Lowenstein’s View: Wireless M&A … Let the games begin

Handshake

On April 28, the quiet period on collusion imposed by the 600 MHz auction will expire, triggering what many believe will be a renewed period of merger and acquisition activity in the mobile and broadband market. The CEOs of Verizon, T-Mobile, and SoftBank have quite publicly played their opening hand during the past week.

What are the drivers? First, with the conclusion of the 600 MHz auctions, the near- to medium-term spectrum picture is clearer. Second, this has been an intense period of competition in the industry, with all of the operators moving to some form of unlimited data plan, juxtaposed against continued data usage growth but flat revenue per account growth, which contributed to, basically, a crappy quarter for all. Third, the competitive landscape is shifting, with AT&T/DirecTV/Time Warner, cable consolidation, Comcast MVNO, and Verizon-Yahoo. And fourth, there’s no capex relief in sight, between the spectrum build outs required to augment coverage and capacity, and the looming small cell/fiber backhaul-centric 5G build.

The climate is also very different than the last major mobile M&A go-round. There has been a lot of deal activity around and adjacent to mobile, and affecting the industry. The pending AT&T acquisition of Time Warner, likely to be approved, is a factor. The new Trump administration is also more favorably disposed to considering deals that, only a couple of years ago, made little headway. It could also be argued that between the Dish spectrum needing to be put to work and Comcast entering the fray as a hybrid MVNO/facilities-based provider (16 million hotspots, 600 MHz spectrum), that there are more than four competitors today. Plus, in the 2-plus years since a Sprint-T-Mobile deal was last floated, Sprint has relied on a fair bit of financial gimmickry to survive, and is not all that much healthier today. Finally, I can’t see 4-plus operators having the wherewithal to support the sheer small cell and backhaul build required to support our insatiable demand for data, plus IoT, plus 5G.

So, what makes the most sense? This is a more complicated question than 2-3 years ago, because many of the possible deals would trigger additional M&A activity. The likeliest scenario is some form of combination of Sprint and T-Mobile (it’s more likely that Deutsche Telekom/T-Mobile buys Sprint than the reverse, in my view). Even though Sprint gets kudos for at least a partial recovery during the past year, it is still difficult to see the company surviving, long-term, on a standalone basis. A Sprint-T-Mobile combination will be needed to effectively compete with the post-DirecTV/Time Warner/AT&T, and a Verizon that is also likely to do something big, more likely adjacent to, rather than within, the industry. Sprint and T-Mobile, together, would have the subscribers, spectrum, and heft to be viable competitors in the broadband connectivity landscape. They would be more attractive as wholesalers to a cable MVNO/hybrid offering, or competing in the content arena, possibly doing something creative with cable or Dish.

A combined Sprint/T-Mobile would put greater pressure on Verizon. A Verizon acquisition of Dish would have some logic, but my sense is that while Verizon might cut a deal for some of Dish’s spectrum (or capacity), the company is more interested in buying a company outside the communications (cable/telco/wireless) universe. Verizon’s competition, in the long term, is more AT&T, Comcast, Google, Apple and Netflix than it is other pure-ish play connectivity providers.

What about cable? Contrary to what some on Wall Street think, I don’t believe Comcast or Charter are all that interested in becoming facilities-based wireless providers. I think they’re happy dabbling in mobile for a year or two, knowing that there’s going to be more, and better priced, wholesale spectrum available, if and when they need it. They are likely to watch from the sidelines, and make a move once Sprint/T-Mobile/Dish/Verizon are played out in some form. The climate could be ripe for a Comcast-Charter deal, or even Verizon-Comcast, a couple of years down the line. And, as far as broadband and 5G infrastructure goes, in the longer term wireless needs cable more than cable needs wireless.

Finally, since all this stuff is increasingly part of the same broadband/content/digital media soup, the climate could become frothy for an even bigger picture deal. The three companies most likely to be involved here, in my view: Apple, Disney, Netflix, and perhaps Amazon. The strategic picture and wants/needs for these companies are different, but this could be a unique moment in time in terms of opportunities presenting themselves (state of telcos, regulatory climate, economy/stock market, cash position, tax reform).

Quiet period ends tomorrow. Let the games begin.

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.