April 2, 2013 – US Wireless Carriers: The Barbarians are at the Gate
US Wireless Carriers: The Barbarians are at the Gate
The US wireless industry is a thirty year story of haves and have-nots. Spectrum holdings, access to capital, and strategic misfires have yielded an oligopoly with VZ and T exploiting inherent cost and coverage advantages to perpetuate high prices, low capex, restrictive usage policies, and supernormal returns. However, M&A, new spectrum, technology, and deep pocketed 3rd parties threaten the status quo, even as user priorities shift from blanket coverage to fast data. Long time sad sack Sprint has cash from Softbank and a plan for Clearwire’s spectrum. T-Mobile and MetroPCS get operating synergies and enough spectrum for a competitive 4G network. New technologies – e.g. LTE Advanced, small cells, multi-band radios, etc. – will also help level things by allowing carriers to boost capacity, increase speeds, and lower costs. The secondary carriers are deploying 4G in new bands, and the market awaits a new swath of 700MHz to be auctioned in 2014, under FCC rules which could stymie VZ and T. These auctions could also bring in 3rd parties, like Google, with strong interest in fast, cheap, limit free wireless. Meanwhile, the spectrum-based coverage advantage that has separated haves and have-nots is growing less important to users who crave fast and reliable data. Together, we expect these factors to amp up competition, leading to more network investment, lower prices, and fewer usage limitations, not only to the benefit of mobile users, but eventually playing for residential broadband as well.
VZ and T have dominated US wireless. The two 850MHz licenses, granted in 1981 and consolidated into VZ and T through years of M&A, carry substantial advantages vs. the higher frequencies that have been subsequently issued to other carriers, enabling better coverage from fewer cells, and thus lower costs. In addition, synergy and cash flow from wireline operations fueled more aggressive build outs than poorly capitalized rivals. Finally, smaller carriers made some serious strategic errors – e.g. Sprint’s pricey Nextel purchase and its commitment to the dead-end WiMAX technology. These advantages have allowed VZ and T to maintain unusually high prices, while damping usage with tiers, caps and throttling, generating oligopoly rents.
Softbank is rescuing Sprint. After watching Nextel die, and giving up on WiMAX in favor of LTE, Sprint was overleveraged and facing pressure to divest its stake in Clearwire and its large swath of unusual 2.5MHz band spectrum. Sprint was on bankruptcy watch until white knight Softbank stepped up with a $20B offer for 70% of the company. The deal will infuse Sprint with the capital to take control of Clearwire and build out LTE Advanced. Softbank, which holds similarly unusual spectrum in Japan, gets scale for the technology needed to exploit the 2.5MHz band, and a crack at using the aggressive tactics that worked at home in the US market.
T-Mobile USA and MetroPCS are a great match. Meanwhile, 4th place T-Mobile lacked the scale, spectrum and capital commitment from Deutsche Telkom needed to make headway. After a deal to sell it to T was waved off by the FCC and DoJ, DT turned around and agreed to merge T-Mobile with super-regional player MetroPCS. The combined company would hold 72MHz of spectrum in most major markets, within 2 commonly used spectrum bands, giving ample room to build out LTE with unfettered choice of equipment and devices.
Technology advances will help level the playing field. LTE updates will increase speeds and cell site capacity, while enabling carriers to aggregate disparate pieces of spectrum and to use “unpaired” spectrum, such as Clearwire’s 2.5GHz. “Small cells” are extremely cost effective for alleviating hot spot congestion and reaching into residential neighborhoods without towers. The newest specs allow small cells to piggy back on macrocells for backhaul, further cutting network costs. Finally, Qualcomm’s innovative 40-band RF chip portends a future where most devices would work on most networks, increasing the availability and lowering the cost for carriers.
New spectrum will likely benefit the smaller carriers. Sprint is refarming its 800MHz Nextel spectrum to LTE and moving on Clearwire and its huge 2.5GHz band holdings. T-Mobile got spectrum from AT&T as a break-up fee, and will have an average of 72MHz in the top markets after the MetroPCS deal closes, including 40MHz of open spectrum for LTE. Dish Networks is sitting on an additional 40MHz that could be a boon to smaller carriers. Finally, the FCC is moving to auction as much as 120MHz of highly desirable 700MHz band spectrum, likely before the end of 2014 and under rules greatly favorable to smaller carriers and new entrants.
Deep pocketed internet players could enter. High prices and data caps are anathema to cloud players like Google or Amazon. Both have been rumored in talks with Sprint, and special arrangements with carriers willing to commit to low priced, unlimited wireless data make sense in both directions. With the upcoming 700MHz auctions the likely last chance at a national footprint in prime spectrum, we would be surprised if the Internet players were not involved.
Consumers care more about data speeds than voice coverage. The first 30 years of wireless competition were about blanket coverage, to the advantage of the incumbent leaders, but the smartphone/tablet revolution brings even greater priority to fast, available data. With LTE Advanced, Sprint and T-Mobile will be able to offer relatively uncongested and unlimited wireless internet into populated areas, without the expense of blanketing the country.
Residential broadband IS in play. The capabilities of LTE Advanced – 100Mbps user speeds, 2Gbps/cell capacity, $35K base station price, etc. – would allow wireless to compete with wired residential broadband priced at $50+/month. With 70% of American households having no other option but a cable modem for video-capable internet, and the self-interest of cable MSOs to thwart on-line alternatives to their television service, the opportunity to inject competition into this market would be irresistible for internet players, should they enter as expected.
Legacy carriers will suffer, upstarts will gain, and consumers will win. VZ, T and cable operators will have to cope with newly vital rivals, competing with more comparable cost structures, improving coverage and potentially superior performance. Both Sprint and T-Mobile stand to pick up market share in mobile, and may enter fixed residential broadband. Google, Amazon, Microsoft, Apple, Facebook, and others will see mobile usage rise with falling prices and bandwidth caps. Most of all, users will see lower monthly bills and uncapped usage.
For our full research notes, please visit our published research site.