Sprint is teaming up with rural carriers to create a virtual 4G LTE wireless network in a move that will help them compete more aggressively against AT&T and Verizon. T-Mobile is considering a similar move.
On Thursday, the Competitive Carrier Association will announce at its conference in San Antonio, Texas the launch of a new Data Access Hub, which creates a one-stop shop for voice and data roaming among carriers that will allow operators large and small to create a virtual nationwide network to compete directly against AT&T and Verizon. Sprint, along with a handful of rural and regional wireless operators, are expected to be among the hub's first participating mobile carriers, and T-Mobile said it's also exploring whether to participate.
"US Cellular and Sprint have already tested the hub," said CCA President Steve Berry. "And it's working. We have other carriers signing up to participate as well. Both Sprint and T-Mobile are on the steering committee."
The announcement of the hub and the fact that national operator Sprint has agreed to participate and the fact that T-Mobile is also considering membership is important because it could change the dynamic of the wireless industry. In short, the hub will give Sprint and T-Mobile, if it joins, as well as dozens of rural operators, access to a nationwide 4G LTE wireless footprint via a patchwork of networks. For Sprint and T-Mobile, which are primarily confined to metro markets, it gives them access to true nationwide coverage, even in rural and suburban markets where they typically don't have coverage. For rural operators, it finally gives them easy access to 4G LTE roaming partners in big cities.
"The hub is all about providing coverage," Berry said. "It would take billions of dollars and several years to build the kind of coverage AT&T and Verizon have today. That's why this concept of the hub is so empowering to smaller players and bigger operators like Sprint and T-Mobile. It gives them choices and incentives to invest in the networks they already operate."
The state of the industry
Today, AT&T and Verizon control more than 70 percent of the wireless market in the US. They also reap the majority of the profits. Sprint chairman and SoftBank CEO Masayoshi Son has argued that this fact alone has kept mobile service prices high in the US and limited consumer choice. He proposes that Sprint and T-Mobile, the third and fourth largest wireless operators in the US, merge in order to compete against the duopoly of AT&T and Verizon.
Son is expected to talk about competition and the opportunity for partnering with other providers during his keynote speech at the conference on Thursday.
So far, regulators have not been keen on the idea of allowing these two companies to combine. Since the companies compete in almost every market, allowing them to merge means consumers would lose choice. What's more, Son's argument presumes a merger would give a combined company the scale in terms of subscribers and capital to compete against the two largest operators. But what Son fails to recognize is that a merged Sprint and T-Mobile still wouldn't solve the biggest problem that Sprint and T-Mobile each face today: a lack of nationwide coverage that achieves the same breadth as either AT&T or Verizon possess.
Sprint and T-Mobile each have markets that primarily cover urban areas, and they each lack coverage in rural markets. The result is that some potential customers may get access in cities where they work, but lack coverage at home in the suburbs. Even if customers get coverage at home and at work, Sprint or T-Mobile may lack coverage other places where they travel. For many customers, this lack of coverage is a deal-breaker when it comes to signing up for service.
CCA's Berry argues the hub solves this dilemma for larger operators like Sprint and T-Mobile, while also helping smaller regional and rural operators gain access to two tier 1 operators in urban centers where they don't operate.
He said Sprint's participation in particular sends a strong message to the market.
"I think Sprint realizes that there are synergies from working with these smaller providers that they need to take a good long look at," he said. "This is an entirely new way of doing business in wireless."
Sprint declined to comment on the hub. T-Mobile issued this statement: "T-Mobile applauds the work of CCA has done to develop a data hub for its members and we are exploring opportunities to participate. In addition, we support an ecosystem that promotes interoperability across spectrum bands."
Coverage is key
Roaming is not a new concept in the wireless world. In fact, the first mobile operators in the US operated only in small regional pockets. Every carrier in the early days roamed with other carriers to provide customers ubiquitous coverage. But roaming charges were expensive. The predecessors of AT&T and Verizon realized that the only way to reduce the cost of roaming was to build or buy nationwide coverage.
So began years of industry consolidation in which today's giants AT&T and Verizon were born. These carriers grew primarily by buying regional and rural operators throughout the country. As they bought up smaller competitors, they accumulated network assets across the US.
Now these two wireless carriers are able to run their businesses without needing to roam on anyone else's network. Their purchasing power is so great that they essentially control the handset market, thus excluding smaller operators access to certain devices. They also have dominated recent spectrum auctions, and in some instances have begun carving out spectrum band plans that exclude all other operators but themselves.
The Federal Communications Commission requires all carriers, including AT&T and Verizon, to provide roaming at reasonable rates for both voice and data service. But the agency hasn't forced the two largest carriers to allow these smaller operators to roam onto their fastest 4G LTE networks. Part of the reason for this has been due to technical issues, such as the incompatible slivers of spectrum that AT&T and Verizon have used in building their initial LTE networks.
The result has been that few smaller operators have been able to strike 4G LTE roaming agreements with either of the two largest carriers.
"How can smaller carriers build 4G LTE in their own footprint and tell customers they have 4G capability nationwide, when the two largest carriers refuse to enter into any 4G LTE roaming relationships with them?" Berry said.
He explained that he is not aware of AT&T striking a single LTE roaming relationship with any of the roughly 100 rural carriers in the CCA. And Verizon only offers access to its 4G LTE spectrum to wireless operators in areas where Verizon doesn't operate a network.
The cumulative effect on the rest of the industry has been chilling, stifling the deployment of next generation from smaller rural and regional operators.
Meanwhile, AT&T's and Verizon's dominance has also kept growth of Sprint and T-Mobile in check by making it financially impossible to build out a significant footprint outside the most populated urban markets.
"It just doesn't make sense for Sprint or T-Mobile to build in some of these areas," Berry said. "You look at a company like Union Wireless in Wyoming. It has a coverage area that is larger than the country of Great Britain. But there are more cows than there are people. How do you make money in a market like that?"
Berry said that Union and other small rural operators have found ways to squeak out profits. But he said it doesn't make sense for any larger carrier to replicate their own network there for the few customers that might roam into the area. In fact, he said it's three to four times more expensive to put up even one cellular tower versus roaming with a local provider.
The 'hub' is the answer
This is where the hub comes into play, Berry said. The hub will make the process of roaming among smaller carriers, Sprint, and T-Mobile much more seamless than it has been in the past. In essence, Berry said it will create a virtual national wireless operator that collectively has a wide enough footprint to allow any small rural carrier, as well as, a T-Mobile or Sprint to truly compete against AT&T and Verizon.
The way the hub works is that wireless operators are able to sign a single agreement and connect to every carrier signed up to the hub. Rates can be negotiated separately, but the business relationships are done through the hub. It allows Sprint or T-Mobile to instantly connect to hundreds of smaller wireless carriers across the US, and it allows these smaller carriers to connect to Sprint and T-Mobile as well as to each other.
The hub can connect all generations of wireless networks from 2G and 3G networks to 4G LTE networks. Berry said the true promise of the hub is in the next generation 4G LTE networks that are being built. Companies like Qualcomm are already designing chipsets that allow every LTE frequency band deployed in the US to operate on a single device, Berry said. This breakthrough coupled with the emergence of voice over LTE technology, will eventually allow true roaming from any LTE network in the US to another. This will also pave the way to a more robust device ecosystem that will allow many smaller carriers to get access to the same devices as larger carriers.
"Until now no one in the wireless market has done business this way," said Berry. "We needed a pathway to provide nationwide 4G LTE service. And the hub provides a seamless connection from one to many."
He explained that the hub will not only allow a customer of Mississippi's C Spire to roam onto Sprint's network in New York City, but it could also provide access to Blue Grass Cellular's network in Kentucky. And with a roaming platform that allows carriers to form one business relationship that can connect to many networks, it opens the door for a multitude of possibilities.
For instance, Berry said the hub could become a destination-roaming partner for overseas operators. He noted that an NTT DoCoMo or SoftBank wouldn't bother striking deals with every small rural and regional operator in the US. But using the hub, it doesn't have to make individual deals. It can deal with the hub, and instantly get access to at least a hundred carrier networks throughout the country. He also said, content providers could eventually strike deals with wireless operators participating in the hub to offer premium access for content.
"You might have someone like ESPN make deals with all carriers participating in the hub," he suggested. "That's something that has never been done before."
With more guaranteed roaming partners, especially for 4G LTE, it also provides incentives to smaller operators to invest more in building and expanding their 4G LTE networks.
"We are empowering the small carriers to remain independent," Berry said. "We're giving them a choice and an opportunity to leverage their assets so they can invest and make some money. Now they will know they will be able to roam on 4G LTE. That's a big deal."
He added that it also allows Sprint and T-Mobile to focus their capital on improving network quality and speeds in the urban markets in which they already operate instead of trying to expand coverage into more far -flung markets simply to expand their footprints.
"This could help Sprint and T-Mobile fill the holes in their network," Berry said. "The rural guys are already in those markets. And in many instances they have a stronger network than either Verizon or AT&T."
"So if you're a large carrier," he went on to say. "Why would you spend the capital to build a network where there's already great access to a high quality network? And it essentially costs you nothing more than a business relationship with the hub."
For these reasons, the hub looks like a win-win for all the carriers involved. But it's likely to give regulators, which are already inclined to reject a merger between Sprint and T-Mobile, even more reason to think that these companies can compete on their own.
Berry tried to downplay the threat to a potential Sprint/T-Mobile merger. He maintains that an argument can still be made for consolidation. He said there are business efficiencies that can be realized through a combination of two companies. Also, a combined Sprint and T-Mobile would nearly double the subscriber base, possibly making device acquisition more affordable. And finally, the merger would give the carriers more wireless spectrum in the dense urban markets where they are concentrated.
"The fact that Sprint and T-Mobile will get a different scope in terms of coverage by using the hub, doesn't mean that they should or shouldn't consolidate," he said. "That is their decision. What we're saying is that with the hub, whether they are operating together or separately, we can have real competitive players in every market where Verizon and AT&T are operating."
Update, 10:24 p.m. PT:This story was updated with a statement from T-Mobile.