FBR: Mobile World Congress -Spectrum not so scarce!

by David Dixon, FBR & Co. (edited by Alan J Weissberger)


We saw mounting evidence at Mobile World Congress (MWC) last week that a new technology cycle is being quickly embraced by the cellular industry, which is generating no top-line growth and has an intense focus on costs (including spectrum, network, BSS and OSS platforms, and device subsidies).

This software-based technology cycle is expected to dramatically lower costs to rival WiFi economics and shift the equipment industry from hardware to a service based model built on commodity hardware.

Key Points & Implications for Cellcos & DISH:

■ Increasing spectrum reuse is challenging the spectrum supply scarcity thesis. As a spectrum asset play, despite the risk of a near-term sale of low band spectrum, we saw mounting evidence at MWC last week that:

(1) software and major changes in architecture design that are exponentially driving up spectrum reuse and improving the economics for new equipment deployed using current and future spectrum bands; and

(2) an increase in supply of capacity spectrum that rivals WiFi economics and is coming on stream faster than expected.

■ The implication is that in a 4G/5G environment, there may not be a spectrum supply challenge. If upcoming global “5”G mobility trials (using 28GHz and 3.5GHz spectrum) do not scale well due to an unacceptable increase in cell site density, then “5G” may be less of a major infrastructure investment and more of a discrete capacity overlay investment in dense areas, similar to 3G and 4G deployments.

■ Near term densification masks the technology shift:

Near term, wireless network capacity challenges continue to be addressed through higher cost macro densification and (to a lesser extent lately, due to extended zoning approval timeframes) small cell densification. But in this note we discuss below why it is misleading to determine a company’s spectrum shortage by simply calculating and comparing spectrum per customer.

■ We think Verizon’s larger strategic threat is cable, not lack of spectrum. Based on MWC regulatory checks, we also see greater likelihood of a Sprint (S)/T-Mobile USA (TMUS) merger, which would provide TMUS with useful low cost High Performance User Equipment (HPUE) and mid band spectrum at 2.5GHz and 2.6GHz. We think TMUS favors this over DISH spectrum due to the ability to immediately leverage capacity with device support this year.

Editor’s Note:  Sprint says HPUE has been in development for more than two years and that it will extend its 2.5 GHz coverage by up to 30 percent, including indoors where the majority of wireless traffic is generated.

■ Even if a S/TMUS merger were to fall through, we think a TMUS/DISH deal is unlikely. We see the wireless ecosystem quickly embracing this new low cost software-based technology cycle at a time when incremental investments in spectrum and network are negative, so we see a TMUS/DISH combination as unlikely.

■ DISH has assembled a potentially solid spectrum position, but the market values this spectrum too highly today. First, it needs to be combined with PCS, G, H, and AWS-4 bands to be optimal. Second, DISH is positioning its spectrum as downlink only, but with the advent of the smartphone camera and enterprise mobility, uplink and downlink traffic will become more balanced. Third, in light of declining wireless revenues, the wireless industry is undergoing a major strategic rethink with respect to spectrum utilization (i.e., use of unlicensed spectrum for low-cost small cell deployments where 80% of traffic is occurring).

■ The key to valuation is how soon the buyer of spectrum needs to move and the appetite for regulatory approval. AT&T and Verizon appear to be prime candidates, with major spectrum challenges in major markets, but they have the highest degree of regulatory risk and are in the midst of a strategic shift regarding their spectrum utilization paths going forward. Furthermore, even if there were appetite for a deal, we do not think a deal will be successful for either of the two major wireless operators until Sprint and/or T-Mobile US become significantly stronger operators. While the AWS-3 auction provided important market direction in valuing DISH s spectrum portfolio, DISH continues to face increased erosion of its pay TV customer base and needs to move quickly, in our view, despite extended build-out milestones.

■ Post-SoftBank and post-Clearwire, Sprint is well positioned on capacity for four or five years and does not need to move quickly; T-Mobile is well positioned on spectrum to manage capacity needs for four to five years, according to Ericsson, so we believe DISH should move to acquire T-Mobile ahead of a Comcast MVNO launch, but we see more strategic alliance opportunities between T-Mobile and Comcast or Google.

■ DISH faces a continued, competitive ARPU and churn disadvantage to cable operators and can only resell broadband. Network trials confirm major challenges with the fixed-broadband business model. We see a more challenging cash flow outlook as a result. Today, as the business slows, margin expansion comes from lower success-based installation costs, but fixed costs rise when DISH loses customers. DISH has to do something soon on the strategic front, particularly as AT&T is positioning to deploy fiber deeper across its access networks in additional markets, potentially covering an incremental 10 million to 15 million homes.


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