What Would Amazon Want With Assets From the 'New' T-Mobile?
Reuters reported that Amazon has entered the fray with interest in purchasing assets divested from Sprint and T-Mobile as part of their possible merger concessions.
First, let's all express our collective shock at this news. I believe Wall Street analyst Craig Moffett of MoffettNathanson says it best in a post today: "After 30 years in and around the telecom industry, it is sometimes tempting to play the role of grizzled veteran and act as though nothing can surprise in the day's news. But then, every once in a while, a news item comes along that is so batshit crazy -- sorry for the profanity, but your author is at a loss for a better word here -- that one is simply brought up short," he wrote. "Today's report from Reuters that Amazon is considering buying Sprint's Boost brand, and, with accompanying spectrum, entering the wireless market, is one of those news items."
OK, now that that's out of the way, let's get down to business. If such a transaction actually occurred, what would Amazon get? And what would it do with whatever it gets?
First, it's important to note that the situation is fluid, to say the least, and there aren't any formal deals yet. Amazon is one of several entities that have reportedly expressed interest in obtaining assets -- either customers, wholesale network access or spectrum -- divested from Sprint and T-Mobile. Other companies that are reportedly "hanging around" the negotiations at the Department of Justice in New York include Charter, Comcast, Dish Network, Q Link Wireless and others. (However, Comcast today reacted to those reports with this statement: "We do not have an interest in acquiring divested spectrum from the Sprint T-Mobile transaction.")
Further, the Sprint/T-Mobile merger transaction itself could ultimately fall apart if the Department of Justice pushes for conditions and divestitures above what T-Mobile executives might accept (Sprint is not making the final call on any of this stuff).
All that said, the possibility of an Internet giant like Amazon purchasing some kind of wireless asset is intriguing.
An Amazon MVNO
"This would be an excellent vehicle for Amazon to dip its toes into the wireless business," said analyst Mark Lowenstein of Mobile Ecosystem. In fact, it was Lowenstein who specifically named Amazon as one of the companies that might be interested in Sprint's Boost prepaid business when the FCC's chairman first said earlier this month that he would sign off on the merger of Sprint and T-Mobile if the companies agreed in part to sell Sprint's Boost prepaid business.
"It's undoubtedly a better network deal than they would get from AT&T or Verizon," Lowenstein continued. "Dish is still a wild card and [the] timeframe [is] too uncertain. And it would even make sense for them to acquire some of the spectrum if it becomes available, as a future hedge, complement to an MVNO deal they sign, test out new service concepts, or even just to hold onto it...they can certainly afford it. And with Boost, Amazon gets an existing base of customers, who they could use to test out a variety of Alexa-based communications features, Prime offers, etc. And six years is a nice timeframe to gauge whether it makes sense to do a deeper dive into wireless in the future."
That certainly makes sense, considering Amazon has a proven track record of attacking the market through decidedly asymmetrical strategies -- just look at its $13.7 billion acquisition of Whole Foods in 2017.
But the real question is what Amazon might want to get from Sprint and T-Mobile. Amazon probably isn't terribly interested in Sprint's Boost customer base. Prepaid customers don't generate the revenues that postpaid customers do, they churn at much higher rates and Amazon already has more Prime monthly subscribers than Boost does anyway.
However, Amazon might be much more interested in getting sweetheart wholesale access to the "New T-Mobile" network that would be created through the merger of Sprint and T-Mobile. The companies laid out the terms of that MVNO in an FCC filing detailing the conditions they agreed to with FCC Chairman Ajit Pai: "New T-Mobile will offer the Boost buyer terms for a six-year wholesale MVNO agreement that will include wholesale rates that will meaningfully improve upon the commercial terms reflected in the most favorable of T-Mobile's and Sprint's three largest MVNO agreements."
With that kind of wholesale access, Amazon could launch an MVNO with New T-Mobile that would allow it to sell mobile services alongside its other Prime offerings like streaming music, streaming video and cheap shipping. Already Amazon has dabbled in selling unlocked Android phones to Prime customers subsidized with advertisements on the lock screen.
Amazon as the next wireless network operator?
What's less clear though is whether Amazon is interested in obtaining spectrum. Although the FCC did not require Sprint and T-Mobile to divest spectrum assets, the DoJ reportedly is keen to do so to support the creation of a fourth nationwide wireless network operator, complete with its own spectrum and network. As the analysts at Well Fargo noted, those kinds of divestitures might not sit well with the executives at T-Mobile: "T-Mobile has stated it would not accept any deal concessions that would change the combined company's value by more than $7B (an important point when thinking about spectrum divestitures)."
And even if New T-Mobile did agree to divest some spectrum, and Amazon bought those spectrum assets, it probably wouldn't be enough spectrum to put Amazon on the same footing as a Verizon or AT&T. "If spectrum is divested it likely will be difficult (impossible) for Amazon to amass the deep spectrum portfolios that AT&T, Verizon or T-Mobile have today especially at the low and midband range," the Wells Fargo analysts wrote.
However, Amazon might not be interested in obtaining spectrum for a standard, commercial wireless network for smartphones. Instead, the company could use the spectrum for some kind of IoT-style network that could control everything from drone deliveries to home automation offerings to autonomous delivery trucks.
Indeed, Amazon has already partnered with Ruckus Networks (now part of Arris), Federated Wireless and others to launch "a fully cloud-native private mobile network solution for developers, ISVs, telecom operators, public sector and enterprises for quick deployment of Industrial IoT applications, such as real-time surveillance, smart meters and worker safety monitoring" using 3.5GHz CBRS spectrum.
Moffett of MoffettNathason was again brutally succinct in his assessment of that particular possibility: "If having a network for the purposes of drones or driverless vehicles is ever going to be mission critical to Amazon's business, it would be a strategic blunder of epic proportions to bring such a network in-house. Oh, and did we mention the fact that telecom is, by its very nature, a highly regulated business? Would Amazon really want to open itself to the regulatory scrutiny and limitations that come with being a telecom provider?"
Regardless, the analysts at Wall Street firm New Street Research wrote that all the noise this week around Sprint and T-Mobile could indicate that executives from the carriers may well be open to the kinds of major divestitures that officials at the DoJ are reportedly looking for.
"Since the deal was announced, investors have wanted to know how the DoJ thinks about the deal. In the last week, the picture has clarified," the New Street analysts wrote. "It appears the DoJ thinks the deal hurts competition by reducing the number of competitors from four to three and that it should only move forward if the number essentially stays at four. While that view is not certain -- press reports may be inaccurate -- it is the most logical conclusion from T-Mobile's willingness to entertain divestitures and other deal commitments that would create a strong fourth competitor. If T-Mobile thought they could win over the DoJ or in court, why would they take that step? But how far a step will they take to do so? Whether it will do so sufficiently to induce one or both to seriously bid on the assets is now is the principal question for investors."
If not Amazon, then who?
According to Moffett, perhaps the most likely result of any Sprint and T-Mobile merger might not involve Amazon at all. Instead, it might involve Dish Network. "A spectrum sharing deal whereby the combined Sprint/T-Mobile would host Dish Network's spectrum in return for the rights to use some of the capacity created with Dish's spectrum would, therefore, seem a logical starting point, as it would satisfy important needs for all involved," Moffet wrote. "And it wouldn't even necessitate any assets at all changing hands."
Continued Moffett: "Dish might or might not want Boost as part of the deal; there's a reasonably good low-end demographic fit between Boost and Dish's satellite subscriber base, and the idea of eventually putting Boost MVNO subscribers onto Dish's own wireless network would make Boost much more financially interesting for Dish Network than for other potential bidders who wouldn't have the same opportunity. That said, the fit can be easily overstated; Dish's subscribers skew rural while Boost's subscriber skew urban. But even if Dish didn't want Boost, it appears that there are other potential buyers out there, and there is no reason to assume that the FCC's requirement to divest Boost and the DOJ's reported requirement to create a fourth player are directly connected. For T-Mobile and Deutsche Telekom, creating an opening for Dish as a fourth competitor would be far less threatening, one would think, than would enabling Amazon."
To find out whether Amazon is really interested in Sprint and T-Mobile assets, tune in next week for another exciting installment of "How the Sprint/T-Mobile world turns."