US Wireless About to Get Interesting (and Ugly)

No-one has any idea what DISH Network’s Charlie Ergen is going to do with his large (and likely-to-be-larger-soon) spectrum holdings.  But he will have a huge market impact in the next 2 years – most likely a negative for incumbents.  DISH must start offering service on some of it by 2016.  Ergen’s obvious choices are.

• “Rent” the spectrum piecemeal to existing players.  This has a certain simplicity to it, but seems least likely.
• Merge with an existing mobile market player.  The most obvious candidate is T-Mobile, which is in desperate need of more spectrum and semi-up-for-sale by parent DT.
• Build out his own network and sell wholesale capacity to other players.  This isn’t likely, but could be his most profitable strategy.  It is certainly the most disruptive to the market.

Renting out spectrum doesn’t seem to satisfy CEO Charlie Ergen’s broader strategic goals.  Stand-alone satellite TV is a shrinking business these days.  DISH (and Ergen) need a new lease on life.  A deal with Verizon or others definitely doesn’t give him that.

The consensus seems to be centered around DISH doing some sort of deal with T-Mobile.  This is certainly the easiest (and most likely) avenue for DISH.  It also gives Ergen a reasonable new lease on life.  But it feels a little small for a man of Ergen’s ambition.

What about a wholesale network?  This probably isn’t really on the radar.  Its worth considering anyway, if only for how it illuminates the current market.  It is potentially a better fit for Ergen’s strategic as well as emotional goals.  He is a guy who likes to upset the apple cart.  A wholesale network would certainly cause upset.  It would also likely be more profitable than simply yoking up his spectrum to T-Mobile’s marketing efforts.

The key is a network that non-carriers can tap.  A wholesale network could (and should) be much more than an MVNO (Mobile Virtual Network Operator – the simple network re-sale deals that underpin most pre-paid wireless offerings).  Sure DISH can sell to T-Mobile or Verizon, but the “new” profit potential lies is selling direct to the likes of Google, Apple, electric utilities, and device manufacturers.  Think devices like the NEST thermostat, or Apple TV, or Amazon Kindle.  Or GE’s aircraft engines and locomotives for that matter.  The technology is the same, but its a very different business approach.

No-touch access & billing.  You need to offer standard contract terms and a seamless path to set up (and pay for) service.  In theory, anyone with a valid credit card should be able to light up a device without ever talking to a human.  Anyone trying to buy wireless capacity today faces months of negotiation over a custom-written contract.  Assuming they can even find the right person to start negotiating with.

Optimized for data – especially time-delayed data “scavengers.”  There is a HUGE amount of extra money to be made in the nooks and crannies between “human” usage events.

• Carriers architect for usage spikes.  Most of the time, most of their network operates far below full utilization.  This sends millions of bits of un-sold data whizzing past our heads every second of every day.  That wastage becomes almost criminal at night (when we’re asleep).
• The key is to enable non-human users to “scavenge” that capacity.  Even selling for pennies on the dollar, you’re hoovering up pennies you wouldn’t otherwise get.  This could be as simple as a two-tier market (expensive guaranteed bit rate and cheap “when available”).  It could be as complex as a continuous Dutch auction (different devices start transmitting as the price/bit drops until the network stops accepting new traffic).  And every night around 3 AM, the entire network can become a vast money-making machine data engine while we humans sleep.
• Remember that machines don’t mind being interrupted.  They don’t mind trying to re-send data.  And they can store up data while waiting for a good (cheap) “send” window to burst it out.  So the entire “Internet of Things” that gets so much buzz is just waiting for a service like this to enable it.
• Today’s carriers have done pathetically little to monetize that capacity.  It is technically (reasonably) straightforward.  The problem is lack of imagination and guts – of which the telecom world is chronically short supply.
• Dish’s spectrum holdings are heavy on “downstream” capacity (to the device) vs “upstream” (from the device).  A media delivery service – think a Netflix and/or Amazon branded set-top box downloading movies – would fit that traffic pattern very well.  And regardless, DISH can price data to skew its traffic in that direction.

Why is this model likely more profitable?

• Much better capacity utilization.
• No marketing costs or customer churn costs.
• Potentially zero bad debt expense if billing is done on a pay-in-advance basis.
• Huge customer lock-in.  At least until incumbents wake up and match the service.  But inertia and installed base will still work in its favor after that.

Doing this would require DISH to build out its own network.  This is perceived as a huge challenge to a lot of investors/analysts who extrapolate from the capital-intensive approach taken by traditional US carriers.  But a cursory look overseas (e.g. India) reveals a multitude of carriers who have built out for very little up front.  They get the vendor to do it, then pay-as-they-go as usage ramps.  The un-consolidated wireless equipment vendor market has several desperate players (Alcatel and Nokia) willing to do anything to stay alive.  So DISH can probably get a network built for surprisingly little up front.

We do know is that Ergen will almost certainly “do something” in 2015.  This is a “known unknown.”  And that something will likely be bad news for incumbents – particularly Verizon, AT&T, and Sprint.  Investors seem to be taking the easier, safer, but dumber approach of “wait for the news to react.”  But it seems likely Ergen’s next move will be disruptive even if we don’t yet know the specifics.  It would seem smarter to position yourself accordingly before the news comes out.    

Some context.

• DISH Networks (the satellite TV company) holds a lot of spectrum – much of which must be operational by 2016 (per FCC license terms).
• DISH is also bidding aggressively in the current AWS-3 spectrum auction running at the FCC.  Prices have soared well past expectations, driven mostly be Ergen.  He may just be trying to increase the reference price for his existing holdings, but he may also be bidding to win.
• DISH is also trying to gain control of the spectrum amassed by Lightsquared before it fell into bankruptcy (forced there partly by Ergen).