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Sprint talks to cablecos, but it risks being a rerun of the Pivot fiasco

There was a distinct sense of déjà vu on reading reports that Sprint might, yet again, dodge a merger with T-Mobile USA, and instead team up with one or more cablecos, most likely the largest ones, Comcast and Charter. Sprint has flirted with the cable operators for over a decade, and the logic for a tie-up remains as strong as ever. But is it likely that a deal now would fare better than the joint venture between these parties over a decade ago?

In 2005, Sprint formed a $200m joint venture, Pivot, with four cable operators – Comcast, Cox, Time Warner Cable and BrightHouse (the last two now part of Charter). This included MVNO agreements, cross-marketing arrangements and grand plans to move towards quad play services which could be offered on a national basis harnessing Sprint’s mobile network and the cablecos’ different wireline footprints and content deals.

In a similar timeframe, there were other cooperations which could have strengthened the combined platform and created quad play services in the US long before these appeared – beyond simple single-bill arrangements – in most of the world. There was a joint SpectrumCo which bid in the AWS auction. Comcast, TWC and BrightHouse were investors, along with Sprint and Google, in Clearwire, the WiMAX-based start-up which aimed to build out wireless broadband to disrupt the telcos. Sprint then acquired Clearwire and briefly seemed to have the makings of a fixed/mobile 4G platform before LTE was in the market.

But then WiMAX became a technology dead end as the LTE juggernaut moved into action, and Sprint exited SpectrumCo and eventually sold out to Softbank. The cablecos sold their spectrum to Verizon and transferred their MVNO relationships to that operator too. Sprint was left running to catch up with the larger MNOs, and then lost its number three spot in the market to T-Mobile, helping to spark rumors that the two companies would merge.

TMO – whose proposed mergers with both AT&T and then Sprint were foiled by regulatory hostility – has been rejuvenated under the CEOship of John Legere, with his series of Uncarrier deals. By contrast, Sprint is still singing the same tune as it was in the WiMAX days. It continues to promise the most advanced 4G network, taking advantage of its plentiful 2.5 GHz spectrum to deliver large amounts of capacity and keep data unlimited. But the network build program has been beset by delays and results have been slow to filter through to financial performance, despite the proppings-up of parent Softbank.

No wonder, then, that Softbank chairman Masayoshi Son was said, earlier this year, to be willing to sell Sprint in order to be cleared to buy TMO.

The change of US government suggested, however, that he might be able to get both, if the regulatory climate around M&A became more relaxed than it was when he previously backed away from talks with TMO because a deal looked likely to be blocked as AT&T’s earlier bid for the smaller MNO had been.

But now, The Wall Street Journal reports that Son has agreed a two-month period of exclusivity to hold talks with Charter and Comcast about possible partnerships. These, the WSJ’s sources indicate, could take a variety of forms, but would almost certainly stop short of full merger.

One possibility sounds very like the web of arrangements in the Pivot era. The WSJ suggests that the two cable operators might take an equity investment in Sprint, which would ease the burden of its finances on Softbank, while also investing in Sprint’s network, on which, in return, they would get to launch a mobile service under a shared brand.

It is not clear how that would play alongside the MVNO deals which both cablecos have with Verizon – Comcast has already announced its own mobile service while Charter is set to follow next year. They, along with Cox and Cablevision, already have experience of operating a single national wireless footprint and brand with the Cable WiFi super-network, but of course, a full commercial launch of mobile and quad play services is a very different matter.

There has been a great deal of speculation around the two large cablecos this year, as well as around Sprint and TMO. Would they merge with one another to achieve a broad footprint and economies of scale for cable, content and WiFi-first multiplay? They could then go on to acquire an MNO and gain better control than they would by merely sticking to their MVNO deals with Verizon. Or would Verizon buy one (or even both) of them to enhance its broadband and content activities?

All the possible outcomes reflect the trend, in mature markets, for mobile, TV and fixed operators to converge, in order to secure a larger share of household connectivity and media spend, in markets where new growth is slowing. Despite the real power now lying in converged players, many antitrust regulators remain focused on traditional market definitions, and so hate to see a reduction in the number of players in a particular category. Even under the laisser-faire Trump regime, a Sprint-TMO merger would face possible blocks, because it would reduce the number of national MNOs, while tie-ups between cablecos, MNOs and telcos would be more acceptable. Sprint would also be able to keep more control than it would if it merged with TMO, a deal in which it would, these days, be the junior partner.

The practical advantages of a Sprint/cable tie-up remain the same as they were in 2005, even if the technologies have moved on. Sprint could take advantage of its old friends’ wireline networks to ease the pain and cost of backhauling its small cells, as its densification program gets underway in earnest.

“The cable industry’s fiber footprint could uniquely help Sprint densify to better enable the 2.5 GHz spectrum,” noted BTIG analyst Walt Piecyk in a client note. “In fact, Charter already provides backhaul to 25,000 cell sites. We believe cable operators in the US are well positioned to leverage their fiber investments beyond simply providing backhaul to the wireless industry, but also by attaching wireless access points across those fiber miles for their own use. We previously sized the cost to Comcast to overlay a wireless network on their footprint at less than $2bn.”

Sprint could also offer content and TV services via a partnership arrangement – something it clearly lacks at a time when AT&T and Verizon are investing heavily in these areas in order to add value to their connectivity. And access to Cable WiFi would fill the large WiFi gap which exists in Sprint’s armory.

There is no doubt in our mind that any sane businessman, finding themselves owning Sprint in the current climate, would draw up a list of requirements beginning with 1) Get more fixed line backhaul 2) Gain access to video content 3) Extend marketing reach 4) Get even more spectrum 5) make it so money is not a problem – and would find a compelling match from Comcast and Charter.

It is not impossible that TMO could join the party too, creating even greater economies of scale in order to challenge the big two. Analyst Jonathan Chaplin of New Street Research wrote in a client note last week that the best scenario for TMO “would be a four-way deal; however that seems tough to get across the goal line. The worst-case scenario would see a Sprint/cable deal that leaves T-Mobile out in the cold entirely; we don’t think this is the most likely outcome either. And then there are a host of scenarios in between, where T-Mobile would benefit, potentially greatly, but without the negotiating leverage that many have assumed.”

TMO’s CFO, Braxton Carter, seems to be thinking the same way. He told investors at a conference in May that talks with Sprint would “of course” take place, but a final arrangement could also include cablecos. “What about Sprint, T-Mobile and a coalition of Comcast and Charter, and the value creation that could come out of that?” he asked.

Neil Begley, an SVP at Moody’s, added to the debate, telling clients: “Comcast and Charter are both well positioned to expand and capitalize in wireless, if not just to share in the future opportunities from the Internet of Things, but also to bundle the all-important wireless in consumers’ eyes with their broadband and pay-TV bundles to improve retention and grow revenue and cashflows. They are uniquely positioned in the catbird seat given their broadband scale, which we believe will be essential to support the fifth generation of wireless; and because they continue to grow, they have strong cashflows and big balance sheets.”

But for all the logic, would ‘Pivot 2.0’ work better than it did a decade ago, when it fell apart after just two years? Arguably the cablecos did not really need a mobile play back then, or not enough to put significant effort and resources into the difficult relationship with Sprint. However, this time around, the need for wireless is far stronger, but do they need Sprint? They have a powerful combination of Cable WiFi, for WiFi-first offerings; in-home broadband and WiFi footprints which help drive multiplay sign-ups and therefore market reach; an existing MVNO deal with Verizon; plus an increasingly strong hand in any deals with MNOs because of their control of coveted fiber for small cell backhaul.

Those four advantages were enough to allow Iliad’s Free Mobile to tip the French mobile and multiplay markets upside down, and Comcast and Charter could have some of the same effect, at least in certain bases, without Sprint’s help.

And while Sprint is better managed than in 2005, and has started to reverse its long period of subscriber defections, it remains reliant on increasingly complicated financial support mechanisms – such as site and device leasing programs – from Softbank. It is still inclined to over-promise and under-deliver when it comes to its network upgrades, and as in the WiMAX days, cablecos might quickly decide there were quicker, less complicated ways to get themselves a top-notch wireless platform.

Even under Softbank, it is hard to see that Sprint’s corporate culture has changed sufficiently. Softbank has been unable to push through much in the way of innovation in its business model and instead has been left just reacting to the spate of changes by TMO, whose Uncarrier policies have taken the US market by storm. So for the cablecos, they would be tying themselves to a network with a continuing poor reputation and reach, and to a company with no marketing nous and limited cash. Sprint would bring no incremental fixed line revenues with it, and it is fighting the mobile-first video war from last place.

On the plus side, they would gain access to a rich seam of spectrum and if they make a joint venture before TMO and Sprint get together in any way, their route into full mobile control would be far cheaper than if they were negotiating with a merged third MNO. They need to decide whether they want to gain more control for less money and keep their cashflow up their sleeves – or wait until the US market has consolidated around three sustainable MNOs, and then invest a far higher sum to acquire one of those far stronger companies.

That would not necessarily be Sprint/TMO. Wireless Watch’s sister service, Faultline, which analyzes digital video and multiplay industries on a weekly basis, has argued that the management team at Verizon will allow its stock to fall and fall so that, in 18-24 months’ time, a combined Comcast and Charter could realistically mount a joint bid and, into the bargain, ensure their MVNO dealings with Verizon did not go to waste.

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