Sprint’s deal with Softbank is bad news for margin-obsessed Wall Street. More competition=lower profits.

Wall Street is turning a cold shoulder to today’s official announcement that Japan’s Softbank will acquire nearly 70% of Sprint-Nextel, giving effective control of the company to Japanese business magnet Masayoshi Son.

The $20.1 billion acquisition is the largest-ever foreign buyout by a Japanese company, made possible by the combination of a historically low U.S. dollar against the increasingly strong yen, giving Softbank even more value for money.

But outside of a handful of investment banks that stand to earn $200 million in fees for helping to advice the two companies about the deal, Wall Street is not happy.

“It’s a competitive headache,” said Christopher King, an analyst at Stifel Nicolaus & Co. The transaction is expected to infuse billions in new capital into perennially third-place Sprint, which is far behind its larger rivals AT&T and Verizon Wireless.

King and other Wall Street analysts fear a bolstered Sprint will spark new competition into the decreasingly competitive wireless marketplace. Softbank is well known in Japan for cut-throat pricing competition, something that could directly impact Verizon and AT&T’s increasingly expensive pricing for wireless service. Many on Wall Street fear an emboldened Sprint could overtake T-Mobile offering aggressively priced service plans.

[flv width=”360″ height=”290″]http://www.phillipdampier.com/video/Bloomberg King Says Sprint Deal Creates Competitive Headaches 10-15-12.mp4[/flv]

Stifel Nicolaus & Co., analyst Christopher King calls today’s announcement by Softbank and Sprint “a competitive headache” for the wireless industry, which may face more competition and lower prices.  (2 minutes)

Christopher King, an analyst for Stifel Nicolaus & Co., called the Sprint-Softbank deal a competitive headache.

Sprint is also expected to put Softbank’s investment to good use — acquiring additional spectrum and quickly upgrading its 4G LTE network, now under construction. The surprise investment could mean a more robust network for Sprint, an important objective for a company criticized for offering less coverage than its larger rivals.

Craig Moffett, an analyst with Sanford Bernstein, said Sprint’s aggressive upgrades are bad news because it means the company is going to spend a lot to improve service and presumably cut prices, which will hurt profit margins at Sprint and its competitors who may be forced to lower prices in turn to compete.

Consumers, especially existing Sprint customers, will likely celebrate a stronger Sprint, especially if it triggers a wireless price war.

The investment banks offering advice to both parties have little to complain about either. Citigroup and Raine Group LLC may earn as much as $200 million in direct fees from the deal. Softbank’s own advisers — Deutsche Bank and Mizuho Securities will earn $70-100 million. Sprint’s advisers — Citigroup, UBS, and Rothschild will likely earn an equal amount, according to Bloomberg News.

Investment bankers are hopeful the deal will help trigger another wave of wireless consolidation, which will bolster their fee earnings. In addition to Leap Wireless’ Cricket, there are at least a dozen independent regional carriers including C-Spire and US Cellular now ripe for acquisition by AT&T, Verizon Wireless, Sprint, or T-Mobile.

Softbank has been acquiring some of its own competitors back home in Japan, including eAccess, largely to gain additional spectrum to bolster its LTE 4G network build.

For now, the deal announced today does not include beleaguered Clearwire, but most Wall Street investors believe the Sprint-controlled company will eventually also be acquired.

[flv]http://www.phillipdampier.com/video/CNBC Sprinting Forward with Softbank 10-15-12.flv[/flv]

CNBC talks with Sanford Bernstein’s Craig Moffett, who is not thrilled with a deal that will leave Sprint on a spending spree to upgrade its network and potentially trigger a price war.  (4 minutes)

Softbank’s marketing is baffling to Americans. The company has produced more than 150 different ads featuring a “typical Japanese family” that is anything but. The Otosan (father) is portrayed as a white dog, accompanied by a more familiar Japanese mother, a daughter played by a famous Japanese pop star, and her African-American brother.

Softbank, Japan’s third largest cell phone company, is said to be in advanced talks with both Sprint-Nextel and Clearwire to acquire a $12.8 billion majority ownership interest in both companies, according to a report from Bloomberg News.

Softbank’s primary motivation isn’t a sudden interest in serving American cell phone users. It wants bigger discounts for expensive smartphones and other mobile equipment for its Japanese customers, and volume discount opportunities are wide open if the company can pool Sprint, Clearwire, and Softbank together as a single buyer.

CNBC reports Softbank originally sought a blockbuster deal with Deutsche Telekom’s T-Mobile USA, Sprint, and Clearwire to form one super-sized carrier, but the German owners of T-Mobile got cold feet and pulled out, fearing the Obama Administration’s antitrust concerns could ultimately torpedo the deal. DT recently proposed an offer for MetroPCS instead, a deal much more likely to pass regulator review.

The deal could provide much-needed financial backing for Sprint, currently embarked on its costly Network Vision plan to upgrade to 4G LTE service. Softbank also sees synergy with Clearwire, because both companies share the same frequencies and TDD LTE network technology, meaning smartphones compatible on one network will work on the other.

Sprint is still said to be considering making a counteroffer for MetroPCS, potentially pulling that company away from T-Mobile, while Leap Wireless’ Cricket also remains a potential takeover target.

Wall Street thinks a foreign player entering the U.S. market will have a much easier time winning regulator approval, because Softbank has no other interests in the U.S. market. The Justice Department and the Federal Communications Commission both ultimately rejected a previous attempt to merge AT&T and T-Mobile, fearing a larger AT&T would reduce competition and stifle innovation.

Softbank is a disruptive competitor in the Japanese cell phone market. It aggressively competes with KDDI and market leader NTT Docomo. The company is perhaps best known for its oddball, often mystifying marketing which features a talking dog interacting with well-known Hollywood stars, including Brad Pitt, Quentin Tarantino, and Tommy Lee Jones.

Ads feature a typical Japanese family played by atypical actors — a strict father played by a talking dog, a more familiar Japanese mother, a daughter played by a famous Japanese pop star, and her African-American brother. The ads are almost incomprehensible to North American audiences used to a more direct marketing approach. But Japanese audiences love the ads they consider both funny and more importantly, unexpected.

That latter theme is particularly important to Softbank’s image in the Japanese cell phone market. With 98.6% of the country ethnically Japanese, the unexpected family underlines the company’s efforts to shake up conventional cell phone service. Softbank is known for introducing unique plans that target different groups of cell phone users often neglected by larger carriers. First to take a chance with the iPhone to appeal to youth, Softbank also sells plans targeting older users that emphasize unlimited calling to family members.

If Softbank brings this type of marketing to the United States, it could challenge T-Mobile as America’s most disruptive carrier. Just don’t expect a talking dog to close the sale.

[flv]http://www.phillipdampier.com/video/CNBC Softbank Said to Be in Talks to Buy Sprint Nextel 10-11-12.flv[/flv]

CNBC covers the deal between Sprint, Clearwire, and Softbank that originally also included T-Mobile USA.  (3 minutes)

 [flv width=”640″ height=”380″]http://www.phillipdampier.com/video/Softbank Tommy Lee Jones.flv[/flv]

Softbank’s legendary ads have been running since June, 2007 and are beyond prolific. More than 150 different ads featuring “the Shirato family” have been produced so far, often with blockbuster Hollywood talent playing along. But most prove baffling to English-speaking audiences, such as this one featuring Tommy Lee Jones as a threatening maid with a uni-brow. (1 minute)

[flv width=”640″ height=”500″]http://www.phillipdampier.com/video/SoftBank Quentin Tarantino.flv[/flv]

Quentin Tarantino hams it up in these two impenetrable ads for Softbank. The rough translation from Japanese does not help much. It starts with the older woman asking Otosan (the dog) if he’s going to a town called Tosa. Otosan says yes. Then, the younger woman asks if Tarantino is also going, and he replies: “I am Tara!” (In the longer version, Tarantino does his Samurai impression “Hai-ya! Samurai spirit! Get him with the Samurai sword! Ho-ha!”)  Otosan responds, “I’m determined to go to Tosa!” The older woman tells Tarantino to calm down. When the phone rings, the younger woman says, “It’s the phone,” and the older woman says, “It’s your wife.” Tarantino gasps. The wife asks for Tara. Tarantino responds, “I am Tara!” His wife yells, “Get home right now!” (1 minute)

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/SoftBank Brad Pitt.flv[/flv]

Not every ad features the Shirato family. A barely recognizable Brad Pitt helps out while showing off some creative ways to use his built-in cell phone camera. (1 minute)

An industry orphan?

Sprint CEO Dan Hesse probably rues the day his Board of Directors pulled the plug on a merger deal that would have combined MetroPCS and Sprint back in February. The merger was abandoned after board members openly worried the transaction would distract Sprint from its network improvement project — dubbed Network Vision — then just getting underway.

The deal with T-Mobile and MetroPCS may have limited Sprint’s takeover options, although analysts say a hostile counteroffer for MetroPCS could still take the small carrier away from T-Mobile.

Hesse himself is a proponent of additional wireless industry consolidation. He believes the current market has too many wireless carriers and the two dominant providers — AT&T and Verizon — enjoy economy of scale Sprint cannot hope to achieve in its current position.

Hesse

Wall Street was more pessimistic about Sprint after the T-Mobile/MetroPCS merger was announced, suggesting they may be an industry orphan, pushed into a corner and running out of options.

Shares of Leap Wireless, the owner of Cricket, rose as much as 17 percent after the T-Mobile deal was announced, signaling Cricket is likely an endangered species. Leap’s cellular network is similar in scope to MetroPCS, although the two companies largely serve different markets. Wall Street’s favorite dance card has Sprint and Leap Wireless as future partners, and Sprint may be forced to acquire the smaller carrier to save face. Leap operates its own modest network of cell towers and has plans to roll out LTE 4G service to its customers. That spectrum could become important to Sprint, especially in the larger urban areas Cricket targets.

An endangered species.

Some Wall Street analysts say deals with MetroPCS, Leap, and other small regional carriers are small potatoes. Many advocate for a much larger merger between Sprint and T-Mobile to more realistically confront the de-facto duopoly of AT&T and Verizon Wireless.

Regulators under the Obama Administration may take a dim view of a merger that combines the third and fourth largest nationwide carriers, but nobody expects much regulatory resistance approving mergers that wipe out MetroPCS and Cricket.

“The problems that Sprint and T-Mobile have are they are not as big as AT&T and Verizon,” Piper Jaffray’s Chris Larsen told Bloomberg News in a phone interview. “They don’t have the scale so therefore it is harder to compete. Increasing your size 25 percent, it helps. But when you are less than half as big as your rival, getting 25 percent bigger narrows the gap, but it does not close the gap.”

[flv]http://www.phillipdampier.com/video/CNBC MetroPCS Down on Merger Reports 10-3-12.flv[/flv]

CNBC reports the T-Mobile/MetroPCS deal reignites wireless consolidation and leaves Sprint in a potentially difficult position.  (5 minutes)

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/Bloomberg Sprint Left Behind as MetroPCS Joins T-Mobile 10-3-12.flv[/flv]

Bloomberg News reports T-Mobile needs more subscribers, but some Wall Street analysts think the company is making a mistake focusing on the prepaid market.  (1 minute)

Apple’s iPhone 5 Wi-Fi bug is showing up on several wireless networks.

Wireless companies with usage caps are in the money — your money — if you happen to own Apple’s iPhone 5. A serious bug afflicting the phone’s ability to connect and hold a Wi-Fi connection when using certain wireless security protocols is chewing up customers’ data allowances and exposing them to overlimit fees, even when they think the phone is connected to a free use Wi-Fi network.

So far, Verizon Wireless has confirmed the problem is impacting their customers, but our readers report problems with AT&T and Sprint iPhones as well.

“Under certain circumstances, iPhone 5 may use Verizon cellular data while the phone is connected to a Wi-Fi network,” said Torod Neptune, a spokesman for Verizon. “Apple has a fix that is being delivered to Verizon customers right on their iPhone 5. Verizon Wireless customers will not be charged for any unwarranted cellular data usage.”

Stop the Cap! reader John Pozniewicz thinks that is nice of Verizon, and wonders when AT&T will start dealing with the nearly $100 in overage fees he has already run up on similarly afflicted iPhone 5 smartphones he bought just last week.

“As best as I can tell, the problem seems to relate to the type of Wi-Fi security protocol your router has enabled,” Pozniewicz reports. “Many in the Apple community forums and I both agree the most likely culprit is AES encryption.”

Sprint customer Halle Thompson also wrote Stop the Cap! yesterday reporting her Sprint iPhone 5 was unable to hold its Wi-Fi connection either, forcing her to deal with Sprint’s slow 3G network, even when at home.

“Thank goodness Sprint doesn’t have a usage limit and overage fees or they would own my house by now, because I use my phone for everything,” Thompson says.

Thompson switched off her router’s wireless security and the problem disappeared, but now her Internet connection is open to everyone in her apartment complex. Pozniewicz spent the weekend experimenting with wireless security protocols and quickly found AES caused his Wi-Fi connection to become unstable.

If your readers are having the same problems I am, here is a workaround that will keep your router reasonably secure and accessible until the pointy heads at Apple figure out this disaster:

Recommended Security Settings:

• WPA only (least secure)
• WPA2 only
• WPA or WPA2 with TKIP

Not recommended:

• AUTO – AES
• WPA or WPA2 with AES enabled
• WPA or WPA2 with both TKIP and AES enabled

Verizon Wireless has told customers it will credit back any overage fees incurred as a result of the bug, but only if they ask. Customers should also demand Verizon reset their allowance or at least note their account regarding the problem. Customers should request credit for overlimit fees for both September and October, because early reports indicate the software update designed to fix this problem has not worked in all cases.

Pozniewicz is having much less success with AT&T which so far has refused all comment on the debacle and has been unwilling to issue any service credits for overages. Pozniewicz is upset, noting he has only had his iPhone 5 for a week and it has already cost him and his company an extra $100.

“I am extremely careful about only using Wi-Fi for anything that will consume a lot of data, but my only clue there was a problem was when I noticed how slowly my so-called ‘Wi-Fi’ connection was performing at home and work and that is when I discovered it was not actually using Wi-Fi at all,” Pozniewicz says. “What is insidious about this is that the Wi-Fi connection is still showing on the phone display, even when I am actually using AT&T’s network.”

Thompson reports her phone does seem to initially connect to Wi-Fi, but then loses the connection seconds or minutes later, eventually switching to Sprint’s 3G or 4G cellular networks. Sprint’s unlimited data plan makes the issue just an inconvenience. For Pozniewicz’s company, which has a contract for a dozen iPhones 5’s with AT&T, the overlimit fees are really adding up. His employees are also quickly burning through their own monthly data allowances.

“AT&T is a pack of vampires and they don’t care about anything other than my money, even after talking to two supervisors, one of which implied I was either lying about the problem or an idiot,” he said.

Here is how iPhone 5 customers can check their data usage: Select Settings, then General, then Usage, then Cellular Usage to see what your phone reports you have used thus far. If the numbers seem wildly out of whack, contact your wireless carrier and let them know you may be afflicted with the iPhone 5 bug and have them note your account for future credit for any subsequent overlimit fees.

Verizon customers should have already received a software update in an effort to correct the problem. You can verify this by following these steps:

1. Select Settings, then General, then About.
2. Wait for the message “Carrier Settings Updated,” then touch OK.
3. Allow the update (if any) to install.
4. If your phone does not automatically restart after the update is complete, turn the phone off and then on again to complete the update.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/iPhone 5 Wifi connection issue.flv[/flv]

iPhone 5’s Wi-Fi problems documented by YouTube user “MNeuenswander,” who found changing the security protocol on his router seemed to resolve the problem.  (2 minutes)

[flv width=”360″ height=”290″]http://www.phillipdampier.com/video/Bloomberg Sprint Liquidity Doesnt Fix Company 9-26-12.mp4[/flv]

Sanford Bernstein’s Craig Moffett is back on Bloomberg News dismissing Sprint’s business strategy and lamenting the cost of subsidizing Apple’s iPhone 5 for existing customers who don’t really ‘need’ a new phone. Moffett sees all downsides for America’s third largest carrier (in May he gave the company a 50-50 shot of landing in bankruptcy court), trying to compete against a virtual duopoly successfully maintained by AT&T and Verizon. He thinks iPhone subsidies and purchase guarantees cost Sprint too much, their 4G LTE network is too little, too late (and will never perform as well as larger competitors who have lower frequency spectrum available for better reception), and their stock is overvalued. Wall Street routinely brings out analysts cheerleading additional mergers and acquisitions for further consolidation in the wireless market. By cutting down Sprint, Wall Street continues to emphasize it has already picked winners (AT&T and Verizon) and losers (Sprint, T-Mobile, everyone else).  (6 minutes)