Roger Entner

Posted on by Roger Entner

The U.S. wireless industry has officially entered a new era, catalyzed by a landmark transaction that confirms the final collapse of EchoStar’s long-held ambition to become a fourth facilities-based carrier. EchoStar has entered into a definitive agreement to sell its complete portfolio of prized AWS-4 and H-block spectrum licenses to SpaceX for approximately $17 billion. The deal, consisting of up to $8.5 billion in cash and an equivalent amount in SpaceX stock, also includes a provision for SpaceX to fund approximately $2 billion of EchoStar’s debt interest payments through late 2027 and establishes a long-term commercial agreement for SpaceX to provide its next-generation Starlink Direct-to-Cell (D2C) service to EchoStar’s Boost Mobile subscribers.

This agreement is not merely a corporate restructuring; it is the definitive end of a regulatory dream and the formal beginning of a new, more complex competitive paradigm. The transaction solidifies the U.S. terrestrial wireless market as a stable, three-player market while simultaneously igniting a new, asymmetric competitive front in satellite-to-cellular connectivity. SpaceX, now armed with dedicated, purpose-built spectrum for Mobile Satellite Service (MSS), and its primary terrestrial partner, T-Mobile, possess a significant first-mover advantage in the race for ubiquitous coverage. This move elevates the D2C value proposition from a niche, emergency-only feature into a core, marketable network attribute.

The cascading effects of this deal will reshape the strategies of every major player for years to come. For EchoStar, it marks the final pivot from a would-be network operator to a “hybrid MVNO” and a significant shareholder in SpaceX, a stunning financial victory for its chairman, Charlie Ergen, born from the ashes of operational failure. For Verizon and AT&T, it provides urgency to accelerate their own D2C counter-strategy with partner AST SpaceMobile. Finally, the transaction presents a novel challenge for regulators. The review will be forced to look beyond traditional concerns of terrestrial spectrum consolidation and grapple with the profound implications of SpaceX’s vertical integration, examining its dominance in the satellite launch market and its new, powerful position in the downstream market for satellite connectivity services. The two-front war has begun.

I. The Deal That Ends an Era: Deconstructing the EchoStar-SpaceX Agreement

The definitive agreement between EchoStar and SpaceX represents one of the most significant strategic transactions in the recent history of the U.S. telecommunications sector. Its architecture reflects the unique financial positions and strategic imperatives of both companies, transferring a uniquely valuable set of spectrum assets that will power a new generation of satellite services and formalizing a commercial alliance that provides a lifeline to a struggling wireless brand.

Financial Architecture and Valuation Analysis

The transaction is structured to provide EchoStar with immediate financial relief and long-term upside, while allowing SpaceX to acquire a critical strategic asset without depleting its capital reserves needed for its ambitious launch and satellite manufacturing programs. The core terms of the agreement are as follows :

  • Total Consideration: The deal is valued at approximately $17 billion.
  • Cash Component: SpaceX will provide up to $8.5 billion in cash.
  • Stock Component: SpaceX will provide up to $8.5 billion in its own stock, with the valuation fixed as of the date the definitive agreement was signed.
  • Debt Servicing: In a crucial provision that addresses EchoStar’s immediate liquidity crisis, SpaceX has agreed to fund an aggregate of approximately $2 billion in cash interest payments due on EchoStar’s substantial debt through November 2027.

This 50/50 cash-and-stock structure is a work of strategic financial engineering. A pure cash deal of this magnitude would place immense strain on SpaceX, a company with massive and continuous capital expenditures for its Starship development and Starlink constellation deployment. Conversely, a pure stock deal would have been unacceptable to EchoStar’s creditors, who require cash to service the company’s more than $26.4 billion in total debt. The balanced split provides an elegant solution. SpaceX preserves vital capital for its core operations, while EchoStar secures sufficient immediate liquidity to manage its most pressing debt obligations and stabilize its financial footing.

Furthermore, by accepting a significant equity stake in one of the world’s most valuable private companies, EchoStar Chairman Charlie Ergen has transformed what could have been a simple liquidation of assets into a long-term investment. This move aligns the financial interests of both parties in the success of the D2C venture that this very spectrum will empower. It gives EchoStar and its shareholders continued participation and upside potential in the high-growth satellite connectivity ecosystem, effectively hedging the sale of its own ambitions against the success of its acquirer.

Asset Deep Dive: The Strategic Value of AWS-4 and H-Block Spectrum

The intense pursuit of these specific licenses by SpaceX was driven by the unique and irreplaceable nature of the AWS-4 band. While the H-block licenses are a valuable addition, the AWS-4 spectrum—encompassing the 2000-2020 MHz uplink and 2180-2200 MHz downlink bands—is widely considered the “golden band” for D2C services.

Its value stems from its history and technical characteristics. Unlike repurposed terrestrial spectrum, such as the sliver of T-Mobile’s PCS G-block currently used for the beta T-Satellite service, the AWS-4 band was originally allocated for Mobile Satellite Service (MSS). The propagation physics of both bands are ideal for the challenges of space-to-ground communication, making it far more efficient for connecting satellites to standard smartphones. More importantly, its existing regulatory framework as an MSS band provides a more direct and less contentious path for satellite use, sidestepping many of the complex technical and legal challenges associated with using terrestrial-designated bands from space under the FCC’s new Supplemental Coverage from Space (SCS) framework.

By acquiring the entire portfolio of these licenses, SpaceX secures exclusive, nationwide rights to this optimal spectrum. This acquisition is transformative, enabling SpaceX to develop and deploy a next-generation Starlink D2C constellation capable of moving beyond the limitations of the current text-only service. With dedicated, purpose-built spectrum, SpaceX can now credibly pursue its roadmap of offering reliable voice, streaming-grade data, and robust IoT capabilities directly to unmodified smartphones, a quantum leap in service capability.

The Commercial Alliance: Defining the Future of Boost Mobile and Starlink D2C

A core component of the definitive agreement is the establishment of a long-term commercial alliance. This partnership will enable EchoStar’s Boost Mobile subscribers to access SpaceX’s next-generation Starlink D2C service, with the connection being managed through Boost’s own cloud-native 5G core network. While seemingly a straightforward value-add for customers, this commercial agreement serves multiple, layered strategic purposes for both companies and for the deal’s regulatory prospects.

For EchoStar, the alliance provides a desperately needed lifeline and a unique point of differentiation for its struggling Boost Mobile brand. Facing relentless subscriber losses and the decommissioning of its own physical network, Boost can now market a truly innovative feature—ubiquitous satellite connectivity—to stanch churn and potentially attract new customers in the hyper-competitive prepaid market. It allows EchoStar to maintain a narrative of being a technology-forward competitor even as it fully transitions to a “hybrid MVNO” model, reliant on the networks of its rivals. It still does not solve Boost Mobile’s remarkable inability to sell its services successfully.

Most critically, this commercial component is a masterful piece of regulatory strategy. The preservation of Boost Mobile as a distinct competitive entity, now enhanced with a unique satellite offering, provides essential political cover for the transaction. It allows the Department of Justice (DOJ) and the Federal Communications Commission (FCC) to approve a deal that otherwise permanently cements a three-player terrestrial market. Regulators can plausibly argue that they have preserved a “fourth wireless competitor,” even if that competitor no longer owns a radio access network. This framework directly mirrors the “hybrid MNO” model established in EchoStar’s prior spectrum sale to AT&T, creating a consistent and defensible regulatory precedent that will ease the path to approval.

II. EchoStar’s Final Chapter: From Contender to Catalyst

The sale of EchoStar’s most valuable spectrum assets was not a strategic choice but an inevitability, the culmination of years of financial strain, commercial missteps, and overwhelming regulatory pressure. The company’s journey from a government-mandated fourth carrier to a motivated spectrum broker is a stark cautionary tale about the brutal economics of the modern wireless industry. Yet, for its chairman, it represents the profitable conclusion to a decades-long speculative bet.

Anatomy of a Forced Sale: Financial Distress, Network Failure, and Regulatory Pressure

The fire sale of EchoStar’s spectrum was precipitated by a combination of three fatal blows that left the company with no viable path forward other than liquidation.

First, the company’s financial position had become untenable. Saddled with a total debt load exceeding $26.4 billion, EchoStar reported a net loss of $306 million in the second quarter of 2025 alone. The financial distress grew so acute that the company began missing multi-million dollar interest payments, a clear signal of a looming liquidity crisis. The post-pandemic rise in interest rates had closed the window for the cheap financing necessary to fund a nationwide network buildout, leaving the company hemorrhaging cash from its wireless division and presiding over a legacy pay-TV business in secular decline. The inclusion of a $2 billion interest payment provision by SpaceX in the final deal underscores the severity of this financial pressure.

Second, EchoStar’s flagship strategic initiative, a technologically advanced, greenfield 5G Open RAN network, was a commercial catastrophe. Despite earning technical praise for its rapid deployment, the network failed to attract a critical mass of subscribers, becoming a “ghost town” that generated no meaningful revenue or positive cash flow. This failure proved that simply building a network is not synonymous with building a successful wireless business. The surrender was signaled definitively when the company laid off 90% of its wireless engineering organization following its initial spectrum sale to AT&T, an irreversible move away from any serious network ambitions.

Finally, the FCC, under Chairman Brendan Carr, delivered the coup de grâce. Prompted by public questions from Elon Musk about why EchoStar was allowed to hold valuable spectrum without fully utilizing it, the commission launched a high-profile campaign against the company’s “spectrum squatting”. This regulatory pressure, amplified by relentless lobbying from SpaceX, initiated formal inquiries into EchoStar’s buildout compliance and effectively froze the company’s ability to raise capital. Cornered financially and regulatorily, Chairman Charlie Ergen was forced to abandon his decades-long strategy of hoarding spectrum, leaving a sale as his only remaining option. Both the AT&T and SpaceX deals are explicitly framed by EchoStar as necessary steps to resolve these pending FCC inquiries.

The Definitive Pivot: Termination of the MDA Space Contract

If any doubt remained about EchoStar’s complete and total surrender of its network infrastructure ambitions, it was erased by a single, decisive action that occurred concurrently with the SpaceX deal announcement. On September 8, 2025, EchoStar issued a termination for convenience notice to MDA Space for a major satellite constellation contract that had been announced just five weeks prior, on August 1, 2025.

This sequence of events reveals the stark, binary choice the company faced. The initial MDA Space contract was a bold statement of intent, committing EchoStar to a multi-billion dollar project to build its own Low Earth Orbit (LEO) satellite constellation for D2D services, positioning itself as a direct competitor to Starlink. It was the “build” path. The subsequent termination, explicitly cited as the result of a “sudden change to EchoStar’s business strategy and plan in the wake of spectrum allocation discussions with the Federal Communications Commission,” was the definitive pivot to the “sell” path. This was not a gradual strategic evolution but an abrupt reversal. The deal with SpaceX made building its own constellation both unnecessary and impossible. The termination of the MDA contract is the final, irrefutable evidence that EchoStar has permanently exited the network infrastructure business, both on the ground and in space.

The Financial Epilogue for Ergen: A Masterclass in Spectrum Arbitrage

Despite the spectacular operational failure of the fourth-carrier project, the great spectrum reshuffle represents an immense financial victory for Charlie Ergen. Over several decades, he masterfully acquired a vast portfolio of spectrum licenses, often at prices far below today’s market value. The recent sales are the culmination of this long-term arbitrage strategy.

The August 2025 sale of 600 MHz and 3.45 GHz spectrum to AT&T netted approximately $23 billion, a price tag roughly $9 billion higher than what EchoStar originally paid for those licenses. Combined with the approximately $17 billion transaction with SpaceX, the total proceeds from the spectrum liquidation will be around $40 billion. This sum is more than sufficient to retire EchoStar’s entire $26.4 billion debt load, with a substantial multi-billion dollar profit remaining for Ergen and the company’s shareholders. While his dream of being a wireless network king is dead, the poker player has walked away from the table with the jackpot.

III. Starlink’s Quantum Leap: Forging a New Satellite-Terrestrial Paradigm

The acquisition of EchoStar’s AWS-4 and H-block spectrum is a watershed moment for SpaceX. It catapults the company’s Starlink division from a promising but niche player in the D2C space into a position of formidable power, armed with the ideal assets to realize its global ambitions. This deal fundamentally alters the D2C value chain, supercharges its alliance with T-Mobile, and introduces complex new questions of vertical integration for antitrust regulators.

From Partner to Kingmaker: The Power of Dedicated MSS Spectrum

Until now, Starlink’s D2C service, offered in partnership with T-Mobile, has been a groundbreaking but technically constrained offering. It has operated by leasing a small slice of T-Mobile’s terrestrial PCS spectrum, a band not optimized for the physics of space-to-ground communication. This has limited the service to basic text messaging, with a roadmap for voice and data still in development.

The acquisition of dedicated, nationwide MSS spectrum changes everything. As previously noted, the AWS-4 band is purpose-built for satellite communications, offering superior performance and a clearer regulatory path. Owning this “golden band” allows SpaceX to transition from a D2C partner, reliant on a carrier’s terrestrial assets, to a D2C kingmaker that controls its own destiny. With exclusive rights to this spectrum, SpaceX can now engineer a fully optimized, next-generation satellite constellation designed to deliver on the full promise of D2C: reliable voice, high-quality data streaming, and ubiquitous IoT connectivity directly to standard smartphones. This elevates the D2C value proposition from a novelty or emergency feature into a core, marketable network attribute, fundamentally changing the competitive landscape.

The T-Mobile Alliance Supercharged: Forging a “Ubiquity Moat”

The most immediate beneficiary of SpaceX’s empowerment is its primary U.S. partner, T-Mobile. The combination of T-Mobile’s extensive terrestrial 5G network and Starlink’s enhanced D2C capabilities creates a hybrid network with a profound competitive advantage. T-Mobile will soon be able to market a service that offers virtually seamless connectivity, eliminating terrestrial dead zones for core voice and data services across the vast majority of the U.S. landmass.

This capability directly addresses a primary consumer pain point and a top purchase driver: the ability to make calls and use data anywhere. This “ubiquity” feature becomes a formidable competitive moat. It creates a stickier service that could significantly reduce customer churn, particularly among high-value subscribers in rural areas, outdoor enthusiasts, and enterprise clients in sectors like logistics, agriculture, and transportation. It provides a compelling reason for customers of rival carriers to switch to T-Mobile and a powerful reason for existing customers to stay. While the service will have inherent limitations, satellite signals struggle to penetrate buildings, confining the primary use case to outdoor environments, its value in eliminating outdoor dead zones gives T-Mobile an asymmetric advantage that rivals, with their still-nascent D2C partnerships, cannot immediately match.

Antitrust Headwinds: Scrutinizing the Vertical Integration of a New Power Broker

While the transfer of spectrum licenses from a non-competitor (EchoStar) to a new entrant (SpaceX) may not trigger traditional horizontal antitrust concerns, the deal’s approval is not guaranteed. It is highly unlikely that the FCC or DOJ will put significant conditions on this deal even though it raises a more complex and potentially more problematic issue: vertical integration and the market power of SpaceX.

The structure of this transaction creates a classic vertical integration scenario that will force antitrust authorities to consider novel questions in the telecommunications space. SpaceX is already the dominant player in the upstream market for satellite launch services, controlling a vast majority of the global commercial launch market. Many of its direct competitors in the satellite communications industry, including companies building rival D2C constellations, are dependent on SpaceX’s rockets to get their satellites into orbit. This reliance has already raised concerns about SpaceX potentially favoring its own Starlink constellation.

By acquiring scarce, premium MSS spectrum, SpaceX is now poised to become the dominant player in the downstream market for D2C services in the U.S. This combination of upstream and downstream market power will compel antitrust enforcers to examine whether SpaceX could leverage its launch monopoly to harm competition in the D2C market. This could manifest in several ways consistent with a classic “raising rivals’ costs” antitrust theory, such as using discriminatory pricing for launches, prioritizing its own satellites over those of competitors, or demanding exclusionary contract terms that limit a customer’s ability to use other launch providers. This shifts the regulatory focus from the FCC’s public interest standard on spectrum utilization to the DOJ’s stricter antitrust framework concerning market power, competitive foreclosure, and the potential for a dominant firm in one market to stifle competition in an adjacent one.

IV. The Terrestrial Counteroffensive: AT&T and Verizon’s Race for Parity

While the SpaceX-EchoStar deal reshapes the satellite-cellular frontier, the battle on the terrestrial front continues unabated. For Verizon, the imperative to secure additional mid-band spectrum is now more acute than ever, though its path is complicated by legal disputes. In response to the formidable T-Mobile/Starlink alliance, Verizon and AT&T have been forced into an unprecedented defensive partnership, betting their D2C future on a single satellite provider, AST SpaceMobile.

The Strategic Imperative for AWS-3 and the Shadow of a Lawsuit

Verizon’s network has long been defined by its quality and reliability, but it faces a relative deficit in critical mid-band spectrum compared to T-Mobile’s vast 2.5 GHz holdings. AT&T’s recent $23 billion acquisition of EchoStar’s 3.45 GHz and 600 MHz spectrum threatened to widen this gap, potentially leaving Verizon in third place in the 5G capacity race.

However, this straightforward strategic move is complicated by a significant legal entanglement. EchoStar is currently suing the FCC in the U.S. Court of Appeals for the Tenth Circuit to block the rules governing the upcoming re-auction of these very AWS-3 licenses. The lawsuit stems from a decade-old issue where Dish Network (now EchoStar) defaulted on winning bids from the original 2015 auction. EchoStar is now potentially liable for any shortfall if the re-auction fails to generate at least $3.3 billion. EchoStar argues that the FCC’s updated, more restrictive auction rules for small businesses will suppress bidding, making a shortfall more likely and unfairly exposing the company to billions in penalties.

This litigation creates a strategic dilemma that directly impacts the competitive balance. The lawsuit introduces significant uncertainty around the timing and final cost of the AWS-3 spectrum, which Congress has mandated must be auctioned by June 2026. Any delay in the auction directly harms Verizon’s ability to close its mid-band capacity gap with AT&T, which has already secured and can begin deploying its new spectrum. Every month the AWS-3 spectrum remains in legal limbo is a month that Verizon’s network risks falling further behind in critical urban markets, eroding the very foundation of its premium brand and value proposition.

The AST SpaceMobile Gambit: A Unified Front Against a Common Threat

Faced with the powerful and vertically integrated T-Mobile/Starlink alliance, Verizon and AT&T have been driven to adopt an unprecedented counter-strategy: a joint, non-exclusive reliance on satellite partner AST SpaceMobile. Both carriers have signed commercial agreements with AST SpaceMobile and are providing it with access to their licensed terrestrial spectrum—primarily in the 850 MHz band—to power its D2C service.

This move represents a fundamental shift in the competitive dynamics of the U.S. wireless market. AT&T and Verizon are historically fierce, zero-sum competitors that have rarely, if ever, collaborated on a core strategic technology platform. Their decision to both partner with AST SpaceMobile, rather than each seeking an exclusive satellite partner, is a clear signal of the profound disruptive threat they perceive from Starlink. This “co-opetition” is a defensive alliance born of necessity. By pooling their spectrum resources and committing their vast subscriber bases to a single satellite platform, they can help AST SpaceMobile achieve the scale, funding, and regulatory momentum necessary to build a viable competing constellation more quickly. This strategy effectively transforms the D2C battle from a three-way free-for-all into a two-sided war between distinct technology ecosystems: the T-Mobile/Starlink bloc versus the AT&T/Verizon/AST SpaceMobile bloc.

Comparative Analysis: Starlink D2C vs. AST SpaceMobile

The two emerging satellite-cellular ecosystems are built on fundamentally different strategic and technical models.

  • The Starlink Model: This is a deeply vertically integrated approach. SpaceX controls the rocket manufacturing, the launch services, the satellite constellation, and now, the dedicated MSS spectrum. This provides significant advantages in terms of cost control, deployment speed, and the ability to optimize the entire system—from satellite to spectrum to handset—for maximum performance. Its primary challenge is the immense capital required to build and maintain this integrated system.
  • The AST SpaceMobile Model: This is a partnership-based approach. AST SpaceMobile relies on its carrier partners (AT&T and Verizon in the U.S.) for access to terrestrial spectrum and their subscriber bases. Its key technological differentiator is its satellite design, which features exceptionally large phased-array antennas. These massive antennas are designed to be powerful enough to connect directly with standard, unmodified smartphones using conventional terrestrial spectrum bands from hundreds of miles in orbit. This model is more capital-efficient for the satellite operator but introduces complexities in coordinating with multiple carrier partners and managing potential interference with terrestrial networks.

The race is now on to see which model can achieve scale and deliver a compelling service to consumers first. Starlink has the advantage of an existing LEO constellation and now, superior spectrum. AST SpaceMobile has the backing of two of the world’s largest carriers and a novel satellite architecture. The outcome of this technological and strategic competition will define the future of ubiquitous connectivity. Alternatively, AT&T and/or Verizon could abandon their AST SpaceMobile partnership and throw in their lot with Starlink. This might be a technically superior solution, but puts them at the mercy of Elon Musk.

V. Navigating the Regulatory Gauntlet

The final approval of the EchoStar-SpaceX spectrum transfer is not a foregone conclusion and must navigate a complex regulatory environment. However, the deal has been skillfully structured to address the primary concerns of the FCC, while the most likely challenge will come from state-level actors seeking consumer protection concessions.

The FCC’s End Game: Why Approval Is the Path of Least Resistance

The FCC is highly likely to approve the spectrum license transfer with minimal friction. The entire transaction is framed as the solution to the very problem that prompted the agency’s investigation in the first place: EchoStar’s perceived “spectrum squatting”. For years, and with increasing public pressure from figures like Chairman Carr, the FCC’s primary objective has been to see EchoStar’s underutilized spectrum put to more intensive use for the benefit of American consumers.

This deal achieves that objective in the most direct way possible. It transfers the licenses from EchoStar, a company that proved unable to deploy them effectively, to SpaceX, a well-capitalized and highly motivated entity that has publicly committed to building a next-generation satellite network on these exact frequencies. For the FCC, approving the deal is the path of least resistance; it allows the commission to declare victory in its campaign against spectrum warehousing. The preservation of Boost Mobile as a “hybrid MNO” with access to this new D2C service provides the necessary political and regulatory justification to bless the transaction.

DOJ and State AGs: The Inevitable Price of Consolidation

While the FCC’s path seems clear, the view from antitrust enforcers is more complex. The Department of Justice is unlikely to block the transaction outright. The “failing firm” doctrine, which was a key rationale in the approval of the T-Mobile/UScellular merger, applies directly to the collapse of EchoStar’s wireless ambitions. With EchoStar having effectively exited the market as a facilities-based competitor, the DOJ lacks a strong basis to argue that this specific spectrum transfer further harms terrestrial competition. The more salient antitrust questions, as noted, relate to vertical integration, which may result in behavioral remedies or oversight rather than a full blockade.

The most probable challenge will emerge from a multi-state coalition of Attorneys General, particularly from Democratic-led states. This is the same playbook used during the T-Mobile/Sprint merger, where state AGs filed suit to block the deal on consumer protection grounds, arguing it would reduce competition and raise prices. A similar legal challenge is almost inevitable. The AGs will argue that allowing the last major independent block of mid-band spectrum to be absorbed into an ecosystem controlled by one of the top three carriers’ partners permanently cements a three-player oligopoly to the detriment of consumers.

However, the most likely outcome of such a challenge is not a complete blockade but a negotiated settlement. Precedent suggests that the carriers will be forced to the negotiating table to offer tangible consumer concessions in exchange for the AGs dropping their lawsuit. These concessions could include multi-year price locks for low-income plans, specific buildout commitments for the D2C service in underserved rural areas within their states, and robust protections for independent Mobile Virtual Network Operators (MVNOs) to ensure a competitive wholesale market. The deal will proceed, but not without a price.

VI. Conclusion: Winners, Losers, and the Future Trajectory of U.S. Connectivity

The great spectrum reshuffle, culminating in the EchoStar-SpaceX transaction, has irrevocably altered the competitive landscape of the U.S. telecommunications and satellite industries. It has created clear winners and losers, solidified a new market structure, and set the strategic trajectories for every major player for the remainder of the decade.

Scoring the Reshuffle:

The definitive terms of the recent deals allow for a clear assessment of the strategic outcomes for all involved parties.

  • Biggest Winners: The clearest victors are Charlie Ergen and SpaceX. Ergen successfully monetized decades of spectrum speculation for a massive profit, deftly navigating operational failure to achieve a stunning financial success. SpaceX acquires the “golden band” of MSS spectrum, the single most critical and previously unobtainable asset needed to realize its global D2C ambitions and establish a commanding technological lead.
  • Primary Beneficiary: T-Mobile emerges as the primary strategic beneficiary among the mobile network operators. Its exclusive partnership with a newly empowered Starlink provides it with a powerful and asymmetric “ubiquity moat”—a unique value proposition of near-total coverage that will be a potent tool for customer acquisition and retention in the years to come.
  • Forced to React: Verizon and AT&T are now firmly on the defensive in the new D2C battle. While their terrestrial network positions are solidified—particularly AT&T’s after its own spectrum purchase from EchoStar—they have been forced into a reactive alliance with AST SpaceMobile to counter the first-mover advantage of the T-Mobile/Starlink bloc. Their success now depends heavily on the execution of a third-party partner in a race where they are starting from behind or they might join the Starlink camp under the premise of “If you can’t beat them, join them.”
  • Biggest Losers: The most significant casualty is the concept of a fourth facilities-based U.S. wireless carrier. The collapse of EchoStar’s effort, despite government mandates and access to spectrum, proves that the economic and competitive barriers to entry are now insurmountably high. EchoStar, the company, also fits this category. While financially solvent, its grand ambitions are dead. It survives as a shell of its former aspirations, relegated to the role of a hybrid MVNO presiding over a satellite TV business in terminal decline.

The Evolving Battlefield: Key Milestones and Strategic Outlook for 2026-2028

The U.S. wireless market now revolves around three titans engaged in a two-front war. The coming years will be defined by their execution on both the terrestrial and satellite fronts. The key milestones that will determine the future trajectory of the industry include:

  • The timeline and outcome of the regulatory review for the SpaceX/EchoStar transaction, including any potential concessions demanded by State Attorneys General.
  • The resolution of EchoStar’s lawsuit against the FCC and the subsequent timing and results of the AWS-3 spectrum re-auction, which will be critical for Verizon’s 5G capacity strategy.
  • The initial commercial launch and real-world performance of Starlink’s enhanced D2C service operating on the AWS-4 spectrum, which will be the first major test of the technology at scale.
  • The successful launch and operational performance of AST SpaceMobile’s first block of commercial BlueBird satellites, which will determine the viability of the AT&T/Verizon counter-strategy.
  • The marketing, pricing, and consumer adoption rates of the competing D2C offerings, which will ultimately reveal whether ubiquitous connectivity is a niche feature or a mass-market demand driver that can reshape carrier loyalty.

The era of four-player competition is definitively over. The war for the future of American connectivity—a war fought simultaneously on the ground and from orbit—has just begun.

Posted on by Roger Entner

The FCC is seeking to more closely regulate a key tactic in mobile carrier marketing—their performance and speed claims.

The commission already does this for fixed broadband and has proposed to use crowd data to set the upper limit for carrier marketing claims.

But here’s the problem: There are significant differences between crowd and scientific testing.

Crowd testing is easier to conduct but tough to draw out any useful conclusions, while scientific testing takes significant resources to conduct but provides easy-to-understand and useful results based on a methodical process that is accurate and enables apples-to-apples comparisons. As a result, the FCC, in taking a shortcut with crowd testing, will not present the full or fair picture of the performance and speed of mobile providers.

Although the differences between crowd and scientific testing could just be chalked up merely to competition, with both sides advocating their approach, a major government agency has decided to throw its lot in with a crowd tester. Such an approach will provide a limited view of the mobile consumer experience and won’t provide an accurate reading of the service providers’ strengths and weaknesses.

In this report, we provide an overview of both scientific and crowd testing and provide a number of observations on the right policy direction.

Download the Report Now

 

 

Posted on by Roger Entner

Recon Analytics recently completed an exhaustive study of the US mobile market and how it compares with its G7 peers (funded by CTIA). This article presents a summary of the study—the results of which are available here.

The US mobile broadband experience is the stuff of lore around the world, in part due to the smartphone revolution that started here, enabled by large, reliable wireless networks and innovative pricing strategies. The US was also the first to roll out fully commercial large-scale LTE networks that offered significantly higher speeds than ever before, and still leads the world in LTE subscribers and deployment. But America’s leadership is in danger. As we see in Exhibit 1, the US recently fell behind in wireless download speeds compared to three other countries in the G7, largely as a result of its own success. Immediate and targeted action by the US government to allocate more spectrum for 4G services is critical if the US is to retain its global leadership role. We are beginning to feel the consequences of a six-year gap between major FCC auctions.

Exhibit 1: Average Mobile Data Speed by Country

Exh-1

Source: Ookla; Capture Date June 13, 2014

Spectrum is the oxygen that makes higher achievable speeds for LTE subscribers possible. At least on paper, the US seems to have a decent amount of spectrum, but it is generally already used for current services such as GSM, CDMA, and HSPA. Even with carriers in the other G7 countries also supporting earlier technology generations, the fact is that the US has utilized the least amount of spectrum for LTE compared to its peers in delivering great service to Americans (see Exhibit 2). In the simplest of terms (and all other things being equal), if there is less spectrum available per user, it will impact customers’ speeds.

Exhibit 2: Deployed LTE Spectrum

Exh-2Source: Recon Analytics and Q1 2014 operator reports, 2014

If spectrum is the oxygen, then capital expenditures are the fuel that accelerates wireless networks. Unsurprisingly, carriers in the United States, which has the most people among the G7 countries and a significantly larger area to cover than others, spend substantially more on capex than carriers in any other G7 member country. Japan, with the second most inhabitants, spends the second most. The smallest nation by population, Canada, spends the least. What is striking, though, is that in the midst of this technological transformation, only Italy and Canada have not continuously increased their capex. This compares to the more than $34 billion the US spent in 2013, which is an all-time industry high.

One impediment for the US is a considerably less concentrated population when compared to other G7 countries. Population density is an important part of the equation used to establish the Recon Analytics Urban Agglomeration Index, and it shows that the US is significantly more spread out. Moreover, the top urban agglomerations in the US add up to a much smaller slice of its overall population than the top urban agglomerations in its G7 peer countries. As a result, it’s more expensive for US carriers to deploy faster networks, and achieve the economies and efficiencies that may be attained in more densely populated countries. This makes the US lead in LTE deployment even more impressive.

Despite these challenges, overall, American smartphone owners are tied with Germany as the most satisfied.

The US pioneered bringing 4G LTE to a mass audience while continuously increasing average download speeds. And now it faces a challenge. Three of its G7 compatriots surpass its lead in download speeds.

What is at the root of this loss of speed leadership? In short, other G7 countries have made significantly more spectrum available for 4G than the United States. The influx of new spectrum, combined with fewer 4G subscribers, has resulted in data speeds skyrocketing in several countries. The only thing preventing the US from falling even further behind are the massive capital investments made by the US wireless providers, which are the largest in totality and second largest per person among the G7 countries.

Our international comparison shows that more spectrum results in faster download speeds. Faced with the convergence of limited spectrum, dispersed population and high usage, US operators are continuously and consistently pumping massive capital investments into their infrastructures to provide Americans with the best possible networks. As a result, data speeds are increasing. That increase in speed, combined with aggressive network management designed to ensure consumers have a robust mobile broadband experience, has driven customer satisfaction in the United States.

At the same time, other countries have accelerated their download speeds substantially faster because they have considerably more spectrum available and deployed for 4G, and because of their geographic and population density advantages. Another contributing factor is that 4G is treated like a premium service – with extra costs – in many countries, which reduces the adoption of 4G solutions and usage of LTE networks. Driven by strong competition, US providers pushed aggressively to transition the subscriber base to 4G solutions without extra fees or charges, producing greater traffic than in countries where download speeds are tied to premium pricing, and placing a greater strain on 4G networks.

It’s clear that the economic and social benefits from wireless technology and services are beyond anything we could have predicted even 20 years ago. Network infrastructure and commitment to capex spending are critical elements that are already in place for the US to achieve superiority once again. The missing piece is spectrum. To regain its lead, the United States should quickly allocate more licensed spectrum to wireless operators, in larger contiguous blocks. When that happens, download speeds will increase more rapidly and US consumers will benefit even more than they already have from the advanced wireless services they have available.

Posted on by Roger Entner

The following Note is the first of a two-part series assessing some of last year’s key market developments and projecting their impact into 2014. We also offer our thoughts on the challenges and opportunities for wireless carriers this year and consider how competition will unfold in the months ahead. Part Two will look at what the year ahead may hold for devices, networks and spectrum.

Looking back, 2013 was a year of transformation in which several major transactions enabled the carriers to reshape and reinforce themselves for a Final Four competition for leadership in the U.S. market. Looking ahead, 2014 shapes up as a year of intensified competition in which carriers test a host of new options for relations with their customers and also step up a fierce contest to establish the superiority of their LTE network. Already, just weeks into the new year, AT&T and T-Mobile have raised and counter-raised with competing offers of cash to convince customers to ditch their current carrier and switch. And, Sprint has revised its plan for accelerated handset upgrades and launched a new Framilies plan to let larger numbers of customers come together and qualify for lower group rates.

Hanging over this continuing tussle to attract and retain customers is a parallel battle over the terms of the 2015 spectrum auctions as well as renewed speculation about a possible merger of a revitalized T-Mobile and spectrum-rich Sprint. The potential entry of DISH and the fate of LightSquared are wildcards that have the potential to reshape the current wireless market depending on how the two companies decide to proceed. The pre-paid market, roiled in 2013 by forced deactivations because of questionable Lifeline signups, bears watching as well. We expect Tracfone will help lead this segment back up in 2014.

As we gaze through the crystal ball, we see a landscape greatly altered from 12 months before. Repositioned as the snarky “uncarrier”, T-Mobile has pushed the market in new directions by decoupling the handset and service components of customer contracts. It also has repeatedly compelled competitors to respond to its redesigned service plans with new offerings of their own. As we open 2014, T-Mobile, Verizon, and AT&T are in the market with plans that could signal the beginning of the end for the handset subsidies that have fueled consumers’ enthusiasm for high-end, but pricey smartphones.

Among the open questions for 2014 is whether consumers would rather pay full price for their handsets, likely financed over time, in exchange for lower monthly service costs or do they prefer the longstanding subsidy model. We wait to see the degree to which each carrier will work to move consumers to a financing-model.

Changed Landscape

As it is, the restructured T-Mobile and Sprint are strategically better positioned than a year ago. After their own talks about a possible merger flamed out to start 2013, the two companies found other partners. T-Mobile struck first in a “reverse acquisition” of Metro PCS. The transaction shifted 9 million Metro PCS customers to T-Mobile, providing an immediate boost in revenues, and also bolstered T-Mobile’s company’s spectrum inventory. The reverse acquisition mechanism, which enables a previously private company (T-Mobile, in this case) to quickly list its stock on public exchanges by acquiring a publicly-held company, also created new financial flexibility and liquidity for T-Mobile and its parent, Deutsche Telekom.

Bolstered by new assets and under the in-your-face leadership style of CEO John Legere, the company shook up the competitive landscape with a host of new offerings and recorded substantial gains in customers. The company’s image has been transformed into that of a feisty and effective challenger, the brand looks fresh, and Mr. Legere has a knack for grabbing headlines. The company has now launched four iterations of “uncarrier” to continually stoke new enthusiasm. The solid investment in its network as well as the media spot light has brought T-Mobile back into consideration for a growing number of consumers. T-Mobile will continue to play the “uncarrier” tune until it no longer works; the difficulty will be to keep finding things that upset consumers and can be profitably recast by T-Mobile.

Sprint also moved in a new direction, ceding its independent status by selling a majority stake to Softbank to get the financial backing it needed to build out of its LTE network. Bankrolled by Softbank, Sprint added to its spectrum holdings by winning a bidding war against Charlie Ergen and DISH Network and acquiring the half of Clearwire it did not already own. With the two moves, Sprint eliminated the ongoing distraction of dealing with an independent Clearwire and emerged a spectrum powerhouse with twice as much spectrum as any other carrier. Toward the end of the year, Sprint acquired yet more spectrum by buying licenses from Revol Wireless, which closed up shop on January 16, 2014. Sprint has since targeted Revol’s customers with special offers from its prepaid brand Boost Mobile. Tactically, however, Sprint is in a difficult situation as its Network Vision project is woefully behind schedule and network quality has suffered.

AT&T and Verizon also moved to shore up their competitive positions. AT&T snapped up Leap Wireless, which sells the Cricket Brand, for $1.2 billion to add key spectrum and expand its position in the prepaid, non-contract market niche. After ten years of on-and-off talks with Vodafone, Verizon spent $130 billion to buy out the British company’s 45 percent share in Verizon Wireless and capture the efficiencies from running its wireline and wireless businesses as an integrated company in which strategies are set solely by Verizon management.

Tracfone also beefed up last year, acquiring a number of prepaid carriers in a market niche troubled by some overzealous carriers’ abuse of the Lifeline program. The acquisitions should pay off for Tracfone this year as it digests last year’s feast.

2014 should see fewer transactions – the opportunities simply do not exist for a repeat of last year. But one big deal is possible as Sprint continues to eye T-Mobile and news reports indicate it has lined up bank financing just in case. However, regulatory approval would not be a sure thing. Both the FCC and the Justice Department have previously suggested a desire for four or more national competitors in the marketplace and the resurgence of T-Mobile as a market driver –as DOJ hoped in opposing the AT&T/T-Mobile transaction in 2011 – would seem to raise an additional barrier to approval. Also, given the recent performance of the two companies, the issue of leadership could complicate talks. It’s possible that Softbank might prefer Legere over current Sprint CEO Dan Hesse to lead a combined company.

Competition Intensifying

The story for last year was T-Mobile’s customer gains after years of net losses. This year, we wait to see whether T-Mobile can maintain its momentum and if Sprint can begin adding to its customer list. Also worth watching is whether Verizon can retain its reputation for having the “best” network, a claim that is increasingly challenged and coveted by all three of its national rivals.

T-Mobile, which got a boost from finally adding the iPhone to its inventory, was the clear 2013 leader in offering new options to consumers. The initial uncarrier program cut monthly charges by $20 and introduced handset financing. The company also shifted most of its customers from service contracts to handset financing contracts that ties them to the carrier until they have paid off the handset, a clever switch that is the virtual equivalent of an early termination fee – but without the complaints. T-Mobile followed with JUMP!, which combines a rapid device trade-in and upgrade plan with traditional handset insurance for a lower rate. A few months later, it added free low-speed international data and texting plus lower-cost international roaming. This rapid-fire innovative pace forced its competitors into catch-up mode, trying to match many of T-Mobile’s innovations. Current indications are that T-Mobile should continue to grow for at least the next six months even without any new uncarrier announcements.

AT&T took aim at T-Mobile and Verizon by lowering its monthly recurring charge by $15 for customers who finance their device, own it outright, or who have had it for more than two years while on contract. Traditionally, AT&T has priced at parity with Verizon Wireless, but the new program drops its prices below Verizon’s for longer-tenured customers and should inhibit churn. The initiative also reduced the price differential with T-Mobile for customers who are not bound by a device financing or service contract. AT&T’s reduction for out-of-contract customers is its best idea so far for keeping its vulnerable feature phone base with the company. It should have help improve their feature phone retention rate, but we doubt it will entirely close that seeping wound.

Though tarnished by a number of large-scale outages of its 4G LTE service, the strength of Verizon’s network has helped it remain the fastest growing contract carrier as the Verizon halo of best network is still intact in the consumer’s mind. Network strength is Verizon’s most significant differentiator and retaining the lead in consumer perceptions about its reliability is vital to its growth strategy. But some metrics suggest the advantage has been slipping.

Recent data from RootMetrics, for example, suggests that AT&T’s LTE is faster than Verizon’s in a majority of markets. The company says, however, that Verizon still has an edge on reliability. When combining those two elements, RootMetrics’ gives AT&T the edge for “combined performance.” The fight for network bragging rights is likely to grow fiercer still as Sprint begins to roll out its super-speed Sprint Spark service. For its part, T-Mobile claims to be the top speed provider in half of its 20 LTE markets based on findings from Speedtest.net and has dramatically expanded its 4G LTE network to cover more than 200 million customers, surpassing Sprint. In the end, the consumers cannot help but be confused by all the contradictory claims.

The increasing capabilities of LTE networks also raises the possibility that one or more wireless providers might aggressively turn to current wireline users as a growth area and pitch them to switch to wireless for all of their broadband needs. AT&T has already announced such a vision and Verizon executives have publically contemplated it. Sprint has more than enough spectrum to make such a pitch and T-Mobile’s recent purchase of 700 MHz spectrum from Verizon brings wireline customers within its reach as well.

AT&T meanwhile must cope with weaker contract growth for handsets, perhaps by building on gains it recorded in tablets last year. During 2013, the company successfully upsold its existing customer base with additional devices. The company also entered the home security and automation business with Digital Life in a significantly more comprehensive and expansive way than any other company. The home security market is notoriously tough to enter due to the difficult approval process in every market it is offered. The company launched 57 markets in 2013 and started doing nationwide broadcast television, setting itself up for growth in 2014.

Sprint spent 2013 in almost perpetual turmoil – making its deal with Softbank, fighting DISH for Clearwire, shutting down its iDEN network and feeding other carrier’s subscriber counts. Network Vision has slowly turned into a nightmare with slow implementation and service degradation, which in turn has led to a reversal in customer opinions of Sprint and contributed to subscriber losses. These losses will continue at least through the remainder of 2014. While Softbank is now on the hunt for T-Mobile and is eager to purchase its smaller rival, it is unlikely that this pursuit will bring Softbank the salvation it apparently is looking for. The odds of winning an approval of such a merger are slim under the current administration, which views the revival of T-Mobile as one of its crowning achievements in promoting wireless competition.

In our view, Sprint might be better advised to get its own house in working order after last year’s tumult and put off a run at T-Mobile for a few years. Longer term, Sprint is pouring Softbank’s money into an upgrade of its LTE network with the intention of overtaking its rivals by 2015 or sooner and touting the newly-claimed technological edge to attract customers. If it can convert that plan to reality, Sprint would be better positioned for a future transaction as the power of two effective challengers combined would have greater upside than a slow mover trying to buy its way to better performance.

On the pre-paid front we see strong growth this year, led by an enlarged Tracfone. The segment started strong in 2013, outpacing post-paid by 10-1 in the early part of the year. But those too-good-to-be-true numbers were inflated by excessive Lifeline signups that the FCC later rolled back. In the end, prepaid net adds went negative as forcible deactivations were higher than adds and contract lines grew again.

 

Posted on by Roger Entner

A few days ago, a short report from the GSMA’s Wireless Intelligence (WI) group intimated that prices for LTE wireless data are lower in Europe than they are in the U.S. WI attributes the lower prices to more competition in Europe, pointing to the fact that multiple LTE networks are competing against each other. At face value, WI’s point on price appears valid; however, when observed a bit closer, the conclusion does not ring true.  The fatal flaw is that it does not take into account the basic tenant of economics that a “price” is established at the point where supply and demand are at equilibrium.  Higher demand for LTE in the US than in Europe, combined with a more limited spectrum inventory to support LTE in the US may well bedevil American consumer advocates until the FCC opens the spectrum spigot.

Consumers in the United States are the undisputed world leaders in their usage of smartphones and consumption of wireless data services. Consider the following.  In Sweden the market leader, TeliaSonera, has 170,000 customers on LTE, or 3% of TeliaSonera’s subscribers.  By comparison, more than 15 million customers, are on LTE networks with coverage that exceeds the entire territory of Sweden several times over. Verizon Wireless, one of the seven operators that are offering LTE in the US already, has more LTE customers than the rest of the world combined and more than 35% of its data traffic is on LTE. Whereas the operators in Europe and indeed the rest of the world are lowering their wireless data prices to attract more customers to their largely empty LTE networks, American consumer demand for LTE is extremely strong.

As a general economic matter, lower demand and lower usage leads to lower prices, while higher demand and higher usage leads to higher prices. Further, in the US where demand is very high and the spectrum resources to support the demand are constrained, prices will be impacted.

As one can see in the table above, United States mobile operators are facing a significantly more constrained supply of spectrum suitable to support wireless data as compared to their foreign counterparts. When we normalize the spectrum available per person, the United States consumer is by far in the worst position. It has per person, only 1/3 of the spectrum available than Italy where demand for wireless data is comparatively weak.  Other countries have assigned three to eight times as much spectrum per person to satisfy the demand for data.   Consider the impact on service prices if the FCC really opened up the spectrum spigot.  When spectrum was still plentiful in the United States, the wireless operators competed prices to the lowest in the industrialized world. The same competitive forces are at play with regard to wireless data pricing, but could take hold faster and more intensely if more spectrum were put into the marketplace and regulators allowed secondary markets to work more quickly and effectively.  Bravo to the FCC for making 30 MHz of WCS spectrum useable for supporting wireless broadband.  More and faster decisions like that will go a long way to accelerating the downward price trajectory for LTE based wireless services.

Posted on by Roger Entner

Due to its indisputable value to Americans, the US wireless industry has  grown into one of the largest sectors of the US economy. The US wireless industry generates as much economic activity as the Czech Republic, the 46th largest economy in the world.

While wireless is one of the most globally connected sectors of our economy, the US wireless industry keeps about three quarters of the economic activity in the United States, boosting business activity in the United States, keeping jobs in America, and generating tax revenues.

Posted on by Roger Entner

Recon Analytics undertook this in-depth report to determine the extent of the economic impact the wireless industry has on the US economy.

We ran an independent analysis based on numerous sources, including data that covered wireless carriers, wireless handset and equipment manufacturers and the overall wireless broadband industry. In addition, we applied our own analysis to the data we collected.

Download the report here.

Posted on by Roger Entner

The situation at the 4G wireless service provider just keeps getting worse, so here’s what it needs to do

One thing is clear about Clearwire: no matter what happens, it needs Sprint more than ever.

Just look at 2011. The 4G WiMax service provider’s best news was the increase in subscribers, from 4.4 million to 10.4 million. Impressive as that was, it came solely on the back of Sprint.

With growth like that, and lingering fears about its survival, you’d think Clearwire would play nice. But Clearwire played a high-risk game of chicken with Sprint during negotiations to extend its resale agreement, and now it’s in a bigger mess than ever.

This ill-advised negotiations tactic pushed Clearwire and Sprint to the brink. As both companies insisted the other needed them more, the deal wasn’t closed until the very day Clearwire could have gone into default in December.

As if that wasn’t enough excitement, the next day, half of its strategic investors — Comcast, Time Warner Cable, and Bright House — decided to stop selling Clearwire services and provide Verizon services instead. Not exactly a vote of confidence.

Could things get worse? Of course. Just a few months later, Google, another strategic investor threw in the towel. Google sold its $500 million initial investment for $66.5 million to Credit Suisse, Bloomberg reported.

How did Clearwire get into this mess?
First, let’s look at how it got here. In early 2011, things looked pretty good for Clearwire. Sprint’s 4G WiMax devices were adding more than a million customers a quarter — a well-needed boost for both companies. Extending the WiMax wholesale agreement between the two companies was a priority. Clearwire knew that its WiMax network gave Sprint an advantage so Clearwire thought it had Sprint over a barrel.

So it pushed for a nonsensical premium from Sprint rather than the more appropriate market rate or slight discount. The negotiations continued on and on for months. There was no progress, with two important deadlines looming: Sprint’s Network Vision investor conference on October 7 and a large Clearwire interest payment on December 1.

October 7 came and Sprint had to announce that it hadn’t renewed the contract with Clearwire. In a fit of hubris, Clearwire thought Sprint would be forced to agree to its terms to save its 4G strategy (and regain Wall Street credibility). Although Sprint’s share price did drop, Clearwire’s all but collapsed because Sprint presented a 4G strategy that didn’t critically rely on Clearwire beyond 2014.

In the next two months, as a possible debt payment default by Clearwire approached, Clearwire realized it needed to make a deal. Sprint was its only option. So they inked the new agreement, which enabled Clearwire to make a huge debt payment. The result is pretty good for both companies. Sprint will pay Clearwire a fixed $926 million for unlimited WiMax access for its customers. (In the old agreement, it had to pay by the megabyte.)

Sprint also will pay Clearwire for bandwidth to its TDD-LTE network — a variant of the 4G LTE network used by Verizon Wireless and AT&T — if Clearwire gets its network up in time. With this new agreement in place, Clearwire avoided bankruptcy and acquired additional funding. With a 49 percent voting share (54 percent ownership stake), bankruptcy would have been inconvenient and might have presented some PR challenges for Sprint, but not been lethal for Sprint.

Clearwire’s last remaining strategic investor, Intel Capital, seems to have forgotten it still owns a part of Clearwire. It neither bailed nor participated in the refunding of Clearwire. Intel’s initial intent was always obvious: create a showcase for a successful WiMax operator and make WiMax a global standard. After all, WiMax is essentially an Intel invention. Now that Clearwire is moving to using TDD-LTE, the WiMax play in the U.S. appears to have withered on the vine, and with that it is only a matter of time until Intel will sell its strategic stake in the company.

Is there any way for Clearwire to get out of this bind?
So, after a year like that, how can Clearwire get on track? Clearwire has made an important first step by being able to win Leap Wireless’ Cricket as an additional client. The remainder won’t be easy, because Clearwire has to add TDD-LTE to its current footprint rapidly. This will make it worthwhile for Sprint, Leap Wireless, and other operators to get on board.

Clearwire has even been able to persuade Wall Street and Sprint to invest billions more in it. It will also need to get the handset manufacturers on its side. Sprint has committed to help Clearwire develop TDD-LTE devices and Clearwire has just agreed with China Mobile, which uses the same technology, to work together on devices.

For operators and manufacturers, it’s all about economics. And it will only make sense for them to include Clearwire-compatible electronics in their devices if the network is widely available. The end of Sprint putting new customers on Clearwire’s WiMax network is in sight. With theiPhone 4S at Sprint, it added 1 million customers in the fourth quarter 2011, half the number added the previous quarter.

Even if Clearwire is doing everything right, there is the regulatory risk nobody is talking about: the FCC is developing a track record of being utterly unpredictable. Consider what happened with LightSquared. In roughly a year’s time, the company went from being the FCC’s choice to create a fifth national wireless provider to being the company that got its regulatory approvals put on hold by the FCC.

And let’s not forget about Dish. The FCC has pulled the rug out from under Charlie Ergen’s Dish by deciding, after months of comments and negotiations, to wait until after the November presidential election before it lets Dish know if the company can use its MSS spectrum to provide terrestrial wireless broadband services. At a minimum, the FCC is proving it is unpredictable.

How is this relevant to Clearwire? In the FCC’s wireless competition reports, the agency appears to view only half of Clearwire’s spectrum as suitable for wireless broadband.

Why? There’s no clear explanation. If the FCC truly believes only some of Clearwire’s spectrum is suitable for broadband, will the FCC try to reclaim it or bar Clearwire from using it to support wireless broadband? No one knows except the FCC, and that could present a very real risk to Clearwire.

With all of this, will more investors come forward to fund the remainder of Clearwire’s network build out?

 

 

Posted on by Roger Entner

At its last meeting, the FCC announced it was commencing a new rulemaking to resolve interference issues in the 700 MHz Block and assess how such interference issues impede interoperability among devices and networks using 700 MHz. Before we delve into a conversation about the FCC’s proposals, it is helpful to remind ourselves of the history of the issue.

The FCC knew about the issues it now wants to study in this newest NPRM (Notice of Proposed Rule Making) before the spectrum was auctioned in 2008. Further, the interference issues were taken into account by the FCC at that time, and informed the rules under which the spectrum was auctioned and purchased.

In its notice of proposed rulemaking, the FCC said that it tries to “protect and promote vibrant competition in the marketplace” and to “balance several competing goals, including facilitating access to spectrum by both small and large providers, providing for the efficient use of the spectrum, and better enabling the delivery of broadband services in the 700 MHz Band.” Furthermore, the FCC observed that “this spectrum is being built out less quickly than anticipated…” and that “the 700 MHz band, at 70 megahertz, one of the largest commercial mobile service bands, is the only non-interoperable commercial mobile service band.”

The potential impact of the FCC deciding to intervene in the way it has proposed is curious for several reasons.

Predictable and expected outcome of licensing a non-homogenous environment: The 700 MHz Block is not only the largest band, but it is also the most heterogeneously licensed. The 700 MHz band is a hodgepodge of interference and licensing problems trying to accommodate everything and everyone. And what we’ve got is a science fair project gone badly wrong. Every other band, whether the PCS band or the AWS band, is the same in terms of licensing requirements and interference. In an effort to accommodate everyone, the FCC moved forward with its plans to auction the 700 MHz for commercial wireless broadband services without fully addressing the fact that TV broadcasters on Channel 51 were causing interference to the lower block of 700 MHz. The A-Block has exclusion zones in the largest markets where interference is rampant. The C-Block has net neutrality restrictions unlike any other band. The E-Block is broadcast spectrum that permits transmission at 50,000 Watts instead of the 1,000 Watts that the paired spectrum around it is allowed to, and that’s why interference occurs. Furthermore, the FCC mixed paired wireless licenses next to unpaired broadcast licenses. Most agree the higher power operations authorized on the E-Block has been a significant contributing factor to the A-Block spectrum selling for less than half the price garnered by the B-Block license. Let’s not even talk about the D-Block, which had public safety restrictions on it that were so unrealistic that one bidder thought it might succeed with a bid below the reserve price.

In summary, contrary to what has been said in the NPRM, only the B-Block has any resemblance to what has been traditionally licensed to wireless operators. If all Blocks would have the same interference characteristics and licensing restrictions then there would be interoperability. However, the FCC decided to go down a different avenue when it licensed the 700 MHz Block that it did before and should not be surprised that it ended up in a completely different place.

Impact on consumers: The impact of interference can be mitigated through additional components and filters. These components have to be permanently powered to immediately thwart the interference, and therefore will reduce battery life, in addition to increase the cost, weight, and dimensions of the device. Considering that consumers will not know the negative impact that additional electronics will have on the battery life of their devices, they will just blame the carrier for it rather than the real culprit, the FCC. What makes this all even worse is that the B-Block and C-Block customers are probably never going to roam on A-Block licenses. So the 200 million customers of AT&T, Verizon, and smaller operators will have to live with the negative impact even though they will never need to have the benefit of having to roam on an A-Block network, as in all likelihood the networks of AT&T and Verizon are going to be comprehensive enough for them not to need to roam on A-Block networks.

The only benefit is that the electronics and filters for A-Block devices are going to be cheaper than they would be otherwise due to the increase purchase volume created by the B- and C-Block carriers. This is basically a government-mandated corporate subsidy from one corporation to another that forces them to buy electronics and filters they otherwise would not need. Furthermore, nobody is stopping any operator from adding the additional bands to the devices they are purchasing to make them interoperable.

The consequences of an interoperability mandate are quite far reaching and chilling. What will stop the FCC from requiring that all phones be interoperable? Every device would need GSM, CDMA, LTE, maybe even iDEN and WiMAX on every frequency used. After all, some of these technologies have been around for more than 20 years. From a practical perspective, such a Turducken device would be a consumer nightmare and become the most visible example of regulatory meddling and government overreach. Such devices would be abominations: larger, heavier, slower, more expensive battery hogs that wouldn’t provide any meaningful user advantage over the unimpeded market of today.

Impact on auction revenues. The winners of the B-Block, which range from AT&T to U.S. Cellular to the Buggs Island Telephone Cooperative, paid a premium for clean spectrum. The winner of the C-Block, Verizon Wireless, paid a smaller premium compared to the B-Block to have un-interfered spectrum that, nonetheless, carries with it net neutrality provisions. Now the FCC wants the winners, which deliberately paid more money to have interference-free spectrum, to “voluntarily” find a way to be interoperable with licenses that they deliberately rejected. If they do not voluntarily submit, the FCC has hinted that it would probably mandate interoperability. So much for “voluntary.”

If the FCC really proceeds with this threat, future auctions the FCC will likely raise less revenues from auctions, if some of the licenses are more impaired than others. The move the FCC appears to be contemplating would set a precedent that it will dramatically change terms and conditions of the licenses after the auction. Any rational buyer would pay only as much as the most impaired license is worth. Therefore, the level government revenues raised through the B- and C-Block licenses would not be equaled.

Impact on spectral efficiency. The FCC’s intended interoperability will perpetuate the problem of interference. This makes it impossible to follow a policy of allocating spectrum to ensure the best possible benefit of the American people. By doubling down on the bad choices that have been made regarding the 700 MHz Block highest, the FCC would perpetuate and expand the impact that interference has. This stands in contradiction to the stated objectives of the Administration and the FCC in the national broadband plan.

At best, the FCC’s proposed approach to addressing the 700 MHz interference issue seems misguided. At worst, it is an intentional ploy to further slow the full development of spectrum for the companies that need it to support their commercial operations. The proposed path on the interoperability issue seems to be a government-sponsored wealth transfer from one company to another, without any regard for the consumer impact. That’s an interesting twist on serving the public interest in a time of looming spectrum exhaust and potentially higher prices for wireless broadband services.

 

Posted on by Roger Entner

It’s that time of year again. The FCC has to develop its next annual report to Congress on the state of competition in the U.S. wireless industry. In the last few years, the FCC has done a good job of expanding the scope of information it analyzes to inform its opinion. The agency’s focus on the wireless industry value chain–from network infrastructure, to over the top operators, to device manufacturers–is a very good trend, but there is room for improvement. 2011 was a year of dramatic regulatory activity with the denial of the AT&T/T-Mobile merger and the proposed acquisition of the cable companies’ idle spectrum by Verizon Wireless. How will these watershed events be analyzed in the next competition report? I hope the FCC will generate a dispassionate, objective and fact-based report on the state of the industry. The analysis and utility of the report could improve if the FCC took the following into consideration:

  • The FCC must recognize the fact that wireless carriers are no longer the “Masters of the Universe.” Although they remain the core of our entire wireless-enabled ecosystem, they are no longer able to chart their own course due to competitive pressures being imposed by other parts of the ecosystem. Paradoxically, however, the FCC is intervening in the activities of the network operators more than it ever has before. It would be very helpful to have the FCC explain this dichotomy, and make clear how it figures that more regulatory hurdles for network operators would grow the ecosystem and serve consumers.
  • For customers, the wireless experience is so much more than just their service provider. If the FCC is going to craft sensible policies based on its wireless competition reports, the agency must adopt a holistic view of the sector and consider how application providers, operating systems and device makers inform and influence the industry’s competitive dynamic, including the consumer impact of over the top providers competing with network operators. Services ranging from WhatsApp to iMessage are competing with services offered by the carriers. This reality could relegate operators to being dumb pipes. Is this a good thing for consumers and the sector overall? Rendering a dynamic growth sector to a stagnant set of dumb pipes doesn’t sound terribly consumer friendly.
  • The FCC must recognize that it needs to view the sector through a clear lens, not one clouded by regulatory hubris. Google and Apple play an extremely powerful role in the wireless ecosphere now. For example, Apple has truly become a king maker in the wireless industry, highlighting how quickly the competitive dynamic changes in this space. If you are a wireless carrier and don’t have the iPhone, you are losing postpaid customers. And if you get the iPhone, your profitability takes a serious hit. In the fourth quarter of 2011, Sprint spent about $500 million on iPhones, which represented about one-third of its OIBDA profits. Despite this significant impact on profitability, the company felt it had no choice but to accept Apple’s terms. Fortunately, for US Cellular and many other providers, Google offers Android as the chess proverbial Queen to handset providers that lets them compete on an almost even footing with Apple. All the while, Google makes more than a billion dollar from mobile advertising through Android handsets. If the FCC fails to take this competitive dynamic into account, any policies it adopts will be immediately outdated and likely to distort the market.
  • The FCC must accept the fact that every wireless operator needs more spectrum. The more successful the operator, the more spectrum it needs, as more customers use more spectrum. Trying to hold up network upgrades and capacity enhancements by some operators as a way to help less successful carriers is a policy that will doom everyone, including the less successful players. Introducing spectrum restrictions on larger operators is, in the long run, akin to managing market share. When the larger, more spectrum-constrained operators have reached their respective spectrum wall, quality declines and prices rise, prompting customers to leave and join other less spectrum-constrained operators. Those networks then become spectrum constrained, leaving customers with nowhere to go for high-quality, low-cost services. The best approach is making more spectrum available to all, and quickly.
  • The FCC has to recognize that all spectrum allocated to CMRS is useful in a loaded network. Below 1 MHz spectrum offers immaterial advantages over above 2 MHz spectrum in a loaded network. At the same time, the FCC should elaborate on why it counts only half of Clearwire’s spectrum in its spectrum screen calculations. If half of Clearwire’s spectrum is unsuitable for mobile broadband service, then it should say so and take the necessary steps. If it is suitable, then it should include it in the spectrum screen since counting only half distorts the level playing field.
  • Contrary to what many want you believe, the market became even more competitive among operators in the last year. The resurgence of Sprint from its near-death experience when it acquired Nextel is living proof of a resilient wireless carrier ecosphere. Sprint is gaining subscribers from all of its major competitors as evidenced by the net positive porting numbers from those operators.
  • Reseller and Mobile Virtual Network Operators are more important than ever. Tracfone is the 5th largest service provider in the country. With a smart-tiered product portfolio, Tracfone demonstrates to the industry how profitable prepaid can be if it’s done right. Page Plus has carved out a healthy niche, and new entrants like Net Zero are planning to shake up the industry. Don’t expect all of them to survive; it’s a competitive market after all.
  • Side-entrants such as Amazon are also making a major impact. Over the course of the last year, Amazon has become the go-to place to get mobile devices and services. Not only does it resell service from all major operators, but it is providing its own hardware. It will be very interesting to see if a 4G Fire tablet will make the same impact on wide-area connected tablets as the Wi-Fi version has made on the local-area wireless tablet market.

We can only hope that the FCC recognizes that it is overseeing a vibrant market that is driven by consumer demand for more and faster mobile capabilities, and it is shaped by competitive forces. The FCC should expand its focus even further to give each part of the value chain the necessary attention it deserves.

 

Posted on by Roger Entner
  • The fourth quarter of 2011 was excellent for the wireless industry. More than 5.7 million net additions in the quarter were fueled by the iPhone 4S launch, demonstrating that massive growth is still possible in wireless. This is welcome news for handset makers, app developers, operators and network vendors alike. AT&T beat its best smartphone sales by more than 50percent in the quarter, Verizon Wireless had the best contract quarter in three years and Sprint had the best subscriber addition numbers since 2005.
  • The launch of the iPhone 4S and the impact it had on the fortunes of the wireless operators, especially Sprint and T-Mobile, made it clear who is the king maker in wireless: Apple–as long as nobody else starts to develop something different and completely magical.
  • Sprint as the most recent “iPhone have” gained contract customers for the first time in almost six years. At the same time, the woes of T-Mobile, as the last remaining nationwide “iPhone have-not” got worse. Customers left T-Mobile in large numbers on the heels of the iPhone 4S launch and the failed acquisition by AT&T.
  • Verizon and AT&T attracted the most contract customers, while Sprint and Tracfone attracted the most non-contract customers. AT&T and Sprint were most successful in attracting wholesale and connected device customers.
  • Who would have thought that Sprint would add 16-times more total customers in the fourth quarter of 2011 than Verizon?
  • The failed acquisition leaves T-Mobile the most vulnerable operator. With mounting customer losses, six months to two years behind the competition in 4G LTE and lukewarm support from its parent, life will be hard for the Seattle-based operator. Will they be able to make it alone or will a new suitor appear?
  • US Cellular is in a precarious situation as it is also behind with its 4G LTE network. In addition, it has to find a reason why people should join them, and it must do that quickly.
  • Clearwire has to execute like it has never executed before. Squandering a two-year lead on 4G (WiMAX) was bad enough. Now its strategic investors are bailing. The company has to build its 4G LTE network quickly to give Sprint enough of a reason to put the unique LTE Clearwire technology in enough of its devices. Without Sprint, Clearwire is dead. Better forget all the romanticized rumors of another white knight carrier coming along to come to the rescue of Clearwire. We have heard it before–many times over the years. Sprint is all you’ve got.
  • The opposition of the Department of Justice and FCC against the acquisition of T-Mobile by AT&T and the similar front lines appearing against the sale of the previously unused cable company spectrum by Verizon Wireless leaves one to wonder how successful carriers are supposed to get the spectrum they need to satisfy their customer’s demands.

AT&T (NYSE:T) had a gangbuster quarter. It added 9.4 million smartphones in the quarter alone, smashing its previous smartphone record by 50 percent. On the heels of the iPhone 4S launch, AT&T more than doubled contract subscriber additions to 717,000 for the quarter. AT&T leads the industry with 56.8 percent of contract customers using a smartphone. Even though Sprint launched the iPhone for the first time, churn stayed muted at 1.4 percent. This shows that there is a significant disconnect between the negative press coverage that AT&T continues to receive and how customers are actually behaving as existing customers stay with AT&T near record low numbers and large numbers of new subscribers are joining them.  Surprisingly, prepaid was weak for the quarter, as prepaid phones are often given as holiday gifts, making December 25 typically the day with the most activations in the year. While Santa seems to have come up short on the prepaid side, the wholesale and connected group made massive gains. Since AT&T dominates the e-reader segment this has been largely driven by Amazon Kindles and Barnes & Noble Nooks.

In January 2012, AT&T introduced new data plans during the quarter. Customers get 50 percent more data for $5 more. There was widespread confusion and misreporting in the press regarding the motivations behind this change. The pricing move has to be looked at through the prism of declining operating margins, which plummeted from 22.9 percent last year to 15.2 percent. The reason for the decline in operating margin is smartphone handset subsidies. AT&T has to slow down the smartphone conversion rate to improve its operating margins as the typical smartphone comes with a $200 to $450 device subsidy. Early adopters and mainstream customers motivated by technical novelty and value have become smartphone users, driving ARPU significantly up. Technology laggards and less affluent customers still using feature phones remain to be converted. For these feature phone users, price is a major motivating factor if they are converting to a smartphone. By increasing the monthly recurring charge the conversion rate especially from their own feature phone base is going to slow down and margins are going to begin to improve due to a better revenue to subsidy ratio.

Santa was very good to Sprint (NYSE:S) in the fourth quarter. Sprint had the most customer additions in the last seven years. APRU went up by $3.68, the highest of any operator in the United States. Also, Sprint finally gained contract customers. The company now has more customers than ever and has officially recovered from its disastrous merger with Nextel six and a half years ago. While the Nextel platform is in terminal decline and continues to lose customers, the Sprint network is adding more and more customers. Sprint sold more than 1.8 million iPhones in the fourth quarter, and 40 percent of iPhone sales were to new Sprint customers. This translates into roughly 720,000 customers, which was substantially more than the 161,000 net contract additions. Numbers like that show that the power in the wireless industry has clearly shifted towards the makers of blockbuster devices. Without the iPhone it is quite likely that Sprint would have continued to lose customers in the fourth quarter. What is concerning is that the percentage of prime postpaid customers on Sprint declined from 83 percent to 82 percent, which is roughly 330,000 customers. This means that twice as many sub-prime customers became new postpaid customers at Sprint than the company had contract net additions. While Sprint was focusing on selling new iPhones, its sales of 4G WiMAX devices slowed down substantially. Sprint added almost 1 million customers on Clearwire’s 4G network. While this is still a respectable number, it was only half of what Sprint added in the previous quarter. Sprint’s churn numbers are also manageable, with contract churn at 1.99 percent and non-contract churn at 3.68 percent. Despite all the concerns about Sprint’s profitability, Sprint raised $2 billion in debt recently for the 4G LTE network expansion and to help out Clearwire.

T-Mobile had a pretty miserable quarter, losing 706,000 contract customers and a buyer. While the quarter began well with the introduction of T-Mobile’s value plans, the iPhone 4S launch on competing networks, combined with the collapsed AT&T deal, devastated T-Mobile’s hope for a positive quarter. Contract churn increased to a disappointing 3.6 percent–the range in which prepaid operators generally see their churn. T-Mobile’s prepaid churn was 6.8 percent. It is admirable that T-Mobile was able to add 220,000 prepaid customers when faced with such high prepaid churn. In an effort to get churn under control, T-Mobile is planning to recontract a lot of their customers, which is a complete reversal of their strategy of the last several years. In other positive news, T-Mobile was able to increase smartphone contract customers to 11 million or 40 percent of its base. T-Mobile’s wholesale business only declined by 39,000, despite one large customer disconnecting 265,000 lines during the quarter. The overall impact of this customer loss was negligible as these 265,000 lines represented only $1 million in revenues or 30 cents of APRU. A 20 percent increase in data ARPU helped to keep blended ARPU flat at $46. With the spectrum that T-Mobile is getting from AT&T as part of the break-up fee, the company is launching a 4G LTE network in the AWS band. It is able to use the optimal 20 MHz configuration in half of its footprint, with the other half using 10 MHz. T-Mobile is able to compete with this, even better than Sprint, which is initially using 10 MHz nationwide. While building out the AWS spectrum with 4G LTE, T-Mobile will move some of its HSPA+ to the 1900 MHz band. This will open the door for T-Mobile to offer the iPhone in the United States. In the short run, jailbroken iPhones running on T-Mobile will be able to take advantage of HSPA speeds first, giving them faster speeds than Verizon or Sprint customers until everyone will see some Apple 4G LTE love.

Verizon Wireless (NYSE:VZ) had a terrific quarter. It added the most contract customers, by far, in the fourth quarter, with more 1.2 million customers, over 50 percent above AT&T’s tally. The company had its best ever smartphone quarter in its history, with 44 percent of its contract base now on smartphones. Contract churn was near record lows at 0.94 percent. The no-contract segment of Verizon Wireless, which traditionally suffered from benign neglect, showed a nice customer uptick. On the heels of the nationwide rollout of its Unleashed product, prepaid net additions jumped to more than a quarter million. The $50 all-you-can-eat plan gives Verizon Wireless an offer to compete against other unlimited prepaid providers albeit with a quality premium built-in. Verizon had to clean up its connected device database, which led to a decline of more than 1.3 million connections. The company also announced that it has come to an agreement to purchase AWS spectrum that is currently owned by several cable companies; the spectrum covers 93 percent of the United States. While the spectrum is currently idle, Verizon Wireless will be able to use it for 4G LTE services–if the transaction gets approved. Verizon and T-Mobile would create a healthy ecosphere in this spectrum band, leading to lower prices for handset. Ironically, this would help T-Mobile the most even though it has petitioned against the spectrum acquisition. Verizon also expanded its 4G LTE network to 195 markets, covering more than 200 million customers.

Leap Wireless (NASDAQ:LEAP) gained 209,000 voice customers and lost 30,000 broadband data customers for a net gain of 179,000. This was a dramatic improvement from only 10,000 net additions during the third quarter. Interestingly, 65,000 new subscribers were added outside of Leap’s network footprint. Generally, operators try to minimize usage outside their own network footprint because roaming costs make these customers unprofitable. Like almost every other carrier out there, Leap is building its own 4G LTE network. MetroPCS (NYSE:PCS) benefitted from the seasonally strong forth quarter by adding 197,000 subscribers.

US Cellular is still in the doldrums, having lost 13,000 subscribers overall, with 20,000 contract customer losses and gains of 7,000 no-contract subscribers. The problem with US Cellular is that it does not get enough new people in the door as postpaid churn is a healthy 1.5 percent. Hence, the company is looking for a new advertising agency to reposition the company. The Belief Project advertising campaign worked well for the US Cellular customer base but did not inspire the proper belief in customers from other carriers. The good news is that US Cellular’s customers are very satisfied with the company and enjoy one of the best networks. The bad news is that this a very well kept secret. US Cellular is also lagging behind in smartphones with only 30 percent of its customers using one. Its smartphone percentage rose to just above 30 percent; 50 percent of devices sold this quarter were smartphones. The company knows that if it wants to remain a viable provider, it has to compete on 4G. The unlaunched 4G LTE network covers 25 percent of US Cellular’s licensed population, with an expected 50 percent by the end of 2012.

While Clearwire (NASDAQ:CLWR) had a good quarter, with 873,000 subscriber additions, the bad news from its strategic investors keeps piling up: Google announced it is selling its Clearwire stake for $47.1 million, which is a 94 percent discount from what it invested at Clearwire’s inception. To make matters worse, Google was only able to realize a price of $1.60 per share compared to the $2.15 the shares were trading at before the announcement. It is becoming clearer and clearer that Sprint is the only friend left for Clearwire. While its other strategic investors are bailing on Clearwire, Sprint is raising more money for them to give it a chance to surive. How dependent Clearwire is on Sprint becomes clear when we look at the net add breakdown. Sprint added 904,000 customers to Clearwire while the company lost 31,000 Clear-branded customers. This is half of the previous quarter due to Sprint’s focus on the iPhone, and this sends a direct message to Clearwire about how vulnerable it really is.

Tracfone had another great quarter, adding almost half a million subscribers. One of the most interesting developments is that Tracfone, one of the savviest advertisers and notorious for stamping out wasteful spending, has a full-fledged TV campaign for Straight Talk. It is a testament to Straight Talk’s success, product positioning, and widespread appeal that Tracfone is going down that route.