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End of year greetings from Fraser, CO and Lake Norman, NC. This has been a week of reflection, not only on the year but also on the decade that was. Taking some time to contemplate the changes that have occurred over the past ten years is instructive and helpful. Scheduled broadcasts (except for live sports?) died over the last decade – the term “binge” was most likely preceded by “spending” in 2010, as opposed to referring to online watching today. Our digital “wait time” expectations shortened (try to pull up a full version of any content-rich website in a poor coverage area). The quality of our smartphone (video) cameras improved and became the “lead” or replacement for our social media posts. And many of us now answer messages and calls that appear on our wrist from Bluetooth earbuds using speech recognition.
Against this technological whirlwind we evaluate the breakup of AT&T in this week’s TSB, an event that started on November 20, 1974, and culminated on January 1, 1984. Many books have been written on the topic in addition to Steve Coll’s “The Deal of the Century: The Breakup of AT&T” (including “The Fall of the Bell System” by Peter Temin and Louis Galambos and “Network Nation: Inventing American Telecommunications” by Richard John), and when applicable we will draw on them in this review. Our focus, however, will be on Coll’s chronicle. As we mentioned in Tim Wu’s The Master Switch (see TSB here), the study of history helps us understand the influences and beliefs that shaped business decisions, many of which parallel those seen in today’s world.
Understanding AT&T’s World in the Early 1970s
Against post-WWII prosperity, America came of age in the 1960s, with baby “boomers” going to work, battling communism in Vietnam, or pursuing university degrees. Science and technology were national interests, and, as a result, subject to increased federal (and sometimes state) attention. The Cold War embers were still hot, although the fiery and dramatic rhetoric of Kennedy and Johnson had evolved by the end of the 1960s – détente was in, shoe-banging was out.
For the two decades following the end of WWII, “systems development” was popular – components working in concert to achieve a particular national or social objective. In the case of telephony, the system consisted of
- terminating equipment
- local networks
- switching (which was often assisted by personnel called operators)
- long-distance networks
- interconnection facilities (to complete calls to independent phone companies)
- operations support: customer service, billing/ collection, research & development, product management
To AT&T executives, the quality of the network was directly correlated to system control. This was not necessarily, as some back-casting historians presume, a vestige of power-hungry monopolists eager to satisfy increasingly demanding shareholders. No doubt that there were some malevolent managers at Ma Bell (as discussed below), but there is a fundamental difference between a stalwart belief in operational efficiency (providing telephone service to everyone at affordable rates) and overt anti-competitive monopolism. Keeping the system together created consistent stability in an increasingly less stable world.
Equally as important, the system control depended on a delicate mix of businesses and consumers. Too many consumers, particularly in high-cost rural locations, and profitability would be compromised. Too many businesses, and capital and service costs would skyrocket. Customer mix was a Jenga puzzle, and MCI’s focus on enterprise voice and private line services threatened its balance.
MCI and AT&T’s Initial Interconnection Discussions
Despite AT&T’s arguments to the contrary, the Federal Communications Commission (FCC) and the capital markets were very interested in MCI’s plans to disintermediate the Bell system. Coll ends Chapter 1 summarizing MCI’s $100 million equity raise in June 1972 (and follow-on $72 million line of credit later that year) and begins the following chapter with a recap of the roundtable discussion that ensued at MCI. Rather than a complete overbuild, MCI would negotiate connections to AT&T’s switches in St. Louis and Chicago (it’s hard to imagine the first interconnection negotiation given their commonplace nature today), and AT&T had complete leverage.
In March 1973, Jack McGowan, MCI’s Chairman, met with AT&T Chairman John deButts and George Cook, an AT&T attorney, at AT&T’s headquarters in New York City (195 Broadway). McGowan dictated a memo after the meeting, saying:
“On the one hand, they piously state a willingness to be fair and are willing to believe it themselves while at the same time they interpret their mandate to compete hard by actions which they know will result in a denial of their position on fairness… It would be incorrect to be encouraged by the potential impact of antitrust action, although it might receive a very favorable reaction at 195 Broadway simply by having them spend more time being advised by counsel. ”
For the next nine years, dozens of attorneys would be employed by each side engulfed in the largest antitrust lawsuit to date. The system was breaking, and MCI cracked open AT&T at its most vulnerable point – interconnection.
The AT&T Chairman Speaks
Competition intensified over the summer of 1973, and AT&T Chairman John deButts used the fall meeting of the National Association of Regulatory Commissioners to respond. Coll spends an entire chapter describing deButts’ speech, which culminates with the following recommendation:
“The time has come for a thinking-through of the future of telecommunications in this country, a thinking-through sufficiently objective as to at least admit the possibility that there may be sectors of our economy – and telecommunications [is] one of them – where the nation is better served by modes of cooperation than by modes of competition, by working together rather than by working at odds.
“The time has come, then, for a moratorium on further experiments in economics, a moratorium sufficient to permit a systematic evaluation not merely of whether competition might be feasible in this or that sector of telecommunications but of the more basic question of the long-term impact on the public.” 
The crowd of regulators stomped and cheered. Bernie Strassburg, the head of the FCC Common Carrier Bureau for the past decade and a 21-year staff lawyer at the Commission prior to that, was in the audience and, according to Coll, took deButts’ comments to mean that AT&T was above the law.
Meanwhile, MCI continued to test the regulatory waters, expanding service from private lines (voice calls between two regional offices) to something called Foreign Exchange or FX, which can best be described as a precursor to toll-free 800 service (Coll offers the example of an airline customer calling a local New York City phone number and being serviced by a customer service representative in Chicago). The challenger had moved from connecting two company locations to connecting customers to company locations. Both private line and FX were highly profitable services.
AT&T took the case to court, and, after losing the first ruling, won on appeal. Coll describes their activities after that decision:
“As soon as the appeals court decision was handed down, it was ordered that all of MCI’s FX lines be disconnected immediately. AT&T engineers worked an entire weekend unplugging the circuits, inconveniencing MCI’s customers and infuriating McGowan. John deButts would later say that the decision to disconnect MCI’s customers was one of the few he ever regretted. The FCC ruled that MCI was, in fact, entitled to sell FX lines, and AT&T was forced to reconnect all of MCI’s customers. The damage, however, was already done. ”
It is tempting to draw some analogies of “above the law” behavior seen today by trillion-dollar market cap companies, but the behavior described above would be akin to Apple removing Google Maps, Netflix or Spotify from the iTunes store. As we have described in very early TSB editions, there’s always been a delicate balance (Apple’s relationship with Google Maps in 2012-2013, for example) initially, but today’s systems, thanks to the role of applications, has been much more friendly than the early days of telecommunications competition.
Attorney General William Saxbe: “I Intend to Bring an Action.”
Thanks to the administrative turmoil created by Watergate (Nixon resigned in August, 1974), most of the attorneys in the Justice Department thought that the AT&T case would be placed on hold. Nixon had appointed William Saxbe, an elder senator from Ohio who enjoyed the golf links much more than the office, as Attorney General earlier in 1974.
The recommendation to file an antitrust suit against AT&T made its way to General Saxbe’s desk in November, 1974. After being briefed by two senior DOJ lawyers working on the case, it was AT&T’s turn to make their case. Coll describes this situation as follows:
“John Wood, a Washington lawyer retained by AT&T, stood up to begin AT&T’s presentation. Mark Garlinghouse, the company’s general counsel, was seated beside him.
“Mr. Saxbe,” Wood began, puffing on a pipe, “before we start our presentation, I’d like to know exactly what your state of mind is on this case. It might help me shape my arguments to you.”
Saxbe paused, spit [tobacco juice], looked at Wood, and said, “I intend to bring an action against you.”
Within an hour of this statement, the SEC stopped trading in AT&T’s stock. John deButts, who happened to be the chairman of the United States Savings Bond campaign in 1974, called Treasury Secretary William Simon to let him know the news. Even President Ford, who was in Japan while all of these actions unfolded, was caught unawares. According to Coll, “Simon then tried to call Saxbe, but the attorney general had left the office for the day. He had gone pheasant hunting.”
Enter George Saunders
Of all of the characters in the AT&T drama, few rise to the importance of George Saunders, a partner at Chicago-based Sidley & Austin who would devote eight years of his life to defending AT&T from the attacks of MCI and the Justice Department. Coll describes Saunders as follows:
“Saunders was an unabashed fat cat, a smooth, luxuriant attorney who wore expensive suits, drank martinis like they were water, and smoked more than a dozen cigars a day. He had been born and raised in Birmingham, Alabama, the son of a house painter, and the first member of his family to ever attend college. He went because even at age fifteen… his extraordinary intellectual gifts were obvious – his mind was like some strange machine. He had nearly total recall of the most complex and obscure facts, and he could effortlessly organize knowledge in sophisticated, well-developed models. The lawyers who worked with him later tried to describe this capacity to others by saying that it was like Saunders had a giant flip-chart in his head that he could summon up instantaneously, search for the information he needed, and then flip forward to make his next point without ever skipping a beat.”
Saunders scored his first victory after a hearing before Judge Joseph Waddy in February, 1975, when he requested, purely as a tactic, that the federal government be required to preserve every document in its possession that might be relevant in the AT&T case (in the pre-email/ server environment, this is a bold request to say the least. Saunders backed off the request from all federal agencies to a mere 44).
After some vigorous conversation (described by Coll in vivid language), Saunders convinced Judge Waddy that AT&T’s fate should be a decision of the FCC and not the courts. He convinced Judge Waddy to postpone any discovery until the jurisdictional case was settled. A mere three months after filing, the case against AT&T was dead and, due to Judge Waddy’s terminal illness, jurisdiction would not be decided for three years.
Enter Ken Anderson
One of my favorite characters in Coll’s book is Ken Anderson, chief of the Special Regulated Entities section of the Department of Justice and the owner of the AT&T case when it resumed in late 1977. Coll describes Anderson as follows:
“Anderson’s approach to life and to the practice of law was somewhat unorthodox. Though he worked in the heart of the city, he lived on a farm in rural Virginia, and on summer weekends he liked to ride around on his big tractor under the hot sun, and then pull off his shirt and bale some hay…. He was a health food enthusiast, and when he rode into Washington on the train he often carried a large paper sack full of raw vegetables. He kept the sack on a shelf in his Justice department office, and during important meetings he would wander over, pull out a carrot stick or a piece of cauliflower, and take a large, loud bite.”
With the previous DOJ attorney (Phil Verveer) off of the case, AT&T saw an opportunity to test the settlement waters as they sized up Anderson. Hal Levy, an AT&T staff lawyer who was working side-by-side with George Saunders, proposed that the parties discuss injunctive relief with AT&T self-sourcing less equipment, and the government agreeing to keep AT&T intact. After hearing Levy out, Anderson replies:
“I’ll tell you one thing. This case is going to be a severed limbs case. We’re going to have severed limbs, AT&T limbs, on the table dripping blood. That’s the way this case is going to be settled. We’re not going to settle this thing with injunctive relief.”
AT&T was also preparing for a transition as John deButts was preparing for his planned retirement (announced in late 1978). George Saunders’ boss, Howard Trienens, left his position as the managing partner of Sidley & Austin to become VP and General Counsel of AT&T under new Chairman Charles Brown in early 1979.
Enter Judge Greene
Of the characters in this multi-act drama, none is as important as Judge Harold H. Greene, who was assigned the case in August, 1978. Coll describes the influence of politics on Greene in the following manner:
“A Jew, Greene was raised in Germany during the 1920s and 1930s. His father owned a jewelry store, and in 1939, as the terror of Hitler’s Reich reached fever pitch, his family fled to Belgium, where it had relatives. Greene was just sixteen years old. When the Germans invaded Belgium, the Greenes fled again, this time to Vichy France. From there, they made their way to Spain, and later Portugal, before emigrating to the United States in 1943. Young Harold Greene was immediately drafted into the U.S. Army and sent back to Europe with a military intelligence unit to work against the Nazis. He saw combat action in his former homeland, but he escaped injury.”
Greene grew up in the youthfulness of Attorney General Robert Kennedy and, according to Coll, wrote the Civil Rights Act of 1964 and the Voting Rights Act of 1965. After leaving the Justice Department in 1967, Greene served as chief judge of the District of Columbia’s Court of General Sessions (municipal court for the District). He would remain there until Jimmy Carter was elected to the presidency, when he was appointed a federal judge. In his new role, he inherited the caseload of the late Joseph Waddy, and was thrown into the middle of a nearly four-year dispute.
Judge Greene was a strong believer in due process and the strict preservation of constitutional rights. He also supported a strong judiciary to check the executive and legislative branches (a hot topic on the heels of Watergate). Unsurprisingly (given his German descent), he was also focused on continuous improvement and courtroom efficiency. Greene was very different from both Saunders and Anderson – his goal was to run his courtroom like clockwork.
1981 marked the beginning of the fourth presidency to span the AT&T antitrust trial. Conventional wisdom indicated that AT&T would finally be vindicated. That was the case until President Ronald Reagan nominated Bill Baxter to lead the antitrust division of the Justice department. While a conservative, Baxter strongly supported the Justice department lawsuit because he strongly believed that regulated local telephone divisions were subsidizing their unregulated counterparts.
This was not the position of other members of Reagan’s incoming cabinet. Secretary of Commerce Malcom Baldridge, Secretary of Defense Casper Weinberger, and counselor Ed Meese all had publicly stated their preference to dismiss the lawsuit. But Attorney General William French Smith was forced to recuse himself form the case due to his previous affiliations with Pacific Telephone. And James Baker, who managed now Vice President George H.W. Bush’s 1980 campaign, was Reagan’s Chief of Staff. Assisting Baxter was Jonathan Rose, an assistant attorney general for the DOJ Office of Legal Policy under Nixon.
Rose ultimately proved an effective partner to Baxter, carefully running point for Justice within the White House. Over the July 4th weekend in 1981, after great deliberation, Baker decided to wait to dismiss the case.
Meanwhile, in Judge Greene’s courtroom, the prosecution had finished calling their witnesses and AT&T made a bold move to dismiss the case. Judge Greene’s response denying the dismissal was succinct:
“Whatever the substantive merits of the motions and the case generally turn out to be, I don’t believe the government’s evidence justifies such cavalier treatment. The government has presented a respectable case that the defendants have violated the antitrust laws, … Defenses have been raised, but I certainly could not say that these defenses are self-evident and will prevail…
I don’t propose to act on the basis of press reports or someone’s concerns unrelated to this lawsuit. The court has an obligation to deal with this lawsuit under existing antitrust laws, and it will do so irrespective of speculation outside the judicial arena.”
The judge would later deny a proposal to continue the case until Congress could pass comprehensive telecommunications legislation (known as bill S. 898). The defense continued to call witnesses throughout the fall of 1981, and, by a 90-4 vote, the Senate passed comprehensive telecommunications legislation to the House, led by Tim Wirth. With a new report on competition released in November, it appeared to AT&T Chairman Brown that pursuing a solution other than complete divestiture was going to be difficult if not impossible.
On January 8, 1982, AT&T and the Justice department signed a consent decree that separated the local phone companies into independent operating units. The concept of intra-LATA vs. inter-LATA access was established, and AT&T retained control of its equipment unit (Western Electric). Over the next two years, AT&T would structurally separate and become independent companies on January 1, 1984.
While Coll’s book ends in 1988, we have the benefit of seeing the full effects of the breakup of AT&T: The rise of multiple fiber-based networks, rapidly decreasing costs to call between states and globally, the rise of wireless spectrum and the rise of the Internet. Had AT&T controlled the network, it’s unlikely a subsequent Telecommunications Act would have been enacted in 1996, the development of the enhanced services provider would never have occurred, and companies such as AOL would have raised capital to quickly establish early Internet infrastructure. While it’s difficult to hang too many events on the AT&T tree, it’s important to understand and evaluate the fundamental changes the consent decree and Modified Final Judgement enabled.
That’s it for this week. Next week, we’ll preview the 2020 Consumer Electronics Show. 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.
Also, I’ll be at CES this year on the 7th and 8th. We have set up a special Sunday Brief table at Gordon Ramsay’s Pub & Grill at 7:30 p.m. on Wednesday January 8 – only three additional slots available, but please reply to firstname.lastname@example.org if you are interested in attending.
Have a great week… and GO CHIEFS!
 IBM, and to a lesser extent, Apple, shared this belief in systems efficiency.
 Coll, p. 26
 Coll, p. 43
 Coll, p. 52
 Coll, p. 68
 Coll, p. 71
 Coll, pp. 75-76
 Coll, p. 115
 Coll, p. 120
 Coll, p. 125
 Coll, p. 234
Holiday greetings from sunny and mild Lake Norman, North Carolina (sunrise shown – unaltered photo). There are a lot of follow-ups to cover, and, if reports are true, there may even be a settlement between the Attorneys General and T-Mobile/ Deutsche Telekom/ Sprint/ Softbank prior to their trial start on Monday (hope springs eternal).
Many thanks for the multitudinous comments on last week’s Thanksgiving book review article. We are not turning into the New York Times Book Review (won’t even try) but there’s a lot to discover and learn from the activities of our predecessors. We will have a similar article on Steven Coll’s 1986 classic outlining the events that lead up to the breakup of AT&T on December 29. Preceding that, we will have a “Three Companies to Watch” special TSB on December 22.
A final thanks for the many referrals that we have had over the past month – over 250 new readers have been added. If you know someone who could benefit from this column, have them send a request to email@example.com and we will get them on the list. We are also in the process of revamping the website (end of January) and promise more things in 2020 (including a merchandise fundraiser for the Davidson College Jay Hurt Hub for Entrepreneurship and Innovation).
This week, we will lead with a discussion of a deep topic – rethinking the wireless (and wireline) network operating system. As mentioned earlier, we have several TSB Follow-Ups.
Programming Tomorrow’s Network
Within wireless communications networks, there are multiple pieces of hardware, each running its own operating software. Each needs to operate to a given specification (usually a 3GPP or LTE Release standard), and there are likely additional requirements placed on the suppliers by the local operators.
This model worked reasonably well when voice and text (using the SS7 TCAP standard) constituted the majority of activity. However, the interest in pushing applications (e.g., WhatsApp owned by Facebook) deeper into the network has created a gap between legacy product development and entrepreneurs. On top of this, there is a need to cost-effectively provide access to less developed areas. On top of this, data growth continues to drive up costs, which create pressures on carriers (and, as a result their suppliers) to deliver a better experience and greater profitability.
This has forced two things to occur:
- Greater network sharing (predominately radios and transport) between network operators. CBRS is the beginning of this trend in the USA (see TSB on CBRS here); and
- Separation of hardware (e.g., a shared radio) and operating software (which may be custom to the operator).
Doing all of this in a secure environment is a challenge. Developing new operating systems amidst a global shortage of software development talent (and recognition of venture capital and other investors that this can be a value-producing endeavor) is an additional challenge. Integrating any operating system changes into the stream of concurrent innovations (e.g., 5G Standalone equipment development, increased mobile edge computing deployments, etc.) requires coordination. Creating competitive advantage in addition to achieving cost reduction targets adds to the heap. It’s like replacing Windows yet expecting no change in how current and future versions of Excel and PowerPoint will work.
We outlined the AT&T efforts in this space in a previous TSB (link is here) but think there’s a few “no brainer” areas where application developers and carriers should come together to improve experience.
- Voice calling. This experience is essentially the same across carriers:
- There is a non-real time contact list that is invoked through a clumsy, 1990’s dialer scheme (see nearby picture);
- There is no voicemail ubiquity within the carrier community (there is at the app layer, however, for WhatsApp, Google Voice, and others);
- To the best of my understanding, there’s no way of automatically integrating stored voicemails into CRMs such as Salesforce;
- There is no reminder or follow up function on voicemails (think how Gmail does this with emails);
- There are inconsistent methods of identifying spam calling (and any other incoming call for that matter);
- There’s no way of knowing any details or status about the party I am calling (such as whether they are on the phone or whether they have made a call in the past five/ten/fifty minutes or even the last day – think the notification scheme for apps such as Skype, etc.);
- For incoming calls, there’s minimal context and no ability to instantly locate/trace the incoming caller (mobile edge computing could fix this pronto and you could see that the call showing 704/Charlotte area code is really originating from Omaha);
- There’s no ability to interrupt a current call (e.g., spouse calling), a call feature common in contact centers (whisper tone);
- There’s no common messaging portal incorporating LinkedIn, Facebook, carrier, WhatsApp and other sources;
- Integration between conferencing services such as Zoom or Skype and the mobile device have not materially changed in 20 years. Still a phone number plus an access code and an announced name.
Is it any wonder that Google Voice, Facebook, and WhatsApp are succeeding and that carrier voicemail solutions are flat to declining? Customers are communicating more than ever, but they are just not into that 1990’s dialer.
To change voice, the interaction between a customer’s contact list (directory), the universal contact list (macro directory), storage (voicemail), availability (presence/ proximity) and the network needs to change. This can all be done faster within the network and is a prime example of how operating systems can and should be rewritten.
Voice application (the dialer provider) should be a choice. It should be portable and interoperable. It should be driven by a microphone and intelligence, not by typed search strings into contact list applications. And the private directory should have live updates (if allowed by the directory listing). The integration of applications functionality deeper into the network can do this, and advancements will occur a lot faster than we see today from the carriers.
- Predictive Analytics (and Customer Care). One of the eye-opening experiences I had with my Flash Wireless experience concerned troubleshooting device issues (Flash had a heavy Bring Your Own Device base). As an MVNO, we tried when possible to go the extra mile if the issue was device-related as opposed to a network issue. We formed a checklist which could easily be databased in today’s environment. Some of the important topics included:
- IoS or Android version
- Recent activity (e.g., voice over Wi-Fi connectivity issue vs the network, messaging activity, new apps downloaded, Wi-Fi vs network data access, location)
- Port-in provider (experience expectations)
- Phone age (and purchase source if it came from one from a known vendor)
- Customer lifecycle age (pre-first bill; first 90 days; over 180 days; etc.)
The number of possible iterations quickly grew, especially since we were in a 3-carrier MVNO environment (location in section b. above really mattered for some of our network providers).
A system that continually interacts with the network could do a better job of measuring data and device quality. If a customer had a service need, problem identification could be instant and highly accurate. Success would not be determined by the smartest care expert, but by the network (and the collective experience of all previous users who had ever used the network in that location at that specific day/time). The cost of caring for older devices could be calculated with high confidence.
To make predictive analytics work, measurement software needs to be pushed further into the network core. Economics aside, if the problem can be remedied by a carrier sharing partner, that can be done instantly through the operating software (not through a SIM setting). Anomalies can be detected for individual users and alerts can be delivered. If the problem was with the provisioning process, for example, the device could be re-provisioned right away (in a nearby store or over the air) or overnight.
The network can be the service expert if issues can be detected quickly. With the consolidation of device models (e.g., more iPhone 8, X, XR, XS, and 11 models in service than ever before), there’s plenty of correlations to be determined (e.g., Sprint iPhone XR users living in Somerset, Kentucky that have activated service in the last 90 days). The result of greater analytical capabilities built into the core could result in dramatically lower cost for customer care.
These are two of probably ten or more use cases that demonstrate the value of rewriting equipment operating systems. This will be an evolution, but not one that is done simply to lower costs – there are many product and customer experience benefits that could create competitive advantage.
Qualcomm Snapdragon 865 Chipset specifics revealed. Increasingly, what’s contained in Qualcomm’s chipsets finds its way into the subsequent generations of smartphones. If that is true, we should expect to see more camera focus (new chipset accommodates up to 200 MP cameras), 5G networks (full support), and faster displays (supporting up to 144 Hz). It was also interesting to learn that the Snapdragon 855 would also support Dual SIM/ Dual Standby (more details on that finding from this XDA Developers report here). As we discussed in last week’s TSB, the Apple XR/XS/ XS Max was the first lineup to support Dual SIM/ Dual Standby – Android development efforts in this area have been slower to emerge. The Qualcomm 855 should be the turning point and we should see the capability available on new devices in 2020. According to the XDA Developers article referenced above, they worked with Gemalto to enable eSIM support within the Qualcomm Secure Processing Unit.
One additional note about the Snapdragon 865 is its support for the Android 11 IdentityCredential API. This would allow, among other things, the ability to store your driver’s license in Android and it would be accepted as a proper form of identification. The complete video of Day 2 which has the details on the 865 are here – the discussion of Dual SIM/ Dual Standby starts at minute 31. The Snapdragon 865 spec sheet is also available here.
DOJ Calls Out Carriers on Remote SIM Provisioning (RSP) Collusion
The day before Thanksgiving, the New York Times ran an article describing the settlement between the Justice Department, the GSMA (standards body) and some US wireless carriers (presumably including AT&T and Verizon) over possible collusion surrounding the development of eSIM device locking.
The Times article is sparse on details – Assistant Attorney General Delrahim’s letter (here), however is not. Here’s what was found concerning the current RSP process (actual findings – emphasis added):
First, RSPv2 requires consumer-users to express affirmatively their intent to switch profiles each time the eSIM toggles between profiles or networks, thereby preventing the eSIM from automatically switching (or optimizing) between profiles. Dynamic or automatic switching is a potential competitive threat because it could lead to a service where a device efficiently selects, on behalf of the user, which profile to use in any given situation. For example, the eSIM could switch services if it detects stronger network coverage or a lower cost network, providing consumers with better or less expensive service. The prohibition on automatic switching would tend to prevent at least one existing operator from offering a new innovative service using an eSIM. That is, in order to offer the new service, the operator would have to convince smartphone manufacturers to forego complying with the RSP Specification.
Second, RSPv2 prevents an eSIM from actively using profiles from multiple carriers simultaneously. Multiple active profiles is a potential competitive threat because it would allow a user to divide usage across operators. For instance, the user could actively maintain two profiles on one device if he or she wanted to receive work-related phone calls to one profile and personal phone calls to another profile, all while carrying only one phone. The user could also actively operate profiles optimized for different coverage areas or for international travel. Although there appear to be technical challenges to allowing multiple active profiles at present, the single active profile requirement in RSPv2 serves as a roadblock to additional disruptive innovation that could solve these technical challenges.
The DOJ’s issue was not only with these two outcomes (which are unmistakably anti-competitive), but with the entire approval process used by the GSMA. Everyone agreed to comply with new process, and, with the advent of the new Qualcomm 865 chipset described above, it’s likely that switching between networks will be placed as a consumer choice with the opportunity to mute future notifications (similar to the roaming notifications process followed for over two decades) and also to allow multiple networks to be accessed simultaneously (making data network selection easier for cable MVNOs and others while potentially keeping voice on the MNO network).
Adam Koeppe Takes the Stage in Vegas (While His Boss is on a Separate Stage in Vegas)
Given space constraints in this week’s TSB, I am going to keep this excerpt short (perhaps we will cover in another TSB this month), but, if you want to know what Verizon is doing with respect to network deployment, listen to his Well Fargo talk with Jennifer Fritzsche here or read the transcript here. Adam covers the AWS 5G Edge announcement, fiber deployment strategy, CBRS (and Enterprise LTE solutions pairing CBRS and millimeter wave spectrum bands), Broadband to the home and relationship to cable MVNO, and a few other topics. Less spin is good for Verizon, and Adam is a “balls and strikes” interview.
What Markets Will See the Greatest Improvement to Sprint/ Boost if New T-Mobile Actually Occurs?
We had been thinking about this topic for a while, and accessed publicly available RootMetrics data (2H 2019 measures only to be most current in our assessment) to see where the current gap between T-Mobile and Sprint exists.
To no one’s surprise, Sprint tends to solely occupy fourth place in nearly each of the 125 markets that RootMetrics measures every six months. How would that performance improve once that Sprint/Boost customer (current device) could access the T-Mobile network?
To determine the greatest impact, we looked at the difference between Sprint and T-Mobile’s Overall Score (perhaps in a future TSB we will dive into the components). As of Wednesday, RootMetrics had published the results of 96 out of 125 markets (77%). The results break down as follows (100 pt scale):
Overall Score Difference Number of Markets Percentage of Total
Less than 3.0 points 19 20%
3.1 – 5.0 points 13 13%
5.1 – 10.0 points 48 50%
More than 10.0 points 16 17%
While there may be debate about the impact to customers for the first two levels (device age could play a significant role in a market where both T-Mobile and Sprint are relatively strong), there’s little debate when there’s a spread in excess of 10 points and the market is not one of the previously announced 5G markets. Here’s a sampling of where Sprint has fallen behind:
- Oklahoma. Below are the most recent charts for Tulsa and Oklahoma City. ‘Nuf said.
- Florida. These are legacy MetroPCS markets for T-Mobile and have very dense coverage. Miami, which was once a priority market for Sprint (non-executive Chairman Marcelo Claure has close ties to the area), has fallen off considerably and is no longer a competitive market for Sprint. Other markets with more than a 10 point spread to T-Mobile include Port St. Lucie (12.2) and Sarasota (11.1). Orlando, Kissimmee, Tampa, and Jacksonville have a 5.1 – 10.0 spread. The other markets are waiting to report.
The remaining markets are both big and small metro areas:
- Atlanta (fast growing area, large market, 5G market)
- Baton Rouge, LA (been a weak network for Sprint for many years)
- Charlotte, NC (fast growing area and second home to most of the financial services industry)
- Denton, TX (North Dallas suburbs)
- Kansas City, MO (very odd as it’s Sprint’s current HQ and a 5G market)
- Louisville, KY
- Memphis, TN
- Nashville, TN (fast growing area)
- San Antonio, TX (Sprint PCS dominated this market because of its design; large market)
- Wichita, KS
Interestingly, no Northeast, Northwest, Southwest or California markets with large gaps. We will update this list in January once RootMetrics has completed their 2H 2019 metro studies.
That’s it for this week. Next week we will begin our discussion of 2020 trends unless events dictate otherwise. 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 great week… and GO CHIEFS!
Greetings from Charlotte, North Carolina (Uptown signpost pictured). We will attempt to answer the question “Do the state Attorneys General have a case?” by summarizing and analyzing their case (find a copy of the complaint here – see point 7).
Following the ebullience of DOJ approval and a very strong earnings report from T-Mobile, investors digested Verizon’s (generally strong for wireless, and weak relative to AT&T for wireline) and Sprint’s (generally weak, Free Cash Flow negative) earnings. We will weave some recent earnings results into this week’s TSB, but, if you want all the details and analysis, look to the Deeper post we will have on the website related to “State Attorneys General Make Their Case”
Let’s dig into the basics of the case by understanding the plaintiffs, the nature of the complaint, and possible remedies/ compromises.
Who is Suing?
For those of you who are not following recent events closely, fourteen states and the District of Columbia are filing suit to permanently block the merger of T-Mobile and Sprint. Those states are as follows:
There is a very good balance of incumbent telcos represented by the suing states and DC. In fact, outside of Texas (let no one forget it’s the HQ of AT&T), there’s really no representation of the former Bell South or Southwestern Bell territories. It is interesting that 11 out of the 15 states or territories have a population density that is higher than the national average (the promise of rural buildout is less attractive in these areas than in Kansas, Nebraska, Wyoming, Oklahoma or the Dakotas). And there are some notable dense areas that are missing: New Jersey, Rhode Island, Delaware and Florida all have high population densities but have not joined the group. Florida and New Jersey split cable coverage between Comcast and Spectrum.
While the plaintiffs in the lawsuit make an argument that competition will raise prices and reduce choices for lower-income Americans, it’s interesting to note that 11 out of the 15 states have high median household income (with 7 of the top 10 household income states represented). In fact, 12 out of the lowest 13 per household income states are not party to the complaint.
The head-scratcher on this list is Colorado, home to Dish (admittedly not as much in the picture when the lawsuit was filed in mid-June) and a relatively less dense area. But it also happens to be home to a significant and growing base of Comcast, Spectrum, and CableLabs employees and is one of the fastest growing states in the country. And, as the nearby chart shows, Colorado has a Democrat Attorney General (profile here).
What isn’t a surprise is that 11 out of 15 states have a strong Comcast presence. Admittedly, Comcast is pretty much everywhere (see map from Broadband Now here), and Illinois
(Comcast is primary provider to Chicago), Washington (Seattle, Tacoma), Georgia (Atlanta), Florida (Miami) and Pennsylvania (Comcast’s home state as well as provider in Philadelphia and Pittsburgh) are not currently represented in the legal action. But if we see others join the lawsuit next week, don’t be surprised if they are one of the five mentioned above (Washington would be a particular blow to T-Mobile whose HQ are in Bellevue).
Bottom line: There are 26 states with a Democrat Attorney General, and half of them have joined together to block the T-Mobile/ Sprint merger. The one Republican state that recently joined the lawsuit happens to be home to T-Mobile’s former proposed merger partner and current competitor, AT&T. While there is no clear pattern beyond political affiliation, it is interesting to note that Comcast/ Xfinity Mobile has a major presence in many of the suing states.
What’s Their Case?
The case is best summed up in the last section (104) of the complaint: “Unless enjoined, the Merger likely will have the following effects in retail mobile wireless telecommunications services across the nation, among others:
- “Actual and potential competition between Sprint and T-Mobile will be eliminated;
- “Competition in retail mobile wireless telecommunications will be lessened substantially;
- “Prices for retail mobile wireless telecommunications services are likely to be higher than they otherwise would be;
- “The quality and quantity of mobile wireless telecommunications services are likely to be less than they otherwise would; and
- “Innovation will likely be reduced.”
Simply put, the telecom marketplace is better off with the current four-company structure, warts and all, then it would be with a three-company structure and Dish as a new entrant (with Sprint’s 800 MHz spectrum). The complaint contends that prices would rise 17-20% as the new T-Mobile would exercise their dominant position in major metropolitan areas such as New York and Los Angeles to keep prices (particularly prepaid) high. It also contends that fewer MVNOs would emerge and current MVNOs like Tracfone/ Straight Talk (20 million total customers) would struggle because neither the new T-Mobile nor Dish would make 4G or 5G capacity available at attractive prices. Finally, they contend that the consequences for the new T-Mobile failing to fulfill their deployment promises to the FCC are too weak.
While the actual market shares are redacted in the complaint, the Herfindahl Index information and the disclosure that the new T-Mobile would have more than 50% market share in the New York and Los Angeles CMAs (see sections 48 and 49 in the complaint) is astounding (full map of the FCC CMAs and RSAs here). CMA 1 and 2 are not small geographic areas, and, as we discussed last week, Dish owns some additional 600 MHz spectrum covering CMA 1. The greater question is “If true, what have AT&T and Verizon been doing in these markets for the last seven years? Have they been retreating to the Connecticut and New Jersey suburbs (as Long Island is covered by CMA 1)?” The disclosure is damning to Verizon and AT&T as it represents their two largest facilities-based (incumbent telco) footprints.
As for the argument that low-income subscribers would be disproportionately impacted, let’s have a look at the map of “mobile phone shops” in Paterson, NJ (I had the opportunity to tour every one of these and a few more as a part of my MVNO education in 2017). As you can see from the nearby picture, there are 17 stores within a 12 square block radius selling every major carrier. There’s a Boost City and two Boost Mobile stores. There’s a Total Wireless (Tracfone MVNO served exclusively by Verizon) and AT&T, Verizon FiOS, T-Mobile and Sprint retail stores in the mall at the bottom of the picture. There are traditional bodega-style shops selling H2O (AT&T MVNO), Ready Mobile (Tracfone MVNO served by T-Mobile), Ultra Mobile (T-Mobile MVNO) and several other brands.
Competition would suffer if T-Mobile eliminated their MVNO business entirely, but there’s absolutely no indication that they would ever throw Tracfone to the curb (their recent earnings call language backs it up). But if they did, AT&T (Cricket) and Verizon (Total Wireless, Xfinity Mobile, Spectrum Mobile) would gladly take their customers.
If space permitted, there’s an argument to be made that if Apple’s new credit card is successful (see latest Bloomberg article here), the concept of device financing through a traditional carrier will be a thing of the past in several years and we will be ordering iPhones with Mint Mobile-like online plans. Traditional carrier stores will go the way of bank branches (minus the need for an ATM).
Bottom line: The case sounds strong, but there’s plenty of contrary evidence indicating that the new T-Mobile would not behave like AT&T and Verizon just because it is bigger. The Herfindahl Index results highlight the metro retreat of the larger established brands more than the growing domination of their smaller rivals.
Let’s Make a Deal!
If a settlement can be achieved, it could include the following:
- Additional wireless subscriber divestitures in high-concentration markets to Dish. That’s a “sleeves off the vest” give on the part of new T-Mobile if they believe that they can win those customers back (T-Mobile’s postpaid monthly phone churn was extremely low this quarter at 0.78%). It may be easier to divest existing Sprint subscribers.
- Force a better MVNO deal for Dish (which would likely delay their construction of a replacement network).
- Mandate “cost plus” roaming rates T-Mobile offers to other carriers who wish to use the new T-Mobile network in rural areas (another “sleeves off the vest” argument which would improve scale for T-Mobile).
- Accelerate the Dish network deployment timeline (which would need to happen separately as Dish is not a party to the state Attorney’s General complaint) with additional penalties for non-compliance.
- Providing Dish (or near-Dish) terms to any new or existing MVNO that wishes to use the new T-Mobile network for the next 7 years (including the ability for any MVNO to exercise core control as outlined in the complaint). This would increase T-Mobile’s overall scale but not improve Dish’s overall competitiveness.
- Significantly higher penalties should T-Mobile not comply with the FCC conditions.
- Additional commitments (including cash payments) to the states. These might include requiring all new devices sold by new T-Mobile to be compatible with all other carriers, establishing a neutral-party run device compatibility database that would allow current and prospective customers to determine whether their current device could deliver a better network experience, and tools to make it easier to bring all text messages and voicemails to carriers should the customer leave the new T-Mobile.
Rather than focusing on the higher market share that the new T-Mobile will have (which has changed dramatically since 2012), the Attorneys General should focus on how to provide incentives to Verizon and AT&T to reestablish their presence in urban areas.
Bottom line: There’s a deal to be made. Rather than run the court through 5G cost models and timelines, the new T-Mobile executives and state officials should create a framework which will result in greater citywide competition and hasten the deployment of tomorrow’s network.
Next week’s issue will summarize 2Q earnings and look at Verizon’s new unlimited pricing plans. If you would like a copy of either the Top 10 Trends or the IoT Basic presentation discussed in last week’s TSB, please let us know at the email below and we’ll get you a copy.
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 will include them on the list.
Have a terrific week!