Strategy Analytics predicts global cellular subscriptions to exceed 7 billion by the end of 2013. Asia Pacific continues to be the largest single region, representing half of the world's cellular subscriptions. LTE will be the most important growth category and global 4G subscriptions will soar over the next five years.

GSM/WCDMA/TD-SCDMA will dominate the wireless ecosystem, with LTE in particular gaining good traction over the next five years.

Cellular subscriptions are outpacing unique users. How many unique users does 2012's 6.6 billion subscriptions represent?

A combination of inactive accounts, individuals using multiple SIM cards in one handset, and the emergence of more multi-device users will drive the subscription/user gap even higher.

More than one quarter of all subscriptions will be on 3G or 4G networks by the end of 2012, with 2G systems witnessing their last year of subscription growth before declines commence in 2013

2012 will see the emergence of LTE as a global 4G technology with total connections growing from 9 fold year on year. The US, Japan and South Korea are the current growth engines for LTE, but which regions and countries will drive the next wave?

Greater scale in the global handset market will help to put LTE on a more rapid adoption curve than seen by WCDMA.

This report forecasts cellular subscriptions by protocol in 6 global regions and 13 major automotive countries from 2007 to 2017. Major protocol forecasts for each major automotive market include

? CDMA (CDMAOne / 1x / EV-DO),

? 2G GSM (GSM / GPRS / EDGE

? 3G GSM (WCDMA / HSDPA / HSUPA / HSPA+ / TD-SCDMA)

? 4G LTE (LTE)

Client reading

On December19^th. AT&T - discouraged by massive DoJ and FCC opposition - ended its bid to add capacity with the acquisition of T-Mobile USA. This leaves AT&T hunting for alternative ways to acquire sufficient spectrum, even though it was finally able to complete the purchase of Qualcomm’s 700MHz Spectrum on December 27^th.

But where does this leave T-Mobile USA?

On December 20^th. Deutsche Telekom (DT) CEO Rene Obermann speaking to his own corporate blogger suggested that T-Mobile USA would need to move to LTE technology eventually; and would also require additional spectrum. He made clear however, that the $3 Billion cash settlement from AT&T would be used initially to reduce DT corporate debt not to further enhance T-Mobile USA’s network that was just upgraded in 2011 to dual carrier HSPA+ and is currently providing sufficient capacity for current customers.

Rumors of T-Mobile USA’s difficulties are exaggerated…

As of end of third quarter of 2011 T-Mobile USA served 33.7 million customers only slightly down from 33.8 million at the end of third quarter 2010. 10.1 million of those customers are now using 3G/4G smartphones up 40% from a year earlier. OIBDA margin was 31% in the third quarter of 2011, up from 28% in the third quarter of 2010 due largely to lower losses from equipment subsidies that were reduced by the launch of T-Mobile’s unlimited Value plans. These Value plans allow customers to subscribe to new services without an upfront payment for a bundled handset. These plans have reduced ‘costs per gross add’ and lowered the cost of subscriber retention.

Overall, T-Mobile USA had a slim but maintainable third quarter net income of $332 million on service revenues of $4.67 billion.

This year therefore, T-Mobile survived disruptions to its retail channels including the discontinued retail partnership with Radio Shack; handled the uncertainty of the AT&T acquisition; and held Contract Customer churn down to 2.4%, although Prepaid churn jumped to 7.2% from 6.6% between the second and third quarters.

T-Mobile is maintaining its customer base and making money.

Challenge is Migration to LTE

The challenge for T-Mobile USA is to fund future growth to compete with the three other large players in the US market – AT&T, Verizon and Sprint - as well as ‘no contract’ low cost prepaid regional operators - Leap Wireless, MetroPCS and US Cellular - all of whom are migrating to LTE.

In November T-Mobile announced that its nationwide ‘4G’ (HSPA+ at 21Mbps) network now covered 208 markets across the US reaching more than 200 million POPs.

But how will T-Mobile migrate this network and its GSM PCS customers to LTE without AT&T?

Possible Migration Path to LTE

We have reported that migration to at least a Hybrid HSPA+/LTE network is key to long term profitability. TMoNews the unofficial blog of T-Mobile USA recently described a possible low cost path for T-Mobile’s LTE migration. See: ‘Editorial: Why T-Mobile Should And Will Deploy LTE (The Technical Edition)’

“At this point in time, T-Mobile is just now refarming PCS spectrum. In a majority of the markets where T-Mobile has both PCS and AWS spectrum with no AWS used, it is quite likely that they will deploy HSPA+ only on PCS because most of the remaining markets only have 10MHz of AWS and 30MHz or more of PCS. AWS will likely be reserved for LTE in these areas.”

“In areas where they’ve got plenty of AWS spectrum and they’re using it for HSPA+, they’ll dedicate about 10MHz of PCS to GSM and 10MHz to HSPA+. If they have 20MHz of PCS or less in a market with lots of AWS, there will be no deployment of HSPA+ on the band, but there will be scaling back of GSM to 10MHz to prepare for LTE. T-Mobile will deploy LTE.”

 “T-Mobile USA has been preparing for LTE on their core network and backend infrastructure for over two years now. … T-Mobile USA has deployed all the necessary components to run IMS on their core network and (has) made a new Wi-Fi Calling solution that uses it. As far as we know, they are the first in the world to commercially deploy IMS for voice, SMS, MMS, and other circuit-switched services. It would be trivial for T-Mobile to change the client software to make it run over LTE or HSPA+. By preparing all the core network and backend infrastructure for LTE this far ahead, their nationwide LTE deployment costs will much lower.” 

Financing the Path to LTE

The key question is whether T-Mobile USA can finance this migration without bringing in new investors. Even if the migration could be done for as little as $6 Billion, additional spectrum will eventually be needed. DT is unlikely to provide that and is being very cautious because of concerns about European market growth and the financial risk of its 40% share of Greek telecom group OTE. DT is also planning to expand in several areas of its European business rather than in the US. 

Nor is DISH Network, who has offered to Partner With T-Mobile likely to be able to finance a T-Mobile upgrade as it focuses on its own rollout.

Meanwhile T-Mobile USA is pursuing business as usual adding ‘no contract’ plans to keep prepaid customers; and offering aggressively priced deals for the Holidays.

And Oh Yes - directly targeting AT&T and iphone4 in its Ads with its attractive T-Mobile girl – Carly Foulkes

It has been a busy few weeks for AT&T.

While many are saying the AT&T T-Mobile “deal is dead”, and AT&T has clearly irritated the FCC staff, AT&T is now finally taking a much more conciliatory attitude.

Our recent report ‘It's all about Spectrum - AT&T T-Mobile Bandwidth matched by Verizon and Sprint’ describes how Verizon and Sprint are both buying control of significant extra spectrum. However, the Verizon AWS spectrum purchase from SpectrumCo. requires FCC approval; and once it approves that deal the FCC will find it difficult to argue that a merged AT&T T-Mobile would have an excessively ‘dominant spectrum position’.

Once the FCC allows Verizon’s spectrum acquisition - and after Sprint’s takes ‘virtual control’ of Clearwire’s spectrum - AT&T will have a very strong case that its ability to compete will be diminished if it is not allowed to acquire T-Mobile.

A complete reversal of the original case.

AT&T is working hard to complete the deal and is thought to have two teams pursuing two parallel options.

Option 1. AT&T is negotiating to divest sufficient spectrum and assets to satisfy the regulators. See:

AT&T and T-Mobile: Will there be a Spectrum Fire Sale to Escape Department of Justice and Close the Deal?

• ·“The company is considering an offer to divest a significantly larger portion of assets than it had initially expected, said the person, who declined to be identified because the plan isn’t public. Though the exact size of the disposals hasn’t been determined, they could be as much as 40 percent of T-Mobile USA’s assets, the person said.”
• “AT&T has been in discussions with MetroPCS Communications Inc. (PCS) and Leap Wireless International Inc. (LEAP) to sell spectrum and customers as a way of propping up competition in the absence of T-Mobile.”
• “AT&T has been secretly working on an audacious 11th-hour deal to salvage the transaction: AT&T is knee-deep in talks with Leap Wireless, a second-tier but growing wireless player, to sell it a big piece of T-Mobile’s customer accounts and some of its wireless spectrum, according to people involved in the negotiations. AT&T hopes such a deal would placate the Justice Department enough for it to drop its opposition to AT&T’s acquisition of T-Mobile, these people said, or at least to strengthen AT&T’s hand if it goes to trial. The deal would make Leap the fourth-largest wireless carrier in the nation, but it would allow AT&T to retain enough of T-Mobile’s valuable wireless spectrum, which it says it badly needs to provide the kind of next-generation service that its customers expect.”
  
  

See Blog: Could AT&T Settlement Catapult Leap and MetroPCS to Top National Status?

Option 2. AT&T is still preparing to fight in court.

• Verizon’s recent actions may have significantly helped AT&T’s case.
• If AT&T makes a new proposal on January 12^th DoJ may demand that AT&T refile that proposal with FCC before it goes to trial. [Note: AT&T correctly noted that it is normal to resolve DoJ issues before getting FCC approval. We also noted that in April in: ‘AT&T T-Mobile Acquisition: How long will it take to close?’]

AT&T really…really….really… wants the T-Mobile spectrum for capacity growth and is not likely to give up easily.

But, if AT&T loses at trial there are two other likely options:

Option A. “A network-sharing deal between AT&T and T-Mobile could be established, but this would probably not allow AT&T to reuse T-Mobile's AWS spectrum for LTE. A major blow for AT&T.

Option B. Deutsche Telekom is still anxious to complete the sale as it has major European investment plans for the $39 Billion. It might decide to spin out T-Mobile to a Private Equity partnership pending a later sale to a new player like. Google. [Several options for T-Mobile’s future are summarized in AT&T and T-Mobile: Will there be a Spectrum Fire Sale to Escape Department of Justice and Close the Deal?

We should know by January 12^th. 2012, if AT&T can come back with a modified proposal that may be acceptable to DoJ, and then the FCC.

Rethinking US Market Structure and Competition in an IP world.

In a recent policy paper Strategy Analytics suggested that the nature of US Mobile Broadband competition has changed and that ‘All-IP’ networks dramatically change both ‘economies of scope and scale’ and the ‘Relevant Geographic Areas’ that determine Competitive Concentration for Anti-Trust purposes.

See: Policy Insight: New Mobile Industry Structure and 'All-IP' Services change AT&T T-Mobile's 'Spectrum Dominance' and Create new 'Challengers'

There may not however, be sufficient time in the current AT&T case to make such a profound change to the traditional 1980s/90s market analysis. Nor to establish rules for the new digital ‘All-IP’ Mobile Broadband Industry.

We noted in the Blog of September 19^th. that AT&T has begun to explore possible spectrum sales to other operators to gain approval of its acquisition of T-Mobile USA. Two operators were mentioned as AT&T’s first targets – Leap Wireless and MetroPCS.

Is it possible that AT&T could satisfy the Department of Justice (DoJ) by divesting spectrum to just these two companies? To answer this we looked at whether MetroPCS and Leap have current presence or operations in the right target ‘divestiture markets’ to expand cost effectively by adding spectrum and subscribers from AT&T. 

The amended DoJ complaint of September 16^th 2011 states that the “…97 CMAs, identified in Appendix B, effectively represent….area(s)  in which the (merger with T-Mobile US) likely would substantially lessen competition for mobile wireless telecommunications services… each constitutes a relevant geographic market under Section 7 of the Clayton Act, 15 U.S.C. § 18.”

The 97 CMAs identified are those where the Herfindahl-Hirschman Index (HHI) is increased by more than 200 points by the AT&T T-Mobile Deal. HHI is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. For example, for a market consisting of four firms with shares of 30, 30, 20, and 20 percent, the HHI is 2,600 – Calculated as follows: 30² + 30² + 20² + 20² = 2,600.

Only three CMAs in the Top 100 are not identified by DoJ as an HHI ‘problem’ - Grand Rapids and Flint, MI and Shreveport, LA. Many on the DoJ list however are in the 200+ to 400 HHI increase range that could potentially be diminished significantly by the sale of Spectrum to the third or fourth largest player in each market. 

To see what role MetroPCS and Leap could play we then conducted an analysis of these 97 ‘problem’ Cellular Market Areas (CMAs). In AT&T’s April 21^st.2011 filing it listed in Appendices B and C the competitors in all the cities where it operates. The chart below shows that in the 97 CMAs listed by DoJ either Leap or Metro PCS has a presence in all except two - Honolulu, HI and Johnson City-Kingsport-Bristol, TN-VA.

MetroPCS and Leap Wireless presence in the 97 problem CMAs

MetroPCS and Leap are present together in a few CMA’s which might create some competitive bidding in: Philadelphia, PA, Buffalo, Rochester, Syracuse and Albany-Schenectady-Troy NY, Toledo, OH-MI, Lansing-East Lansing and the Upper Peninsula MI, as well as Las Vegas, NV and Tacoma, WA

DoJ’s amended complaint also noted that in “more than half of the (97) CMAs…. AT&T and T-Mobile together would have a greater than 40 percent share. In at least 15 of the CMAs, including major metropolitan markets such as Dallas, Houston, Oklahoma City, Birmingham, Honolulu, and Seattle, the combined firm would have a greater than 50 percent share - i.e., more customers than all the other firms combined.” These are clearly the markets where DoJ is most concerned that the merged entity should have a lower share.

In the 15 markets shown in the chart below the DoJ Post-Merger share estimate is over 50%.

MetroPCS and Leap Presence in 14 of 15 ‘Problem’ markets

Either MetroPCS or Leap is in each of the 14 markets. The only exception is Honolulu, HI where neither is currently present.

AT&T needs to sell significant spectrum, and could potentially accomplish most of the required divestitures with sales to MetroPCS and Leap alone. Provided these two operators can raise sufficient financing – potentially even guaranteed by AT&T - this could catapult these two operators to National Status overnight.

AT&T and T-Mobile’s latest subscriber market shares – as well as those for Sprint Nextel, Verizon Wireless, MetroPCS and Leap Wireless - can be seen at ‘Wireless Operator Performance Benchmarking Q2 2011’.

According to two sources speaking to Bloomberg “AT&T is approaching smaller rivals including MetroPCS Communications Inc. (PCS) and Leap Wireless International Inc. (LEAP) to sell spectrum and subscribers” and find a way to gain approval for its acquisition of T-Mobile USA. Sources also said that AT&T “has … reached out to CenturyLink Inc. (CTL), Dish Network Corp. (DISH) and Sprint Nextel Corp. (S) to gauge their interest in buying assets.”

This is the type of strong positive response we predicted in the recent Insight ‘AT&T and T-Mobile: Will there be a Spectrum Fire Sale to Escape Department of Justice and Close the Deal?’ and the earlier blog ‘AT&T Opponents Shift Focus to Challenge Excessive Spectrum Consolidation’. It is likely that AT&T is also reacting to the proposed six month Department of Justice (DoJ) pre-trial schedule and the co-filing by seven states who joined the DoJ lawsuit last week.

Proposed Department of Justice Schedule would go ‘down to the wire.

On September 16, 2011 Department of Justice filed a schedule proposing Monday, March 19 2012 for all steps to be completed in order to be ready for trial. AT&T is anxious to accelerate the process and suggests a completion date of Monday, January 16 2012. This is probably not because AT&T is anxious for a trial but because it still hopes to find a negotiated resolution with both DoJ and FCC as well as the states prior to its March 20, 2012 deadline for enforcing the deal with Deutsche Telekom.

The details of the two proposed Schedules are as follows.

AT&T and DoJ Proposed Schedules

The two parties will meet with US District Court Judge Ellen S. Huvelle on September 21, 2011 to finalize the schedule. AT&T’s proposed schedule is extremely tight for this extensive case.

And the other Parties are Piling on.

Also on September 16 Attorneys General in seven states filed as co-plaintiffs in the DoJ lawsuit. The seven states are led variously by Democrats and Republicans: California, Illinois, Massachusetts, Pennsylvania, Washington, New York, and Ohio. DoJ has had an excellent working relationship with several states in building its case and welcomed their participation.

On the same day Sprint’s attorneys filed motions in Federal Court asking the judge to integrate its case against AT&T in a coordinated proceeding as part of the DOJ complaint.

Summary

These opponents’ actions appear to have stimulated AT&T to initiate aggressive bargaining. AT&T and T-Mobile’s latest subscriber market shares – as well as those for Sprint Nextel, Verizon Wireless, MetroPCS and Leap Wireless - can be seen at ‘Wireless Operator Performance Benchmarking Q2 2011’. User shares are available on request to srudd@stratregyanalytics.com or Pkendall@strategyanalytics.com.

On April 27^th.several competing operators - Cincinnati Bell Wireless, MetroPCS, NTELOS, the Rural Cellular Association (RCA), the Rural Telecommunications Group, and Sprint Nextel Corporation all requested the FCC to consolidate into a single proceeding the upcoming review of the T-Mobile acquisition (11-65) and the earlier Qualcomm MediaFLO Spectrum acquisition filing (11-18).

“In the proposed Qualcomm transaction, AT&T seeks to acquire Qualcomm's six Lower 700 MHz D Block (6 MHz) licenses, which collectively have a nationwide footprint, and five Lower 700 MHz E Block (6 MHz) licenses in five large markets. The T-Mobile transaction includes the acquisition of an additional 50 MHz on average in the same geographic areas covered by the proposed Qualcomm transaction. Obviously, with such an overlap, these two transactions should be examined together, rather than separately.”

In Appendix B. Competitor Chart of AT&T’s April 21^st. Filing there are 567 pages of Competitor Charts for 700 MHz, Cellular, and SMR Licensees that show the Qualcomm D & E Block Spectrum alongside the AT&T Consolidated Spectrum. A Selected example for San Francisco, San Mateo and Washington DC is shown below.

As seen in the above example AT&T’s own Appendix B strongly supports the case for examining the joint impact of the two acquisitions.
AT&T may now regret not having waited to settle the Qualcomm acquisition before seeking to acquire T-Mobile. [Note: Appendix A shows the Spectrum to be consolidated between AT&T and T-Mobile.]

So now the FCC may need to review the competitive and market impact of AT&T's aggregation of spectrum in both proposed transactions on nationwide mobile telephony and broadband services.

AT&T may have trouble establishing that it really needs all the additional Spectrum.

RCA President and CEO Steven K. Berry has called AT&T’s acquisitions a ‘spectrum grab’ and said, “It is clear that AT&T is doing everything possible to gain market dominance by making not one but two major spectrum grabs in the proposed Qualcomm and T-Mobile transactions.”

AT&T is now getting increasingly unfavorable publicity – as Broadband DSL Reports notes “Press (Are) Not Buying AT&T Spectrum Claims”. The chart below is being used in multiple publications to exemplify AT&T’s overreach. It is easy visually to add together either the green 3G columns or the blue 4G columns to estimate the consolidated spectrum of AT&T and T-Mobile. It is apparent they both far outstrip Verizon.

Delay may cause problems for AT&T unless it divests properties rapidly.

The clock is running on the AT&T T-Mobile merger since the FCC established the Pleading Cycle for the AT&T T-Mobile Acquisition (WT Docket 11-65) as follows:

Filings                        Due

Petitions To Deny     May 31, 201

Oppositions                June 10, 2011

Replies                        June 20, 2011

 Despite this aggressive FCC timetable, it is increasingly likely that extensive negotiations will be required – both nationally and state by state. AT&T will probably have to divest sufficient properties to ensure competition in each market on a case by case basis to create even stronger competitors than shown on its website.

The agreement with Deutsche Telekom (DT) however, states that AT&T does not have to agree to divestitures and other regulatory conditions that would have an adverse effect greater than USD 7.8 Billion; only half of subscriber or spectrum sales value is counted towards that sum. AT&T has stated that it is prepared to divest up to 40 percent of the number of T-Mobile subscribers or approximately 13.149 million subscribers - based on the stated value of USD 578 per subscriber. But the likely buyers are AT&Ts competitors who have no incentive to move quickly or to pay full price .

But AT&T’s acquisition agreement with DT for T-Mobile USA has a ‘drop dead’ date of March 20, 2012 after which either AT&T or DT can chose to terminate the deal.

If the deal terminates because of a failure to obtain regulatory clearance there is a provision that A&T must pay DT up to USD3 Billion in cash; enter into a roaming agreement; and “transfer to Deutsche Telekom certain wireless AWS spectrum that [AT&T] does not need for its initial LTE roll-out.”

The growing opposition to AT&T may well push the deal to the fall of 2012 as we predicted in an earlier Insight ’AT&T T-Mobile Acquisition: How long will it take to close?’