Colin Gibbs

[Commentary] The Federal Communications Commission took its first major step toward overhauling the controversial Lifeline program in a move that will punish not just low-income citizens but perhaps small, innovative service providers as well.  Yes, Lifeline was once teeming with fraud, waste and abuse. Yes, the program still has significant flaws. And yes, companies that fail to provide adequate services should be forever barred from Lifeline for preying on some of our most vulnerable citizens.

Tower companies are well positioned as mobile operators ramp up their network investments in coming months in advance of 5G, according to Deutsche Bank. And Sprint and AT&T are at the front of the pack.

Wireless capex among US carriers fell short of expectations in 2016 as operators tightened their belts ahead of 5G deployments. Sprint was the most notable miser among operators in terms of network spend, incrementally lowering its capex guidance in fiscal year 2016 from an initial $4.5 billion to a range of $2 billion to $2.3 billion. Sprint has yet to offer capex guidance for its current fiscal year, but it has said it expects its investments to accelerate as it continues to densify its network. Other major US carriers will begin to open their wallets, too, Deutsche Bank predicted, buoying the tower market.

[Commentary] Federal Communications Commission Chairman Ajit Pai drew applause from the wireless industry yesterday as he outlined his plan to overturn network neutrality rules adopted under his predecessor Tom Wheeler. But rolling back those rules will give the nation’s two largest carriers a huge advantage as the wireless and digital media markets collide.

The fight over net neutrality has grown more contentious in recent months in the wireless industry as carriers increasingly expand into digital media and advertising to offset slowing growth in the US mobile market. AT&T acquired DirecTV and hopes to join forces with Time Warner, for instance, while Verizon has acquired AOL and agreed to buy Yahoo. While zero-rated data is less of a factor in this era of unlimited-data plans, the undoing of net neutrality rules would still give operators opportunities to leverage their own content, placing smaller digital media companies at a disadvantage. Verizon could enable faster speeds for users willing to endure AOL ads, for instance, or AT&T could do the same for mobile users of its DirecTV Now service.

The Federal Communications Commission will lift its so-called “quiet period” on April 27 following the wrap-up of the incentive auction of 600 MHz spectrum, and analysts and industry insiders expect the mergers and acquisitinos talk to heat up quickly. The CEOs of Verizon, T-Mobile and SoftBank have all voiced their interest in potential tie-ups, and Sprint CEO Marcelo Claure noted that he was in Tokyo to meet with the parent company and discuss the carrier’s business. Speculation of major tie-ups has increased in recent months with the election of Donald Trump in the midst of the auction.

While it’s too early to know exactly how regulatory agencies might react to any specific deal, analysts and executives generally agree that they’ll demonstrate a far lighter regulatory touch under President Trump than they did under President Barack Obama. Meanwhile, the US wireless market has grown increasingly competitive, as evidenced by the launch of unlimited-data plans by all four major carriers. The market will only get more heated later this year as cable companies such as Comcast and Charter launch wireless service. Meanwhile, Dish Network—which sits on a pile of unused spectrum—continues to plot its course onto the dance floor.

It’s no secret that some of the nation’s biggest cable operators are positioning themselves to expand into the wireless market in the coming months. Comcast reportedly plunked down nearly $2 billion as a deposit to participate in the incentive auction that will wrap up in the coming weeks, and Charter Communications has applied for regulatory approval for 5G experiments. Both companies are keeping their cards close to the vest as they plot their strategies, however. Comcast CEO Brian Roberts abruptly cut off a question from analyst Craig Moffett on last month's earnings call, saying only that “We’ll clarify things” at some point in the future. Charter has not been much more vocal about its plans.

Verizon’s move to kill smartphone subsidies and raise activation and upgrade fees will increase profit margins, according to analysts, but it risks losing customers and lowering ARPU. The nation’s largest mobile network operator confirmed last week that it will kill subsidies and two-year service contracts to new and existing customers, and instead will require all customers to sign up for its equipment installment plan. Verizon also raised its activation and upgrade fees from $20 to $30. Handset subsidies from carriers have plummeted precipitously in recent years as operators have moved away from contracts in favor of installment plans and leasing models for phones. Subsidies represented roughly 30% of phone sales last year, according to UBS, down from 46% in 2015 and 82% in 2014.

“With this move, we estimate just 10% to 15% of sales (representing business subs) will be subsidized going forward,” UBS Analyst John Hodulik wrote in a research note to investors Wednesday. “Verizon also increased its activation/upgrade fee to $30 from $20. We believe these moves will allow Verizon to maintain 2017 margins at similar levels to 2016 vs. our prior expectations for a decline. However, it will likely pressure subscriber trends as churn increases, aiding T-Mobile and Sprint efforts to take share.”

CenturyLink’s deal to acquire Level 3 for $25 billion underscores the ever-increasing value of fiber for wireless carriers, Jonathan Chaplin of New Street Research said. And that could lead to a bidding war for Level 3 among mobile operators and others looking to shore up their fiber assets. Level 3 boasts “a strong metro fiber footprint” with roughly 34,000 connected buildings, according to a New Street Research report. That footprint alone isn’t enough to support a nationwide densification buildout, but it could play a key role as carriers prepare to deploy 5G networks and technologies. “This is far from a ‘silver bullet’ for a wireless company – they will need a much more distributed fiber network than Level 3 has in order to densify economically – but it is a start,” Chaplin wrote in a research note to subscribers before the deal was officially announced this morning. “Level 3 is undoubtedly a better asset than XO, which Verizon acquired recently, for example…. Level 3 is an increasingly strategic asset, so we also wouldn’t be surprised to see a competitive process evolve if they are in talks.”

AT&T may no longer be looking to spend much in the incentive auction of 600 MHz spectrum now that it has agreed to fork over $85 billion to acquire Time Warner. And that would likely mean that the auction won’t raise nearly as much money as had been expected.

The nation’s second-largest mobile network operator announced over the weekend that it has agreed to buy Time Warner in a blockbuster deal to expand its digital media empire. The move comes as AT&T prepares to launch DirecTV Now, a mobile-focused, over-the-top (OTT) offering in an effort to leverage the 2015 $49 billion acquisition of the satellite TV provider. Interestingly, the announcement came just a few days after Stage 2 of the incentive auction of TV broadcasters’ airwaves ended abruptly after a single round, surprising analysts and other onlookers who expected the second stage to last two weeks or more. Stage 2 generated only $21.5 billion in bids, falling far short of the $54.6 billion that would have ended the event. The unexpectedly truncated round led some analysts to suggest that one bidder that had been looking to buy spectrum nationwide may have put its wallet back in its pocket, essentially walking away from the event. And Tim Farrar of TMF Associates took that scenario one step further, suggesting Comcast – which had been expected to spend roughly $5 billion or $6 billion at auction – might have opted out, choosing to focus primarily on the MVNO agreement it activated with Verizon last year rather than investing heavily to acquire its own spectrum licenses.

The Federal Communications Commission once again declined to say whether the US wireless industry is competitive in its annual report addressing the matter. And once again, industry associations offered very different views. The Commission’s Nineteenth Mobile Wireless Competition Report weighed data from the second half of 2015 in an effort to analyze competition among carriers “as well as examining competition across the entire mobile wireless ecosystem.”

The Wireless Telecommunications Bureau (WTB) for the fifth consecutive time stopped short of concluding the market “was effectively competitive,” saying the space is too complex to be summed up in such a simple way. The FCC estimated Verizon claimed 38.1 percent of overall industry service revenues in 2015, down slightly from 38.7 percent in 2014, while AT&T’s 32.4 percent share of revenues was essentially flat from the previous year. Sprint pocketed 14 percent of all service revenues last year, down from 14.9 percent the previous year, while T-Mobile’s share grew to 13.5 percent last year, up from 11.9 percent in 2014.

The Competitive Carriers Association (CCA) praised the Commission’s unwillingness to deem the mobile market competitive and encouraged the agency to develop reforms that would spur competition. “It’s true that the mobile market continues to evolve as consumers demand more wireless services. Nevertheless the Report affirms CCA’s analysis that the mobile marketplace cannot be considered effectively competitive as a result of concentrated market share, and a duopoly that continues to dominate service revenue and the number of connections and devices,” CCA CEO Steven Berry said.

In a filing at the Federal Communications Commission, T-Mobile hammered Verizon's new price plans as it said competition in the US wireless market is thriving.

The operator cited its uncarrier marketing strategy, which has disrupted the wireless industry in several ways and driven T-Mobile's recent success. The company said some of its tactics have been adopted by other major wireless carriers – Verizon and AT&T, namely – illustrating that competition is thriving in the US mobile market. The filing was submitted as a public comment in advance of the FCC's annual report on the state of competition in the wireless industry, which is due later this year.