It's not much fun being Verizon (VZ) or AT&T (T) right now. The list of competitive threats faced by existing multi-billion dollar revenue streams has become quite lengthy, and new additions seem to arrive every each year. Already, there's cord-cutting, wireline phone disconnections, fierce mobile price competition from T-Mobile (TMUS) and Sprint (S) , the evaporation of long-distance voice revenue, competition from business Ethernet service providers, the growing willingness of low-income consumers to rely solely on mobile data for their Internet needs and the launch of mobile services from cable providers that partly rely on Wi-Fi networks.
In a couple of years, one can probably add the launch of 5G fixed-broadband services to the list of serious competitive threats. Telcos and cable giants are far from blind to it, however, as Verizon and AT&T's bidding war to buy spectrum owner Straight Path Communications (STRP) demonstrates.
A month after AT&T struck a $95.63 per share deal to buy Straight Path, Verizon has announced a $184 per share ($3.1 billion) deal to buy the company that has the backing of Straight Path majority shareholder Howard Jonas. Big Red observes the price represents a 404% premium to where Straight Path traded before the AT&T deal was reached. AT&T will get a $38 million termination fee for its trouble.
Straight Path owns 735 U.S. spectrum licenses for the 39GHz band, and 133 licenses for the 28GHz band. That gives it one of the larger U.S. portfolios of high-frequency millimeter-wave (mmWave) spectrum, which thanks to its tremendous capacity is set to be extensively used to provide 5G fixed-broadband services.
As part of its $1.8 billion purchase of fiber network owner XO Communications, Verizon had already agreed to lease sizable 28GHz and 39GHz spectrum assets from XO affiliate NextLink Wireless, while also gaining the option to buy NextLink down the line. AT&T obtained a somewhat smaller portfolio of mmWave spectrum through its purchase of bankrupt mobile backhaul services provider FiberTower. Other mmWave spectrum owners include Dish Network (DISH) , T-Mobile and Southern carrier C Spire.
In urban areas and certain other settings, mmWave will also be used to provide 5G mobile services, complementing the use of lower-frequency bands. Historically, mobile services have been delivered in sub-3Ghz bands, due to the fact that services delivered via high-band spectrum have struggled to travel long distances or penetrate walls. But technologies such as beamforming, together with the growing use of small cell base stations, will allow mmWave bands to occasionally be deployed.
Nonetheless, with a large percentage of American consumers and businesses only having two credible broadband service options, and average monthly U.S. broadband bills much higher than those in many other developed nations, it's in the fixed-broadband market that mmWave could really have a disruptive impact. By opening the door to new entrants that can deliver multi-gigabit services without having to spend billions and obtain government approvals to dig up streets and deploy last-mile fiber services, high-band 5G services could start to make the U.S. broadband market a lot more competitive in a couple of years.
Fixed wireless' broadband potential certainly doesn't seem to be lost on Alphabet/Google (GOOGL) . The company recently halted Google Fiber's traditional deployments, and in June 2016 bought Webpass, a provider of broadband services to apartment buildings in a handful of metro areas that depend on delivering a high-speed, line-of-sight, wireless connection to the building.
Webpass' services typically provide speeds of up to 1Gbps for $60 per month, easily undercutting the costlier broadband tiers typically offered by telcos and cable providers. It recently launched in Denver, and job postings suggest it might also soon arrive in Seattle. 5G would be a natural fit for Google Fiber/Webpass, potentially opening the door to delivering high-band services to residences and businesses lacking a clear line-of-sight. Meanwhile, Google has been testing experimental wireless technologies in the 3.5GHz band.
T-Mobile, which has promised to start rolling out a nationwide 5G mobile network in 2019, could also leverage 5G to deliver last-mile broadband services. In addition to using some of the $8 billion worth of spectrum licenses it bought in the mobile-friendly 600MHz band, it plans to use 200MHz of spectrum in the 28GHz and 39GHz bands to deploy 5G. The company could conceivably use its high-band spectrum to help offer fixed/mobile service bundles, thus adding to the headaches it's causing for Verizon and AT&T. Various regional players relying on a small number of spectrum licenses, and perhaps in some cases unlicensed spectrum, are also bound to arrive.
The incumbents certainly aren't standing still. Verizon promises to commercially launch 5G fixed services in 2018, after trialing them in a slew of markets in 2017. AT&T has said it will start "consumer-friendly" 5G fixed-wireless tests in the second quarter; it hasn't given a commercial launch date yet. And Comcast (CMCSA) has gone out of its way to insists its network is 5G-ready.
One possibility is that incumbent broadband providers will try to offset the competitive pressure created by 5G in their existing markets by using the technology to expand into locales where they aren't able to offer cable, DSL or fiber services. Certainly, the mmWave spectrum that Verizon and to a lesser extent AT&T have acquired paves the way for them to deliver last-mile broadband in many places where they currently don't.
But on a collective level, 5G stands a good chance of compressing average bill prices and margins for a U.S. broadband industry that for years has reaped outsized profits thanks to limited competition. Though it will take time for their services to roll out, 5G broadband upstarts could ultimately do for the U.S. broadband market what T-Mobile has been doing for the mobile market.