Masayoshi Son’s ambition to use Sprint to disrupt the US telecoms market was derailed. Can he get his plan back on track?
When Masayoshi Son, the Japanese telecoms billionaire, stormed into the US in 2013 by snapping up a controlling stake in Sprint for $22bn, his plan was typically audacious. He wanted to combine the third-largest US wireless group with T-Mobile US, the number four, to create a new force in telecoms that would take on the market leaders: Verizon and AT&T.
The smaller carriers have always struggled to win share from Verizon and AT&T, which together have 180m wireless phone subscribers, over 70 per cent of industry revenues and the best network coverage. Yet Mr Son, or “Masa” as he is known, spotted a major weakness at the “big two”.
His strategy was clear: Verizon and AT&T pay chunky dividends — among the highest in the S&P 500 — and their shares are a favourite among income investors. If a combined Sprint and T-Mobile were to launch a price war, he predicted the larger companies would struggle to respond, sacrificing customers rather than profitability and cash flow. He calculated that this would make it easy for Sprint to pick off enough subscribers to become a threat.
For Mr Son, it was a tried and tested strategy that had enabled him and SoftBank, the company he runs, to build the third-largest telecoms group in Japan. After acquiring Vodafone’s Japanese arm in 2006, SoftBank snatched subscribers from the country’s top carriers, overcoming its weaker network with aggressive marketing and discount pricing. Mr Son then scored a major coup with an exclusive deal in 2008 to sell Apple’s iPhone in Japan, rapidly narrowing the gap with his rivals as the product became the country’s best-selling smartphone.
“What Sprint needs to do now is very similar to the challenges we were facing just a short while ago. We’ve been through this before,” says Kazuhiko Fujihara, finance chief at SoftBank’s mobile phone unit in Japan.
Strategic blow
It is almost two years since Mr Son’s SoftBank took an 80 per cent stake in Sprint, but his dream of becoming a force in US telecoms remains just that. Within weeks of closing the deal, the US telecoms watchdog indicated it would block a merger with T-Mobile on competition grounds, dashing his hopes of achieving the scale needed to establish a credible presence in the market.
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Mr Son’s biggest miscalculation was his confidence that he could get the deal past the US Federal Communications Commission, which has become increasingly interventionist under President Barack Obama. In 2011 it opposed a merger of AT&T and T-Mobile and more recently it blocked the $45bn takeover of Time Warner Cable by Comcast. Bankers and analysts say the combination of Sprint with T-Mobile is unthinkable before a new president enters the White House in 2017.
“Masa obviously believed there was an opening to merge T-Mobile and Sprint, but the message from Washington regulators, in 2014 at least, was that he was incorrect,” says Craig Moffett, an analyst at MoffettNathanson. “As for 2017, it still remains to be seen.”
Cracking America would have been the crowning moment in a 34-year career that saw Mr Son rise from a cash-strapped software-distributing entrepreneur to Japan’s second-richest man with net worth of about $12bn, according to Bloomberg. He is lauded as one of Japan’s foremost business leaders, earning comparisons with Warren Buffett or Bill Gates. Sprint was supposed to be a springboard to take SoftBank outside Japan and build a global telecoms and technology empire at a time when other groups, such as Vodafone of the UK, were pulling out of the US.
Instead, Mr Son’s US adventure has become a drag on his domestic business, resulting in SoftBank having to issue an embarrassing cut to its earnings guidance last year. In the 2014-15 financial year, its annual net profit of $5.4bn was weighed by a loss of $1.5bn at Sprint. The struggling US network has also distracted attention from his successful investment in Alibaba, the Chinese ecommerce sensation in which SoftBank owns a 32 per cent stake worth nearly $70bn, and internet start-ups in other emerging markets.
Analysts say Sprint will become less of a drag on SoftBank as the internet investments start to pay off. But a failure to turn round Sprint threatens to leave a black mark on his legacy as he prepares to hand power at SoftBank to Nikesh Arora, a former Google executive who recently became Mr Son’s number two and heir apparent.
“Mr Son has won all the big gambles until now. It could become his first major defeat,” says Shigeyuki Kishida, a telecoms consultant at InfoCom Research, a Tokyo-based think-tank.
Though Mr Son is known for walking away from bets before they turn sour, analysts say admitting defeat at Sprint would be especially damaging as he tries to turn SoftBank into a global player. “I don’t expect him to sell Sprint because the US is critical to his long-term vision,” says Neale Anderson, an HSBC analyst.
SoftBank executives have signalled that the company could try to relaunch its bid for T-Mobile, saying it would remain flexible if the regulatory environment were to change.
But by then it might be too late. Dish, the satellite television group controlled by Charlie Ergen, recently entered talks with T-Mobile about a merger, a deal that would give Mr Ergen the chance to deploy the billions of dollars’ worth of spectrum he has been stockpiling. Deutsche Telekom, which owns a majority stake in T-Mobile, may also be looking to sell the carrier to Comcast, according to people familiar with the matter.
Mr Ergen has spent billions of dollars snapping up the airwaves needed to deliver wireless services, but he has yet to reveal what he plans to do with them. He too tried to acquire Sprint in 2013, but was outmanoeuvred by Mr Son; now he has a chance to get his revenge by taking T-Mobile off the market.
Tricky turnround
Telecoms
When Mr Son’s grand merger plan was thwarted, he decided to run Sprint as a standalone business, turning to Marcelo Claure, a trusted executive, to lead the charge. But the turnround of Sprint, which has a decade-long history of disappointing customers and shareholders, has proved more difficult than either man predicted.
A Bolivian-born billionaire, Mr Claure made his fortune by founding BrightStar and turning it into the world’s largest distributor of mobile phones, before selling a majority stake to SoftBank for $1.26bn in 2013. Investors ask why he even took the job, which meant swapping a life in Miami, where he has become something of a celebrity by trying to launch a Major League Soccer team with David Beckham, for a tough corporate slog in Kansas City, where Sprint is headquartered.
When Mr Claure became chief executive last August, he found a company in chaos. An executive who still works at the group says scant attention was paid to the underlying business in the period between Mr Son assuming control and the arrival of Mr Claure, during which Sprint lost 1.5m contract customers. Instead, they focused on securing the ill-fated tie-up with T-Mobile.
For most of the past decade, Sprint has been losing money and haemorrhaging subscribers. “I think Masa may have been surprised by the scale of the challenge at Sprint,” says Walter Piecyk, an analyst at BTIG. “You would think, given the challenges over the past 10 plus years, there would have been some level of due diligence as to what he was getting into.”
In March 2014 — before regulators blocked the deal, Mr Son was asked what he would do if Sprint could not complete the T-Mobile takeover. “We need a certain scale but, once we have enough, it’s a three-heavyweight fight. I’d like to have a real fight, not a pseudo fight. And if I can’t have a real fight, I’ll go in for a massive price war,” he replied.
In that spirit Mr Claure has promised to halve the monthly bills of customers who defect from Verizon and AT&T. The eye-catching offers have managed to staunch the loss of subscribers, with 201,000 leaving in the first three months of 2015, its most recent quarter, compared with 693,000 in the same period last year. Yet investors grumble that with such generous deals, Sprint should not be losing customers at all.
Punitive price war
Price wars do not come cheap: in the first three months of this year, Sprint burnt through cash, sending its net debt up $900m to $29.6bn — around $10bn more than its market capitalisation. At this rate it will run out of money in 2016.
When Mr Claure unveiled Sprint’s most recent results, he told the Financial Times that Mr Son would stand by the company if it needed a new injection of capital: “We have a very large shareholder who is very supportive. If the company needed more money, I think he would provide it.”
Sprint’s challenge has been made all the harder by the resurgence of T-Mobile, the fastest-growing US network. In the most recent quarter, it was the only wireless group to add contract phone customers, signing up almost 1m, while AT&T, Verizon and Sprint lost around 600,000 combined. “Masa didn’t see the T-Mobile turnround coming,” says Vivek Stalam, an analyst at New Street Research. “It came out of left field for the entire industry, but it has been particularly painful for Sprint.”
Even worse, T-Mobile has revived its fortunes with the same mixture of price cuts and eye-catching marketing that Mr Claure is trying to deploy at Sprint. “T-Mobile stole the SoftBank playbook,” adds Mr Stalam. “The price cuts at Sprint are not going to be the game-changer they were in Japan, because T-Mobile has already done it.”
Mr Claure insists that there is room for two disruptive forces in US telecoms, although few analysts agree, arguing that Sprint must now pick from a menu of radical options. One advantage it has over its rivals is a huge stockpile of spectrum. Large chunks of it are unused and would cost billions of dollars to deploy, but Sprint could sell some to one of the larger companies, most probably Verizon, and use the proceeds to improve its own inferior network.
That might buy it time until the regulatory regime becomes more favourable to a merger with T-Mobile. “We still don’t know if the regulators would allow it, but it’s easier to imagine it might be allowed if Sprint were insolvent or close to it,” says Mr Moffett. Analysts say a combination of Sprint and T-Mobile makes more sense than one of Dish and T-Mobile, because a merger of telecoms groups would generate more savings.
For Mr Son, perhaps the biggest irony is that his fate lies in the hands of Mr Ergen, the man he beat in the battle to take over Sprint. Many are suspicious of Mr Ergen’s intentions, suggesting he is talking up a deal with T-Mobile to flush out an offer for his own company from Verizon. If that were the case, it could leave the path clear for Mr Son to have another shot at T-Mobile in a few years.
“Dish is really the linchpin at the moment,” says Mr Stalam. “Mr Ergen’s domino has to be the first one to fall.”