Wireless Watch: More US turmoil - Verizon-cable deal in doubt; LightSquared files for Chapter XI May 16, 2012 – Rethink Research
As Verizon and AT&T announce their latest LTE coverage expansions and device plans, the rest of the US 4G market is still in disarray. Opposition to Verizon’s bid to purchase spectrum from four cablecos is mounting, threatening to cause uncertainty and suspended motion just as AT&T’s bid for T-Mobile did last year. Meanwhile, the would-be LTE independents are engaged in their usual dance, with LightSquared finally filing for bankruptcy protection, and Clearwire and Dish poised to take advantage.
On Tuesday, the FCC seemed to be listening to one of T-Mobile’s main arguments against the Verizon-cable deal, that Verizon is likely to stockpile the AWS spectrum it aims to buy, taking it out of the mobile broadband mix for some years. Verizon has dismissed such claims, but the regulator has asked it for clarification on its plans.
In a letter published yesterday, the FCC asks Verizon what steps it has taken to date to deploy services using the localized 700MHz licences it holds in the band’s A and B blocks, which the carrier has offered to sell, if its AWS deal is approved. Verizon’s current LTE network runs in 700MHz, but in the C block, where it has a national allocation. It also acquired holdings in the other two blocks, but these frequencies are fragmented and are not interoperable with the C block services.
Many believe the carrier only bought them, in the 2008 auction, to keep AT&T from building too strong a position (AT&T also has significant A and B block assets). This now looks less important than gaining sufficient AWS spectrum to achieve the levels of coverage and capacity Verizon wants for its second wave of LTE roll-out. However, its apparent indifference to its smaller 700MHz holdings, which have a build-out mandate of June 2013, appears to support TMo’s accusations that it is prepared to ‘warehouse’ spectrum.
So the FCC has asked it to “explain the relevance, if any” of the 700MHz sale plans to its ongoing review of the AWS transaction, including any details of previous sale efforts, and its plans if the AWS deal falls through. It has requested a response by May 22.
In the letter, FCC wireless bureau chief Rick Kaplan asks “what steps to date, if any, has Verizon Wireless taken to deploy mobile services using the Lower 700MHz A or B block licenses (either or both)? On what timetable has Verizon Wireless been planning to deploy mobile service in these Lower 700MHz blocks?” He also wants to know why the sale of those licenses has been made contingent on Verizon securing the cableco’s AWS assets.
However, Verizon supporters point out that few of the winners from the AWS auction in 2006 have yet built out their spectrum (with the major exception of T-Mobile), and it is more likely to be put to good use if Verizon buys more frequencies, since the cablecos have all abandoned plans to deploy their own LTE or 3G systems.
Meanwhile, the 700MHz picture is getting even more complicated. AT&T and US Cellular are separately looking to bolster their stores in the 700MHz bands by purchasing licences from cableco Cox Communications. Cox acquired spectrum in both the AWS auction in 2006 and the 700MHz sale in 2008 but later decided not to build its own networks. Only the former assets are included in its deal with Verizon. Subject to FCC approval, AT&T wants to buy eight Lower B block licences covering areas on the East Coast, including cities in Florida and Virginia. These frequencies cost Cox about $28m in 2008 but no indication of AT&T’s price was made. US Cellular has bought four Lower A block licences mainly in Kansas, which originally cost $30m. And in another separate transaction, AT&T purchased four Lower 700MHz C block licences from Peoples Telephone Cooperative covering locations mainly in Texas.
T-Mobile has taken the lead in fighting Verizon’s spectrum deal, and this week it formalized its alliance with the Rural Cellular Association (RCA) and public interest group Public Knowledge. The trio will form a new formal group, called the Alliance for Broadband Competition, which describes itself as a "collection of like-minded businesses, trade associations, and public interest groups who are concerned about the ability for the current marketplace to sustain a competitive broadband landscape."
When Verizon first announced its agreement to buy AWS spectrum from Comcast, Time Warner Cable and BrightHouse, (and later, in a separate deal, Cox), the plan was expected to gain regulatory approval without much trouble. However, in the fall-out from AT&T’s failed acquisition of T-Mobile, the regulators have become sensitive to claims that too much power is being concentrated in the hands of the big two operators, and Verizon’s plans have met with significant opposition. The FCC and Department of Justice recently extended the review period by 21 days and, while most observers still expect the deal to go through eventually, the carrier may have to make significant concessions such as spectrum divestments.
Sprint has been more muted than TMo in its opposition – it has asked the FCC to scrutinize the plan closely but has not officially called for the plan to be blocked. It supports the new coalition but will not join its initial teleconference, it said.
TMo and the RCA have marshalled various arguments against the Verizon deal, in addition to the stockpiling one – that it will damage competition, especially as it comes with a related cross-marketing agreement for the firm’s broadband and content services; and that Verizon does not even need additional 4G frequencies yet (TMo claims it is using its own spectrum up to 50% more efficiently).
TMo could be a candidate to acquire any offloaded 700MHz spectrum, but is far more interested in more AWS assets coming to market, since it is building its own LTE network in that band, while moving its HSPA+ services to the PCS spectrum. Even smaller operators have been lukewarm about the A and B block holdings, although an exception is US Cellular, which said in a recent FCC filing that it was interested in the assets. CEO Mary Dillon met FCC chairman Julius Genachowski on May 8 and told him the proposed sale could benefit other carriers which own licences in Band Class 12 of the 700MHz band, which include C Spire Wireless and other regional and rural players. She also supported the idea of AT&T acquiring the licences, provided it supported the Band Class 12 ecosystem, giving it greater scale. Carriers in these frequencies have complained that it is hard to source attractive devices because of the fragmentation of the spectrum, and have called for the FCC to make roaming across the whole band, including Verizon’s and AT&T’s networks, to be made mandatory.
If TMo is battling for a role, LightSquared is almost out of the game. With an air of inevitability, it has filed for bankruptcy protection, its vision of creating a new mobile force in the US, with a wholesale LTE network in mobile satellite spectrum, trampled by the interference concerns of the GPS industry.
The company filed for Chapter XI protection hours before it would have defaulted on its debt, but pledged to keep its plans alive. Philip Falcone, head of LightSquared’s main backer Harbinger Capital Partners, said in a note to investors: "I am focused, as I have been throughout the course of this investment, on preserving and maximizing the value of LightSquared for the benefit of Harbinger's investors.” According to The Wall Street Journal, his note said a bankruptcy filing "was a necessary and appropriate decision by LightSquared to preserve its value”.
LightSquared listed more than $1bn in assets and debts. Recently it has axed about half the workforce, halted network build-out and trials, and ended a network hosting agreement with Sprint. Lenders had reportedly demanded, in the run-up to the Chapter XI filing, that Falcone step aside, to be replaced by an independent board; give up a large stake in the firm; and assume personal liability for a future bankruptcy. Falcone is said to have agreed to the first demand only.
Despite its defiant statements, the chances of LightSquared getting approval or financing to restart its LTE project are very slim. Should it get to the liquidation stage, it has a long list of creditors, including Boeing and Alcatel-Lucent, which are owed more than $7m each for satellite and communications kit.
Its main assets are its spectrum, which is worth far less without an FCC waiver to allow terrestrial networks to be built in frequencies originally earmarked only for satellite. It also has satellites, which could be repossessed by Boeing.
LightSquared’s brightest hope probably lies with Dish Network, which has already bought mobile satellite spectrum, in the S-band, from two bankrupt operators, and hopes to build an LTE-Advanced network. As satellite analyst Tim Farrar of TMF points out, the S-band frequencies – which are a safe distance from GPS and are currently being evaluated for an FCC waiver – could be combined with some of LightSquared’s L-band spectrum to increase Dish’s overall capacity. If it could secure the licences sufficiently cheaply from Chapter XI, it could still be worthwhile even if the frequencies with the GPS issues had to be left unused, at least in the short to medium term. Even with those deactivated, or used only for satellite services, Dish would still double its download capacity, says Farrar. Although Dish says it has sufficient spectrum to go ahead with its plan to deploy LTE-Advanced from 2013, subject to an FCC green light, most analysts believe it would quickly need a partner or acquisition to boost its capacity.
LightSquared failed to gain FCC approval for its plan to run a wholesale LTE network in mobile satellite spectrum, leaving its main asset, its spectrum, with very little value. Dish is seeking a similar waiver to the one denied to LightSquared, to run terrestrial-only LTE services in its own mobile satellite frequencies.
Along with Dish, Clearwire is the chief beneficiary of LightSquared’s failure. Its own network had been overshadowed by the newcomer, but now it is picking up some of the deals which would have gone to the satellite player, including Leap Wireless, and a place back near the heart of Sprint’s 4G strategy.
Clearwire has been widely expected to dump its own-branded retail business, on which it has defocused on the past two years, and adopt a wholesale-only model for its upcoming LTE network. However, at last week’s CTIA Wireless event, the operator said it would stay in the retail sector for the foreseeable future.
In its first quarter, fewer than 10% of net new subscribers on Clearwire’s existing WiMAX network were for its own-branded services, while 537,000 of a total of 586,000 were wholesale users. Most of those come from the ‘Sprint 4G’ WiMAX/CDMA offering, especially since Clearwire’s other main MVNO/investors, three cablecos, recently defected to a new Verizon partnership.
The operator is going through a significant transition in its business as it migrates from WiMAX to LTE in key markets, with the new network rolling out during 2013. Also, Sprint has stopped launching new WiMAX devices and will focus its 4G efforts on its own LTE network from the second half of this year, although Clearwire remains part of its mobile broadband picture in future. However, there is a risky period of a year or more when Clearwire does not yet have LTE and Sprint will have sufficient LTE capacity of its own, so the need for other MVNOs and even a retail business is clear, to sustain usage of the WiMAX network and boost confidence in the migration strategy.
As of the end of the first quarter, Clearwire had 11m subscribers, of which 1.3m were retail and 9.7m wholesale, mainly Sprint subscribers. During 2011, the firm had stopped actively promoting its own ‘Clear’ offering, officially to cut costs but also, reportedly, under pressure from Sprint, which perceived conflicts of interest with its own proposition. It killed off its prepaid Rover brand and refocused Clear on pay-as-you-go. But now, thanks to a funding deal with Sprint, Clearwire says it has more resources to revive Clear. "The retail business is alive and well," the firm’s general manager of retail, Dow Draper, told a press conference at CTIA.
He said Clearwire has revamped all its offerings recently and seen “phenomenal” uptake by dealers, as well as mounting a radio and TV advertising campaign in February. The operator offers prepaid daily, weekly and monthly passes and two different speeds - $50 a month for full soeed and $35 for 1.5Mbps. Draper said only those customers on the monthly plans are counted in the quarterly subscriber reports, and the vast majority have the $50 plan. This is geared to home and portable use, not to competing with the big cellcos’ smartphone 4G offerings – there are no plans to offer a WiMAX smartphone. Currently, Clearwire offers a dongle, mobile hotspot and home modem.
No official decision has yet been made on whether to include LTE in the Clear offering, or whether to launch a smartphone. This is likely to depend partly on the attitudes and level of commitment from LTE wholesale partners, not just Sprint but newer additions like Leap Wireless. "When it makes sense to add LTE to the retail mix, we'll do that," Draper said.
According to Clearwire’s CTO John Saw, when that LTE network goes live it will outpace other US services, supporting peak download speeds of 168Mbps because of the high capacity in its 2.5GHz spectrum. This will enable the operator to use LTE-Advanced carrier aggregation to achieve 40MHz channels, twice the size of the largest at Verizon and AT&T.