • TMUS, S and DISH are the obvious beneficiaries, but there are many others. Base station equipment and components companies, backhaul companies, testing companies, tower companies, and vendors likely to contribute to DISH’s unconventional network (e.g. CSCO) should see upside.
  • This is clearly bad for VZ and T. TMUS and DISH will pressure prices and take share, while both companies are constrained by spectrum (VZ) and leverage (T). We are very skeptical that 5G networks dependent on millimeter wave for performance and Dynamic Spectrum Sharing for coverage will be adequate.

After many months of legal and regulatory battles, T-Mobile is at the cusp of completing its merger with the tattered husk of Sprint. Judge Victor Marrero ruled in favor of the deal in the face of opposition by 13 state attorneys general, convinced on the evidence that: 1- The combined companies are much more likely to continue the “uncarrier” challenges to the ruling wireless duopoly than to raise prices and poor man their network; 2 – Left alone, Sprint is very unlikely to remain a viable competitor much less serve as a champion for underserved consumers; and 3 – Dish has a viable path to becoming a real 4th competitor in the US 5G market and is likely to succeed (at least much more likely than is a stand alone Sprint). The ruling required no further concessions for the merging entities, which now must pass perfunctory review by the California Public Utilities Commission and a US district court which will rule on the legality of the FCC’s approval conditions. The state AGs could try to appeal, but only on grounds that the Judge had misinterpreted the relevant law or conducted the trial improperly – that they didn’t like the outcome isn’t good enough. In this context T-Mobile issued a statement asserting that the deal would close as early as April 1.

Ex 1: Snapshot of standard spectrum holdings of the top 4 national carriers

Ex 2: An overview of Capacity and Coverage at various frequency levels

We aren’t surprised by Judge Marrero’s ruling. The AGs case was built on a simplistic view of competition (that more competitors are always better for consumers than less), unreasonable faith in Sprint as a consumer champion, and an out-of-hand rejection of Dish as a viable competitor. In our view, these assertions were dubious from the start. The suit was just politicians being politicians and now its essentially over and investors can focus on what comes next.

We have written about this at length (5G: Why TMUS Will Win). The combined T-Mobile and Sprint will have nearly ideal spectrum assets to build a winning 5G network. T-Mobile has already begun deployment of a national backbone using the 600MHz licenses it bought at FCC auction (Exhibit 1). This low band spectrum carriers for miles, enabling the broadest possible coverage with the minimum capital investment (Exhibit 2). Sprint brings a treasure trove of mid-band spectrum – the signals won’t travel as far (a couple of miles), but they can carry a lot of traffic and the frequencies are low enough that they will penetrate into buildings and show no effects from weather or moving obstacles.. The planned T-Mobile 5G network will have 14x the capacity of the current one with 15x the download speeds and 1/10th the latency, covering more than 90% of the US. In contrast, Verizon’s planned network is dependent on Dynamic Spectrum Sharing (DSS) for its backbone and millimeter wave for density. DSS is a technology that will allow Verizon’s 4G network to handle 5G traffic, sacrificing some of the most important advantages of the standard (e.g. ultra-low latency, support for low power IoT connections, etc.), while millimeter wave frequencies peter out after less than half a mile, cannot penetrate through solid objects (like walls, trees or cars), and are degraded by things like rain or the user’s hand placement. We expect T-Mobile to harvest market share from the market leading duopoly, with these gains driving growth and profitability rather than price hikes.

We are also confident in Dish Network’s ability to establish itself as a viable player in the market. Many analysts have breezily rejected the company’s assertions that it can build out a national 5G network for $10B or so, presuming that Dish would have to follow the same path as the existing carriers – “Verizon spends $20B a YEAR on CAPEX! How can Dish build a whole network from scratch for half of that?” Dish plans something very different, following the same lines as India’s Reliance Jio and Japan’s Rakuten (Exhibit 3, 4). Unlike traditional architectures, which require extensive processing assets in every base station hanging on every tower, the new approach pulls the processing into very low-cost cloud-based hyperscale datacenters – the only thing on the towers are antennae. Such a network could have operating costs less than half that of traditional competitors without sacrificing 5G performance (there would be no support for earlier standards). Moreover, while the network is being built and tuned and as it gains scale, Dish can rely on a favorable MVNO agreement to carry its traffic on T-Mobile’s 5G network for the next 7 years. Rumor has it that intriguing business partners are waiting in the wings (Amazon? Google? Comcast?) Viable indeed.

Who are the winners here? First of all, we believe US consumers are winners. We will get much better 5G network options built by companies that are likely to compete vigorously for our business. Obviously, T-Mobile, Sprint, Dish Networks and their investors are all winners. Suppliers – base station equipment, back haul services and gear, components, network testing, towers … you name it – will have wind at their backs. We want to call out Cisco, which has been a champion for the radical architecture proposed by Dish. Odds are it will get a big contract out of this.

Ex 3: Architecture of cloud native 5G service pioneered by Japan’s Rakuten using virtual RAN and turnkey network infrastructure, that eliminates core infra needs

Ex 4: For comparison, architecture of hardware defined 3G/4G cellular networks


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