Why Regulators Should Approve the T-Mobile/Sprint Deal
On the heels of the T-Mobile/Sprint merger announcement (Round 3), the market has been pessimistic, with consensus on the Street that chances of approval stands at less than 50%. I disagree. If T-Mobile and Sprint play their cards right, the chances of getting the deal through this time ‘round are much better. Here are some of the main points I believe regulators should consider.
- The Market Has Changed. These two companies first broached a deal nearly 5 years ago, not long after SoftBank had acquired Sprint. Much has changed since then. There have been some serious vertical market integrations involving other operators (Comcast-Universal, Verizon-AOL-Yahoo, and pending AT&T-Time Warner). Cable now seems serious about being in mobile, and DISH sits on a treasure trove of spectrum. So even though the number of national facilities-based wireless providers will go from four to three, we’re likely to have 1-3 additional major MVNO/resale players in the future: cable, some incarnation of DISH, and possibly some Internet giant (Google, Facebook, Apple, Amazon…take your pick).
- Why the Focus on Wireless When It’s Broadband That Needs More Competition? I’ve always been curious about the FCC’s maniacal focus on the level of competition in wireless, even though the U.S. has less broadband competition than nearly any other OECD country. Only 50% of U.S. households have a choice of more than one broadband provider. The new T-Mobile, with far greater spectrum breadth and capacity, would be in a much better position to offer a competitive broadband service via wireless, in some contexts.
- What Would Have Become of Sprint? I’m surprised there hasn’t been more focus on this. Sprint has been losing share, has huge debt, and still lags on network coverage and quality. Even the wunderkind Masayashi Son has not been able to turn the company around. Without a merger, what are Sprint’s real prospects? Wouldn’t it be better for network investment, the market, and consumers to have three strong competitors, rather than two giants, a sort of strong #3, and a weak #4? Can regulators point to any other countries where there are four healthy and profitable national wireless carriers?
- This is good for 5G. The challenge of having four strong national competitors is even greater when one considers 5G, given the level of investment that will be required. There’s a very real risk that T-Mobile, and especially Sprint, would fall further behind as 5G gets built. And it’s not only about having a war chest of dollars and spectrum. With the number of small cells that will be required for 5G, especially in urban areas, the zoning/siting/permissioning process alone, spread across four operators, would be a nightmare.
- This Is Partially The Fault Of Our Existing Spectrum Policy. It’s ironic to me that the feds might try to block this deal, while at the same time, it’s been their objective for the past 20 years to maximize the $$ intake from spectrum auctions. T-Mobile, Sprint, and other potential upstarts/new competitors would have a far better chance of building a good network and successfully competing in wireless if they didn’t have to spend tens of billions of dollars to merely acquire the spectrum. In several of the more recent spectrum auctions, well-heeled folks from Comcast to Google have bowed out because, well, it got too expensive for them.Tom Wheeler, former FCC Chairman, now at the Brookings Institutions, has been pushing the idea of spectrum sharing for a number of years. He wrote this week that perhaps the best way to compete in 5G would be for the carriers to build a shared 5G network. This is the sort of creativity we need, rather than government’s current approach of talking out of both sides of its mouth.
- Perhaps Some Creative Concessions Would Be In Order. In the wake of closing arguments at the AT&T-Time Warner trial, it’s been suggested that one possible outcome might be that AT&T wins approval to move forward, but must make some concessions, possibly divesting of the Turner assets or some way of assuring against discriminatory pricing.In previous wireless mergers, concessions have mainly revolved around divestment of spectrum. What about something more creative here? For example, perhaps the new T-Mobile has to agree to offer wholesale rates on some reasonable basis, thereby encouraging a more vibrant resale market. This has been the approach in some other countries, especially some broadband markets in Western Europe, which has resulted in more competition and lower prices. Naturally, new T-Mobile would argue that the same rules should apply to Verizon and AT&T, which could be a condition attached to deals extant and likely in the future.
There are valid arguments on both sides of this one, from a regulatory perspective. But given important changes in the market’s structure, plus the road ahead from a strategic and financial perspective, the benefits of this proposed combination outweigh the potential downsides.