Tales of the Sausage Factory

Ergen Makes Bid For CLWR After All, What’s Up With That?

Last Sunday, I noted that while Ergen was a potential bidder on Clearwire’s (CLWR) 2.5 GHz spectrum, it seemed unlikely given the fact that Sprint would still own a majority stake in CLWR and that governance issues would make this a very messy fight that would potentially tie up DISH assets when they are needed for its own network deployment and for a potential H Block Auction bid. I also noted a lot of other issues that make a purchase by anyone other than Sprint less attractive — such as the cost of network buildout — that cast serious doubt on Crest’s valuation of CLWR’s spectrum at $30 billion.

48 hours later, Ergen makes a bid for CLWR valuing CLWR at at $3.30 a share (a reasonable enough premium over Sprint’s offer to require serious consideration). Mind you, nothing in the bid (what details there are can be found here) contradicts anything I said previously. As noted by CLWR in it’s press release, the proposed deal comes with a bunch of conditions and caveats that reflect Sprint’s ownership and the cost of building out a network that would integrate with Ergen’s AWS-4 spectrum. Which naturally raises the question of why Ergen decided it was worth it to make the bid anyway. Making a serious tender offer — even if you think it will ultimately be rejected — is a non-trivial process that incurs expense. Before dismissing this as mere payback for Sprint’s (successful) push to amend the AWS-4 rules to protect H Block (creating delay in the approval and potential issues for deployment), it is worth considering what the potential upsides are to DISH that justify the cost.

Oh yeah, I should also talk about some consumer stuff and broader stuff as well. Horse race is all well and good, but there are a lot of industry folks that do that better than I do.

More below . . . Read More »

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Tales of the Sausage Factory

Crest’s Moronic Petition To Deny In Sprint/CLWR Symptom of Broader Idiocy That Actually Matters.

OK, I suppose I should really wait until they file, but this story detailing Crest Financial’s planned Petition to Deny in Sprint/Softbank/CLWR appears to be, in my humble opinion, the single dumbest grounds for a Petition to Deny. EVAR. For those just tuning in, Sprint, backed by Softbank, has offered approximately $3/share for the outstanding shares of Clearwire (CLWR). Because some analysts with no understanding of the actual spectrum market think CLWR is sitting on a spectrum pot ‘o gold, Crest is pissed and wants more money. It has already filed a shareholder derivative suit claiming that Sprint leveraged its insider position to buy out Clearwire below fair market value. Given how corporate law has crapped all over minority shareholder rights in recent decades, I am not giving this much hope. Apparently, Crest feels the same way, because they are now taking the fight to the FCC.

According to the story: “In going to the FCC, Crest will argue that the Clearwire deal artificially undervalues the company’s spectrum holdings, Schumacher said. That in turn potentially devalues future revenue for the U.S. government when it auctions off spectrum licenses.” Crest apparently thinks CLWR’s spectrum holdings are worth $30 billion, prompting me to wonder what planet they live on and whether they share it with House Republicans who keep thinking spectrum auctions are automatic pots of gold.

What makes this utterly dumb is the combination of a false factual premise combined with an utter lack of legal grounds, on top of a near zero chance of holding things up politically (unless AT&T or possibly DISH file, which might introduce greater political uncertainty). I would normally confine myself to simply snickering but there is a rather important point to be made here — especially for all those listening to analysts telling broadcasters they can make gajillions in the upcoming incentive auction –about spectrum valuations.

More below . . . .

 

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Tales of the Sausage Factory

Why Eliminating Handset Exclusivity Drops the Price of Cell Phones; or “How Is A BlackBerry Like A Pill?”

Back in February, I bought a Samsung Omnia and regretted it almost immediately thereafter. So when my touch screen finally died, I resolved to get a BlackBerry Curve 8330, as my wife has one and recommended it. Yes, she is on Sprint and I am on Verizon, but you can get the same model on both networks.

I was totally unprepared for the sticker shock. $450. Why? Because I was not eligible to buy new equipment. Did I want a replacement Omnia? No, I decided I really did hate my Omnia $450 worth. Out of curiosity, I asked how much it would cost if I were getting a new contract. Answer: $150, plus a $100 rebate.

Verizon claims here in policy land that this represents a subsidy, which they can only do if they have handset exclusivity. Mind you, this model is not actually exclusive, but let that go. Could it really be that Verizon subsidizes my phone $400? That seems an awful lot. So I decided I would look on Best Buy, assuming that it would represent the actual unsubsidized retail price. So I went to bestbuy.com and plugged in Blackberry Curve 8330. Sure enough, the price for the Verizon phone was $499, close enough to $450 to make Verizon’s subsidy claim feasible.

Then I noticed something odd. The same model phone, but for Alltel, cost $680, for Sprint, $750, and for MetroPCS, $400. Why should the same model phone, purchased at the same place, have such a wild swing in price? Remember, these are the prices without the subsidies for buying a new contract, so it can’t be the difference in what the companies chose to provide. The Best Buy price should reflect the unsubsidized retail price. The only difference, in theory, is the plan, (unless we are pretending to make the same model available to every provider and really aren’t). How could the wireless plan make such a difference?

Then it occurred to me where else I’ve seen this dynamic. Go to the drug store and you can see three people getting exactly the same prescription. But one pays $10, another pays $120, and the third pays $500. How is that possible?

Before elaborating below, I will first make it clear that I am rather short on critical data because most of the critical data is proprietary. So what I’ve got is a tentative hypothesis based on observed facts rather than something I can say with certainty. But it is enough for me to say: “Hey! FCC! Go and use your regulatory powers to get the providers to fork over the necessary data to see if I’m right.”

More below . . .

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Tales of the Sausage Factory

FCC “WiMAX Auction” Already Over — Not a Surprise, But Still Impressive.

Some of you may recall that last month fellower Wetmachiner Greg Rose and I published our first industry report on the FCC’s Auction 86. We dubbed this the “WIMAX Auction” because the band at issue, the 2.5 GHz band, is the focus of major WIMAX activity in the U.S. and the report described the current state of the industry (including coverage maps for Clearwire and Sprint and the most extensive private database yet of who holds what in the band), likely outcomes in the auction, and what the behavior of bidders in the auction would tell us.

One prediction we made, that the auction itself would attract very little interest because it was an “ash and trash” auction of the leaving in the band, held up pretty well. The auction opened on October 27, and closed Friday, November 6. In other words, the entire auction lasted a week (4 bidding days) — which in FCC terms is greased lightning (the 700 MHz auction last year, for example, went on for 38 bidding days covering over 2 months). Total haul was $20 million, which will hopefully serve as a reminder to folks that spectrum auctions are not all multi-billion dollar gold mines.

As promised, we will release a post auction analysis available with the spectrum maps and databases for $799 within the next few months, once we (meaning Greg) have a chance to crunch the numbers and the round by round results. (Those who pre-ordered at the reduced rate when they bought the earlier report do not need to re-order). If you order now (the report is available through Muniwreless.com and through BroadbandCensus.com), you will not only pre-order the post-auction updates, but will get a copy of the original report with its industry analysis and coverage maps.

Stay tuned . . . .

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Inventing the Future

Goal!

How do we improve the breed of collaborative programming tools? Should we have spectator programming competitions on the Internet? (The people who like those things only watch for the crashes!)

I don’t think there’s a good commercial driver for improving programmer productivity(*), but spectator sports and particularly racing has been a good driver in other fields.

  • I think there’s a lot of relevance for the game-theory outcomes of nice-sized sprint programming problems such as whether, say, Tit-for-tat or Pavlov is a better algorithm for Free-Rider scenarios, or whether that changes for a mix of Free-Rider and Volunteer’s-Dilemma.
  • I think most programmers and programming managers still have never really seen very dynamic languages and live debugging environments, and such competition would be a great way to show them off.
  • I think it would put nice stress on the collaborative environment. How many people can watch? Can they see everything such as keystrokes and mouse movement? Is that important? Can they easily see who is doing what? Can they see multiple players’ activity at once? Multiple teams? Can they record and have instant replay?

What would it take to pull this off?


(*) Me on IT management, Tech failures, and the General Theory.

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Tales of the Sausage Factory

Why Do Competitive Markets Keep Misbehaving? The Curious Case Of Cellular Txt Msging.

Been meaning to get to this for awhile now, which is why the links are so old.

It has long been an article of faith among the worshipers of the Gods of the Marketplace that once you achieve “competition” (generally described as at least one more possible new entrant, but certainly where multiple providers exist) you eliminate regulation, because a competitive marketplace gives consumers what they want — like high fuel efficiency standards and a secure financial system. Thus, for the 30 or so years, we have more and more framed the debate in telecom and media policy around whether or not we have “enough” competition rather than about the benefits or drawbacks of any actual policy. Unsurprisingly, you can always argue that we have “enough” competition (or that competition is about to emerge) and thus side step the whole question of the actual state of reality and what reality we might prefer.

Enter the curious case of cellular telephony. I’ll take the case of text messaging, although the same argument applies in varying degrees to other aspects of the wireless market like network attachments and ring tones. As Randall Stross wrote in the NY Times at the end of December, the cost charged to consumers for txt messaging has absolutely nothing whatsoever to do with the actual cost of the service. Yet — as we are constantly reminded — the cell phone market has four national players and numerous regional players. This makes it squindoodles more competitive than, say, the broadband market in most places in the country where you can generally get two somewhat comparable services (cable and DSL) and a whole bunch of also rans that folks like to claim are competition.

Text messaging is so overpriced compared to cost that last year Senator Herb Kohl, Chair of the Senate Antitrust Subcommittee, has sent a letter to AT&T, VZ, T-Mobile, and Sprint (more details here)asking ‘Ello, ‘ello, ‘ello and what’s all this ‘ere, then? — you’re nicked!’ (no, I have no idea why Kohl sounds like a British Bobby from 50 years ago — ask him). As Kohl noted in his letter, the consistent ridiculously high prices for SMS txt messaging “is hardly consistent with the vigorous price competition we hope to see in a competitive marketplace.”

Short answer: it is utterly consistent with the nature of the wireless market. But — and here’s the shocker — real world markets are often much, much more complicated than the followers of the Gods of the Marketplace like to believe. Cell phone companies charge outrageous prices for text messaging (and other services like ring tones) not because they conspire with one another, or even because they engage in conscious parallelism. Nor do they do so because they must as a result of actual costs. They do so because — to use that classic phrase — it is what the market will bear, and the structure of the market ensures there is no benefit to any cellular carrier to offer text msging plans at anything approaching cost plus reasonable profit.

In economic terms, this is an oligopoly. Washington regulators treat oligopolies as if they were the same as competitive markets, unless one can show evidence of actual collusion — in which case it becomes a question of price fixing. But in reality, it doesn’t always work out that way. Even absent collusion, the ability of players to engage in strategic planing can negate the anticipated benefits of competition. Applying this framework to the CMRS market, and the question of the price of text messaging goes from suspicious riddle to entirely predictable. Whether you regard this as a reasonable outcome or not has nothing to do with “competition” or “market failure” and everything to do with whether we make a policy choice to care about it or not.

(Much) longer answer below . . . .

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Tales of the Sausage Factory

We Interrupt This CES Convention For A Breaking 700 MHz News Item

I’m out here at the Consumer electronic Show with actual blogger credentials (primarily so I can get the free back pack and use the blogger lounge). So, of course, we get major 700 MHz Auction news today before I can even start to do CES blogging.

As reported by my fellow PISC-ER Gregory Rose and elsewhere, Frontline Wireless has dropped out of the bidding. That’s kind of a surprise, given how Frontline fought to get a designated entity credit and still pursue wholesale as a real business model. It’s also impossible to say (at the moment at least) why Frontline self-destructed at the last minute.

Leaving aside the Frontline specifics, the big question is “how will this impact the auction” and “will we see wholesale emerge at all as a model.” Unsurprisingly, most analysts are going conventional and saying (a) D block (which Frontline had targeted) may not attract bids to meet the reserve price, and (c) This makes it even less likely we will see a new entrant, let alone a wholesale new entrant.

Also as usual, I will play the contrarian here. D Block is still very attractive to the conventional carriers looking to get national footprint or others looking for national footprint and willing to work with public safety. If AT&T and Verizon are both serious about this auction (and indications are that they are), both may push hard for D Block — especially if C Block is competitive.

On the new entrant side, it still remains to be seen what Vulcan and Google will do. Even if — as I suspect — Google wants to win the network but not build out, it may find D Block attractive. As holder of D Block, Google could still negotiate with third pary carriers (such as Alltel, US Cellular or even Sprint or T-Mobile) to build the network on its terms and to the satisfaction of public safety. The much lower price of D Block would offset the the aggravation of working with public safety and ensuring that their needs come first.

Finally, there’s Towerstream and the other wild cards like Qualcom. Who knows what they intend, especially given the likely competitiveness for C Block.

So while I’m sorry to see Frontline go, I don’t think it hurts the odds for a very competitive auction or a new entrant. It does potentially make a wholesale network more of a stretch, because Frontline was really the only bidder gung-ho on the model (Google being traditionally in favor of wholesale but making no promises at this point beyond “open”). That’s a shame, but not devestating or fatal to a new entrant.

Stay tuned . . . .

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Tales of the Sausage Factory

Sprint Swaps Spectrum Co. for Google: Care To Guess Who Bids in 700 MHz Now?

As I repeatedly observed during the lead up to last Tuesday’s FCC meeting to decide the rules for the 700 MHz band, it is an extremely risky business to try to guess who will bid at this stage. Despite the much shorter time between announcing the rules for the AWS auction last year and the time bidders needed to get their forms in, numerous companies changed their positions, created new ventures, and generally did the unexpected.

Now, with everyone speculating whether whether or not Google will really bid or whether the cablecos will give the telcos a run for their money, comes a significant change. In the course of a week, Sprint has forged an alliance with Google, followed a few days later with a surprise request to exit the cableco consortium SpectrumCo. This comes on top of Sprint’s announcement two weeks ago that it will team with Clearwire to do nationwide WiMax.

And suddenly all those wise speculations about how Sprint won’t bid because it doesn’t have the cash and it has enough spectrum, Clearwire won’t bid because it’s too small to challenge the telcos, and Google won’t bid because they don’t have the expertise and don’t want to spend the money, need some serious recalculation. A Google/Sprint/Clearwire consortium (with possible help from Intel, which both owns a chunk of Clearwire and participated in the auction rulemaking as part of the “4G Coalition” with Google, Skype, and Yahoo!) looks like much more of a spectrum player than any of them alone. Sprint and Clearwire have the infrastructure and expertise, Google has the bucks and the need to expand into wireless. Further, depending on the nature of the partnership, Google could start testing and and marketing its wireless services now so that it does not have to wait until it has built and activated a network (which probably won’t be until 2010 at the earliest).

Meanwhile, what happens to SpectrumCo.? Granted the cablecos still have no plan for the licenses they got in the AWS auction (since, lets face it, the real reason to show up was to block DBS from getting a terrestrial broadband pipe), but to the extent they pretended to have a plan, they usually cited their ability to work with Sprint as a means of implementing it. So what happens now? Granted the cablecos still have tons of money to throw at this, but how will Wall St. treat their stocks if they look set to pour another couple of billion into a business without the benefit of an experienced partner with existing infrastructure? And besides, with the FCC adopting anonymous bidding, the cablecos will find it much harder (if not impossible) to target and block rivals without going all the way and actually winning the licenses. (Remember, blocking is usually cheap because you don’t usually have to spend the blocking premium, you just have to prove to the other guy that you are willing to spend the blocking premium. It’s like when tough guy walks in on shopkeeper and asks if shopkeeper would like to buy “insurance.” Tough guy doesn’t have to actually trash the store to get paid. As long as shopkeeper believes tough guy will break his legs, shopkeeper will pay to avoid testing the theory.)

So, a mere three days after the FCC announces rules, we find ourselves reexamining the conventional wisdom in light of changed events. McDowell rather relished the warning he gave Martin and the rest of the majority that it was “risky” to tailor the band plan to attract a single “white knight” who would become a new national broadband provider. Suddenly, Martin’s confidence that if you set the table folks will come to dinner seems a bit more justified.

But it’s still a few months until FCC forms to participate will be due, and anything can happen in between.

Stay tuned . . . . .

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Tales of the Sausage Factory

Back From Vacation And FCC Auction Still Going On . . . .

As I guessed, the FCC AWS Spectrum Acution continues apace. My two weeks off proving an insufficient time for the wonkiest and most expensive of online multiplayer games — spectrum auctions.

You can track the “action” (as we must call it) here. A quick flip through the current standings yields some interesting patterns so far. The DBS Wireless partnership, Wireless DBS LLC, started with some strong positions on regional licenses. Over time, they have been forced out by Spectrum Co (the Comcast/TW/Sprint group), AWS Wireless (the Salmesi “wild card”) and traditional cell phone cos. Dolan family (Cablevision) took a position in the NYC market (its home base) but also appears to have been knocked out.

A look at the overall stats in round 29 shows that T-Mobile, unsurprisingly, has the lead bid on the most licenses — 129. Spectrum Co comes in nest with 96. After that, there is a significant drop off in the number and nature of licenses held, with traditional cellular companies Cingular and Cricket holding 43 each. Interestingly, AWS is next, with 38. There follows a list of smaller fry with diminishing numbers of licenses in less desirable territories. Of the cable players aside from Comcast/TW, only Cable One (Washington Post) continues to have a presence with 24 licenses.

Unless something dramatic happens, the auction is unlikely to yield a drisuptive player/new competitor (unless one counts Spectrum Co).

More after I unpack and look at the stats.

Stay tuned . . . .

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