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Sprint may plan to mortgage its license proceeds but not the spectrum license

Posted March 16th, 2016 in spectrum, Sprint and tagged , by Alton Drew

Sprint, a mobile broadband provider, has been plodding through eight years of losses. It has been toiling under the weight of $34 billion of debt. To give itself relief, Softbank, the entity with majority control of the carrier, has come up with a plan that involves creating another subsidiary of Softbank and have that subsidiary lend Sprint the money to bail itself out. According to Bloomberg Businessweek:

“According to Sprint Chief Financial Officer Tarek Robbiati, the proposal is to create another subsidiary of Son’s Japanese corporation that will lend Sprint money. The new unit plans to accept the carrier’s wireless equipment and some of its rights to slices of the wireless spectrum as collateral. Sprint says that while it won’t give up control of those precious airwaves—worth more than $115 billion, according to Bloomberg Intelligence—it’s aiming for $3 billion to $5 billion this year from these loans.”

The way Bloomberg Businessweek reports the initiative the first impression one gets is that the actual spectrum licenses can be mortgaged. What can happen is that a security interest in the proceeds of a sale of a spectrum license can be formed. The United States Court of Appeals-Ninth Circuit in MLQ Investors v. Pacific Quadracasting, Inc.held that:

In other words, the FCC may prohibit security interests in licenses themselves because the creation of such an interest could result in foreclosure and transfer of the license without FCC approval.   Such approval is necessary to regulate the airwaves in the public interest.   No such public interest is implicated, however, by a security interest in the proceeds of licenses, which does not grant the creditor any power or control over the license or the segment of the broadcast spectrum it represents.

Sprint investors should be aware of this distinction.

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Why is FCC spectrum policy favoring weak business models?

Reading Jeff Mazella’s piece for the Center of Individual Freedom regarding T-Mobile’s two-sided arguments on spectrum has me wondering why the Federal Communications Commission even attempts to implement spectrum auction policies that favor carriers like T-Mobile and Sprint.  In my opinion, Sprint and T-Mobile’s business models are primitive and lack the vision of AT&T or Verizon’s business models, models that recognize the convergence of broadband platforms and media.

Mr. Mazella makes the argument that the FCC should not accept T-Mobile and Sprint’s request that portions of spectrum be set aside during the 2016 incentive auction.  T-Mobile and Sprint have portfolios filled with an ample amount of spectrum, are backed by large foreign corporations, and in the case of Sprint, have even exercised the option of sitting out a spectrum auction, in Sprint’s case an auction for advanced wireless services (AWS-3) spectrum.

I would add to Mr. Mazella’s argument that Sprint and T-Mobile simply haven’t shown that they are worthy of more favorable treatment simply because they are stuck in the early 2000s and have not shown me that they can or even want to take their business model to the next step.  As a platform, what are they prepared to do in a converging media and broadband environment?  Why should the FCC pick a loser if they are going to pick and choose which companies will succeed in the first place?

After reviewing company filings with the U.S. Securities and Exchange Commission as well as company press releases, I determined that neither Sprint or T-Mobile plan to innovate or make acquisitions in the media space.  In my opinion the next great moves that the duopoly has embarked on, namely acquiring content and the advertising space and technology they provide, is a business model that goes back to the future and works.  The content model puts a premium on the spectrum that wireless carriers compete for and should signal to regulators which carriers are willing to do more than just make rhetorical arguments about competition and innovation.

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No response to Wheeler’s response on wireless

There was no appreciable response to Federal Communications Commission chairman Tom Wheeler’s comments at the CTIA show in Las Vegas mentioning that the FCC may reconsider the distinction between fixed broadband and wireless broadband as it draws closer to issuing new rules on net neutrality or the Open Internet.

The goal of the Open Internet proceedings “is to establish rules of the road for Internet openness that will provide certainty in the market place and facilitate the continuation of the virtuous cycle of investment and innovation”, Mr. Wheeler said.

Consumers are increasingly relying on mobile broadband, noted the chairman, and acknowledged the wireless industry’s position that mobile broadband carriers face constraints that their fixed broadband cousins do not.

AT&T(T:NYSE); Sprint (S: NYSE); and Verizon (VZ: NYSE) saw their share values fall today but it wasn’t clear from media headlines whether the fall was in response to the possibility that fixed and mobile may be treated the same under net neutrality rules or his policy of challenging wireless broadband company mergers such as the attempted AT&T-T-Mobile combination or the more recent attempt by Sprint to acquire T-Mobile.

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The New York Times is wrong on Sprint, T-Mobile

Posted January 1st, 2014 in antitrust, Sprint, T-Mobile USA and tagged , , , by Alton Drew

The editorial board of The New York Times has come out swinging against Sprint‘s (NYSE:S) speculated combination with T-Mobile (NYSE:TMUS).  SoftBank (OTC:SFTBY), a Japanese wireless provider, owns a controlling interest in Sprint.  Should an acquisition be approved by regulators, namely the Federal Communications Commission and the United States Department of Justice, the four largest national carriers would be reduced to the three largest national carriers and such a shrinkage, according to The Times would negatively impact consumers.  Here is the crux of The Times’ argument about the impact on consumers:

“As an independent company, for instance, T-Mobile has recently cut prices aggressively and simplified its cellphone plans. Its phone plans are often much cheaper than comparable packages offered by other cellphone companies. It no longer forces customers into two-year contracts; its subscribers can switch to another wireless firm whenever they like. And it slashed the high international roaming charges it levies on calls customers make when they are traveling abroad and eliminated roaming charges for text messages and Internet service.”

To me, that is not a valid argument to base a rejection of a combination.  T-Mobile’s decision to provide cheaper comparable packages resulted from its ability to identify a niche, an underserved market that could have been left out of the market for wireless broadband services.  It would be bad business judgment for SoftBank to ignore this market especially since T-Mobile’s corner on the underserved market is one of the linchpins of  the company’s success.  SoftBank would still have to compete with AT&T and Verizon and extinguishing an important part of T-Mobile’s business model would be like bringing a knife to a gunfight.

The Times is wrong on this one.

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Spectrum: Larry Downes describes the downside of changing a social goal

Last week Larry Downes posted an article on how the Federal Communications Commission seems to have lost its way on broadband policy. With a spectrum frontier that, according to Mr. Downes, is effectively closed, the FCC appears to have been thrown off course by short term goals preferred by smaller wireless carriers, notably Sprint and T-Mobile, a number of grassroots advocates, and the U.S. Department of Justice.

They have combined to craft and sell a narrative that more spectrum going to larger carriers, specifically AT&T and Verizon, is not good for competition and that future spectrum reverse auction rules should be written to steer spectrum toward smaller carriers in the name of, I don’t know, fairness or equity.

Somewhere lost in this pushing and shoving at the dinner table are two social policy goals. The first goal is making available to all Americans universal access to a nationwide communications network. The second goal is getting broadband access to all American households pursuant to the FCC’s March 2010 national broadband plan. In a free market where consumers are able to choose a provider for broadband services, the FCC is using its bottleneck status as gatekeeper to the airwaves to craft consumer choice according to its own image.

That image is a market where carriers serving 80% of current subscribers should be punished because they got a head start on broadband due to their very organic business model: they were incumbent local exchange carriers with a network in place and a large local phone customer base to sell to. The carriers would have to engage in time travel back to the 1970s in order to get on the same so called equal footing that the FCC would like to see now in the 21st century. That is not going to happen.

What should happen is that Sprint and T-Mobile put to use their current spectrum holdings and enter into strategic partnerships with handset and operating systems providers to sell innovative product and services. As Mr. Downes points out, Sprint, due in part to a merger with Clearwire and it being acquired by SoftBank, is America’s largest holder of spectrum. T-Mobile’s acquisition of MetroPCS garnered for itself additional spectrum.

Rather than indirectly hampering the quality of service AT&T and Verizon’s subscribers would incur because their respective carriers would be shut out of spectrum, Sprint and T-Mobile should give AT&T and Verizon subscribers a good old fashioned market based reason for switching to them versus lobbying for auction rules that violate the very premise of free markets and competition they allegedly believe in.