By Itself, Sprint Will Not Catch AT&T, Verizon, History Suggests

SoftBank CEO Maysaoshi Son argues Sprint must be allowed to purchase T-Mobile US in order to have a shot at massively disrupting U.S. mobile markets.

U.S. regulators are reluctant to allow the number of leading U.S. mobile operators to shrink from four to three.

European regulators face the same issue in France, for example. Operators believe consolidation has to happen, while regulators fear the consequences of reducing the number of service providers from four to three.

SoftBank’s own experience in the Japanese market would suggest Son is correct. When SoftBank purchased the Vodafone assets in Japan in 2006, that operation was the number-three provider, as is Sprint in the U.S. market.

All observers agree SoftBank rather quickly took significant new market share, largely by attracting a larger share of customers than its competitors.

Vodafone’s Japan mobile assets, when purchased by SoftBank, had market share of about 17 percent. On the other hand, Vodafone’s business had fallen from a high of about 19 percent market share in 2003.

Today, SoftBank has about 20 percent share of market.

So, In other words, the net swing in market share since 2006 (eight years) has been about three points, though only one percentage point from the 2003 high.

Granted, SoftBank is growing at the expense of KDDI and NTT. But that is a rather long, slow grind, not a whipsaw and dramatic share shift. And SoftBank remains some distance away from number-two KDDI, which has 28 percent share, while NTT Docomo has 50 percent market share.

Some would argue that, globally, most mobile markets feature rather extreme concentration of market share by two providers. A share of between 25 percent and 70 percent would be within the range of expectations, with share in excess of 40 percent held by the number-one provider in Organization for Economic Cooperation and Development countries.

Others would point to flat revenue growth for tier-one service providers globally, though there are exceptions. Since about 2007, revenue for the top-100 firms globally has been “stagnant” to “declining.”

There are clear implications, namely the growing need for scale to offset declining gross revenue and profit margins in a growing number of markets.

“We need a certain scale, but once we have enough scale to have a level fight, OK. It’s a three-heavyweight fight. If I can have a real fight, I go in more massive price war, a technology war,” Son said on the Charlie Rose TV show.

Without T-Mobile US assets, Sprint cannot rapidly and massively challenge either firm, Son has said. That is partly a view based on SoftBank’s experience in Japan.

SoftBank’s own history in the Japanese market, and the recent experience of Illiad’s Free Mobile in France, might suggest that even a fearsome attack by a number-three or number-four service provider can succeed only to a certain extent.

Who Does Sprint Compete With?

“Who does Sprint compete with?” is a question SoftBank CEO Maysaoshi Son will try to get regulators to think about as he gives a speech to the U.S. Chamber of Commerce on March 11, 2014.

Facing skepticism about a Sprint bid to acquire T-Mobile US, which would reduce the number of national mobile providers from four to three, Son will try to reframe the issue, focusing instead on whether consumers would be helped by the gaining of a third national competitor to telco and cable TV fixed network Internet access services.

Son hopes the reframing will shift thinking from market structure in the mobile business to market structure in the fixed network Internet access business.

Whether that clever bit of “spin” will have any impact is the issue. Regulators are likely to argue that if that was what Sprint really wanted to do, it could do so already.

And, in fact, to a large extent, mobile Internet access already provides most of the access, in terms of number of connections, everywhere.

One might bet that the effort to re-frame a potential merger will have no impact.

Google Fiber, AT&T Fuel Gigabit Network Trend

Google Fiber says it is considering expanding the footprint of its gigabit access networks beyond Kansas City, Mo. and Kansas City Kan., Austin, Texas and Provo, Utah, to some additional metro areas, with nine regions now being investigated.

Separately, AT&T says it will build a fiber to the home network in Dallas. Both illustrate the growing gigabit network trend.

AT&T now says it will build fiber to the home networks in Austin, Texas and Dallas, capable of delivering speeds up to one gigabit per second, at least in Austin.

AT&T has not yet specified speeds for Dallas, but it is reasonable to assume gigabit services will be the draw.

The U.S. Federal Communications Commission has suggested a goal of 100 million U.S. residents having access to 100 Mbps Internet access service by about 2020. Some might have thought that a bit of a stretch. It no longer seems so remote.

Technology Futures, a firm with an extraordinary record of broadband predictions, now argues it is reasonable to expect that half of U.S. broadband access users will be buying 100 Mbps connections by about 2020.

Technology Futures also predicts that about 10 percent of customers will be buying 50 Mbps connections, while 24 percent will still be buying 24 Mbps service.

That might seem a crazy amount of bandwidth for “many typical users,” but standard technology forecasting techniques have, for more than a decade, actually suggested that would happen.

In 2001, for example, Technology Futures predicted that by year-end 2004, over 25 percent of U.S. households will have adopted broadband services, up from about five percent at the end of 2000. The actual U.S. broadband penetration rate was 30 percent, according to the Pew Internet and American Life Project.

“By 2010, we expect that the percentage will exceed 60 percent,” Technology Futures predicted in 2001. The actual penetration wound up being 66 percent.

So widespread 100-Mbps access by 2020 seems increasingly possible. Competitive pressure is forcing AT&T, among others to invest in faster access networks.

And subtle but important changes in thinking are likely to help. In the past, would-be ISPs have faced time-consuming and cost-inducing “make ready” costs when considering access network builds. But Google Fiber provides incentives for municipal authorities to cut those costs.

Google Fiber’s investigation of possible new Google Fiber networks in nine metro areas focuses on three key infrastructure items Google says will make construction more efficient, and increase chances a metro area will get Google Fiber.

The checklist covers some concerns are traditional for cable or telco access providers: access to municipal poles and duct work.

Such access is more or less routine, but Google Fiber will go where there is room on poles and in ductwork, especially where a metro area contains several municipal entities. And Google wants municipalities to do the work of gathering all that information, both municipal-owned and private assets.

Likewise, Google Fiber wants “accurate information” about utility poles, conduit and existing water, gas and electricity lines. Again, you might think that is routine, but it can be time-consuming for a would-be access provider to dig up all the information. Google also wants municipalities to help Google get conduit and pole access in an efficient and timely manner.

The third concern concerns the efficiency of permitting processes, which could entail thousands of separate construction permits, as well as identification of locations where cabinets can be sited.

Google Fiber wants municipalities to streamline those processes so construction can start faster.

That is likely to result in most municipalities streamlining all make ready tasks, to the benefit of all other ISPs looking to build next generation fixed access networks.

Gigabit Access Networks are Becoming Table Stakes

AT&T, which now finds it must deploy gigabit networks in some parts of Austin, Texas, as a counter to Google Fiber, now believes the economics of spot builds are attractive enough that it is moving ahead with fiber to the home deployments in other areas, such as Dallas.

It is unclear what the initial activated bandwidth will be in those areas, but the incremental cost of a gigabit service, compared to 300 Mbps, might be less than was the case just two years ago.

The major cost component of offering a Gigabit is the physical construction of the access network cables, not the optoelectronics.

Arguably, once that is done, the incremental cost of offering 1 Gbps as opposed to 100 Mbps “comes down to slightly more expensive ports, slightly more expensive routers or CPEs and bandwidth provisioning,” argues Benoît Felten. co-founder of Diffraction Analysis.

Various regulators in Europe and North America have estimated the latter incremental cost of gigabit networks cost to be in the 10s of cents per subscriber per month, Felten argues.

Traditionally, ISPs have not wanted to overprovision bandwidth that cannot be monetized relatively quickly. But market conditions in a growing percentage of U.S. markets arguably have changed with the advent of Google Fiber.

Overprovisioning might be necessary in competitive markets where at least one other provider has moved ahead with a symmetrical gigabit offering.

Fiber to the home might be viewed tactically, in terms of what new incremental revenue can be generated, or how much operating costs can be reduced. But sometimes, fiber to the home has to be viewed strategically, not in terms of incremental revenue, but in terms of avoiding massive customer defection, which might imperil asset prices and even ability to continue as a going concern.

In large part, one might argue, that is what now is changing for AT&T and other telcos or cable companies. It isn’t so much that the economics of fiber to the home have dropped so much, or that the incremental costs of gigabit access networks have changed dramatically, but rather that market conditions have altered.

Gigabit networks are, in a growing percentage of markets, becoming “table stakes.”

T-Mobile US and Sprint are in More Trouble Than Some Think

We typically look at the U.S. mobile market in terms of subscribers and revenues. But that might provide a less-robust estimation of the positions of market leaders than one might suppose.

For example, whether one measures by revenue or subscribers, AT&T Mobility and Verizon Wireless represent about 61 percent of all share in the U.S. mobile business. Between them, Sprint and T-Mobile US have about 30 percent share of subscribers.

But gross revenue and subscriber counts are only part of the story. Profits (earnings before interest, taxes, depreciation and amortization) tell another story.

Sprint lost money in 2013. T-Mobile US had about $5.3 billion in earnings before interest, taxes, depreciation and amortization, in 2013.

But AT&T had 2013 mobile segment EBITDA of $25.4 billion. Verizon had mobile segment earnings of $34 billion.

In other words, AT&T and Verizon had 92 percent of earnings among the top four U.S. mobile providers (excluding all profit from AT&T and Verizon fixed network services).

The point is that no matter how one views the desirability of Sprint and T-Mobile US merging, the smaller carriers are dangerously far behind the leaders in terms of profitability.

And if you believe market share and profitability tend to be correlated, that means big trouble for both Sprint and T-Mobile US, over the long term.

DirecTV Might be Next to Get Right to Stream Disney Programming

Dish Network, in what many consider a breakthrough deal, has gotten rights to eventually stream Disney content. DirecTV might be close to gaining similar streaming rights as well.

Those deals will not immediately lead to stand-alone, over the top streaming services that can be bought without also buying a linear video subscription service, for several reasons. For starters, even Disney will not allow such a service to be launched unless the provider also can offer other top-rated networks.

In other words, Disney does not want to be made available as a “Disney-only” service, but only as part of an attractive, broad service that includes much of the standard fare consumers expect to buy as part of a standard expanded basic service from any cable, satellite or telco video services supplier.

On the other hand, one might argue that with the one deal, Dish Network--and DirecTV--are about a quarter of the way to assembling an attractive programming lineup that delivers much of the value consumers expect from an “expanded basic” subscription (the tier of service most consumers buy, including bundles of ad-supported channels).

That’s important, if not the sign such a service will be made available soon.

By itself, Disney might represent about 24 percent of all programming costs for a typical linear video entertainment distributor. Time Warner represents perhaps 21 percent of the program rights cost, NBC about 16 percent, Fox about 14 percent. Getting the three other top networks, in terms of programming cost, would allow Dish Network to provide roughly 75 percent of the value of a subscription, one might roughly argue.

In fact, those four networks account for 75 percent of programming rights fees, and if you assume costs are roughly in line with perceived value, then Dish Network has to reach deals with three more firms to deliver about 75 percent of the value of a traditional video subscription.

Disney distributes the ESPN and ABC family of channels. Time Warner owns TNT, TBS and CNN. Comcast, owns Bravo, USA Network and NBC. News Corp. owns Fox News and Fox broadcast channels.

T-Mobile Doesn't Seem to Think a Sprint Acquisition is Likely

Though T-Mobile US would prefer to sell itself to Sprint or another buyer, to exit the U.S. market, that might not be possible because of high regulator opposition, T-Mobile executives now argue.

That doesn’t mean a sale is seen as impossible over the long term. Indeed, T-Mobile US might well believe that, long term, consolidation is inevitable. But, as with many situations in life or business, the answer to a question is not limited to “yes or no,” but also sometimes is “yes, but not right now.”

Both T-Mobile US and Sprint executives are likely to say, if merger speculation ends, that their firms can compete against Verizon Wireless and AT&T Mobility. What else would you expect executives of public companies to say?

But should merger talks end, the level of competition in the U.S. mobile market is likely to increase. Many observers had expected that a successful Sprint acquisition of T-Mobile US would have reduced the incentives the combined firm would have had to engage in ferocious price competition.

If no immediate prospects for a merger exist, then Sprint is going to have to step up its assault, under conditions where T-Mobile US already has moved first. Logic suggests Sprint will have to try and top T-Mobile US offers, and also cause a greater reaction from AT&T and Verizon.

All of that promotional activity is going to lead to lower profit margins and possibly even less gross revenue, marketwide.

If Sprint and T-Mobile US remain stand-alone firms, there also is going to be heightened pressure for spectrum set-asides or other measures to funnel former broadcast TV spectrum to Sprint and T-Mobile US, on the theory that such new lower-frequency spectrum will allow both to better compete with AT&T Mobility and Verizon Wireless in the coverage area.

Both AT&T Mobility and Verizon Wireless own more lower-frequency spectrum that traditionally is valued because of better signal propagation than higher-frequency signals.

Some would argue that there is a downside to such spectrum set-asides , preventing better-capitalized firms from deploying new spectrum more efficiently. Ultimately, that would work against consumer welfare.

But many believe such policies could well emerge in auctions of former analog TV spectrum, should T-Mobile US and Sprint remain independent entities.