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29 July 2019

Will Dish’s $5bn deal with TMO create the 5G disruptor the USA needs?

T-Mobile USA and Sprint have finally got the go-ahead from the US authorities for their $6.3bn merger, which will create a stronger counterweight to AT&T and Verizon, while ushering in a potentially disruptive fourth MNO. The concession which the two MNOs made to the FCC and Department of Justice – which were concerned about the reduced competition if national MNOs were reduced from four to three – was to divest some spectrum and customers, and offer favorable MVNO terms, to Dish Network.

There were many rumors last month that Dish would be supported by a large web player like Google or Amazon in the much-anticipated deal with ‘the new T-Mobile’, but in the end, the company went alone. That will not stop it forming alliances with one of the webscalers in future to support their growing connectivity ambitions and help fund its roll-out. A deal with Amazon AWS, which would make the cloud giant an anchor tenant for Dish’s network in return for providing or funding infrastructure, remains a logical option for Dish chairman Charlie Ergen, who has often said he will require an infrastructure partner to make a large-scale national build-out of 5G financially viable.

One effect of the latest deal is to end years of ‘will he won’t he’ speculation about whether Ergen really wants to be a network operator, or whether the diverse spectrum holdings he has acquired over the years – by taking over bankrupt satellite providers and participating in auctions – were primarily tradeable assets. The cynical view was bolstered by Dish’s failure to deploy any 4G (it said it was too late in the cycle and would wait for 5G), or – so far – any 5G. It has rolled out some NB-IoT networks, but these represent the cheapest way to fulfil the minimum deployment obligation that cae with some of its spectrum and so stop the FCC cancelling its licences.

Now, Dish will have even more spectrum plus it will not have to build 5G on a national basis since it can use the MVNO agreement to ensure nationwide coverage, while investing in its own equipment only as its business cases, or FCC rules, demand.

In an interview with LightReading, Ergen said: “We always planned to be a fourth competitor in the industry. But, because of the consent decree, we’re able to enter the marketplace in a much more timely, economical fashion, and a much more competitive fashion, so we can be a fourth competitor early on.”

So it will not be allowed to sit on its latest set of assets and do nothing. The $5bn deal with TMO includes a pledge to the FCC to cover at least 70% of the US population by June 2023, with speeds of at least 35Mbps.

That means it could, if it takes a sufficiently ambitious stance, be a truly disruptive force. On a good day, Ergen can outdo even T-Mobile’s CEO John Legere in bold strategies and eye-catching statements.

The MVNO deal goes beyond the standard agreements usually offered by US carriers, which often leave the secondary operator disadvantage in terms of speeds and services. One aspect of the Dish arrangement is that the companies have agreed to promote embedded SIM (eSIM), which will make it easier for customers to switch operators and port their phone numbers. This is a big advantage for a new entrant which will start off with only 2% of the USA’s mobile users.

The other important aspect of the MVNO deal is that it is an ‘infrastructure MVNO’, which means Dish will build out some of its own equipment, giving it greater control of its costs and its quality of service than if it were entirely reliant on a host network. There are options to share costs and infrastructure on both sides in future, especially as they start to densify the network and build indoor systems.

Over time, Dish can, if the sums add up, shift the balance of its network from MVNO to MNO, as Rakuten is doing in Japan, allowing it to build out gradually and in line with demand and revenue. That will be enabled by its own converged core with which it can provision the eSIMs and subscriber information, and control the balance of traffic between its own cells and those of TMO. Most conventional MVNO deals in the USA carry out those functions in the host’s systems. The other prominent infrastructure MVNO deal in the USA is between Sprint and cable operator Altice, which presumably will continue after the merger.

Such arrangements give Dish the flexibility to manage the costs of its build-out far better than it could have done before, even without an infrastructure partner for its own portion of the network. It will be further helped by being 5G-only, with no legacy networks to support and leveraging 5G’s superior spectral efficiency and cost per Gigabyte, from day one. It said will now suspend expansion of its NB-IoT network and convert that to 5G, becoming one of the first 5G Standalone networks (with a full 5G core) in the world.

In this respect, it has many comparisons with Rakuten, which was an MVNO and is now gradually converting to building its own network in a fully cloud-native architecture. It remains to be seen what architecture Dish adopts, but it would certainly make sense to leverage the efficiencies and scalability of cloud-native, since it has no legacy to migrate, and that would be another good reason to form a partnership with a cloud company such as AWS, to avoid the cost of deploying cloud infrastructure.

Ergen referenced Rakuten, as well as the disruptive Indian operator Reliance Jio, in remarks about the TMO deal. Dish’s RFI and RFP for the 5G network will be issued this week and the company said: “We’ll be casting a pretty wide net because, in a 5G world with open interfaces, you have a much broader vendor community to speak to, just like you’re seeing with Rakuten and Jio. That doesn’t mean the traditional vendors won’t be part of it, but we intend to talk to a lot of people because it includes things like mobile edge computing and cloud infrEastructure and transport vendors. So it goes beyond just the traditional core and RAN.”

Ergen has been almost Trump-like in banging the drum for US suppliers, telling LightReading: “We do think it brings into play American vendors that have been left out of the traditional networks. In fact, I’m unaware of any operator today that uses any equipment from US vendors. It’s all European or Chinese or Korean. Nobody writes better software than in the United States, and most of our network will be software. So we know we’ll have a much more American-centric set of vendors than the traditional incumbents.”

A combination of a strategic partner’s cloud platforms, TMO’s MVNO deal and a greenfield 5G RAN of its own could be extremely disruptive. It could deliver lower total cost of ownership (TCO) than the other telcos’ 5G networks and so enable Dish to undercut even its host MNO in the consumer tariffs it can offer.

“We worked with network engineers to determine what it would cost Dish to build and operate a new 5G network,” wrote analysts from New Street Research in a client note. They estimate the cost advantage of starting from scratch with 5G is about 40% in TCO terms.

They wrote: “We show that, once fully loaded, Dish would have a lower cost per unit of capacity than any of the four national carriers today. This gives Dish the ability to price aggressively, to fill the network swiftly, and to create tremendous value for themselves at the expense of the existing carriers. We argue that if our analysis is correct, Dish will find the capital required to build; there are a number of potential partners with deep pockets who have a strategic interest in seeing a new, low-cost network deployed.”

But the real impact for the US competitive landscape will be felt if it looks beyond its own ailing satellite TV base, and beyond any plan to be the new ‘Uncarrier’ for the lower end of the US consumer market, and revives, one more time, the idea of a national neutral host network to support enterprise and IoT services.

Clearwire, Lightsquared (and its successor Ligado), even Dish itself have talked about this kind of platform, which could greatly extend the availability of 5G connectivity for enterprises and industrial users, which remain underserved, especially indoors, by the main operators. A cloud-based, 5G, neutral host network could support large numbers of specialist MVNOs or virtualized private networks, even evolving over time towards a network-as-a-service approach enabled by slicing.

Will Dish think this big? It is too early to say, but Ergen has the potential to be visionary and he will be feeling desperation about his core business (see inset).

However, in the interview he was coy about enterprise and IoT plans. He said that, when there were four MNOs to compete with, it would have been hard for Dish to penetrate the consumer handset space, but as part of the TMO agreement, Dish gets 9.3m customers, mainly from Sprint, which is a solid starting point despite being only 2% of the total base. So conventional consumer handsets will be “a big slice of our network”.

But he added: “We have enough spectrum capacity today that we also will be able to have parts of our network that do exactly what we’ve talked about, whether it be the IoT, whether it be smart cities, utilities, whether it be industrial production or robotics with the precision agriculture. All those things need a piece of a network. And we will have capacity to do that.”

However, there are plenty of casualties which have tried to break into the US market, where the biggest price disruption in recent years has come from an established player, TMO itself. Dish will be mainly tied to a hosted network for some years while it raises the finance and executes the build-out of its own network, which will be a multibillion dollar investment if AWS, Google or another partner – possibly one or more cable operators – does not emerge to share the load.

The deal still needs FCC approval (widely expected), and it still faces opposition from 13 states which had filed lawsuits against the Sprint/TMO merger, arguing that lower competition will hurt their citizens, especially in rural areas and locations where there are only two MNO choices.

The key elements of the Dish-TMO deal:

Dish will pay $5bn for Sprint’s 9.2m prepaid customers (most supported by the Boost Mobile brand) plus 13.5 MHz of low band spectrum and an ‘infrastructure MVNO’ deal which includes the ability to build and operate its own core to manage the MVNO subscribers. In return, Dish has pledged to build its own 5G network that will cover 70% of the US population by June 2023 with speeds of at least 35Mbps (the penalty for failure would be fines of over $2bn).

The MVNO deal will last for seven years, “enabling roaming in certain areas until Dish’s 5G network is built out”. T-Mobile will give Dish “standard transition services arrangements” for three years following the close of the transaction.

Dish will buy 13.5 MHz of Sprint’s nationwide capacity in the 800 MHz band for $3.59bn and the companies “committed to negotiate the leasing of Dish’s 600 MHz spectrum to T-Mobile for a transitional period of time”. That values the Boost customer base at about $1.4bn.

In addition, Dish will have the option to buy at least 20,000 of the cell sites that Sprint and TMO plan to decommission as a result of their merger, as they rationalize their very different networks. The merged MNO will benefit from a strong combination of midband spectrum (Sprint has about 110 MHz in 2.5 GHz, which it plans to use for 5G), and low band coverage spectrum (TMO spent big in the 600 MHz incentive auction last year). TMO has also started some deployments of 5G in millimeter wave bands.

Last year T-Mobile and Sprint had a total of around 110,000 towers. They plan to close down or sell 35,000 of those sites, but to construct another 10,000 in different locations to extend coverage and capacity, plus a small cell densification program.

Dish’s 5G network will use a patchwork of spectrum – it has licences, acquired at auction or by buying defunct mobile satellite operators, in 600 MHz, AWS-4, 700 MHz E Block and AWS H Block bands, plus the addition of Sprint’s 800 MHz. It expects to deploy at least 15,000 5G cell sites by 2023.

Dish also agreed to restrictions on its ability to sell its spectrum, or itself, to another company, in order to preserve four MNOs (though the rise of cableco mobile services may make this factor moot within a few years). These terms will end years of speculation that it would merge with one or more cablecos (having failed to acquire Sprint or to merge with TMO, both topics of aborted negotiations over the years). It may also hasten the sale of Dish’s video assets, which are not subject to the prohibitions and which are performing badly.

For their part, the deal sees TMO and Sprint confirming commitments to the FCC to divest Boost Mobile, not raise prices for three years, and to build out 5G and in-home broadband in rural areas of the country.

TMO deal may hasten the end of Dish’s satellite TV operations:

Meanwhile, the deal with New T-Mobile may prove to be another nail in the coffin of Dish’s ailing satellite pay-TV business. When Dish first invested in spectrum, it was assumed that, if the firm built a 4G network, it would be initially to add new services, and multiplay options, for its TV subscribers, allowing it to raise ARPUs and secure a larger part of each household’s spending.

But in the eight years since Dish acquired two bankrupt mobile satellite players – Terrestar and DBSD – for their spectrum assets, the 4G network has not been built, and the focus for 5G has shifted well beyond Dish’s own dwindling TV base. Now it has a seed user base thanks to acquiring Sprint’s Boost Mobile subscribers, it does not need its own TV customers to fulfil the role of the foundation stone for its mobile business.

Pay-TV is a tough business in the USA now and several players are offsetting losses in that market by investing in mobile, broadband and multiplay services. In its second quarter, for instance, leading cableco Comcast reported escalating video subscriber losses, but turned in healthy revenue and profit margin growth on the back of good performance in wireless, broadband and business services.

Dish will be looking at a similar rebalancing of its revenue base, and its resolve will be strengthened by the experience of AT&T – owner of the other major satellite TV provider, DirecTV – whose TV businesses took a hammering in Q2.

With Dish’s new financial commitment to build 5G and support a prepaid mobile base, there wil be even less in the bank to support the struggling TV business and to persevere with the live streaming service Sling TV.

Dish Network and AT&T together accounted for over 70% of the 3.7m subscriber losses from the top six US pay-TV operators during the first quarter, and that figure is expected to rise sharply in Q2, considering AT&T alone haemorrhaged nearly one million subscribers. At a churn rate of around 200,000 a quarter, Dish is on target to slide to fewer than nine million satellite TV subscribers by year end.