The DoJ fears that in the meantime, the spectrum shortage could lead to operators being incentivised to acquire spectrum for the wrong reasons

The US Department of Justice’s (DoJ) Antitrust Division has called on telecoms regulator the Federal Communications Commission (FCC) to more aggressively regulate the amount of spectrum that the country’s larger operators are able to own.

“The Department of Justice’s principal concern is that acquisitions of spectrum, whether at auction or through subsequent transactions, should not be used to create or enhance market power,” it wrote in a letter to the FCC.

“The Department concludes that rules that ensure the smaller nationwide networks, which  currently lack substantial low-frequency spectrum, have an opportunity to acquire such spectrum could improve the competitive dynamic among nationwide carriers and benefit consumers.”

It has been widely reported that US operators are facing a radio spectrum shortage. As a result, US carriers have been frantically acquiring more spectrum from rival firms.

In January 2013, Verizon signed a deal with rival AT&T to sell its excess 700MHz spectrum licenses. AT&T has also looked to acquire smaller firms for more spectrum, such as the retail wireless operations of Atlantic Tele-Network, which it bought for $780m. Meanwhile, Sprint also looks close to sealing an acquisition of Wimax player Clearwire and T-Mobile USA appears close to sealing its acquisition of MetroPCS.

In response to the spectrum shortage, the FCC has plans in place to make 500MHz of additional spectrum available within ten years, predominantly through freeing up spectrum used by television broadcasters in the country. However, the DoJ voiced its fears that in the meantime, the situation could lead to operators being incentivised to acquire spectrum for the wrong reasons.

The Department added that it is therefore “essential to maintain vigilance against any lessening of the intensity of competitive forces”.

Mike Roberts, principal analyst and head of Americas at Informa Telecoms & Media, said that although operators always crave more spectrum, he concurred that in terms of MHz per subscriber, that the US does look a little tight compared to other major markets.

“Operators have been doing everything they can to get their hands on spectrum or by buying other companies such as T-Mobile buying Metro PCS,” he said. “It has been a pretty high level strategic chess game, driven in part by the need for spectrum.”

Deutsche Telekom has submitted what it says is a final offer for US operator MetroPCS

German operator group Deutsche Telekom has submitted what it says is a final offer for US operator MetroPCS. The firm hopes to persuade a number of MetroPCS’s shareholders that voiced objections to the terms of the initial bid.

The two operators announced plans to merge in October last year with Deutsche Telekom, through its subsidiary T-Mobile USA, owning 74 per cent and MetroPCS left with the remaining 26 per cent. MetroPCS’s board of directors had accepted the initial bid, which would see its shareholders receiving $1.5bn in cash for the stake.

However, some shareholders opposed the merger, including hedge fund Paulson & Co, which owns 9.9 per cent of MetroPCS. The opposition stemmed from the terms of the initial bid, which stated that T-Mobile USA would form part of the combined company with shareholder loans totalling $15bn.

“While we believe in the strategic merits of the proposed combination, Paulson believes the pro forma company has too much debt at too high an interest rate to be competitive in the well capitalised US wireless industry,” the hedge fund wrote in a letter to the MetroPCS board.

As a result, the US operator postponed its shareholder meeting to approve or reject the offer to later this month, prompting Deutsche Telekom to improve its offer. In its revised offer Deutsche Telekom has reduced the shareholder loans by $3.8b to $11.2bn. The German firm said that this move significantly increases the equity value of the combined company.

“Deutsche Telekom will also reduce the interest rate on the $11.2bn of shareholder loans by 50 basis points,” the operator group said in a statement. “This lower rate reflects the new capital structure of the combined company, the improved capital markets environment in recent months, and the interest rate level of MetroPCS newly issued $3.5bn of bonds priced in March.”

The merger was approved by the US Federal Communications Commission (FCC) last month, and MetroPCS has rescheduled its shareholder meeting to April 24.

The Galaxy SIII: How much is it really worth?

US operator T-Mobile has revamped its retail offering, abolishing handset subsidies for premium devices in favour of an interest-free scheme that separates the cost of the device from the cost of network service. Annual  service contracts have also been withdrawn. The pricing overhaul is expected to be one of a number of announcements made by T-Mobile at a press event later on Tuesday, although the changes have already been made on the operator’s online retail portal.

Customers who want to buy Samsung’s flagship SIII smartphone will have to make a downpayment of $69.99 and 24 subsequent $20.00 payments. They can also opt to pay $549.99 for the device up front. On Verizon Wireless the SIII is available for $199.99 on a two-year contract, although Verizon’s online store suggests that price has been cut from $599.99.

Financing plans for devices are popular in a number of emerging markets, where consumers may have comparatively limited spending power. But in recent years there has been a trend towards financing plans in mature markets as well. Informa Telecoms & Media has identified 140 operators using such plans around the world.

Handset subsidy has long been viewed by operators in these markets as a cycle of dependency that needs to be broken. Historically operators have been wary of changing their stance for fear of losing customers to competitors that retain subsidies. But  an increasingly challenging economic environment coupled with regulatory pressure on longer-term contracts that allow subsidies to be recouped now seems to be changing the picture.

The gamble for operators is that cutting annual contracts, as T-Mobile has, might encourage greater churn among the crucial high-spending segment; the upside of device subsidy was greater operator control over the customer.

The FCC has approved the potential merger between operators T-Mobile USA and MetroPCS

The US Federal Communications Commission (FCC) has approved the potential merger between operators T-Mobile USA and MetroPCS.

T-Mobile parent company Deutsche Telekom announced details of the merger in October 2012. It will own 74 per cent of the combined company and MetroPCS the remaining 26 per cent. The deal now hinges on MetroPCS’ shareholders approving it, who will be holding a vote on the matter on April 2012, 2013.

FCC Commissioner Mignon L. Clyburn said that she believes that the merger would not likely result in competitive harm to wireless consumers.

“It also appears that this transaction could lead to benefits such as greater deployment of advanced Long Term Evolution (LTE) services, the expansion of the MetroPCS brand into new geographical markets, and the development of a more robust, nationwide network,” she said.

Clyburn noted that some, such as Communications Workers of America, raised concerns regarding whether the new company would pursue non-network synergies and efficiencies that could lead to significant job losses, a reduction in employment standards, and an adverse impact on customer service.

“In this regard, T-Mobile and MetroPCS made a statement that they have no plans to move call centers offshore or to reduce employment levels at T-Mobile call centers,” commented Clyburn. “They also stated that, over the last six months, the company has hired more than 3,600 employees in its 17 domestic call centers, and plans to continue hiring in those call centers, increasing the number of overall US positions, to support its customers.  I hope that the new company, in fact, pursues a course that increases employment opportunities.”

Mike Roberts, principal analyst at Informa Telecoms and Media said that the deal could spark a final wave of consolidation in the US mobile market, which has been in limbo on the M&A front since regulators blocked AT&T’s bid for T-Mobile USA last year.

“Sprint also reportedly moved to acquire MetroPCS earlier this year but was blocked by its board, and it now appears too late for Sprint to make a counter-offer for MetroPCS. So it may turn its attention to Leap Wireless and/or US Cellular, the next-largest operators in the US after MetroPCS – both have near 6 million subscribers compared to MetroPCS with 9 million, and like MetroPCS they use the same CDMA technology as Sprint,” he said.

“However these smaller deals could complicate any potential merger between T-Mobile USA and Sprint, which has long been rumoured as it would put the combined group on relatively level footing with AT&T and Verizon Wireless.”

US operators see that within a few years, they could be in trouble with regards to spectrum

Much has been made of the perceived spectrum shortage in the US. While operators will arguably never be satisfied with the amount of spectrum they possess and will always welcome more, in terms of MHz available per subscriber in the market, the US does look as though it is lacking in comparison to other major markets.

“US operators see that within a few years, they could be in trouble with regards to spectrum if they don’t act now,” warns Mike Roberts, principal analyst and head of Americas at Informa Telecoms & Media.

Help is on hand though, as US regulator the FCC has ambitious plans to make more spectrum available to the market. The regulator aims to make 500MHz of additional spectrum available within ten years, predominantly through freeing up spectrum used by television broadcasters in the country. While the plans have gained approval, they will take time, and operators will seek out short term solutions in the meanwhile .

Each carrier is going about boosting their spectrum portfolios in different ways, using different bands, strategies and even different technologies to deploy 4G services. “Advanced Wireless Spectrum (AWS) is one of the big bands here, for sure,” says Roberts. “Another big band is the 700MHz band, which is being deployed with LTE.” Verizon is leading the race to reach full nationwide LTE coverage, deploying it in the lower band of 700MHz spectrum that it recently acquired. At the end of 2012, Verizon’s LTE network covered 260 million people, and there are around 300 million people in the country.

The operator is reaching remote rural areas by partnering with regional providers, as part of its Rural America programme. In November last year, Verizon announced that it had entered into an agreement with regional carrier Cellular One. Under the agreement, Verizon Wireless is leasing its 700MHz upper C block wireless spectrum in parts of Texas.

Using the spectrum, Cellular One will construct and operate an LTE network serving its own customers, Verizon Wireless customers, and customers of other LTE networks that are Rural America participants. Cellular One customers will also have access to Verizon Wireless’ 4G LTE network throughout the United States.

In January 2013, Verizon also signed a deal with rival AT&T to sell its excess 700MHz spectrum licenses for $1.9bn in cash plus AWS licences in several states. The 700MHz licenses cover 42 million people in 18 US states including California, Florida, New York, Texas and Washington.

According to AT&T the acquisition complements its existing holdings in the 700MHz B band and will allow the operator to quickly expand its 4G LTE services to meet demand. The company announced that it plans to reach 300 million people in the US with its 4G LTE network by the end of 2014.

AT&T has been aggressively pursuing more spectrum after its bid to take over T-Mobile USA failed last year. Not only was the transaction blocked by authorities, AT&T had to pay its rival $4bn as a consequence. In response, AT&T has looked to acquire smaller firms for more spectrum, such as the retail wireless operations of Atlantic Tele-Network, which operates under the Alltel brand, which it bought for $780m in cash.

Under terms of the agreement, AT&T acquired wireless properties, including licenses, network assets, retail stores and approximately 585,000 subscribers. The move took AT&T’s subscriber base to just over 107 million, putting it about seven million customers behind market leader Verizon.

The operator does not plan to stop there though, and in November, AT&T announced plans to expand its LTE network over the next three years in an initiative dubbed Project Velocity IP, or VIP. It will spend $14bn over the course of the project, with $8bn going on wireless connectivity and $6bn on wireline. It said the aim was to enhance its network to support the growth of mobile applications and cloud services.

Meanwhile, Sprint has also expanded its LTE service in the country, as it continues to develop its Network Vision project. The operator introduced its 4G LTE network in July 2012 and in late January 2013 it extended its coverage to include Austin and Bryan/College Station in Texas; Columbia, Tennessee; Emporia in Kansas; Fort Wayne, Indiana; Gettysburg, Pennsylvania and Framingham and Boston in Massachusetts.

The operator has also significantly improved its 3G service in Puerto Rico and expanded 4G LTE to reach more regions in the country, including Aguadilla, Isabela, Cabo Rojo and Mayagüez.

Sprint also looked close to sealing an acquisition of Wimax player Clearwire; after it gained ownership of a 50 per cent stake in the firm and made a bid of $2.2bn for the remaining shares. However, the deal is now up in the air after US satellite player Dish Network Corporation made a competing bid at a higher price than Sprint’s offer.

T-Mobile USA, the last of the four major national carriers, announced in January 2013 that it would switch on its LTE network in Las Vegas very soon. But the carrier will not officially offer any LTE enabled devices at launch.

“There will be a period when networks are up but we don’t have devices yet,” T-Mobile’s CTO Neville Ray admits. The firm has been making do without LTE thanks to a widespread HSPA+ network offering up to 42Mbps downloads, which is faster than LTE in some areas. However, the operator said it hopes to cover a population of 100 million with LTE by summer 2013.

AT&T has acquired Alltel

US carrier AT&T said Tuesday it has agreed to acquire the retail wireless operations of Atlantic Tele-Network, which operates under the Alltel brand, for $780m in cash.

Under terms of the agreement, AT&T will acquire wireless properties, including licenses, network assets, retail stores and approximately 585,000 subscribers.

The move will take AT&T’s subscriber base to just over 107 million, putting it about seven million customers behind market leader Verizon.

Alltel’s CDMA network covers approximately 4.6 million people in primarily rural areas across six states — Georgia, Idaho, Illinois, North Carolina, Ohio and South Carolina. The acquisition includes spectrum in the 700MHz, 850MHz and 1900MHz bands and is largely complementary to AT&T’s existing network.

AT&T will convert the network to WCDMA to bring it in line with its own operations, and said it expects integration costs for the network conversion will not result in significant dilution to EPS or impact to cash flow. The transaction is subject to review by the Federal Communications Commission and the Department of Justice and to other customary closing conditions and is expected to close in the second half of 2013.

ZTE accused the committee on focusing on making allegations, rather than finding solutions

A US House Intelligence Committee report warned the country’s operators that Chinese infrastructure vendor ZTE and its domestic rival Huawei, pose a threat to the country’s national security. In the wake of the report, David Dai Shu, ZTE’s director of global public affairs, spoke to Telecoms.com to give his comopany’s side of the story.

The investigation was originally requested by Huawei, in February 2011, after the firm denied that there was any justification for US security concerns.

As a result of the investigation, ZTE proposed a model whereby the vendor identifies an independent third party to review the firm’s equipment and software ahead of any network project, in order to ensure that it poses no threat to US national security.

But Dai Shu argued that the committee responsible for the report had not given enough consideration to this solution, known by the vendor as a Trusted Delivery Model.

“From the report we found that the committee noticed ZTE’s efforts regarding the solution. But it doesn’t seem that it paid serious attention to how we proposed to solve this problem. It’s a pity really — we believe that solving the problem is more important than making allegations,” he said.

Dai Shu added that ZTE’s partners in the US were also disappointed that there was no scope in the report for an attempt to resolve the issues.

“In my personal point of view, maybe the committee is not interested in the solution, but there are other committees in the US that are. We’re communicating with the necessary committees in the US trying to figure out how to solve the problem,” he said.

Ultimately, the report is only expected to have a minimal impact on ZTE’s business in the US. The firm generated around $400m in revenue in the country last year, but only around $30m was from its infrastructure business, according to Dai Shu.

“That means that more than 90 per cent of ZTE’s business is based on handsets and devices in the US. This report has very limited influence on ZTE’s business in the US,” he said.

Dai Shu also argued that this finding should apply to any company with manufacturing facilities China. The world’s top five communications vendors manufacture most of their equipment in China.

“So if you strip out the location of the vendor, the equipment is similar. We don’t think it is fair that only ZTE or Chinese companies are being investigated for national security issues. We still believe that figuring out the problem is the priority for the whole industry; the whole supply chain, and not just those based in certain countries and certain companies.”

Dai Shu argued that allegations that ZTE could pose a national security threat have been overplayed, because the company has not been involved in any national network construction. The firm was forbidden from bidding to build Sprint’s network in 2010, and has predominantly participated only in projects with SMEs in the US.

“We have a very good track record for the technical and commercial part of the bidding process. It was unfair for ZTE that it was not for technical or commercial reasons but for political reasons that we were not given the opportunity to bid for the network construction,” said Dai Shu. “After the Sprint failure, it was very clear that there is no way for ZTE to penetrate into the US top tier carriers such as AT&T or Sprint.”

Nonetheless, the vendor is adamant that it can work with the US government to resolve any security issues, with the final version of the report expected to be submitted in mid-November.

“ZTE still has the opportunity to communicate with the committee before the official issue of the report to try to revise some of the content.

“I do believe US government needs more visits to China and we need to talk more openly. So this could actually help us to understand each other in the future.”

The US House Intelligence Committee has issued a report warning US operators not to trust China's ZTE and Huawei

The US House Intelligence Committee has warned the nation’s telecoms operators not to trust Chinese equipment vendors ZTE and Huawei.

The government committee issued the warning after conducting an investigation into the corporate operations of both firms. Huawei had requested the investigation into its operations in February 2011 after denying that there was any justification for US security concerns

The committee said that it had undertaken hours’ of interviews with the firms’ executives, made repeated document requests, reviewed open-source information, and held an open hearing with witnesses from both companies, but that it still remained “unsatisfied with the level of cooperation and candour provided by each company.”

In its conclusion to the investigation, the committee wrote: “The United States should view with suspicion the continued penetration of the US telecommunications market by Chinese telecommunications companies.

“Private-sector entities in the United States are strongly encouraged to consider the long-term security risks associated with doing business with either ZTE or Huawei for equipment or services. US network providers and systems developers are strongly encouraged to seek other vendors for their projects.”

It added that Huawei and ZTE cannot be trusted to be free of foreign state influence, and therefore pose a security threat to the US and to its systems.

ZTE responded to the report by pledging to work with the committee to address all cyber security concerns and insisted its equipment is safe for US telecom infrastructure.

David Dai Shu, ZTE’s director of global public affairs, said it was noteworthy that, after a year-long investigation, the committee rested its conclusions on a finding that ZTE may not be ‘free of state influence.’  He argued that this finding would apply to any company operating in China, and that the committee had not based its challenges on any evidence of unethical or illegal behaviour.”

Speaking to Telecoms.com this morning, Dai Shu said: “If you look at the top five infrastructure vendors in the world, two of them are Chinese, and the other three are Western companies. Of the five vendors, they are mostly manufacturing their equipment in China. So if you strip out the location of the vendor, the equipment is similar. We don’t think it is fair it is only ZTE or Chinese companies are being investigated for national security issues.”

Huawei issued a whitepaper earlier this year, written by the firm’s global cyber security officer and SVP John Suffolk, who was formerly the chief information officer for the UK government. In the whitepaper, he wrote:

“We have never damaged any nation or had the intent to steal any national intelligence, enterprise secrets or breach personal privacy and we will never support or tolerate such activities, nor will we support any entity from any country who may wish us to undertake an activity that would be deemed illegal in any country.”

Fears over China’s vendors seem less intense in the UK. Huawei announced in September 2012 that it will invest £1.3bn ($2bn) in the country, and create 700 new British jobs by 2017. Huawei already employs over 800 people in the UK.

“The British Government values the important relationship with China, both countries have much to offer each other and the business environment we are creating in the UK allows us to maximise this potential,” said Prime Minister David Cameron at the time.

Deutsche Telekom’s T-Mobile USA and MetroPCS have announced plans to merge

Deutsche Telekom’s T-Mobile USA and MetroPCS have announced plans to merge, with DT owning 74 per cent of the combined company and MetroPCS the remaining 26 per cent.

The deal will strengthen T-Mobile’s position in the US, increasing total subscribers by 28 per cent to 43 million and increasing market share from 10 per cent to 13 per cent. More importantly the deal would strengthen their position in the value segment where both companies are focused, with the new company having 23 per cent of the US prepaid market, given T-Mobile USA’s share of 20 per cent and MetroPCS with 3 per cent.

T-Mobile USA has made it clear the deal is all about LTE, with the combined spectrum assets of the companies providing a path to 2 x 20MHz for LTE in many markets, double T-Mobile USA’s current plans for 2 x 10MHz for LTE. In addition T-Mobile USA said that MetroPCS customers will be upgraded from CDMA to a common LTE network as they upgrade their handsets, highlighting plans for a rapid migration from CDMA to LTE.

This reduces but does not eliminate one of the major challenges of the deal which is T-Mobile USA will have to migrate two major technology families – CDMA and WCDMA – to LTE rather than just one. At the same time, it will have to refarm (transition) its combined spectrum holdings from CDMA and WCDMA to LTE. This all adds up to a hugely complex and challenging migration that will take significant time and investment, and which is a major risk for derailing the benefits of the deal which the companies say includes $6-7 billion in expected cost savings.

The deal could also spark a final wave of consolidation in the US mobile market, which has been in limbo on the M&A front since regulators blocked AT&T’s bid for T-Mobile USA last year. Sprint also reportedly moved to acquire MetroPCS earlier this year but was blocked by its board, and it now appears too late for Sprint to make a counter-offer for MetroPCS. So it may turn its attention to Leap Wireless and/or US Cellular, the next-largest operators in the US after MetroPCS – both have near 6 million subscribers compared to MetroPCS with 9 million, and like MetroPCS they use the same CDMA technology as Sprint. However these smaller deals could complicate any potential merger between T-Mobile USA and Sprint, which has long been rumoured as it would put the combined group on relatively level footing with AT&T and Verizon Wireless.

This is first because of the integration challenges both companies would be facing, and second because they would be larger players before they merged, which would make it tougher to gain regulatory approvals. However AT&T currently has 33 per cent of the US mobile market and Verizon 31 per cent, so the even after smaller deals a combined T-Mobile USA and Sprint would also have around one-third of the market, and would be much stronger competition for AT&T and Verizon Wireless.

For Deutsche Telekom its T-Mobile USA acquisition of MetroPCS shows it is committed to investing to improve its scale and strength in the US market, after its attempt to exit the US last year by selling T-Mobile USA to AT&T was blocked by regulators. However Deutsche Telekom will need to do more in future given that even after the acquisition of MetroPCS it will still have less than half the market share of the two dominant players.

Google moves its Wallet service to the cloud and facilitates more card providers

In an attempt to ignite take up of its m-wallet offering, Google has launched a cloud-based version of its wallet for its US users. As a result, users can now add Visa, American Express and Discover credit and debit cards, as well as MasterCard, to their wallet.

Take-up of Google’s Wallet has been slow for a number of reasons. Despite 200,000 retail outlets across the US having payment terminals that allow users to make payments using the service, it  has been limited to just seven handsets, with only two carrier partners, Sprint and Virgin Mobile, supporting the service.

Now though, Google has changed its approach to storing payment cards, opting to store users’ bank details on its own servers rather than on the secure element on the handset.

In addition, Google Wallet users can now add a wider range of credit or debit cards to their wallet. When users add credit or debit cards to the Google Wallet mobile app, they will be issued a virtual MasterCard card by The Bancorp Bank, Google Wallet’s partnering bank.

When users activate their cards in Google Wallet, the cards are linked to the virtual MasterCard card. When they make an in-store purchase, Google facilitates the payment to the merchant for the purchase using the virtual MasterCard, and then charges the amount of the original purchase to the selected debit or credit card.

For these transactions, the merchant will not receive users’ credit or debit card credentials, instead, Google Wallet will present the virtual MasterCard card to the merchant.

“A wallet ID (virtual card number) is stored in the secure storage area of the phone, and this is used to facilitate transactions at the point of sale,” explained Robin Dua, head of product management for Google Wallet.

“Google instantly charges your selected credit or debit card. This new approach speeds up the integration process for banks so they can add their cards to the Wallet app in just a few weeks.”