6 reasons the Sprint/T-Mobile merger is a terrible idea

Phil Goldstein

Rumors of a potential deal between Sprint (NYSE:S) and T-Mobile US (NYSE:TMUS) have been swirling for weeks, with the latest tidbit that Sprint CEO Dan Hesse and SoftBank CEO Masayoshi Son met recently with antitrust officials at the Department of Justice to pitch the idea of a merger.

I'm firmly against such a deal. That's not because I want to see the continued dominance of Verizon Wireless (NYSE:VZ) and AT&T Mobility (NYSE:T), telecom giants that are gobbling up revenues and profits. Instead, a Sprint/T-Mobile merger is a horrible idea on policy, operational and technological levels. And the companies themselves--and the wider industry--would be better off if they didn't merge.

Here's why:

  1. A Sprint/T-Mobile merger is unlikely to get past regulators, and thus will be a waste of time.
    William Baer, assistant attorney general at the Department of Justice's antitrust division, told the New York Times that any wireless merger among the four Tier 1 carriers would face heightened scrutiny: "It's going to be hard for someone to make a persuasive case that reducing four firms to three is actually going to improve competition for the benefit of American consumers," he said, without referring to any specific deal. "Any proposed transaction would get a very hard look from the antitrust division."

    In December, FCC Chairman Tom Wheeler said he would like to keep four major wireless competitors in the market for the agency's upcoming spectrum auctions. "The mobile business is today with four carriers a competitive business." he said. "And it's important it stay that way."

    Regulators are being about as clear as they can be that they want to keep four carriers. Pushing for a deal before the FCC's spectrum auctions, which are currently scheduled for next year, will likely slow down the auctions process and could end with regulators not approving the deal.
     
  2. It would completely scramble plans for the auctions.
    Speaking of auctions, the FCC is currently planning auctions of AWS-3 spectrum, likely pairing the 1755-1780 MHz band and the 2155-2180 MHz band, which all four carriers would probably be interested in (especially T-Mobile, since it's using AWS as its primary LTE band). Additionally, there is the immensely complex 600 MHz auction.

    The FCC is drafting rules for these auctions based on the premise that there will be four national carriers. If there were three, it would suddenly force the FCC to radically recalibrate its spectrum screen (since Sprint and T-Mobile would have more spectrum than either Verizon or AT&T, especially when including the 120 MHz or so of 2.5 GHz spectrum Sprint has via Clearwire). Yes, Verizon and AT&T would still have more low-band spectrum below 1 GHz. But the point is, the FCC likely would need to change how it designs the auctions. That would not only probably delay the auctions but could also spook broadcasters away from participating in the incentive auctions.
     
  3. It would distract the companies' management from other priorities, especially at Sprint.
    Mergers take up a lot of time and energy on the part of management teams. And just last year, T-Mobile merged with MetroPCS, Sprint was acquired by SoftBank, and Sprint merged with Clearwire.

    Although T-Mobile has managed to roll out LTE to 200 million POPs, Sprint still has about five months left to complete its Network Vision network modernization program. Sprint hopes to eventually offer 50-60 Mbps speeds through its "Sprint Spark" tri-band LTE service, but Sprint still has a long way to go to get there. Another merger will likely only push all of that back, which Sprint doesn't need right now.
     
  4. It would be immensely complicated to combine the two networks. 
    Sprint knows a thing or two about running multiple networks with different technologies--just mention the words "Nextel" and "iDEN" to their network team. Seven months after shutting down the Nextel network, does Sprint really need to worry about integrating T-Mobile's GSM/HSPA+/LTE network with its CDMA/LTE network?

    Moreover, the only major spectrum band that Sprint and T-Mobile have in common is 1900 MHz, which Sprint uses for CDMA and LTE and T-Mobile uses for HSPA+ service. Not to mention that T-Mobile is busy migrating MetroPCS customers from CDMA to HSPA+ and LTE-capable phones.

    So would the companies keep CDMA or GSM? Would they deploy LTE across AWS like T-Mobile is doing or across 1900 MHz/800 MHz/2.5 GHz like Sprint? These questions would be mind-bogglingly complicated to sort it out, especially with all of the network executives that would be involved. The result would likely be complications for the combined company and its customers (and more opportunities for Verizon and AT&T).
     
  5. A merger might remove T-Mobile's "uncarrier" ways from the market.
    One of the best arguments against a deal is that T-Mobile is actually succeeding in the market, despite its No. 4 position. During the past three quarters T-Mobile has managed to add a total of around 3.7 million net new customers, an astounding feat in a highly competitive market. (Never mind the fact that the carrier has managed to do this mainly through lowering service costs.) Whatever the method, it's clearly spooking T-Mobile's competitors.

    If Sprint buys T-Mobile, will "uncarrier" CEO John Legere go away? Legere doesn't seem to think so: "The T-Mobile brand, attitude, and identity is here to stay," he has said. The driving force behind the deal seems to be SoftBank's Son, and if the merger is successful he will be forced to pick between Sprint's Dan Hesse and T-Mobile's Legere.
     
  6. It likely would not lead to a company with enough clout to challenge Verizon and AT&T.
    At bottom, the companies seem to be arguing a merger between Sprint and T-Mobile would create a company that could better compete against Verizon and AT&T. But what if the combined Sprint/T-Mobile is such a Frankenstein's monster of network technologies and spectrum bands that it can't compete fast enough or with enough financial firepower?

    At the end of the third quarter, Sprint and T-Mobile together had 99.9 million total subscribers, but at least 43 million of those were low-margin prepaid, wholesale or MVNO customers. Meantime, Verizon continues to lead the industry with postpaid customer additions. As Verizon and AT&T expand into new markets and new opportunities, would a Sprint/T-Mobile get bogged down in the details of a mega-merger? 

I'm not sure if a Sprint/T-Mobile deal will be put forward. But if it is, I think it's a terrible idea.--Phil

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