Bloomberg News

Why Billionaires Salivate Over the U.S. Wireless Market

August 04, 2014

Iliad SA Founder Xavier Niel

Xavier Niel's French wireless provider, Iliad SA, approached T-Mobile’s board with a $33-a-share bid for control of the company. Photographer: Eric Piermont/AFP via Getty Images

T-Mobile US Inc. (TMUS:US) is becoming billionaire bait even though it’s the smallest national competitor in a market where the vast majority of the population already has a mobile phone.

What’s luring France’s Xavier Niel and Japan’s Masayoshi Son to bid on T-Mobile is a chance to get into the $195 billion U.S. industry before a new surge in demand for data services such as Internet access and video streaming. It’s the same rationale Verizon Communications Inc. used to justify its $130 billion deal to acquire full control of Verizon Wireless earlier this year. Data sales are already climbing 18 percent this year, according to analyst Chetan Sharma.

The bet is that wireless data will move beyond phones and tablets to a number of other devices, from cars to smartwatches to thermostats -- all requiring a way to connect to the Internet for updates and monitoring. If that vision comes true, there could be a gold mine in owning one of the few networks capable of handling that demand in the gadget-hungry U.S., where people have proved willing to pay steadily for wireless service even as spending drops elsewhere.

“Subscribers are adding more devices to their plan. And that’s going to drive more data usage, and data usage will drive more growth,” said Colby Synesael, an analyst at Cowen & Co. “The market is attractive, and I think that might spur people into action.”

Risks are plentiful in the U.S. market, too. Regulators are proving resistant to the idea of mergers. Price competition is growing fiercer. Investing in a large country with wide, sparsely populated areas is expensive. And demand could fail to materialize for the services the carriers expect to provide. For every company investing more in the market, there’s one seeking to exit -- T-Mobile parent Deutsche Telekom AG and former Verizon Wireless partner Vodafone Group Plc. (VOD)

Discretionary Income

Still, there are few places like the U.S. for a wager on wireless data growth. Investment in faster 4G download speeds has outpaced Europe. Developing markets like China and Latin America don’t have the same discretionary income for mass adoption of new gadgets and the services that go with them.

“The United States has one of the strongest economies in the world, a good competitive framework for wireless, and still has lower penetration rates compared with other parts of the world,” Verizon Chief Executive Officer Lowell McAdam said last year, explaining the rationale for its wireless deal. “We are just getting started in machine-to-machine, and connected devices.”

With its deal, New York-based Verizon got full control of the largest U.S. mobile-phone provider. Son, the chairman of Tokyo-based SoftBank Corp. (9984), took on a riskier asset, acquiring struggling Sprint Corp. in a $21.6 billion transaction last year. Now he’s said to be seeking to put together a bid for Bellevue, Washington-based T-Mobile as well.

Iliad’s Bid

That plan could be foiled by Niel, whose French wireless provider, Iliad SA, approached T-Mobile’s board with a $33-a-share bid for control of the company. Deutsche Telekom, which owns two-thirds of T-Mobile, considered the offer less competitive than the proposal of about $40 a share that Son is said to be preparing, according to people familiar with the matter.

Then there’s another billionaire: Dish Network Corp. (DISH:US) Chairman Charlie Ergen, who has said he could go after T-Mobile if Sprint fails to buy it.

U.S. regulators may prefer a buyer like Iliad or Dish that would preserve a market with four national carriers, since Son would seek to combine T-Mobile and Sprint into a single company. Son has argued that a merger would help him gain the capital he needs to invest in the faster wireless Internet speeds that consumers crave.

Important Infrastructure

“The mobile Internet is the most important infrastructure for the 21st century,” Son told Charlie Rose in an interview earlier this year. “I would like to provide U.S. citizens the world’s No. 1 network.”

With his SoftBank already among Japan’s largest wireless carriers, Son is straddling two of the regions that are expected to dominate the mobile Internet. Cisco Systems Inc. forecasts that global data traffic over wireless networks will climb at a 61 percent annual clip to 15.9 trillion megabytes in 2018 -- the equivalent of about 4 trillion high-definition movies. North America and Asia will represent two-thirds of that traffic.

And while Asia will have the biggest share of traffic because of its larger population, North America will have a bigger share of advanced gadgets that require ever-faster download and upload speeds -- which let wireless carriers charge more. In North America, 93 percent of mobile devices and connections will be “smart” -- with advanced computing and multimedia capabilities -- by 2018, compared with 47 percent in Asia, Cisco said.

‘Jaw-Dropping’ Divergence

Americans have kept on paying a steady rate for wireless services as speeds get faster and new features like video are added to their plans. U.S. carriers got an average of $48.17 a month in revenue per user in the fourth quarter, compared with $32.51 in France, according to researcher Informa Plc.

Wireless revenue per capita rose 17 percent in the U.S. from the beginning of 2009 through the middle of 2013, compared with a 4 percent decline for the rest of the developed world, according to MoffettNathanson LLC.

“We have witnessed a jaw-dropping 21 percent divergence between the U.S. and the rest of the world in just four short years,” analyst Craig Moffett wrote in a January report. “The U.S. wireless market has steadily grown, first on the back of wireless voice and now, more recently, on the back of wireless data.”

Then there are the devices that don’t even require humans to connect to the network -- cars reporting maintenance problems to the dealership, medical monitoring devices, home-security and climate-control systems. Those industries are increasingly connecting their devices to wireless networks to create the “Internet of Things,” a market that will grow 17.5 percent a year worldwide from 2013 to 2020, according to researcher IDC. Developed markets like the U.S. will make up about 90 percent of these types of connections, IDC said.

‘1,200 Percent’

That means the old way of measuring the maturity of a market, known as penetration, is increasingly irrelevant. When mobile phones were still a new technology, a market penetration of 50 percent meant that half of the population still didn’t have a phone, leaving plenty of room for growth. Now, with tablets also connected to the network, many countries have more connected devices than they do people, leading to penetration rates above 100 percent. The U.S. rate was 104 percent at the end of last year, according to CTIA, the wireless industry group.

Investors in U.S. wireless networks are betting that penetration can expand to many times the population.

“In 2008 when we rolled out the open network, we talked about penetration rates of 400 percent and 500 percent -- I have to admit we were wrong,” Verizon’s McAdam said in March. “It probably ought to be 1,000 percent or 1,200 percent when you look at the Internet of Things.”

To contact the reporters on this story: Olga Kharif in Portland at okharif@bloomberg.net; Caitlin McCabe in New York at cmccabe11@bloomberg.net

To contact the editors responsible for this story: Sarah Rabil at srabil@bloomberg.net Crayton Harrison, John Lear


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