What if The T-Mobile, Sprint Merger Doesn’t Go Through?
Wednesday was quite the day for the wireless industry, with three front page Wall Street Journal articles: “Apple, Qualcomm End Legal Feud”; and “U.S. Threatens to Sink T-Mobile, Sprint Merger”, and feature piece on Nokia, with the Huawei situation as a backdrop. And within hours of the Apple-Qualcomm agreement, Intel announced it was exiting the 5G modem business. That’s a lot to unpack.
There are some quite interesting ironies here, given Qualcomm’s market power on one hand, and the U.S. government’s near irrational focus on wireless industry competitiveness on the other. So the tea leaves appear to be reading more negative on deal that would result in a viable competitor to AT&T and Verizon in wireless, and increase the chances of competition in the near monopolistic broadband industry. At the same time, government seems blasé that well-heeled Intel can’t effectively compete in the wireless modem business, facilitates a duopoly in network equipment by blocking Huawei from supplying its gear to U.S operators (and encouraging other governments to do the same), and allows further consolidation in the media business.
I’m not going to re-hash the arguments in favor of the T-Mobile/Sprint merger. But I do believe that the DOJ, and other government entities seeming to lean against the merger as currently structured have not fully thought through the implications of the deal not going through. President Obama was famous for always asking “and then what”, when confronted with difficult policy choices. As in, “we send troops to Syria…and then what?” So, the DOJ blocks the T-Mobile/Sprint deal…and then what?
The first, not fully thought through implication is what happens to Sprint? It’s not often the acquiree in a deal mounts a campaign in favor. Sprint has not been able to effectively compete for years, and its principal owner has shown little appetite to up its investment. Will Sprint be left to slowly bleed out? How good is that for consumers? Scenario two is that Sprint gets acquired, by somebody else, on the relative cheap. Cable would be the natural, but has shown little appetite to do so, historically. But for kicks, let’s say Comcast or Charter did buy Sprint. How beneficial would that be? Consumers aren’t exactly begging cable to offer them a wireless service, and they haven’t exactly flocked to their relatively me-too MVNO offerings. And how would this be good for broadband competition given cable’s current approach of “buy my Triple Play or I’ll charge you through the nose for broadband” pricing approach, and the fact that broadband pricing is among the highest in the OECD?
And what happens to T-Mobile? The picture is more optimistic, but the company is still weakened. It will have to reduce planned capex on 5G, will not be able to offer a competitive fixed wireless product in the absence of that 2.5 GHz band spectrum, and will have greater difficulty competing in the enterprise market. Oh, and it will have to go out and spend billions more in spectrum. Having to pay billions for more spectrum is, ultimately, an indirect tax on consumers.
Government has also not fully considered the DISH angle here. If the T-Mobile/Sprint merger were to go through, two positive-for-competition results are likely. First, DISH is in a stronger position to build out a wholesale wireless network, given the better prospects for a creative competitive offering (Cable? Google? Amazon?) in a three, rather than four player market. Second, a stronger New T-Mobile puts greater pressure on Verizon to do some sort of deal with DISH. In short, DISH’s spectrum is likelier to be put to productive use, and sooner, in a New T-Mobile scenario.
I’ll reiterate a concern that the government is looking at this merger through too narrow a lens. Yes, given the raft of consolidations over the past few years, the high level optics on going from four to three wireless competitors don’t look great. But the DOJ and other federal entities seem fixated on the HHI index for wireless, while not applying that same rigor to other sectors of the telecom/digital media/tech landscape, which are far more concentrated.
I’d suggest a different approach. First, the government needs to consider what is better for broadband competition, not just wireless competition. The focus on four-to-three in wireless seems myopic, given the state of competition in broadband. Yes, there are would-be competitors in broadband such as Starry, Google/Webpass, and Verizon 5G Home, but those deployments are moving at a relatively slow and piecemeal pace. Second, what is best for U.S. 5G leadership? Better to have three really good 5G networks, and more quickly, than two good 5G networks and some uncertainty as to the breadth, depth, and timing of T-Mobile and Sprint’s deployments if they were to remain standalone. Third, is to recognize that a big part of the 5G opportunity is in the enterprise, industrial, and IoT markets. In wireless today, that’s a relative duopoly, with AT&T and Sprint holding an outsized share compared to the consumer wireless space. New T-Mobile would have a much better chance of competing there than if they remained standalone wireless pure plays. It’s not just about deploying the infrastructure, it’s also about building a significant sales and marketing force to address the broader enterprise opportunity.
I am more optimistic than many other industry and financial analysts that the deal will go through, though there might be more onerous terms/concessions than initially considered. Those opposing this merger have brought up viable points about the potential effects of consolidation on competition and price. But they’ve not adequately considered what the longer term implications are if the deal does not go through.