In the medium term, cable deals will console Sprint for the failed TMO merger

So the engagement between Sprint and T-Mobile USA is off again, and until the next time they dance around one another, Sprint is focusing on the cablecos. It will be supporting an MVNO-based mobile launch by Altice, even as rumors swirl that its owner, Softbank, will seek an alternative merger plan, with Altice’s rival Charter Communications (whose own MVNO is powered by Verizon).

The proposed merger would have created a powerful third player of a similar size to AT&T and Verizon, assuming antitrust authorities could be assuaged, which was considered more likely under the current administration than when Masayoshi Son, Softbank’s chairman, previously went after T-Mobile during the Obama government. Then, he backed away in the face of almost certain blocks or major terms and conditions. This time, the sticking points appeared to have been valuations, particularly of spectrum (Sprint has far more, but TMO is stronger in the cost-effective sub-1 GHz bands); Son’s desire to keep control of his US operator; as well as network and services strategies, which are currently in stark contrast.

Sprint’s CFO Tarek Robbiati told an analyst call, to discuss the Altice arrangement: “I will not venture in selling this transaction in making up for the tens of billions in synergies that we would have had jointly with T-Mobile had we merged with them. These synergies were enormous by every analysts’ account. This transaction is a pretty interesting creative transaction, but it will not deliver the tens of billions in synergies that we would have seen in a merger with T-Mo.”

But a broader pact with the cablecos could deliver some of the benefits Robbiati wanted – fewer synergies, for sure, but unlike TMO, it would bring wireline and TV assets into play for Sprint for the first time, enabling new services and network economics.

Wall Street analysts generally thought the news that Sprint and TMO would stay independent would be good for towercos and equipment suppliers (more customers) but bad for AT&T and Verizon. Although the merger would, had it been proposed officially, been sold to authorities on the basis of enhanced competition for the big two, many believe that it is more problematic for the major telcos to have to respond to two very different challengers, both disruptive in their own way.

“The only positive for AT&T and Verizon is that there is slightly less chance of cable companies receiving an aggressively priced MVNO from T-Mobile/Sprint that would allow cable to be more aggressive in the wireless market,” wrote analysts at New Street Research in a note to investors. “Although, perhaps this is offset by a greater risk of a network sharing deal between cable and one of the challengers.”

But there are risks for the two would-be partners too, since they are left without the economies of scale they had sought from a marriage. “For Sprint, the key question for investors will be how will a standalone Sprint invest in the network while maintaining its commitment to de-lever the balance sheet?” asked Wells Fargo analysts. Some speculated that TMO would look for an alternative merger partner – after all, despite the market impact of its recent ‘Uncarrier’ propositions, it cannot go on eating into its own margins forever, especially with its higher capex burden compared to Sprint’s, and the need to invest in 5G soon.

Both MNOs may seek closer ties with cablecos (or Dish Network) for this reason, though Sprint is a more logical partner for Comcast and co. Certainly, the end of TMO/Sprint talks, while depriving cablecos of a larger MVNO partner in future, does put them in a position of enhanced bargaining power with either of the MNOs individually.

Since the days of WiMAX, the most logical course for Sprint has been to form alliances, or even merge with, the larger cable operators. Successive attempts, such as the Pivot and SpectrumCo ventures with Comcast, Time Warner Cable, BrightHouse and Cox, failed not because the strategy was wrong, but because of failures in execution, and tactical conflicts.

Sprint has always been the most wholesale-driven of the major US MNOs – it largely pioneered the MVNO hosting idea in the US – and given its lack of wireline or TV offerings, it complements rather than competing with the cablecos. The more they have needed to add wireless services to their cables and TV, and create quad play bundles to challenge Verizon and AT&T, the more compelling the Sprint tie-up idea has become.

They give Sprint additional wholesale revenue, cables to backhaul the small cells for its ambitious densification program, and a captive market of homes. In return, they gain access to a newly upgraded and high capacity mobile network, and an MVNO host which they will be able to direct and influence more effectively than Verizon, which is both bigger and more suspicious of their motives.

Altice is signing up for a ‘full’ or ‘heavy’ MVNO, which gives it flexibility in how it chooses to use the Sprint network, and the right to build and run its own core network and back office systems. The cableco said in its announcement that it would “have control over the Altice USA mobile features, functionality, and customer experience”. This is the future of MVNOs, especially when vertical industries start to harness sub-nets to support specialized wireless needs. It is also how Liberty Global CEO Mike Fries advised cablecos to negotiate MVNO deals, when he said, at a recent conference: “What we’ve learned is if you’re going to go MVNO… you need a full MVNO. You need a thick MVNO. You need to control the customer experience, core network.”

“We are excited to bring our global expertise to the US to enhance and strengthen our offerings,” said Dexter Goei, CEO of Altice USA, in a statement. “Working together we will be able to capitalize on Sprint’s vast mobile network, which fits well alongside Altice USA’s deep WiFi network, and leverage Altice’s global mobile experience to deliver greater value, more benefits and seamless connectivity for our US customers.” In France, Altice owns the second largest MNO, SFR, as well as the leading cableco, Numericable.

“We are incredibly excited to work with Altice USA on this innovative win-win solution that benefits both of our companies,” Sprint CEO Marcelo Claure said in a statement. “As content and connectivity continue to converge, we believe this approach will be a model for future strategic arrangements across multiple industries including cable, tech and others.”

Since the days of Pivot, the cablecos have consolidated. Charter now owns Time Warner Cable and BrightHouse, and so has inherited those companies’ MVNO agreements with Verizon (the four main cablecos switched MVNO allegiance to Verizon after Pivot collapsed and Sprint was seen to have backed the wrong 4G horse with WiMAX). Altice has entered the market from France, acquiring Cablevision.

Comcast has already activated its MVNO arrangement to launch Xfinity Mobile, harnessing its extensive network of WiFi hotspots and homespots to offer cost-effective WiFi-first propositions, similar to those of Free Mobile in France. It has also signed a mobile cooperation deal with Charter, which is likely to result in significant cableco activity in this market next year, and a genuine challenge to the big four MNOs.

Sprint needs to make sure it is a partner in that Comcast/Charter push, even if it cannot immediately host their MVNOs.  It can certainly offer them the network infrastructure and spectrum to build out their own independent ‘sub-nets’ (fully controlled networks for specific locations, enterprises or customer bases, on which they can innovate in quality of service and applications far more than with a standard MVNO).

The deal with Altice may be a first step. Sprint will host Altice’s MVNO services and in return will “leverage the Altice USA broadband platform to accelerate the densification of its network”. Of course, Altice is hardly Comcast – it has 5m US customers, compared to 25m for the market leader. Comcast has 250,000 Xfinity Mobile sign-ups so far, so if Altice followed a similar uptake pattern, it would only have about 50,000 by mid-2018 (cablecos are initially targeting their mobile offerings almost exclusively at their own customer base, though that may change in future).

However, the tit-for-tat of MVNO hosting in return for small cell backhaul does point to a new depth of collaboration which could rescue cablecos and mobile-only operators in the age when fixed/mobile convergence is almost mandatory for growth. Robbiati commented on the analyst call: “A standard MVNO with a cable company in our view would not make sense if there isn’t any reciprocal opening up of the infrastructure for Sprint, and so this is why we went down that path. This is not a standard MVNO deal. There is an awful lot of value exchanged between the two parties.”

Such deals may reduce the MVNO revenue Sprint can command (since some of its fees will be ‘in kind’ in the form of access to backhaul, though Robbiati insisted it will generate payments from Altice). But they can certainly reduce operating costs and accelerate densification and 5G. In particular, cablecos often own rights-of-way permits and other pieces of paper which MNOs have been struggling to obtain for their small cell sites, slowing progress in urban areas.

To become really strategic, these two-way cable relationships will need to expand into all the key areas where Sprint needs to add capacity to its network, and that will mean multiple cableco arrangements, given that they are territorial companies. Altice has services in 21 states, but not in all locations within those, so clearly Charter or Comcast would be bigger densification and MVNO prizes.

“While we view the MVNO as providing network deployment efficiencies as Sprint continues to play catch-up, our enthusiasm is tempered by Altice’s somewhat limited footprint,” wrote analysts at Jefferies in a client note. “Altice’s network passes about 7% of US households, though its fiber presence extends to nearly 20,000 fiber route miles spanning 20 states (assuming this is part of the deal). Sprint would most certainly benefit from similar arrangements with CMCSA and CHTR, which together nearly blanket the country and have significantly more customers.”

According to the New York Post, Softbank has wasted no time in reviving talks with Charter to try to secure a broad cable alliance for Sprint. Sprint struck an exclusive two-month deal in May to July this year, to discuss potential partnerships with both Comcast and Charter. That would possibly have involved the cablecos investing in Sprint’s network to accelerate densification and 5G, and/or taking a stake in the operator.

The talks could now be revived and would follow a model of co-investment which is likely to become common in the 5G era. Rather than an MNO shouldering all the cost of a network (often seeing MVNOs and over-the-top players harvesting much of the added value revenue), industrial, enterprise and wireline companies could help finance the build-out,  in return for priority access and a say in how the network is optimized (for instance, to support a particularly important use case such as transport). This model was recently seen in China when Unicom announced that several web and industrial players had taken stakes.

These kind of creative approaches to upgrading networks and services will be essential if MNO economics are still to be viable in the age of 5G. And a combination of the Charter/Comcast mobile alliance plus Sprint plus Altice could create a genuine powerhouse to challenge Verizon and AT&T – in a different way from a TMO combination, and with less overnight results, but with even more potential to reshape the US telecoms landscape. If that alliance becomes real, it may drive TMO into the hands of Dish – or even back to the negotiating table with the newly empowered Sprint. In that scenario, Son might be able to insist on the control of the merged entity which he sees as being so strategic to his future vision.

Softbank increases investment in Sprint:

Meanwhile, despite reports all this year that Masayoshi Son was keen to offload Sprint – perhaps in order to acquire the more dynamic TMO – he now seems determined to invest in the operator and make it the centrepiece of his wireless program. Son believes that wireless connectivity is the glue that holds together most of his strategic businesses, enabling robotics, the Internet of Things and artificial intelligence services. So it makes sense for him to own MNO networks like Sprint’s and Softbank’s.

In the wake of the TMO talks ending, he said he would increase Softbank’s stake in Sprint from 83% to 85% and treble Sprint’s capex budget to between $5bn and $6bn in the “medium term” (in line with TMO’s current figure).

“Let me remind everyone here on the call that our capex for fiscal year 2017 remains unchanged at $3.5bn to $4bn,” Robbiati said on the Altice call. “Our chairman has guided you this morning to a spend of about $5 to $6bn per year for the medium term. That’s what we intend to achieve.”

“Even if it is tough for the next three or four years, on a five or 10-year timescale scale Sprint is a strategically indispensable company,” Son told reporters on Softbank’s earnings call last week. “US telecoms is indispensable infrastructure and as an investing company SoftBank should have the ability to control such infrastructure.”