Why Elon Musk wants to sell you cell service

SpaceX enters the mobile network business

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0:30Hello, and welcome to Decoder. I'm Neil Apatel, Editor-in-Chief of The Verge, and Decoder is my show about big ideas and other problems. Today I'm talking to Walter Pysik, a partner and analyst at LightShed Partners who covers tech, media, and telecom about SpaceX's recently announced plans to become a major wireless carrier. Last week, SpaceX agreed to buy a big chunk of low-band spectrum to expand the Starlink network. That spectrum has been traded around the telecom business for decades now, but SpaceX's ambitious plan is to build, quote, the world's most advanced mobile network. Combined with the news that the FCC approved the deployment of 15,000 next-gen Starlink satellites

1:04and the company's previous agreement to purchase $20 billion worth of Echo Star Spectrum last year, it's now clear that SpaceX is serious about competing with AT&T, Verizon, and T-Mobile. I've covered the telecom business for a long time, and I've always known these companies can say they want to do something until they run into the harsh reality of how expensive it is to actually do it. The telecom graveyard of pivots, bad ideas, and failed acquisitions is vast. Walt has been closely monitoring SpaceX acquisitions, though, and he's correctly predicted that SpaceX was headed in this direction for months now.

1:35So I wanted to dig into whether SpaceX can pull this off, why Walt thinks the existing telecom companies have really fumbled their response to SpaceX's growing threat, and what happens when Elon Musk's rocket company jumps headfirst into a business that everyone loves to hate. Before we get going, do me a favor and subscribe to Decoder on YouTube, where we put out new episodes every Monday and Thursday. Okay, LightShed Partners' Walter Pysik on the harsh reality of SpaceX's mobile wireless plans. Here we go.

The history of the 800 megahertz spectrum

2:10Walter Pysik, your partner, a tech, media, and telecom analyst at LightShed Partners. Welcome to Decoder. Thanks for having me. Looking forward to it. I'm excited to talk to you. I feel like we've been, like, tweeting or posting around each other for many, many years, but I'm a telecom nerd at heart. I've been covering this space for ages. SpaceX is going to make a big splash. They're going to be the fourth major mobile carrier in the United States, maybe the world. They've bought some Spectrum to do it. It's EchoStar Spectrum by way of private equity. It is at once very simple and also very complicated.

2:43Give us the state of the state. I mean, they bought 800 megahertz Spectrum for $8 billion. They spent $20 billion already on EchoStar Spectrum. What are they trying to do here? I mean, it's definitely complicated, but maybe less complicated than trying to figure out how to put a data center out in space and make you not work or something on the moon. But I think, you know, they don't typically want to own Spectrum and spend for Spectrum. If you think about how Starlink was built, satellite companies don't typically pay for Spectrum. And then as the business evolves and as they saw the opportunity in telecom, they purchased some Spectrum initially from EchoStar.

3:20And I think the feedback they got from investors at that time was very positive. And they're like, wait a minute, you know, you should do more here. Like, this is a trillion-dollar enterprise value business in the U.S. alone. Obviously, they have global aspirations, both for Starlink as well as what they're doing, you know, with this, you know, mobile telephone service. So, they bought more. They went back to EchoStar. And that's a key thing, I think, to pay attention to in that they bought some Spectrum and then they went back and bought some more. Because I think, like a lot of things that Elon does, he learns as he goes, right?

3:50So, he bought the Spectrum, got feedback, talked to people in telecom, bought some more Spectrum. Then we didn't hear from them for a while. And then you have this thing that happened last week where they bought some more Spectrum, some stuff that was part of it. I can go through the history of it if you care, but it's a long, wonky telecom stuff. This was originally the Nextel Spectrum, if you remember that company. I do. Actually, I do want you to go through that history because I think the telecom business is best understood as a bunch of lobbyists trying to make everything more complicated than it should be.

4:23And, yes, Spectrum auctions are complicated and what Spectrum is good for what is deeply tied to the physics of the radio Spectrum and all that. But here, it's the 800 megahertz Spectrum from the Nextel service, the old push-to-talk walkie-talkie service, that Sprint had to divest as part of the deal to get sold to T-Mobile. They've been trying to sell it for ages. They sold it to this company, Grain Management. They've been sitting on it for years. And Starlink showed up. Elon bought it. Nobody else wanted it. What did he see in the Spectrum that no one else did?

4:55Well, I think when you realize that you need to build a terrestrial network to support what you're doing with satellites, because satellites work fine if you've got your dish on the top of your house and you're getting your broadband. But when you're trying to connect with a phone that doesn't have the same type of power, by the way, Sirius satellite also has supplementary towers. There's not that many of them, but sometimes when you get out of Sirius coverage, you will connect to a tower. So I think when they bought that Echostar spectrum and then got FCC approval, and if you looked into those details of that FCC approval and what was required, you would see that they can't do this by satellites alone.

5:31There had to be terrestrial. And then I think SpaceX, as Elon is wont to do, tries to send some diversions. Like, oh, we're going to do femto cells. We're not going to do macro, this, that, and the other thing. But I think they realized that they were going to build a terrestrial network. Okay, so now when you finally realize, hey, if I'm going to offer mobile service, I need some form of a terrestrial network. And at the same time, the telcos are not going to help me out. They're not going to give me a wholesale agreement. Then when you go back and say the companies that have the lowest churn, what is the fundamental value you need in a terrestrial network?

6:02It's low-band spectrum. Why? It travels further. You can get better coverage. And you have that connectivity. So getting this low-band spectrum piece was just an important part not to make the satellites work better, but to actually give them the spectrum assets that they need to build a terrestrial network. And I think that's why the stocks reacted, because people finally came to terms with, yeah, he's actually going to build a terrestrial network.

Evaluating the cost and strategy of a terrestrial network

6:26I'm less interested in the stock and more interested in just the cost structure of how this works. So if I remind my brain to being a baby blogger at Engadget 100 years ago, the FCC told all the TV networks they had to stop broadcasting on 700 megahertz, and we were going to run an auction. And Verizon and AT&T bought big chunks of 700 megahertz spectrum, and that's what 4G is built on. And that's the low-bandwidth spectrum that you're talking about. It goes everywhere. This was a big victory that we reallocated 700 megahertz.

6:58800 megahertz was sitting right there the whole time, right? I mean, this is the next tall spectrum. If it is so valuable, why wasn't there a market for it until Elon showed up just now? I mean, so it was part of this transaction, right? T-Mobile ended up having to sell it because basically the government was like, okay, if we're going to allow you to take out the fourth competitor, which was Sprint, then in order to enable another fourth competitor out there, we need to have you guys give up some of your low-band spectrum.

7:28So part of the deal that T-Mobile and Sprint had with the government was that they would sell it to EchoStar. Why? Because Charlie Ergen, or I say it's Dish at the time, right? It's EchoStar now. Dish was going to be the fourth competitor, right? This was the rationale that they gave in terms of the approval of the transaction. So Dish needed low-band spectrum. The problem is, you know, Ergen went about his business, or he's trying to build a network, and then basically just couldn't afford to buy that. So they had the rights to buy. So then at that point, when Ergen failed on the bid to come up with the dollars to buy that spectrum, it enabled T-Mobile and actually forced them to put it up for auction.

8:05Now, your question is, like, why didn't someone else, like, show up then? And, I mean, again, from SpaceX's standpoint, as I mentioned at the start of this podcast, I think their strategy has been evolving over time. In terms of the other telcos, like, they can't really use it. There are some limitations that they have. But, like, in hindsight, maybe Verizon or AT&T should have bought this 800 spectrum for the whatever it was, let's call it $8 billion. They're probably losing more in enterprise value over the concerns of what's happening with SpaceX than it would have cost them just to buy it and what's known as foreclose, right?

8:37Basically just take it, even if they don't use it, or do whatever they need to meet those build-up requirements and stop SpaceX from having unnecessary assets. I just don't think even these companies were taking Elon seriously and thinking that he would actually build the network. Do you think that's colored by the failure of DISH? We covered the promises of DISH Network to build a fourth wireless carrier in this country so closely, and their attempt was predicated on some amount of technology innovation, right?

9:09They were going to build this thing called an ORAN network, which had a more competitive supplier base instead of just Nokia or Siemens or whoever. And they were going to run it on AWS, and that was going to reduce costs. And, man, eventually they supported one Motorola handset in Vegas, and even that was, like, backstopped by AT&T. They just couldn't – they literally could not do it. Like, these promises never came true. DISH, you know, they're a different company, and Charlie Ergun's a different CEO, and their ability to just throw money at a problem until it's solved is very different than Elon.

9:40But if they couldn't innovate to make a cheaper, faster network, what's the evidence that Starlink can stand up an entire terrestrial network at a cost basis that allows them to compete selling service to consumers while they're also standing up an entire network in space? Because that feels like adding up a lot of cost. I'm going to go even back deeper than that. Remember when Sprint was struggling, Masa from SoftBank was claiming the same thing. They were going to cut their CapEx to nothing, and they were going to use these small cells, and, you know, they innovated how wireless was going to get delivered.

10:14That failed. Obviously, they had to get bailed out through the purchase, you know, when T-Mobile bought Sprint, effectively for just the spectrum. That network got completely decommissioned. To your point, you know, DISH, they got network built, but, you know, they just couldn't – they couldn't resonate in the market. The difference between DISH and SpaceX is, you know, Elon's ability to get customers, right? I think that's where DISH truly failed. They built the network. The network worked fine. They had the wholesale agreements that they needed. Well, I'll push back on you a little bit there. Like, I have a very funny email from, like, a DISH PR person from several years ago where they're like, we'd like to issue a correction to your story.

10:48Our network does exist, right? Like, that was the level that they were competing at where they had to insist to us that the network was real even though we could not find it in our tests in the various cities they claimed. Like, maybe there was a network. They built some amount of network. But they had not built anything that compete at the national scale with the big three. Absolutely. It's not like your phone – the phone that I was using, I had an iPhone, that it was mostly going to roam onto the AT&T and T-Mobile wholesale agreements that existed, right? And the theory is you get the customers, you have a go-to-market strategy, and then you backfill the network.

11:22And I think this is probably going to be something similar. And this is like – you can even go back to when John Ledger first took over T-Mobile. They had a crappy network, right? And then he promised, like, hey, we're going to build it with taking on customers, saying that the network is great before the network was great. And then it kind of caught up because they actually finally got the Germans to give them the money, Deutsche Telekom, to invest, you know, in the network. And I think the same thing can happen here where they'll sell something that will probably rely on other assets that are out there, even if they can't – even if the telcos themselves are, like, circling the wagons.

11:55They have the satellite for certain, you know, benefits in terms of coverage and then just build the capacity over time. But, you know, the point is it's going to take time, right? You can't just turn on a network overnight and start selling service on that. So this has always been sort of my framework of how to think about telecom companies. You can try to run the network cheaper or you can run some kind of different technology to make that cheaper. Or you can just spend and just have the best network, which was the Verizon strategy for years and years and years. Then you've got to acquire and manage your customers.

12:26And that was the T-Mobile strategy. That was John Ledger. He was just nicer to people than AT&T was. And he picked up a lot of customers and that drove some investment. And then you've got to get some devices, right? You have to have the iPhone. And we can set that aside because it feels like that era of competition is over. We're not doing exclusive devices anymore. But those are the two.

The financial realities of building a network from scratch

12:45And I'm just looking at the network here. And it does not seem to me from the outside that Starlink is proposing to build a cheaper network. It feels like they're proposing to build a vastly more expensive network because they need the satellites. They're going to launch 15,000 more satellites to support this network. Then they're going to build a terrestrial network by investing in Spectrum on the Ground and building some set of base stations. And then they're going to have to convince one of the big three to let them roam over as some sort of mobile virtual network operator.

13:16And the big three do not want to do that, right? So they're going to overcharge them for that. I'm just stuck at that's a lot of cost, even if you're Elon Musk and you can make some set of people buy whatever you're selling. The third thing you said is obviously the most challenging. That's the kind of the tent in the pole that prevents you from launching services sooner rather than later. But I think there are, without necessarily getting a wholesale agreement, there might be other ways roaming agreements exist out there. There are roaming partners that exist that these telcos still rely on. It's very expensive.

13:46It's not something you can build a high-margin business on. But it perhaps provides an entry to the market sooner rather than later. And then the point of differentiation ultimately, Inc. becomes, you know, not getting as Apple has pitched in terms of satellite connectivity, some person in the middle of the Utah desert texting because, you know, they're injured. There's value there. But it's the soccer field. Like we have, you know, maybe not in the cities, but in the suburbs, there are plenty of areas that the telcos have effectively given up on trying to provide coverage because of nimbyism, meaning people like just don't want these cell sites.

14:23It's that this satellite coverage cannot just give you this basic text messaging that Apple has been doing through the Global Star constellation, but a true cell phone-type experience. So, A, that's a positive. And the second differentiation is the fact that these telcos have 60% EBITDA margins. So, there's a lot of fat there that can be eaten off of that when you're selling other services, you know, in terms of Elon, like selling home broadband, maybe this becomes an entree in terms of pushing Grok and people's usage.

14:56You don't necessarily need 60% margins, you know, in this case for him, you know, to justify building this network. They also talk about, you know, other data connectivity that these, you know, satellites are going to enable. Again, the current constellation, you need a lot of power and you need a dish. But if you don't have that, if you have the cell phone-type power, then the kind of IoT and other type of opportunities that exist there become, I think, another thing that they look at as a revenue opportunity. It's just funny. The IoT story, I mean, that's what all these companies promised us about 4G.

15:29That's what they all promised us about 5G. Like, there's something about this business that just rhymes every time. I'm confident we're going to hear about self-driving cars and robot surgery when it comes to Starlink and Tesla and Optimus. Like, there's something about these applications for next generation networks that just recur and we hear about them all the time. And then I think about our consumer audience at The Verge and they want long battery life and fast service in all places they go. And I'm not sure how that squares with your phone is going to connect directly to a satellite in the middle of a soccer field, right?

16:00Like, there's something about that that also seems challenging. I think it's just the performance in that if your phone does connect to the satellite on the soccer field, and it works, right? I mean, again, a lot of the things that people said wouldn't work on Starlink in terms of airplanes or even getting CPE down below a certain price, they've delivered on. Obviously, Elon sometimes delivers on them a little later than some of his initial optimistic promises, but they ultimately get delivered on. I think there is the ability with these new constellations to give you that type of connectivity on these spaces.

16:34Is that enough to differentiate with consumers? I don't know. The telcos have attacked this in saying, well, no one cares about our D2D service. Well, your D2D service is not good, right? It's just sending basic text messages. What they're talking about is giving you that blanket coverage where you get what you expect from your cell phone wherever you go. That's fine, but you still have to give it to the person in the middle of the building where their cell phone works today and obviously provide the volume at a cost that is going to be attracted to that consumer.

17:05So those are, again, longer-term things that are going to require some amount of terrestrial network build. Then the question is how much, right? And I think a lot of the attacks that have been out there have been, you know, referencing $100 billion, $200 billion. I get that. Why? Telcos, they spend, each of them, $10, $15 billion a year, but they are maintaining massive customer bases. To get that initial network up where you have that usage, where you use that low-band spectrum to get in the buildings, there's not those types of numbers. You're probably talking like, you know, $10 billion, $15 billion for that initial build in terms of CapEx.

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Customer service and scaling consumer operations

18:45The dynamic there is really interesting. I'm just thinking about, I don't know, AT&T when the iPhone came out, right? The network immediately got overloaded because there was a surge of customer demand that took four years to resolve, truly. And part of that resolution was just putting the iPhone on the other carriers. How do you think that will play out for Starlink here? Because right now, Starlink customer service is not the best in the industry.

19:15Their actual service, people love it. And then when they need customer service, it's a bunch of automated systems and people complaining on Reddit. So there's some challenge there, right, if you're running a consumer business at this scale. Yeah, consumer businesses. I mean, think about all the advertising that's done, the fulfillment, dealing with the phones, phone subsidies. And that's a big part of the financing. I think it's just like, how many customers are we talking about? So, you know, for the amount of spectrum that they have now in the network that I'm talking about for $10 or $15 billion, you're not taking 50% share overnight.

19:47And I don't think that would be that expectation from day one. But then the theory of telco is you do that initial CapEx build. You have your initial spectrum purchases, $10, $20, maybe $30 billion, another $10 or $15 billion in terms of CapEx. And then if you are successful and you do get that 5 or 10 million customers, the opportunity to invest more happens, right? If you go back to the old days, when the cable view of wireless was going to be, hey, we're going to get these MVNOs, we're going to drive the wireless companies into the dirt, and then we're just going to buy them.

20:18And I think that happened in at least one European market. And that was the cable bull thesis that was occurring. So, you could have the same bull thesis, I think, emerge from the SpaceX bulls here, where they're going to say, hey, we're going to just drive – we'll get those first 5 or 10 million customers. We'll drive them into the ground. Verizon's going to be so desperate for any type of revenue because their revenue declined. They're just going to hand them a wholesale deal, and then they'll start selling spectrum. There's going to be a spectrum auction with the FCC. And you can see how the narrative can build based on, hey, initial CapEx, not that big, get in the market.

20:49And then if it's successful, we start investing more.

Macro towers versus femtocells

20:52Let's talk about the terrestrial network for one more term. I heard you throw a little water on the idea that they're going to build femtocells. That is what Elon and Gwen Shotwell have been saying, that they don't need to build the traditional kind of terrestrial network that AT&T and Verizon and T-Mobile have, where you have a lot of fiber backhaul, the big sites that require all kinds of zoning permits and everything, that they can basically just put small cell stations next to Starlink dishes, put them anywhere they want, and blanket the world with them. And Starlink itself will be the backhaul.

21:22Now, I sense some problems with this. Like, Starlink is not 100% reliable all the time. If you have a network that is not 100% reliable all the time, you've got some problems. So maybe you've got to backstop it somehow. But you don't think that's what they're doing. You think they're going to build a regular terrestrial network. I mean, I'm sure that'll be a part of it. But you need macro towers for the type of coverage and penetration and power that it's just, I mean, not to explain physics to SpaceX, they probably know it better than anybody. But I think what you'll see is, you know, as they talk more about this low-band spectrum that they purchased, that when we get on the conference calls of these tower companies, that you're going to find out that you're going to see a lot of those antennas show up on towers.

22:01It's just natural. And I think, you know, you can talk about femtos, but it's hard to see that the network is going to get built without macro towers. One of the weirder aspects of the telecom industry as it's constituted in the United States right now is that the cell carriers own some of their towers and operate some of their towers. And then there are these crazy third parties that literally have names like TowerCo that operate a bunch of the other towers. Are those captured? Do you think SpaceX can get deals with those companies or are they beholden to their big partners?

22:31These are huge REITs. American Tower is the biggest one. It's probably one of the largest companies in this, you know, when you consider any REITs. There's other companies out there. So they have these towers. They have space in many cases where, you know, where basically SpaceX can just go and get an additional antenna. So it's a lot easier to do that now than when the wireless companies were initially building this stuff and having to erect their own towers. In addition, you know, EchoStar is going through a bankruptcy. They have a lot of radios that could be used, that could be bought on the cheap, that could expedite, you know, SpaceX's entrance in the market.

23:07They haven't shown interest in that yet. You know, the EchoStar bankruptcy process hasn't yet concluded, but EchoStar can still be a potential partner here by selling them, again, radios that are already on tower. So you've lifted the amount of time. Those radios use the spectrum that SpaceX is purchasing. So it can be a quick fix for them to enter the market. Who knows if they do that? They may have their own view, like Masa did, on how to build this new cheap network. Is there a way to read this as just they're slowly buying EchoStar or whatever EchoStar tried to do?

23:40I mean, EchoStar has some remaining spectrum that Verizon, frankly, really needs. I mean, at this point, there is some strategic sense just to buying EchoStar outright because EchoStar is getting stock that was issued to them at a discount. So if you're buying them, you're effectively buying in your own stock, right? You don't have to issue the cash to the company, and you're getting whatever cash proceeds that, you know, EchoStar is getting from some of its spectrum sales. So they can actually get incremental cash on the balance sheet and buy their stock in. So we'll see if that plays out. And by the way, then you don't have to also deal with DISH, which sometimes can be challenging.

Existing telcos circle the wagons

24:15T-Mobile is in the mix here. I want to talk about Verizon. You've mentioned them several times. But T-Mobile is Starlink's current partner for direct-to-device cell connectivity. Are they just getting rocked? Are they going to be a part of this? How's that going to work? I mean, if you think about the start of that, that was Mike Sievert up on stage with Elon announcing this thing, and everyone's very happy. And then, you know, I think, you know, Deutsche Telekom decided that they needed a different CEO at some point. You've had that transition where Mike, you know, retired and you brought in a new CEO, and I think there might just be a different view on how that relationship works.

24:49I'm guessing that it's been very frustrating for SpaceX to deal with them and certainly would probably want to avoid any exclusivities going forward. But, you know, they may need to if they want to sign one of these wholesale agreements that we talked about before. It just seems like, as you mentioned, SpaceX and Starlink, they went after a little bit of the consumer market here. They bought some Spectrum. They got a good reaction to it. Now they're going to go after the whole thing. And their existing telecom partner is thrown by the wayside. If you look at the three big telecoms in the United States, they are circling the wagons.

25:22They're saying this is never going to work. They're never going to sign the MVO agreements. They're putting together their own satellite pool. There's something here where they are panicked by the existence of meaningful competition in a way that does not usually happen in telecom. Yeah, I mean, I agree with that. And I think, I don't know if it's SpaceX leaving them or T-Mobile leaving SpaceX, but that relationship, which started out so happy with the old CEO, is certainly not positive, right? I mean, you know, T-Mobile executives have been throwing shade at SpaceX, you know, incessantly, you know, over the past couple of months.

25:58And they formed a JV together. And, like, to me, it reminds me of, like, when fixed wireless first hit the cable market and Chris Winfrey, you know, talked about it derisively as cell phone internet, cell phone internet, and played it down. And ultimately, that's what's really bit them and why cable stocks are in the position they're in today, given the amount of customers that they're losing to cell phone internet. There's some similarities now in terms of how these executives are downplaying, you know, what they can do. Like, is it going to be costly? Is it going to be complex?

26:28Sure. But, like, so is TerraFab. Like, and so are so many other things. So is making an autonomous vehicle or catching a rocket with, you know, chopsticks. And I think that's the reality that they have to deal with. Investors have seen, you know, what this management team has done before in other areas and are just applying it here. Whether that's fair or not, you know, time will tell.

Valuing SpaceX and its competing financial priorities

26:50I'm actually very curious about that because I know you cover the company and I know you cover the industry. There's some part of SpaceX that is just a meme stock, right? People love Elon. There's some part of Tesla where it's not valued like a car company. It's valued like a software company, even though it is very much a car company. And we've yet to see where the software multiples might come from for Tesla. I think the same is true of SpaceX, right? It's a huge IPO, but people are buying the physics miracle of the rockets launching and landing. They're buying the promise of Mars.

27:21They're buying the promise of AI, whatever that promise is, however frothy that market is. Those are valued against hopes and dreams. Telecom is not. It's well known. You can be a telecom analyst and you can examine the value of the spectrum. You understand the build outs. The customers are not confusing. Consumers are going to pay some amount of money. There are other competitors that are built in at scale. Why do you think SpaceX would chain itself to a business that is easy to value when all of its other businesses are their dreams?

27:54You can't value dreams. It's just whatever is the biggest number. I mean, I don't think it's an either or. And I would think that when you look at people's attempts to justify the valuation of SpaceX, a lot of that value is going to land on data centers in space and the data centers on the ground. And that's where a lot of the value is. And Starlink, to a certain extent. But that's not the launch business, which theoretically is their business, right? It's not even the AI provision business, right? We're describing them as a hyperscaler.

28:25Yeah, exactly. And well, the AI, those are other big chunks of it. There's a lot of different stories here, but it doesn't mean that they don't pursue this if having connectivity and constellations. And they're talking about connectivity in space, right? Because they believe, right, that there's going to be a demand for connectivity between the data centers, whether it's theirs or others, and their constellations. There are already data centers that I think are using their constellation to connect. So I think when they looked at it, it was just another part of the narrative that you build in terms of SpaceX and justifying the valuation.

28:58Because what do all of these things need? Whether it's robotaxi, whether it's data centers in space, they need money, right? And money needs a narrative. And this is just another one of the narrative to stack on top to say, here's how we can drive incremental value. And the value is, if you look at the enterprise values of these telcos in the United States, you're talking about like a trillion dollars, right? So that's a trillion dollars of enterprise value. They're obviously not going to capture a trillion dollars, right? Because part of it is shrinking the telcos down at the same time at getting whatever that

29:34stake is and the CapEx related to it. I think the fair question is, if capital gets more scarce, how do you allocate between these different things? Don't you want to push TerraFab forward a little bit more or get those terrestrial data centers built so that you can start monetizing the billions of dollars that you're getting there versus diverting whatever the dollars are here for the telco? And I think that is a reasonable thing. The problem for the telcos is, even if that's happening at SpaceX and this gets delayed a year,

30:05that doesn't help them, right? That, you know, the overhang of when that's going to occur, whether that's a year, two years, three years, is always going to be there. They're not going to say, hey, we're just giving up on going after this. It's just going to be a capital allocation issue in the near term that's going to delay when the actual impact hits the telcos in the United States. How much of this is just Elon needs to supply connectivity to his own cars and his own factories and his own robots, and he'll just be his own best customer? I don't think that's it.

30:37I think they really want to build a revenue business out of it. In fact, they're going to use the cars as like hotspots, where they'll put Starlinks on there and then use them as like distribution points. That's going to be part of the play. I do want to end by talking about the existing telcos and what competition might do to them, because I think that's a fascinating dynamic. They are clearly not ready for an actual aggressive competitor. But I want to stick with what you just said for a minute. If I pull that apart, it sounds like what you're describing is the reality of the SpaceX business, which is that Starlink is the thing that makes profits.

31:08Everything else is incinerating money, but investors seem happy with that because the potential payoffs might be huge. So if you take the Starlink profits, you have to make a decision about whether to reinvest them into Starlink and now Starlink's mobile business or into AI or into the launch business or into going to Mars. And regardless of how that allocation happens on what timeline, at some point, enough money will go back into Starlink mobile to pose a real threat to AT&T, Verizon, and T-Mobile.

31:39And that is just a matter of time. Yeah. And I think you nailed it. And that is the issue. And capital becomes the biggest benefactor right now to the telecom companies. How does that capital get allocated? Again, that's in terms of reported results. They're 100% right on that. But in terms of the stocks, that concern is not going to go away because there will be incremental data points. Maybe one of these telcos has a problematic quarter or two. These are not founder CEOs, and they have to do something quick.

32:09It's easy to get a lot of wholesale revenue on the books by doing a deal with SpaceX. Like, these are the types of things that they're going to have to deal with in terms of that long-term risk. Cable's got this. You know, look at Uber. Uber's got the same issue, right? The threat of Waymo and Robotaxi is what keeps that stock where it is. It's not that Waymo, with their 3,000 or 4,000 cars, they're obviously not impacting the 2 million drivers that Uber has in the United States. But the threat of where Waymo is going to be two years from now, three years from now,

32:40or Tesla Robotaxi, that's what investors care about. And that's going to obviously impact these companies. Put that in the context of SpaceX being a public company for me. Is it just that, you know, we're going to get next quarter's results of SpaceX, and we're going to see that XAI is still burning money at enormous rates, but Starlink Mobile made a little bit more money, and that's going to keep everybody happy for a minute? I don't think we have enough history yet in terms of what moves SpaceX stocks one way or another. I think, to your point, you have a lot of believers, regardless of what's printed, they're going

33:12to always look to say, well, who cares about this quarter? Tesla's got the same issue, right? Who cares how many cars that they actually sell? Because it's all about the Robotaxi, and the Robotaxi's about to start scaling. So I think those very, you know, positive people won't care. And then there's going to be the negative people, no matter how much, you know, traction you see them get in, you know, whether it's Starlink or progress on the build of, you know, space compute, that they're going to be like, oh, he's never going to deliver. This is never going to happen. So I think you're just going to have those fighting battles back and forth.

33:46And the primary issue is going to be, can they raise capital off of that, right? In what ways? Because you still need, because if you're burning cash, at some point, you need to bring in cash at some point, right? If these businesses aren't generating enough cash because you're consuming it with the other growth initiatives, you still have to figure out ways to kind of continue to issue cash or issue stock to get more cash on the balance sheet. If I was going to offer that most cynical read, I would say the only business where they can see expanding the service will result in more profits to offset the losses elsewhere

34:19is Starlink. They don't have another business that looks like that. And just to be clear, Starlink is the broadband business that's generating the cash flow. So this mobile business would be cash negative initially before you get into that positive cash position. You have to look at RoboTaxi. There's going to be a lot of CapEx initially, but these cars are pretty cheap. That theoretically could be a cash generator. And the reason I keep bringing it, I know they're two separate companies. I agree with that. But we know that there will be, just like I mentioned earlier, like maybe it makes buying

34:50EchoStar make sense because you're buying effectively cash in your own stock on the cheap. There's different ways to put cash, obviously, on the balance sheet in 10 or $20 billion chunks. But just to make it dumber, obviously the structure of these companies, they're all Elon's companies in the end, right? And he's managed them as closely as anyone can manage big public companies. But to make it as dumb as possible, if you have a dollar and if Gwen Shotwell has a dollar and she wants to light the dollar on fire, she'll put it in XAI against some return somewhere

35:22that might be $50 trillion TAM or whatever their prospectus said. Or you could put the dollar into Starlink Mobile in the build out and you will probably return $1.10. Like, that is what that business looks like because they will get some customers away from AT&T and Verizon. They're already running that thing profitably. And so the idea that they need to show some return somewhere, to me, it feels like that's why they're making this move. Not because it makes the most financial sense. It just makes the most financial sense in the context of SpaceX.

35:54You may be right that the problem with that belief is that it's going to take time for them to get that dollar of profit out of the mobile business, right? They have to still build the network. They still have to sign up customers. You're going to be negative EBITDA for a while. So if you have two different businesses and you think their returns are significantly higher or more interesting to your investors to get to that next catalyst for a space compute or Optimus or whatever it is, that I think is going to play a role.

36:27And look, it could just be, by the way, what does Elon happen to care about the most in that moment, right? What is more interesting to him to do? And frankly, isn't space compute a little bit more interesting to allocate those dollars than taking some mobile customers from AT&T? Yeah, although the man's addicted to his phone and I bet he hates seeing that AT&T logo in the corner. Like, there's just a part of that that's always with these guys.

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The 5G transition and Verizon's vulnerabilities

38:07They do seem a bit panicked. You know, for a time, they were juggernauts. These were unstoppable businesses as mobile was growing. They poured a bunch of money into the 5G transition. I've described the telecom industry as a bunch of lobbyists. Boy, did the lobbyists win the 5G transition. Boy, did they collect all the favors and all the capital they could to build out these networks, and then reality hit them in the face, right? We beat China to some kind of network, and then the thing did not happen, right, that we were supposed to win.

38:37And now we're doing it again AI. That's a different conversation. But that was the narrative with 5G, is that we didn't beat China to 5G something. Who knows what, but we've got to cut all the corners to build this network and spend all the money. It just didn't pay off. You're actually an analyst. You're in the trades. I skim the trades, and boy, are all these CEOs being like, we've got to generate some revenue with these networks now. You mentioned Mike Sievert's gone. The old CEO of Verizon's gone. It just didn't pay off for these guys. Yeah, 5G didn't deliver.

39:07Some of the promises were BS from the beginning. You talked about this earlier, autonomous cars. You're not going to rely on the network to make that millimeter-second decision of whether you're going to hit the car in front of you or not. Remote surgery, even if that was a thing, how is that a scale business when you're generating hundreds of billions of dollars of revenue? So it was like, these were all silly. And Sievert used to be the guy, oh, people would say the same thing about LTE. There's no application. That was not even true. If you remember, the application was video.

39:39And we knew that LTE was going to enable video, and that's what exactly happened. So you're 100% right. This was just basically a way for them to get more spectrum because they were going to still have data growth on their networks, right? So capturing more spectrum to be able to handle the existing growth, and that's cheaper to get spectrum, even at tens of billions of dollars than it is to try and build the network for that capacity. If they had just said, look, we're going to spend all this money, and at the end of it, tens of thousands of people will be able to live stream Taylor Swift during the Aeros

40:09tour at every one of those stops. I think Americans are like, go, go faster. Like, yes, we understand what that is. That is truly the thing they enabled. It's very cool. It's millimeter wave in stadiums, and that's cool. I don't know if there's another one. That said, they are on their back foot, right? They did spend a lot of money. This is around the time when, in my history as a journalist, they would start talking about 6G, and they want to, but they know they shouldn't, so they don't, right? Like, they're having the meetings, but they are certainly not as loud about the next round

40:41of investment as they would normally be in the cycle. Now they have a competitor. Your analysis is that Verizon is by far the weakest here. They have the most to lose. Explain why that is. Well, and also, one other thing to mention is you have a very active FCC chair that would like to raise and put on his resume $100 billion from Spectrum Auctions, so you're right. They're going to talk about 6G again and have to come up with some type of revenue stream to basically justify getting this money. It's going to be a lot harder, though. Like, they're already pretty levered, right?

41:11They've got a new competitor. Now, in terms of Verizon, I mean, the issue is that AT&T has kind of seen this thing developing for some time, so they've built a network where it's fiber, right? So there's only so much that wireless can do where a fiber network is ultimately your best connection. So if you think about customers that own fiber and wireless, very high value, very low churn customers. That's been their strategy. They're plodding along. They're going to get their 2% or 3% revenue growth and just kind of pay their dividend and do their thing, right? That is the standard telco.

41:42T-Mobile didn't have that. They've got the dynamics, like a lot of politics right now between Deutsche Telekom wanting to own it and, like, not wanting to pay a high price and how that all plays out. Verizon just made a lot of bad strategic bets on Spectrum. I mean, media. I mean, obviously, AT&T had their own issues, but at least they got out of DirecTV, you know, and Warner quick enough and have turned the ship. But, like, the media buying millimeter wave Spectrum when they could have bought Echo Star and bought Spectrum.

42:13Even now, they're spectrum constrained compared to, you know, their competitors, and they need to go out and spend $10, $15 billion on the Echo Star spectrum. And you have a new CEO in there that, you know, not really a telco guy that's just kind of doing his thing like, you know, hey, we're just going to cut costs, right? The EBITDA is going to look good because they're just firing a bunch of people, and there's going to be a result. You know, there is going to be an impact of firing that many people in the organization. It may appease investors to make the EBITDA look good for the next couple of quarters,

42:46but at some point, you have to show and have a strategy for some type of revenue growth. What is Verizon's, you know, differentiation in the market right now? They have none, right? So, they're the most, I think, in the crosshairs of where SpaceX, and frankly, even the cable companies, can continue to eat away at those customers. That is, frankly, surprising to me, and it's just my own history, right? I grew up in the Midwest. I went to college in the Midwest. That was singular territory, and it became AT&T. When I moved to New York, 2010, Verizon was the gold standard network in the Northeast.

43:20It was the one everyone had. It cost the most money because it was the best network. The iPhone coming to Verizon a couple years later, huge deal. Verizon's network was so powerful at that time that they could try to force the BlackBerry storm down people's throats. And, like, they were confident enough that their network was the thing holding people to them, that that was a worthwhile strategy. Obviously, it didn't work. They made the wrong bet. You're saying they made the wrong bet on millimeter wave. They made the wrong bet on other spectrum acquisitions. The one that I'm not quite tracking is media, right?

43:50They did buy a bunch of dumb stuff. At one point, they owned Tumblr, which is just one of the most confusing media outcomes of all time, but that stuff was all cheaper and easier for them to flip or shut down than AT&T buying all of Time Warner and putting out, like, a 4-3 black and white Justice League movie. How did AT&T survive that, but you're saying Verizon can't survive owning Yahoo? I mean, I think that's a fair pushback in that, you know, the media impact to Verizon was a lot less than AT&T.

44:20But these, again, were separate businesses. Obviously, it was a capital allocation issue for a period of years, but the decisions on the spectrum front and the competitive front and, frankly, the T-Mobile's impact, John Ledger's impact in taking away this, hey, we've got the best network, you know, left them in a spot where, you know, they were basically like, hey, we'll just keep increasing price on our customers and we'll get that 2% or 3% revenue growth. And they just kind of lost the narrative of what they meant to customers. And I don't really think, you know, under the new CEO, that's been regained.

44:51And do you think their ability to say they have the best network is just gone? I think that's completely gone. That's the crazy thing about this, right? The networks are effectively commoditized. These networks are basically the same, right? And they're getting 60% margins. That's what the whole thing with Dish Wireless, even if it wasn't on their network and you guys tested it wasn't on their network, you could have been buying AT&T's network at half price, right? It's crazy, the ARPU and the margins that these guys get for what is effectively a commoditized market. That's why the AT&T strategy is interesting, because at least they're trying to bundle that

45:24with a high-value fiber network. But for the other guys, like, it's just commoditized wireless. I would actually say the other strategic mistake Verizon made along the way was they got away from Fios, right? They decided it wasn't worthwhile. It seems like they're trying to reinvest in that now and go after that AT&T strategy. Yeah. I mean, I think given their lack of spectrum, I think they can only take fixed wireless so far. So you're right. I wouldn't be surprised if they got back to investing in fiber. The difference, obviously, Fios, you've got union issues and a lot of cost structure issues

45:55that they were dealing with. But I think the pivot to doing more fiber and perhaps laying off the fixed wireless, which is straining the network, is probably the right decision for them, what you'll see happen going forward. I want to end on just a big-picture question here.

The case for four carriers and future paradigm shifts

46:08We have covered so many crazy telecom mergers, and it always feels like the right answer is put more competition in the system. We've mentioned John Ledger several times in this conversation. He only got that job, and T-Mobile only got to exist the way it does because AT&T was prevented from buying T-Mobile, and they paid a breakup fee, which subsidized a huge portion of that early growth and those early strategic moves that Ledger was able to make. But that was good for the market, right? Consumers got a CEO who tried to change the market and have better customer experiences,

46:41reinvested that money in the network. That was good. The existence of Dish Network is T-Mobile trying to buy Sprint, and instead of blocking the deal, we imposed some wild structural remedies, and Makam Dal Rahim, who ran antitrust in the first Trump administration, rightly or wrongly engineered the outcome of Dish Network existing, right? That was his preferred outcome, was we're going to let this happen, but we need to have four carriers. And so, well, Charlie Ergen's going to be – he's my guy.

47:12We were going to stand up a fourth one. And from my perspective, it just seemed obvious that he was never going to do that. Like – and he didn't. And maybe I was correct to make that bet. But it just seemed obvious that Dish Network was going to hold onto a bunch of Spectrum, watch the prices rise, and then flip it when it turned out they'd never built their network. And they were on – they had to hit targets with the FCC that they just weren't hitting over time. Now we have a true fourth competitor, right? Or at least an aggressive competitor of the market in Elon who's probably going to try

47:44to actually do this thing. And these companies are running scared. Is this just evidence that we should have four carriers in the United States and that when inevitably Verizon tries to buy T-Mobile, we should just say, no, the right answer is four, and we're not going to go to three again? Well, under Chairman Wheeler, which goes way back, yeah, four was the number. Wheels and I were buds.

48:07You know, if you called him now, he'd be like, I told you it should have been four, and it's going to go back there. Obviously, in the new administration, they didn't believe that that was the case. And I think you see Chairman Carr, you know, pointing to prices, how he sees them being down, and the competition that's happened in fixed wireless. But I think you always want more competition in a market, right? It drives innovation, and it lowers prices. And margins are, you know, approaching 60% in the wireless business. I can't say we've had a tremendous amount of innovation, which, by the way, gets back

48:39to this, you know, what the telcos are doing in the fear, refusing to give them a wholesale agreement. That's their right, right? But at some point, like, if the FCC's mandate to act in the public interest, like, we have a current administration. Who knows who gets in the next administration? If these telcos are going to push back so hard on what the fourth competitor, in this case, SpaceX, is going to do, the FCC can probably get involved in some ways. And, you know, that is the risk that they run at being so vocally against, you know, this

49:13guy in the market. By the way, you talk about the ultimate consolidation. It's funny. We should save all these quotes now where they're saying, oh, you know, Elon can't be a competitor because he only has 80 megahertz of spectrum. Because then when they want to merge with someone, they're going to claim, oh, no, he's actually a competitor, right? They're going to deny that as a competitive threat. There is nothing funnier than a giant telecom insisting that a thing that is not a competitor is their competitor. They all do it. It's very funny. Last question. Again, this is just the big thing rattling around my head.

49:44We might be on a cusp of an entire paradigm shift in what mobile devices even are, right? If you look at meta, they're going to put out the muse charm. And maybe we're all going to talk to little cartoon AIs all day that run agents in a data center and our use of mobile bandwidth to watch video will go down because we're not even carrying phones anymore. Is that a risk here? Is that – are anyone thinking about this? I mean, we think about this every day at Lightshed in terms of all the different ways that AI and how we interact with our information and how we interact with commerce and using

50:16agents. And Muse has obviously been something we've been waiting for from someone. And there's going to be other versions of that. But you're right. And it decreases – frankly, it's an Apple risk, right? It decreases the importance of the status of holding an iPhone if you're just not, you know, interacting with your data in the same way. If that happens, right, that whole paradigm in terms of the telcos and providing the subsidies and, like, the – whenever there's change, right, there's an opportunity for disruption

50:47and for margins to be contracted. So, yeah, it does change things. And, you know, maybe SpaceX could play. Look, Elon's been asked about making a device. I know Qualcomm, when you meet with those guys, they're like, hey, we have 40 different guys out there making – I don't think he's going to add one more thing to his list. But, again, let's get back to what we've talked about during this podcast and narrative, right? Will TerraFab happen? Will space, you know, whatever, space data centers happen? It may not happen, but you can maybe talk about building a phone. And then that becomes one more issue that the telcos have to deal with in terms of dealing

51:22with their customers. Why am I using this iPhone when I should be using this completely different device, whether it's coming from OpenAI or Anthropic or maybe SpaceX? The idea of Elon shipping a mid-range Android phone with a Play Store on it is so deeply funny to me. I truly hope it happens because that's the product you can make today. And maybe there's a paradigm shift and there's a different set of products. But right now, you need to have Instagram. And there's really but one path to getting Instagram, which is shipping an Android phone with a Play Store on it. Like, we just saw Amazon essentially capitulate with their new tablets, right?

51:55Like, if you're focused on the future, you have to concede to the present. I truly do not believe we will see a mid-range Android phone from SpaceX. But you're saying they might start talking about it. No, I agree with you. And I'm just saying, like, when you're trying to build narratives, like, you know, why not throw that in the hopper? The bigger issue is someone, you know, someone's going to build something that may resonate with... I mean, we've gone a long time. We're spending $1,000 for these phones that are giving us some basic, you know, swipe

52:25functionality. They're going to change in terms of how you use them. So, you know, this is a bigger, obviously, issue, again, for Apple than anybody. But it does change, you know, how the telcos are going to, you know, the role that they're going to play and where that margin should. They gave up a lot of value to Apple at some point during this continuum of the wireless industry. We're going through another paradigm change. So, we'll see how those valuation or those value splits, you know, play out. Walter, we're going to have to have you back soon because it feels like these things are going to happen fast.

52:56And I was very happy to nerd out about telecom with you. Thanks for being on Decoder. Appreciate it. Thank you.

53:02I'd like to thank Walter Pysik for joining me and thank you for checking out this episode of Decoder. To get new episodes every Monday and Thursday, subscribe to our YouTube channel at Decoder Pod and find us on TikTok and Instagram under Decoder Pod as well for more fun stuff we put out every day. If you'd like to let us know what you thought about this episode or really anything else at all, drop us a line. You can email us at decoderattheverge.com. We really do read every email or hit me up directly on Threads or Blue Sky. If you like Decoder, please share it with your friends and subscribe over to your podcast. Decoder is a production of The Verge and part of the Vox Media Podcast Network. The show's producers are Greg Ott, Kate Cox, and Nick Stapp.

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