Sprint and T-Mobile Merger: Should it Go Through?
Sprint and T-Mobile look like they might join forces this summer amidst a telecommunications industry shakeup that will pit them against the juggernauts that are Verizon and AT&T. Is it such a good idea? Definitely, says this writer.
Let's start with the obvious facts. Verizon has 122 million customers and AT&T has 116 million. Simple arithmetic shows that together they account for 75 percent of the U.S. population. How many customers do Sprint and T-Mobile have in comparison? Sprint boasts close to 55 million while T-Mobile, despite its recent growth, sits in fourth place with almost 50 million.
See anything wrong with the equation above? Even if Sprint and T-Mobile were to combine companies, they would still have fewer customers than AT&T alone. Verizon and AT&T's massive subscriber bases over the years have allowed the two to expand their infrastructure to the point their 4G LTE footprint is vastly superior to Sprint and T-Mobile -- and that's where the meat of the argument really lies in my opinion.
A Sprint and T-Mobile carrier would be bigger, no doubt, but in what way? Both Sprint and T-Mobile lack consistent coverage outside of densely populated urban areas and neither can really help each other out in that respect. What can and will happen, however, is the new company will have a deeper pocket together than on their own.
"If you have more customers, you can afford to build a larger network," Sprint CEO Dan Hesse told CNET. "Only then do you have the revenue to justify building in smaller suburbs and rural areas."
"If you live in an urban core, you will have access to AT&T and Verizon and you'll also likely have access to T-Mobile and Sprint. But when you go to less populated areas, Sprint and T-Mobile might not be there."
The FCC will be auctioning off valuable low-frequency spectrums in 2015 and would be a perfect opportunity for Sprint and T-Mobile to snag a decent chunk. Low frequency spectrum is especially valuable to carriers because it covers large rural areas well and allows for cost-effective expansion. Problem is, everybody wants a piece of the action, including the powerful Verizon and AT&T titans.
The FCC has proposed certain rules that would set aside spectrum for smaller players like Sprint and T-Mobile so they wouldn't completely be shut out of the auction simply due to their finances. Still, the amount isn't going to change the main ratio: that Verizon and AT&T will walk away with more low-frequency spectrum than Sprint and T-Mobile. What Sprint and T-Mobile need is more cash to compete, and a merger would certainly allow the two to pony up for more assets. Bear in mind the auction rules would change if the merger happens as the rules are based on "current market conditions."
Still, despite it being a pretty clear win-win for Sprint and T-Mobile, the U.S. Department of Justice's antitrust division and the FCC have both expressed concern about consolidation. Customers will be left with three major national carriers instead of four, and this is bad, they say. The argument, however, isn't rock solid. Analysts have already shown that countries such as the Netherlands, Greece, and Austria have all improved their wireless experience when the number of carriers dropped to three from four.
Plus there's the ongoing redistribution in the telecommunications industry. Comcast-Time Warner and AT&T-DirecTV mergers are looking likely, and further fuel speculation that Sprint and T-Mobile will be given a chance too. The industries are different but the lesson is the same: more scale means higher heights can be scaled.
"My view is if they are willing to approve these other two deals, it would be more difficult to not approve a merger in wireless," Hesse says.
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