Throughout the course of the trial, we will endeavor to update clients on particularly important days (though not necessarily daily). Today, we saw a pretty tough day for the companies, as one would expect given that the states are putting on their side of the case. The states used the witnesses to introduce texts and emails that were helpful for the states’ argument that the unconditioned 4-to-3 merger violates the law, that T-Mobile and Sprint are direct competitors, that Sprint has other options to the merger, and that the deal could result in increased prices. In addition, the judge declined to hear opening statements and sought to curtail the witness lists, making it more difficult, in our view, for the companies to re-frame the core arguments. While nothing changed our odds, we can clearly see how the states are setting up their arguments.
In this note we discuss why we think the odds of legislation dictating critical terms of the C-Band reallocation process are greater than we had previously thought, though much depends on several critical decisions of the Congressional Budget Office (CBO). In that light, the upcoming mark-up of the Thune/Wicker Bill is also more important than we had thought, both for what it reveals about the legislation but also for what, if anything, it tells us about how CBO is thinking about whether the C-Band auction can be scored for new expenditures, whether CBO believes that the score could be aided by a faster transition, and whether CBO believes that faster transition requires significant payments to the CBA members beyond relocation expenses.
In addition, we review several recent ex partes, which to us demonstrate an alignment of the key buyers the process has not enjoyed to date, but a difference in emphasis and no details about how to achieve their mutual objectives.
Rakuten is the highest profile virtualised Radio Access Network project in the world, and CEO Mikitani’s MWC tub-thumping lifted vRAN to the top of the ‘hot topic’ list for 2019. Speakers at our recent 5G conference (key takeaways from the telecom team HERE and the tech team HERE), and plenty of other news flow, have indicated that virtualisation of the core and the RAN is the way forward for lower unit costs and more flexible, secure, and scalable networking.
We don’t see this as a change of trend – unit costs have been falling relentlessly for several decades – but virtualisation is one of the key drivers for continued declines over the next decade. Virtualisation has a large and growing band of global enthusiasts too, including heavyweight operators, and an increasingly wide ecosystem.
Precisely because Rakuten put vRAN front and centre in its extravagant pitch to MWC earlier this year, it’s natural to suspect that vRAN is at the root of its disappointing trajectory since then. But, just as vRAN isn’t central to Rakuten’s story, in our view (see HERE), it also isn’t why the launch is late and impact being downgraded. This diagnosis matters for the Japanese market, but it also matters for vRAN globally.
On Monday, the most important trialOne could argue it was actually the trial that broke up AT&T but at that point, the wireless industry largely existed in the brilliant imagination of some engineers and a young cable executive named Craig McCaw. Wireless was considered so unimportant that the lawyer for AT&T basically gave away the cellular licenses to the Baby Bells without much thought. Because Karma has a weirder sense of humor than any of us can possibly understand, that lawyer eventually became the CEO of AT&T Wireless, which AT&T created by spending $12.6 billion to buy McCaw’s company, instead of simply having the original licenses. ever for the wireless industry begins in New York. In this Weekend Update, we provide our final notes on recent developments and how to watch the trial.
We start with a summary of a call we did with antitrust experts last week. While both predicted the States win, both were intrigued by the implications of the Companies still arguing about the deal rather than just focusing on the fix. Both also offered advice on what witnesses and issues to watch for indications of how the Judge might be thinking. We then discuss the most important outcomes and revelations of two pre-trial conferences at the end of last week, including the Judge’s own description of the issues, the parties’ different framings of the core issue and the implications of the first six witnesses, all designed, we think, to allow the States to introduce course of business documents that will undercut the Companies claim of increased competitiveness as the motive for the deal and the fix.
We review some evidentiary rulings we don’t believe will ultimately be material but one that has a potential to provide significant headline risk for the Companies. We note some filings at the FCC that go to an issue raised by the States in their pre-trial memo on the reliance of the Companies on proceedings that have not yet concluded. We conclude with a discussion of the importance of Charlie Ergen’s credibility as a witness by reviewing how another judge, in a bankruptcy proceeding, viewed his credibility.
We note that we are again splitting our Weekend Updates in two, with a separate update focused on C-Band and the upcoming Senate mark-up on related legislation being published sometime on Monday.
Continue reading “TMUS/S/DISH: Final Notes for How to Watch Before Game Time”
In the past, EM growth has been a major driver for some of the developed market equity stories. Telefonica’s expansion into Latam was one of the big telco stories from the mid-1990s. Telenor’s aggressive Asian expansion in the early part of this millennium also made their equity story stand out as core EU earnings were under pressure. However, EM exposure for developed market telecoms companies has been gradually diminishing over the past 5 years and Telefonica’s announcement this week that it now defining all of its Latam assets ex-Brazil as non-core (see HERE for our view) marks a further retreat. However, arguably no EM market has been more volatile than India. Last week we took Vodafone management around London (see HERE for more details), and one of the key concerns that shareholders were bringing up was India and whether Vodafone could be liable for yet more cash injections into India on top of the £17bn already committed over the past 10 years. However, just as the roadshow was entering its final meeting, the Government announced a moratorium on spectrum fees, potentially marking a major inflection point in Government thinking and suggesting the risk-reward is now skewed to the upside (see HERE for more details) and EM exposure could potentially become a major driver for a developed market telco again.
In another busy week, we have already published notes on C-Band (LINK) and legal issues relating to DISH’s licenses (LINK). In this note, we focus on last week’s developments on the upcoming trial about the big wireless merger. We discuss why John Legere’s upcoming resignation incrementally undercuts his credibility as a witness, how the DOJ’s surprising motion, and unsurprising loss, to disqualify the states’ outside counsel reflects Delrahim’s nervousness about the trial and incrementally undercuts the companies’ argument that the court should defer to the DOJ’s judgement, and why it might be that discovery issues focus on DT/TMUS communications. We also provide a mediation on Presidential involvement in our sector, prompted by his impact on the C-Band process and his suggestion that Apple should help with America’s deployment of 5G networks. Finally, we plan on being off the coming week (and would be very thankful if the fates make that possible) but want to wish all our readers a wonderful Thanksgiving Day holiday.
This week we were often asked whether DISH would be able to sell their spectrum licenses, like broadcasters and mobile carriers do all the time, with little FCC objection or process and no sharing of proceeds with the government,Other than, of course, taxes. or would such a sales effort to sell trigger the FCC to claim that the proceeds should largely go to the government. In this note, we detail why we think it is clearly the first.
With another big news week, we are splitting the Weekend Update into two notes; this C-Band focused one and another, to arrive Sunday night, providing an update on the merger and other telecom policy news. (We are also publishing this morning a note discussing why DISH should be able to sell its licensees without the government taking the proceeds, a question that came up a lot this week: LINK).
In this C-Band note we discuss what we have learned, and the critical questions still to be answered, in the first week of the FCC’s new C-Band direction (which we refer to as Version 3.0) of running the auction itself. We think the initial stakeholder and political reactions demonstrate that the question of the private v. public auction is no longer in play, that CBA’s leverage to obtain funds lies not in threats about litigation or the narrative about how political leadership is depriving America of leadership in 5G, but only in its leverage related to the time to clear 300MHz, that the process is likely to go down both a legislative and regulatory track but the FCC is likely to finish before Congress, probably rendering Congressional efforts moot. We think both tracks will be bipartisan, which is important for reducing any political risk of election results causing another rethink and a C-Band version 4.0. We don’t have new insight into what may be the most important investment question, which is which enterprises the FCC believes should receive funds beyond relocation expenses and, further, between those enterprises, how should any funds be sized and allocated.
Once those questions are answered, however, there are multiple ways of effectuating that distribution though each carries different political and litigation risks. Part of the calculus requires estimating the results of the auction and calculating those requires understanding the other spectrum bands that will also be coming into the market.
We got a fright when we saw T-Mobile announce a conference call for Monday morning with no mention of what it would focus on. We worried that they may announce that they were abandoning the deal. I am not sure why it didn’t occur to us that Legere might be stepping down to focus his energies on Slow Cooker Sundays.
As we broke open the models in preparation for the call and started running through scenarios around what might come next for each of T-Mobile and Sprint, we realized that the world had changed quite materially since we first set out our thesis for the deal. We have some work to do mapping out the no-deal scenarios in more rigorous detail, but in the meantime, we have some thoughts on what the options for both companies are, and the pros and cons of each.
Over the weekend, we wrote that the C-Band policy was about to move to Version 3.0. (LINK) Yesterday, a one-two punch from Chairman Pai and Senators Thune and Wicker set the framework for that new version.
First, in a tweet, Pai committed to an FCC auction by the end of 2020. The tweet was consistent with our weekend view that the FCC order will not be circulated until early next year.
Second, Senators introduced legislation that would also require an FCC auction by the end of 2020 and in addition, “require the FCC to capture for the taxpayer at least 50 percent of the fair market value of the spectrum.” That means that the most CBA could obtain for its members would be an amount equal to 50% minus relocation expenses to other current users. Unlike the CBA proposal offered Friday, the proceeds would be pre-tax. As we had discussed, Eutelsat saying that the satellite companies should get at least 50% may have seemed to them like it was setting a ceiling but to members of Congress, that was the floor. (LINK)
So what happens now? We will let our colleague, Vivek Stalam, discuss the financial implications for Intelsat in a separate note, while we focus on the new policy direction.