Entner: T-Mobile and Dish merger would follow macro trend as media, networks converge

a Roger Entner Recon Analytics

Roger Entner

As media and networks are converging, T-Mobile US and Dish Network are reportedly talking about merging. The two companies share a mindset as aggressive challenger brands with a maniacal focus on cost cutting, something both companies have to focus on because they entered their respective markets late. When you are the proverbial runt of the litter, you have to work that much harder to be successful, but both companies have shown that it is very much achievable. T-Mobile captured 99.7 percent of smartphone growth in the first quarter of 2015 and Dish is neck-and-neck with DirecTV every quarter. Both companies are being led by strong, iconic leaders, Dish's Charlie Ergen and T-Mobile's John Legere, who will be an explosive combination when working at the same company.

We just don't know if they will blow up the competition or each other.

The logic behind the merger is compelling--just look at what their competitors are doing. AT&T is trying to purchase DirecTV and Verizon Communications is trying to launch its own version of it. More than 60 percent of wireless traffic is video and entities that control both the network that transports the video and the content itself capture big profits. So, the theory is that when you put a network expert together with a content expert, you create a powerful, competitive counter to the giant content creators and edge providers.

Netflix is certainly concerned about their competitors combining network and content, but nobody is jumping out of the windows in the Los Gatos, Calif., headquarters of Netflix. The short life of Redbox Instant, the joint venture of Verizon and Redbox, which closed after less than two years of existence, likely allays some of the fears Netflix might have of impending doom. And there is always the regulator to turn to if things get too hot in the marketplace. The FCC, or as some people joke ,the "NCC" has indicated a fondness for the public policy and regulatory arguments made by Netflix and could certainly use the regulatory lever to Netflix's advantage.

The T-Mobile/Dish merger would combine a powerful wireless network with a large TV provider  that has a lot of warehoused spectrum. The combined entity would have the second most wireless spectrum in the United States after Sprint. It would have more than two times the spectrum per subscriber than AT&T and two-and-a-half times that of Verizon Wireless, with most of it ideally suited to provide even more video services such as Sling TV to the T-Mobile customer base.

Operator

Q1 '15 Connections in millions

Q1 '15 Market Share

Average Spectrum in MHz

% of Spectrum

Difference between Spectrum & Market Share

Average Spectrum in Hz/connection

AT&T

121.7 million

34.6%

143.1

22%

(12.6%)

1.18

Verizon

108.5 million

30.8%

110.6

17%

(13.8%)

1.02

Sprint

57.1 million

16.2%

208.2

33%

16.8%

3.64

T-Mobile

56.8 million

16.1%

78.1

12%

(4.1%)

1.37

Dish

0

 

71.6

11%

11%

n/a

T-Mobile
/Dish

56.8 million

16.1%

149.7

23%

6.9%

2.63

U.S. Cellular

4.7 million

1.4%

6.5

1%

(0.4%)

1.36

Others

3 million

0.9%

32.5

5%

4.1%

3.57

With the third- and fourth-largest carriers owning more spectrum than the largest and second largest carriers, the market dynamic is interesting. This should be a market in which T-Mobile/Dish and Sprint surge ahead as strong challengers to AT&T and Verizon, using their long spectrum runways before either one would need new, additional spectrum.

The biggest question for a possible Dish/T-Mobile merger is whether consumers are actually interested in purchasing the combined services of the two companies. As of right now, there is little reason to purchase services from both companies on a stand-along basis beyond receiving a discount. Therefore, if the merger is to succeed, the combined company must create an Apple-like experience for subscribers where the integration of content, network and service yields tangible and new benefits for consumers.

As always, there is a significant integration risk with any merger. It is common that a merging company looks inward for as long as a year while people figure out everything from a new reporting structure to where the bathrooms are in the new building. While T-Mobile brilliantly executed the integration of MetroPCS without the common merger paralysis, it takes two to tango and integrating a network provider and a content provider is only lightly-chartered territory. With a merger of equals, T-Mobile/Dish can create a lot of contention, where strong leadership figures will continue to be active at the merged entity.

An interesting side show will be how, and if, Deutsche Telekom will exit the venture; DT still owns 66 percent of T-Mobile's shares. As Deutsche Telekom has stated repeatedly--and through now this third attempt to sell T-Mobile USA has proven--it wants to exit the U.S. market. It is hard to imagine Dish being able to acquire T-Mobile USA through a cash offer, which would give Deutsche Telekom a clear way out. A stock-based merger of equals would not achieve that and just entangle Deutsche Telekom even longer in the U.S. with even less control than it has now.

Roger Entner is the Founder and Analyst at Recon Analytics. He received an Honorary Doctor of Science from Heriot-Watt University. Recon Analytics specializes in fact-based research and the analysis of disparate data sources to provide unprecedented insights into the world of telecommunications. Follow Roger on Twitter @rogerentner.

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