** Editor’s Note:  This was originally sent to SB readers on June 22, 2014 **

June greetings from Dallas, where, as the picture shows, we are enjoying needed rain.  Thanks for the many comments on last week’s column.  Many of you shared your experiences with Google Fiber (those of you who have it in Kansas City don’t appear to be going back to cable or U-Verse in the near future), while others accused me of oversimpifying in-building wireless efforts (admittedly, I did leave the concept of obtaining Building Authorization Agreements out of the Brief.  They are hard to get and involve specialized real estate/ legal expertise).  Thanks for your readership, and please keep the comments coming!

Over the past two weeks, we have written about major changes in the telecom industry, including:

1. The half trillion dollar value and multi-hundred billion dollar capital shift from network to software providers
2. The threat of Google as a new entrant to the residential and small business markets
3. Fundamental architecture changes that will take place as content is pushed to the edge
4. In-building data capacity needs will accelerate fibered metro building deployments (which drove Level3 to offer to buy tw telecom this week for 12.5x EBITDA).

The last three points are “take it to the bank” certainties that will impact some parts of the telecommunications industry more than others.  Amid the hype, remember this:  If one carrier can deliver consistent experiences while outside, en route, near building, and in-building, all of the other carriers will need to follow suit.  The top three carriers (Verizon, AT&T, and Sprint) are driven to do this because most of their current data pricing plans are capped.  Not only is third-party Wi-Fi offloading viewed as inferior and inconsistent when compared to the increasing affordability of in-building small cell solutions, in-building Wi-Fi now has become a revenue threat to the carriers.

There are many drivers of change in the wireless industry, but four deserve special mention:

1. The ripples of T-Mobile’s Uncarrier strategy are beginning to be seen throughout the industry.  First, it was the introduction of Equipment Installment Plans (EIP), and the separation it has driven between equipment sale and service revenue quality.  As AT&T, Verizon, and Sprint transition their bases from traditional subsidy (which, at the end of the two-year term and beyond, can have attractive economics) to EIP models, the pressure on service revenues (particularly data ARPA/ ARPU growth) becomes greater.  As we covered in Sunday Brief Q1 earnings reviews, the transition of T-Mobile’s base will be nearly complete by the end of 2014.

The most important thing to remember with these shifts, however, is the increased flexibility it provides the incumbent providers’ base of customers.  Under the traditional $325-350 subsidy model termination penalty scheme, the perception among the base was that they were “locked” until the end of the two years.  None of the new plans carry two-year contract terms, and, as Sprint and T-Mobile have shown, they are willing to pay multi-hundred dollar termination fees to drive up gross additions .  A more unstable base should have AT&T and Verizon on edge.

To add fuel to the fire, T-Mobile will launch a new program  to the AT&T/ Verizon base this week.  For a $700 hold on your credit
card, T-Mobile will send you a new iPhone 5s for a free one week test drive (I have confirmed with T-Mobile that the one week starts upon iPhone receipt – something to consider when you sign up).  This is not a plan that is aimed at the traditional T-Mobile base, but one that gets current (Sprint/AT&T/Verizon) iPhone 5s users into a T-Mobile store to have a conversation.  (If the customer is a current iPhone 4s user, they will receive a double benefit due to the 64bit processing and LTE capabilities inherent in the 5s – a very clever move on the part of T-Mobile).

Will this plan have the same effect as equalizing the cost of an Android Wi-Fi only tablet?  Likely not.  But it could erase perceptions of poor network coverage for some.  While many see this move as more “Carrier” than “Uncarrier”, I see this as Part 1 of a multi-part plan to reintroduce the T-Mobile network (voice, text, data) to millions of skeptical AT&T and Verizon customers (some of whom may have previously been T-Mobile customers).  At worst, this program will provide real-time feedback on their network improvements and identify coverage gaps (and hopefully reiterate the need to begin a substantial in-building coverage initiative for T-Mobile hopefuls who are captive to multi-story living/ working environments).  At best, it will propel 2-3 million gross additions through the end of 2014.

2. The drive for spectrum outside of the FCC auction process will continue.  There have been a lot of discussions this week about Verizon’s interest in Dish network spectrum (this article places a $17 billion value on the asset, and it’s very likely that Verizon’s interest is focused on Dish’s AWS-4 holdings as opposed to the 700MHz spectrum band), and also T-Mobile’s interest in acquiring additional 700 MHz A-Block (a.k.a., “low band”) spectrum from the likes of Paul Allen’s Vulcan Ventures (who holds the Seattle and Portland licenses) and spectrum management companies King Street LLC and Cavalier Wireless (the full list of original A-Block winners can be found here).

We have already seen AT&T actively pursuing spectrum purchases since 2012 in the 2.3 GHz/ WCS band (see here for their Sprint spectrum purchase that escaped most media headlines), and this week Sprint announced their first wave of rural partnerships which will leverage their Tri-Band capabilities.

With the frequency-sharing rules of the upcoming AWS-3 auction, and the “reserved/ unreserved” designation for the 600 MHz auction discussed in a previous Sunday Brief, is anyone surprised that unrestrained and adjacent spectrum would be interesting to larger carriers?  Absolutely not.  Announcements serve to entice more broadcasters to participate in the 600 MHz auction process, and hopefully keep additional regulations to a minimum.

Interestingly, if there are a wave of spectrum sale transactions prior to the end of the year, look for new categories of bidders (e.g., non-traditional wireless providers) to emerge for the licensed spectrum.

3. Consolidation efforts will fail, not because of Sprint’s lackluster efforts, but because of T-Mobile’s unbelievable success.   In second quarter earnings, we will see the full fruits of T-Mobile’s Early Termination Fee buyout initiative announced in January.  Surprisingly to most (although not all), T-Mobile’s results will equally impact Sprint and AT&T (given the process ease of SIM-card swapping between AT&T and T-Mobile, this might be viewed as a slight victory for AT&T).

As we have shown in previous Sunday Briefs (see picture), the retail postpaid gap between T-Mobile and Sprint is shrinking (if one exists in retail prepaid after 2014  I’ll be very surprised).  The eleven million subscriber gap at the beginning of 2013 could be as small as four million as we exit 2014.  And, considering the composition of T-Mobile’s (smartphones) vs. Sprint’s (tablet) net additions, the revenue gap will be even smaller.

While there will be many traditional regulatory concerns (link to the Herfindahl index definition is here), the trends beg the question “Why should T-Mobile take on Sprint?”  Does Sprint’s base of customers provide unique differentiation (and, given a large portion of the base is still on unlimited and unthrottled LTE data plans, can the value of the customer base increase)?  Does Sprint’s base allow T-Mobile to build unique capabilities in the enterprise segment (which Sprint largely abandoned in 2013 to focus on small and medium customers)?  Can Sprint out-innovate T-Mobile with a new management team (or, as one of you wrote recently, “Where is the Sprint problem – with the quality of the clay or with the potter?”).

Time is not on Sprint’s side:  Service revenues are shrinking, management is leaving, and customers (particularly Corporate Liable enterprise customers) are questioning.  No doubt, there is a value to scale, but T-Mobile is worth much more than $40/ share in a couple of years without Sprint.  Could a cash infusion from Comcast/ Time Warner or a cable consortium be a viable alternative?  Does T-Mobile even need cable as a strategic investor?

Consolidation makes good headlines, but every month that goes by without an announcement opens up better alternatives for T-Mobile than Sprint (and makes the “Why?” question more difficult to answer).  Remember – at the beginning of 2006, Sprint Nextel, AT&T Wireless, and Verizon were basically the same size.  One non-traditional strategic partner/ investor could reset the equation for T-Mobile and the industry.

 4. The cable industry (as opposed to FiOS or U-Verse) will unveil Wi-Fi capabilities in 2015 that will be easier to use and intensify the battle for data in the home and office.  The blind spot in wireless carrier strategic plans is cable.  Their Wi-Fi efforts are very close to tackling the issue of in-home (and in-office) data usage.  The rollout of an additional 100MHz of 5GHz Wi-Fi capacity will also fuel the bandwidth fire.  More to come on this in a future Sunday Brief, but, given the arguments presented above and in previous analyses, cable would easily eliminate 10-20% of the data upside from the wireless carriers in 2015.  (Editor’s note:  for a view of the extra expansion from the cable industry’s point of view, check out this CableLabs blog post).

These are a few of the issues wireless service providers face, but they cover nearly every aspect of the business environment:  non-traditional competitors presenting real substitutes, traditional competitors redefining the buying process, increases in supply, new regulations, and the increasing sophistication of smartphones and tablets are but a few of the dynamics that will be discussed around the strategic planning table.  Who wins is anyone’s guess.  But every carrier will attempt to move the needle.

In other important news this week, we do not have space to do a full analysis of the new Amazon smartphone (we will try to tackle the new Fire Phone in depth next week).  In the meantime, check out two in-depth reviews here and here, and an excellent interview with Ian Freed from Amazon here.

Have a terrific week!