Amid reports that the Department of Justice (DoJ) is exploring conditions that could create a fourth competitor if the proposed combination of T-Mobile and Sprint were to happen, analysts raised a number of questions around how such a deal might be accomplished.
Citing unnamed sources with knowledge of the matter, Bloomberg reported that officials want T-Mobile and Sprint to spin out a fourth wireless carrier as a condition for approving the proposed merger between the two. Bloomberg also reported that the companies are considering the divestiture of some airwaves to win approval of their $26.5 billion merger, a proposal it said has attracted interest from Comcast and Charter Communications.
Such a concept isn’t out of the blue — reports previously stated how the deal as currently structured wasn’t getting the DoJ’s approval. Last month, executives from both T-Mobile and Sprint took to Twitter to refute a Wall Street Journal story about the transaction’s status.
In a note to investors on Thursday, New Street Research policy analysts, led by Blair Levin, explored the possible criteria for a fourth competitor. If approval requires a new fourth competitor, the starting point for the analysis by the DoJ can be found in the government’s 2011 complaint against the combination of AT&T and T-Mobile, they said.
It reads, in part: "To replace the competition that would be lost from AT&T's elimination of T-Mobile as an independent competitor, moreover, a new entrant would need to have nationwide spectrum, a national network, scale economies that arise from having tens of millions of customers, and a strong brand, as well as other valued characteristics.”
There are a limited number of candidates who, with limited conditions, would meet those criteria, the New Street analysts said. The list includes cable, if the divestiture included spectrum and there was an MVNO sufficient to provide time to build out the remaining elements of a terrestrial mobile network. Dish Network would also qualify if it had an MVNO and therefore time to build the network. The analysts previously laid out a number of alternatives that might get the deal over the finish line.
Analyst Iain Gillott, founder and president of iGR, said it never occurred to him that the FCC — whose chairman has signaled he will OK the deal with certain conditions — would jeopardize the deal. But he always figured the DoJ would pose a problem because it clearly has said it wants four operators to compete in the market. He remains skeptical a deal is going to get done, giving it barely a 30% chance of happening.
As far as creating a fourth operator by spinning out part of Sprint, the devil is in the details. “I think it’s very, very difficult,” he told FierceWireless.
Questions, to name a few, abound around who gets what spectrum, how towers and cell sites would be divvied up and the prospects of the combined entity helping form a new would-be competitor.
Bill Ho, founder and principal analyst at 556 Ventures, said he was perplexed on how a new entrant would have the skill sets and resources to create a carrier from scratch. One way, he suggested, is to take a page from the U.K. market and do infrastructure sharing (voluntary or involuntary).
T-Mobile has argued that a strong third player will be more effective to compete against AT&T and Verizon versus two weaker players, while the DoJ has been quite adamant on the number 4. (Although Antitrust Division head Makan Delrahim said on CNBC that there’s no “magical number.”)
If the deal is blocked, it’s possible the market will decide Sprint’s fate through the natural course of business, Gillott suggested. It might not happen immediately, but in time, it’s possible Sprint’s 2.5 GHz spectrum ends up in T-Mobile’s hands without a formal merger process.
Gillott also is reluctant to compare the U.S. wireless market to what’s happened in other countries where the wireless carrier market has been whittled down to three. “We need to find out from a market perspective if we need four operators or three is sufficient, and whether a fourth can’t be supported,” he said. “To me, that’s what the DoJ is saying. Well, let’s find out.”