Introducing The New Sprint

You may hate the story that gives you the ending first, but here it is: Tokyo-based SoftBank Corp now owns a controlling stake in Sprint, America’s No. 3 wireless carrier. SoftBank also deposited $1.9 billion into Sprint’s checkbook on July 10 as part of the deal. SoftBank previously injected $3.1 billion to strengthen Sprint's finances. In return, SoftBank now owns 78 percent of Sprint. Sprint also now owns all of Clearwire, which has been Sprint’s wireless network partner. On July 9, Sprint completed the $3.9 billion purchase of the half of Clearwire it didn’t already own.

Dan Hesse will remain CEO of the new Sprint, while SoftBank CEO, chairman and founder Masayoshi Son is now chairman of Sprint’s board, and SoftBank Holdings President Ronald Fisher is vice chairman. Because Sprint is now a foreign-owned U.S. telecom operator, former chairman of the Joint Chiefs of Staff Mike Mullen is also joining the board to oversee security matters.

This story began on October 15, 2012 when Sprint Nextel (1) agreed to sell 70 percent of itself to SoftBank for $20.1 billion. Softbank promised to inject $8.0 billion of new capital to strengthen Sprint’s balance sheet, and to pay a further $12.1 billion to buy existing Sprint shares. (2) [We’ve been tracking this story all along.] Back in October, we highlighted the purchase as a way for 1) Sprint to compete with Verizon Wireless, which controls 32 percent of the U.S. wireless market, and AT&T Mobility, which has a 30 percent market share, and 2) SoftBank chief executive Masayoshi Son to have influence over the future of the industry at a time when every big U.S. operator is scrambling for spectrum. Son wants to use the acquisition to help fulfill his ambition of making SoftBank the world’s biggest mobile phone operator. SoftBank wants to replicate its domestic success with Sprint’s 55.2 million subscribers by improving networks and services, Son said.

The completed deal creates the world’s third-largest mobile phone operator by revenues. Softbank group now has 96 million users. SoftBank plans to invest $16 billion in capital improvements at Sprint in the next two years, CEO Masayoshi Son said this week. That $16 billion investment will more than double the pace of current capital growth, and most will go to base stations for Sprint's LTE network, Son said. After the next two years, the pace of investment will slow to about $6 billion a year. Sprint has about 90 cities on LTE today, well behind AT&T and LTE market leader Verizon. Son also said that SoftBank and Sprint will open a joint hardware and software research center in Silicon Valley, employing up to 1,000 workers. Son said he's seen "considerable possibility for cutting costs" at Sprint, with up to $3 billion in annual savings by combining SoftBank's Japan purchases of base stations and smartphones with those of Sprint in the U.S.

Sprint is poised to become a spectrum powerhouse. As noted above, Sprint announced the successful completion of its transaction to acquire 100 percent ownership of Clearwire. The merger agreement was first announced on December 17, 2012 and Clearwire shareholders approved the transaction at a special meeting of stockholders held on July 8, 2013. Owning Clearwire outright gives Sprint control over its valuable wireless airwaves, which are a key to Sprint’s game plan in the battle for subscribers. With Clearwire’s spectrum, Sprint expects to muster a faster wireless service to compete with larger rivals Verizon and AT&T as well as T-Mobile, which is No. 4 nationally. With control of Clearwire’s spectrum, Sprint now controls more spectrum in the 100 largest US wireless markets than Verizon Wireless and AT&T together. But Clearwire’s spectrum is in a high frequency range that means its signal does not penetrate buildings as well as, or travel as far as, signals using lower-frequency spectrum owned by Verizon and AT&T. That means mobile telecom network operators using the higher frequency band have to build many more cell towers in dense urban areas where most people live.

The deal’s completion comes after the blessing of U.S. regulators. On July 5, the Federal Communications Commission released its decision that the transactions were in the public interest:

“The FCC finds that these proposed transactions are not likely to result in competitive or other public interest harms in the provision of mobile wireless services. In addition, the FCC anticipates that the proposed transactions likely will result in key public interest benefits, acceleration of deployment of advanced mobile broadband services and enhanced competition in the mobile wireless market, through the increased investment by Softbank in the Sprint and Clearwire networks.”

The Sprint-Clearwire transaction dominated the FCC’s decision. Taking over Clearwire gives Sprint the single-largest spectrum portfolio in the U.S., though the individual licenses aren’t quite as valuable as the low-frequency spectrum held by AT&T and Verizon. Many of Clearwire’s licenses are in weird configurations, making it difficult to deploy networks over them. Still Verizon and AT&T asked the FCC to force Sprint to divest some of those licenses as a condition of its approval. The FCC ultimately opted to let Sprint keep everything. Sprint has held a substantial stake in Clearwire (it’s currently the majority owner) since 2008, and though it’s never had direct control over the company, the FCC has always counted Clearwire’s spectrum as part of Sprint’s holdings in all other transactions. From the FCC’s perspective, nothing has changed under this deal except Sprint’s majority ownership of Clearwire now becomes complete ownership.

AT&T’s Joan Marsh reacted with a blog post calling the FCC’s decision “neither rational nor defensible.” She writes, “Not only is it inconsistent with the FCC’s own findings elsewhere, but it is directly contrary to the manner in which the FCC treated the neighboring WCS band at 2.3 GHz. When AT&T acquired those licenses, the FCC found that the spectrum was usable for mobile wireless services and promptly adjusted the screen.(3) Yet here, when Softbank acquires far more substantial spectrum rights in the 2.5 GHz band, the FCC ignores the ground truth and refuses to make the appropriate screen adjustment with little justification.” She concludes: “The screen framework has been and can continue to be an effective tool for assessing competitive impact, but until that framework is updated by the FCC to reflect ALL spectrum that is available and usable – and in this case currently being used – for mobile wireless services, the framework is a significantly flawed tool that seeks to advantage some competitors to the disadvantage of others.”

“The FCC put political expediency before policy when it chose not to count Clearwire’s spectrum in the spectrum screen,” said the American Consumer Institute Center for Citizen Research.

Acting FCC Chairwoman Mignon Clyburn said:

“Today is a good day for all Americans who use mobile broadband services… The increased investment in Sprint’s and Clearwire’s networks is likely to accelerate deployment of mobile broadband services and enhance competition in the mobile marketplace, promoting customer choice, innovation and lower prices… I am pleased that the Commission was able to act in a timely manner, voting to adopt an order within two weeks of the parties providing the Commission notice of the revised terms of their transactions.”

FCC Commissioner Ajit Pai said U.S. consumers will benefit from “an invigorated company better able to deliver advanced wireless products and services.” He also celebrated the FCC’s decision not to impose conditions that aren’t “transaction-specific.” “That result is especially meaningful here, where the total amount of mobile broadband spectrum attributed to Sprint did not change as a result of the transaction. This will be an important precedent as we consider other spectrum-related transactions.”

The deal between Sprint and Softbank has also been approved by the Department of Justice and the Committee on Foreign Investment in the United States (CFIUS) , a U.S. Treasury Department agency authorized to review transactions involving a foreign person or company. Lawmakers such as Sen. Chuck Schumer (D-NY) had raised concerns about the deal between Sprint and Softbank because of the Japanese firm’s business relationship with Huawei — a Chinese telecom firm that has been under scrutiny by the House Intelligence Committee. Under the deal approved by CFIUS, Sprint and SoftBank agreed to appoint an independent, voting member to its board to serve as security director. This board member, the aforementioned Mike Mullen, will be charged with ensuring the agreement has been followed. He or she must have the appropriate security clearances and will be the government’s contact for all security-related issues. The CFIUS approval required also gave the federal government the right to approve and review certain Sprint vendors and service providers. It also included provisions for the Clearwire deal: U.S. officials will have a onetime right to remove any equipment within the Sprint or Clearwire network by Dec. 31, 2016.

Sprint CEO Hesse highlighted competition in a statement released after the deal won FCC approval: “Just two years ago, the wireless industry was at the doorstep of duopoly. But with these transformative transactions, we are one step closer to a stronger Sprint, which will better serve consumers, challenge the market share leaders and drive innovation in the American economy.”

With the transaction complete, attention now turns to what the new Sprint will mean for U.S. wireless consumers. SoftBank has a history of barging into new fields and undercutting its rivals with cheap prices, new services, and oddball advertising. On July 11, Sprint announced The Sprint Unlimited Guarantee which guarantees customers unlimited talk (calls to any wireline or mobile phone), text and data while on the Sprint network, for the life of the line of service. The idea is to stand out from the carrier’s larger U.S. rivals, which are switching to tiered plans -- where customers pay more when they use more data. The new pledge is also aimed at competing with rivals offering data share plans that allow families and multiple devices to ride on one account.

GigaOm's Kevin Fitchard writes, "Sprint, it’s time to build that network you’ve been promising." Ever since Sprint began bandying about the term 4G back in 2006, it’s been talking a big game about networks. It’s boasted about its significant spectrum holdings, its willingness to take the lead in new technologies, and its desire to overturn the established business models of mobile telecom. But in those seven years, that promised game-changing network has failed to materialize. Sprint now has the resources to create one of the most powerful, if not the most powerful, LTE network in the country — one that would certainly put its current LTE efforts to shame. A small portion of its 2.5 GHz spectrum is currently being used in the old Clearwire WiMAX network, and some of that spectrum is in weird configurations, making it less useful for mobile broadband. But the companies still have a lot of airwaves to play with. With more capacity Sprint can support more mobile broadband connections and deliver that service at a much lower cost to the consumer.

We’ll be watching for developments and, as always, we’ll see you in the Headlines.

Notes:
1) Sprint shut down its legacy Nextel network on June 30, forcing the 1.3 million customers who were still on it at the end of March to find a new carrier.
2) Here’s how the numbers played out in the final deal: SoftBank now owns 78 percent of Sprint after investing $21.6 billion in the company. Of that, $16.6 billion will go to Sprint shareholders, with $1.9 billion more (for a total of $5 billion) being added as new capital into Sprint itself.
3) The spectrum screen is an analytic tool the FCC uses to determine how much spectrum in one market held by one company should trigger additional regulatory review.

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