SpaceX Takes Bold Step to Compete with AT&T and Verizon

Today, I’m diving into a conversation with Walter Piecyk, a partner and analyst at LightShed Partners, who specializes in tech, media, and telecom. We’re discussing SpaceX’s bold move to become a significant player in the wireless carrier space.

Recently, SpaceX secured a substantial portion of low-band spectrum to enhance the Starlink network, a spectrum that has been circulating in the telecom industry for years. Their ambitious goal is to create “the world’s most advanced mobile network.”

With the FCC’s approval for the deployment of 15,000 next-gen Starlink satellites and last year’s agreement to acquire nearly $20 billion worth of EchoStar spectrum, it’s evident that SpaceX is serious about taking on giants like AT&T, Verizon, and T-Mobile.

Having followed the telecom sector for quite some time, I know that companies often express grand ambitions until they face the reality of the costs involved. The telecom industry is littered with failed pivots and acquisitions.

Walter has been closely tracking SpaceX’s moves and has anticipated this direction for months. I wanted to explore whether SpaceX can pull this off, why Walter believes the existing telecom players have mismanaged their response to SpaceX’s rise, and what it means when Elon Musk’s rocket company enters a market that’s often met with skepticism.

Let’s get into it: Walter Piecyk from LightShed Partners on SpaceX’s mobile expansion plans.

This interview has been lightly edited for length and clarity.

Walter, welcome to the discussion. It’s great to have you here.

Thanks for having me. I’m excited to be here.

I feel like we’ve been interacting online for years, but I’m a telecom enthusiast at heart. SpaceX is poised to make a significant impact as the fourth major mobile carrier in the U.S. and potentially globally. They’ve acquired some spectrum to facilitate this.

They’ve purchased EchoStar spectrum through private equity, which is both straightforward and complex. Can you break down the current situation? SpaceX has acquired 800 MHz of spectrum for $8 billion and has already invested nearly $20 billion in EchoStar spectrum. What’s their strategy here?

It’s definitely intricate, but perhaps less so than figuring out how to establish a data center in space. Typically, satellite companies don’t pay for spectrum, but as Starlink evolved, they recognized the telecom opportunity and initially purchased some spectrum from EchoStar.

The positive feedback from investors encouraged them to pursue more. This is a trillion-dollar business in the U.S. alone, and they have global ambitions for both Starlink and their mobile service. So, they went back to EchoStar for additional spectrum, which is noteworthy. Elon Musk often learns as he goes, and after acquiring the initial spectrum and gathering feedback, they decided to buy more.

We didn’t hear much from them for a while, but last week’s acquisition of additional spectrum was significant. This spectrum was originally associated with Nextel, if you recall.

Absolutely, I’d love for you to elaborate on that history. The telecom industry often seems like a maze of lobbyists complicating matters. Spectrum auctions can be convoluted, and the physics behind what spectrum is suitable for what use is complex.

This 800 MHz spectrum comes from the old Nextel push-to-talk service, which Sprint had to divest to facilitate its sale to T-Mobile. They’ve been trying to offload it for years, eventually selling it to Grain Management. When Starlink emerged, Elon seized the opportunity. What did he see in this spectrum that others overlooked?

To build a terrestrial network supporting satellite operations, you need reliable coverage. Satellites work well with a dish on your roof for broadband, but connecting to a phone requires better coverage, especially indoors. Sirius Satellite has supplementary towers, but they’re limited. When SpaceX acquired the EchoStar spectrum and received FCC approval, it became clear they couldn’t rely solely on satellites; a terrestrial network was essential.

Elon Musk has hinted at various technologies, but they ultimately realized that to offer mobile service, a terrestrial network was necessary. The existing telcos aren’t going to assist them with wholesale agreements, so they needed low-band spectrum for better coverage and connectivity.

Acquiring this low-band spectrum was crucial, not just for satellite performance but for building a terrestrial network. That’s why the market reacted positively; people recognized that Elon is genuinely committed to establishing a terrestrial network.

I’m more curious about the cost structure. Reflecting on my early days as a blogger, I remember when the FCC mandated TV networks to stop broadcasting on 700 MHz, leading to a significant auction. Verizon and AT&T acquired large portions of that spectrum, which became the backbone of 4G. If 800 MHz is so valuable, why was it overlooked until now?

The spectrum was part of a transaction where T-Mobile had to divest it to allow for a fourth competitor after acquiring Sprint. The government required them to sell it to EchoStar, with the expectation that Charlie Ergen would become that fourth competitor. However, he struggled to build a network and couldn’t afford the spectrum.

When he failed to secure the necessary funds, T-Mobile was forced to auction it off. As for why no one else pursued it, SpaceX’s strategy has evolved over time. The other telcos faced limitations in utilizing it. In hindsight, Verizon or AT&T should have acquired the 800 MHz spectrum for around $8 billion. They might be losing more in enterprise value due to SpaceX’s emergence than what it would have cost to secure that spectrum.

Do you think the failure of Dish Network influences this perception? We’ve closely followed Dish’s attempts to establish a fourth wireless carrier, which relied on technological innovation.

Dish aimed to create an O-RAN network with a diverse supplier base and run it on AWS to reduce costs. Ultimately, they struggled to deliver on their promises. Their efforts were hampered by a lack of market resonance, unlike SpaceX, which has a proven ability to attract customers.

If Dish couldn’t innovate to create a cost-effective network, what evidence do we have that Starlink can establish a terrestrial network competitively while also managing a space network? That seems like a daunting financial challenge.

Let’s go back further. Remember when Sprint was struggling? Masayoshi Son from SoftBank claimed they would cut CapEx to nothing and innovate wireless delivery. That didn’t pan out, and Sprint had to be bailed out when T-Mobile acquired them, primarily for their spectrum.

Dish built a network, but it didn’t resonate in the market. The difference with SpaceX is Elon’s knack for customer acquisition. Dish failed in that regard. They had the necessary agreements, but they couldn’t attract customers.

I’d push back a bit. I recall a Dish PR person insisting their network existed, despite our inability to find it in various cities. They may have built some infrastructure, but it didn’t compete nationally with the big three.

Absolutely. The phones I used often roamed onto AT&T and T-Mobile networks. The strategy is to attract customers first and then backfill the network. SpaceX might follow a similar approach, leveraging existing assets while gradually building capacity.

You can draw parallels to when John Legere took over T-Mobile. They had a subpar network, but he promised improvements while attracting customers. Eventually, they secured funding from Deutsche Telekom to enhance their network.

SpaceX could adopt a similar strategy, selling services that rely on existing assets while building their network over time. However, this process takes time; you can’t launch a network overnight.

My framework for telecom companies involves either running a network more efficiently or adopting innovative technology to reduce costs. Alternatively, you can invest heavily to create the best network, as Verizon did for years. Then, you need to manage customer acquisition, which was T-Mobile’s approach under Legere.

You also need devices. While exclusive devices are less common now, the focus remains on network quality. From my perspective, it seems Starlink is proposing to build a more expensive network, requiring significant investment in satellites and terrestrial infrastructure.

They plan to launch 15,000 satellites and invest in ground spectrum and base stations. Convincing one of the big three to allow them to roam as a mobile virtual network operator (MVNO) will be challenging, and they may face high costs. It seems like a daunting financial undertaking, even for someone like Elon Musk.

The roaming agreement is indeed a significant hurdle. However, there are existing roaming partners that telcos rely on, albeit at high costs. This could provide a quicker market entry, even if it’s not a high-margin business.

Apple’s satellite connectivity has shown value in remote areas, but the challenge remains providing reliable coverage in urban settings where consumers expect seamless service. The telcos have largely neglected suburban areas, creating an opportunity for satellite coverage to fill that gap.

Additionally, telcos enjoy high EBITDA margins, which means there’s room for SpaceX to offer competitive pricing without needing to match those margins. They could also explore IoT opportunities with their satellites, which could open new revenue streams.

It’s interesting to note that the IoT narrative has been a recurring theme in telecom, often tied to promises of 4G and 5G. We frequently hear about ambitious applications like self-driving cars and robot surgery. The consumer audience desires long battery life and reliable service, which raises questions about connecting directly to satellites.

If a phone connects to a satellite in a field, it could work, but many initial doubts about Starlink’s capabilities have been proven wrong. While Elon may not always meet his optimistic timelines, he ultimately delivers.

The challenge lies in differentiating with consumers. Telcos have dismissed direct-to-device services, but their offerings often lack quality. SpaceX aims to provide blanket coverage that meets consumer expectations, but they still need to deliver reliable service in buildings and at competitive prices.

The initial network build will require significant investment, but estimates suggest it could be around $10 billion to $15 billion, far less than the $100 billion to $200 billion figures being thrown around. Telcos spend $10 billion to $15 billion annually to maintain large customer bases.

Reflecting on AT&T’s experience with the iPhone, they faced network overload due to sudden customer demand. How do you see this playing out for Starlink, especially considering their current customer service challenges?

For consumer businesses, effective advertising, fulfillment, and customer management are crucial. With the spectrum they have, they won’t capture a significant market share overnight. The initial CapEx build and spectrum purchases could total $10 billion to $30 billion.

If they successfully attract five to ten million customers, they can reinvest and grow. Historically, cable companies have attempted to drive down wireless competitors, and a similar narrative could emerge for SpaceX.

Let’s revisit the terrestrial network. You’ve expressed skepticism about their femtocell strategy. Elon and Gwynne Shotwell have suggested they can bypass traditional terrestrial networks, but you believe they’ll need to build a conventional network.

While femtocells may play a role, macro towers are essential for adequate coverage and power. As they discuss the low-band spectrum, we’ll likely see antennas on existing towers.

The telecom industry has a mix of carriers owning and operating their towers alongside third-party operators. Do you think SpaceX can negotiate deals with these companies, or are they tied to their larger partners?

These are substantial real estate investment trusts (REITs), like American Tower, which could facilitate SpaceX’s entry by allowing them to add antennas. Additionally, EchoStar’s bankruptcy could provide opportunities for SpaceX to acquire radios at a lower cost.

Is there a possibility that SpaceX is gradually acquiring EchoStar or leveraging its assets?

EchoStar has valuable spectrum that Verizon needs. Acquiring EchoStar could make strategic sense for SpaceX, allowing them to gain spectrum and cash flow without issuing new stock.

T-Mobile is currently Starlink’s partner for direct-to-device connectivity. How do you see their relationship evolving, especially after leadership changes at T-Mobile?

Initially, the partnership was strong, but leadership changes may have altered that dynamic. SpaceX might find it frustrating to work with T-Mobile, especially if they seek to avoid exclusivity in future agreements.

The major U.S. telecoms are clearly on edge, dismissing SpaceX’s potential. They’re forming their own satellite initiatives, indicating a level of panic in response to this new competition.

I agree. The relationship between SpaceX and T-Mobile has soured, with T-Mobile executives publicly downplaying SpaceX’s capabilities. This mirrors past situations where companies underestimated competition, leading to significant market shifts.

The telecom industry has historically been resistant to competition, but SpaceX’s emergence could force a reevaluation of that stance. If the FCC perceives a threat to public interest, they may intervene.

It’s amusing to see telecom giants downplay competitors while simultaneously acknowledging them when it suits their narrative.

As we wrap up, I’m curious about the potential paradigm shift in mobile devices. With companies like Meta exploring new forms of interaction, could this change how we use mobile bandwidth?

At LightShed, we consider the implications of AI and how it might alter our interactions with information and commerce. If mobile devices become less central, it could disrupt the telecom landscape and impact how telcos operate.

Elon Musk’s interest in connectivity extends beyond just his vehicles and factories; he aims to build a revenue-generating business.

The existing telcos seem unprepared for this level of competition. They’ve invested heavily in 5G, but the promised returns haven’t materialized.

The telecom industry has often been driven by lobbyists, and while they’ve made significant investments, the reality of competition is setting in.

Verizon, in particular, seems vulnerable due to strategic missteps and a lack of differentiation. They’ve lost their edge in the market, and their reliance on price increases is no longer a sustainable strategy.

It’s surprising to see how far Verizon has fallen from its former status as the gold standard in mobile networks. Their past decisions have left them exposed to competition from SpaceX and others.

The commoditization of networks has made it challenging for telcos to maintain their competitive edge. The focus on margins has overshadowed the need for innovation and customer experience.

As we look ahead, the telecom landscape is evolving, and the emergence of new competitors like SpaceX could reshape the industry.

Walter, it’s been a pleasure discussing these developments with you. I look forward to having you back soon as these changes unfold. Thank you for joining me.

Thank you! I appreciate the opportunity.