There’s no let-up in the relentless consolidation of the US telecoms and media market. Sprint, T-Mobile and Dish continue to dance around one another; Comcast is offering $45bn for Time Warner Cable to create the largest US cableco; and now AT&T has announced a $67.1bn deal (including debt) to acquire the leading US satellite TV company DirecTV.
AT&T is offering $95 per DirecTV share in a combination of stock and cash, and says it has the financing lined up already for the $28.50 per share cash portion. To ease the path with regulators, the telco has offered to sell its 8% stake in America Movil, worth about $5bn (if it can get Movil to agree).
If the deal is cleared by antitrust authorities, the immediate impact on AT&T Mobility will be limited. DirecTV does not have spectrum (except in Latin America), so the cellular arm of AT&T will continue with its plans to bid in next year’s 600MHz auction and to acquire frequencies in other ways (Sprint’s WCS holdings in 2.3GHz are its latest reported target). The LTE portion of the grand Project VIP infrastructure plan will not be much altered, and AT&T insists the spend on acquiring DirecTV will not eat into the money assigned for that program.
Bill Smith, president of network operations, told the PCIA conference: ‘Don’t be concerned that this is a left-turn by AT&T. One of the advantages, or one of the reasons to put these companies together, is because more and more people are looking at content on their mobile devices.’ He said AT&T was ahead of schedule with one of Project VIP’s key goals, to cover at least 300m people with LTE by the end of this year. The next phase will be to add capacity with small cells and DAS and implement SDN (software defined networking) and advanced SON (self-optimizing networks).
In a statement, AT&T said the DirecTV deal ‘does not alter AT&T’s plans to meaningfully participate in the FCC’s planned spectrum auctions later this year and in 2015’. It has said it will bid ‘at least $9bn’ in the 2015 incentive auction in 600MHz provided it can acquire enough for a 2×10 MHz footprint across the US.
So, most of the direct impact will be on AT&T’s U-verse broadband/video businesses, and its ability to compete with Comcast/TWC and others. The takeover will give the telco national satellite-TV coverage to combine with its existing fiber-based packages, which are limited to its own operating regions.
In other words, its video reach will match the national coverage of its mobile services. That is where the indirect impact will be felt on the cellular business. The triple play is quickly evolving into a quad play, and more video is being consumed on mobile devices, so cellcos must differentiate themselves with content partnerships, not just access speeds ‘ the key point which would make sense of a Sprint/Dish merger, since Sprint signally lacks any video activity. The quad play means that it will be increasingly hard to assess AT&T Mobility, the big growth driver of the company, in isolation from other business units, and the additional content and triple play reach acquired with DirecTV will bolster the mobile arm too.
DirecTV CEO Mike White said in an interview: ‘Randall [Stephenson, AT&T’s CEO} and I have had a relationship for a number of years. Over the last year, things began to change with technologies — AT&T started to be able to offer more broadband and better broadband. With it comes a continuing evolution for mobile video.’
This will be AT&T’s biggest takeover since it was reassembled via mergers with ‘Baby Bells’ SBC and BellSouth in 2005-6 ‘ and the first megadeal under Stephenson, who famously spent a year trying, and failing, to acquire T-Mobile USA. That disaster put both AT&T and Verizon off large wireless-focused deals, indicating the sensitivity of regulators to further reduction in cellco numbers when mobile networks are driving growth and innovation in US services. That same sensitivity made AT&T go after DirecTV rather than its rival Dish, which would have come with the complications of spectrum ownership; it saw Verizon gaining substantial new spectrum via a deal with four cablecos, not via acquisition; and it may still block any attempt by Sprint, and its Softbank parent, to take over T-Mobile to create a stronger challenger to the big two.
With the cable operators on the rise, antitrust agencies are less worried about non-mobile consolidation, though there is likely to be a list of requirements, beyond the Latin American divestments, before the AT&T/DirecTV deal is cleared. But most analysts believe the transaction is highly likely to be cleared, probably in the 12-month period anticipated by the firms themselves. ‘There are sensitive areas for sure but they are all manageable,’ Stephenson told Bloomberg. ‘We think this will pass regulatory muster.’ That confidence is reflected in the fact that there will be no break-up fee due to DirecTV if regulators do stymie the deal. When its TMo bid failed, AT&T had to pay Deutsche Telekom, the parent of its prey, $3bn plus spectrum, and DT is reportedly looking for an even bigger pay-off should Sprint try and fail to buy TMo.
Consumer groups hope the process will not be so smooth and plan to lobby against the merger. ‘The captains of our communications industry have clearly run out of ideas,’ Craig Aaron, CEO of advocacy group Free Press, said in a statement. ‘Instead of innovating and investing in their networks, companies like AT&T and Comcast are simply buying up the competition. These takeovers are expensive, and consumers end up footing the bill for merger mania.’
‘Merger mania’ is unlikely to stop here though. Sprint and Softbank are still making it clear they would like to bid for T-Mobile, and waste no opportunity to make the case, even before an offer is on the table, for a strong third player, as opposed to two operators with little fighting chance against Verizon and AT&T.
And the latest turn of the wheel once again puts Dish at the center of speculation. On the one hand, the satellite-TV player has lost the often-rumored chance to merge with DirecTV itself. Or indeed with AT&T ‘ though the antitrust issues outlined above would have made that unlikely anyway, or a marriage to Verizon. There were inevitable reports that Verizon would retaliate against AT&T/DirecTV by bidding for Dish itself, something the telco’s CEO, Lowell McAdam, dismissed as ‘someone’s fantasy’.
He said Verizon had ‘done its big deal’, referring to the $130bn buy-out of Vodafone from their joint venture, gaining full control of the Verizon Wireless crown jewel and its mobile video potential. As with its cable spectrum deal, Verizon has steered clear of outright takeovers and focused on building its wireless arsenal without outraging regulators. Mobile has greater revenue growth potential than satellite but AT&T ‘settled for a more conventional transaction to fund its dividend and hide slowing growth’, as Walt Piecyk, an analyst at BTIG, put it, while improving its cashflow and video reach.
That leaves Dish still needing a wireless partner – a merger or at least a sweeping infrastructure and spectrum deal ‘ to be able to pursue its own national LTE plans. It needs additional spectrum to be able to support the same levels of capacity and speed as the established cellcos, and it needs an infrastructure partner to reduce the cost of rolling out a network from scratch, and rather late in the day. If it does not succeed, and just cashes in its spectrum, it will still need a cellco partner or merger, to be able to offer a quad play and mobile video, and remain competitive against its expanding rivals.
Despite past hostilities ‘ Dish mounted a hostile bid for Sprint and/or Clearwire last year ‘ Sprint is still the obvious partner for Dish, since the latter would bring the video content deals and negotiating power that Sprint signally lacks. In that respect, the satellite-TV firm would be a better fit than TMo, though it would bring complications too ‘ yet another spectrum band for Sprint’s already complex Network Vision infrastructure to support, less additional spectrum capacity than TMo, and increased debt.
There is also the possibility of Dish tying with TMo, which also needs improved video and content properties in order to compete on high value services. Dish’s Ergen said on the firm’s most recent earnings call that he would not enter any more bidding wars but would pounce on T-Mobile should a Sprint offer fail or never materialize. Earlier this year, it was reported that Softbank, which has pushed for a TMo merger, was being put off by expected regulatory hostility, and last month there were reports that the putative deal was ‘dead in the water’, but in the wake of the AT&T proposals, many expect the FCC and DoJ to look more kindly on a Sprint/TMo combination, as a counterweight. A formal offer is now widely expected in June or July.
Ergen commented: ‘We don’t have the kind of money to go outbid Sprint for T-Mobile or outbid AT&T for DirecTV. So we have to be well positioned so no matter what happens it’s all good for us, and I think we’re there.’ Often referred to as a consummate gambler in business (and formerly a professional blackjack player), Ergen said: ‘I wasn’t a very good poker player but when a bunch of drunken fools were throwing money around occasionally I was able to pick up the pot at the end of the day.’
The logical outcome might be for all three firms to partner ‘ a merger of all three would not pass regulatory muster, but a deal to pool infrastructure and spectrum and build a powerful national 4G network, with guaranteed capacity to support new entrants and other MVNOs, would be a big step forward, challenging the big two not with copycat quad plays (impossible), but with the kind of open, alternative business models that Clearwire espoused in its pre-Sprint WiMAX days.
Meanwhile, Ergen is also waiting for the outcome of his legal challenges to be allowed to buy spectrum from bankrupt LightSquared, which has gone to court to resist Dish’s advances. The two firms may face court-ordered mediation to resolve their differences after US Bankruptcy Court Judge Shelley Chapman recently threw out LightSquared’s latest restructuring proposal. Chapman ruled that LightSquared’s plan would have illegally treated Ergen worse than other holders of the company’s bank debt.
With all this, the next six months will be another of those periods in which the US industry waits to see how the land lies once the regulators have made their pronouncements. As always, the company least distracted by the process will take advantage ‘ and as usual in recent times, that is Verizon. While AT&T, Comcast, Sprint and Dish lobby for their takeovers, Verizon has its fully owned mobile arm and its second wave of LTE build-out, in its AWS spectrum, both progressing to plan, helping it to build on the headstart it won when it deployed its original LTE so early.
FCC rules on auctions and neutrality:
Tom Wheeler is having a tempestuous start to his leadership of the FCC, which was engaged with two critical issues this month ‘ revised net neutrality rules, and next year’s incentive auction of 600MHz broadcast spectrum.
The Commission has voted to approve rules governing the auction, which will be important in defining the competitive landscape for mobile services in the second half of the decade. The rules seek to ensure that AT&T and Verizon do not improve their already dominant position by being able to buy all the spectrum, though the final conditions emerged as more favorable than expected to the big two. After fierce lobbying by both kingpins, and threats to boycott the process altogether, the FCC reduced the amount of spectrum it will set aside for new entrants in the reserve part of the process, a level previously set at 50%.
The proposed system of reserved bidding establishes a market-based reserve of up to 30MHz, for carriers which currently hold less than one-third of available sub-1GHz frequencies. There would be a trigger point, as-yet undefined, during the pre-auction process, to decide at what point the sale would be split into reserved and unreserved bidding. An FCC official gave the example that, if there was 100MHz of spectrum to bid on, no more than 30MHz would be reserved for eligible bidders. However, if eligible bidders demanded only 20MHz in a given market when the trigger was met, then only 20MHz would be reserved, and 80MHz would remain unreserved.
The Competitive Carrier Association, which represents rural operators, said in a statement: “Creating a spectrum reserve will allow every carrier, large and small, the opportunity to bid in the auction, which is critically important given the superior propagation characteristics of low band spectrum.’
The rules also put in place “reasonable” guard bands that can be used for unlicensed wireless use. Depending on how much spectrum the auction gets from broadcasters, the guard bands could consist of between 14MHz and 28MHz of spectrum for unlicensed use. The FCC also made it possible to use 6MHz in channel 37 in markets where incumbent services aren’t using the channel for Wi-Fi and other unlicensed uses.
Google, always the cheerleader for licence-exempt frequencies, said in a statement: ‘The FCC had a challenge in designing its plan for an auction of TV broadcast spectrum, and we’re pleased that it is supporting both licensed and unlicensed uses. While the plan doesn’t provide as much unlicensed spectrum as we recommended, it should provide just enough unlicensed spectrum to attract investments in equipment and operations in the new band.”
The FCC has also revised the rules on the controversial issue of spectrum screen. The screen previously covered a total of about 453MHz. If a carrier acquired more than one-third of that total (150MHz) in a given market, the FCC would review the transaction carefully and could block it. Under the new changes, the screen now includes a total of 582MHz of spectrum (due to the addition of the recently allocated AWS-4 and PCS H-Block bands, and the EBS spectrum) and so would kick in if a carrier acquired more than 195MHz in a given market. This limits Sprint’s freedom of action as it owns an average of 200MHz in the top 100 markets, mainly because of its huge holdings in 2.5GHz EBS frequencies, which were not previously included in the screen. By comparison, Verizon owns an average of 105MHz, AT&T 129MHz and T-Mobile 78MHz in the top 100 markets.
Dish extends fixed wireless efforts:
While Dish waits for the necessary partner to build a full mobile network, it is upping its activities in fixed wireless, at least generating some revenue from its spectrum and giving it a testbed for new technologies.
As an expansion of its alliance with Ntelos Holdings, Dish will offer the fixed wireless service in several Virginia cities including Roanoke and Charlottesville this year and aims to reach 500,000 homes this year. It will bundle its video service in order to offer a triple play to compete with those of cablecos and telcos, and to target underserved regions.
Dish is also engaged in similar roll-outs in partnership with Sprint, using the Clearwire spectrum to co-develop a residential broadband offering in Texas. This will go live soon in Corpus Christi and then expand to other cities. Both Clearwire and nTelos have spectrum in 2.5GHz which supports TD-LTE.
In both cases, Dish’s engineers will handle the installation of indoor or ruggedized outdoor antennas and routers, which sees the company tapping into its existing resources for installing satellite dishes.
There are also deepening ties between the other parties in this fixed wireless triangle, with Dish expanding a wholesale deal with nTelos to allow for access to one another’s LTE networks until 2022. This is the first major agreement since Sprint announced a plan to extend 4G roaming via partnerships with the Competitive Carriers Association and the NetAmerica Alliance. nTelos will continue to be the exclusive network provider for Sprint services in its western Virginia and West Virginia service area; Sprint customers will have access to the smaller firm’s new LTE network; nTelos will have access to Sprint’s 800MHz, 1.9GHz and 2.5GHz spectrum throughout the territory; and its users will have roaming rights on the entire Sprint network. At about 468,000 subscribers, nTelos is the seventh largest US wireless carrier. The partners indicated there would be further cooperation in future beyond this new agreement but insisted there was no impact on the nTelos/Dish trials.
Tim Farrar, an analyst at satellite research firm TMF Associates, told Bloomberg: ‘Just doing fixed broadband is a low value use of spectrum compared to using it in a mobile network. But [Dish chairman Charlie Ergen] may go ahead with a build-out if he thinks no partner is going to emerge any time soon.’