Capacity and Wireless

July 18, 2018 
Dear Lens Subscribers,

Over the coming months, there will be debate and discussion about the merits of the T-Mobile/Sprint merger, from the perspective of the industry and consumers. As we start down this road, it's important to look at the broader context of how the wireless and broadband industries are evolving, and how capacity is a major dictator of the type of service that wireless operators can offer consumers. See our full piece below.  

Capacity is The Name of the Game in The Future of Wireless

Over the coming months, there will be debate and discussion about the merits of the T-Mobile/Sprint merger, from the perspective of the industry and consumers. A natural concern is that in going from four national facilities-based wireless providers to three, that the industry will become less competitive, that consumers will have less choice, and that prices will rise. But as we start down this road, it's important to look at the broader context of how the wireless and broadband industries are evolving, and how capacity is a major dictator of the type of service that wireless operators can offer consumers.
One of the key arguments that helped persuade Judge Leon to reject the DOJ's challenge of the AT&T-Time Warner deal is how the traditional pay TV industry is undergoing fundamental change with the rise of broadband, OTT business models, and new players from Netflix to Amazon to YouTube. The wireless industry is experiencing similar tectonic changes. The first 25 years of the industry was mainly about wire-free voice, texting, and low-speed data. Now, it's all about high-speed data. The overwhelming percentage of phone use is for data services, with video and rich media driving average data consumption growth of some 30% annually, with no end in sight. With the growth of smartphones, advances in 4G LTE networks, and approach of 5G, wireless is becoming part of the overall broadband landscape, with consumers expecting much the same type of connectivity from T-Mobile and AT&T as they do from Comcast and Charter.
Wireless operators are continually challenged to keep up with this demand for data, in the face of a competitive pricing market and 'Unlimited' plans, where the average revenue per subscriber (ARPU) has remained essentially flat for the past several years.
In order to meet this insatiable demand for data without raising prices, wireless operators are all racing to bolster their capacity positions. And there are only two ways they can do this: to make sure they have sufficient spectrum breadth and depth, and to deploy innovative techniques to improve 'spectrum efficiency'.
It's clear that T-Mobile and Sprint, if they remain standalone businesses, will be challenged to keep up with AT&T and Verizon. The latter two operators, who control 2/3 of mobile subscribers, are using their rich capacity positions to expand beyond providing core wireless connectivity, whether it's zero-rated video content bundles from AT&T/DirecTV/Warner Media, or Verizon's plan to offer fixed wireless access in 30+ cities.
With the addition of Sprint's spectrum, T-Mobile adds to its spectrum in the lower bands, which is critical to improving in-building and rural coverage,
but more importantly it gains important assets in the 2.5 GHz band. This will be
an important part of the company's plans and add crucial coverage and capacity to offer fast 5G service , particularly in the face of the significant 5G mmWave spectrum already owned by Verizon and AT&T that they can use for 5G. T-Mobile also gains capabilities that enable them to be more competitive in the enterprise market.
In this thinking about future capacity and coverage requirements, one must also consider what the roadmap for Sprint looks like, were it to remain a standalone business. Even with recent improvements, Sprint's network continues to lag that of the other three main wireless operators, and its capex expressed as a percentage of revenues ('capital intensity' - a common industry benchmark) has fluctuated wildly in recent years. It is also unclear whether Sprint's current owners are prepared to spend the tens of billions of dollars required to shore up the competitive gap, acquire needed additional spectrum, and build out 5G.  
Against this backdrop, bear in mind that wireless is unique in that operators pay the government billions of dollars for the right to own spectrum. By contrast, Comcast and Charter can light up another strand of fiber and ba-boom, speed and capacity go up a notch. In fact, over the past ten years, wireless operators have averaged 1.5x the capital intensity of cable/telco -- not including the billions of additional dollars spent on spectrum.
The spectrum and capacity position of the New T-Mobile enables the company to keep up with AT&T and Verizon, and also opens up new business opportunities that will benefit consumers. T-Mobile stated in its Public Interest Statement filing on the merger that it plans to use some of Sprint's 2.5 GHz spectrum to offer fixed wireless access (FWA) in some cities, which would give some consumers an additional option for broadband services. Those who are concerned about the "lack of competition" in wireless might well note that some 50% of U.S. consumers only have a choice of one decent broadband provider. With 5G, one can envision the possibility that in the early 2020s, some consumers might be able to have one ΓΌber 'broadband' provider, rather than today's prevailing structure of separate fixed and mobile subscriptions. In that scenario, the New T-Mobile could increase broadband options
and reduce the overall household spend on communications.
Also, with an improved capacity position, it's likely that major operators in the industry would be more open to MVNOs and innovative wholesale business models. Look at Verizon as an example of a wireless operator that has historically eschewed MVNOs and resellers. Now, when it is required to support the Xfinity Mobile offering by virtue of a 2012 spectrum swap arrangement, Verizon's $5 per GB wholesale data rate has resulted in Xfinity Mobile's imposing new limits on data consumption and throttling of video speeds.  
With an improved capacity situation, one could envision the New T-Mobile and other wireless operators creating a more attractive wholesale business, which would encourage innovative business models and new types of offerings to consumers.  
In the future wireless business, having adequate capacity is the 'ante' required to meet the continued growth in data demand. Operators with ample capacity would be more open to innovative business models, whether it's a more vibrant wholesale business or offering a competitive broadband service. They would also be in a position to more effectively embrace the huge structural changes occurring at the intersection of communications and media.

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Lowenstein's columns are featured in his own Lens on Wireless newsletter, and in Fierce Wireless, Tech.Pinions, and Re/Code.
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