T-Mobile/Sprint: When 3 + 4 = 3

Submitted on May 4, 2018

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On April 29, 2018, T-Mobile US and Sprint announced that the boards of the two companies had agreed to enter into an agreement to merge. The companies said they hope to close the deal in the first half of 2019. The most obvious argument in favor the deal? “Telecom is a scale business,” said Blair Levin, a policy adviser for the analysis firm New Street Research. “There are huge advantages of scale, and T-Mobile and Sprint have been carrying the cost of a network over a much smaller number of customers.” But there's a lot going on here in a deal that would change the U.S. wireless market.

T-Mobile US, controlled by German telecommunications company Deutsche Telekom AG, is the third-largest wireless carrier in the U.S. with 72.6 million customers served by two main brands: T-Mobile and MetroPCS. T-Mobile's 4G network reaches 322 million people in the U.S. The company has a market value of $55 billion.

As of Dec. 31, 2017, Sprint, controlled by Japanese telecommunications company SoftBank, was the fourth-largest U.S. mobile network operator serving 54.6 million connections including "no-contract" brands Virgin Mobile USA, Boost Mobile, and Assurance Wireless. In addition to offering wireless telephony and internet services, Spring is a global Tier 1 internet backbone. Sprint's 4G wireless services are available to nearly 300 million people in the U.S. The company has licenses for 204 MHz of spectrum and more than 160MHz of 2.5 GHz spectrum in the top 100 U.S. markets. Sprint has a market value of $26 billion.

Nature of the Transaction

The deal is an all-stock transaction: T-Mobile will exchange 9.75 Sprint shares for each T-Mobile share. T-Mobile parent Deutsche Telekom will own 42% of the combined company and Sprint parent SoftBank Group will own 27%. The remaining 31% will be held by the public. Deutsche Telekom would also control voting rights over 69% of the new company and appoint nine of its 14 directors.

The two companies will also have about $60 billion of combined net debt. The combined company would have about $74 billion in annual revenue.

The combined company will be named T-Mobile, headquartered in Bellevue, Washington, and led by current T-Mobile CEO John Legere.

T-Mobile and Sprint Public Interest Claims

T-Mobile and Sprint are making three claims about how the transaction will benefit consumers and not just the new company's bottom line.

5G

T-Mobile and Sprint claim that the new T-Mobile will have the network capacity to rapidly create a nationwide 5G network. You may not be familar with 5G -- mainly because it does not exist yet.

The G in 5G means it's a generation of wireless technology. While most generations have technically been defined by their data transmission speeds, each has also been marked by a break in encoding methods, or "air interfaces," which make it incompatible with the previous generation. 5G brings three new aspects to the table: greater speed (to move more data), lower latency (to be more responsive), and the ability to connect a lot more devices at once (for sensors and smart devices). The actual 5G radio system, known as 5G-NR, won't be compatible with 4G. But all 5G devices, initially, will need 4G because they'll lean on it to make initial connections before trading up to 5G where it's available.

T-Mobile and Sprint say the new company will be able to light up a broad and deep 5G network faster than either company could separately. But just two months ago, T-Mobile said it would "build out 5G in 30 cities this year" and that it would deliver "a truly transformative 5G experience on your smartphone nationwide." Sprint CEO Marcelo Claure, meanwhile, told investors in February that Sprint's "strong spectrum assets" will enable "Sprint to be the leader in the true mobile 5G." Sprint said it would "deliver the nation’s first 5G mobile network in the first half of 2019."

A Better Competitor

The companies say the new T-Mobile will have lower costs, greater economies of scale, and the resources to provide U.S. consumers and businesses with lower prices, better quality, unmatched value, and greater competition.

“This isn’t a case of going from 4 to 3 wireless companies – there are now at least 7 or 8 big competitors in this converging market," said T-Mobile's Legere while announcing the deal. "And in 5G, we’ll go from 0 to 1. Only the new T-Mobile will have the capacity to deliver real, nationwide 5G. We’re confident that, once regulators see the compelling benefits, they’ll agree this is the right move at the right time for consumers and the country."

Specifically, T-Mobile and Sprint are promising to bring more choice and competition – for all consumers, including three key underserved areas:

Rural communities: Rural Americans seldom have a choice of more than one or two wireless, broadband, or cable providers. The new T-Mobile will end that with increased reach and plans to open hundreds of new stores in rural communities, creating thousands of new jobs. Millions of Americans in rural communities will have more choice and competition, where they may have none today.
Broadband marketplace: 51% of Americans have only one high-speed broadband option – no choice at all! The combined company will create a viable alternative for millions by enabling mobile connections that rival broadband, driving prices lower, and improving service.
Business and government wireless services: Today, Verizon and AT&T dominate this category with 4 times more customers than Sprint and T-Mobile added together. With its assets and capabilities, the new company will unlock real competition for business and government customers.

Matt Wood and Derek Turner at Free Press warn, however, that the deal will mean higher prices for consumers. A decade ago, there were six national wireless carriers, now there's just four. T-Mobile and Sprint have had fewer customers and fewer advantages than their larger rivals AT&T and Verizon. They have been motivated to recover their investments in their networks by 1) selling directly to customers (including more affordable prepaid options), and 2) selling capacity to resellers. People of color, and people with lower incomes more generally, and disproportionately, choose the T-Mobile and Sprint brands instead of AT&T and Verizon. Were it not for the existence of T-Mobile and Sprint as independent competitors to the wireless market's giants AT&T and Verizon, the digital divide would be much worse, and people in low-income communities and communities of color would be even more unconnected than they currently are.

Jobs

The combined company, they say, will employ more people than both companies separately and create thousands of new American jobs.

In October 2017, when T-Mobile and Sprint were last talking about a merger, the Communications Workers of America warned the deal would result in the loss of at least 20,000 U.S. jobs and will harm consumers by reducing competition and rewarding two companies that illegally have “crammed and slammed” millions of customers.

“Allowing Sprint and T-Mobile to merge guarantees the loss of tens of thousands of U.S. jobs that would result from store closures and the consolidation of administrative work. Corporations and Wall Street applaud this ‘synergy,’ but employees and their families would bear all the costs of this merger,” said CWA President Chris Shelton.

Regulatory Review

Now that T-Mobile and Sprint have agreed to merge, they must convince regulators it is a good idea. Here's a quick take on the review ahead.

Committee on Foreign Investment in the United States

The Committee on Foreign Investment in the United States (CFIUS) is an intra-agency panel run from the Treasury Department that reviews mergers and can block them on national security grounds. It will review the merger because of the foreign ownership of both companies. Since Deutsche Telekom and SoftBank had to undergo reviews by CFIUS when they bought control of their respective American wireless providers years ago, you might assume any transfer of assets between the two now would pass muster. But this is the Trump administration and it has taken a harder stance on foreign-owned acquisitions. SoftBank has ties to Huawei and ZTE, two Chinese tech companies whose connections to Beijing have been a matter of controversy. President Donald Trump is reportedly considering signing an executive order that would restrict the sale of Chinese telecommunications equipment -- from providers like Huawei and ZTE -- in the United States.

Federal Communications Commission

The FCC's mandate is to consider the public interest in reviewing transactions. In 2014, SoftBank founder Masayoshi Son met with then-FCC Chairman Tom Wheeler and the Justice Department’s antitrust chief at the time, Bill Baer, to convince the regulators that AT&T and Verizon were an oligopoly that had a stranglehold on the United States wireless market. Wheeler and Baer rejected the argument and concluded that effectively reducing the wireless market to three major carriers from four would not be good for consumers.

T-Mobile and Sprint are now betting they'll be able to convince FCC Chairman Ajit Pai that the combination has merit.

Department of Justice

The deal will also be reviewed by the Justice Department and its current antitrust chief, Makan Delrahim. T-Mobile and Sprint’s deal would unite two direct competitors, a type of deal that regulators have traditionally frowned upon. For example, in 2011, the Justice Department blocked AT&T’s bid for T-Mobile, arguing that shrinking from four carriers to three “would remove a significant competitive force from the market.” Baer came to that conclusion in 2014, too. Many of the department’s antitrust staff members today are holdovers from 2014, suggesting they may take similar stances now as they did then.

In addition, Delrahim recently opened an investigation into whether AT&T, Verizon, and potentially other carriers have colluded to hamstring an effort to help consumers switch wireless service providers more easily. Does it make sense to allow the market to consolidate while this investigation plays out?

Conclusion

T-Mobile and Sprint face a number of political hurdles — including consumers’ heightened skepticism about the rapid pace of consolidation in the media and telecommunications industries. From President Trump to Sen. Elizabeth Warren (D-MA), policymakers have been sounding off against these deals and may train their fire on this transaction.

Some analysts say the government’s argument for opposing a T-Mobile/Sprint hook-up in 2014 has since proved correct. Preventing consolidation paved the way for T-Mobile to launch its "Uncarrier" campaign that reshaped the wireless industry, said Craig Moffett, a telecom analyst at the research firm MoffettNathanson. The result has been lower prices and more consumer-friendly business practices, such as the end of long-term customer contracts.

“The DOJ’s decision to block the [earlier] transaction has been validated in every conceivable way,” Moffett said. “T-Mobile has not only survived — it has thrived. The market has become more competitive. Consumers have unambiguously benefited from the DOJ’s decision. That poses a problematic backdrop for this merger.”

T-Mobile/Sprint will be making headlines for months to come. Be sure to follow along in Headlines.

May 9 -- Where Do We Go From Here? Words from the Conscience of the FCC (United Church of Christ's media justice ministry, OC Inc.)

May 10 -- Open Meeting (Federal Communications Commission)

May 15 -- An Open Internet Détente: How and Why Bipartisan Legislation Should End the Net Neutrality Wars (Information Technology and Innovation Foundation)

By Kevin Taglang.

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