The Department of Justice announced on July 26, 2019, that it approved the T-Mobile/Sprint merger under a series of conditions involving divestitures to Dish Network. What do all the conditions of the transaction mean in plain English?
In short, Charlie Ergen’s Dish has been given a new lease on life for several years, while the impact across the industry in terms of pricing, competition and rollout of 5G is less clear—other than we can expect Verizon and AT&T to focus on implementing their respective 5G strategies while Sprint and T-Mobile integrate their businesses.
DISH gets Sprint’s prepaid businesses
Dish Network is becoming a wireless service provider with 9.3 million customers. Until it builds out its own network, Dish will be the second largest MVNO in the United States. The brands that Dish is buying are in distress.
According to the T-Mobile/Sprint/Dish announcement, Sprint’s prepaid business has almost 7,500 distribution points from Walmart and independent retailers. As a comparison, T-Mobile’s MetroPCS has over 10,500 distribution points. More importantly Sprint’s prepaid business lost over the last year about 3,000 distribution points from Target, Best Buy and Meijers due to poor performance.
This represents a decrease of about 30% of Sprint prepaid sales distribution network and probably at least of 25% of Sprint prepaid’s gross adds. This would indicate that Sprint prepaid’s gross adds will decrease from roughly 4 million over the last year to 3 million going forward, translating into a subscriber loss of the same number. The $1.4 billion that Dish pays for Sprint’s prepaid business roughly represents the expected future cash flows of somewhere between $1.5 billion to $2 billion from the 9.3 million customers over their expected remaining life time. Building a retail store costs between $1 million and $2 million. If Dish wants to have a similar physical presence as the other competitors, it would need around 2,000 corporate retail stores for $2 billion to $3 billion cost.
What is interesting is that 9.3 million prepaid customers are being transferred from Sprint to Dish but Sprint only recognizes 8.1 million as prepaid in its financial statement. The solution to this puzzle is that Sprint counts any prepaid customer that pays for their phone in installments, like the BoostUp program, as postpaid customer, not prepaid.
DISH gets Master Services Agreement for network access
The key in the Master Service Agreement (MSA) is the phased approach. Logically, Dish would add all new customers onto the T-Mobile network and subsequently to its own 5G network. With Sprint’s 4.37% prepaid churn rate, mathematically all of its customers quit the carrier within 22 months. The big question here is what route Dish will take. Dish intends to build a stand-alone 5G network based on the 3GPP Release 16 standard.
The problem is that 5G Release 16 has not been finalized yet—delayed until March 2020—as it has been caught in the crossfire of the U.S.-China dispute over 5G and Huawei. It takes roughly six to 12 months after the standard has been finalized for equipment to become available. Dish’s Ergen said he would like to have the first city up by the end of 2020. This is an extremely ambitious time line and assumes no delays in finalizing Release 16 and immediate availability of equipment and manpower to install the network, while design and deployment companies are at full capacity. Until then, Dish is dependent on T-Mobile as its host network provider.
Transition services agreement to support prepaid customers
This means that Sprint’s CDMA network will be operational for up to three years and that the New T-Mobile will provide core networking services if needed during that time. Considering that the expected average life of Sprint’s prepaid customer base is 22 months, a 50% additional life will provide services for 90% of the customers. After the three years, the customers have to be off the Sprint network, either on Dish’s 5G Network or T-Mobile’s network.
DISH gets Sprint’s 800 MHz spectrum licenses
Low-band spectrum is needed to provide coverage outdoors and reliable service inside buildings since the signals travel far and penetrate buildings well. Sprint has a nationwide 800 MHz license with 14 MHz of bandwidth. Fourteen MHz is sufficient spectrum to provide voice communications in people’s homes and businesses, but not enough for high-speed data. Even using carrier aggregation with higher bands and therefore more bandwidth will be challenging due to the inferior propagation characteristics of the higher band spectrum. The two-year lease-back is there to continue to allow Sprint to maintain its current coverage without impacting Dish’s actual deployment plans.
Dish gets option to take over decommissioned cell sites and retail locations
One of the biggest challenges for Dish is to quickly build a wireless network and have a large retail distribution network. After T-Mobile has integrated the Sprint sites into its network, Dish will be able to take over decommissioned cell sites and retail locations, which is a blessing and a curse at the same time. The cell sites and retail locations that the New T-Mobile will decommission and look to divest after the merger closes are going to be the most expensive, least performing assets. Some sites and retail locations might work for Dish, but in general the rejects of another carrier’s are not the best foundation to build a real competitor.
Dish gets agreement to engage in negotiations with T-Mobile for Dish’s 600 MHz spectrum
Dish owns at least one license in all 486 nationwide license areas. This could serve as Dish’s low band frequency to cover in-building customers very well. T-Mobile has a 600 MHz nationwide license that it uses for its 5G network, especially in rural America. Neither AT&T nor Verizon were allowed to bid on the 600 MHz licenses and therefore are unlikely buyers. This makes T-Mobile the natural buyer.
More 600 MHz spectrum would always be useful for T-Mobile as it plans to bring wireless broadband and TV into the parts of the country that do not have broadband at all. At the same time, these parts of the country are where satellite TV providers like Dish are the strongest. It remains to be seen how likely Dish is to arm T-Mobile with more spectrum to attack satellite customers with a better and faster offer. The agreement to engage in a negotiation is not particularly meaningful, considering that all other negotiations to buy or sell spectrum have not needed an explicit agreement to negotiate.
As part of this agreement, Dish has also committed itself to build a 5G network with speeds exceeding 35 Mbps that covers 70% of the U.S. population with 5G by June 14, 2023 or it has to pay $2.2 billion to the U.S. government. Dish had also previously committed to the FCC to have deployed a core network and provide 5G service to more than 20% of the U.S. population by 2022. Dish’s AWS-4, 700 MHz, and H Block licenses need to cover 50% of the U.S. population by June 2023 to get a two-year build-out extension. All of the build-out requirements culminate in the 2022 and 2023 time frame. It’s either build out or return the licenses to the U.S. government.
What’s the impact on the market?
Currently, what the Dish deal actually represents is not that Dish is becoming a facilities-based network operator, but a $3.6 billion option to become one, when 5G Release 16 equipment becomes available.
By choosing to build a stand-alone 5G network, Dish puts itself at the mercy of the U.S./China trade conflict with all the ups and downs that come with it. With all the exuberance about a new entrant, we have to remember it will take several years for Dish to become a facilities-based operator. In the interim, Dish will be an MVNO with all the constraints that come with it. For decades the FCC did not consider MVNO full competitors as they are dependent on a network operator for its services and how the contract has been structured financially.
We also need to keep in mind that the T-Mobile/Sprint deal will not close until the lawsuit with the states is resolved. The trial pits now 15 state attorneys general against this deal, which could start as early as December. After the deal was approved by the Department of Justice, the Republican attorney general of Texas joined his 14 Democratic attorney generals. This development creates a lot of doubt about the notion that the Department of Justice conditions would address most if not all concerns of the state attorneys. The Republican Attorney General of Texas would not have gone against the Republication Department of Justice if he thought the remedies ordered in the federal approval of the merger would be anywhere near what he thought necessary. Just when T-Mobile, Sprint and Dish could hope for an easy settlement with the states, the new plaintiff clearly upset that notion.
The longer the state trial takes, the less time Dish has to build out as the deadline for 70% population coverage is fixed. We also cannot discount that Dish pulls out at the last moment and sells its spectrum. It’s spectrum is worth much more—with some estimates around $30 billion—than $3.6 billion that it paid for the Sprint prepaid business and the fine to the government. Not buying the 800 MHz from the New T-Mobile would cost only $72 million.
The other white elephant in the room is that Dish does not own millimeter wave (mmWave) spectrum. If a key differentiator of 5G is ultra-high speeds which are only achievable with the multiple hundreds of MHz wide channels, then Dish is at a serious disadvantage of being the only competitor in the market without it. The experience of the last decade has clearly shown that network quality and speed is indispensable for a wireless competitor—the lack of it was Sprint’s undoing.
Dish mentioned on their Q2 2019 earnings call that they intend to migrate from being an MVNO on T-Mobile’s core to being an MVNO on its own core to being a mobile network operator. A core-to-core connection between Dish’s and T-Mobile’s cores in conjunction with eSIM/dual SIM would allow seamless roaming with uninterrupted voice and data sessions as Dish customers would move on and off the respective networks.
On the network design level, Dish would build a fully virtualized 5G network, similar to Rakuten’s virtualized 4G network, including Open RAN and edge computing capabilities. This would allow Dish to build the network 25% cheaper and substantially lower operating costs. This, together with the MVNO deal, would allow Dish to be modestly profitable from the outset.
Dish also mentioned that it expects its network to cost $10 billion and that it would eventually need more funding. AT&T, Verizon, and soon the New T-Mobile will spend $10 billion every year to maintain and improve their already existing networks. Basically, $10 billion per year has become the standard capital expenditure spend for a nationwide carrier that wants to compete. Dish, without a network, will need more than $10 billion per year to catch up and be ready when the wholesale deal with T-Mobile expires in seven years. If it spends less like its peers, like Sprint did, Dish will suffer the same fate as Sprint.
Rolling out a wireless network city by city is not something that the U.S. wireless market has seen for 40 years. The nature of nationwide television advertising made it increasingly inefficient to go to market city by city but favored nationwide rollouts. A consumer could walk into a store anywhere in the United States and get the service they heard of.
It also gives competitors less insights of how the company will compete and more importantly less time to react to the product launch. A competitor that you see coming to new markets is not as impactful as one that launches nationwide. Digital advertising has made media campaigns a lot more surgical and localized but online only represents about 10% of wireless gross additions. It will be interesting to see how Dish is going to approach selling the different packages it is offering in different parts of the country.
Ultimately, Dish could be an aggressive competitor similar to what it is in satellite. Dish competes on price and features with good customer service. Unfortunately, at the current trajectory, the satellite business will become unprofitable in about three years as subscribers, revenue and profit are declining precipitously. The underlying profitability of Dish’s core satellite business, capital intensity of wireless, the hyper-competitiveness of the wireless industry, the vagaries of international politics, delays in technical standards, the fickleness of investors, and plain old execution risks are the biggest complicating factors in Dish becoming successful in wireless.
For T-Mobile, if the states’ suit gets successfully resolved, then T-Mobile got everything it wanted and had to give up on the things it didn’t want or need. Sprint’s prepaid business does not fit into T-Mobile’s brand line up with Metro by T-Mobile being their very successful prepaid brand.
Boost Mobile, Virgin Mobile USA and Sprint Prepaid are brands in distress and customer bases under pressure. If T-Mobile wouldn’t have found a buyer for them, they would have just let them wither on the vine collecting revenue from an ever smaller customer base.
The 14 MHz in the 800 MHz band is not enough spectrum to make a difference to T-Mobile, especially since it’s about only half of that along the border due to interference issues.
With the Sprint merger, T-Mobile has leapfrogged not only AT&T as second largest postpaid phone carrier, but it also has overtaken AT&T and Verizon in terms of traditional band spectrum, plus T-Mobile has more than 120 MHz in the 2500 MHz band. This lays the foundation for T-Mobile to regain the speed crown outside the 5G mmWave areas where their competitors have more spectrum deployed than T-Mobile.
When we combine Sprint’s spectrum with T-Mobile’s track record of 22 quarters of leading the industry in branded phone customer growth, we see a super-charged competitor that has now even more tools at its disposal to win against AT&T, Verizon and Dish. In Q2 2019, T-Mobile added 710,000 postpaid phone customers, AT&T added 72,000, Verizon added 245,000 and Sprint lost 128,000. In a nutshell, T-Mobile added more than twice as many valuable postpaid phone customers than AT&T and Verizon combined. With the Sprint acquisition, T-Mobile’s run of industry leading growth is likely to continue, if not accelerate.