Buying the Uncarrier: The Effects and Challenges of a Sprint/T-Mobile Merger

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Rumors of a merger between Sprint and T-Mobile — the U.S.’s third and fourth largest Wireless Network providers, respectively — have been floating around for years. Recently, though, the whispers have been heating up to an almost unbearable degree, as talks of break-up fees, closed-door meetings with the Federal Communications Commission and future spectrum auctions have dominated the headlines. Just last week, new reports indicated that the two sides have agreed to terms of a $32 billion deal that could be announced as early as July.

SprintThat’s all well and good, but the question on consumers’ minds is simple: will they join forces, or won’t they? And if they do, how does it affect me? The former sounds simple enough, but there are more variables involved in it than a quadratic equation, with multiple steps to take before a potential merger could take place. Uncertainty surrounding the “will they or won’t they” debate makes the second question even more difficult to address.

Publicly, neither company will substantiate any rumor that a deal is even in the works. When reached for comment, reps for Sprint said the company “doesn’t comment on rumors and speculation” while T-Mobile simply said that it “will not be commenting at this time.” It’s worth noting that officers from both sides have strongly hinted at the idea of consolidiation in the past, though.

The idea behind the rumored merger is that, in order to compete with powerhouses AT&T and Verizon, Sprint must acquire T-Mobile and move the US wireless industry to a three-provider model. The question plaguing regulators is whether or not such a model is in the best interest of the consumer.

According to recent estimates, AT&T and Verizon are in a dead heat for first in the US wireless market, with both hovering around the 105-110 million users mark. Sprint sits in a distant third with 54 million, and T-Mobile comes in fourth with 47 million. Together, those latter 101 million users would theoretically allow Sprint and T-Mobile to present a much stronger third-place competitor.

But first things first, Sprint and T-Mobile must come to terms on an acquisition deal. With regulatory approval pending and very much up in the air, both companies are looking to protect their interests. It’s long been reported that T-Mobile is looking for a hearty breakup package, in which it’d receive a fee and a portion of Sprint’s spectrum, should the companies agree on a deal and then have it denied by regulators. More concretely, the latest reports say that the current deal on the table would see Sprint pony up $1 billion to the magenta carrier if the merger goes unconsummated.

T-MobileThis is especially relevant since, in 2011, AT&T attempted to acquire T-Mobile in a $39 billion deal that was eventually blocked by federal regulators. When the deal fell through, AT&T lost a whopping $4 billion dollars in breakup fees and a large amount of its spectrum, which T-Mobile has aptly used to grow its position in the market in the last few years.

“T-Mobile did well after the failed AT&T merger. There are a couple of things there that T-Mobile is going to be very careful that they have similar requirements in place for a potential deal with Sprint,” said Geoff Blaber, a mobile analyst at CSS Insight.

It goes without saying that Sprint wouldn’t benefit from the kind of hit AT&T took. A failed merger with that kind of fee would leave Sprint even farther behind its rivals, still without a distinct identity on which to grow its brand.

“Sprint is going to be exceptionally conscious that they would make T-Mobile that much stronger and make themselves a much, much more distant fourth in the market,” Blaber said. “It would be huge a detriment and it wouldn’t just be because of the breakup fee but also the spectrum they would have to give up.”

Furthermore, notes Yankee Group senior analyst Richard Karpinski, a failed merger would place Sprint’s brand in a tougher spot, an issue Karpinski believes federal regulators will take into account when discussing approval and eventually taking a vote.

“Their biggest challenge is market position — what are they? Verizon and AT&T have an identity. T-Mobile has one in spades. Without a deal, Sprint would need to carve out a unique identity that supports it as an independent player over the long run,” Karpinski said. “That will be a tough and expensive proposition.”

Regulatory Approval

How a failed merger would affect Sprint and T-Mobile’s standing is just one issue regulators will have to take into account when discussing whether or not to approve a proposed merger. Both Sprint and T-Mobile have their arguments, third parties have an interest in the outcome, and an upcoming spectrum auction could throw another wrench in the debate.

T-Mobile CEO John Legere“The argument from Sprint and T-Mobile is really straightforward: the longer the regulators hold off (on approval), the weaker the third and fourth carriers become. Then Verizon and AT&T get stronger and…that is not in the customer interest,” Blaber said.

Regulators made it clear when AT&T attempted to acquire T-Mobile that they didn’t believe a three-carrier model was in the best consumer interest. Blaber doesn’t think much has changed. He noted, “Regulators continue to point to the success of T-Mobile in the recent months; they have still been competitive over the last four months.”

T-Mobile released its Q1 2014 earnings report early last month, revealing that it added 2.4 million net new customers — more than all of the other wireless carriers combined. It was T-Mobile’s best quarter ever. Blaber noted that regulators have pointed to these numbers as evidence that T-Mobile’s “Uncarrier” initiatives are making it more competitive with the other carriers.

However, Blaber said T-Mobile’s recent success is due largely to the break-up fees and, more importantly, the spectrum it gained from AT&T in the failed 2011 merger. Had it not gained those advantages, it wouldn’t have the means to be as competitive as it’s finding itself. And even though it gained more than 2 million new customers, T-Mobile lost $151 million in the quarter.

It’s not just the interests of T-Mobile and Sprint that regulators will have to take into account, though. Karpinski notes that many other companies in peripheral industries may want to have a say in the outcome.

“Whether or not the deal goes through, I think you’ll see some wildcard players have an impact on the final outcome, such as Dish, or even Google or Apple. Whether and how the U.S. market goes to three national players is a huge market decision,” he said. “Lots of impacted companies and sectors may ultimately have their say or somehow participate in the matter.”

The telecommunications industry has seen an increase in consolidation in the past year, as Comcast is attempting to purchase Time Warner and AT&T has officially agreed to purchase DirecTV. These mergers and acquisitions could change the way consumers connect to the Internet, as well as the way they pay for and watch television. Each company is jockeying for position with an eye on what their competitors are doing, and the soon-to-be merging ones will be under just as much regulatory scrutiny as Sprint and T-Mobile might be. They won’t be shy about voicing their opinions on the potential pairing, Karpinski explained.

Softbank CEO and Sprint chairman Masayoshi SonAnother issue regulators must address is an upcoming spectrum auction, slated to take place mid-2015. The FCC recently voted to place restrictions on the auction that will ensure Verizon and AT&T don’t dominate the bidding, reserving some spectrum in each market for carriers that don’t already own large portions of low-frequency airwaves.

That means T-Mobile and Sprint should have more opportunity to purchase the highly sought-after spectrum, potentially growing their networks to better compete with the wider-ranging signals of the top two carriers. The auction rules are based off the current state of the wireless market, though, meaning that regulators would likely revisit and rewrite the rules for a three-carrier market structure if they were to approve a Sprint/T-Mobile merger.

“This is the big factor in the near-term,” Blaber said. “I think that that pending spectrum auction being designed as such is in the favor of the smaller carriers and will play a big role. It strikes me that we will be very unlikely to see a move from Sprint and T-Mobile towards a merger until after that spectrum auction.”

How a Merger Would Affect Customers

If and when a merger does happen, customers are likely to wonder how exactly the changes would affect them. T-Mobile has made strong gains with its “Uncarrier” strategy, while Sprint recently rolled out its new “Framily” plans, so what happens to the customers who have recently jumped on board?

“The deal would likely have little impact on customers right away. Bringing the two networks and two pricing models together wouldn’t happen overnight,” Karpinski said.

T-Mobile LTE adHowever, Blaber said the two companies would need to merge their models and create one cohesive brand in order to present truly strong competition to Verizon and AT&T. He contended that this will be a key part of any merger proposal.

Karpinski noted that the combined assets of T-Mobile and Sprint would have enough clout to truly pursue an “Uncarrier” strategy and differentiate the new third carrier from the traditional options provided by AT&T and Verizon.

“I think you’d see more of the same that we already see from T-Mobile, and what Sprint is starting to move toward with its Framily plan,” he said. “Though equal in size, I believe the combo of Sprint/T-Mobile would still need to pursue a disruptive strategy to differentiate itself.” Whether or not that strategy would look more like Sprint or T-Mobile’s recent moves is still hard to determine right now, though.

Even still, a Sprint/T-Mobile merger probably wouldn’t just affect its own customers. If the combined company can really challenge Verizon and AT&T, it would force the two mega-carriers to slash their prices in order to keep people from jumping ship, right? Maybe not, according to Karpinski.

“As for Verizon and AT&T, they have not been drastically hurt by T-Mobile’s recent gains just yet, and you wouldn’t see them running scared from a Sprint/T-Mobile combo,” he said. “The U.S. market is fairly premium priced these days, and consumers seem happy to shell out for expensive, high-end phones and premium data contracts. A Sprint/T-Mobile combo wouldn’t likely slash prices drastically, but find other ways to be different from their rivals while trying to stay as profitable as possible.”

The Bottom Line

With neither carrier officially commenting on whether or not a merger is near, and with so many variables at play, it’s difficult to say if and when we’ll see a wireless market with three major players. But as rumors heat up and the spectrum auction nears, it seems something will happen one way or another.

With so much to lose, both Karpinski and Blaber agree that Sprint isn’t likely to make a move unless it’s assured regulatory approval is imminent.

Sprint logo“I think we may only see a deal if the two parties have a behind-the-scenes deal cut with the FCC that will deliver regulatory approval,” Karpinski said.

Even if a deal between the two companies doesn’t come to fruition, there are other options at play. Amid an announcement that AT&T has formally agreed to purchase DirecTV for $48.5 billion, rumors have popped up that Dish Network may be interested in purchasing T-Mobile should the Sprint merger breakdown.

“It would still face a lot of regulator scrutiny, but not nearly the extent that the Sprint/T-Mobile merger would have,” Blaber commented on said rumors. “That would stand to make a much stronger company and one that would be able to use its strengths across many segments.”

Either way, Blaber believes a shake-up of the market is coming soon.

“The bottom line here is that something has to change, and the question is when that will happen,” he said. “It strikes me that it will be sooner rather than later, but it will happen sometime after the upcoming spectrum merger.”

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