In the race to acquire spectrum and market share, AT&T and Verizon Wireless have already won most of the awards worth taking and have little to fear from smaller competitors. The U.S. government has seen to that.

The two wireless giants have benefited enormously from government spectrum auctions that award the most favorable wireless spectrum to the highest bidder, a policy that retards competition and guarantees deep-pocketed companies will continue to dominate in the coverage wars.

Winner-take-all spectrum auctions have already proven that AT&T and Verizon are best equipped to bid and win coveted 700MHz spectrum which provides the best indoor and fringe-area reception. This is why AT&T and Verizon customers often find “more bars in more places” than customers relying on Sprint or T-Mobile. Smaller carriers typically have to offer service over much-higher frequencies that don’t penetrate buildings very well. With a reduced level of service, these competitors are at an immediate competitive disadvantage. They also must spend more for a larger number of cell towers to provide uniform service.

Verizon’s own presentation materials tout the benefits of controlling 700MHz spectrum, which is less costly to deploy and offers more robust coverage.

Sprint and T-Mobile have two strikes against them at the outset — less favorable spectrum and much smaller coverage areas. Customers who want the best reception under all circumstances usually get it from the biggest two players. Those focused primarily on price are willing to sacrifice that reception for a lower bill.

The same story is developing in the wireless data marketplace. AT&T and Verizon Wireless have the strongest networks as Sprint and T-Mobile fight to catch up.

Where America Went Wrong: The Repeal of Spectrum Caps

Tom Wheeler: America’s #1 advocate for repeal of Spectrum Caps is now the chairman of the FCC.

Originally, the United States prevented excessive market domination with a “Spectrum Cap,” — a maximum amount of wireless spectrum providers could hold in any local market. The rule was part of the sweeping changes in telecommunications law introduced in the mid-1990s. Wireless spectrum auctions replaced lotteries or strict frequency assignments based on merit. The U.S. government promoted the auction system as a win for the U.S. Treasury, which has been promised $60 billion in proceeds from the wireless industry (not the amount actually collected) since auctions began in 1994.

The cost to U.S. consumers from increasing cell phone bills in barely competitive markets is still adding up.

After the auction system was introduced, the largest carriers acquired some of the most favorable, lower-frequency spectrum, easily outbidding smaller rivals. Most of the smaller regional carriers that ultimately won coveted 700MHz spectrum emerged victorious only when AT&T and Verizon felt the smaller markets were not worth the investment. In larger markets, spectrum caps were a gatekeeper against acquiring excess spectrum and, more importantly, rampant industry consolidation.

Under the pre-2001 rules, wireless companies couldn’t own more than 45MHz of spectrum in a single urban area or more than 55MHz in a rural area. That was when Verizon and AT&T competed with carriers that no longer exist — old familiar names like Nextel, Cingular, VoiceStream, Alltel, Centennial Communications, Qwest, and many others considered safe from poaching because the most likely buyers would find themselves over their spectrum limits.

As the largest carriers realized the caps were an effective merger/buyout firewall, the wireless industry began a fierce lobbying campaign against them. Leading the charge was Tom Wheeler, then-president of the CTIA Wireless Association, the nation’s top cellular industry lobbying group. Today he is chairman of the Federal Communications Commission.

“Today, America faces a severe spectrum shortage for wireless services,” Wheeler said in 2001. “The spectrum cap is a legacy of spectrum abundance, not shortages; the inefficiencies it perpetuates cannot be allowed to continue. While the U.S. government is looking for ways to catch up to the rest of the world on spectrum allocations, removal of the cap can at least increase the efficiency of existing spectrum.”

Former FCC Commissioner Michael Copps opposed retiring Spectrum Caps: “Let’s not kid ourselves: This is, for some, more about corporate mergers than it is about anything else.”

Wheeler was backed by an intensive lobbying effort funded by the largest wireless companies itching to merge and acquire.

By the end of 2001, the new Bush Administration’s FCC was ready to deal, gradually repealing the spectrum caps and fueling major wireless industry consolidation in the process. Providers everywhere could now own or control 55MHz of spectrum in any market, with the promise the caps would be repealed altogether by March 2003.

The result was already foreseen by former FCC Commissioner Michael Copps in November 2001, when he strongly dissented to the Republican majority gung ho for dissolving spectrum caps.

“Let’s not kid ourselves: This is, for some, more about corporate mergers than it is about anything else,” Copps wrote in his strong dissent. “Just look at what the analysts are talking about as the specter of spectrum cap renewal approaches – their almost exclusive focus is on evaluating the candidates for corporate takeovers and handicapping the winners and losers in the spectrum bazaar we are about to open.”

Just in case Copps might be making headway in his campaign to protect competition, Wheeler began complaining even louder about spectrum caps during the spring of 2003, just before their dissolution.

“The wireless industry fought long and hard to secure this spectrum for America’s wireless consumers,” said Wheeler. “Now we must tread carefully — in this era of rapid technological change, writing rules that are too restrictive would be irresponsible. In order to use this spectrum both efficiently and effectively, those who purchase this spectrum at auction must be allowed the freedom to grow and evolve with the demands of the market.”

Europe: Protecting Consumers from Giant Multinational Competition Consolidators (Some of the same ones AT&T reportedly wants to buy)

There is a reason Europeans are shocked by the costs of wireless service in the United States and Canada. North Americans pay higher prices for less service than our European counterparts. Most of the New World also has fewer choices in near-equivalent service providers.

Much of this difference can be attributed to European regulators maintaining focus on driving competition forward and disallowing rampant industry consolidation. But as Wall Street turns its attentions increasingly towards Europe to push for the next big wave of wireless mergers, the European system of “competition first” could be undermined if providers follow the North American model of high profits and reduced competition through consolidation.

Across much of Europe, at least four national carriers serve each EU member state, almost all controlling a share of the most valued, low-frequency wireless spectrum. European regulators do not allow a small handful of providers to maintain a stranglehold on the most valuable radio spectrum. Competitors have traditionally been offered a spectrum foundation to build networks that can stand up to their larger counterparts — the large multinationals or ex-state monopoly providers who had a head start providing service.

A report released by Finland market research firm Rewheel in May found clear evidence that the European model was benefiting consumers at the expense of rampant provider profits. Europeans in “progressive” markets that welcomed new competitive entrants pay lower prices for far more service. In some cases, the price differences between the five giant multinational providers that dominate Europe — Vodafone, KPN, France Telecom, Telefonica and Deutsche Telekom — were staggering. Competitors like Tele2, TeliaSonera, and “3” charge up to ten times less than the larger companies for equal levels of service.

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“Europe is ripe for competition,” reports Bloomberg News. Providers like AT&T may be preparing to embark on a European wireless acquisition frenzy, but Wall Street warns profits are much lower because of robust price competition in Europe that benefits consumers. (4 minutes)

The study also found a number of the largest European providers were following in the footsteps of Verizon Wireless, AT&T, Rogers, Bell, and Telus here in North America:

• Prices were enormously higher in markets that lack effective competition from an upstart competitor able to deliver a comparable level of service. Smaller cell companies with very limited infrastructure or with non-favored spectrum could not provoke dominant players to cut prices because reception quality was starkly lower and consumers would have to cope with a reduced level of service. In Europe, when new competitors were able to fully build-out their networks using favorable spectrum, incumbents in these progressive markets slashed prices and boosted services to compete. In North America, upstart competitors cannot access favorable spectrum for financial reasons and the investor community has dismissed many of these players as afterthoughts, starving them of much-needed investment.
• Large dominant European providers are now heavily lobbying for deregulation of merger and acquisition rules and want the right to acquire the competition entering their markets.
• In almost half of the EU27 member state markets spectrum is utilized very inefficiently by the largest incumbent telco groups who are keen to protect their legacy fixed assets and cement their European dominance with more consolidation at the price of competition. In the United States and Canada, many of the largest providers crying the loudest for more wireless spectrum have still not used the spectrum already acquired.

From the Finnish report:

The obvious question that needs to be asked is how is it technologically possible and economically viable for Tele2, 3 and TeliaSonera to offer four times more gigabytes of data usage at a fraction of the price charged by larger companies.

• Do independent challengers have privileged access to more efficient technologies (i.e. LTE) than the E4 group members?
• Do they hold relatively more spectrum capacity than the E4 group members?
• Do independent challengers have access to more radio sites and their spectrum reuse factor is higher than the E4 group members?
• Or are independent challengers (i.e. Tele2, DNA) unprofitable?

None of the above are true.

The answer is actually very simple. Independent challengers and incumbents such as TeliaSonera present mainly in progressive markets are utilizing the spectrum resources assigned to them. In contrast, incumbent telco groups […] rather than utilizing their spectrum resources instead appear to be more concerned about keeping the unit price of mobile data very high […] by restricting supply, the same way the lawful “cartel” of OPEC controls the price of oil by turning the tap off.

In progressive markets (where at least one independent challenger is present, triggering spectrum utilization competition) such as Finland, Sweden, Austria and the UK, mobile data consumption per capita is up to ten times higher than in protected markets.

In some European countries dominated by the biggest players, consumers are being gouged for service. Where robust competition exists, prices are dramatically lower.

The European nation where market conditions are most similar to the United States is Germany. Two large carriers dominate the market: Deutsche Telekom, the former state-owned telephone company and Vodafone, part owner of Verizon Wireless.

In Germany, consumers spending €20 ($26) end up with a data plan offering as little as 200MB of usage per month. In progressive markets in adjacent countries, spending the same amount will buy an unlimited use data plan or at least one offering tens of gigabytes of usage. In short, German smartphone service is up to 100 times more restrictive than that found in nearby Scandinavia or in the United Kingdom. These same two companies charge Germans double what English customers pay and a Berliner will end up with 22 times less data service after the bill is settled.

So what is going on in Germany that allows the marketplace to stay so price-distorted? The fact all four significant competitors have close ties to or are owned by the large multinational telecom operators mentioned above. Deutsche Telekom, Vodafone, Telefonica and E-Plus, the latter one belonging to the Dutch KPN Group are all members of a lobbying organization attempting to persuade the EU to invest public funds into improving Europe’s wired broadband networks. Playing against that proposition is a growing number of Europeans moving to wireless. By charging dramatically higher wireless prices in Germany, all four companies have successfully argued that wireless adoption is not a significant reason to stall public financing of private broadband projects. In fact, Germany’s wireless growth is well below other EU nations.

The Finnish researchers point out the evidence of informal provider collusion is pretty stark in Germany:

“One would expect these ‘European Champions,’ especially the ones with lower market shares (Telefonica and E-Plus), to look at the smartphone centric market transformation as an opportunity to secure or improve their market share, especially in light of the fact they should have plenty of unused radio spectrum capacities to make their offers more consumer-appealing,” the report finds. But in fact these new entrants have priced their services very closely in alignment with the larger two.

“Undoubtedly, multinational incumbent telco groups and their investors have good reasons to lobby EU decision makers to enact friendly policies that will protect their inherited oligopolistic high profit margins,” the report states. “But will the German model serve the best interest of consumers and business in other EU member states? In Rewheel’s opinion, clearly not. Enforcing an overly ‘convergent player friendly’ German model would severely limit competition in the mobile markets, leading to high prices for consumers and the Internet of mobile things and sever under-utilization of the member states’ scarce national radio spectrum resources.”

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Competition is brutal in Europe’s wireless marketplace — a factor Bloomberg News says could temper AT&T’s planned “European Wireless Takeover.” What makes the difference between enormous profits in North America and heavy price discounting in Europe? Spectrum policy, which gives European competitors a more level playing field. Bloomberg analysts speculate AT&T will bankroll its rumored European buyouts and mergers with the enormous profits it earns from U.S. subscribers.  (4 minutes)

AT&T announced late Friday it was acquiring Leap Wireless for almost $1.2 billion — a premium of 88 percent over Leap’s stock price.

Creditors may be pleased. Leap Wireless had $2.8 billion of net debt which is expected to be retired by AT&T as part of the buyout. Go to https://www.edudebt.sg/achieve-debt-freedom-with-edudebts-expert-guide-to-debt-consolidation-plan-in-singapore/ to learn more about debt consolidation.

The Cricket prepaid brand is expected to survive the acquisition, at least for now. Unlike many other prepaid providers, Leap Wireless owns and operates its own CDMA and LTE cell network in its “home service” areas. The Cricket brand is best known for its PCS prepaid service, which is targeted almost exclusively in urban areas. Leap has an extensive roaming agreement with Sprint to provide service where its own cell network does not reach.

AT&T has not said if it will eventually convert Leap’s CDMA network to the standard AT&T uses — GSM. It may not be as important in the future as LTE becomes available to five million Cricket customers. AT&T said the purchase would open Cricket users to roaming on AT&T’s cellular and data networks, which cover a larger service area than Sprint. The biggest impact may be felt by Cricket’s dealer network. AT&T is likely to move the Cricket brand “in-house” and market it within AT&T stores.

Both AT&T and Verizon Wireless have been strongly urging on consolidation in the wireless provider market. Executives at both companies and several Wall Street analysts predict America will eventually have three major carriers, presumably Verizon, AT&T, and a consolidated Sprint, which could eventually acquire T-Mobile. These predictions all assume federal regulators will accept the wireless industry’s premise that fierce competition will remain with fewer providers. A handful of small independent providers may continue to exist as outliers, but most do not believe they will have any significant impact on the market share of the top three.

Many wireless industry observers believe AT&T is not interested in Leap/Cricket because of its business model. It is Leap’s spectrum holdings in large urban markets that makes it an attractive takeover target.

AT&T expects no problems with regulator approval and anticipates the acquisition will be complete by early 2014.

“The combined company will have the financial resources, scale and spectrum to better compete with other major national providers for customers interested in low-cost prepaid service,” AT&T said in a release on Friday.

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.

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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.

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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)

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.”

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

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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)

The parent company of T-Mobile USA has agreed to buy MetroPCS in a reverse stock split that leaves parent Deutsche Telekom able to eventually spin off the combined entity as an independent company and exit the U.S. market.

The merger will bolster T-Mobile’s mobile spectrum in several large cities, with up to 20MHz available for a robust LTE 4G network, better positioning the company to compete with third-place Sprint.

T-Mobile plans to decommission the smaller carrier’s CDMA network by 2015, gradually shifting  MetroPCS users to T-Mobile’s HSPA+ and LTE networks as customers purchase new equipment. MetroPCS customers will find T-Mobile phones for sale immediately after the deal closes.

“We have no plans to smash together T-Mobile’s GSM and MetroPCS’ CDMA customers together,” said T-Mobile CEO John Legere, defending against any comparison with the Sprint-Nextel merger. “We will be encouraging customers to switch to T-Mobile’s network as customers upgrade their phones.”

Legere says any customers still using MetroPCS’ network during the last 8-12 months before the network is decommissioned will be offered a strong incentive, such as a deeply discounted phone, to move.

Legere

Legere adds the deal will cement T-Mobile’s position as America’s only nationwide carrier offering truly unlimited 4G HSPA+/LTE wireless data service. Sprint’s network still largely depends on 3G and an older, slower standard called WiMAX. Legere says T-Mobile will now become the nation’s largest no-contract phone carrier, and will emphasize it welcomes customers who bring their own phones to the carrier.

Legere adds T-Mobile’s new 4G network will be able to rival the quality of its larger competitors when it is fully deployed.

“The T-Mobile and MetroPCS brands are a great strategic fit – both operationally and culturally,” René Obermann, the chief executive of Deutsche Telekom, said in a statement. “The new company will be the value leader in wireless with the scale, spectrum and financial and other resources to expand its geographic coverage, broaden choice among all types of customers and continue to innovate.”

But the merger also may trigger an even larger wave of wireless consolidation in the industry, as remaining players jockey for position in response to today’s announcement. Both Sprint and Leap Wireless, which owns Cricket, are under increasing pressure from investors to respond. Leap Wireless could soon face a takeover bid itself, either from T-Mobile USA or Sprint. Some investors are even calling for Sprint and T-Mobile to merge, becoming a more effective competitor for Verizon and AT&T.

The proposed  merger still needs approval from the Federal Communications Commission. Regulators are not likely to oppose deals with either MetroPCS or Leap Wireless, as both smaller carriers operate networks that largely do not overlap and both hold only a minuscule market share.

German investors wary about T-Mobile’s new emphasis on prepaid service, considered a negative in Europe, were reassured by Legere that Americans pay higher prices for prepaid, no contract service than what is prevalent in Europe.

The combined T-Mobile/MetroPCS remains the fourth place carrier with 42.5 million customers. Sprint has 56.4 million customers.

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T-Mobile CEO John Legere talks about the benefits of combining T-Mobile USA and MetroPCS. “This isn’t a deal to survive – it’s to thrive.” (5 minutes)