Sprint and the U.S. Mobile Market: Room for Three But No More
Dana is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Despite all the complaints about “spectrum shortage,” the U.S. mobile market is filled with waste, by design. Multiple networks, often incompatible, have to be extended across the entire country in order to be competitive.
This has made the market a nice little duopoly, held by AT&T and Verizon (NYSE: VZ) Wireless. Unfortunately investors don't get the full benefit of this, because both carriers own enormous wired networks, which are losing customers and still cost money to maintain.
Duopoly not hugely profitable
Verizon actually lost money in the last quarter, which it blamed on Hurricane Sandy. But even AT&T is failing to grow its top line, its margins are under pressure, and, given that it's an aging company with an aging work force, it has pension obligations to pay.
Neither company, in short, can afford a price war, despite the huge margins they get for mobile contracts, thanks in part to $200 “phone discounts” users pay off with 24-month contracts at $50-100/month each.
Value investors consider Sprint (NYSE: S) a better choice. They've thought this for years, and they've gotten their assets handed to them as a result. This was once a $25/share stock in the middle of the last decade, but last summer you could have gotten in for as little as $2.10/share.
So why is it priced at $5.67/share now? And why are there suddenly analysts pounding the table for the stock at this high price?
Son-San's bold plan
Two words: Masayoshi Son. Son-san is a swashbuckling gambler. He managed to lose about $16 billion in the dot-bomb of the early 2000s, but came back by buying out Vodafone's Japanese operation for $15.5 billion, using lots of leverage, in 2006.
Son recognized that the Japanese market was a cozy duopoly whose owners were reluctant to risk their margins by investing further. He was quick-to-market with the iPhone, he kept prices highly competitive, and Softbank is now the leading mobile carrier in that country, leading the old duopolists – KDDI and NTT DoCoMo – by a country mile.
He plans to do the same thing here. Build the biggest network, advertise it like crazy, push prices down, and take the market. In the deal, announced in October , Son is only taking 70% of Sprint, leaving the rest to the public market. Since Sprint also owns 51% of Clearwire (NASDAQ: CLWR), which has been trying unsuccessfully to break through the duopoly with a variety of partners for years, you'd think he has the weapons to succeed.
Can DISH get into this?
But hold on for just a minute there. Dish Network (NASDAQ: DISH) wants in on on this deal. The company made a bid for Clearwire despite Son's controlling stake, and CEO Jim Patterson says he wants to buy Sprint, too.
What is a savvy investor to do? Building a third network is going to be a tremendous financial lift, as shown by the failure of Sprint and Clearwire to do it, either together or separately. The chances of success would be higher if Sprint and Dish were working together, rather than bidding against one another. Those investors betting that there will be some sort of bidding war for Clearwire will, in the end, be disappointed. I can't see smart people like Patterson and Son wasting scarce cash that way.
There remains plenty of equity within Sprint, and Clearwire, with which Son and Patterson can do a friendly deal, with results that will appear on Dish Networks' books. But even that will just be a first step. There remains the hard work of making incompatible networks compatible, of building out that super-network Son envisions. And then there will be marketing costs, and compressed margins, before profits can rise.
What to do
The only smart play is to watch what happens carefully. Assuming Son can pull this deal together, you should have an opportunity about a year from now to short AT&T, Verizon, or both and profit handsomely. If DISH can't make a deal with Son, short DISH. And if there's a hint that Son lacks the capital to get this done, then short Sprint instead.
Meanwhile, grab some popcorn and enjoy the carnage.
DanaFBlankenhorn has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!