Confused about the wireless markets? Here’s a breakdown

1Executive Summary

Holy spectrum shortage, people. Between the collapse of AT&T’s proposed $39 billion merger with T-Mobile and the death throes of a proposed wholesale 4G network created by a satellite company and now-broke hedge fund, the wireless industry has generated a lot of stories but no real change in the past year. We still have the same top four providers, and Clearwire is still struggling. The hoped-for entrance of LightSquared as a wholesale LTE-provider hasn’t materialized, and while Dish says it plans to enter the market, that news is balanced out by Cox’s deciding to leave it.

What a difference a year doesn’t make

When we began the year, there were four big players all touting their 4G networks, even though technically none of them were 4G and only Verizon actually had begun deployment of an LTE network. As of January, Verizon got the coveted iPhone and still held the top spot as the nation’s largest carrier, followed by AT&T.

Clearwire, meanwhile, was struggling with its finances and whether or not it would transition from WiMAX to an LTE network. It’s partner, Sprint, was still in the No. 3 position and was struggling with its investment in Clearwire and its own hodgepodge of network technologies. T-Mobile was rapidly deploying an HSPA+ network and deflecting concerns about its spectrum position and plans to upgrade to LTE.

And LightSquared, the dark horse in the wireless race, was beginning its fight with the GPS industry over claims that its terrestrial network would interfere with GPS radios in navigation equipment. Also, its backer, Harbinger Capital Partners, was experiencing problems as spooked investors demanded their money back.

The wireless industry isn’t for wimps, but between January and December a lot has happened to give investors and industry watchers heartburn. So where are we now, and what happens next?

The big 4

AT&T’s proposed acquisition of T-Mobile would have reshaped the wireless industry significantly, but the deal, announced in March, was a victim of a changing political climate that led the government to push back on approving the merger. As of Monday, AT&T has a month to basically think up a new deal or go home. There’s no way Ma Bell can keep the deal it proposed in March, but I don’t see its giving up entirely and calmly forking over its spectrum and a $3 billion break-up fee. The net-net of the failure will that be AT&T may have to spend more to deploy its LTE network and support the devices it already has.

As for T-Mobile, its fate is a little less clear. The smallest national carrier does have to figure out how it will deploy its LTE network. While it doesn’t have to do an actual deployment right away, it does need to think about how it plans to move to 4G, given its limited spectrum position. With the AT&T deal in doubt, Dish Networks, MetroPCS and Leap Wireless have all expressed an interest in a partnership. T-Mobile could combine its existing network and spectrum with any of these players and get more cash and airwaves to help it deploy a next-generation network. So if T-Mobile’s parent can get its hands on the $3 billion break-up fee and some of AT&T’s spectrum, it’s possible T-Mobile could find itself able to keep on trucking.

Anyhow, T-Mobile would not be the only operator to lock down its future by partnering with another company. Sprint has been forced into the arms of Clearwire, which will help the carrier get a 4G network up and running but will also continue bleeding the Overland Park, Kan.–based company for cash.

The bottom line is that it seems like even as the Department of Justice and Federal Communications Commission say no to consolidation by the No. 1 and No. 2 operators, the smaller players have no choice but to cuddle up and hope to get to 4G.

“It’s clear that a lot of capital [is] involved in building out LTE and 4G, and we’re not going to have four-to-six nationwide LTE networks coming,” said Chetan Sharma, an industry consultant and analyst, in an interview. “I expect some form of consolidation that takes that into account.”

LightSquared, Clearwire, Dish and the wannabe operators

We have long said it takes guts to be a wireless operator, and this year is proving again how tough a road it can be. Clearwire hit the skids in the latter half of the year after announcing that it would move from building out a WiMAX network to deploying an LTE network if it could find $600 million in cash, which it has since found. It also shifted strategies, becoming a wholesaler as opposed to a retailer, which helps it save on costs. It is now stuck with Sprint, which coincidentally had tried to make a break from Clearwire with LightSquared.

So far LightSquared isn’t looking like a big success, and this week its primary backer, Harbinger Capital, liquidated its funds in the face of a U.S. Securities and Exchange violation. The implications for LightSquared, which is facing a political and technical fight over whether or not its spectrum interferes with existing GPS receivers, are unknown, but it is safe to say that it is still too hard to parlay satellite spectrum into a mobile broadband service. As Sharma noted, the jury is still out when it comes to the success of satellite players in the mobile broadband market.

Yet despite LightSquared’s drama (and the drama of other players such as TerreStar before it) Dish Networks says it is willing to bet on building out a mobile network. On Monday, CEO Joe Clayton told reporters that if the AT&T and T-Mobile deal falls through, Dish will be willing to partner with T-Mobile. Dish has spent up to $3 billion buying spectrum to help it diversify beyond pay TV, but I have questioned its commitment to and ability to build a true LTE network using its satellite spectrum. However, if it signed a deal with T-Mobile, it would gain early on what LightSquared couldn’t: a terrestrial network partner. Then, if the FCC sees that Dish can line up T-Mobile, perhaps it will dump its efforts to get LightSquared up and running and bet on Charlie Ergen and company as opposed to Harbinger’s wireless play.

The future belongs to Big Red and Ma Bell

If the FCC granted waivers to Dish like the ones it granted to LightSquared and if Dish has the capital and terrestrial partner, it could be the first satellite company to get a real mobile network off the ground. That would give us something to look forward to in 2012. Because for 2011, when all is said and done (and it’s not done yet — we still have a few weeks), a lot of the players made news, but few made big moves.

In fact, the deals that will probably have the most influence in wireless broadband happened in December, when Verizon signed two agreements to acquire AWS spectrum from the cable companies. Those deals looks like the ceding of the mobile broadband business to AT&T and Verizon and the wireline business to the cable guys. Of course, we’ll have to wait until 2012 to see if the FCC approves it.

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