The Finish Line is Close for Sprint

No one expected the level of drama and the maneuverings among Sprint, Clearwire, Softbank and DISH. To be sure, the stakes were high for all parties. A poker game analogy is appropriate as this corporate soap opera has seen its share of raised bids and stare downs.

DISH with Charlie Ergen at its helm played the classical disruptor, raising the stakes on its bid on both Sprint and Clearwire. It's logical since the DISH core business is sliding and DISH has no access to any mobile opportunities (revenue).  Though DISH has its own spectrum, it doesn't have the ability to launch service on its own. With Sprint's Network Vision strategy, DISH can ride the Sprint host with lower capital expenditure than if it built a network from scratch. But Sprint has a revenue generating subscriber base and direct sales channels that DISH can tap into if it own Sprint.  However, with a deeper pocketed Softbank raising the ante, DISH needed to fold and focus on a less capital intensive deal - Clearwire.

However, Sprint "pulled a DISH" and raised its bid for Clearwire at the last minute $5/share vs $4.40.  This reversed a Clearwire board recommendation for DISH. Let's face it, money talks and with that, the activist investors were placated. After all, they were looking to maximize any bid anyway. What didn't hurt was Sprint's lawsuit against DISH and Clearwire citing the illegality of the DISH offer.   Sprint is near the finish line to realize 100% ownership of Clearwire, unless DISH "pulls another DISH." 

The real question if the Sprint-Clearwire deal makes it is what are DISH's options to get into the mobile space and monetize its spectrum? Will Sprint and DISH bury the hatchet? In my view, they have to. DISH still needs to make use of its spectrum and Sprint is the logical partner (at this moment) since Network Vision was created for spectrum hosting. Though Sprint said in the past, wholesale revenue wasn't totally baked into the Network Vision model, any wholesale money (a fleeting LightSquared) will help its return on investment. Of course DISH can court T-Mobile, but they're focusing on its own LTE buildout. Moreover, they haven't planned for spectrum hosting. We shall see............. 

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Sprint and Clearwire - It had to be - Network Future?

Now that Sprint will acquire the remaining 50% of Clearwire that it already did not own, what does this say about the near term and future?  While there are many stories about the financial side, most industry insiders knew that the Clearwire acquisition was a strategic imperative. Back in October when Sprint moved to take more control, I offered some thoughts  on why Sprint's long term control of Clearwire made sense. Much of the logic is rooted in the long term network strategy.

Network Vision

Sprint's network strategy hasn't changed since 2010 with the introduction of its Network Vision.  Many analysts derided the price tag and its hosting positioning but today, Sprint's bet seems to have turned out well.

When Sprint announced Network Vision in 2010, it seemed a bit presumptuous that 2.5 GHz was included into the spectrum chart especially since Clearwire had not committed to the effort and especially Sprint did not control any of that spectrum.  Clearwire had its own separate network deployment strategy with capital already sunk in specific markets using WiMAX to power Sprint's 4G data play. 

In order to expand markets, it was logical that Clearwire take advantage of Network Vision but that didn't happen. Executive tensions (between Sprint and Clearwire), the need for Clearwire corporate independence and lack of capital to expand contributed to stalling the grand Network Vision execution.  With the urgency to stay in the LTE game against wireless competitors, Sprint worked with Clearwire on specific markets to deploy the TD-LTE flavor in specific 'high data tonnage' markets.  It was clear, Clearwire would provide the complement to Sprint's near term PCS-based LTE strategy.  

Fast forward to 2012, what has changed?  The answer - Softbank.  Though the Softbank-Sprint acquisition approval is scheduled for mid-2013, Softbank's $3.1B bond purchase in October freed Sprint to make specific strategic moves beyond Clearwire in the form of US Cellular subscriber and spectrum acquisition in November. 

Back to the 'new' Sprint network,  surprisingly, the network slide hasn't changed.  To Sprint's credit, they're executing on their vision.

But what has changed is a bit more detail specific to LTE.  Today's 800 MHz band primary is envisioned for voice. With better in-building penetration properties, having voice is still the 'bread and butter' revenue bearing service.  800 also hosts the soon to be discontinued iDEN platform. Eventually 800 will also run LTE with VoLTE.  However, 800 LTE is more than 2-3 years away. The near term LTE solution is in the PCS band. But with only a 5 X 5 deployment and also running 3G, the analyst community questioned whether this could handle increasingly high-data usage especially in light of an unlimited data service proposition. 

Enter TD-LTE and Clearwire

To address high data use, Sprint engaged Clearwire in a data offload arrangement.  Rather than a national TD-LTE view, Sprint would identify specific high-data tonnage markets for Clearwire to buildout its TD-LTE. The concept: with plenty of 2.5 GHz spectrum, Clearwire (and Sprint) could address subscriber [retail and wholesale (think data MVNOs)] capacity and still offer a speed differentiation. Yet with an independent Clearwire, Sprint clearly had no control of its future. Therefore, it was a strategic imperative for Sprint to take over Clearwire.   Sprint also had to act as the financial community was advocating Clearwire sell "excess" 2.5 spectrum to raise cash.  This flies in the face of any network planner as history has shown that spectrum always appreciates and the overused 'spectrum is the lifeblood of a network' adage still holds.

Two "2.5 GHz Dollar" Questions 

Assuming that the Clearwire acquisition goes through, will Sprint expand or accelerate the original Clearwire deployment plan?  I say yes, they have to eventually.  Whatever the TD-LTE markets previously agreed upon, it only address specific high density markets.  To offer a broader coverage story that rivals competitors, Sprint will need to show a bigger TD-LTE footprint.  It's taken for granted that a data-offload (of PCS LTE) strategy is still in play.  

There are two questions in my mind that Sprint need to address.  First, a broader future question is when Sprint will exploit the national 2.5 GHz coverage.  With a national footprint, Sprint ensures a richer wholesale platform and deeper capacity.  Sprint strategy guys have likely played this scenario out.  With less than ideal propagation (relative to 800 (and 700)), small cells and associated backhaul will play a prominent role (read more capital).  The second is more of a technical question.  When will Sprint take advantage of its potential speed advantage. With aggregating spectrum, Sprint can position speed and unlimited as a marketing differentiator much like Verizon Wireless' coverage.  Of course the answer is when the TD-LTE ecosystem commercially supports this on the infrastructure and device side.

Stay tuned for more Sprint moves in 2013. 

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Why Sprint + DISH Makes Sense

Today's Bloomberg report  suggesting a possible deal where Sprint hosts DISH's spectrum is logical. While DISH has held this spectrum for some time, they have yet to throw services on it. DISH needs a mobile component as all their fixed line rivals (e.g., AT&T, Verizon and Cable Cos) have or will have mobile capability.  The media and industry speculation with Google in mid-November has yet to materialize.

Keeping Up with Competitors

From a fixed line view, these competitors are pushing for subscribers being able to access content in any device (i.e., smartphones, tablets, PCs, TVs, cars?). Of course the service provider will love to upsell an alternate access medium to customers. While DISH is a capable satellite provider, it has little experience in the terrestrial side. A national buildout of their MSS spectrum would be capital intensive and outside of their core competency. 

Enter Sprint

Sprint's big bet in their 2010 Network Vision strategy that hosting spectrum would be an element of its wholesale strategy. There was much promise as then cable company (SpectrumCo)  partners had a near national AWS footprint and Clearwire needed a platform to expand to new markets. So far, only the nearly defunct LightSquared was the only shortlived spectrum hosting deal. Therefore, any spectrum holder who needed to bring up service is fair wholesale game.  With the Softbank cash infusion,  Sprint has publicly stated that it has the flexibility to do more things.  Aggressively courting DISH and hosting MSS spectrum should be a no-brainer despite any previous tension on MSS spectrum interference with with Sprint PCS operation.

Possibilities

It's an inevitability that MSS will run LTE. If MSS bands were to increase Sprint's LTE capability beyond their 5X5 channel implementation, a wider LTE band helps Sprint LTE capacity allowing Sprint's Unlimited data proposition to extend. Speed is another factor in which channels can be aggregated to provide a fatter LTE pipe.  

A DISH deal allows for a long term alternative (and a lever) to being locked in with Clearwire's TD-LTE. At a minimum, a DISH+Sprint PCS/MSS LTE pipe complements  any data offload.

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Sprint - Thoughts Ahead of the Earnings Release

Sprint is the third Tier 1 carrier set to release its earnings and performance metrics, October 25th at 9:00 AM.   The company is in the midst of a turnaround cycle. For the most part, it is succeeding as evidenced by customer service, churn decline and postpaid growth (on the Sprint platform). This turnaround story is in part what drew the October 15th SoftBank $20 billion acquisition.  While the deal isn't expected to close until next year, Sprint ahead of this earnings call has moved to acquire controlling interest in Clearwire as a foundation for the 'new' Sprint's future plans. Regardless of the good news for Sprint, its meat and potatoes operations either support its continued the turnaround trend or present areas of challenge.

Net Additions:   

On a macro view, the overall net additions are in the positive range largely due to the strength of Sprint's prepaid strategy and wholesale business. The number of MVNOs using the Sprint platform has been a welcomed component in driving net additions.   On the postpaid side, there are two stories that newcomers need to focus on.  One is the iDEN side which has been bleeding subscribers for a couple of years. There's no secret that the iDEN network will cease in mid-2013, the thrust is to retain the remaining 4.4 million iDEN (as of Q2 2012) customers of which 3.1 million are postpaid. It stands to reason that the remaining iDEN subscribers are a loyal base that depend on the push to talk function and have it well integrated in its operations.  They're the candidates to migrate to the CDMA-based Direct Connect. However, Verizon Wireless and AT&T has been very aggressive in courting these customers throughout the years. In Q2, Sprint presented a 60% iDEN subscriber recapture rate, the expectation should be that percentage should increase.  iDEN losses amounted to under one million in Q2 of which over two-thirds were postpaid. Sprint has warned that these losses will pick up towards iDEN's end of life.  What will Q3 hold in total iDEN losses and most importantly, the recapture message?

It's clear that the Sprint platform (a mix of CDMA and now LTE) will continue to be positive.  The upswing in its Q2 442K postpaid net additions were largely helped by the 1.5 million iPhone gross adds which brought in switchers (40% new to Sprint).  Observers will continue to pay attention to the iPhone numbers that should manifest itself partly in churn and postpaid net adds.  With its unlimited proposition and a Sprint LTE iPhone, will 40% stay flat or increase?  

On the prepaid front, the Assurance growth engine (as well as other companies with similar offerings like Tracfone's Safelink) had been impacted with the FCC's modernizing of the Lifeline program in Q2. Will this continue to impact Q3 results? A big bet in prepaid was the introduction of the iPhone at Virgin Mobile. However Sprint did not provide the granularity of prepaid versus postpaid iPhone activations.   It'd be nice to understand the Boost and Virgin Mobile brand's contribution to the prepaid story.

Churn:   From a trend view, Sprint is definitely turning around. Though the postpaid figures incorporate the iDEN bleeding, the results have been good.  For the Sprint platform (Q2 1.69%, Q1 2.0%), it has offset iDEN figures well (Q2 2.56%, Q1 2.09%). To follow a turnaround story that incorporates the anti-churn tool (iPhone), one hopes that the Sprint platform percentage to continue to decline.  Will it break 1.5%?  

Similarly on the prepaid side, the trend looks decent but detail needs to be examined on the Sprint platform figures for Q3. As a reference gauge with Q2/Q1 numbers, Sprint platform reported 3.16%/2.92% while the iDEN side came in with 7.18%/8.73%.  Prepaid churn is tough as it's the nature of the offering but sticky products and decreased trending help the cause.

ARPU: Sprint 's approximately $61 postpaid ARPU mark follows only AT&T. With AT&T just increasing to $65.20 in Q3, The expectation for Sprint is to cross $61 given Sprint's sharp growth slope.  

Prepaid ARPU (Q2 - $26.59/ Q1 $26.82) is trending down partly as the result of possible dilution associated with lower ARPU bearing Assurance customers. Logically, as those customers increase in number, it offsets the higher-ARPU bearing Boost and Virgin Mobile Beyond Talk subscribers. However, Sprint executives have always touted the low-churn aspect of Assurance users along with low acquisition costs. Therefore, they argue, Assurance users are provide stable profit in the long term.  

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Why the Surprise over Sprint Controlling Clearwire?

There are people in the media and the industry who are astounded that Sprint would enter into control of Clearwire, especially with the history of friction at the executive levels.  To be sure, Clearwire and Sprint have been on their respective rollercoasters but the relationship is symbiotic and beneficial in the long term.  

 

Clearwire's value proposition is its spectrum depth. Though it seemed to be handicapped with the funky non-standard 2.5 GHz band and more TDD than the standard FDD, this has turned around for the better.  What's good?

• The spectrum depth allows Sprint to continue to offer an unlimited proposition. It does so now using WiMAX technology under a flat-rate contract with Clearwire. When TD-LTE comes, the current thinking is to address 'high tonnage' markets for data offloading from the Sprint 5 X 5 channel PCS LTE network.
• Having TDD spectrum can be advantageous. You can devote more channels to the downlink. Most of the data consumption is on the downlink anyway whether it's mobile or fixed.  Under a FDD scenario, the bands are usually the same 'width.'  If there isn't a lot of uplink traffic, it feels like it's less efficient.  
• That funky band (sometimes a little variation - 2.6 GHz (close)) is now positioned to be a global LTE roaming band with presence in Asia and Europe.

If purchasing Clearwire wasn't an overt condition of the SoftBank deal, it should have been logical given the speed ambitions of Mr. Son. Allowing a non-fully controlled Clearwire can upset that plan.  The Clearwire takeover scenario would never have come into play with out the SoftBank acquisition. Sprint was in no financial position to further outright fund Clearwire as it was busy with its own turnaround execution.  

Network Vision Looks Better

Bob Azzi (Sprint's public face for Network Vision) must be relieved.  When Network Vision was conceived, it was pre-built with spectrum hosting/network sharing in mind.  Although LightSquared signed on, their business model went south due to GPS interference.  The Sprint conceived 2010 Network Vision graphic below kind of blatantly put the 2.5 GHz band out there even though Sprint didn't own the band.

Meanwhile Clearwire was expanding on its own WiMAX network in specific markets with expansion encumbered by CapEx and customers to help with that pesky revenue thing.  Throughout Network Vision, analysts including me, expected that Clearwire would jump on board. But they didn't.  Some point to money, some point to independence but the end result is that Clearwire was not on the Sprint Network Vision bandwagon.  This may have changed as Clearwire and Sprint worked out their TD-LTE deployment priorities. Sprint desires specific markets that Clearwire had no network, the Sprint Network Vision platform would be the natural choice rather than spending the CapEx on a parallel network.

What Could Be: If there is enough money (thanks SoftBank), Sprint and Clearwire can be more aggressive in TD-LTE expansion, going to more geographic markets than planned (constrained). Sprint's slim PCS-based LTE won't have that spectre of capacity challenged.  Moreover, more channels (and maybe hardware and backhaul and....) can be thrown to not only address capacity but also speed, addressing Mr. Son's fast mobile speed experience expectation. 

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SoftBank & Sprint Deal - Speed Expectations & Implications

In the October 15, 2012 Japanese Strategic Partnership announcement, SoftBank's CEO Masayoshi Son cited slow US network speed compared to Japan.  Though the chart reflects 2011 data and may change as the US builds out LTE in the coming years, the point is that Japan leads the way. Conspicuously absent, by the way, are know speed-forward countries South Korea and Singapore.

Reading between the lines, SoftBank has lofty speed ambitions based on the Japanese market. While LTE will be the great speed equalizer in the US market stands now, competitors cannot claim overall speed dominance.  Sure AT&T and Verizon Wireless go back and forth citing 3rd parties (here and here), the reality is that carriers cannot officially state that their LTE is faster than competitors.  Part of the speed equation is capacity.  While speed brings in the early adopter speed geeks, the bigger carrier thrust is to make the data service available to everyone.  This means having sufficient capacity within spectrum constraints.

US carriers have been providing operating expectations though. Some more specific than others.

Verizon Wireless' latest LTE market expansion announcement alludes to speed ranges:

"In real-world, fully loaded network environments, 4G LTE users should experience average data rates of 5 to 12 megabits per second (Mbps) on the downlink and 2 to 5 Mbps on the uplink. When customers travel outside of 4G LTE coverage areas, devices automatically connect to the Verizon Wireless 3G network, where available, enabling customers to stay connected from coast to coast."

AT&T positions its LTE speed in comparison to 3G in its latest LTE market expansion in Dallas-Fort Worth release. 

" Faster speeds. LTE technology is capable of delivering mobile Internet speeds up to 10 times faster than 3G. Customers can stream, download, upload and game faster than ever before."

Interestingly, rather than stating a range, it pits it has superior LTE speed against Verizon Wireless citing a PC World comparison (here). 

Now back to Sprint.  As it builds out its Network Vision strategy, its LTE implementation is a rather small 5X5 MHz channel implementation. Smaller channels and balancing capacity may yield slower speeds but that doesn't stop its marketing.

Looking ahead when Clearwire comes into the picture with their TD-LTE technology, the current Sprint view is for data offload in 'heavy data tonnage' markets. This suggests a capacity approach given Sprint's unlimited data proposition.  Yet Clearwire's spectrum depth also allows Sprint to add the additional speed component, thereby realizing Son's vision of blowing the doors off competitors (in Japan and the US).  If speed (along with unlimited) is going to be a market differentiation, Clearwire and network expansion and tweaks will be necessary in the coming years.  This means more capital is necessary for Clearwire to do so.  Direction and commitment will be necessary from the 'new' Sprint.

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