The Telecom Battle: American Market, International Intrigue
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What a turn of events in just a month! Barely a month after Huawei was turned away because of espionage allegations by the US Government; a Japanese telecom company has jumped into the telecom fray, and announced a $20 billion purchase of Sprint Nextel, in what is being considered the biggest merger since the failed AT&T-T-Mobile attempt a year ago.
In the wake of Huawei’s unsuccessful attempt to play in the US telecommunications market, Softbank, a Japanese telecom company, agreed to buy a controlling interest of struggling phone company, Sprint Nextel (NYSE: S), for $20 billion, in an effort to increase the company’s global presence, and introduce itself in the United States. This play, led by CEO Masayoshi Son, along with the partnership of Sprint CEO Dan Hesse, is a bold move that the Wall Street Journal suggests is as much about “bravado” as it is business competitiveness. The planned merger has been seen as an increase in foreign involvement in the American market, as well as a potential set-back for Chinese telecom giants Huawei and ZTE, and a new threat to the dominance of AT&T and Verizon in the war over LTE networking.
We got Apples!
While Huawei and ZTE have been beset by problems with Washington accusing them of being conduits of Chinese espionage and patent infringement, Softbank is set to fill in as the new power-player in the market. Mr. Son’s track record as owner of the company shows that he is a man not afraid of risky bets, especially when it comes to taking struggling companies and making them competitive. In Japan, he bought Vodafone Japan, and quickly established Vodafone as a serious competitor in the Japanese market. Under Mr. Son’s oversight, Vodaphone Japan became the exclusive seller of Apple’s iPhone for the first few years, giving them a huge leg-up in the market. Mr. Son is hoping to repeat this luck across the ocean, this time trying to put Sprint in the same league as cell phone titans AT&T and Verizon.
Sprint will also be offering LTE data plans with the Apple iPad Mini that is slated to be released before Christmas. Yes, there have been some criticisms over Apple's new iPad Mini (which can be mistaken for an iPod Touch), and it does come with the usual "it costs THAT much" type of price, but Sprint going for the device this soon after the merger proposal is a bet worth making. People still go crazy over the latest Apple gadget, and the stronger partnership between Apple and Sprint should make both companies very happy, now that Sprint can have the network to do Apple's devices justice.
Oh great, it's the government again
There are some obstacles in the way of this deal being finalized, namely the Justice Department’s pre-clearance of this merger. While the backers of this deal don’t foresee any problems with Washington, the blocked $39 billion merger of T-Mobile (owned by Deutsche Telekom) and AT&T due to anti-trust concerns, demonstrate the relative difficulty of foreign companies’ ability to buy American companies in a heavily regulated sector like telecommunications, according to Wall Street Journal correspondent Ryan Dezember. Some analysts have pointed to Vodafone’s 45% stake in Verizon as an example of a strong partnership that has been beneficial to the consumers, as well as demonstrating a lack of anti-trust problems. Also, the $20 billion merger is nearly half the price of the merger of T-Mobile and AT&T, which should make it easier to clear.
It's No Way for Huawei
Then there is Huawei, who, according to telecommunications insider Craig Galibraith, suffered a huge blow to their US plans. Not only has Softbank come in and stole their thunder, they are now in the unenviable position of “proving a negative”, meaning they have to prove to Washington that they aren’t spies, and they aren’t trying to infringe on US patent law. ZTE is also suffering a setback from these latest developments, and posted a bad earnings report last week on the heels of the bad government review as well as weakening demand for electronics during the economic slowdown. For these two companies, the slowdown will be felt more, now that the US is effectively closed off to them.
This benefits Sprint and Softbank even more, as now they can take aim at asserting themselves in the US market without the two Chinese colossuses to worry about. It's never a good thing when the American government is the gatekeeper of free market competition, a role better served by the consumers, especially when it deprives those very consumers of one of the fastest internet providers in the world. Huawei and ZTE can complain all they want about their treatment by Washington, and they probably have that right when a regional competitor is allowed to waltz in without a fight. Unfortunately for them, they're just the wrong nationality at the wrong time, but both companies are strong enough to weather this setback, and will undoubtedly be back for Round 2 once the US-China tension cools off, possibly right after the elections.
From Market Dominator to Market Battlefield
It wasn't too long ago that America was the undisputed king of telecommunications. After all, many of the major players were American companies, the research was done by American scientists, and the tech millionaires started off as starry-eyed college kids from suburbia. That's all changed in the last few years, as America has now become the battlefield in an increasingly global market. This has been highlighted recently by the proposed purchase of Sprint Nextel by Japanese giant Softbank, and its gutsy CEO, who is the latest telecom tycoon to try his hand in America. Thanks to the deal as well, Sprint got $3 billion in capital infusion, which will be used to become majority owner of the small spectrum-rich company Clearwire (NASDAQ: CLWR), which can allow it to access the same technology Verizon and AT&T have. Given Clearwire's proficiency in the spectrum world, which is needed for many of today's smartphones to operate the many apps that one loads your phone (let he who is without Angry Birds launch the first bird), Sprint can now use its partnership with the spectrum company to its maximum potential. It's probably a good thing the market has turned out like this though, even if you're of the "America is #1" crowd. More competition in the marketplace, American or foreign, helps the consumer in the long run. Thanks to Softbank, there can soon be three big shots in the telecom industry rather than just two.
It’s been a crazy month in the telecom world. Huawei is out, Softbank is in, and the American telecommunication industry is looking more global. It’s a bit disappointing that part of this new climate has the taint of federal interference, and even a smattering of protectionism, but it is what it is. Besides, things this hot don't stay a secret forever, and when everybody gets into the scrum, the consumer always wins. So sit back, break out the price guides and enjoy your app-fueled world, this is going to be a fun market to watch.
jmckenna15 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. 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.If you have questions about this post or the Fool’s blog network, click here for information.