Quick Thoughts: AT&T Whiffs, Apple Strikes Back
When the AT&T/T-Mobile deal was first announced on March 20th, it seemed improbable that the deal would be allowed by either the DoJ or the FCC, both of which had the power to stop it, without significant concessions. The collapse of the deal on Monday and AT&T’s subsequent guidance that 4Q11 earnings would be reduced by $4B to accommodate payment of a break-up fee to T-Mobile USA owner Deutsche Telekom is stinging indictment of AT&T management. AT&T apparently believed that its powerful lobbying organization could win the day, despite obvious reservations from the Obama-appointed DoJ and FCC and a terminally gridlocked Congress. While I believed that there were still options that could have preserved AT&T’s acquisition of T-Mobile’s spectrum without reducing retail competition – i.e. buying the network only and allowing T-Mobile a long term lease to capacity on the combined platform at favorable terms – such avenues were not seriously pursued, calling into question management’s assertion that the proposed acquisition was solely about network efficiency. Ultimately, this folly leaves AT&T worse off, with a $3B cash payment to DT accompanied by a transfer of $1B in spectrum rights.
Looking forward, Verizon is sitting pretty, having entered into agreement with a variety of cable operators to buy a 40MHz block of spectrum that has lain fallow since it was licensed in 2006. Not only does this give Verizon 60-70MHz of spectrum to devote to 4G LTE, but it also takes the most attractive alternative to the merger off the table for its bitter rival. AT&T must now consider several less palatable options: 1) Partner with or buy Dish, which has pieced together 40MHz of satellite spectrum that has been tentatively approved for mobile use and intends to build its own LTE network; 2) Partner with or buy LightSquared, which is pursuing plans of its own to build LTE in another 40MHz block of satellite spectrum, but which must resolve technical interference with GPS systems before it will be allowed to operate; 3) Partner with or buy Clearwire, which has a huge 150MHz block of spectrum in an extremely unattractive frequency band that significantly limits practical cell sizes; or 4) wait for the government to free up additional spectrum for auction. None of these options can make up for the time lost in the quixotic quest for merger approval, and all have drawbacks relative to Verizon’s clean spectrum deal. Note that I believe deals for other, smaller carriers like Leap, MetroPCS or USCellular, even if acceptable to regulators, are not tenable, because these carriers have CDMA networks that are not compatible with AT&T’s current GSM and WCDMA networks. For the same reason, I do not expect T-Mobile to merge with these carriers or with Sprint. Indeed, I believe the logical solution for these other carriers is to combine together to create a more muscular #3 competitor. T-Mobile has the same options that we listed, aided by $3B in cash and additional spectrum rights provided by AT&T.
Verizon is the biggest winner here, as it sees AT&T scrambling and has no new regulatory restrictions on its own activities. Dish is also a winner – its spectrum rights are now elevated to premier status, considering the alternatives. I’m not sure Sprint is really a winner, as it could have benefitted from the stifling of competition that would have resulted from the absorption of T-Mobile. The same is true for Leap, MetroPCS and USCellular, which can probably assume that neither Verizon nor AT&T will come a calling with bankers in tow, but could see a fruitful combination with Sprint.
On a completely different note, Apple won a US import ban on smartphones from HTC via an ITC ruling. This ban relates to a single patent for automatically converting specific types of data, such as telephone numbers, contained in unstructured documents, such as emails, into clickable links that open a separate program, such as a dialer. HTC will almost certainly implement a timely technical workaround, and is free to sell any products that have already entered the country, so the business disruption will be minor, although an acceptable workaround may impair the user experience relative to the iPhone. Two weeks ago, Apple had been hit with a one-two disappointment, when its request for a preliminary injunction against Samsung was denied, clarifying the limitations of applying design-based patents in US courts, and Motorola won a preliminary injunction against Apple in Germany.
This latest ITC ruling is a minor step in a major slog. There is no fast track for pressing intellectual property claims, and despite Steve Jobs’ promise of “thermonuclear war”, the better metaphor would be a multi-front war of attrition. The battles are fought patent by patent, country by country, court by court, against multiple potential adversaries. Win one injunction, and it gets stayed pending appeal. Get the injunction enforced and the competitor quickly provides a technical workaround that no longer infringes on that patent, and you have to start the whole process once again based on a different patent that is being infringed. Meanwhile, the thing is sucking up time, money and resources while your rivals continue to work on skirting patents that you have asserted and which haven’t as yet come to trial. Ultimately, the only real solution is a negotiated settlement with all of the major Google ecosystem partners, which will certainly deny Jobs’ his wish to destroy Android, but could result in a nice steady royalty stream for Apple.
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