Sprint Chairman Bypasses Regulators to Make Expansion Case

Both the Department of Justice and the FCC have said they have deep concerns about Sprint’s possible purchase of T-Mobile (CD Feb 6 p1). Chairman Tom Wheeler signaled his concerns the same day he met with Son (CD Feb 4 p13). Son told reporters after his Chamber speech that he did not plan to meet with federal regulators on this trip to Washington, but added that “whenever we have the opportunity sometime in the future, that is I think necessary.” Son said he came to Washington to “have a real discussion” to urge stronger competition in the U.S. wireless broadband market, which he believes currently only features “pseudo-competition” because of the presence of market leaders Verizon Wireless and AT&T.

SoftBank has “not decided” yet whether to bid for T-Mobile, Son told reporters, but added that “scale is needed to have a real fight” against Verizon Wireless and AT&T. On Charlie Rose, Son said SoftBank would buy T-Mobile US “if we could,” though there is no formal agreement so far. Son said he wasn’t sure how good his chances are to make the buy. “We would like to make a deal happen, but there are steps and details we have to work out.” Son told Rose “I want to be No. 1” in the U.S. market.

Son said Tuesday that he feels an “obligation” as Sprint’s chairman to propose solutions that will ensure the U.S. does not continue “falling behind” in terms of its wireless broadband capability. Son cited an OpenSignal study released in February that found the U.S. now ranks 15th in average LTE speeds with an average of 6.5 Mbps (http://bit.ly/1bSuOMw). SoftBank’s LTE services in Japan have an average of 21.3 Mbps, Son said. Mobile broadband will be “at the center” of U.S. infrastructure, as important to keeping the U.S. on top as railroads were in the 1860s and highways were in the 1950s, he said. SoftBank and Sprint engineers are already working to increase Sprint’s LTE speed through deployment of the Sprint Spark program on Sprint’s 2.5 GHz spectrum, which promises speeds of up to 60 Mbps, Son said. The Sprint Spark program is just a first step, and Sprint could eventually increase its LTE speed to 200 Mbps if it could gain additional infrastructure through acquisitions, he said.

Son on Tuesday added a new line of argument for additional Sprint acquisitions, stating that an expanded SoftBank presence in the U.S. would provide an alternative to wireline broadband access in the midst of the Comcast-Time Warner Cable deal. That deal, which would combine the two major wireline broadband providers, is seen as likely to face serious regulatory hurdles (CD Feb 14 p1). The Comcast-TWC combo would make U.S. wireline broadband even more expensive, pushing it to become more than 10 times as expensive per megabit as it is in Japan, Son said. Only 33 percent of U.S. consumers have the choice between three or more wireline broadband providers, so SoftBank would like to be the “third alternative” that can offer service at a lower price, he said. Wireless broadband is not a serious speed competitor with cable broadband at present, but it will be in the future, Son said.

Son said he hoped SoftBank would be able to play the same disruptive role in the U.S. wireless market that it played in Japan. American consumers pay an average of 1.7 times more per gigabit of data use than consumers in Japan -- the result, Son says, of SoftBank’s price war against dominant Japanese incumbent Nippon Telegraph & Telephone (NTT). Son also noted SoftBank’s disruptor role on Charlie Rose. “For Internet devices, the highway itself as infrastructure is not good enough,” he said. “That is a big problem. That was a big problem for Japan so I challenged NTT.” Rose asked Son if he wanted SoftBank to be the biggest phone company in the world. “That’s my wish,” Son replied.

Verizon Wireless and AT&T own more than 75 percent of the postpaid wireless market and 80 percent of corporate customers, Son said on Charlie Rose. “They are happy with where they are,” he said. “They make a ton of money. ... They are very comfortable where they are, which I don’t blame. If I were in their shoes I would be happy.” The two big carriers don’t face “real competition” and Sprint and T-Mobile are too small by themselves to take them on, he said. He called Sprint and T-Mobile “two little ones who are not able to fight without enough scale.” Combining the two would level the playing field, Son said. “We need a certain scale,” he said. With a merger, there would be a “three-heavyweight fight,” he said. “I would like to have the real fight, OK? Not the pseudo fight -- the real fight.”

Industry Observers Skeptical

Regulators appear to be “pretty dug in against this merger,” said Guggenheim analyst Paul Gallant. “So expanding the discussion to include the wireline broadband market is a smart move and has to be at least somewhat appealing to the FCC and DOJ. I don’t know how far it moves the needle, but if it could actually be executed by the companies, it’s a helpful new argument."

Jeff Silva, analyst at Medley Global Advisors, questioned whether U.S. regulators would approve a Sprint/T-Mobile deal, regardless of the pitch. “I tend to doubt Son’s strategy will work, though I admire his tenaciousness and expect his road show to generate lots of headlines in coming days,” Silva said. “Most indications to date strongly suggest the Justice Department and FCC simply are not comfortable with a Sprint/T-Mobile combination at this time, especially amid recent market turbulence created by T-Mobile’s un-carrier strategy. Son vowed to engage in a massive price war if a Sprint/T-Mobile merger clears regulators, but T-Mobile alone is already creating meaningful price disruption in the wireless space. From that flows the U.S. government’s view that such a tie-up is premature. End of story, sort of.”

"To put it gently, Mr. Son must have a finely tuned sense of irony,” said Free State Foundation President Randolph May. “When AT&T and T-Mobile wanted to merge, Sprint insisted the wireless market needed four national market participants to remain competitive. Now, it seems that three competitors would be just fine. T-Mobile has shown recently that it can be a disruptive force in the market in a way that attracts new subscribers. This is positive.” May said he is not suggesting that a Sprint/T-Mobile merger should be rejected. “I would just like to see the case argued without Mr. Son denigrating the current competitiveness of the wireless marketplace and getting all twisted into knots trying to avoid the implications of Sprint’s previous positions."

Son’s message to U.S. regulators is “’trust in me, not in competition,'” said Fred Campbell, executive director of the Center for Boundless Innovation in Technology (CBIT). “But US antitrust laws don’t make exceptions for the cult of personality, and he didn’t offer any other reason for US regulators to consider approving a Sprint offer to purchase T-Mobile’s market share.” Son’s argument is “the US wireless market isn’t competitive enough, so policymakers need to approve the merger of the third and fourth largest wireless companies in order to improve competition, because going from four nationwide wireless companies to three will make things even more competitive,” Campbell said in a blog post (http://bit.ly/1g5OyXR). “An argument like that takes nerve, especially now. When AT&T attempted to buy T-Mobile a few years ago, Sprint led the charge against it, arguing vociferously that permitting the market to consolidate from four to only three nationwide wireless companies would harm innovation and wireless competition."

Son’s argument is problematic, said Public Knowledge Senior Vice President Harold Feld. “Those who believe we have problems with our broadband infrastructure don’t believe the solution is consolidation,” Feld said. “Those who believe that further consolidation in the wireless market would be fine don’t believe we have problems in our broadband market. Furthermore, Sprint has to start actually deploying new technology and doing disruptive things in the market if it wants to get taken seriously as a potentially disruptive competitor. A history of challenging incumbents in Japan, using unbundling regulations we don’t have here, is not going to impress regulators. T-Mobile is doing disruptive things. Sprint is still just talking about being disruptive."

Free Press “expressed skepticism about public interest benefits when the rumors started flying in December,” said Policy Director Matt Wood. “Then, as we told the Senate Judiciary Antitrust Subcommittee last month, we remain skeptical about the notion that having fewer competitors would increase competition. But as I also said in that hearing about this long-rumored deal, the jury’s not only still out, it hasn’t even been called yet."

AT&T Senior Executive Vice President Jim Cicconi said jokingly in a statement reacting to Son’s speech that “if Mr. Son is having a bad experience with US wireless, it must be because he’s using Sprint."

Bret Swanson, president of Entropy Economics, wrote in Forbes that Son’s arguments are “nonsensu,” Japanese for nonsense. “It’s true that the U.S. needs to clear more wireless spectrum,” Swanson said (http://onforb.es/1iwTBIP). “But the urgent need for more spectrum mostly shows how much positive momentum American mobile enjoys. Mr. Son should get his merger. But not for the reason he states. The notion that U.S. broadband and mobile are lagging is simply false, and dangerous -- because it is being used as a pretext for massive new regulation of the Internet economy."

Meanwhile, with a possible merger fight looming, SoftBank said Tuesday it has hired Bruce Gottlieb as executive vice president for legal and regulatory affairs, based in Washington. Gottlieb, former president of National Journal, was a top aide to former FCC Chairman Julius Genachowski and former Commissioner Michael Copps. ,