Sprint’s prospects look grim without T-Mobile: analysts

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Sprint could undergo a restructuring, but that's not a good option, according to analysts. (Fierce Wireless)

Sprint has made it pretty clear what will happen if the proposed merger with T-Mobile is not allowed to go through.

“Sprint’s standalone competitive future is in peril,” the company told the FCC in April. Sprint can’t fund the necessary investments to maintain its current competitive status, much less improve its position as a distant fourth carrier. In short, Sprint’s competitive relevance as a standalone company is “highly uncertain.”

Opponents to the deal argue (PDF) that Sprint is not in as dire straights as it would have everyone believe, and they say if allowed to go through, the proposed merger would stymie competition and lead to fewer jobs in the wireless sector and higher prices for consumers. But several industry analysts who spoke with FierceWireless are less confident in Sprint’s ability to go it alone and believe going from four to three wireless carriers would end up being the best-case scenario for the industry. (Sprint will reveal more about its current financial situation when it reports fiscal fourth-quarter 2018 results on Tuesday, May 7.)

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Among Sprint’s options, if the transaction doesn’t go through, is a restructuring. But analysts said that would mean additional cost cutting and tax an already reduced workforce—and one of the big reasons the company has failed is its lack of investment in the network. With a restructuring, “it’s an ugly option,” said Chetan Sharma, founder and CEO of Chetan Sharma Consulting.

Cable co as buyer?

Given the history of the wireless industry and its interactions with cable, cable companies are often mentioned as potential suitors. Comcast or Charter Communications could step in, but it isn’t clear either of them is seriously interested in becoming a facilities-based wireless service provider.

If not a cable company, who then? Sprint’s current majority owner, SoftBank, is based in Japan, and it has not invested in Sprint in a way that indicates it’s in it for the long haul. It has been investing in pretty much anything else, from food delivery services to Uber and a dog-walking company. But given the current political environment, Senzi Fili Consulting founder and president Monica Paolini said it’s unlikely that a successful buyer would come from abroad.

“Their brand has been tarnished from previous lack of network investments,” said William Ho, principal analyst at 556 Ventures, noting that Sprint has been trying to rebuild its network reputation. CTO John Saw’s big bet on massive MIMO and related technology may help, “but it’s the blocking and tackling of marketing and sales to bring new and old customers back to experience the new network.”

For the most part, analysts trace Sprint’s demise to the combination with Nextel Communications, which happened back in 2005. That transaction resulted in Sprint running two networks—CDMA and iDEN—for years with substantial cost and integration challenges that led to the write-off of nearly $30 billion in 2008. Sprint eventually shut down the iDEN network, even though its push-to-talk service had been a rousing success back in the day and had attracted its fair share of fans.

The decision to go with WiMAX before LTE emerged as the 4G standard further exacerbated things, requiring Sprint to replace its WiMAX gear with LTE. And it famously sat out the 600 MHz auction in 2016 in part due to lack of financial resoruces and the need to spend cash on more immediate network needs. That led to the current unfixable problem of not being able to acquire sufficient low-band spectrum.  

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One analyst speculated that perhaps SoftBank owner Masayoshi Son was so forward-thinking that he intentionally stayed out of the 600 MHz auction, thereby increasing Sprint’s chances for a merger down the line. (That’s how stunned the analyst community was when Sprint did not participate in that auction, its last best chance of acquiring the low-band spectrum that T-Mobile is using for its 5G backbone.)

Other options

One competitive option for Sprint would be to build out its 2.5 GHz network in some cities and offer a value-based fixed wireless broadband service, according to Mark Lowenstein, managing director of Mobile Ecosystem. It could be the "Metro PCS" of broadband, targeting particular cities and neighborhoods and could probably do so less expensively than Verizon.

From a network perspective, Sprint needs to keep building out its LTE/5G network to stay competitive. It may even have an upper hand in providing a better 5G uniform coverage/user experience than others possibly, suggested 556 Ventures’ Ho.

The worst thing that the network can experience is to have capex cut even further to build out the 5G footprint. “From a national coverage ‘map’ their 800 may not cut it visually as T-Mobile’s 600, ergo the ‘new T-Mobile’s’ extensive coverage map,” Ho said, adding that on another front, Sprint has been trying to make IoT inroads with its Curiosity platform, but it remains to be seen how it’ll compete against the bigger competitors in that space.  

Regulators still mulling it over

Opponents to the deal, including rural wireless operators, are concerned that without Sprint, they will have fewer roaming partners, and T-Mobile traditionally has not negotiated those kinds of deals as favorably as Sprint, meaning regional carriers’ roaming costs will go up. There are also concerns about the impact on the prepaid sector.

RELATED: New T-Mobile will be in the market for more spectrum: Legere

Makan Delrahim, the U.S. Assistant Attorney General for the U.S. Department of Justice Antitrust Division, said during an April 29 appearance on CNBC that he had not made up his mind about the Sprint/T-Mobile merger and that the investigation was continuing. His comments came after the Wall Street Journal reported that Department of Justice staff had concerns about the way the deal was currently structured. Delrahim also said there is no “magical number” in any particular market as to what makes it competitive.

The question of what makes for a competitive industry is a complicated one, Sharma acknowledged. Historically, however, his research shows that markets end up whittling down to three operators. India, which was home to seven or eight service providers, ultimately ended up with three.

“Three is the right number,” Sharma said, adding that he thinks the market is asking for a merger. An ecosystem with three stronger players is healthier than one with one or two strong contenders and two others that are both struggling. 

Regulators have to recognize that scale matters in this business, said Ken Rehbehn of IHS Markit. Both Sprint and T-Mobile started out with PCS 1.9 GHz spectrum, which is challenging from a coverage standpoint. Of course, they acquired more spectrum over the years, but they were never in a position like AT&T and Verizon with legacy cellular holdings including 800 MHz.

Lowenstein said one of the reasons he has been in favor of the T-Mobile/Sprint merger is the future of Sprint is so tenuous. “I don't think the DoJ, and other federal and state government entities leaning negative on the deal have fully thought through, ‘OK, we reject the merger... what happens to Sprint’?,” he said.

“If the deal does not go through, Sprint will have a difficult time surviving as a standalone entity,” he said. “The company continues to lose share, and is no longer competitive in the enterprise market. Sprint's competitive position with respect to network will worsen, as T-Mobile launches 600 MHz, and as AT&T and Verizon roll out new spectrum bands and deploy 5G. SoftBank has not shown much appetite to increase its investment in Sprint to the extent required to have a competitive network for the 5G era.”

In short, “the worst-case scenario of course is that Sprint is basically left to 'bleed out,' to put it crudely. That would be really lousy for customers, employees, and shareholders,” Lowenstein said.

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