Sprint and the cable companies

The Wall Street Journal reports this morning that Sprint, Comcast and Charter Communications are discussing an agreement for mutual support in providing a discount mobile telephone service.

Sprint is controlled by the Japanese conglomerate Softbank, whose chairman, Masayoshi Son, made his first mark in that country by launching a successful deep-discount mobile phone service that resulted in much lower prices for consumers there.  Mr. Son has already tried once to repeat this move in the US.  To gain the requisite size to offer a similar disruptive service in the US, he agreed to combine with T-Mobile.  This would have formed a third big mobile telecom group, after Verizon and ATT.  But the federal government ruled against his plan, on the grounds that joining Sprint and T-Mobile would reduce the number of big telecom companies in the US from four to three (violating an anti-trust rule of thumb that frowns on market shares above 25%).  The fact that Mr. Son wanted to provide more competition, not less, made no apparent difference to the regulators.

Hence, I think, Mr. Son’s very visible support for Mr. Trump, as a businessman who might see through regulatory clutter.

I’m not sure what will develop from talks among the three parties.  I don’t think this is simply a way for Son to extract himself from an investment gone wrong in Sprint, however.  My guess (as someone with too-high cellphone bills, my hope?) is that a viable mobile service with adequate national coverage will emerge from the talks.

If so, while this may/may not be good news for the companies involved, it is definitely bad news for both Verizon and ATT.

Masayoshi Son and Donald Trump

Masayoshi Son is the visionary entrepreneur who controls Softbank, an innovative Japanese communications and internet giant.  Several years ago, Softbank gained control of the US wireless company Sprint.  Mr. Son’s intention was to buy T-Mobile and merge the two, creating a third large national wireless company able to compete with ATT and Verizon.

The Obama administration vetoed the combination on antitrust grounds.  On the surface, this made sense, since the number of competitors in the US market would be reduced from four to three.  On the other hand, the relative market shares of #3 and #4 ares small enough that they have not made much difference in how the two giants operate.  Also, Mr. Son entered the Japanese wireless market in the same fashion, piecing together a national network out of smaller firms. Then he disrupted the existing oligopoly through very aggressive, consumer-friendly, price competition.  He created competition–and much lower wireless bills–where there had been none before.

His intention is to do the same in the US market.  From where I sit, government disapproval of the proposed merger of Sprint and T-Mobile stifled competition rather than promoting it.

My guess is that Mr. Son will have better success explaining his motives to the Trump administration.  A Sprint/T-Mobile combination would likely be good for us as consumers of wireless services, but bad for the incumbents, ATT and Verizon.

Intel (INTC) and ARM Holdings (ARMH)

chipmaking rivalry

The big division in the chip-making industry over the past 15-20 years has been between giant vertically integrated makers like INTC, Texas Instruments … which manufacture chips designed in-house and smaller digitally-oriented design firms who rent structural intellectual property from ARMH, modify it and have chips made in third-party contract fabrication factories like those run by TSMC.

INTC’s advantages have been the raw power of its chips and its manufacturing superiority.  Users of the ARMH framework tout the elegance of their designs that enables output to be smaller, use less electricity and generate less heat.

disruption by iPhone

The balance of power began to shift away from INTC and toward the ARMH camp when INTC decided not to make chips for the iPhone.  It may be that INTC management thought smartphones were a flash in the pan, as urban legend has it, or it may simply have been that INTC knew its chips ran too hot and used too much power for Apple to be satisfied with them.  In any event, INTC has been trying to reinvent itself since then, by improving its chip design while maintaining its manufacturing edge.

On the latter front, INTC continues do well; on the former, not so much.  Despite a lot of design effort, its low-power, low-heat solutions for the smartphone world haven’t been good enough to gain much traction.

This itself threatens the manufacturing operation.  As INTC steadily shrinks the size of its chips, each silicon wafer processed becomes capable of yielding more output.  At some point, INTC’s factories are potentially going to be capable of churning out more chips than the company can reasonably expect to sell to its PC and server customers.  The capital equipment used in chip making is so expensive–$3 billion+ today, maybe $10 billion+ for the fabs of a few years from now–that the factories have to run at high utilization rates to be profitable.  INTC has already said that next-generation (extreme ultraviolet lithography) technology is too expensive for even INTC to invest in by itself.

Hence the deal with ARMH.

three other points:

–presumably working with ARMH-based firms will help INTC fine-tune its manufacturing processes for mobile and the Internet of Things

–this may be the first step in closer cooperation between the two companies

–the arrangement has been announced very quickly after Softbank agreed to acquire ARMH.  Are the two connected?  If so, Masayoshi Son may have plans for much greater integration of the two rival firms.