Competition

Roger Entner
Roger Entner
Analyst and Founder

In 2014, roughly 143 million mobile phones were sold in the United States, approximately 90% of them smartphones. This is a decline of 25 million phones from 2013 when approximately 168 million phones were sold – and only half of them were smartphones. The decline in phone sales is predominately due to the rise of equipment financing plans, compounded by slower new subscriber additions. At the same time, consumers’ phone purchase habits have changed significantly. A growing number of American consumers delay their phone upgrades to take advantage of the lower monthly service prices carriers offer to consumers who wait to upgrade phones at the end of their two-year contracts.

Consumers who are purchasing replacement phones are focusing on newer, higher priced devices. Even though device sales declined by 15% year-over-year, device revenues increased by about 5%. In the short term, this flight to higher priced devices increases revenues and profitability for mobile carriers, but longer-term the trend is negative, as it takes longer for new devices to permeate the network. Device manufactures are cheering the higher revenues as the market has shifted heavily towards higher priced smartphones. Now that smartphones make up 90% of handsets sold, device manufactures can no longer cannibalize feature phones for significant revenue upside. We expect device sales to fall by 5% to 136 million in 2015 and to fall again by 4% to 131 million in 2016.

With device sales and new subscriber additions declining, the impact on the handset replacement cycle has been significant. Handset replacement has abruptly slowed to the lowest rate since we began calculating the metric. The introduction of Equipment Installment Plans (EIP) has made a significant impact on the handset replacement cycle by extending it to 26.5 months in 2014, an increase of 4.1 months compared to the previous year.

 

Handset replacement cycle 2014 - Replacement Cycle

Americans typically upgraded their phone at three points in time: Roughly every year when a new generation device was launched; approximately every two years when the contract expired, causing customers to either change operators or became eligible for subsidized prices; or whenever their phones became obsolescent or stopped working. With the rise of EIP plans that incentivize both rapid upgrades every year and delayed phone upgrades through discounted service pricing, consumers have eschewed the traditional two-year service plan upgrade cycle.

Handset replacement cycle 2014 - When do people replace their device

The percentage of devices being replaced every year increased from 45% in 2013 to 49% in 2014, while the percentage of devices that replaced obsolete devices sky rocketed from 15% in 2013 to 35% in 2014. The percentage of devices being replaced at the traditional two year time point fell from 40% in 2013 to 16% in 2014, while they represented slightly more than 50% of replaced devices from 2010 to 2012. As As Americans bifurcate their purchasing behavior, we are observing the beginning of a capabilities gap between Americans who upgrade their phone every year and those who upgrade it when the device becomes obsolete or breaks.

The handset replacement cycle measures how often existing customers are upgrading their phones. It is an important measure of how close the average consumer’s device is to the technical state–of-the-art. Whereas most consumers used to upgrade after two years, today’s market sees an interesting dichotomy: Nearly half of consumers upgrade every year, but more than a third keep their devices until they become obsolete. A longer handset replacement cycle will have several ramifications on innovation throughout the mobile ecosystem:

  • Less innovation in applications: Application capabilities may be artificially restrained, as developers deal with an average consumer who is less able to take advantage of new technologies that improve the utility of the device and service. The introduction of EIP has created an earthquake-like, tectonic shift in when Americans are upgrading their mobile phones. Software developers face a new dilemma, as they must nowgrapple with the fact that a large percentage of smartphones in use won’t be able to run their new cutting edge apps. In order to run on the largest number of devices possible, some developers won’t build the latest-and-greatest capabilities into their apps, thereby slowing the pace of innovation in the mobile space.
  • Less competition from smaller handset providers. Most handset manufacturers – who are already struggling to remain profitable – will be under pressure to cut their research budgets as revenues decline, therefore reducing the amount of effort dedicated to making the next generation smartphones even better. Smaller handset providers are going to be disproportionally hit, making their devices less competitive compared to larger handset providers — leading to a shakeout.
  • Spectrum crunch in major markets. The spectrum crunch in major markets will be worse than otherwise as older devices cannot access new spectrum bands as they are lacking the necessary electronics for it. Device capabilities determine which network capabilities the phone can access. A six year old iPhone 3G will achieve download speeds of 2 Mbps with its first generation WCDMA chipsets, whereas a new iPhone 6 will be able to download the same content 25 times faster due to its new 4G LTE capabilities able to access newly licensed spectrum. As fewer people upgrade their devices, the pace with which consumers can use new unused parts of the networks on new spectrum slows down and consumers are stuck on congested legacy spectrum. This engineering reality is particularly important as mobile operators are currently spending more than $45 billion on new spectrum.
  • Delayed transition to next-generation services. The monumental transition to VoLTE — and therefore to a more efficient use of spectrum, with significantly better voice quality — will be slowed by an embedded base of older devices.

To be sure, despite the bifurcated market and all the problems caused by it, some positive developments could still increase revenue for manufacturers:

  • Speed boosts. Faster speeds mean access to better and more content and higher profits for web retailers and carriers alike. The faster the download speeds a device can support, the better the user experience as the consumer does not have to wait for video content to be buffered or web sites to be loaded. According to Akamai, a one second delay in page load results in a 7% decline of purchase conversion.
  • More power. Access to more advanced screens and processors allow more appealing graphics and more powerful applications to run on your phone. This begets more usage and more consumption of content which in turn generates more revenue and profits for multiple entities across the mobile broadband value chain.
  • Better batteries. Newer battery technology allows phones to run longer allowing them to be used to do more for a longer period of time. This too impacts the virtuous cycle of more use begets more revenues and profits.

Unfortunately, those longer-term developments could be largely offset in the short term by the slowed innovation and cramped spectrum caused by delayed handset replacement.

Who are short-term and long-term winners and losers in this change?

  • US Consumers: Short-term winner, long-term loser.
    Consumers get $20 per month more in their pocket for waiting to upgrade their phone. In the longer term, consumers will have fewer choices and delayed mobile phone innovations and fewer new apps taking advantage of new hardware features than they would have in a higher volume scenario with more device manufacturers.
  • The US (app) economy: Short-term winner, long-term loser.
    While an approximately $12 billion per year (50 million devices times $20 per month) in additional stimulus for other the rest of the economy is helping boost restaurant sales and reducing consumer debt, the economy will feel the long-term negative impact. As consumers and businesses alike are tempted to delay an upgrade, the beneficial impact between mobile and productivity in the US will weaken as new services that save us money, improve our lives, and make the economy more efficient take longer to be implemented. One especially poignant example is mobile payments. ApplePay is revolutionizing mobile payment with high attachment rates because people with the new iPhone 6 can take advantage of ApplePay. People who delay cannot, creating a barrier to adoption. The same is true for NFC (or not) enabled devices for other mobile payment platforms like PayPal or Google wallet.
  • Device manufacturers: Short-term winner, long-term loser.
    Device manufacturers benefitted handsomely as smartphones as a proportion of handset sales increased from roughly 50% in 2013 to 90% in 2014 and profits surged. In 2015 and onwards, profits will fall as the number of devices will continue to decline
  • T-Mobile: Short-term big winner, long-term loser.
    T-Mobile successfully reshaped the mobile industry through the introduction of its EIP, and has grown faster than all other carriers combined. At the same time, roughly 30% of its new customers did not buy a new handset, but brought their own. As a result, the handset base is aging and cannot take advantage of new bands like 700 MHz and VoLTE. The introduction of SCORE! has to be seen in the context that T-Mobile wants to speed up the handset replacement cycle, and is willing to incur a modest subsidy.
  • AT&T: Short-term winner, long-term loser.
    AT&T followed T-Mobile aggressively into the brave new EIP world. AT&T has been able to defend its base against lower priced T-Mobile and other operators who offer EIP financial benefits as device subsidy expenditures have declined significantly. AT&T will face the same problems as T-Mobile as the device universe of its customers ages.
  • Verizon: Short-term neutral, long-term neutral.
    Verizon is holding on as tightly as it can to the status quo, while offering customers who want it an option to do EIP. In the short term, Verizon benefits less than T-Mobile and AT&T from the changes, but will also not suffer as much from a lengthened handset replacement cycle.
  • Sprint: Short-term loser, long-term winner.
    Sprint, like every other company, dabbles in EIP offers, but only Sprint with its 24-month handset leasing program has a viable plan in place to keep the device upgrade cycle in place and reap the benefits from a customer base with newer devices.
Roger Entner
Roger Entner
Analyst and Founder

Over the last two years, in addition to attracting new customers, most of the wireless industry has focused on better serving its existing consumers with products and services those consumers want. We all watch more mobile video and play mobile games. As a result, an unsung hero—in form of the tablet—has emerged. Launched only 4 years ago by Apple, the iPad was quickly imitated by others. Initially, the main focus was on Wi-Fi-only tablets, which are only connected close to a hotspot. But now, as Wi-Fi-only tablet sales slow, LTE-connected tablets have gained in popularity and have become a significant growth source for carriers as the traditional mobile phone business weakened and shifted considerably.

Exhibit 1: Postpaid branded net additions by device category, Q4 2013 to Q3 2014

2014-Tablet-Exhibit1

This trend culminated over the last four quarters, with 61% of the branded postpaid growth of the four nationwide operators coming from tablets. This development shows the tremendous change that the mobile industry is continuing to undergo and identifies a significant driver of the growth in data consumption by the most suitable device—tablets—for media consumption and gaming.

Why have consumers, who in years past mostly ignored tablets with wide-area connectivity, suddenly shifted their purchasing behavior? Three factors led to this significant change:

1)     The cost of service has declined: The introduction of mobile share plans has made tablets economically possible for consumers. Before mobile share plans, adding a tablet meant a separate data plan with a separate data allotment for $40 or more—in addition to paying $100 or more for the tablet with wide-area connectivity compared to a Wi-Fi only device. With mobile share plans, adding a tablet is typically only $10 per month, still within the realm of impulse buying or cheap enough justify it as a way to pacify a child in the back seat of the car or a husband needing to watch NFL Sunday games just about anywhere.

2)     The cost of tablets has declined: A substantial decrease in the cost of wide-area connected tablets from various manufacturers has made them more affordable. While wide-area Android tablets were as much as $500 when they were first introduced as a lower-cost alternative to Apple iPads, the unsubsidized retail cost has come down to roughly $250 without a contract or commitment. If a consumer enters a 2-year contract the cost of the device is $100, but even that is frequently discounted down to zero.

3)     Equipment installment plans have made devices even more affordable: A $250 tablet is generally about $12.50 per month on an installment plan offered by the nationwide operators. As many Americans generally prefer to pay over time instead of upfront, the addressable market for tablets increased substantially.

Not every operator is, or has been, equally dependent on tablets for their growth. Tablet promotions have become the operator’s weapon of choice to make their quarterly postpaid branded subscriber growth number. When we look at how dependent operators are on tablets for growth, quite an interesting picture emerges.

 

For Sprint, a Beacon of Hope

Even as Sprint went through a sea of troubles attracting new subscribers to their network, its success in tablets served as a beacon of hope for the company. The company jumped aggressively on the tablet trend and succeeded in satisfying customer demand.

Exhibit 2: Sprint postpaid branded net additions by device category, Q4 2013 to Q3 2014

2014-Tablet-Exhibit2

While Sprint lost almost 2.4 million branded phone connections in the last four quarters, it gained almost 1.8 million new tablet connections. Losing 600,000 postpaid branded connections is nothing to write home about, but without its tablet sales, results would have been even more devastating.

 

AT&T, the Balancing Pioneer

AT&T was at the forefront of meeting customer demand for tablets. Because it was ahead of the market and other carriers in satisfying consumer craving for entertainment on the go, it initially struggled with the profitability of selling subsidized tablets. After developing the market and volumes, the overall market moved in AT&T’s direction. As a result, other operators shared the efficiency gains that come from higher sales volumes.

 Exhibit 3: AT&T postpaid branded net additions by device category, Q4 2013 to Q3 2014

2014-Tablet-Exhibit3

AT&T achieved the second most branded postpaid phone additions in the industry by capturing 1.65 million new phone customers, slightly ahead of Verizon Wireless but less than half of T-Mobile. It also added 1.45 million tablets, which represent 45% of its net additions for the last four quarters, giving AT&T the most balanced growth of the nationwide carriers. Slightly behind AT&T in recognizing the trend towards tablets, Verizon Wireless’ results show that more focus often leads to better results.

 

Verizon Adds Almost as Many Tablets as the Other Carriers Combined

With a slightly larger customer base and slightly less new phone customers (1.64 million), Verizon Wireless added twice as many new tablet connections as AT&T with 3.5 million, compared to AT&T’s 1.3 million.

Exhibit 4: Verizon postpaid branded net additions by device category, Q4 2013 to Q3 2014

2014-Tablet-Exhibit4

With more than two thirds of its postpaid branded net additions coming from tablets, Verizon Wireless had the highest net postpaid branded subscriber net additions. Since the majority of the growth was meeting the needs of current customers rather than new customers, it significantly overestimates the strength of the customer acquisition engine of Verizon Wireless. While Verizon Wireless can be satisfied that it added more connections than anyone else, being number three in branded postpaid additions in its core segment must be a wakeup call in Basking Ridge.

 

T-Mobile’s Lack of Tablet Focus Hides Future Growth Potential

T-Mobile’s relentless drive to innovate—sometimes more substantive than at other times, combined with a CEO that has almost become a Jesus-like figure to some—has yielded spectacular new branded postpaid customer growth. T-Mobile added more than 3.8 million new phone customers, growing faster than the rest of the industry in new phone customers combined. The operator was near death before John Legere arrived. He changed the rules of the game in wireless, revitalized the organization and took it to previously unknown heights.

Exhibit 5: T-Mobile postpaid branded net additions by device category, Q4 2013 to Q3 2014

2014-Tablet-Exhibit5

The only weakness in T-Mobile’s performance was its lackluster additions of tablets. Despite being the only operator that offers free data for life for tablets, T-Mobile added only a small fraction of tablets compared to its competitors. The company, which focused on new customer phone growth, largely ignored tablets as it added only 665,000 new postpaid branded tablets, a third of what Sprint achieved with roughly the same subscriber figures. But this apparent weakness in tablet sales now also gives T-Mobile the opportunity to go back to its current customers like its competitors and, with sufficient focus, add one to three million more tablets in future quarters.

 

Roger Entner
Roger Entner
Analyst and Founder

All the while when we were trapped in the Title II News Blizzard that made any other topic seem small and irrelevant, the FCC has been conducting an auction of wireless spectrum. This wasn’t supposed to be the big auction – that honor was reserved for the incentive auction, in which broadcasters would sell spectrum they hadn’t deployed since the digital TV transition consolidated things. This was just an auction for “AWS-3” spectrum, Advanced Wireless Service frequencies in a high band that wasn’t expected to pique much carrier interest. The FCC had set a reserve price of $10.6 billion.

The auction has netted more than $43 billion and counting. Or, as the House Energy and Commerce leadership put it, “BOOM!”

The success of the AWS-3 auction has amazed the press and pundits alike. In fact, FCC Chairman Tom Wheeler has observed that “The AWS-3 auction is at these incredible levels … despite the fact that I’ve been talking about Title II all along.” While I don’t want to debate the FCC Chairman, it would seem a stretch to claim that the huge dollars being bid for AWS-3 spectrum are because the carriers embrace a particular regulatory framework. To the contrary, it appears the cold, hard reality of needing a key input for the business is driving the eye-popping bids. The auction seems to be exceeding everyone’s expectations in spite of the threats of extending Title II to wireless data (Title II currently applies to wireless voice, not data as some have alleged). The holiday season is a time of hope and clearly, the companies bidding in this AWS-3 auction are hoping that government regulation of wireless won’t render their investment null and void.

From a business perspective, the top reasons AWS-3 is blowing away its progeny are:

  • The AWS-3 band is used everywhere on earth. It’s the only band out of more than 50 that can make that claim. If you’re a carrier with customers that travel the world, and you want your customers to enjoy 4G LTE, this is the band to have. Without AWS-3 spectrum, carriers have to resort to guesswork to determine which three or four bands will be sufficient for their customers to have global coverage.
  • According to Mike Rollins at Citi Research, the 10×10 MHz J-block is trading at a 15% valuation premium compared to the average of the 5×5 MHz blocks. The valuation validates the engineers, industry analysts like me and international auction designers who have been saying that wider channelization and mid to high band spectrum combines to create the new beachfront spectrum. One can only hope that Auction 97 puts to rest the erroneous notion that lower band spectrum is somehow more valuable than higher band spectrum. The Mhz/pop values in Auction 97 are significantly higher than that in Auction 66, even adjusted for inflation. In a world where we have 99% 4G LTE coverage, the propagation advantages of lower band spectrum are being nullified by the need for smaller cells to provide more capacity. In an urban area, a 700 MHz network looks no different than 2500 MHz network – and a lot more people live in urban areas than in rural areas.
  • Operators are scared by the delay in the ultra-complicated, one-shot-only incentive auction. That delay is a decidedly mixed blessing, because when reading the tea leaves, it quickly becomes apparent that at this point in the process, there aren’t enough broadcasters willing to part with their licenses to make this auction a success. The NAB’s lawsuit delays the auction and gives FCC the opportunity to make the auction more attractive and provides more time to convince more broadcasters that it is actually in their best interest to put up their licenses for auction.
  • Historically low interest rates make the assumption of debt a viable means to pay for spectrum acquisitions. Just like home buyers can afford to spend more money on their new home due to lower mortgage rates, operators can afford to spend more on spectrum when they can borrow money to do so and do it cheaply.
  • Spectrum is a finite, essential resource that drives the business. This means that as long as there is an ongoing and increasing in demand for it, spectrum increases in value over time.
  • Auction 97 is here, it’s happening, and the frequencies are for real. The prospect of more spectrum in the foreseeable future is rather slim. The promised 500 MHz of spectrum for wireless is increasingly looking like a mirage in the desert. Contrary to what some people think, the bidding in Auction 97 seems to reflect the evaporated trust in the ability of the government to provide access to more spectrum in the future. They’re reflective of a flight into quality spectrum assets today, not a sign of trust in what the future will bring.

What is most exciting about the auction is yet to come – the build-out of the spectrum and expansion of existing networks. That will be the truly best outcome for American consumers and validation of the fact that spectrum auctions are the most efficient tool for allocating a scarce resource.

Roger Entner
Roger Entner
Analyst and Founder

After several failed attempts to come up with a net neutrality proposal that reasonably addresses legal, industry and consumer advocate concerns around the optimal legal foundation for net neutrality, the FCC made public last week it wanted to pursue a new “hyrbrid” approach that would apply both Title II and Section 706 regulations on Internet providers. While the policy elite inside the Beltway pondered what a hybrid approach would look like and how it would operate, the White House ushered in yet another layer of political complexity and confusion to the debate. On Monday morning, in an unprecedented move, President Obama announced in a video address that he had asked the FCC to classify all internet services – mobile and fixed – as Title II under the 1934 Communications Act. Never before has a President publically directed the FCC, an independent agency, to do something this specific on a policy issue within the FCC’s oversight. While the President did note that the FCC is an independent agency and that ultimately the decision is theirs alone, his message couldn’t be any clearer. Anyone who is or ever has been in a relationship knows what the “the decision is ultimately yours alone” line really means.

The market response was swift, and predictable. The video address had the effect of resolving the uncertainty about whether the FCC was really, truly, seriously going to do Title II. Within hours of the announcement, the NYSE saw a drop of 4.5% to 7.6% in value among the largest ISPs by the close of the bell Monday. Some investment analysts such as Wells Fargo’s Marci Ryvicker estimate that the downside risk for cable stocks can be as much as 23% of their current value. And why did investors react so negatively to the President’s message? Simple. A Title II world minimizes future growth opportunities for ISPs. Equally scary to investors, a Title II world at this point in time spells regulatory chaos and legal wrangling for years to come, a scenario antithetical to low cost of capital and high investment.

President Obama’s foray into broadband policy could represent a major turning point in telecommunications and internet policy both for the United States and the world as a whole, if the FCC adheres to what the President requested. In a world where prices decline, services improve, and choices increase, this country’s most senior leader has decided that a heavy-handed regulatory framework developed 80 years ago is the right vehicle to grow jobs, attract investment and catalyze innovation in the digital economy. Unfortunately, the most likely scenario is that regulations designed for a monopoly world will bring us back to the regulated monopoly times where every incentive to exceed the government requirements was eliminated.

Governments in other countries, both democratic and less than democratic, will see this decision of the US government as an endorsement of their own efforts to more closely censure and close down the Internet within their borders.

By pursuing Title II, the government is hobbling a part of the most vibrant segment of the economy. How interfering into such an interdependent system with a bludgeon like Title II can lead to an improvement for the overall system is difficult to see. Title II was introduced into a steady-state, innovation-free system that did not change for the next 50 years as there was no incentive to change. The “strongest possible rules” that President Obama asks for is the same type of corset that will probably suffocate innovation and investment in mobile and fixed internet. For a thriving internet, both technologies and business methods of all players need to evolve, small and large alike. Innovation dies when it has to ask for regulatory approval. Adding insult to injury, Title II does not cure the alleged problem, paid prioritization. Title II does not prevent paid prioritization as long as the prioritization is available to everyone who purchases the exact same service.

The market has made it clear that it does not have an appetite for draconian government interventions here. Whether the FCC will appreciate the signals the market is sending is an open question, as is whether the FCC cares what the market thinks. For the record, the agency should care. Pushing out high speed broadband to more than 95% of the US population is a key objective of this Administration. A Title II world could very likely preclude that from ever happening if the market decides the regulatory risk is too high.

Roger Entner
Roger Entner
Analyst and Founder

A raging debate over the future of the U.S. wireless industry has taken center stage in Washington, and attracted the attention of the Europeans whose own wireless industry is imploding.  The outcome of the debate will directly impact the US economy, shape US broadband technology and consumer trends for decades and could signal the US government wants to play a much larger role in the marketplace.

But first, a few words about the debate.  At this week’s Senate Commerce hearing, we heard evidence explaining why the most spectrum constrained companies – the companies with more demand on their network than they have capacity to support –need more spectrum and how that would benefit consumers and the US economy.  According to CTIA’s Steve Largent, citing Recon Analytics research, the U.S. wireless industry is responsible for 3.8 million jobs, directly and indirectly, accounting for 2.6% of all U.S. employment. The U.S. wireless industry created $195 billion economic activity around the world and would be the 46th largest economy if it would be a country. A total of $146 billion was retained in the United States.   The implication being if you feed more spectrum into the pipeline, these growth stats will grow even larger.  Representing the interests of smaller carriers, Steve Berry of CCA took a different view of things, and requested government help in improving the competitive positions of his member companies.  One of the big asks was for the FCC to ensure that future spectrum is steered away from the most spectrum constrained companies and into the hands of less spectrum constrained companies. In an interesting interjection Senator Warner countered the argument that barring Verizon and AT&T would enhance competition by stating that the only effect of such bidder restriction would be that T-Mobile and Sprint instead would beat the smaller competitors and nothing would have changed – convenient for T-Mobile and Sprint, but nobody else. Meanwhile, the cable companies made the case for making more unlicensed spectrum available and the equipment manufacturer Cisco reconfirmed that our wireless broadband networks are awash in mobile video and are about to collapse under the weight.

The calmly delivered testimony belied the intense policy debate raging through the halls of the FCC and Congress.  The FCC and DOJ’s antitrust division have made it clear they would like to manage market share in the industry by restricting spectrum ownership.  The two companies the government is eager to help manage are naturally a bit less than enthusiastic about the idea.  Competitors of the two companies are of course thrilled with the concept.  Three questions seem to be lost in the fury.   What is the problem the FCC and DOJ want to solve?  Will the proposed solution actually resolve the stated problem?  How will consumers be impacted?

The FCC and DOJ are fearful that the two largest companies today may continue to be the largest in the future and prices will go up.  Staff at both agencies indicate a concern with an industry where market share is not “more equally” distributed among the multiple providers.  The DOJ’s suggested remedy is to limit the amount of spectrum the two largest providers can use to support their networks.  As the New York Times put it, the DOJ is suggesting that the FCC limit competition in order to expand competition.

The theory seems to rest on the notion that customers of spectrum constrained companies will experience degraded service quality and higher prices over time, prompting the customers to defect to other providers, presumably the ones with more spectrum and fewer customers.  Or perhaps the theory is that steering spectrum away from some of the companies that need it, and into the hands of others that may not need it as urgently, will slow the growth of the larger companies and enable the smaller competitors to essentially catch up.  Either way, having a policy that effectively curtails the growth of some companies could certainly shift market share in the industry, but would it produce prices lower than they are trending today?  Would it produce more investment in faster build-out of 4G?  Would it catalyze the mobile app economy?  Would it give the American consumer a better value package than they are currently receiving?

Basic economies of scale and a quick review of recent history tell us that prices are lower when you have an abundance of a resource.  Prices are higher when resources are in short supply.  Apply that basic concept to spectrum and the US wireless industry and it holds true.  Prices for services have declined as more spectrum has come into the marketplace.  Just since 2005, prices for voice dropped by roughly 10 percent, prices for data by 90 percent, and for text messages by 85 percent.  Billions in investment has poured into the networks in the last 5 years alone – more than $140 billion. In this time of industry consolidation, text book economics predicts a decline in investment, but instead both in absolute numbers and in capital investment per subscribers, we are at or near historic highs. In 2012, wireless carriers invested $1,106 in capital investment per subscribers, a figure that was only higher between 1985 and 1993, when subscriber numbers and wireless networks were in their infancy.  And the FCC sped things along by holding spectrum auctions and enabling secondary market transactions, infusing the industry with more spectrum.

Americans have bigger, faster and more capable wireless broadband networks than their European counterparts.  Already today, Verizon Wireless is close to covering 90% of Americans with LTE, AT&T has about 65% and both AT&T and T-Mobile expects to have 90% LTE by the end of 2013. Sprint is not far behind and even regional carriers such as US Cellular have launched extensive networks. What are the European carriers doing? Most are launching their first networks in 2014 or 2015 as there are held back by regulatory dictates. It comes as no surprise then that more than half of all LTE subscribers are in the United States. More than a third of American households have found their wireless connection so useful, reliable and affordable that they have completely cut the cord.  According to an ITIF report[i] , US wireless broadband networks “speeds are higher than generally thought”, being “ranked 8th tied with Denmark” for average speed but “less well provisioned with spectrum” than those in other countries, reaffirming again the spectrum shortage the U.S. is already experiencing.

Regulators and policymakers are right to keep a close and careful eye on the sector.  But managing market share by restricting spectrum ownership seems a risky experiment, and one that should be catching the attention of industries beyond wireless.  If the US government finds it appropriate to cap a company’s growth at specific market shares when there are no indications of anticompetitive behavior or rising consumer prices, what is to stop the government from looking at all sectors of the US economy and jumping in with vigor to manipulate specific company’s growth prospects?

American regulators and critics of the US mobile industry have long judged the US harshly as compared to its European counterparts.  But the current reality of the European mobile marketplace provides a stark reminder that theoretical niceties of competition policy have precious little to do with getting networks built, increasing capacity and driving prices down. Billions and billions of investment in the networks are what build the networks, drive consumption and reduce prices.  Preventing billions of investment from being made would seem the exact wrong policy to pursue in the U.S.

While Washington wrestles with theories of competition and ideal market structure, companies like Softbank and Dish, and the recently refreshed T-Mobile, are actively jockeying for position to take on the largest two providers just as companies are ramping up their build of 4G.   The next few years hold tremendous promise for consumers, the industry, and the US economy.  Let’s hope Washington doesn’t limit competition in the name of promoting it before this happens.


[i] ITIF, The Whole Picture: Where America’s Broadband Networks Really Stand, February 2013.

Roger Entner
Roger Entner
Analyst and Founder

Dish Network just threw its hat into another merger ring with its $25.5 billion bid to acquire Sprint. This follows Dish’s bid to purchase Clearwire, which Sprint was already in the process of purchasing. Dish’s announcement followed Friday’s news that Verizon Wireless is offering to purchase some spectrum from Clearwire, all while Crest Financial is adamantly opposing Sprint’s proposed  purchase of Clearwire. It looks like Sprint can’t catch a break here. Lets look at how the different constituents – Sprint shareholders, Sprint as the company, Sprint’s customers, Sprint’s competitiors, and the regulator – are affected:

Sprint shareholders are going to get more money. The Softbank offer values Sprint at slightly over $20 billion, while Dish’s offer values Sprint at over $25 billion. It is quite possible that Softbank will sweeten its offer to top that of Dish Network.

Sprint as a company is going to experience a longer phase of uncertainty. The company’s direction, while not in in limbo, will remain on the same course as it is now so as to preserve the opportunity to change direction for the new owners. Unfortunately for Sprint the current course includes postpaid customer losses and a course adjustment is very much needed. This is especially the case since T-Mobile has just announced a brand new positioning and Sprint as the other nationwide value leader brand needs to respond to it. The increased ability to bundle products with Dish could help make Sprint an integrated media company, an idea former Sprint CEO Gary Forsee always championed – unfortunately before its time. Maybe the time is right for Charlie Ergen? What speaks for Softbank is its expertise in running wireless networks and its deep pockets. Bringing Sprint’s network up to par after years of underinvestment will require significant financial resources which Softbank has in abundance.

Sprint customers might be the big winners when it comes to the ways Dish could bundle its offers with that of Sprint. How much can be bundled with linear television is yet to be seen after the MediaFlo flop. On-demand video on the other side is the major source of data consumption on wireless networks, but mostly short-form content rather than the movies that Dish has available through Blockbuster. With the huge infusion of additional spectral capacity, the post-merger company could support very high quality, very fast mobile video and other mobile data applications.  Dish’s traditional cost-cutting measures and low prices would make Sprint a solid value player. Dish is also known for its good customer service so customers would continue to benefit there. At the same time, they would forgo new impulses from Japan where customer service and network performance is legendary.

Sprint’s competitors, especially T-Mobile, will see this as a welcome development. As T-Mobile is going through a merger itself and is repositioning it as the “uncarrier” it benefits the most when its direct competitor for the value segment among the nationwide carriers has to battle warring suitors. Verizon and AT&T are probably standing by watching the spectacle in amazement. If Dish were to acquire Sprint, the combined company would hold more than double the amount of spectrum held by AT&T and Verizon, catapulting Sprint ahead of its competitors in terms of capacity to support intensive data use by subscribers.

Regulators must be feeling a tad embarrassed to be overtaken by events so quickly, yet again. Just last week the Department of Justice argued to the FCC that the agency limit AT&T and Verizon access to more spectrum in the upcoming incentive auctions and instead get the spectrum into the hands of the “smaller” national providers on the theory that the “smaller” providers needed the infusion of spectrum to compete.  Not even a week later, the proposed DISH/Sprint/Clearwire merger would create an operator that has 2.5-times as much spectrum as Verizon or AT&T. No fictional play could have made the Department of Justice’s position more untenable, more quickly. As the regulators desperately try to engineer the birth of another nationwide carrier, they forget how poorly such machinations have worked in the recent past. Terms like NextWave and LightSquared, seem to have evaporated from recent memory inside the Beltway. It will be interesting to see how this proposed transaction will be evaluated by the regulators, assuming the Sprint shareholders allow it to proceed. If nothing else, it’s another reminder that the wireless sector has a way of working issues out a lot faster than Washington.