T-Mobile Sprint Merger Focus is on 5G and China Competition

T-Mobile USA and Sprint announced they would merge on Sunday. The combined company will be named T-Mobile, which says it “will be a force for positive change in the U.S. wireless, video, and broadband industries. The combination of spectrum holdings, resulting network scale, and expected run rate cost synergies of $6+ billion, representing a net present value (NPV) of $43+ billion will supercharge T-Mobile’s Un-carrier strategy to disrupt the marketplace and lay the foundation for U.S. companies and innovators to lead in the 5G era.”

T-Mobile said in that same referenced press release:

The New T-Mobile will have the network capacity to rapidly create a nationwide 5G network with the breadth and depth needed to enable U.S. firms and entrepreneurs to continue to lead the world in the coming 5G era, as U.S. companies did in 4G. The new company will be able to light up a broad and deep 5G network faster than either company could separately. T-Mobile deployed nationwide LTE twice as fast as Verizon and three times faster than AT&T, and the combined company is positioned to do the same in 5G with deep spectrum assets and network capacity.

The combined company will have lower costs, greater economies of scale, and the resources to provide U.S. consumers and businesses with lower prices, better quality, unmatched value, and greater competition. The New T-Mobile will employ more people than both companies separately and create thousands of new American jobs.

While T-Mobile (AKA “the un-carrier”) has been growing quickly, Sprint has been recovering from its worst days.  It’s still growing slowly and bleeding cash, with 54.6 million users across its various brands. “This deal is probably more necessary for Sprint than T-Mobile,” said Amy Yong, a research analyst at Macquarie Capital.

All the stars have aligned,” Marcelo Claure, Sprint’s chief executive, said in an interview. He added that the deal “allows this company to offer the best product at better prices, lower prices.”

Putting together the country’s third- and fourth-largest mobile service providers would be one of the most significant consolidations in the U.S. wireless market in years. A combined T-Mobile and Sprint, with almost 100 million retail subscribers as of Dec. 31st, would put it ahead of AT&T, with 93.6 million, and not far behind Verizon’s 116.3 million. (Or, as the colorful Mr. Legere put it, the transaction would help it better compete against the companies that he has previously referred to as “dumb and dumber.”)

Behind the Merger — Funding the 5G Infrastructure Build-Out:

A huge part of T-Mobile and Sprint’s push is emphasizing the future of 5G. Proponents say the superfast wireless standard (in late 2020 IMT 2020 standard by ITU-R WP5D is scheduled for its first release)  would not only make downloading movies faster, but underpin huge advances in autonomous vehicles, internet-connected devices and more.

Wireless network operators are preparing to spend billions of dollars to expand their pre-standard “5G” infrastructure.  Sprint and T-Mobile would have much more difficulty than competitors in funding that “5G” build-out. Sprint has about $32 billion in debt on its books, while T-Mobile generates a small fraction of the cash that Verizon and AT&T do.

Again, quoting from T-Mobile’s press release:

Neither company standing alone can create a nationwide 5G network with the breadth and depth required to fuel the next wave of mobile Internet innovation in the U.S. and answer competitive challenges from abroad.

……………………………………………………………………………………………………………………………………………………………….

Traditional wireless telecoms (like AT&T and Verizon) now find themselves competing against newer contenders looking to chip away at their wireless market share. Comcast and Charter Communications are cable companies/MSOs each with a large installed base of broadband cable Internet customers that have begun offering wireless service plans to their subscribers, mostly as MVNOs.

As pre-standard 5G is first being positioned for fixed wireless broadband access, the unified T-Mobile and Sprint would ostensibly compete against cable providers like Comcast and Charter in addition to wireless mega telcoms AT&T and Verizon.  While the IMT 2020 forthcoming ITU-R standard doesn’t implicitly acknowledge “5G fixed broadband access” there is some justification for the combined company to compete with MSOs/Cablecos, AT&T (U-Verse and AT&T Fiber) and Verizon (FiOS).

In addition to varying coverage maps, the two wireless carriers have wide swaths of spectrum that only sometimes overlap (Sprint has the 800MHz and 2.5GHz bands, while T-Mobile has 600MHz and 700MHz). You could see more comprehensive coverage from the merged entity (the new T-Mobile). Moreover, there’s no question that gigabit bandwidth and low latency make that a more of a viable option for fixed broadband internet access. The first “5G” deployments are focused on replacing broadband, not upgrading the smartphone, other mobile gadgets or IoT devices.

T-Mobile CEO John Legere took it further saying, “Global tech leadership in the next decade is at stake. And only the new T-Mobile will have the network and spectrum capacity to quickly create a broad and deep 5G network in the first few years of the 5G innovation cycle, the years that will determine if American firms lead or follow in the 5G digital economy.”

The China Factor:

The hidden agenda here from T-Mobile and Sprint is that failure to keep up in 5G would give China and Chinese firms a huge competitive technology edge.  The Trump administration has called 5G a “national priority” and hinted at building a nationwide 5G network, primarily to compete against China (that rumor was later denied).

In March, the Trump administration blocked a hostile bid by Singapore-based Broadcom for San Diego-based Qualcomm, citing national security concerns. Some analysts questioned whether the predominantly foreign ownership of the combined company — including SoftBank, which has business ties to Chinese companies like Huawei — posed possible national security risks.

They kept pointing to China on the call, but that is just a nice way to grease the skids,” said Will Townsend, an analyst with Moor Insights and Strategy, a research firm based in Texas, referring to a T-Mobile conference call with reporters and analysts on Sunday.

The focus on China does raise tricky questions for Sprint’s controlling shareholder, the Japanese conglomerate SoftBank, which buys telecom equipment from Chinese manufacturers. Still, most experts agree that the deal would produce a healthier company, one with more financial resources to pursue 5G. And where the rivalry in advanced industries between the United States and China is concerned, the prize is significant.

Many pundits (but not this author) say that 5G will impact a huge set of future economic and technological opportunities — from self-driving cars to smart cities and factories to virtual and augmented reality requiring huge amounts of bandwidth and/or low latency.

It’s hard to argue that 5G is not key to the next five to 10 years,” said Chris Lane, a telecom analyst in Hong Kong with Sanford C. Bernstein. “Strategically, if you’re the U.S. and you’re trying to plan industrial policy, this deal makes sense.”

Mobile carriers in China have already announced bold plans to roll out 5G networks, and it is unlikely that the creation of a new American wireless giant would affect them. China Mobile, which has nearly 900 million wireless customers, is aiming to begin large-scale 5G trials in several Chinese cities this year.

Other Chinese companies are still vulnerable to American pressure, though. In particular, the United States government has placed restrictions on one giant Chinese supplier of the equipment that will make those new networks possible, and is investigating another.

For years, Huawei and ZTE have been unable to sell to large American wireless operators over security concerns. But the Department of Commerce recently went further, blocking ZTE from using American-made components for seven years, saying the company had failed to reprimand employees who violated American sanctions against Iran and North Korea.

ZTE now faces the prospect of being unable to manufacture network gear during the years in which wireless providers in China and elsewhere will most likely be building 5G networks. Huawei, meanwhile, faces an ongoing inquiry related to violations of American trade controls.

Serious disruption to either company’s business could mean a boon for their main rivals in telecommunications equipment, Nokia of Finland and Ericsson of Sweden.

It could also put SoftBank in an awkward position.

SoftBank has been working with ZTE in Japan, but now they have to try to find other partners,” said Tsutsumu Ishikawa, an independent expert in Tokyo who covers the mobile industry.

As T-Mobile and Sprint seek Washington’s blessing for their union, the Trump administration might even require that SoftBank drop Huawei and ZTE as suppliers, said Mr. Lane of Bernstein. Masayoshi Son, SoftBank’s founder, has also cultivated personal ties with President Trump.

If the administration for whatever reason doesn’t want Chinese suppliers of network equipment in Japan, either — and it’s possible — then I’m sure Masa would be willing to compromise,” Mr. Lane said, using Mr. Son’s nickname. “I think he’s quite pragmatic.”

A lot of people are genuinely struggling to figure out, ‘What is the business case for 5G?’” said Ramakrishna Maruvada, a telecom analyst in Singapore with Daiwa Capital Markets. “Most operators do not think faster consumer broadband is a good enough reason to be pursuing a huge leap in technology.”  [This author absolutely agrees.  However, low latency is probably more important than bandwidth for many “5G” applications like real time control of IoT devices/equipment, autonomous vehicle to vehicle communications, and virtual reality/augmented reality.]

 

 

 

 

 

17 thoughts on “T-Mobile Sprint Merger Focus is on 5G and China Competition

  1. I still think this no cash deal is mostly about improving market credibility for one reason:
    Improving access to credit and/or further investment capital.
    Improved access includes (naturally) better terms for mobile subscribers

  2. Resistance to the deal from consumers is fear that the reduction to 3 wireless operators will cause price increases.
    They should also consider what will happen if one of these two firms collapses, as Sprint might do.

  3. Good summary, Alan. The final comment about 5G and its business case is a good one to end on. Is 5G a nice-to-have or a must-have and is there really an urgency and/or national security reason to justify the hype?

    Dave Burstein has some pretty good evidence from other markets that having 4 competitors versus 3 competitors is important in ensuring there isn’t an oligopoly. The question is whether another competitor (Comcast, Google’s Project Fi, etc.) would rise to become a 4th national wireless entity if Sprint goes away?

  4. Resistance to the deal from consumers is fear that the reduction to 3 wireless operators will cause price increases.
    They should also consider what will happen if one of these two firms collapses, as Sprint might do.
    ………………………………………………………………………………………………………….
    Just to carry your speculation a little further.
    The consumer needs to think about who would pick up the pieces should Sprint collapse.
    The proposed “merger” seems better than that.
    …………………………………………………………………………………….
    My concern about the merger is that it will reduce the pressure that keeps pricing competitive in wireless.

  5. From Wayne Duggan, U.S.News & World Report May 1, 2018:

    Even if the Sprint buyout is eventually allowed to proceed, the regulatory approval process will be a long-term distraction to T-Mobile and Sprint. T-Mobile has said it expects the deal to be completed in the first half of 2019, but analysts are skeptical of that timetable.

    Morgan Stanley analyst Simon Flannery says Verizon and AT&T ( T) could also benefit from any court-ordered T-Mobile asset sales that are part of the approval process.

    “Verizon could benefit from fewer competitors for spectrum assets and potentially even gain access to some divested spectrum,” Flannery says.

    In addition, Flannery says reducing the number of top U.S. wireless service providers from four to three would likely ease some competitive pricing pressures on Verizon, likely one of the primary concerns among regulators.

    “AT&T and Verizon could benefit from market consolidation, although the new T-Mobile would be a formidable competitor particularly in new areas such as 5G and fixed broadband,” Flannery says.

    Bank of America analyst David Barden says the pattern of price cutting and aggressive promotions in the wireless market might ease up if the deal is approved.

    “Assuming a tie-up of S/TMUS is approved, we believe it would repair some of the market and potentially see the three companies act more rationally,” Barden says.

    Barden says T-Mobile will try to make the case that a merger with Sprint would provide a true threat to Verizon, but Barden isn’t buying it.

    “We think moving from a four- to three-player market structure should benefit the industry over time,” he says.

  6. 5G for All:

    5G plans have propelled the merger deal between the United States’ third and fourth biggest telcos. After several failed attempts to merge, this one could work out, but is subject to regulatory approval that the telecom world will be watching closely. According to the companies, the combined 5G network will leverage both T-Mobile’s 5G plans to use the 600MHz band of spectrum and Sprint’s plans for the 2.5GHz band to build “the highest capacity mobile network in US history.”

    YouTube Video: https://www.youtube.com/watch?time_continue=2&v=1nsbmtwMrgY

  7. Sprint and T-Mobile: A coalition of also-rans
    Once upon a time, two wireless carriers were struggling to survive in a cutthroat business. They tried going it alone, and even almost married other players. But each seemed to find a kindred spirit in the other, and they soon began a courtship. After months of rumors, false starts and premature breakups, T-Mobile and Sprint are finally getting together. Well, pending regulatory approval, anyway. Their respective parent companies Deutsche Telekom and Softbank have reached an agreement to merge the two US carriers, and they’re calling the resulting company the “New T-Mobile.” No cute couple name here (sad, I’d fully ship Spree-Mobile or Trint), but the combined organization would be worth a total of $146 billion and cover almost 100 million subscribers.

    The ramifications of this union are significant. Not only would this cut the number of US national carriers from four to three, but it could also spur serious change in the wireless industry, and it all boils down to one crucial reason: better competition. That sounds a little counter-intuitive, since cutting the number of national carriers seems on the surface like it’s reducing competition.

    Much of the announcement focused on how the union could boost the new T-Mobile’s position in the race to deliver a widely available 5G network. The first 5G-ready phones are expected to be available in 2019, which would put pressure on carriers that risk losing disgruntled customers to rivals that beat them to the punch.

    The company was up front about why the merger was necessary if either individual partner was to even have a hope in taking on AT&T, Verizon and international rivals. “Neither company standing alone can create a nationwide 5G network with the breadth and depth required to fuel the next wave of mobile Internet innovation in the U.S. and answer competitive challenges from abroad,” T-Mobile said.

    5G offers something of a fresh start for the carriers. T-Mobile and Sprint, which struggled mightily in the 4G rollout (hey, WiMax!), will have an opportunity to reinvent themselves in a less established arena. Though AT&T and Verizon own most of the recently freed up spectrum that will power the new standard, the combined Sprint and T-Mobile airwaves put them in a better position to build out coverage. Plus, the merged entity can spend more on infrastructure. By pooling their resources, Sprint and T-Mobile should be able to get off to a faster start in the 5G race.

    That’s not to say the union will fix all their problems or give them a lead. It would take years to technologically integrate the two networks, and T-Mobile has said the merger would take three years to complete. In that time, AT&T and Verizon will continue to plow ahead on 5G, and they don’t have to deal with the messy minutiae of a merger on the side, either.

    https://www.engadget.com/2018/05/01/sprint-t-mobile-merger-story/

  8. NY Times Opinion: Letting Sprint and T-Mobile Merge Is a Terrible Idea

    The merits of some mergers make for a close case, but the proposed merger between the mobile carriers Sprint and T-Mobile, which would create a new telecommunications behemoth, is not one of them. Basic economics strongly suggests the proposed combination should be dead on arrival, at least if the nation’s antitrust law still stands for competition and lower prices for consumers. In addition, the recent history of telecommunications and similar industries indicates that allowing consolidation to just three “majors” — Verizon, AT&T and the new T-Mobile (merged with Sprint) — is a terrible idea.

    The problem for Sprint and T-Mobile is that they themselves have done such a good job of proving the merits of the four-way competition they now seek to eliminate. In 2011, the government held the line at four competitors by blocking a proposed merger between AT&T and T-Mobile, and it did so again in 2014, when it blocked an effort by Sprint to buy T-Mobile. Result: The “wireless wars” — intense price and service competition that even skeptics of government action concede have been good for consumers and the economy.

    T-Mobile, the self-proclaimed “uncarrier,” has done an admirable job of attacking termination fees, abusive contracts and other mistreatment — often outperforming regulators as an agent of consumer protection. Sprint, meanwhile, has come to excel in its role as a price-cutting maverick. Allow me to advertise for Sprint: Did you know that it offers a service for $60 with an unlimited data plan?

    In short, competition has actually worked the way economists say it is supposed to, forcing firms to improve quality or face elimination. But it takes competitors to compete, which is where blocking mergers comes in. That’s a point well demonstrated by the case of the airline industry, where the government let the mergers happen. Over the last decade, Delta was allowed to buy Northwest, United to buy Continental, and American to buy US Airways, leaving behind just three majors. What happened next demonstrates the “curse of triopoly” in all its terrible glory.

    If the 2010s were good years for mobile customers, they have not been happy years for airline passengers. Instead, the three major airlines spent the same period finding ways to give less for more: fewer flights (more crowded planes), smaller seats, fewer flight attendants, higher baggage and change fees and a stubborn resistance to lowering fares, even as oil prices plummeted. All this was made possible, indeed easy, given limited competition, for there was no “unairline” of national stature to keep the airlines honest. (Southwest came closest.) As a result, the airline industry has become astonishingly profitable — last year it made more than $5 billion in baggage and change fees alone — while the mistreatment of consumers has become a regular feature of the evening news.

    So if you want the mobile industry to look more like the airline industry, the proposed merger of Sprint and T-Mobile is the one for you. But the chief executives of Sprint and T-Mobile, Marcelo Claure and John Legere, insist that they will be different, and have both now taken to dressing like aging rock stars to underline their maverick status. They say that they will still challenge Verizon and AT&T with low prices and have promised an enticing, Trump-tailored menu including the spending of billions of dollars on a 5G network, which they link to “three million new jobs,” while also presumably paying off some of Sprint’s $33 billion in debt.
    It is safe to say that the mathematics don’t quite add up. T-Mobile and Sprint are already doing a good job threatening AT&T and Verizon with their lower prices and better contracts. The real effect of the merger will be to decrease the incentives of anyone in the industry to lower prices further and to provide plenty of new reasons to raise them. The new T-Mobile, without Sprint nipping at its heels, will surely notice that there’s now nothing to stop it from adding new fees — for where, exactly, are consumers supposed to turn? Perhaps Mr. Legere, who would run the merged company, considers himself a man invulnerable to mere financial pressure, but that is quite a bet on a man who is, after all, only an employee.

    The last and most absurd of the arguments for approving the merger is that it will help America “win the race to 5G” (that is, to be the first to build an advanced, fifth generation network) against a shadowy Chinese and Korean menace. (The Japanese and Germans, the actual owners of Sprint and T-Mobile, are spared villainous status this time around.) The whole idea of a “race” is a way to lobby Congress and regulators by stoking Strangelovian fears of a “5G gap.”

    Granted, spending on infrastructure is important; but killing competitors is an irresponsible way to try and promote it. As history shows and as the antitrust laws dictate, the United States does better by betting on the competitive process.

    https://www.nytimes.com/2018/05/01/opinion/sprint-t-mobile-merger.html

  9. T-Mobile and Sprint don’t need to merge for 5G—they said so two months ago

    One of the US’ most successful mobile broadband providers is acquiring a struggling, smaller competitor, but it needs government approval of the merger. To make their case, the merging companies tell regulators that they can’t fully upgrade to the next generation of wireless technology as standalone firms. They must join forces, or US wireless consumers won’t benefit from an upgraded network, the companies say.

    That description applies equally well to AT&T’s attempted takeover of T-Mobile USA in 2011 and to T-Mobile’s just-announced plan to buy Sprint. Obama administration regulators rejected the AT&T/T-Mobile claims in 2011 and forced the companies to continue operating separately. Each one thrived on its own.

    Trump administration regulators might see similarities between the network upgrade claims of AT&T in 2011 and T-Mobile today. They could even look at statements made by T-Mobile and Sprint just a couple of months ago, when each company said it was on track for a huge 5G deployment—without any mention of needing a merger. But the Federal Communications Commission’s new Republican leadership is far more friendly to telecoms than Democrats were, and it could approve the T-Mobile/Sprint combination without much fuss.

    The failed AT&T/T-Mobile merger- After calling off their merger in December 2011, both AT&T and T-Mobile completed the jump from 3G to 4G. AT&T has maintained its dominant market position along with Verizon Wireless. T-Mobile leapfrogged Sprint to become the nation’s third-biggest carrier and routinely claims (whether accurately or not) that its network is even better than AT&T’s and Verizon’s.

    But suddenly, after years of boasting about how its network is the best in the US, T-Mobile says it can’t possibly make an effective move from 4G to 5G unless it is allowed to buy Sprint. The change in rhetoric might be less surprising if T-Mobile’s previous claims about its network had been limited to its ability to deploy 4G. But as recently as two months ago, T-Mobile said it would “build out 5G in 30 cities this year” and that it would deliver “a truly transformative 5G experience on your smartphone nationwide.”

    “T-Mobile is in a unique position with 5G, with its unpopulated spectrum holdings and multi-spectrum strategy,” the company said on February 27. “While other wireless companies must kick customers off their congested LTE networks to build out 5G, the Un-carrier is building 5G on wide-open airwaves.”

    Sprint CEO Marcelo Claure, meanwhile, told investors in February that Sprint’s “strong spectrum assets” will enable “Sprint to be the leader in the true mobile 5G.” Sprint kept up the positive notes on 5G on February 27, claiming it would “deliver the nation’s first 5G mobile network in the first half of 2019.”

    Something must have changed dramatically in the past nine weeks. When announcing the merger on Sunday, T-Mobile and Sprint said, “Neither company standing alone can create a nationwide 5G network with the breadth and depth required to fuel the next wave of mobile Internet innovation in the US and answer competitive challenges from abroad.”

    https://arstechnica.com/tech-policy/2018/05/t-mobile-and-sprint-dont-need-to-merge-for-5g-they-said-so-two-months-ago/

  10. Alan Weissberger, thanks for your insightful analysis of the proposed T-Mobile — Sprint merger! And thanks for sharing your great posts every week!

  11. T-Mobile Sprint merger is mostly about T-Mobile acquiring Sprint’s subscribers. The proposed stock swap is a cashless transaction to give T-Mobile the first crack at Sprint’s customers at a substantially discounted price.
    1. T-Mobile’s market cap per subscriber is about 1.7X higher than that of Sprint.
    2. Assuming T-Mobile can retain Sprint customers the proposed acquisition would give T-Mobile a subscriber base and scale that would be comparable to either Verizon or AT&T.
    3. T-Mobile would, over time, shut down an unstainable Sprint’s network.

    Much of the talk about 5G, in the context, is only relevant because the merged company would likely have the muscle to expand and enhance its network. Maybe, by then, we will all know what 5G is other than it is faster than 4G!!

  12. NY Times: Sprint and T-Mobile C.E.O.s Are in Washington to Sell Their Merger. Here’s What They’ll Confront

    From the moment T-Mobile and Sprint announced their $26.5 billion merger on Sunday, the wireless carriers have positioned their proposed deal with an eye toward Washington. After all, regulators in the Obama administration blocked one of their previous efforts to combine.

    This time around, the chief executives of the companies emphasized that merging would help them to:

    ■ Build a next-generation wireless network, one robust enough to keep up with China in a growing technological arms race;

    ■ Create thousands of jobs, especially in rural areas;

    ■ Keep prices low for consumers, especially as cable companies like Comcast try to enter the market.

    Not everyone is convinced they’ll do everything. The heads of both companies began a charm offensive in Washington on Tuesday May 2nd.

    https://www.nytimes.com/2018/05/01/business/dealbook/sprint-tmobile-merger-regulatory-approval.html

  13. Verizon CEO couldn’t care less about T-Mobile and Sprint’s $26B merger. Lowell McAdam is skeptical the tie-up will lead to a more competitive market for high-speed 5G wireless broadband access.
    T-Mobile’s plan to merge with wireless rival Sprint doesn’t even rate a blip on Verizon’s radar.

    That was Verizon CEO Lowell McAdam’s reaction Wednesday when asked his opinion about the $26 billion deal between the third- and fourth-largest US wireless carriers.

    “We don’t care, is the answer to that,” McAdam told GeekWire, facetiously alluding to past attempts by T-Mobile to merge with Sprint and AT&T. “Maybe the fourth time is the charm here, I don’t know.”

    The deal, announced Sunday, comes amid intense competition among US carriers to win customers, leading to freebies like access to Netflix, as well as a renewed eagerness to court smartphone users with unlimited data. Sprint is still giving away a year of service for free. Those competitive pressures have driven T-Mobile and Sprint together.

    McAdam expressed skepticism that the deal would make the US more competitive in the emerging market for high-speed 5G wireless broadband access.

    “In the areas like 5G, we’ve been pushing forward with that strategy,” he said. “I don’t think that merger matters from a 5G perspective. We’re going to do it regardless and we’re way ahead of everybody. We’ve made all the investments that are required in fiber and millimeter wave spectrum and those sorts of things.”
    https://www.cnet.com/news/verizon-ceo-couldnt-care-less-about-t-mobile-and-sprints-26b-merger/

  14. This article is one of the best-motivated articles on the proposed merger of T-Mobile and Sprint. Therefore it is extremely informative and enlightening especially on the 5G and China Factor
    Thanks

  15. WSJ 9/2018: The 5G Race: China and U.S. Battle to Control World’s Fastest Wireless Internet

    The early waves of mobile communications were largely driven by American and European companies. As the next era of 5G approaches, promising to again transform the way people use the internet, a battle is on to determine whether the U.S. or China will dominate.

    Equipment makers and telecom operators in both countries are rushing to test and roll out the next generation of wireless networks, which will be as much as 100 times faster than the current 4G standard. Governments are involved as well—with China making the bigger push.

    The new networks are expected to enable the steering of driverless cars and doctors to perform complex surgeries remotely. They could power connected appliances in the so-called Internet of Things, and virtual and augmented reality. Towers would beam high-speed internet to devices, reducing reliance on cables and Wi-Fi.

    At the Shenzhen headquarters of Huawei Technologies Co., executives and researchers gathered in July to celebrate one of its technologies being named a critical part of 5G. The man who invented it, Turkish scientist Erdal Arikan, was greeted with thunderous applause. The win meant a stream of future royalties and leverage for the company—and it marked a milestone in China’s quest to dominate the technology.

    At a Verizon Communications Inc. lab in Bedminster, N.J., recently, computer screens showed engineers how glare-resistant window coatings can interfere with delivering 5G’s superfast internet into homes. A model of a head known as Mrs. Head tested the audio quality of new wireless devices. Verizon began experimenting with 5G in 11 markets last year.

    Nearby, in Murray Hill, N.J., Nokia Corp. engineers are testing a 5G-compatible sleeve that factory workers could wear like an arm brace during their shifts to steer drones or monitor their vital signs. The company began its 5G-related research in 2007.

    While the economics of 5G are still being worked out, boosters say the potential payoffs are immense. Companies that own patents stand to make billions of dollars in royalties. Countries with the largest and most reliable networks will have a head start in developing the technologies enabled by faster speeds. The dominant equipment suppliers could give national intelligence agencies and militaries an advantage in spying on or disrupting rival countries’ networks.

    “As we face the future, we know deep down that the birth of 5G standards represents a new beginning,” Huawei’s chairman, Eric Xu, told the audience at the company event.

    Hans Vestberg, Verizon’s chief executive officer, speaks of the technology in equally dramatic terms. “We are strong believers that 5G [will have] a very transformative effect on many things in our society,” he said. “Consumer, media, entertainment…whole industries.”

    By some measures, China is ahead. Since 2013, a government-led committee has worked with China’s mobile carriers and gear-makers on testing and development. The state-led approach, combined with an enormous domestic market, ensures that Chinese companies such as Huawei will sell large quantities of 5G equipment and gain valuable experience in the process.

    In the U.S., where the government typically avoids mandating and coordinating efforts by the private sector, much of the experimentation has been led by companies such as AT&T Inc., Verizon, Samsung Electronics Co. and Nokia. Last week, tech companies including Intel Corp. and Cisco Systems Inc. argued in comments filed to the U.S. Trade Representative that proposed tariffs would raise the cost of routers, switches and other goods, slowing development of 5G.

    Three of the major carriers plan to roll out 5G service in select cities later this year, though most mobile devices compatible with the new network won’t be ready until early 2019.

    The race to 5G has come with tit-for-tat regulatory moves aimed at securing each country’s advantage. In March, the Trump administration blocked Singapore-based Broadcom’s acquisition of U.S. chip giant and 5G leader Qualcomm Inc., citing concerns that Broadcom would cut the company’s research and development funds and allow Chinese companies to pull ahead in 5G.

    In July, China squelched Qualcomm’s planned acquisition of Dutch chip maker NXP Semiconductors NV, a deal that would have helped Qualcomm profit from 5G investments in new markets such as connected cars.

    Much of the U.S. unease stems from the rising clout of Huawei, which was labeled a national-security threat, along with ZTE Corp. , by a Congressional panel in 2012 that said those firms’ equipment could be used for spying on Americans. In August, aligning itself with the U.S., Australia said it was banning Huawei and ZTE equipment from its 5G network. Other U.S. allies are studying similar bans.

    Huawei and ZTE have consistently denied providing government agencies with backdoor access to their products. Beijing has likewise pushed to replace or sideline U.S. high-tech firms within China’s networks on fears of espionage.

    China has made 5G a priority after failing to keep pace with Western countries in developing previous generations of mobile networks. The U.S. dominated 4G, built in the late 2000s, much in the same way Europeans controlled 3G standards. The American lead in 4G has been a boon to companies such as Apple Inc. and Qualcomm, and helped give rise to a host of consumer smartphone applications from the U.S.

    Since 2015, China has built about 350,000 cell sites, compared with fewer than 30,000 in the U.S., according to an August study by consulting firm Deloitte. It also noted China has 14.1 sites for every 10,000 people, compared with 4.7 in the U.S. That matters for 5G, because the new networks will require much larger numbers of cell sites than 4G.

    The physical manifestation of China’s push is a government-run 5G lab near the Great Wall north of Beijing. The sprawling facility is festooned with base stations and prototype mobile devices, with indoor and outdoor facilities for each of the major Chinese carriers and equipment makers, according to engineers and executives who have visited the site.

    Trials are coordinated by a consortium of tech firms, universities and research institutes that operate under China’s Ministry of Industry and Information Technology. The group aims to wrap up tests by the end of the year.

    After those trials conclude, state-run carrier China Mobile , the world’s largest mobile operator by subscribers, will follow up with its own tests in 17 cities, according to Chih-Lin I, a former Bell Labs researcher and the company’s chief scientist of mobile technologies. China’s 5G service is expected to be ready for commercial use by 2020.

    The faster generation of networks relies on sophisticated technology that allows wireless airwaves to be used more efficiently. Plans call for it to run on high-frequency millimeter waves, which can handle more data but can’t travel as far as lower-frequency waves used by older networks. That means 5G will rely on clusters of antennae as well as decentralized data centers close to consumers and businesses—requiring big investments in infrastructure. The networks are expected to have the speed and responsiveness needed for advances such as driverless cars, which must instantaneously communicate with traffic signals, other cars and their surroundings.

    China’s bid to steer the 5G future depends heavily on setting technical standards the rest of the world will have to follow—and pay royalties and licensing fees to use. It has played an aggressive role in the international telecom industry collective that sets global standards.

    Experts inside and outside China expect Qualcomm and other Western firms to end up with a majority of the essential patents once the standards are fully determined, but China is making progress.

    In 2009, as Huawei’s 5G push began, it recruited Tong Wen, a former senior researcher at now-defunct equipment maker Nortel Networks Corp., to set up a research lab in Ottawa. While flipping through an academic journal, Mr. Tong had stumbled on “polar coding,” a novel method for correcting errors in data transmission invented by Mr. Arikan, the Turkish scientist.

    Huawei poured resources into developing it, and the government leaned on Chinese companies to vote for it en masse at a key standard-setting meeting at the Peppermill Resort in Reno, Nev., in 2016. The result was a tense fight that lasted past midnight with proponents of a rival technology favored by most Western firms, according to one standards expert who was there.

    “The Chinese decided this was important,” the expert said. “This was one of the biggest political battles we’ve ever seen.”

    The meeting ended with a compromise: Polar codes will be adopted for part of the standard, giving Huawei ownership of a critical patent. The company has spent more than $1 billion on 5G research and development so far.

    The U.S. government has stopped short of mandating efforts by the private sector, opening the door to more diffuse outcomes determined by the work of individual companies. In January, a senior National Security Council official floated the idea of rivaling Beijing with a government-led effort to build a nationalized wireless network, but regulators and officials said it was too expensive and unrealistic.

    Earlier this month, the Federal Communications Commission announced a plan to speed up the build-out of 5G networks by overriding some local rules and fees governing the deployment of small cellular transmitters, an important component of the infrastructure. The plan is expected to win approval in late September.

    The government has funded some academic research that has paved the way for commercial technologies. One agency, the National Science Foundation, is coordinating an effort to build test beds for 5G and future generations of wireless networks.

    “The United States is very much behind in this space” relative to Europe, South Korea, Japan and China, said a 2015 internal NSF report on 5G network development.

    Thyaga Nandagopal—a former researcher at Bell Labs who is a director at the foundation—is leading the test bed project, in which companies, academics and government agencies will be able to test 5G and other wireless network applications in tandem. Nearly 30 U.S., European and Asian companies have committed $50 million of capital and equipment over the next seven years, while the U.S. government has pledged to invest another $50 million. In New York, an NSF-funded site run by academic institutions including Columbia University aims to launch a small pilot phase by the beginning of January.

    Mr. Nandagopal said that China’s coordinated investments have put it in a “pretty good pole position” but that the NSF’s efforts are focused on wireless developments after 2020, rather than the early years of 5G deployment.

    “We can invest our money strategically and still get better results than anyone else,” he said.

    Some American telecom companies are staking claims to rooftops and light poles where they can position small cells that enable the faster networks, and pressing equipment and device makers to create 5G-compatible products.

    Verizon’s Hans Vestberg at the Consumer Electronics Show on Jan. 10 in Las Vegas.
    Verizon’s Hans Vestberg at the Consumer Electronics Show on Jan. 10 in Las Vegas. PHOTO: STEVE MARCUS/REUTERS
    For all the investment, industry experts note the standards for 5G aren’t fully written and wireless carriers are still figuring out how they can best profit from the service.

    At a 5G forum in Santa Clara, Calif., in July, Henning Schulzrinne, a former chief technology officer at the FCC, said operators would also have to find a way to drastically reduce the cost of data to make applications such as augmented or virtual reality affordable enough to sell to consumers over 5G. Some of those applications could work using 4G or Wi-Fi instead.

    “Who’s going to stream AR or VR if it’s going to cost them $10 per minute?” he said.

    John Donovan, chief executive of AT&T’s communications business, said the company’s researchers have been among the most prolific writers of 5G standards, but it is being cautious as it puts the technology in the field.

    “To deploy technology in advance of need, before the use cases are there—you’re wasting money,” he said.

    Executives at Huawei have also sought to temper 5G expectations. Before an audience of analysts at an annual meeting at the Shenzhen headquarters in April, Mr. Xu, Huawei’s chairman, said that “the entire industry and also governments around the world have regarded 5G too high, to the extent that it’s going to be the digital infrastructure for everything.”

    Huawei and China Mobile will push ahead with 5G on a large scale regardless, according to executives from both companies.

    “5G is such an important strategic project for China—kitchen sink, all the resources,” said Edison Lee, a telecom analyst at investment bank Jefferies in Hong Kong. “Because if they get their foot in the door for 5G, they get their foot in the door of 6G, 7G, 8G.”

    https://www.wsj.com/articles/the-5g-race-china-and-u-s-battle-to-control-worlds-fastest-wireless-internet-1536516373

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