So now the Kerrisdale report has been released, along with a prebuttal from Citigroup, claiming that Kerrisdale is “Absolutely Not a Thesis Changer”. However, as I noted last week, the biggest issue in thinking about the future for DISH is likely its capital structure, which neither of the reports address at all.
I also wish that both of them were better at math, when they try to assess whether today’s wireless networks are operating at capacity (though perhaps its hardly surprising when these calculations have been a recurring problem for New Street Research, CTIA, the FCC, Ofcom and even the ITU). Citi criticize Kerrisdale for considering New Albany, Ohio as a representative location, given its lower than average population density amongst US metropolitan areas (suggesting that 1000 people per sq km is more representative than 258 people per sq km), and also allege that Kerrisdale “ignores the variance in usage during the day” (suggesting that 40% of traffic needs to be accommodated in each of the 2 hour long morning and evening rush hours).
By making these adjustments, Citi claims that average utilization with a 25MHz downlink spectrum allocation would be 280% in the morning and evening peaks, compared to the 15% daily average estimated by Kerrisdale. Of course Citi exaggerate on the upside and Kerrisdale exaggerate on the downside.
The correct calculation for a “typical” situation should take the average number of subscribers per cellsite (144M subs on 48.6K cellsites for Verizon, according to Citi’s own report, or 2965 subs/site, compared to 1773 in Kerrisdale’s report and 7092 subs/site in Citi’s report) and the average busy hour ratio for mobile traffic (6.9% according to Cisco’s Feb 2016 VNI report which says the busy hour has 66% more traffic than average, although carriers typically build to around an 8% busy hour, perhaps 9%-10% in very peaky locations) and should also derate by the share of traffic carried on the downlink (around 87% in the US according to Sandvine), which neither report takes into consideration.
That would result in a daily downlink traffic of around 258GB per site (vs 177GB for Kerrisdale and 709GB for Citi) and a busy hour traffic of 17.8GB rather than the 142GB estimated by Citi. Then, using their own assumptions about capacity per site, each site would see a busy hour utilization of 35%, not 15% and certainly not 280%, suggesting that there is some headroom on most cellsites, just as you would expect, but that carriers will need to continue to upgrade their networks in years to come, to cope with future traffic growth, especially in peak locations.
That brings us back to my original thesis: Verizon might find DISH’s spectrum useful, but its network is not in danger of imminent collapse without it. Instead Verizon might prioritize increased use of small cells, sectorization and beamforming, and treat buying spectrum as the last thing to do, as Bob Azzi (former Sprint CTO) suggested on today’s Tegus call that I participated in.
This is a poker game, and if Ergen can prolong his license term (by building out fixed wireless broadband, as all of the call participants agreed would be logical) then he may be able to wait for Verizon to come to the table. If DISH can push up the price of spectrum in the incentive auction and prevent LightSquared/Ligado from offering a midband alternative then Ergen will be in a stronger position. So it seems more logical to me to talk about where that money will come from over the next couple of years, and not whether DISH will be forced to sell at a discounted price or Verizon will be forced to pay whatever DISH demands.