Dish – the Newest Cellular Carrier

One of the primary reasons that the T-Mobile and Sprint merger got approved was the agreement that Dish Networks will become the fourth nationwide cellular carrier. Now that the merger has been completed, Dish is off and running to take the steps needed to launch a new nationwide 5G network.

Dish is preparing to launch the cellular business with a lot of spectrum. The company is already sitting on 600 MHz and 700 MHz spectrum that covers most of the country. The company also owns blocks of 1,700 MHz AWS spectrum that is the workhorse in cellular networks. As part of the merger arrangement, Dish is purchasing Sprint’s 800 MHz spectrum.

The company envisions a new ‘virtual’ network that will be 100% software-driven, which would give the company the most modern cellular network in the country. If the network can be built quickly enough, the company should have an advantage for speed-to-market as new 5G features are introduced into the cellular network.

Like with any new venture, the company’s biggest challenge is going to be cash. Dish already paid T-Mobile $1.4 billion for the prepaid cellular company Boost Mobile. Dish is also paying $3.6 billion for the 800 MHz spectrum from Sprint. Meanwhile, Dish’s existing core satellite business continues to lose customers and revenues – the company lost 511,000 customers in 2019, and another 132,000 in the first quarter of this year – that’s 6.5% of its customer base.

Dish faces an immediate liquidity problem that has become complicated by the COVID-19 crisis. The company had enough cash on hand to pay off debt of $1.1 billion that will be due in May. But the company still faces debt retirements of $2 billion due in both June 2021 and 2022. Additionally, the company needs to raise an estimated $9 billion to build the new cellular network. The company needs to raise at least several billion in equity in a hurry if it wants to attract the needed new debt. That will be challenging due to the COVID-19 crisis as many big investors are sitting on the sidelines waiting for the markets to stabilize.

To really complicate things, Dish is operating under a tight time clock. As part of the merger agreement, Dish agreed to build over 15,000 cell sites by June 2023 that will cover 70% of the US population. That commitment not only requires Dish to raise the needed funds, but to get major construction started while the country is dealing with the COVID-19 crisis. The company faces fines of up to $2 billion for failure to meet that commitment. Dish has been battling with the FCC for years due to its failure to use its spectrum holding, so the deal comes with the tight timeline to ensure that the spectrum finally gets used to serve customers.

One of the interesting challenges the company faces is getting onto existing towers. Many of the most desirable urban towers are already full. It seems logical that T-Mobile will be decommissioning duplicative Sprint tower space over time, but that’s not something that will happen overnight, particularly with the COVID-19 crisis. It also seems likely that Dish will get caught up by the various supply chain issues that are cropping up everywhere in the industry due to the coronavirus.

Anybody who has ever launched a new broadband venture knows the other challenges facing the company. All of this growth much be done by a company that is just now hiring the staff who will pull it off. Deploying to 15,000 cellular sites in two years would be an intimidating challenge for any existing cellular company, and the idea of being nimble with a company that is adding the needed staff during the build-out period is frankly scary. Dish will obviously have to rely on outsourcing a lot of the cell site acquisition and construction – but in an industry that already has full employment, there aren’t hordes of skilled technicians sitting on the sidelines waiting for work. One of the key positions that is massively short-handed nationwide is experienced tower climbers.

Every detail of making this work is an intimidating task. For example, the company will need to arrange for 15,000 fiber backhaul connections to provide the needed bandwidth. Dish will have to conduct 15,000 load analyses on towers – something that is unique to each tower and that is done to make sure a tower can safely accommodate the new dishes and that the tower will hold up in windy conditions. Dish also needs to build one or more gigantic network operations centers to operate the new network. I can’t recall any equally ambitious telecom project.

Cellular customers everywhere should be rooting for the company to pull this off. Dish president Charlie Ergan has promised to compete vigorously on price to win market share – something that will be good for customers even if they don’t change to Dish.

The chances are high that the company won’t make its June 2023 deadline. The already overaggressive business plan will be further complicated by COVID-19 issues which likely means it will take longer to raise the needed money while dealing with issues like dealing with social distancing for the staff and supply chain delays. If the company meets some decent percentage of the plan, I hope the FCC will let them off the hook for fines. The country could use a new cellular network, particularly one that is technically superior to the other carriers and that wants to set low prices.

Selling Transport to Small Cell Sites

A lot of my clients make money by selling transport to the big traditional cell sites. Except for a few of them that operate middle-mile networks, the extra money from cell site transport adds a relatively high-margin product into the last-mile network.

Companies are now wondering how hard they should pursue small cell sites. They keep reading about the real-estate grab in the major cities where a number of companies are competing to build small cell enclosures, hoping to attract multiple carriers. They want to understand the size of the potential market for small cells outside of the major metropolitan areas. It’s not an easy question to answer.

The cellular carriers are building small cell sites in larger markets because they have exhausted the capabilities of the traditional large cell sites. The cellular companies have pushed bigger data plans and convinced customers that it’s okay to watch video on cellphones, and now they find that they are running out of bandwidth capacity. The only two immediate fixes are to build additional cell sites (thus, the small cells) or else add more spectrum. They eventually will layer on full 5G capability that will stretch spectrum a lot farther.

There are varying estimates for the eventual market for small cell sites. For example, the CTIA, the lobbying group for the wireless industry, estimates that small cells will grow from 86,000 in 2018 to 800,000 by 2026. The Wall Street analyst firm Cowan estimates 275,000 small cells by the end of 2023.

The big companies that are in the cellular backhaul business are asking the same questions as my clients. Crown Castle is embracing the small cell opportunity and sees it as a big area of future growth. Its competitor American Tower is more cautious and only chases small cell opportunities that have high margins. They caution that the profit opportunity for small cells is a lot less than at big towers. Other companies like Zayo and CenturyLink are pursuing small cells where it makes sense, but neither has yet made this a major part of their growth strategy – they are instead hoping to monetize the opportunity by adding small cells where they already own fiber.

The question that most of my clients want to understand is if the small cell building craze that has hit major metropolitan areas will ever make it out to smaller cities. In general, the big cellular carriers report that the amount of data used on their cell sites is doubling every two years. That’s a huge growth rate that can’t be sustained for very long on any network. But it’s likely that this rate of growth is not the same everywhere, and there are likely many smaller markets where cell sites are still underutilized.

Metropolitan cell sites were already using a lot of broadband even before customers started using more data. We know this because the cellular carriers have been buying and using robust data backhaul to urban sites of a gigabit or more in capacity. One good way to judge the potential for small cell sites is to look at the broadband used on existing tall tower sites. If a big tower site is using only a few hundred Mbps of bandwidth, then the cell site is not overloaded and still has room to accommodate broadband growth.

Everybody also wants to understand the revenue potential. The analyst firm Cowan estimates that the revenue opportunity per small cell site will average between $500 and $1,000 per site per month. That seems like a high price outside of metropolitan areas, where fiber is really expensive. I’ve already been seeing the big cellular carriers pushing for much lower transport rates for the big cell sites and in smaller markets carriers want to pay less than $1,000 per big tower. It probably takes 5 – 7 small cells to fully replace a large tower and it’s hard to envision the cellular carriers greatly expanding their backhaul bill unless they have no option.

It’s also becoming clear that both Verizon and AT&T have a strategy of building their own fiber anyplace where the backhaul costs are too high. We’ve already seen each carrier build some fiber in smaller markets in the last few years to avoid high transport cost situations. If both companies continue to be willing to overbuild to avoid transport costs, they have great leverage for negotiating reasonable, and lower transport costs.

As usual, I always put pen to paper. If the CTIA is right and there will be 800,000 small cell sites within six years that would mean a new annual backhaul cost of almost $5 billion annually for the cellular companies at a cost of $500 per site. While this is a profitable industry, the carriers are not going to absorb that kind of cost increase unless they have no option. If the 800,000 figure is a good estimate, I predict that within that same 6-year period that the cellular carriers will build fiber to a significant percentage of the new sites.

Perhaps the most important factor about the small cell business is that it’s local. I have one client in a town of 7,000 that recently saw several small cell sites added. I have clients in much larger communities where the carriers are not currently looking at small cell sites.

The bottom line for me is that anybody that owns fiber ought to probably provide backhaul for small cells on existing fiber routes. I’d be a lot more cautious about building new fiber for small cell sites. If that new fiber doesn’t drive other good revenue opportunities then it’s probably a much riskier investment than building fiber for the big tower cell sites. It’s also worth understanding the kind of small cell site being constructed. Many small cells sites will continue to be strictly used for cellular service while others might also support 5G local loops. Every last mile fiber provider should be leery about providing access to a broadband competitor.

The High Cost of US Cellular Broadband

The Finland-based company Rewheel has been tracking cellular prices since 2014. Their latest report looks specifically at the cost of cellular broadband and shows that US prices are among the highest in the developed world. Rewheel specifically focuses on countries in the European Union and countries that are members of OECD (the Organization for Economic Cooperation and Development), which brings in countries in North America and South America and countries like South Korea, Australia and New Zealand.

The US, Canada and a few other countries are the outliers with the highest broadband prices. The study shows that the average price charged for of a gigabit of downloaded cellular data in the US is just over $6. Nearly half of the countries studied have gigabit prices for less than $1. To put our cellular broadband prices into perspective, US cellular broadband rates are 16 times higher than the average rate in the European Union. What is striking is that the cost per gigabit in the US dropped 11% since 2017 due to carriers increasing the size of data allowances.

The study also correlated broadband prices to the number of cellular competition in a country. In general counties with multiple cellular competitors have lower broadband rates – for instance, countries with three cellular competitors have higher rates than countries with 4 or more competitors. Again, the US with four primary cellular spectrum owners is an outlier compared to other countries with that many cellular companies.

The study doesn’t look at specific reasons for the rates in various countries, or the ramifications for higher or lower prices. However, a lot of the reasons for high prices in the US are well understood:

  • In the US one of the larger costs or providing cellular service is the cost of transport to get data to and from cell sites. The prices charged to cellular providers here is far higher than fiber transport costs in many other companies. The price for fiber transport in the US grew out of the extremely high prices of transport that were billed for decades by AT&T and the other big monopoly telcos, and those prices are still high today.
  • Cellular networks are already overloaded. The cellular companies really don’t want customers to use a lot more mobile data on the cellular networks and hope that most usage gets handed off to WiFi networks. Lower cellular data prices would increase cellular network usage, and the cellular carriers in this country have not invested in the underlying cellular networks to handle greater traffic volumes.
  • The nature of competition here is different than in many other countries. The big carriers in the US have adopted an oligopoly pricing mindset where they compete on things other than price. This is not true just for cellular broadband, but also for landline broadband, cable TV service and most of our telecom markets.

There are a lot of ramifications for having higher cellular broadband prices:

  • Number one is the overall cost of cellular service in the US. The Rewheel study shows there are 14 countries in 2018 where customers can buy a smartphone plan for $34 per month (30 euros) that includes truly unlimited broadband plus at least 1,000 minutes of phone calling. It’s hard for a customer in the US to find a similar plan for under $70. Since practically everybody in the US has a cellphone, the cost of cellular phone bills is a burden on many US families.
  • Several studies over the last year have shown that US cellular customers have grown accustomed to self-limiting their cellular usage. Even customers who buy the so-called unlimited data plans that are capped at 20 GB in monthly download don’t use even half of that data on average. Cellular data caps have taught us to not use cell phone data – a concept that would be foreign in Europe.
  • Because of the high price of landline and cellular broadband, many homes have elected to use their cellphones for broadband since they can’t afford both connections. Such homes are paying far more per GB of data than the rest of us and are further penalized for going over monthly cellular data caps.
  • There are many homes in the rural US where cellular data is the only broadband option (other than satellite which most have tried and rejected). I hear stories all of the time in my travels in rural America where households with schoolkids are spending $500 or more per month on cellular data. The big cellular companies are gladly taking their money and haved no incentive to find an affordable option in rural America,

Shrinking Cellular Backhaul Revenues

There are a few carriers that rely on cellular backhaul as a major part of their revenue stream, but there are many more carriers that provide transport to a handful of cell sites. In all cases these are some of the highest-margin and lucrative products sold on the market today, and a business line that every carrier wants to keep. However, there are big changes coming in the cellular market and today I will look at the trends that are going to affect this market over the next decade.

Increasing Bandwidth Demand. The growth in bandwidth demand at many cell sites is explosive with the overall growth in cellular data doubling every 18 months. This growth is not the same everywhere with growth coming in cell sites serving residential customers and not in older cell sites built to satisfy highway phone coverage.

The demand growth is being driven by several factors. First, it’s becoming far more prevalent for customers to use cellphones to watch video. Part of that growth in demand comes directly from the big cellular companies which are bundling in access to content as part of the service. But a more important reason for the growth in demand is that the historic reluctance of customers to use cellular data is eroding as the cellular companies push ‘unlimited’ data plans.

Demands for Lower Transport Costs. Cellular service has become a commodity. The industry is no longer adding many new customers since almost everybody has a cellphone. This has led to price wars between cellular providers, and lower average customer prices are driving the cellular companies to look to cost reductions. At least in urban areas they are starting to also lose significant customers to Comcast, with Charter just entering the fray.

Recently I’ve seen cellular companies ask for lower prices as contracts get renewed or else demand greater bandwidth for the prices already in place. This means that fiber owners are not likely to see increases in revenues even as the bandwidth they are delivering grows.

Cellular Carriers Building Fiber. I’ve had several clients tell me recently that Verizon or AT&T is building fiber in their area. While this construction might be to reach a new large customer, the most likely reason these companies are building right now is to eliminate leased transport at cell sites. This is not just happening in urban areas and one of my clients who serves a market of 10,000 homes tells me that Verizon is building fiber to all of the cell sites in the area.

Verizon made headlines last year when they ordered $1 billion in fiber. AT&T is also building furiously. If you believe the claims made by T-Mobile and Sprint as part of the proposed merger – they also will be expanding their own fiber.

I also expect the cellular carriers to make reciprocal deals to swap fiber connections at cell sites where they now own fiber. If Verizon and AT&T each build to 2,000 cell sites they could easily swap transport and both gain access to 4,000 cell sites – that’s a huge nationwide decrease in transport revenues for others.

Growth of Small Cells. Layered on top of all of this is the predicted growth of small cell sites. I don’t think anybody knows how big this might market grow. I’ve seen optimistic predictions that small sell sites will be everywhere and other predictions that the business case for small cell sites might never materialize. Many of my clients are seeing the deployment of a few small cell sites to relive 4G congestion, but it’s hard to predict in smaller markets if this will ever expand past that.

One thing we can know for sure is that the cellular carriers will not be willing to pay the same prices for connection to small cell sites that they’ve been paying for the big cell tower sites. By definition, a smaller cell site is going to serve a smaller number of customers and the pricing must be reduced accordingly for it to make sense for the cellular providers.

Conclusion. My best guess is that cellular transport will be hit and miss depending up the specific local situation. There are many who will lose all cell site transport where the cellular carriers decide to build their own fiber. But even where they don’t build fiber I would expect the cellular carriers to bring the threat of physical bypass into price negotiations to drive transport prices far below where they are today.

This is a natural economic consequence of cellular becoming a commodity. As the cellular industry tightens its belt it’s going to demand lower costs from its supply chain. Transport costs are one of the major costs of the cellular industry and the most natural place for them to look to reduce costs. The big cell companies already understand this future which is one of the primary reasons they are furiously building fiber today while they have the cash to do so.