Well, it looks like 2016 has arrived a little early. We have all known that a Sprint-TMO combination was a distinct possibility at some point, but believed, given the acquisition, and re-capitalization deals involving both companies just this year, that things would play out for a while. But Sprint's thinking is that if a merger is a distinct inevitability, perhaps better to do it now. I think this makes some sense, and might be better long-term for the wireless industry and consumers. If this deal passes an initial "smell test" with regulators over the next few weeks (so much for FCC staffers' holiday break), there is also the possibility that others, such as Dish, will enter the bidding for TMO.
I have long believed that the original "Big Four", which is really now "Big Two Plus Two", would ultimately settle at a structure of three national carriers. There are few, if any countries today, that have more than three facilities-based wireless operators who are all doing well financially. There aren't many reasons why the United States is any different.
In order to understand why Masayashi Son is testing the regulatory waters, consider what Sprint, as a standalone entity, is up against. While Sprint has, behind the scenes, been feverishly deploying Network Vision and getting its network up to competitive snuff, the company has been in a holding pattern, with respect to major new initiatives, or aggressive national marketing. It has had to sit on the sidelines and watch T-Mobile set much of the tone for the wireless industry this past year, as it rolled out a competitive 4G network, smoothly incorporated MetroPCS, and succeeded with its "un-carrier" plan.
In the meantime, we now have three near-national LTE networks. Verizon, AT&T and T-Mobile continue to strengthen their spectrum positions with various acquisitions and horse-trading deals. T-Mobile with Metro PCS and AT&T with Leap Wireless will become even more formidable in the prepaid businesses substantially in 2014, putting pressure on Sprint MVNOs such as Virgin Mobile and Boost.
On top of this, Sprint faces the prospect of having to spend another several billion dollars in upcoming auctions in order to bolster its sub-2.5 GHz spectrum holdings.
Also consider the fact that with 70 percent smartphone penetration, organic industry growth is getting harder to come by and most of the business consists of trying to get existing subs to increase their data "buckets" and taking share from other carriers. This is why AT&T and Verizon have been trying to grow their fixed broadband and video businesses, and investing aggressively in future growth opportunities in areas such as home security, connected car, and enterprise.
A key question, of course, is whether this will pass regulatory muster. A combined Sprint and TMO would still have fewer subscribers than AT&T or Verizon, so I don't see the DOJ having much of an anti-trust case. I think Sprint-TMO could successfully argue that they would have a better chance of competing together than separately, particularly given the investment in network and spectrum that will continue to be required to keep pace with the annual near-doubling in data consumption.
The FCC, however, will look at this differently. This is an early an important test for Tom Wheeler. It has not even been two months since he was confirmed as FCC chairman, but Wheeler has indicated, through words and actions, that he would like to see four national competitors. Mr. Son will have to convince the FCC that we're better off with the "guaranteed" long-term viability of three than the riskier prospect of "two plus two", and that there's still ample opportunity for a long-term reduction in wireless prices. There is danger that the oligopoly that would result from this wireless triumvirate will keep prices relatively high, on the order of the prevailing $10 per GB that the industry seems to have comfortable settled into.
We will also need some convincing that folding the TMO network into Network Vision won't be Sprint-Nextel redux. T-Mobile has done a great job of improving its 4G network and launching LTE. TMO would get pulled into a costly and technically complex network integration and customer transition scenario, which comes with substantial risk.
The FCC will also, naturally, be concerned that a Sprint-TMO deal will dilute the value of upcoming spectrum auctions. I understand that the FCC would prefer to look at a deal like this after the auctions play out and once Sprint has taken a real shot at a turnaround with Network Vision in place. But, we also have to be realistic: it will be 2017-2018 before services utilizing spectrum from the incentive auctions become commercially available. That's a long time in a world where Snapchat and Vine barely existed two years ago.
The FCC should also consider that a merged Sprint and TMO would increase the chances that a fourth entity, possibly in the form of Dish, could successfully enter and compete in the wireless business. The FCC could take some actions to help smooth the way for this possibility, rather than waiting for the whole Sprint scenario to play itself out over the next couple of years. A maverick fourth player, plus enough spectrum and an activist policy to encourage aggressive resale plays (think Amazon, Google, Netflix), might compensate for concerns about industry consolidation and pricing. I'm all for wireless competition, but maybe that competition should start taking different forms.
We still don't know exactly how serious Mr. Son's intentions are at this point. But the fact that the possibility of a Sprint-TMO deal has surfaced represents an opportunity for the FCC, early in Tom Wheeler's term, to step back and look at the wireless and broadband businesses more holistically. This is a great time to consider whether today's structure of separate fixed and mobile voice broadband subscriptions, to the tune of $300 per month for the average household, is still a sustainable model in 3-4 years' time. With additional spectrum, LTE Advanced, small cells, and so on, the delta between the "fixed" and "mobile" broadband businesses will narrow in the coming years. We should be thinking about which scenarios provide the best chance of delivering the "most overall network" to U.S. consumers, at reasonable cost, circa 2018-2020.
Mark Lowenstein, a leading industry analyst, consultant, and commentator, is Managing Director of Mobile Ecosystem. Click here to subscribe to his free Lens on Wireless monthly newsletter, or follow him on Twitter at @marklowenstein.