An Ignoble Experiment

2. Dish's Ergen leaves door open for T-Mobile deal if a Sprint/T-Mobile effort fails

AT&T Mobility (NYSE: T) is considering selling the Muve Music business it acquired via its $1.2 billion purchase of Leap Wireless and Leap's prepaid Cricket brand, according to a New York Times report.

The report, citing unnamed sources, said that AT&T has begun accepting bids for the Muve business. Other music services could potentially be involved in the auction, the report added.

Cricket spokeswoman Alejandra Arango declined to comment directly on whether AT&T was shutting down the service. "After a careful review, we've decided to explore alternative music options to Muve," she said in a statement to the Times. "For now, nothing changes for our Muve customers. They'll continue to enjoy their Muve experience at this time, as we evaluate alternative music options."

That's a noticeable shift from less than two months ago when Arango told FierceWireless AT&T and Cricket were working to bring their brands together and were focused on integration. At the time, there was no indication that Muve might be sold.

Leap launched Muve Music in 2011 and the service is currently offered for free in service plans for customers with Android smartphones. In a Securities and Exchange Commission filing made in early March, Leap said Muve Music was available to more than 2.3 million Cricket customers as of the end of 2013, "and is currently among the largest on-demand music subscription services in the U.S. as measured by the number of paid users."

Interestingly, Leap said last year it inked a licensing agreement to provide Muve Music to TIM Celular S.A. in Brazil. Leap previously announced it was working to license Muve to overseas carriers.

Muve allows Cricket customers to download an unlimited number of songs from labels including Universal Music Group, Warner Music Group and Sony Music Entertainment. Muve Music 4.0, which Leap launched in July 2013, introduced a new user interface designed to support more efficient navigation, highlighted by a new sidebar menu giving users immediate access to all core features. The redesign also allowed customers to play songs as soon as they begin downloading.

AT&T's reported plans to sell Muve could be due to the carrier's existing partnership with Beats Music. AT&T in January announced it would offer the Beats Music streaming service at a discount to its family plan customers. AT&T also pays to market for the service.

Muve has numerous competitors. Analysts estimate Spotify may have around 2 million paying U.S. subscribers, the Times reported, and Rhapsody recently announced that it has 1.7 million global customers.

As GigaOM notes, any potential suitor for Muve will likely face challenges because Muve customers have been able to get the service for free as a bundled component of their Cricket service plans. Convincing Muve customers, many of whom are low-income subscribers, to pay a subscription fee could be a difficult task.

AT&T plans to roll out service plans for the "New Cricket" sometime this quarter. According to a source familiar with the company's plans, AT&T will launch the refreshed Cricket service with pricing plans that are almost identical to AT&T's current Aio Wireless prepaid offering. It's unclear if Muve will be sold before or after that rollout.

For more:
- see this NYT article
- see this GigaOM article

Related Articles:
Rumor Mill: AT&T's 'New Cricket' plans to start at $40/month, speeds to be capped
Sprint: Spotify is just the first - 'more to come' for Framily plans
AT&T to launch renewed Cricket prepaid brand in Q2
Cricket's Muve Music's fate is up in air following AT&T deal
AT&T's Aio launches 'Group Save' plans, taking a page from Sprint's 'Framily'
FCC approves AT&T's acquisition of Cricket provider Leap, with divestitures

Read more about: Cricket, Cricket Communications
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This week's sponsor is GSMA.

By Phil Goldstein

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3. Report: Apple to buy Beats for $3.2B, gaining access to streaming music service

Dish Network (NASDAQ: DISH) Chairman Charlie Ergen reiterated his decision not to get into a bidding war with Sprint (NYSE: S) over T-Mobile US (NYSE:TMUS), but indicated that he would be ready to move if Sprint tried to make a bid for T-Mobile and failed.

"We don't have the kind of money to, you know, go outbid Sprint for T-Mobile or outbid AT&T for DirecTV. So we have to be well positioned so no matter what happens it's all good for us, and I think we're there," Ergen said on a conference call to discuss Dish's first-quarter earnings, according to Bloomberg.

In addition to a potential Sprint/T-Mobile deal, there has also been recent speculation that AT&T (NYSE: T) could bid for Dish rival DirecTV (NASDAQ: DTV). AT&T could pay more than $100 per share for DirecTV and still find it financially attractive, Ergen said.

If regulators at the FCC and Department of Justice were to block a deal between Sprint and T-Mobile, "then T-Mobile would have strategic interest to us, yes," Ergen said. However, he added that he sees a Sprint and T-Mobile merger as a logical way to create a larger wireless competitor.

Ergen's comments echo what he said in February, when he noted that Sprint and T-Mobile would be able cut costs by merging in ways that he couldn't match, and that Sprint parent SoftBank has the financial resources to outbid Dish.

Deutsche Telekom CEO Timotheus Hoettges said he is open to a deal between DT's T-Mobile and Sprint, but said that U.S. regulators have clearly signaled their skepticism of such a deal. Sprint is reportedly preparing to make a formal offer for T-Mobile in June or July, though Sprint CEO Dan Hesse has also said that "theoretically, if such a transaction were to occur, we would have some convincing to do" in terms of dealing with regulators.

Interestingly, Ergen also said that it would "make a lot of sense" for a company like AT&T or Verizon (NYSE: VZ) to purchase Dish.

Dish controls 40 MHz of AWS-4 spectrum in the 2 GHz band and recently paid $1.56 billion for 10 MHz more of spectrum in the 1900 MHz PCS H Block auction. Now, Ergen said, we're "ready to harvest," according to the Wall Street Journal.

BTIG analyst Walter Piecyk wrote in a recent blog post that proposed changes to the FCC's spectrum screen could pave the way for a carrier like AT&T or Verizon to purchase Dish's spectrum. The FCC has proposed changes to the spectrum screen that could limit the amount of spectrum carriers can acquire, but Piecyk noted that the changes wouldn't prohibit AT&T or Verizon from acquiring Dish's spectrum.

For more:
- see this WSJ article (sub. req.)
- see this Bloomberg article
- see this Reuters article

Related Articles:
FCC to add Sprint, Dish spectrum to spectrum screen
Analysis: Sprint, Dish could broaden partnership - but it would be complicated
H Block auction ends at $1.564B, with Dish Network as likely winner
Dish's Ergen: We won't fight a Sprint bid for T-Mobile

Read more about: AT&T, FCC
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By Phil Goldstein

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4. Alcatel-Lucent: Verizon, AT&T and Sprint accounted for 39% of Q1 revenue

Apple (NASDAQ: AAPL) is in the process of finalizing a $3.2 billion deal for Beats Electronics, in what would be its biggest deal ever, according to multiple reports. The overriding question analysts have at this point is: Why? The answer is not entirely clear, but Apple could be inking the deal to get access not only to Beats' sleek headphones but also its fledgling streaming music service on the cheap.

According to reports from the Financial Times, the New York Times, Bloomberg and the Wall Street Journal, Apple could announce the deal as early as next week, though the reports cautioned the deal is not yet final. Apple and Beats, co-founded by rapper Dr. Dre, declined to comment, according to the reports. However, according to The Verge, actor Tyrese Gibson posted a video on his Facebook page in which he was seen presumably celebrating with Dre, and in which he reiterated the $3.2 billion figure and urged Forbes to change its list of the world's richest people because Dre has now joined the "billionaire boys club."

For Apple, an acquisition of Beats would represent a departure from a long-time strategy of acquiring mostly small technology companies for their talent and underlying technology to incorporate into Apple's future products. On Apple's most recent earnings conference call in late April, Apple CEO Tim Cook said that Apple had acquired 24 companies in the last 18 months.

"We are expanding Apple's products and services into new categories, and we are not going to underinvest in this business," Cook said.

Yet acquiring Beats would seem to be out of step with Apple's focus on selling what it deems the best products, since the Beats headphones, while popular, are seen by audiophiles as not the best headphones on the market. Similarly, the Beats Music streaming music service was only started in January and is a miniscule competitor right now to the likes of Spotify, Pandora and Rdio.

Creative Strategies analyst Ben Bajarin told the New York Times that Apple is likely thinking about a wider music strategy with the purchase. "This would have to fit into a much longer, more innovative strategy around perhaps the hardware and the service," he said.

Re/code, citing unnamed industry sources, said Beats' electronics sales of headphones and speakers are more than $1 billion per year, but that the streaming music service likely has only around 200,000 users. AT&T Mobility (NYSE: T) in January announced it would offer the Beats Music streaming service at a discount to its family plan customers. AT&T also pays to market for the service.

The streaming music service is likely what is driving Apple to make the deal, analysts said. "They are buying into the future and the future is going to be streaming and subscription," Jon Irwin, the former president of rival music service Rhapsody, told Bloomberg." Revenue from streaming and subscription is growing. Files and downloads are shrinking. Everyone has to engage in streaming and subscription."

In September 2013 Apple launched its own streaming service via iTunes Radio. However, the free, ad-supported service, which is similar in many ways to Pandora, gives users limited control over the songs they can hear. Users can remove the ads if they pay for Apple's iTunes Match service, which costs $25 per year, but they still have to buy individual songs for full price through iTunes.

A March Billboard report, which cited unnamed sources, said that Apple was pondering a new on-demand streaming music service to compete with Spotify and Beats amid declining sales from the iTunes store.

Spotify was last valued at $4 billion and has reportedly been pondering an initial public offering, Re/code notes, so it might have been too expensive for Apple, even though Apple has around $150 billion in cash on its balance sheet. As BTIG analyst Walter Piecyk pointed out, the reported $3.2 billion purchase price is less than 2 percent of Apple's cash and less than 10 percent of its annual free cash flow.

Beats Music features a catalog of more than 20 million fully licensed songs from all the major labels, including Universal Music Group, Sony Music Entertainment and Warner Music Group, as well as all independent labels. The service offers unlimited access to curated music (both streaming and downloaded for offline listening) of the songs, albums and playlists. In addition to personalization technology, Beats Music uses human experts to curate hand-picked songs while streaming.

This would not be the first time Beats has partnered with a mobile hardware company. HTC bought a majority stake in Beats in 2011 for $300 million only to later sell it all back in September 2013. In all, HTC got $415 million from selling its stake after making the $300 million investment. HTC recently announced a deal with speaker maker Harman Kardon to put the company's audio technology in its One M8 smartphone.

For more:
- see this FT article (sub. req.)
- see this NYT article
- see this Bloomberg article
- see this WSJ article (sub. req.)
- see this 9to5Mac article
- see this The Verge article
- see these three separate articles from Re/code
- see this BTIG post

Read more about: rumors, Dr. Dre
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By Phil Goldstein

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5. U.S. Cellular signals opposition to 'reserved' spectrum plan for 600 MHz auction

Alcatel-Lucent (NYSE: ALU) sharply cut its losses in the first quarter and its adjusted operating income beat analyst expectations, but sales dipped year-over-year in the United States, its largest market by far.

Overall, the company reported a net loss of $101 million, down nearly 80 percent from a net loss of $486.2 million in the year-ago period. The company's adjusted operating income of around $45.5 million was ahead of analysts' expectations for a roughly break-even figure, according to the Wall Street Journal, after a $246.5 million adjusted operating loss in the year-ago quarter.

The company's total sales slipped in the first quarter by 3.3 percent to $4.07 billion, partially due to declines in the company's managed-services unit, which has been exiting unprofitable contracts. The vendor's "Access" unit, which includes its wireless business, saw its revenue fall slightly to around $2.17 billion.

In the United States, Alcatel-Lucent's largest region by revenue, sales fell to $1.89 billion in the first quarter from $1.98 billion in the year-ago period. Interestingly, the company noted that "a few large telecommunications service providers account for a significant portion of our revenues." In the first quarter of 2014, Verizon (NYSE: VZ), AT&T (NYSE: T) and Sprint (NYSE: S) represented respectively 17 percent, 14 percent and 8 percent of the company's revenues. That compares to 13 percent, 11 percent and 11 percent, respectively, in the first quarter of 2013. Alcatel-Lucent is a key vendor for each of the carrier's LTE networks.

Alcatel-Lucent CEO Michel Combes, as part of his "Shift" restructuring plan, has vowed to slash expenses by around $1.38 billion by 2015 and to sell another $1.38 billion in assets. So far he has cut costs by around $658.4 million and divested more than $482 million worth of assets.

"Net income was negative because of non-recurring elements like financial and pension costs, as well as restructuring costs," CFO Jean Raby said in a Bloomberg TV interview. "The first quarter shows another milestone: we're nearly halfway on our cost-cutting plan, and we still have about 18 months to go."

According to the Journal, Raby added on a conference call with reporters: "You could say much has been done. But much remains to be done. Why are we still negative at level of net income? It is the weight of history."

Alcatel-Lucent has struggled to turn a regular profit since it was formed in 2006, largely because of its small scale relative to the likes of Ericsson (NASDAQ: ERIC) and Huawei. In February, for example, the company reported its first quarterly profit in two years. Alcatel-Lucent has followed the path of Nokia (NYSE:NOK) in slimming down its networks business and trying to become more of a specialist focused on IP networking, LTE and small cells.

"Sales are short of what we were expecting, but profitability is improving substantially," Eric Beaudet, an analyst at Natixis, wrote in a note to clients, according to Bloomberg. "This comforts us in the company's ability to reach its 2015 targets."

For more:
- see this release
- see this WSJ article (sub. req.)
- see this Bloomberg article
- see this Reuters article

Special Report: Wireless in the first quarter of 2014

Read more about: LTE, quarterly earnings
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By Phil Goldstein

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