Sprint (NYSE: S) and T-Mobile US (NYSE:TMUS) are reportedly closing in on a deal for Sprint to pay around $32 billion for T-Mobile, and while the deal is not yet final, financial analysts say that Sprint would need to slash its prices to match those of lower-cost T-Mobile if the deal went forward.
Sprint's postpaid average revenue per user was $63.52 in the first quarter, compared with $50.01 for T-Mobile. However, that disparity reflects the fact that the vast majority of T-Mobile customers are on no-contract Simple Choice plans without device subsidies, which have lower ARPUs and shift revenue from service revenue to equipment revenue. T-Mobile said that 75 percent of its branded postpaid customers were on its Value or Simple Choice plans at the end of the first quarter, up from 69 percent at the end of the fourth quarter of 2013. T-Mobile expects between 85 and 90 percent of its branded postpaid customers to be on the plans by the end of 2014.
Analysts said that because of the disparity, SoftBank-owned Sprint would need to cut prices. "It is not a sustainable situation. If the companies merge, they will need uniform pricing across the company," Jefferies analyst Mike McCormack told Reuters.
The deal could potentially save the carriers billions of dollars on network equipment and handset purchases. However, a deal would force Sprint to make tough choices, not only about its network and prices, but about its culture. T-Mobile CEO John Legere has reportedly been tipped as the leader of the new company, with Sprint CEO Dan Hesse stepping down. Legere and his brash style, along with T-Mobile's "uncarrier" brand, would likely stay, forcing SoftBank CEO Masayoshi Son to make tough choices.
"I think he's realized he's between a rock and a hard place. Sprint's prices are much too high, but if Sprint cuts prices, its stock will fall," MoffettNathanson analyst Craig Moffett told Reuters. "They don't come close to justifying their stock price."
Also at play is what would happen to the two carriers' brands if they merged. T-Mobile's branding, along with its decision to pay off the Early Termination Fees of customers who switch and trade in their phones, has clearly been working for it of late. T-Mobile added 2.4 million total customers, including 1.3 million branded postpaid subscribers, in the first quarter, the most of any U.S. carrier. That has come at a cost though, as T-Mobile lost $151 million in the quarter.
Still, T-Mobile's brand is hot right now. "The most important thing is to find a name that best competes with AT&T and Verizon," Laura Ries, a brand consultant who cofounded marketing strategy firm Ries & Ries, told Bloomberg. "If I had to choose, I'd go with T-Mobile as the name because it is fresher and it has mobile in the name."
"Branding will be a huge question if these two firms come together," Tim Calkins, a marketing and branding professor at Northwestern University's Kellogg School of Management, told Bloomberg. "They need to understand what Sprint means to people and what T-Mobile means."
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