Tuesday, May 9, 2017

Big shifts in the U.S. mobile market – Part 2

Preamble

After years of rather stagnant market positioning and look-a-like services, suddenly a lot is happening in the U.S. mobile market. In the first part of this article, the move to unlimited mobile data plans and the new regulatory climate in Washington were covered. Part 2 will look at other key factors affecting the market.

The rapidly evolving spectrum map

The next big force that looks set to disrupt the U.S. market is the rapidly evolving spectrum map. A scramble is underway to lock down spectrum for 5G, with unlicensed spectrum coming into play. There is also the possibility of wildcard players entering the market, notably Comcast, which has already signalled its imminent launch of a nationwide mobile service using Verizon's network. This move could help revitalise its triple play bundles, now that home phone service no longer seems like a worthy leg to the three-part bundle. In fact, in Q1 Comcast reported a drop of 27,000 residential voice customers, although the number of business voice customers rose by 5,000 during the first quarter. Rather than launch an all-out attack on the big four mobile operators, Comcast is likely to pick up a smaller number of its existing cable customers who may not be heavy mobile users but are tired of separate bills for their communications services.

Broadcast Incentive auction spectrum

The FCC's 600 MHz broadcast incentive auction, which concluded in April, attracted bids totalling $19.8 billion (gross revenue) for 70 MHz of spectrum for nationwide mobile use. The FCC scored a major success with the undertaking, noting that the exercise ended among the highest grossing auctions ever conducted. More than $10 billion of the total sum will go to 175 broadcasters whose previously licensed spectrum was selected for the incentive auction; remaining funds go to the U.S. Treasury.

A total of 50 bidders won 70 MHz of licensed spectrum nationwide, including a total of 14 MHz of spectrum available for unlicensed use and wireless microphones. On a nationwide basis, 70 MHz is the most mobile broadband ever auctioned below 1 GHz by the FCC. Among the largest winners were T-Mobile, Dish, Comcast and US Cellular.

T-Mobile proclaims itself the winner

As the auction closed, T-Mobile US immediately declared itself the winner having secured 45% of all low-band spectrum sold, covering 100% of the U.S. and Puerto Rico, 'enabling the Un-carrier to compete in every corner of the country'. The acquired $7.9 billion in spectrum licenses represents 31 MHz nationwide, on average, and quadruples T-Mobile’s low-band holdings. It also represents the largest investment to date for T-Mobile US. T-Mobile's colourful CEO John Legere put it this way: 'T-Mobile now has the largest swath of unused low-band spectrum in the country, that is a BFD for our customers!'.

The company anticipates that some of this 600 MHz spectrum will be clear and ready for activation this year. Ericsson and Nokia have announced 600 MHz infrastructure platforms and Qualcomm is expected to begin delivering chipsets supporting 600 MHz this year. T-Mobile already claims a performance advantage for its LTE network over AT&T and Verizon, and if all goes to plan T-Mobile feels that it will be in the position to bump up its performance to even higher levels.

For their part, AT&T, Sprint and Verizon separately stated that they did not need to bid for the 600 MHz licenses because they each have significant low-band spectrum already. While these band offer superior in-building penetration, AT&T and Verizon are racing for millimetre wave spectrum in the 28 GHz and 39 GHz bands for carrying 5G services. Sprint, on the other hand, has been the king of the 2.5 GHz spectrum since the days of the Clearwire WiMAX venture. These bands are not tied in via carrier aggregation for its LTE network.

Dish Network

Dish Network was the second biggest buyer at the 600 MHz auction with a commitment of $6.2 billion for nationwide licenses in urban areas. Earlier this year, working an FCC deployment deadline for 700 MHz licenses acquired in 2008, Dish unveiled plans to launch a narrowband IoT (NB-IoT) network. In FCC filings, Dish has said it intends to operate a 5G network geared toward IoT services rather than building a 4G/LTE network that would duplicate those of the wireless incumbents. Dish also holds AWS-3 spectrum and AWS-4 spectrum acquired for $2.8 billion from two bankrupt satellite companies (DBSD and TerreStar). Because an NB-IoT tower can cover over ten times the geographic area compared to the coverage of a typical LTE tower, Dish believes it will be able to scale up a powerful IoT network very quickly. In Q4 2016, Dish circulated a Request for Information (RFI) to over a dozen vendors for the construction of this NB-IoT network. Once technology and product selections have been made, Dish expects to roll out the full network by March 2020.

Comcast

Comcast was another big buyer in the FCC broadcast incentive auction, spending $1.7 billion for spectrum licenses mostly in its current wireline footprint. Some of this cost was recaptured in the reverse auction, where NBC (Comcast's subsidiary) sold spectrum licenses in Chicago, Philadelphia and New York valued at $482 million. Unlike the T-Mobile licenses, may of those acquired by Comcast are currently in use and the process to clear these bands may take a number of years. For its forthcoming mobile launch, Comcast will operate as an MVNO on Verizon's infrastructure, although metro backhaul and the long-haul backbone conceivably could run over Comcast's network.  Following the auction, Comcast stated: 'Comcast made a strategically compelling investment at historically low prices… it has no current plans for the acquired spectrum and the spectrum will not be cleared by the FCC and available for use for several years... the launch and growth of the Xfinity Mobile product is not dependent on this purchased spectrum'.

While the company has stated that it has no immediate plans for the newly licensed 600 MHz spectrum, it would not have purchased it if mobile were not a big part of its future. This point is worth noting, as Comcast is known to be seriously interested in mobile. Verizon will be searching for media partners beyond AOL and Yahoo to provide exclusive, top-tier video content to compete with a revitalised AT&T + Time Warner, plus there could also bee a more hand-off approach at the FCC. So the time could be ripe for a deal.

Bidding begins for millimetre-wave spectrum

Several other twists and turns in U.S. spectrum also happened in the first part of the year. On April 10th, AT&T agreed to acquire Straight Path Communications, which holds a nationwide portfolio of millimetre-wave (mmWave) spectrum, including 39 GHz and 28 GHz licenses. Specifically, AT&T agreed to buy 735 mmWave licenses in the 39 GHz band and 133 licenses in the 28 GHz band. These licenses cover the entire U.S., including the top 40 markets. The deal was valued at $1.6 billion, which includes liabilities and amounts to be remitted to the FCC per the terms of Straight Path's January 2017 consent decree. The bid for Straight Path was actually AT&T's second move to buy spectrum this year. Although AT&T did not participate in the 600 MHz broadcast Incentive auction, in late January it announced plans to acquire FiberTower, a privately-held company based in San Francisco that holds an extensive spectrum footprint in 24 GHz and 39 GHz bands. Financial terms of this deal were not disclosed. AT&T touted both deals as major enhancements to its IoT ambitions.

However, on April 25th Straight Path Communications issued a press release stating that it has received a superior offer from a multi-national telecommunications company, which the market takes to be Verizon Communications. This offer is valued at $104.64 per share (reflecting an enterprise value of $1.8 billion). It remains to be seen if AT&T will increase its bid or settle for a $38 million break-up fee should Straight Path ultimately choose the second suitor.

(A subsequent article will look at two other mega-trends that started to impact the U.S. mobile industry in the first part of this year: the FirstNet emergency network, which is finally getting underway, and the early 5G rollouts that are just over the horizon.)

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