Elon Musk caused phone stocks to crash. The surprise was elsewhere
The plunge of T-Mobile’s shares by 13.3% following the reported $8 billion wireless spectrum deal between SpaceX and Grain Management showed that although the big phone companies in America had lost value, the shares in cell tower companies rose. This contradiction shows where Wall Street thinks the next telecommunications opportunity might appear.
Even though Elon Musk has not set up his own nationwide mobile network, he has managed to scare some of the largest telecommunications companies in America. On October 9, T-Mobile’s share price dropped by 13.3 per cent and both AT&T and Verizon also experienced heavy losses. At the same time, Crown Castle, which is a major owner of communication infrastructure, saw its shares rise by about 15.6 per cent. It seems that investors were concerned about the future of the traditional phone companies yet became more optimistic regarding the infrastructure that a new competitor might require.
The odd response from the market came about after SpaceX announced on October 8 that it had agreed to buy up nationwide wireless spectrum from Grain Management. The agreement, which is reportedly worth about $8 billion, may enable SpaceX to turn Starlink Mobile into a direct competitor with America’s biggest wireless companies. What is especially interesting in this case is that some of the spectrum that SpaceX now wants was originally owned by T-Mobile.
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As stated in Grain Management’s official announcement, SpaceX has agreed to buy Grain Management’s nationwide 800 MHz spectrum portfolio, provided that the Federal Communications Commission gives its approval. The acquisition includes up to 14 megahertz of paired low-band spectrum, a type that enables wireless signals to travel relatively long distances and to penetrate buildings more effectively than higher-frequency signals. This helps to overcome an important limitation encountered by satellite-based mobile services, especially when customers are located inside homes, offices and other buildings.
There is a most striking financial irony about the deal. As Ars Technica reported, Grain Management got the spectrum from T-Mobile early this year as a result of a transaction that included $2.9 billion in cash and other spectrum licences. T-Mobile had obtained the frequencies as a result of its 2020 merger with Sprint and was therefore obliged to sell them pursuant to conditions imposed by the government. SpaceX is now buying those same frequencies in order to set up a service which could compete with T-Mobile, even though the two companies already co-operate on satellite connectivity.
The earlier transaction and the reported SpaceX purchase price cannot be directly compared since the original agreement involved a swap of spectrum. However, the case shows how valuable wireless frequencies can become when technological advances open up new potential applications for them. An asset which had originally belonged to a well-established mobile operator is now being incorporated into a strategy that has disturbed investors in the telecommunications industry.
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The more surprising thing was what happened among the companies which own communication towers. Even though the shares of the traditional carriers dropped, Crown Castle rose by about 15.6% and American Tower increased by 9.3% on October 9, as Barron’s market coverage states. The reason for this is simple: SpaceX could eventually become a major customer of the physical infrastructure which conventional telecommunication companies currently use.
Even though Starlink has thousands of satellites, reliable mobile coverage in densely populated cities might still need ground-based antennas, equipment on roofs and cellular towers. Setting up an independent nationwide network would require a large amount of investment, but taking advantage of existing infrastructure could be another possibility. For operators of towers, a new national customer could lead to extra rental income without the necessity of creating a completely new business model.
A financial contradiction arises since investors are reducing their expectations regarding the existing phone companies because they are concerned about further competition, at the same time as they are rewarding the businesses which might provide the infrastructure for this competition. The market is essentially betting that SpaceX might endanger the established carriers while at the same time increasing the value of some of their infrastructure providers.
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There is still a strong opposing argument, namely that buying spectrum is not equivalent to setting up a competitive wireless network and that SpaceX will still have to get regulatory approval as well as make investments in the equipment needed to deliver a reliable service; present-day carriers have a considerable amount of infrastructure, millions of customers and well-established relationships which would be both expensive and time-consuming for a new competitor to duplicate.
John Saw, T-Mobile’s chief technology officer, made a distinction on the occasion of comments reported by Fierce Network. He said:
“Spectrum is an essential ingredient. But it takes a network to deliver on its promise.”
Analysts’ expectations also show the financial uncertainty. As reported by Barron’s, Citi analyst Michael Rollins has suggested that SpaceX is not likely to seriously disrupt the telecommunications industry until at least 2029. Moreover, there is no assurance that SpaceX will secure sufficient infrastructure from the existing tower companies to warrant the sharp rise in their stock prices. Thus, the two aspects of the market reaction on October 9 are largely based on assumptions regarding future spending and competition rather than on any immediate change in corporate earnings.
The next thing that investors should keep an eye on is whether or not the spectrum acquisition gets approval from the FCC, how much SpaceX pledges to spend on terrestrial infrastructure, and whether Starlink Mobile starts to draw customers away from the existing carriers. It will be these developments that will show if the market’s sudden change of mind was well justified.
Elon Musk need not necessarily replace Verizon, AT&T or T-Mobile to change their financial outlook. The fact that a further national competitor might appear could already be sufficient to change expectations regarding future profits and spending on infrastructure. The most significant aspect of the selloff on Friday was not just that the phone companies had lost value, but that investors had rushed to the companies which might benefit from assisting their newest rival.