An Ignoble Experiment

> Creating new business opportunities with customer data - Thursday, May 16, 2pm ET / 11am PT

What a difference a day makes in the wireless industry. Just last week it appeared that Japanese operator Softbank's plan to acquire 70 percent of Sprint Nextel (NYSE:S) for $20.1 billion was on track, as was Sprint's bid to take control of Clearwire (NASDAQ:CLWR). Both deals were expected to close by mid-year.

However, today all bets are off. This morning Dish Network (NASDAQ: DISH) announced a $25.5 billion unsolicited offer to buy Sprint Nextel, which was followed shortly by the revelation that Verizon Wireless (NYSE:VZ) made an unsolicited offer to purchase Clearwire's (NASDAQ:CLWR) spectrum license leases in major markets for up to $1.5 billion.

Certainly there are pros and cons to all these scenarios but what seems apparent to me is that Dish's bid for Sprint and Verizon's bid for Clearwire will likely put Sprint's future plans in limbo while these deals are evaluated by shareholders, the FCC and the Department of Justice.

And Sprint, which is already behind the curve in terms of deploying LTE, can't really afford more delays and turmoil. "For Sprint this just adds confusion," said Roger Entner, analyst and founder of Recon Analytics. "Sprint shareholders get more money from Dish's proposed deal, but how is Charlie [Ergen, Dish's chairman] going to invest in Sprint?" asked Entner. "Will he improve the network? It's going to slow everything down."

Sprint is in the midst of a major overhaul to its network. As of February, Sprint had launched LTE in 58 cities and the company said it now expects to cover 200 million POPs with LTE by the end of the year. That 200 million POP figure is significantly lower than Sprint's original goal of having 250 million POPs covered with LTE by year-end. Currently, Sprint is on the same pace as T-Mobile USA, which plans to have 200 million POPs covered with LTE by year-end.

Will Dish's offer throw a wrench into Sprint's plan? Not immediately, according to industry analyst Bill Ho. Ho believes that in the short-term Sprint's LTE plans will progress as planned for the rest of 2013 and possibly into 2014 because that capital has already been allocated. However, what happens next is clearly uncertain--something that Sprint's competitors will likely try to exploit. "This creates months of uncertainty for Sprint," Entner said. "They can't do anything strategic."

Turmoil creates opportunity and that's exactly what Sprint's competitors are banking on. --Sue

Read more about: Verizon Wireless
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Today's Top News

1. Dish makes $25.5B offer to buy Sprint, countering Softbank

By Phil Goldstein

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2. Report: Verizon wants to obtain Clearwire's spectrum

There is finally an answer to what Charlie Ergen and Dish Network (NASDAQ: DISH) intend to do with the company's $10 billion cash pile: buy Sprint Nextel (NYSE:S). Dish has made an offer worth $25.5 billion to buy 68 percent of Sprint, countering Japanese operator Softbank's $20.1 billion deal to buy 70 percent of Sprint.

Under Dish's proposed offer, Sprint shareholders would receive $7 a share, consisting of $4.76 in cash and stock representing about 32 percent of the combined company, vs. 30 percent under the Softbank deal, according to Dish. That equates to $17.3 billion cash and $8.2 billion stock, according to Bloomberg. Dish said the total offer represents a 13 percent premium on the Softbank deal, which Sprint and Softbank announced in October.

"Sprint is in play," Ergen told the Wall Street Journal. "We think we've made an offer that's much more compelling than the Softbank transaction."

Sprint said its board of directors will evaluate Dish's proposal "carefully and consistent with its fiduciary and legal duties. The company does not plan to comment further until the appropriate time."

On a conference call this morning, Ergen, Dish's chairman, said that cable companies are now able to provide video in the home and wireless carriers can deliver video to consumers outside of the home, but that no one company can combine those experiences. "There really is no one company on national scale that puts it all together," he said. "The new Dish/Sprint company will do that."

Dish said the deal will result in "synergies and growth opportunities" estimated at $37 billion in net present value, including an estimated $11 billion in cost savings.

Sprint is a much larger company than Dish, with $35.3 billion in revenue last year, compared with $14.3 billion for Dish, making the deal a heavy lift financially. According to the Journal, which cited information from CapitallQ, the combined company would have more than $36 billion in debt, even before adding in the $9 billion Dish indicated it would borrow to get the deal done.

Sprint's board will now need to decide whether to accept Dish's offer over Softbank's, and if it picks Dish's bid, Softbank will have an opportunity to increase its own offer, according to the Journal. Ergen said on the conference call that it is too soon to tell whether Dish will be drawn into a bidding war with Softbank. "Obviously, we'll have to see how this plays out," he said, adding that both Dish and Softbank see Sprint as "a very attractive asset."

Dish now has a record $10 billion in cash in hand, about as much as oil and gas giant Exxon Mobil, according to Bloomberg. The company's cash is again throwing the wireless industry into limbo; Sprint and Softbank had expected to finalize their deal by mid-year. The FCC has said it is on track to finish its review the Sprint-Softbank deal by the end of May.

Separately, Dish has made a conditional counteroffer to Clearwire, and Ergen noted that Dish has not formally withdrawn its Clearwire offer. However, his comments and those of Thomas Cullen, Dish's executive vice president for corporate development, made it clear that Dish thinks Clearwire's 2.5 GHz spectrum will be a key part of the total combined company. However, Ergen said that Dish's offer to Sprint is not contingent on Clearwire accepting Sprint's offer.

And now it appears Clearwire is also in flux: According to the Wall Street Journal, Verizon Wireless has made a bid for Clearwire's spectrum worth up to $1.5 billion. Click here for that story.

Ergen has said that his company wants to use its 40 MHz of AWS-4 spectrum to create an LTE-Advanced wireless network to allow customers to access video content as well as voice and data inside and outside the home. He has also said that Dish would like to partner with a wireless company to do that, but that if Dish cannot, it will look to sell its airwaves.

Dish must cover at least 40 percent of the population in areas covered by its spectrum with a wireless network in the next four years, or face penalties. Further, the FCC has said Dish must cover at least 70 percent of that population within seven years.

If Dish--or a future licensee of the AWS-4 spectrum--fails to hit the 40 percent mark in four years, it must hit the 70 percent coverage threshold in six, rather than seven years. Further, if Dish fails to hit the 70 percent mark in any economic area as defined by the FCC, it will automatically lose its right to deploy service there.

For more:
- see this release
- see this Dish letter
- see this Dish fact sheet
- see this Bloomberg article
- see this WSJ article (sub. req.)
- see this separate WSJ article (sub. req.)
- see this NYT article

Related Articles:
Dish amasses $10B cash pile as questions swirl over its plans
Report: Worries about Chinese vendors weigh on Sprint/Softbank deal
FCC's Genachowski says review of Sprint/Softbank deal is on track
Clearwire shareholder Crest puts up more resistance to Sprint deal
Sprint, Softbank and Clearwire press cases for deals to FCC's Genachowski
Clearwire execs stand to rake in millions if Sprint deal goes through

Read more about: DISH Network, Clearwire, Charles Ergen
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By Phil Goldstein

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3. AT&T, Verizon may face restrictions in 600 MHz auction

Verizon Wireless (NYSE:VZ) made an unsolicited offer to Clearwire (NASDAQ:CLWR) to purchase Clearwire's spectrum license leases in major markets for up to $1.5 billion, according to a Wall Street Journal report. The report, citing unnamed sources familiar with the matter, said that it is unclear whether Verizon has any interest in Clearwire beyond getting the spectrum licenses.

In a regulatory filing, Clearwire said a special committee of its board is reviewing an offer from an unnamed "strategic buyer" to purchase its spectrum license leases. The Journal said the unnamed party is Verizon. Clearwire's filing, made Friday, is notable in light of Dish Network's (NASDAQ: DISH) proposal to today purchase Sprint Nextel (NYSE:S), which envisions Clearwire's spectrum being a part of the combined company. Click here for that story.

According to the filing with the Securities and Exchange Commission, on April 8, Clearwire received an unsolicited, non-binding written proposal from "Party J," which Clearwire said is "a strategic buyer." Party J offered to acquire Clearwire's spectrum leases "generally located in large markets that cover approximately 5 billion MHz-POPs at a gross price of approximately $1.0 to $1.5 billion." The price would be reduced by the present value of what Clearwire pays to lease the spectrum, which could be substantial, Clearwire said.

Representatives for Verizon and Clearwire declined to comment.

The unsolicited offer would value Clearwire's spectrum at $0.20-$0.30 per MHz-POP on a gross basis, according to BTIG analyst Walter Piecyk, who noted that Sprint's $2.97 per share offer to take control of Clearwire values Clearwire's spectrum at $0.21 per MHz-POP.

Clearwire has around 160 MHz of 2.5 GHz spectrum in the top 100 markets. However, any deal for its spectrum would face substantial hurdles because Sprint, Clearwire's majority owner, has a number of contractual rights to the spectrum that would make it difficult for an outside party to get control of the airwaves.

In the filing, Clearwire also noted that its board is "actively considering" whether the company will default on a $255 million interest payment due June 1 on about $4.5 billion of outstanding debt. In that event, the company would be forced to seek bankruptcy protection.

Clearwire urged its shareholders to vote in favor of Sprint's offer to take control of the company, but said that if the deal is not completed it will need to "explore all available alternatives, and substantial doubt may arise regarding" whether or not Clearwire can continue operating.

Last week Crest Financial, the largest minority shareholder in Clearwire, made good on its promise to wage a proxy battle in an effort to block Sprint's offer. Crest supports Dish's conditional $3.30-per-share counterbid to Clearwire and, along with other minority shareholders, contends that Sprint's offer undervalues Clearwire and its spectrum assets.

For more:
- see this WSJ article (sub. req.)
- see this SEC filing
- see this Bloomberg article
- see this Reuters article
- see this BTIG blog post (reg. req.)

Related Articles:
Clearwire shareholder Crest wages proxy fight to block Sprint deal
Clearwire shareholder Crest offers $240M to block Sprint deal
Clearwire takes another $80M payment from Sprint
FCC's Genachowski says review of Sprint/Softbank deal is on track
Clearwire shareholder Crest puts up more resistance to Sprint deal
Sprint, Softbank and Clearwire press cases for deals to FCC's Genachowski

Read more about: Clearwire, wireless spectrum
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By Tammy Parker

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4. Verizon reacts to T-Mobile, will launch device financing program April 21

In a significant blow to U.S. mobile market leaders AT&T (NYSE:T) and Verizon Wireless (NYSE:VZ), the U.S. Department of Justice called on the FCC to ensure Sprint Nextel (NYSE:S) and T-Mobile USA have ample opportunity to acquire 600 MHz spectrum that will be made available via 2014's incentive auctions of TV broadcast frequencies.

"The Department concludes that rules that ensure the smaller nationwide networks, which currently lack substantial low-frequency spectrum, have an opportunity to acquire such spectrum could improve the competitive dynamic among nationwide carriers and benefit consumers," said the DoJ's Antitrust Division.

The DoJ successfully prevented AT&T's proposed acquisition of T-Mobile in 2011, going so far as to file suit to prevent the deal. Its new FCC filing could set the stage for restrictions on bidding by AT&T and Verizon, the nation's largest mobile operators and holders of considerable amounts of 700 MHz and 800 MHz spectrum, which is particularly useful for transmitting broadband data inside buildings and over long distances in rural areas.

Saying Sprint and T-Mobile hold "virtually" no low-frequency spectrum, the DoJ contended the two have "a somewhat diminished ability to compete, particularly in rural areas."

The two market leaders might face caps on how much spectrum they could buy at auction. Alternatively, there could be other restrictions placed on them, such as a requirement that they divest some existing spectrum holdings in exchange for being able to bid on the new spectrum. The DoJ suggested allowing large operators to acquire "smaller blocks" of low-frequency spectrum but restricting them from gaining "larger blocks."

The department also raised the theory that larger operators might be tempted to buy spectrum and warehouse it to keep it out of reach of smaller rivals. "Carriers may have incentives to acquire spectrum for purposes other than efficiently expanding their own capacity or services," said the DoJ.

However, Robert Hahn and Peter Passell, economists specializing in regulation, recently issued a report shooting down that theory, arguing incumbent providers are putting spectrum to use about as fast as they can.

Meanwhile, smaller carriers and their representatives cheered the DoJ's filing.

"The Justice Department is absolutely right," said Larry Krevor, Sprint's vice president of government affairs. "Ensuring that all carriers, large and small, have access to low-band spectrum would improve competition and benefit consumers. We are hopeful that the FCC will adopt policies which recognize the importance of low-band spectrum to wireless competition and the American economy as a whole."

Steven Berry, president & CEO of the Competitive Carriers Association, commented, "Access to spectrum, and in particular interoperable, low-frequency spectrum, is critical to competition, and carriers of all sizes must be allowed the opportunity to access usable spectrum. CCA couldn't agree more with DoJ that excessive market power harms competition. AT&T and Verizon control almost 85 percent of the spectrum below 1 GHz, using its (sic) market power to thwart competition and prevent competitive carriers from using their own spectrum in the Lower 700 MHz band."

Problems in the Lower 700 MHz band loom over planning for 600 MHz spectrum auctions. During a Senate Commerce Committee hearing last week on the state of rural communications, LeRoy "Ted" Carlson Jr., chairman of US Cellular, admonished the FCC to avoid a repeat of the Lower 700 MHz interoperability issues as it considers the rules for 600 MHz incentive auctions. Among other things, Carlson alleged AT&T's use of Band 17 equipment instead of Band 12 equipment needed by other Lower 700 MHz A Block licensees, has "fractured the handset ecosystem."

If that is true, however, it might indicate that smaller operators have as much to lose as AT&T and Verizon if the two market leaders are restricted from fully participating in auctions of 600 MHz spectrum. Without the nation's two dominant operators driving device demand and economies of scale, the handset ecosystem could become even more fractured if vendors ignore the smaller carriers' needs for 600 MHz-enabled devices.

Further, less money might be generated for the federal treasury and the national public-safety broadband network, which is supposed to gain funding from auction proceeds.

The auction of 700 MHz digital dividend spectrum in 2009 brought in some $20 billion for about 50 MHz of spectrum. The goal of the 600 MHz auction process is to release 120 MHz of spectrum for wireless broadband use

For more:
- see this Justice Department filing
- see this CCA release
- see this Reuters article
- see this Wall Street Journal article (sub. req.)
- see this CNET article
- see this Associated Press article

Read more about: Department of Justice
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By Phil Goldstein

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5. T-Mobile crows of 'gangbusters' store traffic as iPhone 5 goes on sale

Verizon Wireless (NYSE:VZ) confirmed it will launch a "Device Payment Plan" starting April 21 to help customers finance the purchase of devices that cost more than $350.

The new payment plan comes amid Verizon's decision to no longer allow customers to upgrade their handset at a subsidized price before the end of their 24-month contract. Previously, the carrier allowed some subscribers to upgrade their phones at a subsidized price after 20 months.

"Customers also have the option of purchasing a phone at full price at any point before their contract expires and beginning April 21, some devices will be available for purchase through the Verizon Wireless Device Payment Plan," Verizon wrote in a post in which it explained the changes to its upgrade policy.

Verizon's financing plan would let customers upgrade and pay for devices without having to sign up for a new contract or pay the full cost up-front. However, the payment plan will not reduce a customer's monthly rate plan bill.

"We are, in fact, implementing a device payment plan for smartphones (and tablets and the Galaxy Camera) that cost more than $349.99," Verizon spokeswoman Debi Lewis told FierceWireless.

She said consumers will pay the full retail price of the smartphone or tablet in 12 monthly payments, with the first payment collected at the point of sale. She also said the payment plan includes a $24 finance charge, billed at $2/month included in the plan. Customers can have two open Device Payment Plans.

More and more carriers are experimenting with device payment plans. It is a central part of T-Mobile USA's new "Uncarrier" strategy, in which customers can either buy their smartphone outright for the full cost of the device or they can make a down payment and then pay for the remainder of the cost of the device in monthly installments.

Sprint Nextel's (NYSE:S) prepaid brand Virgin Mobile and regional wireless carrier C Spire Wireless have tested handset financing programs. Both operators used the startup BillFloat to support their pilot programs, which took place in the first quarter. Leap Wireless' (NASDAQ:LEAP) Cricket and MetroPCS (NYSE:PCS) both launched handset financing options late last year.

For more:
- see this Verizon post
- see this Droid Life post
- see this Engadget article

Related Articles:
Verizon tightens handset upgrade policy
Verizon to add $30 upgrade fee for new handsets
AT&T testing new 'Plus' loyalty program
Verizon ends 'New Every Two' upgrade policy
Sprint shortens return period to 14 days, axes Premier program
Sprint tinkers with Premier handset upgrade program

Read more about: Verizon Wireless, subsidies
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By Phil Goldstein

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