Mobile Future

The Little Engine That Won’t?

At a recent U.S. Senate hearing on the state of mobile competition, the representative from T-Mobile, the U.S. subsidiary of the telecommunications company Deutsche Telekom, described the company as “the little engine that could” in characterizing its approach toward competing and innovating in the dynamic US mobile marketplace.

By many measures, and according to a number of its own public statements, T-Mo’s “little engine” strategy seems to be paying-off.

In its most recent earnings call, Team Pink recently announced it added 1.6 million new customers last quarter, and a whopping 4.4 million for the year, of which about 2 million were postpaid customers. The company said it expects to add between 2 million and 3 million new postpaid customers in 2014.

At CES, I heard T-Mobile’s CEO John Legere announce that the reach of T-Mo’s LTE network has shattered records with the fastest 4G LTE deployment in the US, growing in less than one year from covering zero to 209 million people, with overall network coverage reaching 96 percent of Americans.

And just a few days ago, describing itself in a press release as “the fastest growing wireless company in the US,” the company announced plans to upgrade its existing 2G/EDGE network to LTE and begin deploying additional LTE coverage on the 700 MHz A-Block spectrum that it’s acquiring from Verizon for $2.365 billion and certain AWS and PCS licenses.

Add to this the fact that T-Mo, along with its parent DT, now have a combined market capitalization approaching $100 billion, putting them in the same leagues as other of the world’s largest global mobile, tech, and/or broadband-focused companies like Softbank/Sprint, Intel, Comcast, amongst others, and not far behind Facebook and Mobile Future members like AT&T and Verizon.

This is all very impressive.

To its credit, T-Mo has achieved all of this market success without getting help or favors from the U.S. government or American taxpayers, but the old-fashioned way:  with pluck, imagination, and a focus on innovation, investment, and listening to customers.

Which is why it was puzzling to read Deutsche Telekom’s CEO Timotheus Hoetgess comment recently in the pages of the Wall Street Journal that when it comes to competing in the upcoming 600 MHz spectrum auction being prepared by the FCC,  “T-Mobile can’t keep up” with its rivals.

Really?

This is a surprising statement coming from the leader of a globally ambitious and financially capable telecommunications giant like Deutsche Telekom.   After all, with nearly $100 billion in combined market capitalization, Deutsche Telekom’s “little engine” T-Mobile would seem to have all the coal it will ever need in its tender  — and more — to far outbid any competitor in any auction — should they simply choose to put it to use.

The notion that T-Mobile “can’t keep up” is equally incongruous given the competitive determination we’ve been seeing — and admiring — not just from T-Mobile itself, but from other much newer players in the US mobile innovation ecosystem.

Just ask Mark Zuckerberg, whose “hacker way” to building Facebook was on full and bold display a few weeks ago when his company found $19 billion good reasons recently to “like” the free texting service What’s App.  This investment was the very definition of putting a company’s vision — along with its financial resources — where its mouth is.

But Deutsche Telekom/T-Mobile appears to be pursuing a different strategy.  And that is to get the US government to help lower their cost of doing business and accessing spectrum with an auction designed to favor their own company and customers while effectively penalizing the hundreds of millions of American mobile consumers who with eyes wide open have chosen to sign-up with other competitive mobile services.

The claim that T-Mo and its deep-pocketed parent can’t “keep up” with their US competitors in upcoming spectrum auctions is belied not just by their considerable financial capacity, but also by its record in past public spectrum auctions.

In fact, when T-Mobile last chose to participate in an open spectrum auction, for the AWS band back in 2006, which did not include caps or other restrictions, it actually won 26% of the available spectrum licenses — more than the amount won by AT&T and Verizon combined, which ended up with 25% between them.

Indeed, designing public auctions for our nation’s airwaves to favor one competitor over another is not only bad policy.  It also turns out to be very bad practice.

Mobile Future took a hard look at the track record of restricted spectrum auctions around the world in a recent research paper.  And what we found was entirely unsurprising:  when governments bake-in restrictions or caps to their public spectrum auctions to favor one competitor over another, the results are bleak, not just in terms of revenues raised, but also in terms of spectrum allocated, and new entrants sustainably created.   Last year’s multi-band auction in the UK is only the most recent of a number of examples of restricted spectrum auctions gone bad. The British auction had imposed participation caps on larger bidders, and the results were so poor that the Cameron government launched an official inquiry to find out why and how it so badly went off the rails.

Conversely, we also took a close look at auction results in the US over the past decade to assess if the FCC’s current policy approach — which carefully has avoided caps and restrictions in favor of open auctions using case-by-case reviews based on a spectrum screen — actually works.  The answer, also unsurprisingly, was yes and resoundingly so.  If a bidder showed up to the auctions, regardless of how big or small it turned out to be, it could walk away with spectrum.   In fact, in the nine spectrum auctions held by the FCC between 2003 and 2013 without caps, restrictions, or other in thumb-on-the-scale set-asides, fully 46% of the spectrum licenses up for bid were won by non-national carriers.

The bottom line is that the United States Congress, in passing the Spectrum Act of 2010, made clear its intention — rightly — was to authorize a spectrum auction, not a spectrum give away, and to promote systemic competition, not to advantage one national competitor over another.

Given the turbo-charged wireless marketplace we now live in, it would be utter folly for the US government to act in such as way as to try to predict — or shape  — our future mobile marketplace.

As just one of the more recent examples of our ever-changing mobile market, Softbank CEO — and the new owner of Sprint  — Masayoshi Son, has been making the rounds in Washington, the talk shows and various industry events trying to lay the groundwork for a potential Sprint bid for T-Mobile, even as Sprint is busy echoing T-Mobile’s pleadings for special treatment by the FCC for its shareholders and customers in the nation’s spectrum auctions.

This prospect should give serious pause to officials at the FCC who are in the endgame right now of their exacting work of designing the rules for the upcoming AWS and 600 MHz auctions.

Imagine this scenario:  what would happen if the Commission were to yield to the lobbying efforts of companies like Deutsche Telekom/T-Mobile and Softbank/Sprint and design the upcoming auctions in a way that will make it cheaper and easier for these companies to acquire spectrum than their competitors, and then they were to try to merge?

The demand for spectrum would be fundamentally different than predicted, undermining the auction’s ability to achieve its various and important policy goals. And the clean up crew for the spectrum mess that would be created necessarily would be American consumers and taxpayers.

So what should the US government do?

The FCC should stick with the spectrum auction design principles which have proven time and again to work best for the public interest, and for American consumers:  Keep ‘em open.  Keep ‘em simple.

Ultimately, if it does so, it will be all – not just some — of our nation’s mobile consumers who will benefit.  Equally, it will be all, not just some, of the important national policy objectives our public spectrum auctions are meant to achieve — more competition, more spectrum, and the creation of a national public safety network — that will be most effectively met.

At the end of the day, rather than turning-in to a “little engine that won’t,” reliant on the beneficence of the US government and taxpayers,  T-Mobile — along with Sprint, AT&T, Verizon and all other current and future competitors — should rely instead on their own commercial ingenuity and their own financial resources — to get the job done.