Insights from the Sprint/T-Mobile US merger ruling (Part 5)
Part 5: Dish’s ambitions and how they played into the merger approval
The merger of T-Mobile US and Sprint recently cleared what was widely seen as the last major hurdle to a successful closing: U.S. District Court Judge Victor Marrero rejected the claims of a group of state attorneys-general that the merger of T-Mobile US and Sprint would reduce competition in the U.S. consumer wireless market.
With that ruling, T-Mobile US could be looking at closing the merger as soon as April 1, although there still some moving parts: a separate legal approval for the related Dish Network settlement (which includes asset divestment to Dish of Sprint’s prepaid businesses, some 800 MHz spectrum and access to wireless infrastructure sites so that it can become a fourth facilities-based competitor) and approval from the California Public Utility Commission.
The 170-page ruling by Marrero covers past, present and future: he goes through some of the telecom history that brought both parties to the point of merging, the current competitive state of the industry, the arguments that he found unpersuasive versus what was compelling, the reasoning on which he based his decision, and some strategic points from New T-Mobile’s vision for how it’s going to operate—which ultimately persuaded Marrero that it won’t harm wireless competition in the U.S.
Here is the fifth and final installment of a series documenting key highlights, tidbits and testimony from the trial, as outlined in the judge’s ruling. (You can also read Part One, Part Two, Part Three and Part Four.) Marrero goes over the role of Dish Network as a new consumer wireless market entrant in mitigating competitive concerns, and there are some intriguing business tidbits about how Dish is preparing to enter the market and operate.
If it weren’t for Dish Network, there probably would not be a New T-Mobile. Marrero called the Department of Justice’s effort to establish Dish as a fourth nationwide mobile network operator and “replacement for Sprint” one of the key factors in helping to establish that allowing the merger of Sprint and T-Mobile US won’t ultimately be anti-competitive. Under the law, Marrero wrote, such a new market entrant can counteract anticompetitive concerns if the entry would be “timely, likely and sufficient in its magnitude, character and scope.” He then went through the ways that Dish as a new entrant fit those criteria.
Will Dish be the new “maverick” disrupter? Dish, Marrero wrote, could serve as “a new maverick” in the wireless market. It is, he wrote, “undeniably well equipped” to enter the retail wireless market because of its large spectrum portfolio: worth roughly $22 billion and on-par with Verizon’s in size, with “significant quantities of both low-band and mid-band spectrum capable of supporting highly data-intensive consumer uses.” Dish, he continued, “has clearly been financially sound over the past decade” and Dish Chairman Charlie Ergen has expressed a desire for Dish to enter the wireless market since at least 2012, and he “reiterated at trial his intention to ‘compete with the largest wireless operators in the United States … from day one. Dish’s track record and numerous awards for innovation and customer service, as well as evidence of the currently confidential and creative strategic partnerships that Dish is planning, suggest that Dish would compete as a disruptive ‘maverick’ … offering low prices for innovative and high-quality services.”
Boost will be the basis for Dish’s wireless business. The divestiture of Boost to Dish, which is required in the DoJ settlement referenced previously, “would be a strong starting point for Dish to compete” due to Boost’s success in the prepaid market, Marrero concluded, and the subscribers and assets that Dish would receive. That means 9.4 million existing Boost customers and 500 Boost employees with experience in the consumer wireless market, plus 7,500 retail storefronts. Executives from Boost and Dish testified that Boost’s distribution model “is already quite similar to that of Dish, which will help accelerate Dish’s plans to expand its distribution to areas not currently well covered by Sprint.”
The MVNO agreement required of the New T-Mobile is a huge boon to Dish. Boost customers will use the New T-Mobile network “rather than the decidedly poorer-quality Sprint network,” Marrero wrote, adding that according to testimony, “Sprint’s poor network quality drove over 44% of Boost’s churn,” so using a better network will strengthen Boost’s viability under Dish.
New T-Mobile has to provide Dish with access to its network for seven years at wholesale rates “significantly lower than those provided under typical MVNO agreements,” according to the ruling. “Ergen projected that Boost customers would actually pay a lower price under Dish than they currently do as a result of this low wholesale rate,” Marrero wrote, adding that this will help Dish focus on its own network instead of paying high MVNO rates to New T-Mobile. Ergen also told the court that Dish “will lower its prices in anticipation of its transition to an MNO; Dish could recoup any short-term losses from lower prices by attracting subscribers to its own network and thus avoiding the costs associated with use of the New T-Mobile network.”
A monitor has been set up to make sure that New T-Mobile doesn’t mess with Dish’s ability to use New T-Mo’s network. This is part of the DoJ settlement, and there has been a formula established that “provides the wholesale price to Dish will never increase. On the contrary, Dish’s price is designed to decrease as the New T-Mobile experiences increases in capacity” and the DoJ settlement also provides that “New T-Mobile cannot cap the extent to which Dish uses its network over the first three years—theoretically, there is nothing to stop Dish from filling more than half of New T-Mobile’s network capacity.”
Also, New T-Mobile can’t charge Dish if customers switch from New T-Mobile to Dish, a tactic which can be found in other MVNO agreements.
“These arrangements all ensure that Dish could compete with New T-Mobile and other market incumbents on highly advantageous terms upon entry,” Marrero wrote, adding that the terms of the MVNO agreement “will inure far more to Dish’s benefit than New T-Mobile’s.”
Dish has extremely ambitious network plans. The state AGs argued that with just 9.4 million customers compared to Sprint’s 40 million, Dish’s scale would hinder its ability to compete, and so would the cost and time that it takes to build a national wireless network.
But Dish’s testimony to the court and the particulars of the DoJ and FCC mediations around the merger persuaded Marrero that its “innovative network plans” will result in a network that costs less and is up and running “faster than might normally be expected.”
Dish has committed to building a network that provides speeds of at least 35 Mbps, with at least 15,000 5G cell sites. It plans to built a virtualized network and use open Radio Access Network technology so that it can take bids on various elements of the RAN rather than going with a single vendor. Eleven vendors have already told Dish that they could deliver the virtualized core in the first quarter of 2020, according to the ruling, and “even traditional RAN vendors have indicated to Dish that they could support open RAN within the next 18 months.”
The company estimates network construction costs between $8 billion-$10 billion, and as far as funding that expense, it recently put together $2 billion from stock sales and “has secured several highly confident letters from banks” indicating that they can raised $10 billion (Morgan Stanley, Deutsche Bank and JP Morgan were all named in citations in the ruling). Dish already has $3 billion in cash, though it will use about $1.4 billion of that to acquire Boost.
On the infrastructure side, Marrero noted that Dish doesn’t have a legacy network to contend with, which potentially reduces the cost and complexity of a nationwide network deployment. Dish “may utilize any and all cell sites that New T-Mobile would otherwise decommission, gaining access to tens of thousands of cell towers ready for almost immediate use,” and it will also have access to retail stores that New T-Mobile would otherwise close, so it can expand its distribution. Marrero also said that in addition to at least 20,000 towers that New T-Mobile will make available to Dish, Dish “has also identified and signed master service agreements for 32,300 towers that do not need structural reinforcement and thus could become operational in relatively short order.”
Marrero wrote that given all of those circumstances, “Dish is hardly at any competitive disadvantage at all, let alone a significant one,” even though its customer base will be markedly smaller than the other three MNOs.
Is Dish serious about a nationwide 5G network? The state AGs cast doubt on whether Dish really plans to get into the wireless market, citing everything from T-Mobile US and Sprint executives who called building a mobile wireless network one of many “stupid bluffs” by Ergen, saying that he would merely building “a meaningless thin network so that he doesn’t get in trouble with the FCC.” One Deutsche Telekom official scoffed at Dish’s network as “something the lawyers can use, but not something customers can use.” Dish, the state AGs argued, has already had issues living up to other build-out commitments to the FCC. (Ergen apparently called such remarks “mere discouragement by threatened industry incumbents.”) But Marrero gave short shrift to those comments and pointed out that the DoJ and FCC “have strongly supported Dish’s entry” to the market “despite being aware of those concerns.”
Dish, he went on, stands to lost $2 billion in fines and $12 billion in spectrum if it doesn’t deploy a nationwide 5G network that covers at least 70% of the U.S. population by June 2023, and those are “strong disincentives for Dish to skirt compliance.” It also is being required by the FCC to dedicate its 600 MHz spectrum to 5G service by 2023, four years earlier than previously required.
Marrero wrote that proof of Dish’s intent can be found in its details RFPs for a virtualized 5G network, hiring of several senior executives to help with network build-out (including former Sprint CTO Stephen Bye). Dish has already dedicated 850 employees “fully to its mobile wireless services business,” according to the ruling, 500 of whom are engineers, and it will add to that with the 500 Boost employees that it will gain through the Boost divestment. Dish plans to start its wireless business with about 2,000 employees, and it has also been working with standards organizations and received commitments from handset manufacturers that it will have access to devices that support use of its spectrum bands, although there is one band left to incorporate. The company also has a preliminary business plan that outlines a city-by-city network build-out, joint marketing with “various strategic partners” and a plan to transition from serving prepaid customers to adding postpaid customers.
“Though Dish’s amassing of unused spectrum over the past seven years has been criticized as a form of speculative hoarding,” Marrero wrote, “the evidence at trial suggested that Dish’s storage of spectrum is better understood as careful preparation to ensure Dish possessed the most critical resource required to compete in an industry with high barriers to entry.”
With Dish in the market, a four-national-player landscape will be preserved. Marrero also took issue with the state AGs’ argument that post-merger, the three largest wireless operators could, if not actively collude on pricing, at least pull their competitive punches.
“T-Mobile has built its identity and business strategy on insulting, antagonizing, and challenging AT&T and Verizon to offer pro-consumer packages and lower pricing, and the court finds it highly unlikely that New T-Mobile will simply rest satisfied with its increased market share after the intense regulator and public scrutiny of this transaction,” Marrero wrote. “As [CEO John Legere] and other T-Mobile executives noted at trial, doing so would essentially repudiate T-Mobile’s entire public image.”
In addition, he said, soon-to-be New T-Mobile CEO Mike Sievert testified that the company “would be taking a very significant risk by raising prices or slowing its competitive pace, because consumers in the market still generally believe that AT&T and Verizon have superior quality networks” and higher prices might nudge those users to pay just a little more to get service from one of those two operators.
“It is not likely, perhaps improbably or even not rational, that a major new or reinforced market participant, rather than vying aggressively to entice additional customers from competitors by introducing innovations, and investing more to protect and expand market share, would do the exact opposite,” Marrero concluded, going on to add, “To borrow a sports metaphor, a boxer who has strived and sweated for years to reach the title prize fight is not likely to pull punches and take a dive the moment he steps into the ring against the reining champ.”
Read the full ruling here.
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