The Bid to Buy Sprint

Yesterday, CNN Money reported here that Dish Network launched an unsolicited bid to buy Sprint Nextel for $25.5 billion. It's a counter offer by Dish Network that is attempting to outbid an offer accepted by Sprint in October from a Japanese tech company called Softbank. Softbank offered about $20 billion in exchange for 70% equity in Sprint Nextel.  The move makes a lot of sense for Sprint because the company is strapped for cash. They're using the cash from a potential buyer to help sustain their ship. Sprint has been struggling mightily with debt and launching their LTE network for the past few years, and AT&T's recent attempt to buy T-Mobile has signaled that the telecomm industry has turned into a duopoly. Interestingly enough, I started my young career out at one of the largest telecomm providers in the US, and found the move by Dish fascinating.

Three key things stick out to me in this attempt to buy Sprint. 

1) Bandwidth (aka Spectrum): Many industries need raw materials such as steel, wood, textile, etc. to run the businesses within that industry. The telecomm industry is no different. In telecomm, the "raw material" is bandwidth, or spectrum as it is known in the industry. It's a very finite resource, and one of the major reasons why AT&T tried to buy T-Mobile in the first place. It would have opened up the airwaves for AT&T customers and been a phenomenal way for AT&T to acquire market share as well. Now, why would a Pay-TV company like Dish Network want to buy Sprint and be willing to pay the $600 million severance fee owed to Softbank? Simple, Dish Network understands the changing landscape of consumers slowly adopting or fusing together Pay-TV and internet together. The Atlantic Wire argued that Dish would use Sprint's broadband network to stream content to their users. The article states:

Dish Network satellite TV hardware

Dish more than other pay-television companies has its eye on the future. Ergen before has said he already thinks people are cutting the cord. So, it's being proactive. Ideally Dish would like to hook people to pay TV early, he said in that same interview. That's where innovations like the Dish Hopper—which allows consumers to skip over commercials completely—come in. But, he ultimately knows that television watching is heading to the Internet, a la carte style, he said during an AllThingsD interview. "The Internet is really a la carte today," he said. "That's ultimately where we have to compete." What better way to compete than getting people to pay his company to serve them the very Internet that runs that online video.

The company is already looking ahead to the future, and being a first-mover in a changing industry could pay big dividends for Dish in the future. The Chairman of Dish, Charles Ergen, imagines a "TV Everywhere" model where consumers can receive content on their televisions as well as on their mobile devices. In order to sustain heavy streaming, there has to be plenty of bandwidth. A Dish Network and Sprint Nextel combination would provide a substantial amount of streaming capacity for their customers. 

A Sprint Nextel cell tower

2) Killing Two Birds with One Bid: CNN Money stated that Dish would be able to capture the bandwidth they were after when they bid on Clearwire. Another indication that Dish Network did not want to wait around and was attempting to react to this shift in consumer preferences as early as the end of 2012. In CNN Money's article, they reported that Sprint and Dish were in a bidding war for Clearwire, and Clearwire ultimately chose Sprint. The recurring theme here is, bandwidth. Now, a potential Dish acquisition of Sprint would give Dish their initial target of Clearwire along with Sprint. Essentially, three players with a lot of the finite resource of bandwidth would be able to deliver a strong streaming network. Of course, acquisition is a phenomenal way to grab market share and set up potential market growth. Dish is well on it's way to getting that done in the ultra competitive Pay-TV industry. 

3) Revenue Capture: In my recent post, I wrote about how pirating could really hurt the streaming companies because people could exchange passwords and usernames without any repercussions from the company. Furthermore, without a true way to monitor that, streaming companies may have a tough time growing. Well, it looks like a Dish and Sprint combination may have figured out how to remedy that. The Atlantic Wire argued: 

In an ideal world, Dish's customers can access its content from any device, anywhere. In order to do that, people need a wireless or data connection. It tried to buy up ClearWire to get just that. But, it ran into a lot of contractual problems. Sprint, on the other hand, can offer that without the issues. Again, if Dish owns those waves, it can get you to pay into its system twice. It not only owns the cable you're watching, but the wireless network, too.

Dish is able to grab two revenue streams with this model. They can own your cell service as well as your TV service. Immediately, consumers switching costs go up drastically because they are intertwined with mobile and TV service. Clever pricing and a TV Everywhere proposition would make it difficult for customers to make a move away from the company. 

This move by Dish has signaled that maybe Pay-TV and streaming services don't need to compete, but they are actually better in a joint-venture or an acquisition. I think this move by Dish, although unsolicited, has sent a strong message to the other players in the industry. It's going to be interesting to see how this plays out. 

Shawn

Sources: http://www.theatlanticwire.com/technology/2013/04/dish-sprint-bid/64222/

http://money.cnn.com/2013/04/15/technology/dish-sprint-bid/index.html?hpt=hp_t3

http://dealbook.nytimes.com/2011/12/19/att-withdraws-39-bid-for-t-mobile/

http://online.wsj.com/article/SB10000872396390444097904577539313305919578.html