Inside the Sprint-Charter Talks and Son's IoT Vision

Masayoshi Son is a clever blend of crazy, visionary, and pragmatic. The SoftBank Founder and CEO is back in the headlines, acting behind the scenes after Sprint recently floated the idea of merger with Charter Communications. Many, including myself, expect to see more direct SoftBank involvement next.

Why, you ask? There are plenty of reasons why some sort of SoftBank-Charter-Sprint-X deal could take place. Mobile spectrum, cable footprint, and mobile small-cell deployments make a powerful combination. I believe Son's vision is to use these assets to expand SoftBank's capabilities to connect IoT devices, including cars, to artificial intelligence and edge computing.

Connecting the IoT

At Mobile World Congress 2017 earlier this year in Barcelona, Son laid out the strategic vision of SoftBank guiding "communications for the singularity," in other words being the network provider for more than a trillion IoT devices that could share and process data with artificial intelligence in the cloud to predict the future.

SoftBank also owns ARM, which it bought in 2016 for $32 billion. ARM is a huge provider of low-power efficient chips for IoT, which also have uses for small cells. Which are being deployed by Sprint. Which could be used as IoT hubs for edge computing! This complete's Son's vision of the future. All he needs is a bigger network -- such as Charter or T-Mobile US.

More to come. Charter quickly rebuffed the idea of merging with -- or being taken under by -- Sprint, which is much smaller. Charter is a booming cable company with a $120 billion market cap. Sprint is the #4 US mobile provider with a $35 billion market cap. It's kind of like me asking Steph Curry if he wants to shoot hoops.

But all of these companies circling each other makes sense. Cable companies have been talking to Sprint for a while, interested in acquiring more mobile assets either using equity or partnerships. SoftBank has also been eager to acquire more US mobile assets for years, though the US government is an obstacle. Business wise, it makes sense. T-Mobile US and Sprint are #3 and #4 behind AT&T and Verizon, so why wouldn't they combine? With a new US administration, SoftBank and Son may think there is now a window to move with a change in regulatory resistance.

Son, the driving visionary behind SoftBank, is always on the move. SoftBank is a public company trading in Japan. Its share price is up nearly 150 percent since 2011 and it has a market cap of about $86 billion. It has roots in Japan's telecom carriers, where it owns various mobile assets in Japan including Vodafone Japan. It is a voracious acquirer and investor. It bought its controlling stake in Sprint in 2012. SoftBank was an early investor in Chinese e-commerce giant Alibaba, amassing a 32 percent position, turning millions into billions. SoftBank's also got a position in the ride-sharing giant Didi in China.

Son has huge ambitions. In an earnings call in 2016, he said he has a 300-year plan for the company. Nothing like planning four generations out!

SoftBank make a strategic and smart move to buy UK-based ARM Holdings in a big bet on IoT. ARM dominates the market for low-power chips that can be used in smaller devices and holds enormous process for IoT markets such as connected cars. Some other smallish deals from the SoftBank universe: SoftBank in February agreed to buy Fortress Investment -- a private equity fund and hedge fund -- for $3.3 billion. It is also in the process of buying the Boston Dynamics robotics business from Google parent Alphabet for undisclosed terms.

Sprint's Small-Cell Bets

So of course the big question is: How does Sprint fit into this plan?

When SoftBank bought Sprint in 2012, the ailing service provider was a deep value play. Some thought the carrier would go bankrupt. The high-profile merger with Nextel was failing. Sprint was suffering from a misguided strategy to bet on WiMax technology, a competitor to 3G that was losing market share to the emerging standard. It was hemorrhaging cash.

The infusion of capital and the presence of Son and SoftBank has stabilized Sprint and boosted the share price. Sprint now trades around $5.86 after hitting a low of $2.85 in 2016 -- but Sprint's resurgence has been slow going. The carrier still badly trails AT&T, T-Mobile, and Verizon in North American markets. Being #4 isn't much fun.

Sprint recently reversed the trend of losing money and is now in a position to start expanding again, rather than focus on cost-cutting. In reporting its fiscal first-quarter (June) results, the Overland Park, Kansas-based company reported a profit of $206 million, or five cents a share, reversing a loss of $302 million in the year-ago period. It's also boosting capital spending (capex). The company said capex was $1.2 billion million related to networking, an estimate of $850 million, according to Raymond James. That's up an astounding 112 percent q/q, and 137 percent y/y.

Where's the money going? The company is focused on expanding small cells, which are small mobile base stations that can be used to extend the network by strapping them onto telephone poles or buildings and connecting back to macro base stations. Sprint has discussed trial partnerships with cable operators for integrating small cells into their infrastructure.

This is one of many connections with the Charter activity and SoftBank's possible future strategy: small cells and cable. Sprint sees the opportunity to increase its footprint with a combination of cable infrastructure blended with small-cell expansion in urban areas.

Why small cells? We have mentioned Son's obsession with the singularity -- which he has tied to IoT (see $34 billion ARM deal) and connectivity. Small cells are efficient mobile base stations that can rapidly and efficiently expand coverage and provide high-bandwidth connection, especially in urban areas. Look for more to be strapped to street lamps near you.

It's become trendy for service providers to bet on small cells as a path to 5G expansion. Verizon has also been focusing on small cells, believing the investment in small cells will pay off when the equipment can be leveraged for 5G, to provide mobile cellular broadband -- and IoT connectivity.

Charter, with its impressive $117 billion market cap and steadily rising stock price, says it's not interested in doing a deal with Sprint. But it does want mobile spectrum and assets. Expect that Softbank and Mr. Son are involved.

This should make for some more fun in 2017 as all these names get sprinkled together in a flurry of deal talks. Sprint is perennially part of merger rumors. The rumors of a tie-up with T-Mobile US go back for years. The SoftBank money makes it more real. It only makes sense that Son and SoftBank now see an opportunity for some kind of combination that ratchets up his ambitious vision to take over IoT, the singularity, and the world.

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