Just as everyone heaved a sigh of relief that the Sprint/Softbank/Clearwire/Dish safa was over, and settled down for a summer respite from the US telcos’ spectrum arms race, there was an unexpected postscript to the tale. AT&T, whose failed bid for T-Mobile left it stranded as Verizon and Sprint pursued their important spectrum deals, jumped in to acquire Leap Wireless ‘ hardly in the same league as Verizon’s cablecos or Sprint’s recent agreements, but a useful addition to its spectrum pile, and far more likely to pass regulatory approval than T-Mobile because of Leap’s small size and probable non-viability as a standalone entity. Not that the M&A whirl is necessarily over yet ‘ Dish will still be examining its options after failing to gain control of either Sprint or Clearwire, and that puts T-Mobile, newly merged with MetroPCS, in the firing line again. Some analysts even think Sprint might bid for TMo itself, though that could raise the Department of Justice’s heckles, and would threaten to turn the third cellcos’ mixture of spectrum bands from a rich seam to mere chaos.
The face of the US mobile industry by the end of the year will depend partly depend on the outcome of the long-standing dalliance between Sprint and Dish. If the mobile firm lets the bygones of their recent fights be bygones, they could benefit from a network/spectrum alliance and even a cross-marketing deal like Verizon’s with its new-found cable friends. If they continue to feud, and Sprint sees a mobilized Dish as a threat rather than a possible ally against Verizon and AT&T, Dish might indeed try for TMo (whose major shareholder, Deutsche Telekom, can only sell its stake early if it offloads it in its entirety to an acquirer). And in that eventuality, Sprint/Softbank might step into thwart it. Failure to accommodate with either Sprint or TMo ‘ or perhaps to pursue the more eccentric option of a LightSquared tie-up (see Wireless Watch July 11 2013) ‘ would almost certainly force Dish to give up on hopes of controlling its own mobile network and to sell its existing spectrum.
John Paulson, the hedge fund billionaire whose firm is the largest outside investor in T-Mobile USA, is certainly talking up the chances of a lucrative sale to Dish or Sprint. He told clients that, having become a 2.3% stakeholder in TMo because of Paulson & Co’s shares in MetroPCS, he planned to hang onto the TMo stocks in anticipation of further industry consolidation. TMo’s stock has rise in value by over 50% since its MetroPCS merger on May 1, giving it a market value of $17.8bn. ‘While the merger closed, we continue to hold the stock as we believe that T-Mobile remains a potential takeover target for either Dish or Sprint,’ Paulson & Co wrote in a letter to clients.
The hedge fund was also the second largest investor in Sprint before Softbank’s purchase of 78%, and remains the third largest owner of stock in Leap Wireless, so will be pleased at AT&T’s latest move, which puts a high value on the flat rate carrier’s assets, primarily its spectrum. On paper, AT&T has paid a crazy price for a regional operator with a broken business model and falling share, but as it sees its main rivals building up their airwaves capacity, it doubtless feels it has no choice but to snap up the last remaining spectrum holder of any size which it would be cleared to purchase ‘ if only to stop Verizon or Sprint getting in first. As the big two carriers shift from the initial coverage phase of their LTE roll-outs, to build new services around high capacity, their battle for spectrum in key markets is only intensifying.
So, if regulators allow – and an alternative bidder, such as Dish or Verizon – does not materialize, AT&T will pay a princely $15 a share in cash for Leap, valuing the smaller company at $1.2bn. AT&T will get all Leap’s licences, networks, retail stores and about 5m subscribers but the main attraction will be the firm’s AWS frequencies, which will push AT&T ahead in its ongoing battle for spectrum capacity. It already holds AWS licences of its own and plans to start building out LTE in that band once it finishes its current 700MHz deployment.
Leap’s CDMA network covers about 96m POPs in 35 states and its LTE services currently reach 21m of those people. The AWS and PCS spectrum covers 137m POPs, so in addition to existing LTE users, AT&T gets some additional unused 4G frequencies covering 41m potential customers.
Though Leap is not nationwide, it does have spectrum in some covetable areas, notably the densely populated mid-Atlantic seaboard from Philadelphia down to Richmond, Virginia; and the area west of the Mississippi,where it has 26 MHz or more of PCS, AWS and 700MHz frequencies in cities like San Antonio, Houston, Denver, Kansas City, San Diego, Phoenix and Portland. It also has smaller chunks in some prime cities like Chicago, Pittsburgh, Memphis, Nashville, Charlotte, New Orleans, Oklahoma City and Salt Lake City. However, except in very rural areas, AT&T already owns at least 26MHz of spectrum in most markets and from 70MHz to well over 100MHz in most densely populated cities ‘ so while Leap will be a useful addition, and more readily deployable than AT&T’s recently acquired WCS (2.3GHz) assets, it will not be a game changer in the larger operator’s ability to add speed, capacity and new applications to LTE.
Coverage analyzers Mosaik point out that, except for a few small areas in the southwest and the Mexican border, and some black spots on the outskirts of Houston, Texas, Leap does not have a network anywhere that AT&T does not. So this is not about quick coverage improvements, or about Leap’s existing LTE build-out, but about the new game in the US, now the big mergers are done ‘ incrementally increasingly spectrum capacity, a process which should accelerate the ongoing trend for larger cellcos to snap up small regional and rural players, especially those with holdings in the fragmented 700MHz band. Verizon has addressed these localized 700MHz owners via its rural LTE partnership program, while AT&T has been more inclined to buy the players outright, although the wide variety of band plans in 700MHz raises many device and roaming challenges. In reality, a chunk of AWS or, in future, refarmable PCS spectrum will be far more valuable than dribs and drabs of 700MHz, despite that band’s reputation as ‘beachfront’. Nonetheless, there are signs of desperation in the price it is paying for Leap ‘ as well as $1.2bn, double the firm’s closing price on Friday, it is taking on $2.8bn in Leap debt, making the deal worth $4bn ‘ more than the $3.9bn Verizon paid for an incomparably valuable spectrum/marketing deal with four cablecos for their AWS airwaves.
For Leap, AT&T is a savior. The prepaid carrier has been left somewhat stranded since its arch-rival, roaming partner and often-touted merger prospect, MetroPCS, tied up instead with T-Mobile. An acquisition by a larger player, therefore, makes sense for its survival.
The other interesting aspect of the deal is whether AT&T will finally take the prepaid market seriously. Despite some recent halfhearted moves, the leading two operators have largely steered clear of the reduced margins of the pay-as-you-go sector, leaving it to an increasingly bitter price war between T-Mobile/MetroPCS, Leap and Sprint’s various prepaid brands, such as Boost and Virgin. However, while spectrum will be more valuable than a low end user base to AT&T, it may be eyeing the increasing tendency of relatively high value subscribers to opt for prepaid deals, especially for second devices such as tablets or for family members.
“It’s mostly about spectrum,” Craig Moffett of Moffett Research told CNet. “They keep Leap’s spectrum out of T-Mobile’s hands. Most people thought T-Mobile would be the eventual buyer.”
However, accommodating 5.2m prepaid, mainly low value (in AT&T terms) customers will create challenges, especially as the business is not growing ‘ Leap lost a net 93,037 customers in the first quarter and posted a net loss of $109.6m. And of course, its 3G/CDMA network is incompatible with AT&T’s HSPA(+) system. The acquirer will have to find ways to migrate those users to LTE as quickly as possible, or further subscriber losses in low-ARPU 3G may actually be welcome.
AT&T’s own prepaid efforts have been lackluster. It does offer the Go pay-as-you-go service and recently started testing a new offering called Aio Wireless, but in the first quarter this year, it reported a net loss of 184,000 prepaid customers.
This is a contrast with Sprint, which has built up its prepaid brands aggressively ‘ but now hopes LTE services, and differentiators like its new ‘lifetime guarantee’ of unlimited data deals, will reverse its decline in contract subscribers. To that end, and despite talk that Sprint, armed with Softbank’s cash, could now go after Leap or T-Mobile itself, the third carrier should concentrate on its second attempt at a prize it first chased with its WiMAX roll-outs ‘ revolutionary and daring then, now clearly a blind alley which left Sprint far behind the big two. However, its bid to create the highest capacity mobile broadband network in the US is not dead, since it still has the spectrum which underpinned those early efforts, having rescued Clearwire from Dish’s clutches.
It has taken the skilled alchemist Softbank ‘ well used, as the third player in its own market, to turning neglected spectrum bands into gold ‘ to force Sprint to value its Clearwire spectrum assets again. After the failure of its WiMAX gamble, it seemed to lose interest in the plentiful but problematic frequencies (unpaired and so non-mainstream; fragmented with many licences leased from a variety of small players; high frequency, raising coverage and penetration issues). Clearwire was sidelined and almost dumped, its own LTE roll-out plans starved of sustenance by Sprint’s neglect. The larger firm even preferred an alliance with the doomed LightSquared ‘ with its even odder spectrum ‘ to the venture in which it owned 50%.
But Softbank saw Clearwire has a key attraction in its bid to control Sprint. The spectrum is in the same overall band as the Japanese cellco’s own 2.5GHz TDD holdings, themselves won via an unconventional route (they were originally earmarked for upgrades to the PHS service). And a Japanese operator knows the value of a huge chunk of spectrum, in almost any band, to satisfy the ever-growing demands of an advanced mobile population ‘ which the US is rapidly becoming.
Clearwire’s spectrum and LTE build-out will now be put where it always should have been ‘ at the heart of the Sprint strategy, and consolidated where possible with the Network Vision flexible infrastructure platform, and with the cellco’s own LTE deployments in 1.9GHz PCS and the 800MHz iDEN spectrum. These two bands can provide coverage and indoor penetration while Clearwire’s can support small cells and massive bandwidth, enabling new services and ‘ critically for Sprint ‘ the capacity to continue its now-unique unlimited data plans, and still make a profit on heavy duty consumers.
The first concrete signs of this tri-band strategy were seen this week, when Sprint said it would soon begin selling 800MHz/1.9GHz/2.5GHz devices. It outlined the respective roles of its three bands, saying Clearwire’s spectrum “excels at broad-based, high speed coverage, and is expected to provide Sprint customers increased speeds and capacity in densely populated cities’. It is also important for offloading traffic from the other networks.
Meanwhile, Sprint said 1.9GHz was its ‘primary” LTE band, and 800MHz would be ideal for penetrating buildings. It said the current 1.9GHz network supports average download speeds of 6-8Mbps and peaks of 25Mbps. Clearwire CTO John Saw said last year that Clearwire’s TD-LTE network would support theoretical peaks of 168Mbps by 2014. The first devices to access Sprint’s 2.5GHz LTE service will be the Netgear Zing Mobile Hotspot, the Netgear 341U USB stick and the MiFi 500 LTE by Novatel Wireless, all on sale from Friday. Next steps will be to offer triband handsets, and to move towards carrier aggregation to boost speeds.
Meanwhile, Sprint is hopeful of gaining additional 1.9GHz spectrum early next year, with the FCC planning to auction the PCS H Block as early as January ‘ its first major spectrum sale since 2008’s high stakes 700MHz sale. The spectrum will be auctioned in 176 individual Economic Areas across the country and the agency is currently seeking public comment on its proposed rules, including the reserve price and the value of minimum opening bids.The H block is a 10MHz allocation of paired airwaves that runs from 1915MHz-1920MHz (uplink) and 1995MHz-2000MHz (downlink), and forms part of 65MHz of spectrum Congress mandated the FCC to auction by February 2015. The US Treasury will be hoping that the current inflated level of pricing which carriers are prepared to pay even for slivers of spectrum will persist into the new year.
However, the key lesson from the latest M&A chapter is that Verizon played a killer move by negotiating those cableco agreements while AT&T was effectively out of action waiting for the outcome of its TMo bid. It managed to acquire far more plentiful and high quality spectrum than it could have secured via a single acquisition, because of regulatory disapproval; it gained valuable marketing partners to help reach areas where it has no fixed lines; and it not only put its rivals on the back foot in terms of prime LTE spectrum, but forced them to look around for less attractive, and overpriced, deals of their own.
From now on, US consolidation will be all about the leavings ‘ but it will still continue, putting increasing power into the hands of the big four (assuming Dish joins up with Sprint or TMo, or exits altogether). Industry analyst Chetan Sharma voiced the views of many, saying: ‘Everyone below the top four is pretty much done’ because of the looming consolidation. I don’t think they’ll exist beyond the next 18 months.’ US Cellular could be the next target, given its relatively large size (about 5m users) and attractive Chicago-centered region. It has already offloaded some assets ‘ some Midwestern markets to Sprint recently for $480m, and most of its Mississippi spectrum to T-Mobile for $308m.
Public interest groups are eyeing the trend with concern. Harold Feld, SVP at Public Knowledge, said in a statement that AT&T now has enough spectrum and should focus on using that efficiently. ‘This is getting ridiculous. The Justice Department and the Federal Communications Commission need to say ‘no’ to this latest effort by AT&T to buy out its rivals and rebuild ‘Ma Cell’,’ he said.