Sprint and T-Mobile: A Necessary New Chapter in US Telecoms

by / 0 Comments / 111 View / June 13, 2014

Merger mania has reached a fevered high in the communications industries over the past month, with major companies AT&T, Verizon, and Comcast all announcing blockbuster deals. Some of the biggest news was made last week, when multiple reports stated that Sprint, the nation’s third largest wireless carrier, would seek to acquire T-Mobile, the fourth largest, in a deal valued at around $32 billion dollars. The agreement is one that has been a point of speculation for years and, simply put, is one that needed to happen. Consolidation efforts in the communications fields have made it impossible for Sprint or T-Mobile to survive independently in the long term, and this merger is an effort that gives both (in the form of a combined company) at least some chance of success. Regulators are likely to be the biggest barrier to the deal, with the Department of Justice and the Federal Communications Commission both appearing hesitant to approve the deal. Despite their noble intentions, the antitrust warriors should stand aside—the deal will benefit customers by creating the needed third large wireless carrier, one with a distinct economic incentive to compete with the duopoly of Verizon and AT&T in the wireless industry.

T-Mobile and Sprint are in the smaller half of the big four American wireless carriers. The two, each with about 50 million subscribers, have struggled with their scale in efforts to compete with the larger half, AT&T and Verizon, which each have about 100 million subscribers and control 75% of the wireless market’s revenues. T-Mobile and Sprint’s smaller subscriber bases have limited efforts to expand their network size and have left them to compete for lower-margin customers, while AT&T and Verizon have been able to modernize their networks more quickly and offer more high-margin plans for wealthier, more profitable customers. This deal, an effort to create a stronger third competitor in the wireless market, comes as a response to the consolidation efforts across all of the communications industries.

Cross-industry deals are in vogue as the lines between companies in the traditional wireless coverage, internet, and pay-TV industries have blurred. AT&T announced a deal last month to buy DirectTV, the nation’s largest satellite TV provider, for about $50 billion, and Comcast is seeking to merge with Time Warner Cable in a $45 billion deal that would create a national TV and internet behemoth with more than 30% of the TV subscriber base in its hands. Interestingly, the satellite TV provider Dish had bid on Sprint in April of last year for $25.5 billion in an effort to build the first of the combined national media and wireless carriers. These new communications conglomerates are seeking to get ahead of the changing tastes of US consumers, who are increasingly consuming content online and on their mobile devices. Bundling multiple communications platforms and services has become a lucrative model designed to address these changes. TV companies are perpetuated in their capacity to offer content, while wireless carriers and Internet providers seek to take advantage of the consumption of consumers on wireless devices.

The Sprint and T-Mobile tie-up is a necessary next step in this multi-market compression. Independently, neither Sprint nor T-Mobile has the necessary infrastructure or scale to compete with AT&T or Verizon in wireless coverage, let alone in the new multi-communication platform format of the coming decades. Efforts to grow organically are difficult in the industry, because the success of one of the two underdogs comes mostly at the cost of the other, not AT&T or Verizon. While T-Mobile tasted success in the first quarter of 2014 with their new “Uncarrier” marketing strategy, adding more than 1.3 million subscribers, the company recorded its fourth quarterly loss in a row. Sprint has been losing customers and money over the past five quarters, with 2.5 million postpaid customers leaving the company’s fold. A combined company would have a much stronger ability to compete with Verizon and AT&T. The combined T-Mobile/Sprint would have about 102.7 million subscribers and well-positioned spectrum assets. But, the combined firm would still face major obstacles to success, such as a large debt load and network technology incompatibility.

Regulators’ chief concern in clearing the deal has been the loss of a fourth company and the associated competitive volatility. This concern can be put to rest by looking at a recent report by New Street Research, which, after looking at 21 developed telecommunications markets overseas, found that the relative strength of competitors was more important to competitive pricing than the number of competitors in the market. In other words, a stronger T-Mobile/Sprint conglomerate will better serve consumers in terms of pricing and service than a weak duo of T-Mobile and Sprint, both of which are bleeding cash. Concerns can also be allayed by looking at the structure of the new company. The T-Mobile/Sprint firm would have a strong position in lower-margin prepaid customers, but would still be weak in postpaid consumers when compared to AT&T and Verizon. Postpaid customers are much higher margin, so economic incentives would dictate that Sprint/T-Mobile would seek to poach some of these customers through pricing and attractive services. The likely leadership of the combined company hints at such an approach, with John Legere, the maverick head of T-Mobile, as presumed CEO. Legere has led the aforementioned “Uncarrier” pricing strategy of T-Mobile, and has stated that, in order to continue his shakeup of the wireless industry, more scale was going to be needed. The merger could provide exactly this kind of size and also aid the consumer’s pocketbook.

Regulators have a unique opportunity to reshape the competitive landscape of the wireless industry and the broader set of communications industries. The T-Mobile/Sprint combined firm should be pushed through by the government in order to create a new national power in the industry, one that will help to bring down prices.

 

References

  1. Editors. “Let Sprint Buy T-Mobile.” BloombergView.com. Bloomberg News, 10 June 2014. Web. 10 June 2014.
  2. Griggs, Brandon. “Netflix to Al Franken: Comcast Takeover Would Harm Consumers.” CNN. Cable News Network, 24 Apr. 2014. Web. 12 June 2014.
  3. Moritz, Scott, and Amy Thompson. “T-Mobile Adds More Customers Than AT&T, Verizon Combined.” Bloomberg.com. Bloomberg, 1 May 2014. Web. 12 June 2014.
  4. Knutson, Ryan. “Masayoshi Son Presses to Turn Sprint Around.” The Wall Street Journal. Dow Jones & Company, 5 June 2014. Web. 12 June 2014.
  5. O’Toole, James. “T-Mobile Is at a Crossroads, so Is the U.S. Wireless Industry.”CNNMoney. Cable News Network, 08 June 2014. Web. 12 June 2014.
  6. Dano, Mike. “Analysts: Sprint/T-Mobile Must Merge or One Will Fail.”FierceWireless. N.p., 11 Apr. 2014. Web. 12 June 2014.