Events: Industry Note Review
May 18, 2015
I came across an Oppenheimer Communication & Cloud industry note that I think is relatively pertinent to DISH, and the wireless industry as a whole. I am on a trip on my phone writing this, so formatting will be touched up later.
The note’s summary is as follows:
“We believe that Internet companies are looking to more vertically integrate communications and cloud infrastructure and over time offer a fully integrated suite of applications to control the customer relationship. This is occurring both in the consumer and enterprise markets. We see Google as wanting to dominate every aspect of consumers’ daily life. Currently the carriers control the customer relationships and critical last-mile infrastructure. Carriers will need to invest in new virtualized and a dozen other technologies to retain this leadership. Luckily these investments should leverage existing infrastructure and dramatically lower costs from an automated network and end-user experience. Regardless, companies with unique infrastructure – spectrum, towers, fiber, carrier-neutral datacenters, and managed service – are well positioned.”
17 MILE ANALYSIS
Ergen. It is fascinating to watch in real time the marketplace catch up with Ergen’s wireless prognostications from the last four years. While the market refuses to acknowledge the step-change in spectrum valuation/end-uses that has occurred since the advent of the smartphone, Ergen continues to lay out in Kindergarten-level-ABC/1-2-3 terms how drastically different the wireless industry will look five years from now.
In a virtuous cycle, as network operators boost networks quality, speed and capacity, consumers increase utilization and speed demands, which in turn drives the need for greater capacity. But on top of this, according to Oppenheimer, the Internet companies are looking to stress capacity even more thru the creation of integrated wireless/cloud services. This is what Ergen is alluding to, and why in the latest DISH conference call he referenced recent discussions with companies requiring cloud support. Oppenheimer echoes Ergen’s sentiment:
“We believe that new communications companies (Internet companies) are using the power of the cloud and wireless broadband to drive their ecosystem of applications to deliver a superior on-demand end-user experience to take full control of the customer relationship. The next stage in this evolution will be seamless integration of these assets bundled with some services at a low price.
“We think we are entering the sweet spot of this industry wide restructuring, and we expect to see more change…in the next five years than we have seen in the last 15.”
Incumbents. While the incumbents have the valuable infrastructure required to meet the demands of the new wireless world order, the current configuration is not sustainable, as evidenced by prohibitive data caps and expensive data plans.
Consumers require lower prices and higher capacity, and the incumbents will be pushed in that direction by the Internet companies, wireless upstarts like DISH, and quasi-upstarts like S & TMUS. Oppenheimer:
“This competitive threat, in our opinion, will force the incumbent carriers to upgrade their networks to offer the most capacity and best coverage either to compete on the consumer side or act as wholesale connectivity providers in the long term.”
Oppenheimer believes the incumbents ultimately break themselves up into several companies, with the spectrum alone potentially worth the entirety of the company if utilized in a different configuration.
While difficult to envision what that would look like at this point, it squares with something Andy Kessler said the other day in a WSJ op-ed, that GOOG and VZ are on a crash course. With LTE technology rapidly improving productivity, and ‘software defined networking’ (SDN) rapidly bringing down opex, one can envision a world where enormous scale would allow for a dramatic reduction in prices (think AMZN’s AWS pricing…) alongside significant increases in data capacity.
Avengers. Maybe GOOG ‘crashes’ into VZ via a take-out, or perhaps a DISH/S/TMUS combo partners with GOOG to create a wireless powerhouse that can take on, or ‘crash’, the incumbents…
Ergen has long-lusted after Sprint’s network depth and speed potential, and I have long-believed some sort of a tie-up is inevitable, with leadership the only, albeit big, question. FinTwit member SkeleCap dubbed a DISH/S/TMUS combo the ‘Avengers’, due to the formidable combo Ergen/Legere/Claure would be. I don’t disagree; and the thought of the Avengers partnering with GOOG is chilling, both from an investment opportunity standpoint, and from a competitive standpoint…standing in VZ’s shoes.
With the backing of a well-capitalized GOOG, the Avengers could build an enormous low-cost fixed wireless broadband network on the back of existing S/TMUS infrastructure, and combine it with DISH’s SatTV & Sling products, and S/TMUS voice offering. Again, chilling.
Bidding War. I believe that it makes an enormous amount of sense for VZ to acquire DISH in order to solidify its position as the leading last-mile wireless provider. While small cells and unlicensed spectrum will assist in expanding capacity, DISH’s 40 MHz of downlink spectrum would be a tremendous step toward making VZ’s LTE network far & away the #1 asset in the wireless industry. As such, I continue to believe DISH movement in a non-VZ direction likely sparks a bidding war.
More than likely the ultimate set of outcomes for the wireless space is entirely different than outlined. And while different outcomes will result in different valuations for companies involved, I believe DISH represents the most outcome-neutral opportunity out of DISH, S and TMUS, as a result of its egregious standalone undervaluation, Charlie Ergen, virgin spectrum portfolio, and the virtual guarantee of its involvement in any major wireless restructuring discussions.