TC2's David Rohde on Telecom
By David Rohde Posted September 2, 2014
Just because the U.S. government basically forced Sprint to go it alone in the wireless market doesn’t mean that T-Mobile can’t still be sold to somebody else.
A successful buyout of T-Mobile US would mean the third time’s the charm. AT&T failed in 2011 and Sprint for all intents and purposes failed this year (since the deal was never going to be announced unless Sprint parent SoftBank had the regulatory politics lined up in its favor).
Here’s my bet: T-Mobile’s principal owner Deutsche Telekom will only sell out if it gets north of the $39 billion AT&T originally offered in 2011. Why not? T-Mobile’s a hotter brand now than it was then.
There’s no sense for DT in reverting back to the $32 billion that SoftBank and Sprint put on the table. No other prospective buyer would have Sprint’s and AT&T’s ultimately disqualifying problem from an antitrust standpoint – that they’re one of the other national U.S. carriers. Not unless Verizon’s planning a T-Mobile takeover (I’ll call an ambulance if you just had a heart attack).
Now here’s the problem in all this: What it would take any other acquirer to get to $40 billion might require slicing and dicing T-Mobile’s finances to such an extent that it would render T-Mobile even less of an enterprise factor than it is now.
Today’s post-Labor Day news tidbits demonstrate the challenge. You remember that a French carrier named Iliad SA put a slightly laughable offer for T-Mobile on the table (well, on the world financial markets rumor mill) a month ago. Iliad only got to a bit more than SoftBank’s offer for T-Mobile through a financial sleight-of-hand with little more heft than a PowerPoint bullet: the promise to “count” $10 billion of “synergies” in the value of the deal to the seller.
I get that two merged companies don’t need two human resources departments, but the only way to get to anything remotely near $10 billion in synergies is to cut network investments – the last thing T-Mobile, or any U.S. wireless carrier, needs right now.
As if to acknowledge the credibility issue, Iliad clearly leaked over the holiday weekend that it has prospective partners among name-brand global companies with interests in the IT communications markets talking about a joint bid. Stories in outlets like London’s Financial Times and Reuters imply that these partners could include other diversified conglomerates like SoftBank, and there’s always the cash hordes stashed at U.S.-based tech giants.
Our friend Rob Powell at Telecom Ramblings astutely notes that the prospective partner in Iliad’s next bid could be none other than Dish Network, the ostensible “loser” when SoftBank “won” the bidding for Sprint (although at a higher price than SoftBank wanted to pay). With AT&T on track to get its acquisition of DirecTV approved and sealed, Dish is almost universally assumed to be poised to go after its own blockbuster merger deal.
But reviewing this speculation basically redoubles the synergy concern rather than alleviates it. In the Financial Times’ telling, T-Mobile comes across as practically a plaything for global captains of finance. An Iliad official who promotes a joint bid with a partner then talks about raising T-Mobile’s operating margins from the 20s to the 30s in percentage terms. How? By “better managing call center costs.” Maybe some ex-Sprint customer service executives might want to relate their experience on that (better yet, their customers might). In the enterprise you can read that as cutting “account team costs” in an era where bad or reduced account teams spell nightmares for business users.
There’s also the “successful business guru” trap in U.S. wireless that we’ve already discussed. Rob Powell notes the likely ambition of Dish’s Charlie Ergen in the T-Mobile partner-bid speculation. Iliad itself features yet another of these “disruptive business heroes” in the figure of Xavier Niel, who has beaten down French consumer wireless pricing. What has so far defeated the hubris of this archetype in the U.S. wireless market is geographic size and cultural challenges. It bears repeating that the U.S. is neither the European Union nor a Pacific Rim archipelago.
I doubt that any of these guys will put a hamster in their TV commercials as Softbank basically forced Sprint to do. But unless they’re prepared to stream NFL games starting this weekend to a tablet in Anywhere USA as Verizon repeatedly brags it can, they’re not likely to be able to grab subscribers at much of any profitable price point.
U.S. regulators played their part by holding firm on four national carriers in the face of SoftBank’s Washington public policy spin. But that’s only half the game. More will have to happen to prevent wireless as well as wireline from effective duopoly status, especially in the face of AT&T’s new unification moves among its divisions. Of course there’s always the quarter trillion or so in cash stashed at the five biggest tech companies that could change the game instantly. Buying into wireless devices has been enough of a challenge, but could the margins in wireless carriers attract them? Stranger things have happened.
By David Rohde Posted August 28, 2014
Let’s play a word association game. If I say “Ethernet access,” what’s the first thing that comes to mind? “10 megabits per second”? I can understand that answer. It’s what I would have said up until recently.
As of now, though, I don’t think that’s the right frame of mind.
Dedicated access of 10M, 20M and up is still a ways “out there” for most locations for most users. It makes Ethernet access seem like a specialized product for specialized locations, no matter how attractive Ethernet is to network managers schooled in computer networking over local area networks.
But Ethernet out to the WAN is in fact becoming mainstream. Even if you don’t ask for it, carriers from the largest incumbents to the most specialized competitors may be pushing Ethernet dedicated access on you. Often it’s a replacement for NxT1 requirements – if you ask for 3xT1 or 4.5M in a demand set it may come back to you as 5M Ethernet.
The good news: It now often comes with a better price than 3 “Ts”. The bad (or uncertain) news: Do you know what it’s being provided over? Frankly, does the carrier itself know (especially if it’s not the ILEC in the area, which it probably isn’t)? Are you prepared to accept Ethernet over Copper (EoC)? What are you going to tell your branch offices in terms of installation intervals?
Here’s the worst – or let’s say the most challenging – news of all: It’s now clear that the telecom industry is not going to wait until there’s fiber everywhere and Ethernet installation becomes routine before essentially ripping up the way they propose dedicated access. Remember, for all the talk and preparation for “voice” over IP to replace TDM-based Plain Old Telephone Service, we also have to deal with the fact that T1 and T3 are TDM technologies and subject to the scrap heap as well.
The great thing about T1 is that it’s universally available and even the newbiest CLEC with little or no last-mile physical facilities of its own knows how to order it, price it out, and give you some sort of predictable installation projection. But by the time Ethernet access becomes the default option as carriers say sayonara to TDM, it almost certainly will not be the case that Ethernet rollouts will be as operationally routine as T1 is today. Availability will not be 100%, and pricing will be all over the map with some carriers still struggling to get away from location-by-location pricing. Even the largest carriers may still be favoring their own ILEC territories in their pricing.
And installation intervals? Get familiar with the troubling concept of “Special Construction.” Listen, it’s great that the fiber footprint in the country is changing, perhaps driven by the experience of recent years where arguably the fiber footprint to residences overtook that of business locations. In fact, the pending merger of Level 3 and TW Telecom is largely driven by TWT’s buildout in 80 metro areas and nearly 22,000 on-net buildings.
But a great deal of Ethernet access is sold with the promise of on-net installation. At least TWT is honest about the fact that it builds out to business locations to provide Ethernet access based largely on the sales it makes. Can you say the same for AT&T and Verizon? Have you heard that installation intervals for migrations are no longer 30-45 days per location and more like 90-120 days on a routine schedule, maybe 6 months if “Special Construction” is required, and even 9-12 months in situations where the (big incumbent) carrier only revealed the need for Special Construction after the fact?
All this might even be comprehensible if Special Construction were strictly a question of fiber builds in the carrier “last mile,” but it’s not. Often the really thorny issue is in-building remediation. Talk about finger-pointing! A core skill going forward for corporate telecom professionals will be structuring carrier deals and financial incentives to anticipate and fulfill Special Construction requirements such that they keep your new Ethernet access-based network as economically efficient as it should be and your migration schedule predictable and credible throughout your enterprise.
As usual, the better this issue is handled right up front – in your competitive RFP’s text of requirements and the demand set triggering your bidders’ financial proposals – the better your final result will be. Because of that, we are introducing a new session on Ethernet access at our semi-annual Negotiate Enterprise Communications Deals conference. In next month’s edition of the conference in San Diego, TC2′s Technology Director David Lee and LB3’s Hank Levine will join me in diving into all aspects of Ethernet access for enterprises.
If you know anything about this conference, you know that there’s also likely to be great input from experienced peers of yours who’ve already tackled this issue. You don’t have to wait for the Ethernet access session itself on Friday morning – just bring up the subject at any lunch table or conference social function and you’re bound to get educated.
And so back to the word association game. Those users who have dealt with this issue might have a different instinctive answer when I say “Ethernet access” and I ask for the first thing that pops into their heads. Their answer would likely be “Special Construction” (uttered with a sigh and a slump of the shoulders). There’s a lot of experience to learn from. About now is the time to make preparations for the onrushing wave of change in dedicated access for corporate wide-area networks.
By David Rohde Posted August 27, 2014
Carrier executives come and go, and sometimes they just play musical chairs. Still, a shift yesterday in AT&T’s top ranks portends more than the usual seat-shifting.
Ralph de la Vega, formerly AT&T Mobility’s CEO, is getting a brand new position as CEO of the “Mobile & Business Solutions Group.” That means that Mobility itself is getting a new CEO (everyone’s a “CEO” these days), and that will be a former chief of wireless partnerships named Glenn Lurie.
The fact that there’s now anyone at the top of the org chart who’s an overseer of “Mobile and Business Solutions” tells you something about AT&T’s future direction. That direction is something like Verizon’s, and not likely to make things easier for large enterprises.
Verizon some time ago shifted control of all facets of many of its enterprise accounts away from “Verizon Business” to veterans of Verizon Wireless, an organization whose stock-in-trade is charging more for non-commodity service and not necessarily providing commensurate flexibility or responsiveness. Remember that Verizon Wireless didn’t used to be totally owned by Verizon, and never really engaged in the sort of hand-to-hand combat that today’s Big 2 carriers inherited from their most important original links to the enterprise market.
Those historical organizations – the legacy AT&T interexchange carrier business that RBOC SBC bought in 2006, and the legacy MCI that was folded into RBOC Verizon at the end of the WorldCom bankruptcy saga – were schooled in competition across market-leading prices, business terms, network performance, and national and global scalability. MCI turned into “Verizon Business” and carried forward its scrappy, competitive practices until it began getting subsumed under the haughty, top-dog-and-we-know-it attitude of Verizon Wireless in the account control sweepstakes. Now the question is whether the same thing will happen at AT&T.
Some of the difficulty here revolves around carrier economics. Carriers today make more money on wireless than on wireline. Actually, it’s more accurate to say that AT&T and Verizon make a lot of money on wireless and Sprint and T-Mobile make no money on wireless. And tellingly, one of the very reasons that AT&T and Verizon lead the wireless pack is that their still-healthy (and recently, actually slightly growing) margins on wireline give them an “in” to corporate wireless business in a way Sprint has basically forfeited and T-Mobile never had.
But now AT&T may let the complacency of wireless money-making creep across its entire enterprise effort as it integrates wireless and wireline under de la Vega. AT&T officials say they have been working for some time to integrate their wireless and wireline operations, including folding its marketing and distribution for the business solutions group into AT&T’s Mobility division.
In dealing with all this, the first thing you’ll want to watch out for is what I call “lumpy” behavior. One of the things that can happen with an organization in thrall to its 45%-50% wireless margins is to fail to put its best foot forward out of the gates on a wireline procurement, and then react with shock when they find out you’re serious about competition.
You can still get to a great result with AT&T vs. Verizon competition on a core enterprise procurement – our own stock-in-trade at TC2 is to ensure that – but the path to get there has been changing. These days you can almost hear the pounding of tables in the background when a Verizon makes a lazy effort on its first-round proposal and their account executives have to climb up the ladder inside their organization to get a serious bid on the table in Round 2. If this becomes industry-standard practice it might be time to buy some furniture-industry stocks for all the tables that will have to be replaced at Big 2 carrier offices.
There’s also going to be a real premium going forward for users in understanding unified contracts for wireless and wireline (and local and hosted and managed) services with comprehensive term revenue commitments. It’s one of many subjects we’re discussing at next month’s Negotiate Enterprise Communications Deals conference in San Diego, and AT&T’s organization shift just ramps up the importance of this topic even more.
Of course there are always silver linings and offsetting factors to AT&T’s shift. I can think of three right now:
- Culturally AT&T has always had a buffer against losing respect for wireline telecommunications, more so than any other carrier. Its very name still conjures up Alexander Graham Bell and “telephones.” No media outlet would dare call AT&T “a wireless company” as it does almost everybody else (including, sometimes, Verizon). It’s typically last to phase out a service because of legacy revenues. It remains to be seen whether they will handle this organization shift in the same way as Verizon or in a more modulated fashion.
- Accelerating price competition in consumer wireless, now headlined by Sprint’s desperation to turn around subscriber losses under new CEO Marcelo Claure, are bound to cut wireless margins somewhat. Since wireless executives everywhere can’t be quite as fat and happy about their business as they were even 6 months ago, account executives had better not let too much wireline business float away or they’ll be in for a shock come Christmas time.
- The fourth quarter of 2014 will feature a completed merger between Level 3 (with its enthusiasm for SIP Trunking) and TW Telecom (a champion of Ethernet access), and continued progress by CenturyLink in moving away from its local telco roots to national wireline business (where its so-called “strategic revenue” hit 51% of total company revenue in the second quarter). Several other players are awaiting any slip-up by the Big 2 in core wireline and getting ready to pounce.
Just be prepared for the change. It really is likely to be a “new” AT&T for once. The sooner you recognize behavioral shifts and their underlying causes, the better you can react.
By David Rohde Posted August 18, 2014
Marcelo Claure, Sprint’s new CEO, is an impressive guy. He started cell-phone recycler and distributor Brightstar Corp. in 1997, built it to $10 billion in revenues, and sold most of it last year to SoftBank for $1.26 billion. He owns a soccer team in Bolivia, where he was born. He’s equally comfortable in the U.S., where he went to school. He works 28 hours a day. He doesn’t take no for an answer. He hobnobs with David Beckham. He’s 6½ feet tall.
My question is what difference any of that is going to make for Sprint.
I know that’s not a very trendy thing to say. What I’m supposed to do here is to accept the way that SoftBank/Sprint Chairman Masayoshi Son (also a foreign-born, U.S.-educated billionaire) lauds Claure as a younger version of himself – a hard-charging, convention-defying, dream-catching wizard of global business. Then I’m supposed to declare this a new day dawning for Sprint under its exciting new leadership.
But telecom is a funny business. By “telecom” I specifically mean carriers – the actual network services providers. The fact that Claure (pronounced “claw-RAY,” more or less) succeeded in a related business – the shuffling around and insuring of handset devices – is almost a detriment because it may lead him to easy analogies that are wrong.
Telecom carriers are exceptionally capital-intensive. It’s a remarkably tactile business – ironic when we’re talking about wireless carriers, but no less true nevertheless. It requires a tremendous amount of infrastructure – you know, actual stuff – around the country, even if some of it is leased back from independent real estate owners, as cell towers often now are.
And networks are unforgiving, especially when end-users are losing their patience for distinctions between wired and wireless networks for coverage, throughput and reliability. It’s very hard to sell people on choices according to lesser or greater network quality across multiple price points, like so many cans of green beans at a warehouse store vs. fresh vegetables at the organic market. Yet this is the way Claure seems to think the market works, based on his hardware distribution experience.
This disconnect was evident on Claure’s second day on the job last week during a “town hall” meeting for Sprint employees. The news out of the town hall was that Sprint is preparing wireless-plan price cuts of the sort it’s already testing in limited markets – a $50 unlimited-data plan for individuals, and the same $160 family-of-four pricing that AT&T and Verizon now promote but with 20G of shared data rather than 10G.
But in a telling moment of candor, Claure gave this explanation of Sprint’s upcoming pricing moves: “When you have a great network, you don’t have to compete on price. When your network is behind, unfortunately you have to compete on value and price.”
Gee thanks, Marcelo. If that isn’t straight out of Verizon’s playbook – “For Best Results, Use Verizon” (and pay up for it) – I don’t know what is. While advertising yourself as an inferior product may have some play in the consumer market – what the marketing gurus might call “value positioning” – it’s really a non-starter in the enterprise market.
Behind that fact is a bunch of recent historical context that Claure, who’s been a member of Sprint’s board since January, may have missed. Having dropped its pursuit of T-Mobile in the face of regulatory opposition, Sprint now has to go out for deals on its own with what is becoming a degraded brand. In the business market, Sprint’s image woes can be chalked up to a number of factors. There’s obviously the mess with Nextel, whose push-to-talk subscribers scattered across the industry when the network was turned off in June 2013. There’s also the failed 4G adventure with WiMax, which Sprint scrambled to replace with LTE. And there’s its also-ran status with Apple, whose iPhone burrowed its way to enterprise acceptance.
But a much more insidious factor has hurt Sprint in the enterprise. As the company started to pull away from the wireline market, it actually continued to offer high-quality MPLS and other WAN services. But it fell into the terrible habit of refusing to bid on plain old long distance service over the PSTN in corporate RFPs combining voice and data requirements. Hey, old-fashioned POTS – what could be more backward-looking, right? Or at least that’s how Sprint clearly looked at it. Unfortunately, that left the field for comprehensive enterprise wireline RFPs to AT&T and Verizon. Share of mind dramatically declined for Sprint in the enterprise.
Could Sprint still grab attention in the wireless business market with price cuts, if it were married to dramatic quality improvements? Of course it could, and we’d love to see it because we’re in the business of obtaining market-leading prices for our clients. But here’s where Sprint’s money woes get in the way. Its $27 billion debt overhang dramatically limits its ability to do all of the following at once: finish its LTE buildout, bid for billions of dollars’ worth of new spectrum in a 2015 auction of low-band, high-propagation frequencies previously assigned to UHF television, and fully absorb the gargantuan equipment subsidies it’s committed to Apple, Samsung and others rather than burden users with some of the cost.
There’s really no chance Sprint can pull off all that, and Claure himself last week also said he will drive Sprint to be “extremely cost-efficient.” That’s a very typical thing for an executive in a distribution-chain type business (such as Brightstar) to say. For capital-intensive businesses (like Sprint), not so much.
If Sprint wants to distinguish itself with customer service going forward, a different messaging and mindset is required. Great customer support begins with a happy employee base, and I can tell you that folks in Overland Park, Kansas (Sprint HQ) and elsewhere are no longer sure what’s worse for their own personal future – a merger with T-Mobile or a hard-charging, cost-watching barn-burner with a track record like Claure’s.
Thankfully, the enterprise wireline market is throbbing with energy from second-tier players, including the soon-to-be-merged Level 3 and TW Telecom, and in wireless T-Mobile looks set to continue pushing on aggressively although its enterprise share hasn’t really broken out yet. But new, exciting CEO or not, Sprint’s position looks tenuous.
My best advice to Claure would be not to overdo the analogies with his past success – it hasn’t worked too well for Masayoshi Son either in his Sprint adventure in the U.S. so far. Only a no-excuses network, top customer services and price competitiveness will play here. Right now, for the erstwhile member of the once-upon-a-time U.S. “Big 3,” that is, dare I say it, a very tall challenge.
By David Rohde Posted August 6, 2014
The deal was never announced, so it doesn’t have to be formally withdrawn. But Sprint has decided to end its long-obvious pursuit of an acquisition of T-Mobile US. The key problem from beginning to end: U.S. regulators would turn the deal down.
Now the ongoing problem for Sprint is simply that it’s suffering big-time and needs to look for another solution without a merger. Step one is ousting CEO Dan Hesse, who will be replaced today by Marcelo Claure, a billionaire Bolivian mobile hardware entrepreneur, according to media reports on Wednesday morning.
The executive shakeup represents a turnaround of attitude by Sprint owner SoftBank, whose CEO Masayoshi Son has now clearly soured on his nearly $22 billion acquisition of the ostensible No. 3 U.S. carrier and was recently hoping to replace Hesse with T-Mobile CEO John Legere.
The path for Sprint to become relevant again in its pursuit of positioning against behemoths AT&T and Verizon now depends on a combination of completing a no-excuses catch-up on mobile broadband capability, a clearer marketing approach than its much-mocked “Framily” campaign featuring a talking pet hamster, and success on its own in an important 2015 spectrum auction. The fact that the FCC last week threw cold water on a joint venture between Sprint and T-Mobile for the auction of key low-band, high-propagation spectrum was considered the final indication that a full merger would be blocked in Washington.
One unrecoverable victim of Sprint’s T-Mobile pursuit may be the last flickerings of Sprint’s fading position in the market for new enterprise wireline business, where it has almost completely lost its presence to CenturyLink, Level 3 (likely soon in combination with TW Telecom), aggressive smaller players like XO, and a bevy of newly combining fiber providers.
The T-Mobile acquisition dream gone, there is now little to show for CEO Dan Hesse’s tenure other than a sloppy merger with Nextel, a duplicative mobile broadband buildout that first failed with WiMax and is still huffing and puffing with LTE, and abandonment of its once-price-competitive and loyalty-engendering enterprise wireline market share.
In some fairness to Hesse, it’s now clear that Masayoshi Son’s overweening confidence based on past SoftBank acquisitions (such as its own takeover of Vodafone’s Japanese wireless network) has taken a hit. Superficially applying the same model to the unique U.S. market has naturally proven to be difficult. SoftBank itself basically pushed the Framily advertising “saga” on Sprint after yanking Sprint’s previous campaign, but AT&T’s clear pricing message and Verizon’s relentless network-quality assurances have trumped Sprint’s story. And it has seemed to come as a shock to SoftBank how much it takes to fill in the massive and scattered U.S. geography with broadband capability.
As for T-Mobile, the challenge will be how long it can goose the market with price competition without showing meaningful profits – a strategy that worked as long as it could expect to sell out at a hefty price for its majority owner Deutsche Telekom. Enterprises’ main focus in all of this is whether either independent or merged carriers can combine price competition with enterprise relevance. That remained an open question for T-Mobile throughout the Sprint/T-Mobile merger dance.
At least at the moment it doesn’t appear that Deutsche Telekom will easily fall for alternative buyout offers from players who are unlikely to bring that enterprise focus. Last week a cut-rate French carrier cooked up an offer to buy out T-Mobile based on an unrealistic $10 billion in “synergies” that would clearly eat into the kind of network investment that enterprises have to see to get the functionality and coverage that satisfies corporate end-users. Media reports indicate that T-Mobile basically laughed that offer out of the room. But many more chess moves will be coming. They will be fascinating to watch.
By David Rohde Posted August 1, 2014
Yesterday a company you’ve probably never heard of said they want to buy T-Mobile. Is this a bidding war against Sprint and SoftBank, a ruse to get Sprint and SoftBank to formally announce their bid, or simply a publicity stunt?
Actually the details of the offer by French consumer wireless discounter Iliad SA could be read a number of different ways. First of all, Iliad’s “offer” to buy T-Mobile was no more formally “announced” than Sprint’s has been. Instead, in an elaborate journalistic dance, it was clearly leaked to the media, and then “confirmed” by the company.
Second, the financial metrics are a little hard to believe. Iliad is offering far less per share than Sprint almost certainly will offer for T-Mobile. But Iliad pre-calculated a whopping $10 billion in “synergies” to come up with a supposed effective total bid of $40.50 per share – magically 50 cents higher than the generally assumed amount of the bid in real money that Sprint and SoftBank are preparing.
Now really, how many “synergies” can there be when the whole point of these wireless mergers is supposed to be to join and strengthen mobile broadband networks? It’s not like closing down so many redundant bank branches or coffee shops when two such companies join together. Hold that thought.
Third, in one straightforward interpretation of its offer, Iliad simply wants to become the new owner of T-Mobile. But in another interpretation it’s looking to replace Deutsche Telekom and give DT a pure exit from the U.S., and then T-Mobile could seek a U.S.-based merger partner, since the Iliad offer is remarkably for the same majority percentage stake that DT now has.
If so, I suspect that’s misreading DT’s desperation to exit the U.S. market. DT is the Vodafone of this whole piece – DT’s T-Mobile stake keeps rising in value just as Vodafone’s stake in Verizon Wireless kept zooming higher. DT’s waited this long, why not wait a little longer to see what SoftBank – one of the world’s largest conglomerates when all is said and done – finally ponies up? Maybe it’ll even be higher than the $40 a share, or $32 billion in total, that’s been discussed.
And that’s really the point – regardless of the details of any competing offer, trial balloon or even publicity stunt, the longer the Sprint/T-Mobile soap opera goes on the more risks pile up in terms of the marketplace impact of whatever deal is to come:
- The ultimate price paid will rise, and that squeezes network investment. That’s what happened when SoftBank bought Sprint after raising its offer to fend off a competing offer from Dish Network. It reduced to $5 billion the amount of the sale price available for extra network investment after those Sprint shareholders were paid off. That has continued to have effects on Sprint as it huffs and puffs to catch up on LTE and struggles to ever gain a net increase in post-paid, bill-paying wireless subscribers.
- More players get involved who are light-years away from the enterprise market. A key risk in all telecom mergers – ever – is senior management attention to the culture of competitive enterprise needs for scalability, best-practices contract terms, and market-based pricing on a continuous, real-time basis. The further any T-Mobile deal gets from these considerations, the more risk there is of the merged company failing to provide the competitive enterprise player that the merger was supposed to be about in the first place. Certainly anything like $10 billion in “synergies” ain’t gonna get your executive end-users the reliable mobile broadband network they’re expecting.
- Pressure grows on SoftBank to explain how a Sprint/T-Mobile merger does not reduce competition. No matter how goofy the Iliad offer may be, the immediate discussion about it centered around the fact that its purchasing T-Mobile would retain four national carriers in the U.S. rather reducing the number to three. Regardless of the merits of three vs. four, it remains the working assumption of the government dating from its rejection of AT&T’s proposed acquisition of T-Mobile in 2011 that four carriers is what works in the U.S. The opportunity to find any other buyer rather than Sprint could fortify the backbone of those regulators who do not want to trade this principle for concessions or bargains from the merging companies on other regulatory and marketplace issues.
Keep in mind these three heightened risks for Sprint and T-Mobile as the competing Iliad bid plays out, or as other players around the world send up their own trial balloons. Perhaps Sprint and SoftBank may want to cut all of these problems off at the pass. But that may give them less time to line up their political ducks in a row than they apparently think they need, and it may take a more expensive formal announcement of the merger than they had planned.
By David Rohde Posted July 30, 2014
If there’s going to be a merger between Sprint and T-Mobile, it looks like it’s not going to be announced next month.
Maybe everybody should mark their calendars for Tuesday, September 2. That’s the day after the U.S. Labor Day holiday. Investment bankers often work holiday weekends when there’s a big payoff involved.
What’s the holdup? Major news sources including the Wall Street Journal say that financing is not really the issue. Nor should it be, with SoftBank having access to enormous capital resources in Asia, and the company holding a huge stake in Chinese e-commerce company Alibaba that it can monetize.
But there’s little indication yet that the U.S. government is giving way on its default position that it opposes any merger among the four U.S. national carriers. And as time goes on, it’s not even a question for the regulators of simply yes and no on a merger deal.
Whatever they would decide on a prospective merger affects the rules for a key 2015 auction of television airwaves to the carriers. Pasting Sprint and T-Mobile together would almost certainly cause the regulators to ease or erase set-asides for the two on some of the spectrum as smaller, individual carriers.
The passage of time creates another challenge for each carrier, which you can see in a tidbit from the recent quarterly earnings reports for the industry. In a set of metrics that would have been unthinkable two or three years ago, both AT&T and Verizon reported very low churn of under 1% among their customer base. Verizon, the historic leader in low churn, was at 0.94%, while AT&T was further down at 0.86%.
Now, particularly in AT&T’s case, the churn only partly represents increased customer satisfaction with the network. Rather it shows the results of AT&T’s aggressive re-pricing of consumer accounts – up to 70% of the customer base, according to AT&T execs – in response to the T-Mobile-inspired price and terms competition in 2014.
But the tenacious way in which Verizon and AT&T are holding onto their customers – Verizon mostly by labeling itself the premier network and AT&T mostly by finding price points it likes – threatens to leave crumbs for Sprint and T-Mobile. In essence Sprint and T-Mobile are starting to argue from failure – that they can’t hack it on their own. Softbank’s relentless advertising in Washington in airports, train stations and, yes, the sides of buses that it’s an “innovator” and “entrepreneur” is based on the idea that there’s an optimum distribution of market share in a wireless market that the U.S. is moving away from with two biggies and two little sisters.
In reality it’s very unlikely that SoftBank has reduced its desire one bit to get the merger announced. As the Wall Street Journal mentioned today, it’s much more likely that Deutsche Telekom, 67% owner of T-Mobile US, is gun-shy until the politics are arranged. In doing this deal, DT is essentially trusting that SoftBank can “sell” its counter-intuitive, pro-competitive story of the merger to the U.S. regulators.
Of course DT will have a breakup fee in case the deal fails its regulatory review – a fee that SoftBank CEO Masayoshi Son never wanted to offer in the first place – but its preferred outcome is of course merger approval. It looks like hard work to get this done.
By David Rohde Posted June 20, 2014
Will Level 3’s acquisition of TW Telecom be a roaring success or just another problem-riddled merger? You can see some of the tension in a comment thread at Telecom Ramblings that I helped kick off.
Some folks emphasize the clear fit of assets that constitutes one of the best matching up of jigsaw puzzle pieces in the U.S. telecom industry in some time. Others note the striking fact that TW Telecom has stayed away from the merger game for a long time and has been free been to do nothing but grow, invest and execute. They fear that this period comes to an end with Level 3’s embrace and the inevitable stress, uncertainty and culture clash that dogs almost every telecom industry merger (and, in some people’s view, Level 3’s acquisitions in particular).
I’ve noted the importance of the merged company’s continuing investments in capital expenditures largely along the TW Telecom model. As you can see at Telecom Ramblings, much of the defense of Level 3’s prospects after it absorbs TWT has to do with technicalities regarding Level 3’s ability to retire or refinance debt. Unfortunately, that’s not good enough, or shall we say it’s necessary but not sufficient.
In my time in telecom, merely the excessive focus by a carrier’s top executives on the success of Wall Street transactions almost always correlates with a belief that the carrier’s assets will “speak for themselves.” But that’s not how it works – a number of times on this blog I’ve used the term “everything has to go right” to describe what a competitive carrier usually has to do to get large enterprises’ core business.
That includes not just the acquisition or buildout of facilities-based networks but also a powerful sales executive or account team who can grasp the scope of an enterprise RFP and get things done on both prices and terms – and then can hand off the rollout or migration of services to a platform and/or support staff that scales up.
There’s a certain kind of “capital expenditure” involved in these things too, and it’s something that TWT has put some measure of effort into with its service delivery platform emphasizing dynamic capacity management of its Ethernet services. But the real test will come if a core of brand-name enterprises sign on to Level 3’s new local-to-global story with its now matched pair of acquisitions in TWT and Global Crossing.
Part of the difficulty here is that in the stock market, the Level 3/TWT merger has been viewed very favorably because it’s focused on the quote-unquote “enterprise” market. All that investment commentators really mean by that, however, is the business market as opposed to the wholesale market where one carrier sells to another. That’s great as far as it goes – the wholesale carrier market has seen its margins stripped to the bone – but the business market as a whole is not the same as the true enterprise market that we at TC2 and LB3 serve.
This test will now increasingly face Level 3 and TW Telecom and, for that matter, any other combination of facilities-based carriers in the very lively fiber-and-bandwidth market that is finally making U.S. metros something more than one dominant player and a pile of also-rans. It’s a key reason why we follow this metro fiber market so closely at TC2 and have all eyes on this transaction in particular.