By now you know the news. From a government coffer perspective, the AWS-3 auction was a whopping success, raising some $45 billion. This is about double what was expected by the Street, with some of the licenses fetching upwards of $5 per MHz-POP (2-4x the average of the 2008 700 MHz auction).
Wall Street and the trade press have provided extensive analysis of the auction results, by market, band and carrier. Instead, I'd like to step back and provide a strategic perspective of what this means for the industry.
It is clear that the operators have determined that their network capacity position is going to be an increasingly important differentiator, both in terms of what they can offer customers (pricing and video content) and in their enterprise value. Consider this: Jonathan Chaplin of New Street Research values DISH at $127 a share, with $107 of that coming from the company's spectrum value and only $20 from its core business of serving some 14 million satellite TV customers.
My view is that the AWS-3 auction results will lead to some pretty important changes in the makeup of the wireless industry. Three themes:
1. Network economics are going to become a bigger part of the operator's day-to-day business
2. Spectrum assets and network capacity are becoming critical currency
3.This will be a year of aggressive deal activity, certainly involving unique partnerships and perhaps some blockbuster M&A
Let's explore each of these in a little more detail.
1. The Impact on Economics
The operators are spending real money on this spectrum. They are all going to have to raise substantial funds to cover their obligations, which will be a bonanza for Wall Street. Look at AT&T, which has all of the sudden become a pretty highly leveraged company with the pending DirecTV, Iusacell and Nextel Mexico acquisitions and other Latin/South America ambitions, and $18.2 billion in AWS spectrum. Verizon is shopping around its towers and certain landline assets, in part to fund wireless spectrum and capex spend, plus it has some TV ambitions leveraging the Intel platform. Even by sitting out of the auction, Sprint's financial position improved because of the increased value of its 2.5 GHz holdings.
I believe operator economics are going to become a much more visible factor in the industry over the next couple of years. AT&T and Verizon are going to have to figure out how to somehow fund the twin ambitions of additional spectrum to meet the data needs of customers, while finding additional market opportunities now that organic revenue growth in wireless is maturing. Sprint and TMO parent companies are becoming more conservative. In TMO's case, Deutsche Telekom is expecting the company to return more cash to the parent, after a pretty spendthrift 2013-14. Sprint has pulled back on its network spend, particularly with regards to its 2.5 GHz ambitions, in part to get on a more level LTE playing field before getting ahead of itself on Spark, and in part to fund its shift to positioning as the "value carrier."
With all their financial obligations, I believe the wireless operators are going to be far less reckless, pricing-wise, than they have been over the past 18 months. This has been a pretty unique period, with 10 percent to 20 percent reductions in price, more generous data allocations, and aggressive iPhone and device/ETF buyout deals in order to win customers. Operators are now on more fragile financial tenterhooks, and I believe there will be a near-collusive effort to stabilize ARPU. AT&T and Verizon will expend greater effort to keep existing customers, but will be more conservative with regard to chasing net add share.
2. Network Capacity Situation
It is time to start looking at wireless operators' business in different ways, particularly now that we have four near national LTE networks. With the AWS auctions, most operators will have the ability to offer 10x10 and even 20x20 in major markets. Carrier aggregation is coming into its own. I think one of the implications of this is that the wireless part of the carriers' business will be increasingly measured by its network capacity situation:
- What are the demands on network capacity, given subscriber/connected device/video growth?
- What is an operator's ability to meet those capacity demands?
- What does it cost the operator to deliver that extra GB of capacity to a subscriber?
As an example, part of the valuation of both Sprint and TMO is attributed to the fact that they have greater network capacity per existing subscriber, or as compared to their share of revenues. According to Jonathan Chaplin at New Street Research, AT&T and Verizon have 38 percent share of overall industry capacity, post-auction, but 73 percent of revenues (caveat: this is held capacity, not deployed capacity).
This tells us a few things:
- Sprint and TMO will be far more willing to do wholesale deals
- Even with success at the AWS auction, both Verizon and AT&T still need more spectrum/capacity. They will do more spectrum deals, and will invest aggressively in small cells, DAS, carrier aggregation, and every other trick they can find, to meet capacity demand.
- Expect less opening of the GB allocation spigots, especially from AT&T and Verizon, than we saw in 2014. Conversely, if they feel they need to do this in order to be competitive, subscribers will see network performance suffer in certain cities
I also expect that the wireless network battle will be fought more on a market-by-market basis. It will be harder for operators to make general claims about '"biggest, best, largest, fastest, strongest, newest" or any other 'est you can think of, with regard to their networks. We are seeing greater variation in operator spectrum position, capacity, and performance, by city. Verizon might still be able to stake a claim to best overall 4G network, but, in my opinion, performance is problematic some times in some cities.
3. Increased Deal Activity
This is going to be a huge year for deals in the wireless industry. First, there will be a lot of horse-trading of AWS-3 spectrum between the auction winners, as they seek to better align their spectrum blocks in major markets. Second, the increased value of spectrum, means it is going to become a key currency in wireless deals. For example, Sprint could sell some of its 2.5 GHz assets (which increased in value due to AWS-3) in order to fund operations.
The question du jour, of course, is what DISH is going to do. I believe DISH will have to make a move in 2015, rather than continuing to keep its spectrum holdings under the mattress. Its options are: ink a network-sharing deal with another operator, most likely T-Mobile or Verizon; build out all or part of a wireless network; establish a LightSquared-like wholesale business; or just continue to hoard its spectrum. I believe it would be foolhardy for DISH to build a wireless network. Not only would it be enormously expensive and take years, but the United States doesn't need five national wireless networks (we're the only country in the world with four LTE networks as it is). I believe DISH will take a hybrid approach of establishing a wholesale business selling spectrum capacity as a way of funding, in part, a retail wireless service via some sort of network capacity/sharing deal with an operator.
That said, I think DISH is primarily interested in using wireless to offer a competitive alternative in broadband and OTT television, rather than competing with the Big Four in traditional wireless services. The biggest question to me remains whether it is economically feasible for DISH, even with its spectrum holdings, to offer broadband via wireless – promising, let's say, 10-20 Mbps download and averaging 50-75 GB/month per household in capacity. One interesting scenario is whether DISH could deflect some OTT video viewing in those households onto Netflix, or some substitute, using satellite.
With all the attention on what DISH might do, I think this will be a year that Verizon does something big. All of its biggest competitors in wireless and cable are involved in some pretty significant, potentially game-changing acquisitions. Verizon was quieter than expected in the AWS-3 auctions, and is trying to sell its towers and unload parts of its landline business. This tells me that Verizon has something up its sleeve. A deal with DISH could help Verizon access more wireless spectrum, and more aggressively compete outside FiOS markets in broadband and pay TV. There will be other deals involving Verizon this year, and not just DISH.
Finally, keep your eyes on Google, Comcast, Amazon, Netflix, Apple, America Movil, and some of the big media companies such as Disney and Viacom. They are all candidates to somehow intensify their participation in mobile-Wi-Fi-broadband and video (pay TV or OTT), as all these businesses are becoming increasingly inter-related. Deltas are narrowing between mobile and Wi-Fi, fixed and mobile broadband, pay TV and OTT, and TV/PC/tablet/phone. These are the key players that are driving change in mobile and digital media.
Mark Lowenstein, a leading industry analyst, consultant, and commentator, is Managing Director of Mobile Ecosystem. Click here to subscribe to his free Lens on Wireless monthly newsletter, or follow him on Twitter at @marklowenstein.