Is T-Mobile US Sprint Merger in Trouble?

I never claim to understand all the politics of communications law and regulation, but it does seem to me that the latest filing by T-Mobile US, and the pause of the merger review by the Federal Communications Commission, does suggest policymakers are not yet convinced the Sprint merger with T-Mobile US is really in the public interest. Indeed, merger opposition is not a new story. The AT&T effort to buy T-Mobile US was rebuffed, for example.

Initially, the claim was that the merged company would be a stronger competitor to AT&T and Verizon, which is true as far as it goes. A much-bigger company with much-greater scale--in a scale business--should do better.

Ignore for the moment the fact that no equity analyst I ever have heard from thinks “lower prices” are an outcome. Instead, they believe higher prices are the outcome. That is not to say market concentration and prices are related is a simple and obvious way.  

Still, most might agree the merger is better for Sprint and T-Mobile US. It is not so clear it is good for consumers , at least in terms of the amount of price competition in the U.S. mobile market. That noted, it remains unclear how much competition the U.S. mobile market can sustain, long term.

But some of us would argue the answer is yet unknown, as Comcast, Charter and possibly other large entities with scale could be big forces. The U.S. market arguably is big enough, with enough ways to create new business models blending app, services and access, that the “best” answer might not be “two or three” pure-play mobile service providers.

Someday, we might find that mobile access is something that is part of the core value proposition for bundles of vale that bridge apps, services, devices and network services. We just do not know where the larger business is headed, except to note that “access alone” is getting to be a dangerously-thin way to earn revenue on a sustainable basis.

I’ve argued in the past that among the most-sustainable outcomes is for Comcast and Charter to combine assets with T-Mobile and Sprint, for example, pairing one mobile firm with one cable leader. Other combinations might be proposed, but none seem to have the clean “we provide access services” rationale as well as cable-plus-mobile.

That is the analogy to AT&T and Verizon’s operation as entities with mobility and fixed assets.

The filing leads with the argument that “new” T-Mobile will challenge the cable operator “monopoly” of fixed network internet access. “New T-Mobile will not only raise the performance bar and enhance competition for mobile wireless services, but also enter into and disrupt in-home broadband,” the document says. Some of us believe that is a reasonable or plausible claim.

But it strays from the basic argument that new T-Mobile actually is good for mobile consumers. And that suggests T-Mobile believes it has not won that argument. Some of us have argued the deal would face a high bar because the U.S. mobile market already is concentrated.

In the mobile business, as well as the fixed business, competition is going to occur in different ways, in the future. So both T-Mobile US and Sprint are long-term asset sellers, if this merger is not approved. Some might argue that would be better for both innovation and competition, long term.

East Asia Leads FTTH Net Gains

Almost 82 per cent of global fiber to the home  fiber to the home net additions came from China in the third quarter of 2018,  which reported a six percent quarterly growth in fiber connections, according to Point Topic.

Argentina in the same quarter saw net additions rise 21 percent; Brazil saw 19 percent net additions; the United Kingdom added 11 percent while France gained 10 percent.

As in recent previous quarters, 70 percent of all new fixed broadband subscribers were added in East Asia.

source: Point Topic

According to the latest research by Point Topic, in the third quarter of  2018 the number of global fixed broadband subscribers exceeded one billion, having increased by 2.6 per cent quarter-on-quarter.

5G: What Matters is Ability to Create Economic Value

Most observers spend way too much time worrying about which firm or country is ahead or behind in 5G. Ultimately, what matters is how much value any firm or nation can wring out of a platform. We have seen this before, in fixed network broadband generally.

If being “way ahead in broadband” means people are watching television, the direct productivity or economic development value might be questionable. “Is there a broad economic societal payoff from increasing broadband speeds from 10 Mbps to 25 Mbps, or are the benefits mostly private in nature (e.g., faster movie downloads)?” asks George Ford, Phoenix Center chief economist.

“Do counties with mostly 25 Mbps broadband connections fare better economically than counties with mostly 10 Mbps broadband connections?” Ford rhetorically asks. “I find no evidence of such an effect here, at least with respect to the growth in jobs, personal income, or labor earnings between 2013 and 2015.”

“Broadband (and higher speed broadband) is not randomly distributed across geography, but rather is deployed in areas where the ratio of demand to costs is favorable, complicating the task of discovering broadband’s influence on economic outcomes,” Ford notes.

To cite just one example, “population density in counties with predominately 25 Mbps service averages 603 persons per square mile, but only 32 persons-per-square-mile for counties with predominately 10 Mbps broadband service,” Ford notes.

That matters because infrastructure is cheaper to deploy in urban areas than rural areas. So population density alone might explain speed differences, as a matter of supply.

Average population for the treated counties (where 25 Mbps is a minimum speed) is 251,490, but a paltry 22,013 for the control group (10 Mbps service)—a 10-fold difference, says Ford. But there are other important differences.

The average number of jobs in the treated group is 150,288, while only 10,605 in the control group. If one assumes stronger economic activity also creates higher demand for faster broadband, the difference between areas with 25 Mbps and 10 Mbps is explainable.

Similar size differentials are observed for total earnings as well as personal income. In other words, higher-income consumers can afford to pay for more-expensive broadband.  Large differences are also seen in the share of persons with a college education (22 percent in 25-Mbps areas compared to 14 percent in 10-Mbps areas).

In a broad sense, the issue is whether economic growth is driven by something other than broadband speeds. In other words, faster broadband gets deployed where demand is highest, and those areas also tend to be areas of higher household income and higher economic growth generally.

What matters is the ability to wring value from broadband.

“Stated simply, merely counting broadband connections or penetration, without regard to any consideration of value, assumes that all types of broadband connections are equal and that all societies are equal and identical in how they value Internet access by speed and connection mode; that all users of broadband place equal value upon that connection and all such connections can be produced at equal cost,” notes George Ford, Phoenix Center chief economist.

That is not to say faster internet access is immaterial. Faster broadband might lead to technological advances that do much more than simply increase broadband speeds, Ford notes.

The point is that it is hard to identify the relationship between broadband and economic growth.

Enterprises Say They are Deploying Edge Computing

Around 10 percent of enterprise-generated data is created and processed outside a traditional centralized data center or cloud, according to Gartner. By 2025, Gartner predicts this figure will reach 75 percent, says Santhosh Rao, Gartner senior research director.

As the volume and velocity of data increases, so too does the inefficiency of streaming all this information to a cloud or data center for processing.”

That is the reason many are convinced edge computing will be important: possibly 75 percent of computing shifts to venues outside private data centers and hyperscale data centers, eventually.

Some processing will continue to be done by devices. Other processing will happen locally, inside a building, at what some call a gateway. “Edge servers can form clusters or micro data centers where more computing power is needed locally,” says Rao.

“Servers deployed in 5G cellular base stations will host applications and cache content for local subscribers, without having to send traffic through a congested backbone network,” says Rao.

And there are signs enterprises believe edge computing has its place. About 37 percent of 100 service provider executives surveyed by 451 Research on behalf of Vertiv already have deployed at least some edge computing to complement their mobile operations, Vertiv says. An additional 47 percent say they plan to deploy their own infrastructure edge assets.

Though most of the infrastructure edge use cases (including multiservice edge computing) involve the need for ultra-low latency performance, there are some use cases where bandwidth also is fundamental.

Virtual reality video quality similar to high-definition TV quality requires bandwidth of 80 Mbps to 100 Mbps, compared to 5 Mbps for HD video streaming, for example.

source: Vertiv

Bandwidth Charges Might Drive Edge Computing

Eventually, we might find that avoiding local access bottlenecks and high bandwidth bills is as big a driver of edge computing as the need for ultra-low latency processing speed, even if low latency always is said to be the driver for edge computing.

“If you need to analyze a large amount of data, your internet connection might not be able to cope with the data flow, and it would result in your inability to extract real value from data,” says Riccardo Di Blasio.

In other cases, WAN bandwidth charges might be the issue. “If you are an oil and gas company which is drilling in Angola and requires computing, today the alternatives are to either build your own data centers like in the 90s, (with all the cost, and scale limitations associated with) or to use a cloud provider (where the nearest data center will be probably in the UAE or South Africa, at least 5,000 miles away) with enormous costs and pretty lousy SLAs,” says Di Blasio.

By 2025, almost 20 percent of data created will be real-time in nature, rather than being sent to the core of the network for processing, says B.S. Teh, Seagate SVP. That is the sort of use case that benefits from local processing at the edge, or close to where the data actually is generated.

“We see edge as a big driver of growth,” he said. Some growing use cases, such as video surveillance will benefit from edge processing, sometimes not because latency is always so important, but simply to avoid wide area network transport costs.

The top reason for using edge computing is ultra-low latency. But there are other drivers, including use cases where processing at the edge alleviates the need to move bulk data generated by bandwidth intensive apps across the wide area network.

Wikibon compared the three-year management and processing costs of a cloud-only solution using AWS IoT services compared with an edge-plus-cloud solution, to support cameras, security sensors, sensors on the wind-turbines and access sensors for all employee physical access points at a remote wind farm.

At a distance of 200 miles between the wind-farm and the cloud, and with an assumed 95 percent reduction in traffic from using the edge computing capabilities, the total cost is reduced from about $81,000 to $29,000 over three years. The cost of edge-plus-cloud computing is about a third the cost of a cloud-only approach, Wikibon estimated.

source: Wikibon

Why AT&T Should Not Invest Too Heavily in FTTH

A telco executive once told me, nearly two decades ago, that the investment in fiber to the home was not intended to boost revenues or necessarily to gain market share on other key competitors, but instead simply to allow the firm to remain in business.

In other words, the rationale for FTTH was strategic, and not necessarily motivated by classic return on investment criteria. That arguably remains the case: it is not that FTTH upgrades are unnecessary, but that the return is thin enough that deployment cases have to be looked at quite carefully.

AT&T and Verizon, for example, now are flat in terms of net additions, with nearly all the telco segment losses coming from other telcos still heavily reliant on copper connections. In other words, at current levels of investment, AT&T and Verizon are holding their subscriber bases, but not gaining on cable competitors.

The big unknown is what happens if either firm were to dramatically increase investment. Verizon is largely FTTH already, so the issue is what happens if investments to boost consumer internet access speeds were to be made.

AT&T has added perhaps four million new FTTH lines over the past few years. AT&T says it will have connected 14 million U.S. homes with fiber-to-home facilities by the end of 2019.  If AT&T passes a total of 62 million homes, that implies FTTH will be about 23 percent of total passings.

Keep in mind that the entertainment group (consumer services including all internet access services) represents about 15 percent of the company’s adjusted EBITDA. In other words, earnings from 62 million homes generates just 15 percent of AT&T total. There is limited upside, one might argue.

At a high level, and for immediate purposes, AT&T has passed less than a quarter of consumer locations with FTTH. Still, while not growing its internet access market share, it is holding steady, overall. A rational executive might conclude that scarce capital is best deployed elsewhere, to reduce debt and build the 5G network.

Still, you might wonder why AT&T apparently has been so slow to upgrade, given recent evidence that, where it chooses to build optical fiber access facilities, it can get 50-percent take rates, as well as higher dual-play revenues (video entertainment plus internet access). The key is that those areas tend to be the areas of highest household income. So spot builds make more sense than full-town or full-city upgrades, given other demands for investment or debt repayment.

And AT&T has to prioritize mobility. Recall that mobility represents half of AT&T's revenue.

WarnerMedia represents about 17 percent of the company’s revenue and adjusted EBITDA. That’s more revenue and profit than AT&T makes from consumer fixed network operations.

And recall that WarnerMedia earns money from lots of customers and content and service providers not on AT&T’s network. It is an “app,” not a network service confined just to AT&T.

Business wireline represents about 17 percent of the company’s adjusted EBITDA.

In terms of revenues, mobility represents 40 percent, entertainment group 26 percent and business wireline about 15 percent of total quarterly revenue of $45.7 billion.

The business issue is whether any massive expansion of FTTH would produce revenue gains great enough to justify the move, and what the opportunity costs might be.

In fact, opportunity cost probably is the bigger issue. With capital limited, does it make more sense to invest in 5G and the mobile platform, or put lots more capital into the fixed networks business that drives a minority of revenue for both AT&T and Verizon.

Verizon earns 87 percent of its profits from its mobile network.  

But it is not clear how much upside exists for AT&T, in terms of fixed network internet access revenue. You might argue that the best case for AT&T, for a massive upgrade of its consumer access network, is about 10 percent upside in terms of consumer market share.

That is by no means insignificant, depending on the assumptions one makes about the cost of the upgrades. Still, given that as important as it is, fixed network internet access now is a mature business, there are limits to how much capital a telco “ought” to invest, compared to deploying capital elsewhere.

Realistically, a major telco has to expect it will, under the best of circumstances, and in a two-provider market, split share with a competent and motivated cable TV provider. If cable now has about 60 percent share, and AT&T about 40 percent share, that implies a sort of share ceiling of 50 percent. That is one driver of revenue. The other is revenue per account.

But typical account revenues have not risen as much as one might expect, given consumer shifts to higher-speed services that tend to cost more.

Basically, internet access prices in the developed world have tended to move roughly in line with growth in gross domestic product, and are flat to declining in terms of spending as a percentage of gross national income per person, according to the International Telecommunications Union.  

So there are important reasons why scarce capital has to be put places other than massive consumer FTTH upgrades. Consumer fixed network operations produce relatively little revenue or profit for AT&T.

So a rational executive would invest just enough to hang on to most of the revenue, as long as possible, while investing for revenue growth elsewhere. Just saying.

5G Business Models Might Look a Lot Like 4G, Early On

The 5G business model is not so different from what mobile operators faced when introducing 4G less than a decade ago.

LTE promised new use cases and new revenues. Released commercially in the United States in 2010, carriers expected LTE to provide an immediate boost to smart cities, asset tracking, retail, manufacturing, health care, and many other industries.

That sounds like the promises for 5G as well. One might note that some anticipated new use cases for 3G also sounded an awful lot like what was expected for 4G.

Many assumed that if carriers played an integral role shaping the ecosystems that comprised these use cases, then profits would follow. That is not exactly what happened. To be sure, 4G has enabled capacity growth to match demand, which was driven by application providers.

Mobile operators facing rapid traffic growth from average revenue per user (ARPU) from intense price competition also discovered that most of the financial value of 4G was reaped by app providers.

Basically, 4G provided concrete value as a way of reducing cost per bit. The same thing is going to happen with 5G, even if hopes for incremental revenue eventually will be realized from enterprise use cases and apps dependent on edge computing.

Connectivity service providers could become key suppliers of such edge computing. In consumer markets, 5G will be important partly because it enables faster speeds and lower costs per bit.

source: Deloitte