Tag Archives: wireless spectrum

T-Mobile Provides a Compelling Investment Opportunity

I have written at length about my research regarding government regulation in the wireless telecommunications industry, which I had to conduct for Econ 432. As I studied the regulatory and antitrust issues facing this industry, I because interested in it from an investment stand point as well. Last month, I pitched an investment in T-Mobile (NYSE:TMUS) to an investment club that I am a member in called Michigan Interactive Investments and the club invested in the company following the pitch. Our thesis was that T-Mobile survived an attempted takeover by AT&T in 2011 thanks to an antitrust intervention and since then has come a long way in terms of boosting its network quality and brand reputation. As the primary disruptive force, in a relatively uncompetitive industry, I believe T-Mobile has the capability to disrupt the established business model and steal significant share from its competitors, which is why I recommend investing in it now.

From an industry perspective, wireless telecommunications seems to be a very attractive industry. According to IBIS World Reports, the industry is expected to grow at 6.6% percent over the next five years, outpacing GDP growth. The driver for this growth is not necessarily adding new subscribers, but rather selling existing subscribers more data. Individuals are purchasing more devices that need wireless connections, such as tablets so data needs will continue to rise for some time to come, which will benefit the entire industry.

The necessary requirement in order to sell more data to consumers, however, is a good network. A good network requires heavy investment in infrastructure and spectrum licenses. This mean that barriers to entry are very high, which should protect incumbents like T-Mobile. One question is, though, how does T-Mobile’s network stack up against competitors? According to CNET, T-Mobile CEO John Legere has claimed that the company now has the fastest 4G LTE speeds in some markets, as shown by average speeds on Speedtest.net, a long way from not having LTE at all three years ago. It is true that they are the smallest of the Big 4 wireless companies, but they have made great strides in improving their network. Now that they have a network that they are closer to their rivals in terms of quality, T-Mobile is free to compete on other points like price and contract flexibility in order to win customers.

I also believe now is a great time to invest in T-Mobile because there is a very low-key catalyst that could boost the stock significantly – the 2015 600 MHz spectrum auction. According to the Wall Street Journal, the FCC is planning to auction a significant chunk of spectrum in the 600 MHz range, which has some of the best properties of any spectrum ever auctioned, making it incredibly valuable. All spectrum below 1 GHz is considered low frequency and has excellent propagation and range properties, which make them very valuable to wireless broadband providers. T-Mobile is the only wireless company without significant low frequency holdings as shown below as the WSJ explains.

The key to the 2015 auction is that the FCC is considering imposing caps that limit how much the Big 2 – AT&T and Verizon – can acquire of the low frequency spectrum. This could be a big win for T-Mobile, which would have a clear path at acquiring the spectrum it needs to further improve its network and compete at a higher level with the Big 2.

Because the market may not be fully buying into T-Mobile’s turn around, or may not be fully pricing in the possibility of the company winning low frequency spectrum, I believe the stock may be underpriced at the current level and now is a great time to invest in a company that is one the rise.

 

New Market Trend – Demand for Internet

As our society is constantly becoming more and more connected by technology, the infrastructure needed to facilitate these connections has become highly demanded. As I check news outlets such as Wall Street Journal and Yahoo daily, I have noticed a growing trend in the news – the competition between firms for wireless spectrum. This competition has gotten heated as many companies compete to provide wireless connection to the more than 2 billion people around the world that live in uncovered regions.

Along with the two largest wireless carriers in the US AT&T and Verizon, other tech firms are investing into infrastructure that they hope can one day provide wireless services to people around the world. Facebook, has recently made investments in order to increase worldwide internet connection. Along with their partnerships with Samsung and Qualcomm, Facebook announced that it is looking to acquire Titan Aerospace, a solar powered drone company based out of New Mexico. Facebook plans to use the Titan drones for the purpose of beaming laser broadband connection to areas without coverage. According to the Titan Aerospace website, the drones can deliver internet at approximately 1 GB per second, which is significantly faster than broadband. Facebook CEO Mark Zuckerberg has often expressed his desire to make wireless internet available to all parts of the world.

Amazon is another company that is looking to invest in wireless coverage in order to increase the range of their product use. Amazon recently announced their intention to stream ad-supported television. In order to seamlessly stream this service Amazon has looked into ways in which they can use unclogged wireless spectrum to stream video without bugs and backlog.

Overall the increased demand for internet content and services has created a situation where companies are demanding more ways to deliver content to their customers. All these combined factors have created a new market trend where companies are actively looking to invest in ways to provide internet coverage to the 2 billion people living in uncovered areas across the world. For this reason, as an investor I hope to take advantage of this trend by investing in companies that are positioned to succeed from this trend. One company that I think could benefit from this new trend is Globalstar Inc., who has invested in new satellite constellations that will be able to provide wifi to rural areas in the country using low frequency spectrum. The current FCC Chairman, Tom Wheeler, has already expressed his favor for new technology that can transmit wireless service, so it will be very interesting to see what type of technology develops over the years and how this technology will change the way we use internet.

 

Optimal Wireless Telecom Regulation

In a previous post, I discussed my semester long research project for another class, Econ 432: Government Regulation taught by Professor Jim Adams. My research has focused around the wireless telecommunications industry in the United States, which I believe is a vitally important industry in our modern information age. There are two main regulatory concerns, which I addressed in my research (and in my previous post). Because this industry has very high seller concentration, anti-trust regulation is very important as evidenced by the DOJ’s blocking of AT&T’s attempted acquisition of T-Mobile in 2011. The other important regulatory concern is spectrum allocation. Spectrum is required to operate a mobile network and there is a fixed supply, so the FCC uses auctions to efficiently allocate the licenses. These two regulatory issues have shaped the modern wireless telecom industry and made it what it is today – a four firm oligopoly market, where consumers are constantly frustrated with the service and prices offered. So how can the government fix this industry, which is plagued with anti-competitive practices? I offer three recommendations that the government should implement in order to save US wireless going forward:

  1. Publicly commit to a four firm market structure. After a wave of consolidation in the 2000s, the wireless market came to be dominated by four firms. AT&T, which had combined in Cingular, and Verizon dominate the market, controlling nearly two third of the market combined. Their smaller rivals consist of Sprint, which acquired Nextel, and T-Mobile comprise the rest of the market. So now we are left with four national firms, which doesn’t exactly call to mind a highly competitive market. However, it is important to consider that the fixed costs of running a mobile network are very high, which makes some degree of natural monopoly inevitable. During the 2011 anti-trust suit against AT&T/T-Mobile the DOJ expressed desire to maintain a four firm market structure. Now there are rumors that Sprint and T-Mobile want to combine to better compete with the big two. The FCC, however, should preempt this move and publicly announce that it is committed to maintain the four firm market structure as it is the best way to ensure competition among the remaining national carriers.
  2. Put mechanisms in place to ensure equitable distribution of spectrum among the carriers. The beauty of auctioning spectrum, is that it is typically highly efficient – the firm that values it the most is willing to pay the most. It is just good economics. The problem arises, however, as market power is established among the incumbent firms. AT&T and Verizon are willing to pay more than their instrinsic value in order to keep the spectrum from Sprint and T-Mobile, and they have the financial firepower to do so. The FCC can put mechanisms in place in spectrum auctions that penalize the incumbents or prevent them from hording spectrum in order to give T-Mobile and Sprint the chance to build sufficient spectrum holdings of their own.
  3. Encourage market entry and innovation by setting aside unlicensed spectrum blocks. The point of spectrum licensing is that it prevents signal interference, which would diminish our social utility derived from the spectrum. However, the current system creates enormous barrier to entry that stifle competition. The FCC could combat this by actively setting aside unlicensed blocks of spectrum that anyone is free to broadcast over. Technological advances have diminished the impact of interference for some applications and allowing a small “free market” experiment to take place in terms of wireless spectrum usage could allow for innovation and new entrants that will improve wireless technology and boost social welfare in the future.

 

 

How to Fix Wireless Telecom in the US

For much of the past semester, I have been studying the wireless telecommunications industry in the US as my personal project for Econ 432: Government Regulations class taught by Professor Jim Adams. In addition to studying past anti-trust cases and non-antitrust regulatory issues, we have also been assigned to study government regulation in one specific industry of our choosing. As someone entering a role in technology, media, and telecommunications investment banking, I thought wireless telecom would be a rich and interesting field for study and I was right.  I wanted to share some of my findings here and describe some of the recommendations I plan to make in my final paper.

When analyzing markets in Econ 432, we were taught to first analyze the relevant product and geographic markets. In this case, the “product” is actually a service – the ability to access a wireless network to transmit data. There are four main wireless telecom companies in the US: AT&T, Verizon, Sprint, and T-Mobile. AT&T and Verizon are considered the “Big Two” as they control over 60% of the market jointly and operate the largest, fastest networks. Because of the extreme seller concentration in this market, any merger activity should be expected to be heavily scrutinized as a potential anti-trust violation. Indeed, we saw one of the most significant anti-trust suits in recent years in 2011 when the Department of Justice blocked AT&T’s attempted $39 billion acquisition of T-Mobile.

The reason behind the high seller concentration is somewhat complex and difficult to avoid. For one, operating a wireless network requires a large up front investment in infrastructure, which makes barriers to entry very high and sets up a natural monopoly scenario. Scale is very important in wireless – marginal costs are low so adding new customers is cheap but high fixed costs mean that in order to drop average costs, operators have an incentive to become large. The other concern is that wireless spectrum licenses are required to transmit signals and the amount of spectrum is fixed and auctioned by the Federal Communications Commission. Companies like Verizon and AT&T can afford to pay the most for spectrum and horde it to prevent up start competitors from threatening them.

Most would agree that the current state of affairs in wireless is not ideal from the consumer standpoint. Options are limited to the four big carriers and customers get locked into two year contracts, limiting their ability to move if they are displeased with their service. The key to making this industry more consumer friendly is the T-Mobile.

T-Mobile, which has traditionally been the innovative, scrappy competitor in a relatively stagnant industry – barely survived the 2011 takeover attempt from AT&T. Now, however, they are on an aggressive campaign to shake up this industry. They have eliminated fixed contracts and rebranded themselves as the “un-carrier.” They have upgraded their network speeds. They offer the most competitive pricing. And so far, this strategy appears to be working. According to a piece in Quartz, more customers that are about to switch carriers say they will move to T-Mobile than any other company:

most-likely-carrier-to-choose-if-switching-in-the-next-six-months-at-t-sprint-nextel-t-mobile-verizon_chartbuilder

Encouraging the competition that T-Mobile brings is key to making this industry more innovative and consumer friendly. Time will tell if T-Mobile’s strategy is effective at gaining market share, but either way the threat that they are bringing to the incumbent’s status quo will be good for everyone – besides AT&T and Verizon shareholders of course.

Better competition through mechanism design

Today, The Wall Street Journal highlighted the increase in consumers’ wireless bills despite a sort of “price war” in the wireless market.  T-Mobile had lowered its prices and started offering incentives in order to get people to switch from the major carriers Verizon and AT&T.  Those carriers followed suit.  In addition, there has even been a move away from having subsidized devices, thus allowing people out of their contracts with out a fee (now handsets are financed by the customer, and I wonder if the carriers aren’t better off for it). Even with all this price action, the industry has an HHI (the Herfindahl-Hirschman index, a measure of market concentration where 1 is perfect competition, 10000 is monopoly) of roughly 2600, and is increasing (see graphic below).  This is roughly equivalent to a market with only four carriers!  In addition, the CFO of T-Mobile believes that the carriers will consolidate further. Given the number of carriers to begin with this seems to indicate that the industry is heading toward further concentration of monopoly power.  In order to make sense of increased market concentration despite intense price competition we need to consider what makes a wireless company wireless.

fcc-wireless-report-2011-illo03

Wireless carriers broadcast over frequencies that make up the wireless spectrum.  In order to broadcast over a certain spectrum in a certain area, you need to have the licenses to do so.  Once a company has the license it can build a network of towers and provide service to the area. In short, no licenses, no wireless.  To get a better idea of how spectrum rights effect market share, consider the following two graphics.  As can be seen, owning spectrum effects your ability to grow and compete (Sprint is having network problems currently…the reader can decide for themselves whether the spectrum has anything to do with a carriers network).

fcc measuring competitionspectrumAllocation

The next auction is will be the most complex of any auctions the FCC has attempted before.  The FCC means to have two auctions going at once, one auction where broadcast companies get to auction off their old spectrum from broadcasting analog TV, while wireless carriers participate in an auction for newly bundled spectrum.  If the fierce competition that consumers currently enjoy is to continue, this auction needs to consider mechanisms that will ensure the big firms like AT&T and Verizon don’t put themselves in an unassailable position as incumbents.

To do accomplish this end, the FCC should implement a spectrum cap such that it ensures a new incumbent will enter.  Research shows that spectrum caps can ensure such outcomes.  In 2010, Germany used spectrum caps in its “Mega” spectrum auction.  The auction raised almost 4.4 billion euros for the German government, and included restrictions on how much of the new offerings the incumbents could purchase.  This ensures that smaller companies can expand and continue to compete with the larger firms.  It also weakens a main barrier to entry into the wireless market, further increasing competition.  Another provision that must be enforced is that no matter who buys the license, they must use it.  The above mechanisms are useless if incumbents can accumulate spectrum to deny it to others, or if “new entrants” just turn around and sell it to the incumbents.

Critics of policies like this one say that such restrictions will decrease the revenue of the auction.  This is accurate; but the goal of the auction is to encourage competition, not maximize the revenue.  While Verizon would pay handsomely for a wireless monopoly, and no doubt that auction would raise record profits, it would all but ensure there was no real competition.  Opponents may attack the less then optimal revenue, but to do so is missing the point of what the auction is designed to do.  On a lighter note, I doubt said critics would want to live under a government that did maximize its revenue, making their qualm more reassuring of the auctions effectiveness then concerning.

We can observe today that if given the opportunity, competition can be intense in the wireless industry.  Even the little companies like Metro PCS and Boost Mobile can give Verizon and AT&T a run for their money in small markets.  In order to see this continue, the FCC should utilize mechanisms in their spectrum auctions that ensure this competition continues.  While market consolidation is a consequence of the market for wireless services maturing, the United States should take care now to make sure the wireless industry doesn’t grow up to be anti-competitive.