Feature Article

April 07, 2014

Wheelings & Dealings: Cincinnati Bell Sells Mobile Business to Verizon Wireless

Cincinnati Bell is selling its mobile spectrum licenses and tower-related assets to Verizon for $210 million after 16 years as a regional mobile provider. The sale is part of a pattern in the mobile business, which started out as a fragmented business, only to consolidate as a national business over time.

The sale includes $194 million in cash and Verizon Wireless assumption of tower lease obligations.

Perhaps counter intuitively, consumer benefit arguably has grown as the business has consolidated. Prices have fallen as industry concentration has increased. That is not to say the process can continue indefinitely.

Some would point to the earlier decades of mobile service, when it was a niche service dominated by two providers, as an example of how a mobile duopoly does not, in fact, promote innovation or lead to lower prices.

Some would say it was the availability of new spectrum, awarded to new contestants, such as Sprint, that brought the higher level of competition and innovation to the industry, something that happened in the 1990s.

And consolidation is the tough problem the Federal Communications Commission and Department of Justice must continue to wrestle with, since it is not completely clear how best to maintain competition and innovation in the U.S. mobile business.

The prevailing view at the FCC and DoJ is that competition requires four national service providers. Others would argue such a market is inherently unstable and cannot be sustained over the long term, as Sprint and T-Mobile US simply lack the scale needed to compete effectively.

Sprint, though growing revenue, continues to show an operating loss, and has since at least 2006. T-Mobile has been on a subscriber upswing since the start of 2013, but profits and net income are the issue.

T-Mobile US net income dropped by nearly 90 percent in 2013, for example, the direct result of a successful subscriber market share attack.

Total T-Mobile US revenue in fourth quarter 2013 rose 10.2 percent after taking into account the acquisition of MetroPCS.

But branded postpaid average revenue per user fell by 2.9 percent. Cost per new customer rose by $10 during the quarter to $317.

As a result, T-Mobile US's fourth-quarter cash flow (leaving out non-recurring items) dropped 7.8 percent from the third quarter of 2013.

In 2012, T-Mobile US posted operating margins of 9.6 percent; this figure shrank to 4.1 percent in 2013.

Debt burdens also are rising. T-Mobile US has announced capital spending plans of $4.3 billion to $4.6 billion in cash, compared to projections of cash flow before cash interest and taxes of $5.7 billion to $6 billion.

The point is that, a continued marketing war will hit earnings at potentially all the four national carriers, but will eventually harm Sprint and T-Mobile US even more, as those two carriers do not have the financial strength of AT&T and Verizon.

Edited by Stefania Viscusi

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