An Ignoble Experiment

2. DT open to creating 'super maverick' with T-Mobile US, but is wary of regulatory hurdles

AT&T Mobility (NYSE: T) was not affected that much in the first quarter by T-Mobile US' (NYSE:TMUS) offer to pay up to $650 in Early Termination Fees to customers who switched to T-Mobile, according to AT&T CFO John Stephens.

Instead, AT&T is seeing strong momentum in its Next handset upgrade program and in the shift away from the traditional U.S. model of offering a subsidized smartphone in exchange for a two-year contract, which he said is positive for AT&T and consumers.

AT&T, which early in the first quarter cut the prices of its shared data plans for families, netted 625,000 postpaid additions in the first quarter, beating many analysts' estimates. However, that figure included around 449,000 tablet activations. AT&T's postpaid churn was 1.07 percent, down sequentially and up slightly compared to 1.04 percent in the year-ago quarter. T-Mobile, in part because of the ETF offer, saw branded postpaid net additions surge to more than 1.3 million in the first quarter.

Speaking at the Jefferies Technology, Media and Telecom Conference, Stephens said he would "leave everyone to judge if that [ETF offer] had a real effect or a real impact." He said it "doesn't appear based on our results that there was much of an impact."

Stephens said T-Mobile's ETF offer, which is not a limited-time promotion, is going to be economically challenging. "It's not something that a company with a best-in-class balance sheet would jump into," he said.

T-Mobile has said the offer was recorded as a reduction in its equipment sales revenues, and had a negative impact on both its revenue and adjusted EBITDA of around $100 million in the quarter. However, T-Mobile executives have defended the economics of the offer, saying it lures high-value customers who spend more with the carrier.

Overall, despite price changes at T-Mobile, Verizon Wireless (NYSE: VZ), Sprint (NYSE: S) and other carriers in recent months, Stephens said he views the competitive environment as "more noisy than it is disruptive" in terms of pricing.

As he has in the past, Stephens touched on AT&T's Next program, which has been gaining momentum. Under the plan, customers finance the cost of their phone in monthly payments and can upgrade after a year. They also get access to discounted service pricing under AT&T's Mobile Share Value plans. AT&T said that more than 40 percent, or 2.9 million, of all smartphone gross adds and upgrades were on AT&T Next in the first quarter; without 1.1 million accelerated upgrades, the Next adoption rate was about 35 percent, up from 15 percent in the fourth quarter.

"We are very optimistic about this," Stephens said. "We think this is a very transformational strategy."

AT&T has said the Next program shifts revenue from service revenue to handset revenue, but that it doesn't affect the company's overall financial situation. "It'll have an impact on traditional statistics," Stephens said. "Economically, it's just a tradeoff."

Customers like the pricing transparency of separating the cost of devices from service, Stephens said. He said AT&T is "investing in its customers" through the plan and is seeing them be more satisfied with their service and buy larger and more expensive data buckets. AT&T said at the end of the first quarter, 46 percent of Mobile Share accounts had 10 GB or higher plans, up from 28 percent in the year-ago quarter and 27 percent in the fourth quarter of 2013.

For more:
- see this webcast
- see this CNET article

Read more about: ETFs. ETF, Early Termination Fees
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This week's sponsor is GSMA.

By Phil Goldstein

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3. Sprint slams on the brakes for top 5% of data users in congested areas

Deutsche Telekom CEO Timotheus Hoettges held the door open to a possible combination between Sprint (NYSE: S) and its T-Mobile US (NYSE:TMUS) unit, but said that U.S. regulators have clearly signaled their skepticism of such a deal.

Hoettges

The DT chief acknowledged that there is a great deal of market speculation about a potential merger between Sprint and T-Mobile and he did not want to "put oil into the fire." However, Hoettges said on a conference call while discussing DT's first-quarter earnings that DT is open to creating a "super maverick" carrier in the U.S.

"I think to really create value in the market at the highest speed, with a better network, with even more spectrum, a combination for instance with one of the players would make a lot of sense to create a super maverick against AT&T (NYSE: T), against this bifurcated market in the U.S," he said.

Yet the DT chief acknowledged that regulators at the FCC and Department of Justice have expressed a desire to maintain four national U.S. carriers. "We're getting signals from the regulatory authority as well as antitrust supervisors that such a merger isn't seen as expedient," Hoettges said. "Against that backdrop, we have to see how we can develop the business so it creates the most value for our shareholders."

Overall, Hoettges said that DT is "very proud" of the growth T-Mobile has seen in the U.S. and that
"this is becoming a self-funding platform which is creating more momentum in the marketplace."

Sprint executives met with banks in April to secure debt arrangements for the transaction, according to a recent Bloomberg report. The report, citing unnamed sources, said that Sprint CFO Joe Euteneuer and Treasurer Greg Block met with six banks to get financing in place for when Sprint decides to make a move on T-Mobile. Sprint is expected to make a formal bid in June or July, the report added.

The report said Sprint parent SoftBank and DT, which controls around 67 percent of T-Mobile, are still debating who would run the combined company, with T-Mobile CEO John Legere seen as the leading candidate. Sprint CEO Dan Hesse has said he would be open to relinquishing control of a combined Sprint and T-Mobile.

Hesse said earlier this week in an interview with Bloomberg TV that the industry would be healthier with a stronger No. 3 player. "You'd have healthier competition with a stronger No. 3," he said. "I can't comment specifically on any speculation with respect to M&A, but I think a stronger No. 3 would be better for consumers."

However, Hesse also said that a lot of regulators have expressed skepticism about combining No. 3 Sprint with T-Mobile. "Theoretically, if such a transaction were to occur, we would have some convincing to do," he said.

For more:
- see this webcast
- see this Bloomberg article
- see this separate Bloomberg article

Read more about: T-Mobile USA, Sprint
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By Tammy Parker

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4. CCA's Berry expects strong participation from smaller carriers in 600 MHz auction

Sprint's (NYSE: S) pledge of unlimited data is looking increasingly less sustainable, as the carrier maneuvers to rein in network traffic generated by its heaviest data users and ensure quality of service for the majority of its customers.

Postpaid as well as prepaid Sprint customers, including those on its Virgin Mobile USA and Boost Mobile sub-brands, have begun receiving notices alerting them to new data "prioritization management" the operator will employ as of next month to prevent network congestion.

For example, a text message sent to Virgin Mobile customers said: "Beginning 6/1/14, to provide more customers with a high quality data experience during heavy usage times, Virgin Mobile USA may manage prioritization of access to network resources in congested areas for customers within the top 5 percent of data users."

Prioritization can include a reduction of throughput or speed for those targeted users connected to congested sites.

The approach "will enable us to provide more customers with a high quality data experience during heavy usage times," Sprint said in a statement sent to FierceWirelessTech. "Once the customer is no longer connected to a congested cell site, or the site is no longer congested, speeds will return to normal."

Prioritization represents an evolution in Sprint's approach to handling a growing data onslaught. "The practice is not the result of a sudden spike; rather, data usage has been increasing on a steady and increasingly steep basis for years and we expect the trend to only continue in years to come as more customers use mobile applications and as those applications grow in complexity and capability," said Sprint spokesman Lloyd Karnes.

In duplicate FAQ pages on the Sprint, Virgin and Boost websites, the network operator contends the heaviest data users consume a disproportionate share of network resources. Sprint said it has employed "fairness algorithms" on its CDMA and LTE networks to "dynamically allocate available bandwidth in a way that is fair to all users."

Regarding its WIMAX network, Sprint said it may periodically measure a user's bandwidth usage as well as overall bandwidth usage for all users on a segment or sector and the make temporary adjustments in available network resources as needed.

One problem for customers under the Sprint's prioritization scheme is that there is no exact amount of data consumption that will place them within the top 5 percent of users in any given month, and the threshold will change monthly as demand changes. But Sprint said customers who typically use 5 GB or more in a given month will likely be in that uppermost tier.

A customer who slips into that group will be subject to network prioritization during the following month of service. "Customers that continue to fall within the top 5 percent of data users will continue to be subject to prioritization," Sprint said.

Boost and Virgin have throttled users' speeds down to 256 kbps since spring 2012 if they exceed 2.5 GB of data usage in a monthly cycle. In March, Virgin and Boost customers were told that starting this month those using more than 2.5 GB of data would have their data speeds reduced to 128 kbps.

Customers can top up to re-start their monthly billing cycle if they want to access faster 3G CDMA or LTE speeds. This month, Boost also unveiled a $60 monthly plan that includes 5 GB of data before throttling.

By throttling its heaviest users to control congestion, Sprint is following the lead of the other three U.S. national mobile carriers.

During September 2011, Verizon Wireless (NYSE: VZ) implemented what it termed a "network optimization" plan to limit the bandwidth for the operator's top 5 percent of 3G smartphone users who are on a grandfathered unlimited data plan.

One month later, AT&T Mobility (NYSE: T) instituted a similar plan, targeting the top 5 percent of users on unlimited plans in specific high-traffic locations. However, AT&T was forced to alter its approach in early 2012 after an outcry from users who were unprepared to have their speeds reduced, particularly in cases where some of them had only consumed 2 GB of data. AT&T's revised policy slowed speeds of unlimited data users who exceeded specific data thresholds.

T-Mobile US (NYSE:TMUS) also uses a form of prioritization, noting "certain T-Mobile plans may be prioritized" over service plans under its GoSmart Mobile prepaid brand.

For more:
- see this Sprint FAQ, Virgin FAQ and Boost FAQ

Read more about: data speed, LTE
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By Phil Goldstein

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5. Rumor Mill: AT&T's 'New Cricket' plans to start at $40/month, speeds to be capped

WASHINGTON--Competitive Carriers Association President Steve Berry said he is confident that next year's incentive auction of 600 MHz broadcast spectrum will draw wide participation from smaller carriers and that the auction will be successful.

Berry

"I fully expect every competitive carrier to want to get access to this [600 MHz] ecosystem," Berry said at event here on Wednesday. Participating will give smaller carriers a chance to get more spectrum for next generation LTE services, he added. The event was press briefing sponsored by the New America Foundation think tank. Besides, Berry speakers included representatives from Sprint (NYSE: S), T-Mobile US (NYSE:TMUS), Dish Network (NASDAQ: DISH), and public interest groups Public Knowledge, Free Press and the Consumer Federation of America.

?As the FCC prepares to vote next week on rules for the incentive auction, representatives of smaller carriers said they are positive about the framework the FCC has proposed. Verizon Wireless (NYSE: VZ) and AT&T (NYSE: T) have argued that rules that could limit how much spectrum they can bid on at the auction are unfair, but representatives from competitive carriers and public interest groups said that the large carriers will still be able to bid on vast amounts of spectrum.

Both AT&T and Verizon have expressed their strong displeasure with proposed rules that could potentially limit how much spectrum they can bid on in certain markets. AT&T argued last week that "there is simply no basis" to give Sprint and T-Mobile special treatment in the auction, because they already control low-band spectrum. Verizon told the FCC it would be "perverse and unjust" for the FCC to adopt auction rules that "subsidize some large multinational companies at the expense of their competitors."

Berry said he could not say whether AT&T and Verizon will petition the FCC to change or reverse such rules if the full commission votes to approve them. "They clearly have a right to do that," he said. "I really don't see where they would have much legal ground to stand on." Berry noted that the 2012 law that authorized the FCC to conduct the incentive auction grants it the authority "to adopt and enforce rules of general applicability, including rules concerning spectrum aggregation that promote competition."

Berry also said any delay ahead of the auction will delay the carriers ability to start deploying the 600 MHz airwaves. "There is a lot in this structure of this auction for everyone," he said.

Under the FCC's proposed rules, the commission would establish a market-based reserve of up to 30 MHz of spectrum for carriers that currently hold less than one-third of available low-band spectrum in a market. The FCC would then establish a spectrum reserve "trigger point" during the pre-auction process to figure out at what point the auction would split into "reserved" and "unreserved" bidding. The FCC is going to open up to comment what that trigger point will be; it hasn't been decided yet but it could be related to market prices or when enough money has been raised in bidding to pay broadcasters and clear them from the spectrum they are giving up.

When the trigger point is reached, the amount of "reserved" spectrum in each market will be established based on demand in that market by eligible bidders, but it will be no more than 30 MHz. If demand for the reserved spectrum is less than 30 MHz at that point, the remaining balance would be available on an unreserved basis.

Importantly, any carrier that holds more than one-third of available low-band spectrum in a market would be able to bid on all unreserved spectrum in that market, but would be ineligible to bid on any reserved spectrum, which is likely going to restrict Verizon and AT&T in many markets. The FCC also said that any provider that holds less than one-third of available low-band spectrum in a market would be able to bid on all unreserved spectrum in that market, and all reserved spectrum in that market.

Jeff Blum, Dish's senior vice president and deputy general counsel, said at the briefing that the reserved spectrum part of the auction will only take effect if the trigger point is reached in a market. It "only kicks in when revenue has been raised to pay for broadcasters' repacking. If sufficient revenue is not generated, there will be no reserve."

Berry said he calculated that AT&T will be able to bid in two-thirds of all the markets in which spectrum is likely to be reserved. "We have the possibility of an auction that brings in as much on the reserved [spectrum] as on the unreserved," he said.

Kathleen Ham, T-Mobile's vice president of federal regulatory affairs, said if AT&T is concerned about having enough spectrum to augment capacity on its network, the AWS-3 auction, scheduled for this fall, is a perfect opportunity for AT&T to acquire mid-band spectrum.. "Go at it," she said. "If that's the issue with their network, go solve it."

Ham added: "This is the last opportunity for this type of [low-band] spectrum to be rolled out that any of us are aware of," and that T-Mobile needs to acquire it to be able to sufficiently compete on a national basis.

The FCC plans to auction the spectrum in Partial Economic Areas license sizes, the middle ground between large Economic Areas and smaller Cellular Markets Areas. "Anything larger than a PEA would have been the equivalent of a regulatory execution for every small carrier in the United States," Berry said, adding that the FCC "should be commended" for going with PEAs.

Not everyone in the nation's capital is on board with the proposals endorsed by the pariicpants at the New America Foundation. A spokesperson for Mobile Fuutre, a coalition mobil and Internet companies whose membership includes Verizon and AT&T, said in a sttaement that that "despite the pleadings we heard today for special treatment and special favors from companies like T-Mobile and Sprint, the stakes for our mobile economy are simply too high to risk turning the important upcoming 600 MHz auction into yet another science experiment."

"The fact is that all American mobile customers--not just a select few--need more spectrum. A successful auction hinges on substantial supply as well as demand," the spokesperon said. "Artificially limiting either via regulatory fiat would be a grave mistake. The FCC has a real opportunity to sustain American mobile competition while addressing our increasingly congested networks--not by picking auction winner and losers--but by agreeing to a simple, inclusive, and fair incentive auction design that welcomes all sellers and buyers equally. Anything less will not just jeopardize the overall ability of the auction to succeed, but also America's continued wireless broadband leadership."

By Mike Dano

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