Sprint-Clearwire Marriage Gets Closer; Samsung Eyes Europe

(May 25 2011) 4G , LTE , WiMAX

1. By Caroline Gabriel, Research Director, Rethink Technology Research.

   As U.S. Senate hearings on the proposed AT&T acquisition of T-Mobile got under way, both of the largest U.S. carriers painted a picture of inevitable consolidation in the country. Verizon Wireless said it had expected the AT&T/T-Mobile move for years, while AT&T said Clearwire and LightSquared should themselves merge, since there would not be room for two wholesale networks. That comment echoed the expectations of many, that both the wholesale carriers will combine their operations with those of Sprint, which says it will announce its 4G plans during the summer. Meanwhile, Vodafone’s CEO said a similar consolidation would be good for Europe, which would reduce the number of customers there—but that has not stopped Samsung from launching a new infrastructure venture for the region.

   John Stankey, head of AT&T's enterprise business, told Reuters that the best hope for U.S. mobile wholesale providers might be to merge. "We have two people staking out a wholesale play in the market. It's hard in economic theory and it's hard in past practice in telecommunications to ever find a market where two wholesale players ever competed effectively," he said. "There really isn't a profitable wholesale model in wireless today. Do you know one that's making money? Do you know one that's on a trajectory to make money? Do you know of one that's not in jeopardy of running out of money in the next 12 months?"

   The remarks were clearly aimed at Clearwire, which has failed to find an additional investor, or to raise additional cash by selling surplus spectrum. Increasingly, it is losing its own freedom of action and looks on course to unify its networks with those of its largest shareholder and MVNO Sprint. A further indication that it will pool its spectrum with Sprint’s—and share the larger operator’s cell sites and new Network Vision flexible infrastructure—came with the news that it will outsource its network operations to Ericsson in a seven-year deal. Ericsson already manages Sprint’s own cellular networks and is one of three suppliers to Network Vision, which will enable the cellco to support multiple standards in its spectrum. Clearwire already shares 40 percent of its cell sites with Sprint, 70 percent in large metros.

   Sprint CEO Dan Hesse recently acknowledged that, as many had speculated, his company was talking to Clearwire about using those base stations to host the WiMAX player’s network too. That, in turn, would almost certainly mean a shift to LTE for Clearwire, and possibly a full merger with its biggest MVNO customer.

   In the short term, the Ericsson deal is being presented as part of Clearwire’s ongoing cost-cutting program. Outsourcing networks is an increasingly popular move for major carriers, reducing costs and boosting efficiency, and Ericsson is now the largest operator in the world in terms of the number of subscribers it handles.

   The companies did not provide financial terms of their deal. "We think the Ericsson deal can further lower operating expenses in the third quarter that are already likely to drop in the second quarter," said Walter Piecyk, an analyst at BTIG Research, contributing to the bid to achieve EBITDA profitability by 2012. Clearwire retains ownership of its assets and will transfer about 700 staff to Ericsson, but denied there would be layoffs. Clearwire insisted the decision was made independently of Sprint though a spokeswoman added: "Sprint has been very pleased with the partnership it had with Ericsson. That certainly influenced our decision."

   There was some consternation over whether Ericsson could manage a WiMAX network, having been famously hostile to the technology. The choice of the Swedish supplier was seen as a further sign that Clearwire would migrate, over time, to LTE, but the WiMAX network will undoubtedly be in action for years to come. Ericsson said its managed services tools were suited to any wireless platform. It would, also, have been hard to find a managed services supplier with sufficient scale and experience that was specialized in WiMAX, given that Huawei was probably effectively barred from the project.

   As for consolidation among the larger cellcos, Verizon Communications’ COO Lowell McAdam said it was “inevitable. It was kind of like gravity,” adding that Verizon had expected, for about four years, that AT&T “was going to have to make a move like this to meet its customers' demands.”

   There has been much talk that Verizon might make its own bid for Sprint—which would be much complicated if the latter does go ahead with merger, or even network sharing, with Clearwire and/or LightSquared. Sprint CEO Dan Hesse warned the Senate hearing that an AT&T/T-Mobile combination might force his own company to be acquired, but analysts’ attention had moved on from Verizon to CenturyLink, the biggest telecom company with no wireless unit. CenturyLink has the financial resources and has shown an appetite for major deals, plus it needs a wireless business, wrote analysts at Piper Jaffray in a recent research note. And there would be far fewer regulatory hurdles than for Verizon. CenturyLink’s market value is about $25 billion, compared with about $15 billion for Sprint, and the company has already acquired former Baby Bell Qwest and Sprint’s former long-lines business Embarq for cash.

   In the meantime, Sprint and consumer groups are being left to take the lead in arguing against the AT&T transaction. At the initial Senate hearings, AT&T CEO Randall Stephenson countered accusations of reduced U.S. competition by pleading a spectrum shortage.

   The stakes are high. A Reuters report has indicated that it will cost AT&T $6 billion if the deal does not go through. The U.S. firm will have to pay T-Mobile parent Deutsche Telekom $6 billion in assets, cash and services as a breakup fee, should regulators block the $39 billion merger or impose such stringent conditions that it becomes non-viable. Sources told the news agency that the penalty clause, at over 15 percent of the deal price, is a world record in its size, and would be made up of $3 billion in cash, $2 billion worth of spectrum and a roaming agreement valued at $1 billion.

   The Department of Justice and the FCC will need to approve the takeover, and hearings have started after a round of filings and submissions from supporters and opponents (mainly the latter) over the past few weeks. During a hearing in front of the Senate Judiciary Committee, Stephenson said the acquisition was necessary to bring his company sufficient “spectrum depth” to extend LTE to the whole country, including rural areas. This sparked considerable hostility from some senators and attendees, who pointed out that AT&T has the largest spectrum holdings among the big four cellcos and has actively advertised itself as the carrier with the strongest spectrum position. One of the panelists at the hearing, Sprint CEO Dan Hesse, commented: "AT&T doesn't use the spectrum it has; AT&T already has the spectrum it needs to reach rural America." But Stephenson retorted that, in many areas, AT&T lacks the 20 MHz of “contiguous unused spectrum" required for the best 4G deployment.

   Philipp Humm, CEO of T-Mobile USA, also played the spectrum card, saying his company did not have sufficient resources to roll out its own LTE network. Senator Amy Klobuchar questioned how T-Mobile could be currently advertising itself has having the “largest 4G network” in the U.S.

   Stephenson also responded to the inevitable questions over the decline in competition the merger would cause, saying that there would be many smaller players, as well as a powerful Verizon, left in the game, and that many markets had a choice of five cellcos when local players were included. Some panelists mocked this viewpoint, comparing it to Mom and Pop stores trying to compete with Walmart.

   "First and foremost, this transaction is about consumers," Stephenson said. "It's about keeping up with consumer demand specifically. It's about having the capacity to drive innovation and competitive prices” and raise service quality.

   Some senators reacted negatively, claiming it would allow AT&T to raise its prices and ax jobs, while Sen. Herb Kohl (D-Wisc.) said AT&T and Verizon would control about 80 percent of the market between them. He added: "This is a business deal to make your company more successful and more profitable. We should discuss it in that context, not that this is in the national interest."

   Meanwhile, across the pond, Vodafone CEO Vittorio Colao said consolidation would be a good thing in Europe too, and success for AT&T might be the catalyst. "Consolidation would be a good thing, beneficial to all," he said during a presentation in London, but added: "We will see if it goes ahead in the U.S."

   Consolidation in Europe could shrink the number of customers available for the big infrastructure players even more quickly than the RAN sharing trend, but that has not stopped Samsung seeking to gain a place in the 4G equipment market in the region. Despite its huge, and growing, influence on most aspects of wireless technology—handsets, memory, displays, processors—Samsung has been a bit player on the infrastructure side. However, when it took the lead in developing WiMAX, it promised that would also give it a head start in all 4G OFDM-based technologies, notably LTE. This week, it has formalized its plans and created a new division, based in the U.K., specifically charged with breaking into the European LTE market.

   This is a formidable task, given the power and entrenched position of the European majors—Ericsson, Alcatel-Lucent and Nokia Siemens—combined with the aggressive rise of Huawei and ZTE. With operators looking to combine their networks and reduce their costs, there hardly seems to be room for a new supplier. A wave of consolidation has already seen Motorola Networks and Nortel disappear, while Samsung may remember the fate of several well-funded players that tried to take on Ericsson in 3G—Motorola itself, Fujitsu and another firm seeking a comeback at the LTE stage, NEC.

   However, Samsung has already shown itself capable of addressing more than LTE migration paths for its WiMAX customers, such as Yota in Russia or Clearwire in the U.S. It has signed a list of contracts that do not include WiMAX or even its closest LTE relative, TD-LTE. These include MetroPCS and Cellular South in the U.S. and it claims to have a total of seven commercial LTE wins and 30 carrier partnerships or trials.

   However, its WiMAX leadership has proved its biggest launch pad, getting it a foothold in some major carriers that would not normally have considered a supplier from outside the top three. Its presence, alongside Ericsson and Alcatel-Lucent, in Sprint’s huge Network Vision rollout was because of its position as Clearwire’s lead vendor—with the near certainty that those two operators will combine their networks, Samsung acts as a useful bridge, and its fellow vendors have had to license its WiMAX technology to ensure support for all Sprint’s air interfaces (even if it is actually Huawei, excluded from Network Vision, which is doing a lot of the heavy lifting for Clearwire’s TD-LTE migration trials).

   In another contract where WiMAX acorns may lead to LTE oak trees, Samsung is set to share Yota’s LTE rollout with Huawei, having been the startup’s WiMAX provider. This has become a hugely important deal as Yota will provide a wholesale network supporting all four major Russian operators.

   Samsung’s other advantage has always been its South Korean roots. South Korea remains one of the most advanced nations in terms of national investment in emerging broadband technologies and Samsung not only gains access to the results of the huge state R&D program, but works closely with some of the world’s most savvy carriers. In WiMAX, the long established 802.16 process was overtaken by South Korea’s homegrown alternative, WiBro, and when that was adopted as the Mobile WiMAX standard, Samsung seized an immediate head start in technology and IPR. Now it is tapping into similar activities around LTE—such as early demonstrations of LTE-Advanced and beyond, and SKT’s cutting-edge plan for an LTE build-out harnessing cloud RANs, femtocells and new Web services. The intensive South Korean R&D activities have also helped Samsung gain a major IPR position in LTE, where it claims 25 percent of essential IPR.

   So will all these advantages really carry any weight against Ericsson and Huawei in the European market? Samsung’s new European Network Operations (ENO) organization will not only sell the kit, but will work to “increase awareness of its field proven LTE solution,” which may be the key challenge. Youngki Kim, EVP and general manager of the firm’s Telecommunication Systems Business, said: “We believe that ENO will play a pivotal role for Samsung in helping us achieve significant 4G LTE success in Europe, through the introduction of our advanced LTE technologies, building on our 30 years of experience in the telecommunications systems industry.”

   The company chose last week’s LTE World Summit in Amsterdam to show off its flexible base station, which supports LTE, W-CDMA, WiMAX, GSM and CDMA on a single platform; and its Smart LTE network optimization solution. Both address key carrier concerns regarding multi-technology build-outs and efficient use of spectrum. But the real advantage Samsung can play is the ability to support end-to-end solutions, from core to RAN to devices. This was the hallmark of 2G and early 3G industries, but the various elements have increasingly been divorced. The traditional infrastructure vendors have sold off their device operations, or placed them in joint ventures, most recently with the separation of the two halves of Motorola. Yet, the big challengers in 4G—Huawei, ZTE and possibly Samsung—are all end-to-end players, and Samsung’s early production of WiMAX and LTE devices has certainly won it the ear of carriers on the infrastructure side on various occasions (this was explicit at MetroPCS).

   Indeed, Arun Bhikshesvaran, VP of strategy and market development for Ericsson North America, recently told Telecom.com: “The kind of company that I would worry about is the kind of company that can pull together a fantastic story that connects everything from user experience, though the devices, all the way to the core of the network.”

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