The wireless industry is in a state of flux right now. Earlier this year, when AT&T announced plans to acquire T-Mobile USA from Deutsche Telekom in a deal valued at $39 billion, there was immediate concern for the future of the industry.
The critics said that the merger would create a “duopoly” comprised of Verizon and AT&T that controlled 75 percent of the wireless market and 90 percent of the profits that dwarfed Sprint. As a result the wireless market would lose all semblance of real competition and Sprint would be forced to sell out to Verizon or be crushed out of existence.
But last month, the U.S. Department of Justice gave Sprint a reprieve by filing suit in the District of Columbia, seeking an injunction against the merger on the ground that it was anticompetitive and violated federal antitrust law. On Sept. 6 Sprint filed its own antitrust lawsuit in federal court seeking to block the merger.
The FCC, which also must approve the deal, has expressed some concern over the merger, but has yet to make a final determination on whether to allow the transfer of wireless licenses required by the deal. While AT&T can fight the lawsuits in court, it looks like the legal damage is fatal.
However, perhaps another deal could be forged from the ruins of this one. The way it looks right now, the market would be well-served if Sprint and T-Mobile combine forces to take on AT&T and Verizon in the U.S. wireless business. Not only will it create a more competitive environment, but Verizon and AT&T might just start to worry. With the current state of competition in the industry, that wouldn’t be a bad thing.
Read on to find out why Sprint and T-Mobile USA should merge.
1. The government would approve it
After the Department of Justice announced that it would not support the merger between AT&T and T-Mobile USA, the organization said that the issue was that the two companies combined would hurt competition in the marketplace. However, if Sprint and T-Mobile USA merge, there would be less fear of that. Even combined, the two companies would be smaller than Verizon and AT&T. If they were to merge, it would simply create three big companies in the space, rather than two big firms and two smaller companies. In other words, it’s quite likely that the merger between T-Mobile and Sprint would be approved.
2. Both companies need each other
Although they’re both performing relatively well in their own right, T-Mobile and Sprint need each other. The companies are much smaller than their chief competitors in the space and neither of them have the iPhone to help bolster sales. They’re both fighting an uphill battle that they can’t win on their own. But together, all that could change.
3. AT&T and Verizon would face real competition
As it stands right now, there isn’t anything that would make AT&T or Verizon worry about their positions in the market. The two firms know that they can’t combine and they realize that there isn’t a single company that will be able to push them off their thrones. However, a combined Sprint and T-Mobile would put the companies on notice. Gone would be the days when Verizon and AT&T don’t need to look in the rearview mirror. With a bigger third-place company to compete with, AT&T and Verizon would be far more likely to respond with better service, improved phones, reasonable prices and other tricks to cement their positions as leaders in the wireless business.
4. They’re investing heavily in infrastructure
Both T-Mobile and Sprint are investing heavily in 4G networking. The companies realize that it’s the future and they don’t want to be left behind as the bigger companies in the market continue to dump billions into their networks. However, if they merged, they would be able to combine their technology investment efforts and over the long-term, generate profits that will allow them to keep growing. Both Sprint and T-Mobile have the same goal in mind; now they just need to combine their efforts.
5. Consolidation will eventually happen
Like it or not, the wireless industry is poised for consolidation. AT&T might not be allowed to combine with T-Mobile USA at this juncture, but in the next several years, expect at least one other company to acquire another and for that deal to eventually be approved as the market continues to fluctuate. Before that happens, why shouldn’t Sprint and T-Mobile insulate themselves and merge? It would cut off future consolidation threats, and it would make the combined firm far more competitive. It’s a win-win.
6. Deutsche Telekom obviously wants a deal
Deutsche Telekom, the company that owns T-Mobile USA, is obviously ready and willing to accept a deal to get out of the U.S. business. After all, the firm readily accepted AT&T’s bid, even though it has gone out of its way to take aim at the wireless giant in the past. But it might not take much for Deutsche Telekom to bite on a merger with Sprint. The deal won’t be nearly as big, but it could expect to own a much larger share of Sprint to make the deal happen. In the AT&T deal, Deutsche Telekom was only promised 8 percent of AT&T. That wouldn’t happen in a Sprint deal.
7. Greater economies of scale
One of the nice things about merging is that the newly formed company can benefit from economies of scale. The firms could spend less in infrastructure, reduce capital spending, find areas to save money on their workforces, and more. The result would be a more agile company that would be better-equipped to take on Verizon and AT&T.
8. Maybe Apple will come along
So far, Apple has balked at bringing its iPhone to Sprint or T-Mobile’s network. Some have speculated that the decision is due mainly to Apple’s desire to maximize its chances of selling devices, and with a fraction of the number of customers AT&T and Verizon has, the iPhone maker sees little reason to bring its handset to Sprint or T-Mobile. However, if the firms do merge, all that could change. Now, Apple would have three large companies it could sell its iPhone to and all parties would benefit.
9. More options would be offered to customers
One of the problems in a merger between Sprint and T-Mobile is that the companies are currently operating their networks on different technologies. Sprint uses CDMA, while T-Mobile uses GSM. However, that might not be such a bad thing. Perhaps the company can use that to offer more choice to customers. Those that want GSM can have that. Those that are looking for CDMA can opt for that technology. Or, if it wants, the firm can just invest heavily in GSM and allow CDMA to gradually fade away, thus helping extend T-Mobile’s service nationwide. In either case, it appears customers could benefit heavily from a merger.
10. A pricing war?
The wireless industry is unlike any other. Rather than several companies differentiating their products to attract customers, the wireless carriers today offer the same basic plans at the same prices. In fact, if one compares an individual 700-minute plan from Verizon and AT&T, they’ll find that they’re offered at the same price. However, both T-Mobile and Sprint have not followed suit in every case. Sprint still has unlimited data, and T-Mobile offers attractive plan pricing. Perhaps if the two firms combine, a pricing war will ensue, and customers, looking for the best deal, might just benefit.