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In this Industry Buzz podcast, the UCStrategies experts discuss the proposed acquisition of T-Mobile by AT&T. Among the questions posed to the group: Will it actually happen? Will the regulators allow this type of industry reshaping to occur? What happens to the side players such as Sprint? How will this change the rules of the cellular game? And most importantly for this group: what impact will this have on unified communications?
The Expert panel includes Michael Finneran, Russell Bennett, John Bartlett, Andy Zmolek, Marty Parker, Art Rosenberg, and Steve Leaden.
Michael Finneran: Good afternoon, this is Michael Finneran for the UCStrategies Industry Buzz podcast this week. The subject is the biggest subject we are dealing with in the telecommunications world, which is the proposed acquisition of T-Mobile by AT&T. The deal would put T-Mobile in AT&T’s hands for the price of $39,000,000,000, at the end of which, Deutsche Telekom, the current owner of T-Mobile would own 8% of AT&T. Also, there is a $3,000,000,000 breakup provision as part of the agreement and if it does go through, it would greatly change the composition of the U.S. cellular market. AT&T would leap to the front, with 43% market share, going far past Verizon’s 34%. Of course, that also means that 77% of US Cellular customers would be in the hands of one of those two carriers. Sprint would come in third with 17%. Now, a number of the UCStrategies experts have different views on this and the big questions we will be wrestling with is number one, will this actually happen? Will the regulators allow this type of industry reshaping to occur? Also, what happens to some of the side players like US Sprint? Also, how will this change the rules of the cellular game and most importantly for our group, is the impact on UC.
Now, first up is Russell Bennett, who wants to talk about the impact on Deutsche Telekom, Russell?
Russell Bennett: Thanks Michael. I looked at all the commentary and the analysis on the internet and it is quite interesting that Deutsche Telekom’s CFO was very pleased that he was getting, in his view, a 50% premium on any market valuation on T-Mobile. And he said that he was going to spend some of the money that he got paying down debt and returning money to shareholders through share buy-back programs. I don’t think that is the entire story. I think that Deutsche Telekom are looking at doing something else. They clearly wanted to exit the U.S. cellular market and got a very good price for doing so, and they are going to use a chunk of that money, not just to pay down their debt, but to get into other things. I saw one comment from an analyst saying that they were going to concentrate on the multi-media internet market. Now, being UC analysts, we will always interpret that as being UC investments and we certainly know that the data centers and putting glass in the ground and building up wireless networks costs a lot of money. And Deutsche Telekom clearly are focused on what’s next, rather than what just happened, which in their view is the cellular market. I will hand it back to Michael.
Michael Finneran: Interesting, actually mid-day yesterday, Deutsche Telekom’s stock was up 13%, so apparently the market appreciates their move. John Bartlett, you had been looking at this in terms of the overall industry consolidation.
John Bartlett: Yeah, right, this is John. I recently read a book called, The Master Switch, by Tim Wu, which is very interesting and I recommend it to anyone trying to follow this industry. And he looks at the big picture of how information distribution services like telephony and radio and now, the internet and wireless telephony have evolved over the past century and a half. And what he shows is that there is this cycle where we start with innovation – and there are many small open and competitive players in the space – and then what we see is this aggregation until we have just a very small number or in some cases, one, player delivering that capability to us. And so here it is, it's just happening and a lot of the commentary on the net implies that Sprint is in trouble. And so, we may not just be dropping from four to three in the U.S., but we may quickly see that drop from three to two. And the two players, surprisingly enough are maybe not, are two of the major chunks of the original AT&T. So it's just instructive to step back and look at this cycle. And what Tim Wu says is that we won’t break that, we won’t change that model until the next disruptive technology comes along, which repositions them, and I don’t know what that will be yet. So, I think it is pretty interesting. Back to you, Michael.
Michael Finneran: Also, one of the elements I have been following in this is the impact on technology. Most of what we have seen up to this point in terms of the new ideas being brought to the table in the mobile business have been coming from the smaller suppliers, who are Sprint and T-Mobile. Now, with T-Mobile off the table, Sprint’s stock was down 14% yesterday, so the market is looking favorably on them. We could see a number of ramifications going in different directions. Now, I know Andy Zmolek, you have been looking at some of the offerings in UC from some of the carriers, what have you found?
Andy Zmolek: I think in particular, between AT&T and T-Mobile, AT&T has clearly done the most work and UC offerings and bringing more and more of their UC offerings, which started really outside the mobile units into some of the mobile offerings. And it's clear that this is likely going to be accelerated into the T-Mobile customer base, which is a little less enterprise-centric historically. But certainly, what you are looking at now is a single GSM – I mean there are pockets of GSM in regional carriers, but in general this means there’s a single national GSM player for the U.S., and where T-Mobile was really going to be disadvantaged by not having it's own backhaul story, in other words, they would have to go to someone else to get the backhaul. They couldn’t get it at favorable rates, whereas both AT&T and Verizon have very good land capabilities and of course, Sprint started out with that as well and still has those capabilities. So this basically allows AT&T to grow their network and use their backhaul capabilities to expand T-Mobile’s network. And then in addition, allows some of their offerings, like unified communications to be brought into a customer base that may not be exposed to those yet.
Michael Finneran: Very interesting point. We generally forget that we are talking about a mobile operator that a lot of their infrastructure is on the ground and certainly with the move to 3G and now 4G services, the requirements of that backhaul—in the old days, you used to run one T1 line out to a base station and that was it. Even with the move to 3G, we saw them in many cases tripling the backhaul capacity to provide those higher speed data services. But Marty Parker, you had some observations on what this might mean to the UC market as a whole.
Marty Parker: Yeah, Michael, thank you very much and thanks for the great insights each of you have provided. I think the big trends that we have already been seeing Michael, are that enterprises are rapidly virtualizing. People just aren’t working inside the walls of the business anymore, whether that’s because of their job – they are out in the field, they are out selling and servicing, it's because the enterprises don’t want to pay for the space and they are saying work at home, that’s fine with us, or environmental concerns – don’t spend the gas to commute. In any case, enterprises are rapidly virtualizing and it appears that the wireless world is going to have a lot to do with that. We saw that one of the quotes in the announcement was that broadband wireless data, as you were just suggesting, has grown 8,000% in the past four years, of course that’s off a very small denominator, so it is easy to get 8,000%. But still, we’re seeing that data traffic out there. I think this will reflect in the UC world in the mobile device applications. We have already seen a lot of that going on, but in, I’d say, in some limited ways. I think that now with just two major carriers, it can make the applications world simpler to deploy, whether for the vendors because they have fewer carriers to test on and fewer devices to be concerned about, or the enterprises who are perhaps going to be more ready to say, “this is our corporate plan”—you know, we’re a Verizon Corporation or we’re an AT&T Corporation and not have so much concern about how many different carriers they have to deal with across their employee base, so it may be that they will look to those two major carriers to solve those problems for them. You have already suggested that there may be some regulatory pressure, as well as competitive pressure to normalize the devices in the network and that could also play to this effect. So I think that UC could be facilitated. We could see UC growth from this transaction, assuming it goes through because it will simplify life for the UC vendors and potentially simplify life for the enterprises. I am not sure what it means to some of the pricing, but there will still be competition. So those are my thoughts about it, Michael.
Michael Finneran: Art I think you have an observation to make here, as well.
Art Rosenberg: I actually just want to expand a little on what Marty was talking about, because UC includes not just person-to-person contacts, but process-to-person, so outbound notifications, with automated self-services... These are the things where organizations will not only satisfy customers needs or user needs, not just their own customers or even within the organization, but delivering information proactively rather than waiting for people to go in and retrieve things. The more you can automate the more efficient and more effective you will have your applications working. So this is going to be a big area with the mobile apps, because now you are breaking down application areas into specific functions that can be selectively used by not just the individual end users, but the processes that deal with those end users and all of this will be facilitated because it’s mobile, people are therefore more accessible than before. So it's all going to come together, my only concern is that the track record of AT&T – what they did with Apple was horrendous and I don’t know if I can trust them, unless they are prevented by legislation or whatever, from exploiting their role.
Michael Finneran: Well interesting observations. I have one question I would like to ask each of our participants before we go off the air. It's a two-part question. I call it “go through, and the other shoe.” That is, will the deal actually go through, and if it does, will we see the other shoe drop which is, Verizon acquiring Sprint, at which point the top two suppliers in the U.S. would have virtually 94% market share. So, Russell, what do you think on the two?
Russell Bennett: I think it will probably go through after a long period of review. The Chairman of the FCC has already said he is not going to comment, so they are obviously thinking about it hard. But I think it will go through. Will Sprint be picked by Verizon? I think they probably will, it will be a long negotiation and discussion, Dan Hesse clearly wants to stay independent, but he may see his options being significantly reduced now.
Art Rosenberg: I think it's going to be very important to have interoperability – basically, we need the equivalent of a PSTN, but for wireless. That has not been there.
Michael Finneran: Andy, you very close to the cellular business, how do you see these shaking out?
Andy Zmolek: I think there will be a lot of hand wringing about the competitive impacts of this. I think what will likely happen is that there will be some regulations introduced in order to satisfy some of the concerns that are raised. My suspicion is that you are going to see a little bit more pressure to get open market devices out there and available. The interesting thing the dynamics of this, especially if it becomes an AT&T/Verizon duopoly, is that you are talking about two fundamentally different technologies. You cannot cost effectively build a device that does both. You can do it, you can buy world phones that are certified by both, but the certification process involved and the amount of complexity involved, generally makes that less useful. That said, I think we are definitely going to see speculation about Verizon/Sprint, but I predict that it will go nowhere because frankly there are too many differences in technologies between Verizon and Sprint when you look at all the things that Sprint has to do complete winding down the IDEN networks and then where Sprint’s decided to go in terms of WiMAX, that’s going to be complicated. I have heard noises from the Sprint side saying they are moving towards LTE. I wouldn’t completely rule out the possibility that if this were revisited three or four years from now that there might be something there, but I think it's very unlikely that in the next three years you are going to see anything happen between Verizon and Sprint.
Michael Finneran: So a yes and a no, but you bring up the WiMAX issue. It is very interesting with Sprint and one of the biggest assets they have, that in conjunction with their partner Clearwire and WiMAX is a hundred to a hundred and twenty megahertz of 2.5-gigahertz spectrum, in most of the major markets across the U.S. And in the wireless business, that’s plumb. That is a big asset. Marty where do you come down, are we going to get one or both of these coming through?
Marty Parker: At least one. There is no doubt, having worked in large corporations and been close to a few mergers – there is no doubt that these two organizations pre-vetted this proposal with their governments. So we may go through hand wringing and so forth and there will be letters to the FCC and to the FTC, that’s fine. As you suggested, there probably will be some resultant agreements and rules laid out as conditions of the merger, but it's going to happen. So will the second shoe drop? Gee Michael, I think it's going to happen one way or the other. We’re seeing a major consolidation going on here and in the face of that, as John Bartlett highlighted earlier, Sprint will either get squeezed or bought, and who knows but what they’re trying to sell themselves already. We’ll see. It would be hard to see them fighting for a third of the market against those two companies.
Michael Finneran: Well, there is a fairly well known rumor that T-Mobile and Sprint were talking about combining and one of the first calls the Chairman of Deutsche Telekom made after the decision came down was to Dan Hesse, the CEO of Sprint, who reportedly almost fell off his chair when he heard that they were going with AT&T. So it seems that our analysts are in agreement across the board that this will go through. So AT&T’s three billion-dollar breakup price will not become an issue. So we will certainly be watching this closely, both in terms of the impact on the mobile market and the impact of UC, particularly for enterprise customers.
Andy Zmolek: Michael, one note about the UC implications that I don’t think a lot of people realize – I think this is going to accelerate hosted UC and I think it's going to accelerate offerings from the wireless carriers in that space.
Steve Leaden: Just one final comment to counter everything here – getting down to a duopoly, you know bigger may not be better, especially for corporate, as well as the consumer base, subscriber. So could that potentially mean higher prices and more limits on service, potentially less innovation with less competitors? Typically, that is what we have seen in the market, so let’s see what happens.
Michael Finneran: Well we have heard from our UC experts and across the board, it appears, the deal will most likely go ahead. We will have to keep our eyes on the market now in terms of the prices, the availability of UC services, UC in the cloud, and particularly UC in the cloud provided by the mobile vendors, and this was an interesting discussion to be sure. Thanks very much.
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