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Urban small cell strategy – Network Suicide or Good Business?

Good or BadIntense speculation around Sprint’s small cell network strategy has included it being termed Network Suicide. Meanwhile, Sprint shares were up almost 20% on the day of their latest earnings report. So does adopting an urban small cell strategy make for good business or signal a downturn? Sprint's large spectrum holdings and lack of fibre/wireline assets are causing a switch to NLoS Wireless backhaul, which affects their choice of RAN architecture to use traditional Small Cell rather than Cloud RAN.

 

 

Forecasting the death of a network

Ian Gillot of IGR pulled no punches in a recent article reviewing Sprint’s network evolution plans. He speculated that Sprint would terminate tower leases early, pay to remove redundant equipment while deploying large numbers of small cells on poles and other street furniture. He thought planning permission would be difficult to come by, or be revoked for installations trying to bypass the system. He felt that relying on wireless backhaul for such small cells would limit the full capacity required.

Sprint’s smooth migration to urban small cells

During the earnings call, John Saw, Sprint’s CTO, clarified that they had no plans to terminate leases or disconnect macrocells. When each lease comes up for renewal (typically they last 5 to 7 years), they would assess if alternative means are available to provide service – such as using a nearby rooftop or monopole. Generally speaking, macrocell tower sites are needed to provide umbrella coverage throughout wide areas and continue to be required. However, in some dense urban areas similar or better service may be achieved from other locations.

Sprint’s network vision is to densify the network by adding small cells in those locations which most need them. The term “surgical” was used to indicate this is a carefully engineered operation. Crowdsourced data analytics, using smartphone Apps to monitor network performance, would be an important source of planning data.  Poles, rooftops and street furniture would all be considered as potential sites. A progressive densification shouldn’t be disruptive or reduce performance anywhere in the network – it’s more of a continuous improvement than a rip-and-replace.

Elsewhere, I read this densification program is scheduled to start during this quarter (Jan to March 2016).

Their failed Clearwire WiMAX network will finally be switched off next month.

Non Line-of-sight wireless backhaul in their own licenced spectrum

Sprint also clarified that they plan to use non-line-of-sight backhaul to connect many of these small cells into traffic hubs. They’ll retain fibre to larger sites and microwave point-to-point to meet their needs. With a huge spectrum portfolio of some 200MHz in the 2.5GHz band, they can afford to allocate a substantial amount for that purpose. When questioned specifically on that point, Dr Saw wasn’t prepared to state an exact proportion. It’s cheaper than fibre and quicker to deploy for smaller sites.

I’d speculate that product such as Airspan’s Airsynergy small cells, which have an integrated NLoS capability, would fit these requirements. No doubt other vendors are also involved.

This is good news for NLoS wireless backhaul vendors and definitely one to watch. Sprint has no wireline/fibre assets of their own but almost 200MHz of 2.5GHz spectrum, hence the tradeoffs. They won’t be investing in CloudRAN or RRH architectures that require dark fibre to small cell sites.

No mention of In-Building strategy

One aspect that wasn’t mentioned during the earnings call relates to in-building wireless, where we’ve seen a lot of activity from both Verizon and AT&T recently. I understand that Sprint have not been participating in many new investments in DAS systems of late.

Handset subsidies/financing is changing

Handset subsidies have formed a large part of many network operator’s revenues for years. We are seeing this being reported differently by many operators. Sprint have “neutralised the cash burn on handset leasing costs”.

This has a strong impact on ARPU (Average Revenue per User), a popular metric used to assess revenue throughout the industry. Sprint’s CFO said this was a difficult parameter and needs to include average total billing per user (ie service plus handset) less residual value of the handset at the end of the lease. With contracts that upgrade handsets annually becoming more popular (e.g. iPhone Forever), that’s an important factor.

A difficult set of accounts

Sprint’s finances are in pretty bad shape, and it’s a huge task to turn the company around. Progress is being made, with its lowest ever churn rate, subscriber count growing and improving network performance. Nonetheless, it’s still making a loss, has huge debt and is now the smallest of the four major US mobile networks.

Takeaways include:

  • Postpaid churn may be at their lowest ever but is still higher than all the other major networks
  • Subscriber count at almost 60 million is still a very substantial number
  • ARPU is half that of Verizon’s
  • Spectrum remains their largest asset by a long way, valued at $40 Billion on their balance sheet, half their total assets, representing $660 per subscriber.
  • Liquidity is critical. They’re scraping along with relatively little free cash in the bank and high debt (over 2x revenue). Income this quarter includes $1.1 Billion from sale/leaseback of towers, and they’ll repeat this every quarter for the next year or so. Their large competitors are awash with cash, even if they are cutting back on expenditure after splurging on LTE network rollout.

It was fun to watch the Sprint stock price ramp up during the morning of the earnings call, increasing by as much as 20% at times. It seemed the market thinks more highly of the network vision than some analysts do. A closer look at the previous few days share price movement puts this in context – some scaremongering had caused a temporary dip – so the share price really only moved up by less than 10% over recent days.

Sprint Stockprice 26 Jan 16

Sprint Stockprice 22 26 Jan 2016

Comparative performance

Sprint’s performance as reported on Rootmetrics continues to be relatively poor. OpenSignal gives them better marks. Neilsen notes faster download speeds. These vary considerably for specific localities, but Verizon network performance does seem to be well ahead. If Sprint can improve their network quality (and that’s a big if), and achieve that at comparatively lower cost, their competitive advantage could attract back some customers. They certainly have a spectrum advantage which helps but a poor reputation to overcome. Sprint Executives believe they can achieve that and then justify premium pricing rather than the heavy discounting being used at the moment (50% lower than their competitors).

Meanwhile, Verizon and AT&T will continue to have strong revenue and profit streams generating enough cash to respond. It should be an interesting few years ahead as the shape of the US mobile networks continue to evolve.

Comparative figures for top four US networks shows quite a contrast

  Verizon AT&T T-Mobile Sprint
Latest Results Dec 15 Dec 15 Oct 15 Dec 15
Total Subscribers 112M 129M 61M 59M
Revenue 91.7B 73.7B 31.9B 24.1B
Operating Profit 29.9B 19.8B 247M (197M)
Postpaid Churn 0.96% 1.18% 1.46% 1.62%
Assets N/A N/A 58.4B 79.5B
Market Cap N/A N/A 30.92B 10B
ARPU/month $68 $47 $43 $34

Figures taken from latest published results for wireless business only where available. E&OE. None of the above constitutes investment advice

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Comments   

#1 Anthony McCray said: 
From Sprint's recent financial statements and looking at the comparative figures, I don't see why Sprint is still getting bashed. They are making improvements and that is what is important. Only time will tell if their strategies pan out.
0 Quote 2016-01-28 19:34
 
#2 ThinkSmallCell said: 
@Anthony: The huge debt that Sprint is burdened with combined with a relatively poor reputation means there is a real risk of bankruptcy from which investors could lose their entire stake. On the other hand, if the new management can turn the company around, deliver good quality service at competitive prices and become profitable, doubling or trebling their market value, then the returns could be several hundred percent. It's a very difficult task and success is not certain. Further heavy cuts in customer care personnel as they try to switch more of this online to save money could backfire. As you say, only time will tell if these bold moves pay off. With a very large customer base and substantial spectrum holdings, a return to profit could mean massive change in valuation.
0 Quote 2016-02-01 07:39
 
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