Greetings from Davidson, North Carolina, and Virginia Beach, Virginia (sunrise pictured), where we are enjoying several days of R&R prior to two weeks of travel. This week’s TSB will contain an update on and a detailed analysis of the state attorneys general case against the T-Mobile/ Sprint merger. We will also have several TSB Follow-Ups.
Many thanks to those of you who suggested additional titles for the History of Technology. Next week, we will provide an amended list of the top six most important telecommunications and technology chronicles. If you have additional suggestions, please send them to email@example.com.
The Implications of This Case are Significant
One of the most important events to impact the telecom industry for the next decade is the now nineteen state attorneys general lawsuit against T-Mobile USA and Sprint (copy here). If the attorneys general successfully prosecute their case, Sprint will need to find another merger partner or significantly restructure their balance sheet. If the wireless companies win, new T-Mobile will prove a formidable challenger to AT&T and Verizon in postpaid and enterprise, and prepaid (or credit-challenged) wireless subscribers could see higher prices or reduced service quality.
We devoted an issue to the trial in early August and believe that an update is warranted. This week’s TSB examines the details of the complaint and provides insight into possible outcomes.
The case was originally filed in the Southern District of New York on June 11 (this date is prior to the late July DOJ settlement but after FCC Chairman Pai publicly supported the merger with conditions) by nine state attorneys general and the District of Columbia. Ten days later an additional four states joined the amended complaint.
Texas’ Republican attorney general, Ken Paxton, joined the lawsuit on August 1 after fully reviewing the Department of Justice settlement with the merging parties and Dish networks. “After careful evaluation of the proposed merger and the settlement, we do not anticipate that the proposed new entrant will replace the competitive role of Sprint anytime soon” stated Attorney General Paxton. The Lone Star State continues to be the lone Republican attorney general in the complaint. After Texas joined, the trial start date was moved form October 7 to December 9. The case continues to be expected to last 2-3 weeks. 140 hours of total depositions were allowed by the judge.
After Texas joined the party, Oregon (Aug 12), Illinois (Sept 3), and Pennsylvania (Sept 18) added their support. Notable population centers not participating in the lawsuit are Florida, Georgia, North and South Carolina, Washington (T-Mobile HQ), Ohio, Missouri (de facto Sprint HQ) and Arizona.
The Case Against the Merger
The states make the following arguments in their June 11 complaint:
- The merger of T-Mobile and Sprint would lessen competition. Based on redacted documents discussed in the complaint, it has been a long-held view of Deutsche Telekom and T-Mobile USA that market rationalization (four to three providers) would lead to higher profitability.
- Contained in the competition arguments is the implication that Sprint is capitalized to continue their aggressive rollout of 5G services nationwide.
- Also contained in these arguments is the assumption that a roaming deal between T-Mobile and Sprint would enable Sprint to cost-effectively fill in coverage and speed gaps until Sprint could economically supplement their network.
- MVNOs are not long-term competitors because they are subject to a shrinking number of networks who will wholesale to them. Specifically, the lawsuit points out that T-Mobile currently does not permit an MVNO to have core control. The Dish agreement will apparently be the exception to this rule.
- While the new T-Mobile will likely provide a broadband replacement product, that is not a relevant determinant (or offset) to the lack of competition that will occur in mobile wireless services. Any fixed wireless offsets should not count in the competitiveness calculation.
- The merger, even with the divestiture of Boost Mobile, would also provide the new
company with a dominant market share in two large Cellular Market Areas (CMAs) – New York City (CMA #1 shown nearby) and Los Angeles (note that these data points represent two highly dense incumbent telco areas of AT&T and Verizon).
- The new entity would also have significant pro forma market share in Austin, Dallas, Houston, and San Antonio, TX; San Francisco, San Jose, San Diego, and Sacramento, CA; Tampa/ St. Petersburg, Orlando, and Miami, FL; Chicago, IL; Washington, DC, Baltimore, MD and Philadelphia, PA; Detroit, MI; Minneapolis, MN, and many other areas represented by the states that have joined in the case. While the numbers have been redacted, the largest gains appear to be in Los Angeles, New York City, Chicago, Houston, Atlanta, Miami, Detroit, and Tampa/ St. Pete.
- While there will be significant activity occurring post-merger, this activity will not spur the type of innovation needed to provide lower prices and higher quality services to credit-challenged, low income, prepaid wireless subscribers.
In addition to the document, Fox Business News is reporting that the states are preparing an argument that Dish, even with the terms of the deal we discussed in a previous TSB entitled “Playing Charlie’s Hand”, will be a financially weaker competitor than a non-merged Sprint.
Reframing and Refocusing the Argument
The state attorneys general make an average to weak case to prevent the merger of T-Mobile and Sprint. Without a doubt, merging the third and fourth largest wireless carriers will create more competition for Verizon and AT&T with respect to multi-line, enterprise, and state government segments. However, to contend that Verizon and AT&T have no competitive counterpunch in New York and Los Angeles is laughable.
Imagine the cross-examination of Ronan Dunne, Verizon’s CEO of their Consumer Group, or of Jeff McElfresh, the new CEO of AT&T Communications, concerning their respective companies’ competitiveness in their two most densely populated markets:
- How much has AT&T/ Verizon invested in New York/ Los Angeles in the last decade?
- Specifically, how much has your company spent with tower company leases, how many route miles of fiber, etc., in New York City and Los Angeles (these figures would include enterprise and government spending on infrastructure that could be leveraged)?
- How successful has your company been with wired broadband deployment in these markets?
- What is the state of under-utilization in these markets? How easy would it be to upgrade tower and backhaul infrastructure to make these markets more competitive? How long would it take?
- How dependent are these markets on deploying a successful 5G strategy?
The answers will significantly diminish the argument that New York and Los Angeles (or any other major metropolitan market) are going to be markedly impacted by less investment. Even if Boost faltered (and we have highlighted the execution risks that will occur with the transition from legacy Sprint to new Dish networks), Cricket (AT&T’s MVNO), Visible (Verizon MVNO started by ex-Verizon execs), Xfinity Mobile (Verizon MVNO), Spectrum Mobile (Verizon MVNO with core control ambitions), Altice Mobile (Sprint and AT&T MVNO with core control capabilities), Mint Mobile (T-Mobile MVNO), and Tracfone (a multi-carrier MVNO doing business as Wal Mart’s Straight Talk or as Ready Mobile) would jump at the opportunity to pick up 1-3-5 market share points. Bottom line: The reason why T-Mobile’s share is great in New York and Los Angeles is that they built robust networks and effective distribution channels in these markets. Distribution barriers to entry for large, well-funded competitors are low. As a result, the possibility, driven by new network (5G) deployment, that Verizon and AT&T, either on a retail basis or through MVNOs of their own, reverse the market share gains T-Mobile and Sprint have achieved over the past decade are high. Distribution will follow investment.
On top of this, however, is the increased discussion of competition the new T-Mobile will provide in rural markets. T-Mobile committed to deploy 100 Mbps speeds to 67% of the US rural population in six years. From a competitive perspective, less densely populated areas have a longer payback because the addressable market (homes passed, number of wireless subscribers, machine-2-machine connected devices) is smaller. Verizon and AT&T have enjoyed duopoly returns (which, when unregulated, can be greater than regulated monopoly returns), especially where they are also the incumbent telecommunications provider. Bottom line: The competitiveness ledger needs to account for the overwhelmingly positive impact the new T-Mobile’s commitment will have on widely dispersed markets. This is not to diminish the need to serve poorer urban communities, but to acknowledge the increased risks taken in areas where few homes and people exist.
Finally, the likelihood of substantial interest in Dish’s new business model is underestimated. Without going into all of the cost savings details of deploying the next generation of 5G standards (called Stand Alone 5G), Dish was smart to hold firm to having the option to deploy new systems when the lower cost structure was available. (Here’s a very interesting article showing that there is increased interest among the carrier community in deploying Stand Alone 5G standards – it will quickly become the default configuration, and Dish will be a direct beneficiary). It is difficult to imagine that a data-centric network will be unattractive to others, and that (gasp) it might be perfectly paired with the regional networks deployed by cable to support their MVNOs. Bottom line: Only the most delusional industry analysts think that Sprint can emerge from a failed merger without a recapitalization/ reorganization. That will cost the telecom industry more than the risk of Dish building out their network (including 800 MHz from Sprint) and failing. Trading the risk of a much less expensive new network build for the certainty of the long-term financial damage done through an inevitable Chapter 11 reorganization is rational and reasonable.
The trial date is a little more than two months away, and, from a thorough read of the initial and amended documentation, there’s no reason why the parties should not settle. The attorneys general should focus their efforts on how to make Dish more successful, and not on how to maintain the status quo.
(For those of you who want to view some good dialogue supporting the settlement from Assistant Attorney General Makan Delrahim, this YouTube video of the September 17 Senate Judiciary Committee Hearing has two very interesting dialogues at minute 20 with Senator Klobuchar and at minute 54 with Senator Leahy).
- Faster speeds for the same price: Comcast does it again. The Internet provider raised their speeds on four offerings across 11 states last week:
— Performance Plus increased from 60 Mbps to 75 Mbps
— Performance Pro increased from 150 Mbps to 175 Mbps
— Blast! Pro increased from 250 Mbps to 275 Mbps
— Extreme Pro increased from 400 Mbps to 500 Mbps
This represents the 17th time in the past 18 years that Comcast has increased speeds. Approximately 85% of Comcast’s 25.6 million (end of 2Q 2019) subscribers will see this increase. This turns up the heat on their telco competitors to match the speed growth and increase their fiber builds. It also means that many more Xfinity subscribers will enjoy higher speeds/performance working from home than at the office. More on the speed increases from this GeekWire article.
- CableLabs announces that they will be releasing the DOCSIS 4.0 standards in early 2020 (CableLabs blog post here). These standards will improve the total capacity available in an existing cable connection (using a technology innovation called Extended Spectrum DOCSIS) and also improve the utilization within the current DOCSIS 3.1 capacities through a development called Full Duplex DOCSIS.
At a minimum, these changes will double maximum speeds from the 1 Gbps in the current standard. Assuming that the rollout of the standard leads to the first product deployment by the end of 2021, millions of existing customers will have the ability to have increased home and small business capacity.
- Apple iPhone 11, iPhone 11 Pro, and iPhone 11 Pro Plus online availability updates. Attached and shown below are the online inventory levels as of Friday, September 27. Updates are compared to Tuesday, September 24 levels. Generally speaking, iPhone 11 levels are remaining stable with immediate availability of certain colors and sizes for AT&T and Verizon (green and yellow are the most popular colors). T-Mobile has less availability of the iPhone 11 due to their aggressive iPhone trade-in credit promotion (at least $350 for iPhone 7 and higher). Magenta has more incentive to move customers to the latest devices (versus the iPhone 8 or earlier) due to the 600 MHz availability (which started with last year’s XR and XS/ XS Max models).
T-Mobile’s online shortages continue into the iPhone 11 Pro and 11 Pro Max. This is more surprising given the fact that all T-Mobile customers who want to purchase these devices need to pay something upfront (no $0 down offer). The iPhone 11 Pro carries a $249-599 upfront payment, and the iPhone 11 Pro Max carries a $349-699 upfront payment.
We will be updating this weekly in partnership with Wave7 Research. Note: in-store inventory levels will differ from online availability.
- Trial Balloon? DirecTV signals NFL Sunday Ticket exclusivity may be ending. Late Friday afternoon, the Wall Street Journal reported that AT&T is seriously looking at not renewing exclusivity for the DirecTV Sunday Ticket product. Based on estimates outlined in the article, Sunday Ticket is generates approximately $900 million in annual revenues (~2% of AT&T’s Entertainment Group) with about $1.5 billion in total costs (the Entertainment Group EBITDA would rise ~5% if the exclusivity costs were eliminated and AT&T broke even on the product).
Next week, we will cover several investments being made in the VC/start-up world that have the potential to influence the telecommunications landscape. Until then, if you have friends who would like to be on the email distribution, please have them send an email to firstname.lastname@example.org and we will include them on the list.
Have a terrific week… and GO CHIEFS!
Greetings from Charlotte, North Carolina (picture is, from left, Frank Cairon, formerly of Verizon Wireless and Ryan Barker, currently with Verizon Wireless enjoying some good Mexican food on Friday in the Queen City with yours truly).
This week’s TSB examines the short-term dynamics that could impact wireless growth in the third quarter and through the end of the year. At the end of this week’s TSB we will also briefly examine the current state of litigations and investigations active and pending (T-Mobile/ Sprint, Facebook, and Google).
Follow-up to Last Week’s CBRS article
Before diving into earnings drivers, a quick shout out to Federated Wireless, who raised $51 million this week in a mammoth C Round financing (full announcement here). Existing investors American Tower, Allied Minds, and GIC (Singapore sovereign wealth fund) all participated in the round, and Pennant Investors (Tim McDonald, formerly of Eagle River (Craig McCaw), will be joining the Federated board) and SBA joined with fresh cash. Kudos to Federated CEO Iyad Tarazi for his continued leadership and perseverance. With $51 million in additional cash, spectrum sharing gets a global boost.
In addition to this news, the FCC also has placed the approval and scheduling of the Private Access License auction (this is the dedicated band that gets priority over the General Authorized Access band) on the docket for June 2020 (FCC Commissioner Pai’s blog post is here). It’s generally assumed that this means a C-Band auction will come at the end of 2020/ beginning of 2021 (although this week’s news that Eutelsat has withdrawn from the C-Band Alliance has some believing that there may be a side deal afoot). The PAL auction timeline is in line with expectations, and it’s likely participants will include some new(ish) entrants.
Third Quarter Earnings – What Could Dislodge Wireless?
Speaking of expectations, there’re not a lot of dramatic changes expected in the wireless arena. Consensus has T-Mobile leading the postpaid phone net additions race (no surprise), with Sprint struggling to keep pace, AT&T in the 0-300K range for postpaid phone thanks in large part to FirstNet gains, and Verizon, excluding cable MVNO revenues, growing their retail postpaid phone base only slightly. With the exception of FirstNet (and a few quarters of decent Verizon growth), this is a pretty consistent story dating back to early 2017. What events could change the equation and dislodge the current structure?
- More rapid AT&T postpaid phone net additions led by FirstNet. Here’s how AT&T CFO John Stephens summarized the relationship between spectrum rollout and FirstNet deployments at an investor conference in early August:
We had some AWS-3 and some WCS spectrum that we had, so to speak, in the warehouse that we hadn’t deployed. We had 700 spectrum, Band 14 from FirstNet, which the government was requiring us to deploy. And then we got a whole new set of technologies that were coming out, 256 QAM and 4-way MIMO and carrier aggregation. They were particularly important to us because of our diverse spectrum portfolio. So we got the FirstNet contract and we had to touch a tower, have to go out on the network. And we decided, with this contract, now is the time to, so to speak, do everything. Put all the spectrum in service, that’s the 60 megahertz. In some towers, it’s 50, some towers, it’s 60, but it’s 60 megahertz of new spectrum that was generally unused that we’re putting in.
This has the effect of increased costs, but also improved network performance. With 350,000 net additions already from FirstNet (Stephens disclosed this in the same conference), it’s entirely possible that they could post a 100K net add surprise due to increased coverage and deployments. In turn, improved wireless bandwidth, while driving up costs, should lower churn in areas like Detroit (RootMetrics overall winner in a tie with Verizon – first since 2012), and Boston (first RootMetrics overall win in Bean Town since 2017).
- Faster cable MVNO growth. While this week’s news was on Altice’s aggressive $20 unlimited price point for existing customers (great analysis on their strategy here), both Charter and Comcast see a lot of mover activity in the third quarter. This would seem to be a very good time to present their wireless offer. Here’s a chart of net additions by both Charter and Comcast for the past two years:
While the two largest cable providers accounted for ~390K growth in 2Q (and over 1.3 million net additions growth over the last four quarters), there’s a strong likelihood that this figure could grow even greater as the attractiveness of the wireless bundle pricing takes effect. Both Spectrum and Comcast are maturing their service assurance processes, and those efforts should lower churn.
Comcast also made a number of changes to their “By the Gig” plans which encourage this option for multi-line plans that use 2-6 Gigabytes per line per month (and therefore use a lot of Xfinity Wi-Fi services). It basically amounts to a prepayment for overage services, but could be attractive for certain segments/ demographics (full details on these offer changes are here). Charter did not follow the Comcast changes described in the link and their “By the Gig” pricing continues to be $2/ mo / gigabyte higher.
Both Comcast and Charter are running into Apple iPhone announcement headwinds if next week’s headlines meet expectations (no 5G, no CBRS, no special financing deals, better camera). If the changes do not increase willingness to upgrade/ change to an iPhone, it’s going to be very difficult to craft a cable plan (even $20/ mo.) that will buck the trend. The upgrade cycle will be extended to 4Q 2020, when both the carriers and Comcast/ Charter will have full access to 5G.
Our prediction is that Charter and Comcast will have 475-500K net additions in the third quarter thanks to a combination of lower churn and higher gross additions (led by increased moving activity). Altice’s offer will add another 70K net additions in September, with those gains coming from Sprint retail and, to a lesser extent, T-Mobile retail and wholesale (Tracfone).
- T-Mobile’s 600 MHz coverage (and gross add) improvements. As T-Mobile, Sprint, and the state Attorneys General try to find a resolution to their quagmire, T-Mobile keeps on deploying 600 MHz spectrum. Here’re their reported (through Q2 2019) and estimated (Q3/Q4) progress:
Every new device on the T-Mobile.com website (and every T-Mobile store) is 600 MHz/ LTE Band 71 capable. Many older devices are not, however, and that is preventing greater market share gains in secondary and tertiary geographies (many/ most BYOD Android devices from AT&T, for example, will have the 700 MHz but not have the 600 MHz band). The expected Apple announcement represents a slight headwind for T-Mobile as well.
There’s a natural gross add/ upgrade path that follows 145 million coverage growth over a 12-month period. Assuming T-Mobile keeps their churn rate at 0.8%/ month over 3Q (2.4% of the ending branded postpaid 2Q base would be ~1.07 million disconnections), they have grown their 600 MHz marketable base by 20 million from Q1 to Q2 and by another 50 million from Q2 to Q3. If they just grew their penetration in the 600 MHz band by 1.5% for Q1-Q3 incremental POPs (or 0.5% penetration for the entire estimated 3Q 2019 footprint), they would negate the entire estimated branded postpaid churn for the rest of the country. This ex-urban/ rural growth opportunity is unique to T-Mobile and would at the expense of AT&T and Verizon.
Offsetting the 600MHz growth is small cell progress. T-Mobile committed at the beginning of the year to deploy 20,000 incremental small cells in 2019, but that guidance was withdrawn in their Q2 Factbook with H1 growth of only 1,000. That leaves a very large backlog of in-process capital (excluding capitalized interest, total capital spending was $3.48 billion vs an estimated spending range at the high end of $5.4 – $5.7 billion). T-Mobile should spend at least $2.2 billion in capital spending in the second half of 2019 on 5G, 600 MHz, and other initiatives and will undoubtedly be left with a lot of in-process small cell deployments.
- Sprint’s prepaid and postpaid churn. There’re a lot of headwinds for Sprint in the third quarter – overall 2Q churn trends are higher than previous year’s, and no one expects the seasonal respite to last long. It’s likely that 3Q postpaid churn could exceed 1.85%, led by postpaid phone churn of a similar level (look for late September promotional activity).
Prepaid churn is a bit tougher to forecast and will also be tracked closely. If the postpaid churn comes in below 2Q levels, check the prepaid recategorizations to postpaid (they were 116K in Q2 and 129K in Q1). Both prepaid and reclassified postpaid accounts will be transferred to Dish assuming the merger goes through, but it makes the postpaid headline number more palatable.
The 30-day guarantee promotion, according to most reports, has been an ineffective switching tool. (Sprint’s 5G rollout success has been much more impactful). Expect Sprint to say very little until there is clarity on the litigation, and to post greater than expected losses in prepaid subscribers as they preserve their marketing dollars for a post-merger world.
Litigation Tracker: Why the Facebook, Google, and T-Mobile/ Sprint cases are not all the same
Speaking of litigation and investigation, we were very dismayed that media sources are choosing to lump the New York-led Facebook investigation announced Friday, the to be announced Texas-led Google investigation, and the on-going T-Mobile/ Sprint (TMUS/S) litigation into one mega-story. While there are some similarities, the upcoming Google action is broader than Facebook and more bipartisan than the TMUS/S complaint.
As most of you who are following the TMUS/S suit know, the states of Oregon and Illinois recently joined the original 14 states and the District of Columbia to block the merger. (As an aside, Fox Business is reporting that the state AG group is focusing on the inexperience and shaky financial condition of Dish Networks as opposed to what would have been an uphill market concentration battle). In fact, in the original TSB concerning the lawsuit (here), we were surprised by the absence of Illinois. The figure below shows who is involved in what (underlined states are named in the Facebook litigation):
To recap, there are 40 states + the District of Columbia named in the National Association of Attorneys General comment letter to the FTC (filing here), and at least 30 of them are joining a Texas-led lawsuit against Google to be announced early this week.
The makeup of the states in the FTC letter is very bipartisan: 14 Republican and 26 Democrat attorneys general. All of the states involved in the TMUS/S litigation are also named in the FTC comment letter. To contrast, of the 17 states in the TMUS/S litigation, only Texas (AT&T HQ) is Republican and the other 16 are Democrat.
As we stated in the TSB on the AG lawsuit, very few sparsely-populated states, regardless of political affiliation, are participating in the T-Mobile/ Sprint litigation. Fourteen of the fifteen least densely populated states in the US (data here) are named in the Google/ FTC letter. However, only two of the fourteen (Colorado, Oregon) are participating in the TMUS/S litigation. The promise of a rural solution outweighs the benefits of a fourth carrier in metropolitan and suburban areas.
The Facebook investigation is also widely bipartisan with five Democrats and four Republican states represented. Florida is involved in the Facebook investigation but none of the other two legal activities. In addition, there are nine states (including New Jersey, a Democrat stronghold) that are not currently participating in any legal activity.
Bottom Line: Concerns about Google’s anti-competitive practices are supported by a large number of state Attorneys General and are very bipartisan. A subsegment of Democrat AGs (and TX) is also a part of the T-Mobile/ Sprint lawsuit. And an even smaller subsegment plus Florida is a part of the recently announced Facebook investigation.
Next week, we will highlight some wireline trends and talk about overall profitability across the telecommunications sector. Until then, if you have friends who would like to be on the email distribution, please have them send an email to email@example.com and we will include them on the list.
Have a terrific week… and GO CHIEFS!
The following articles provide a good overview of CBRS. There are a lot of things changing with CBRS each day, and we will be sure to keep the list updated as new developments occur.
- One of the best government sites is the NTIA CBRS page here. Included in this is the original NTIA October 2010 Fast Track Report cited in this week’s TSB
- The FCC Report and Order on CBRS from 2015 is here.
- This Ruckus on-line tutorial is a terrific place to start if you need a 20-minute high level overview of CBRS.
- The CBRS Alliance has a page devoted to certified devices that is updated frequently. The latest certified devices are here.
- Light Reading had a recent article summarizing AT&T’s, US Cellular’s and Verizon’s outdoor interests. It’s here.
- Charter’s SVP Technology Craig Cowden’s address at MCWA in 2018 is here (20 min). A good summary of the value of CBRS to the cable industry. Charter’s FCC application for their CBRS tests is here.
- Adam Koeppe’s June interview with RCR Wireless concerning 5G, CBRS, MIMO, Beamforming and more is here. The Light Reading article referenced in the TSB is here.
- A good summary of MIdCo’s 2018/ 2019 trial with Telrad and Federated Wireless from Fierce Wireless is here.
- Telecompetitor interview with Federated Wireless CEO Iyad Tarazi is here. In this article, Iyad describes Federated’s role in the Kinetic Edge Alliance, which we ran out of time to discuss and is a very interesting intersection point between computing, proximity, and network sharing. More on that group here.