Feature Article

June 26, 2014

Merging Smaller Wireless Companies Could Increase Suburban Competition

Maybe it is just the way that my mind works, but I have been noticing a lot of Catch-22 scenarios lately. The satirical novel written by Joseph Heller created the phrase “catch-22,” and it has come to be defined as a paradoxical situation from which an individual cannot escape because of contradictory rules.

The latest scenario to catch my attention is the fact that U.S. regulators, which basically consist of the Federal Communications Commission (FCC) and the Department of Justice (DOJ), would prefer to keep Sprint and T-Mobile as two individual smaller wireless operators so that there would be more competition between them, AT&T and Verizon. The problem, of course, is that the smaller companies cannot possibly compete with what can be referred to as the two giants. So you can see the catch-22, the two smaller companies want to join forces to form a third giant in an effort to be on equal footing, but the U.S. regulators would prefer four separate companies to enhance competition.

In a recent interview with CNET, Sprint CEO, Dan Hesse made reference to this when he stated that consolidation in the wireless market could finally result in a third major wireless operator with the network footprint to finally rival AT&T and Verizon. The problem is that neither of the two smaller carriers have the ability to provide in as many markets as AT&T and Verizon can.

At the beginning of the month I wrote that Sprint is looking to close a deal where it would acquire T-Mobile to form the larger carrier that is needed to compete with the giants. One factor that the U.S. regulators might be taking issue with is the fact that Sprint’s parent company is Japanese and T-Mobile’s is German.

The argument that Hesse is trying to get the regulators to understand is that "If you have more customers, you can afford to build a larger network. Only then do you have the revenue to justify building in smaller suburbs and rural areas." This is also the reasoning behind why Softbank’s CEO, Masayoshi Son is so interested in a merger between his company and T-Mobile.

While this does sound like a reasonable argument the real question is will the FCC and the DOJ see it as such? I am inclined to believe that they will not. All the indications are that the U.S. regulators have inferred they are not in favor of such a merger. Not really sure why, but they seem to feel that more is better, but only in terms of numbers. They would rather have four companies regardless of size because that is what they feel is the magic number.

The problem that Sprint and T-Mobile face is they each have less than half of the wireless subscribers that both AT&T and Verizon have. This means the two giants can cover a much greater area that includes urban, suburban and many rural markets. On the other hand, Sprint and T-Mobile have, more or less, been forced to build their networks primarily in densely populated cities, where they are more likely to make returns on investments. Any further expansion into suburban areas would be a major expense.

Here is another catch-22, for Sprint or T-Mobile to be able to serve customers in these more remote areas; they rely on expensive roaming relationships with AT&T and Verizon, which have deployed their networks to more markets. According to Hesse these roaming deals are expensive, ideally, it would be better if Sprint had the network in these markets to serve customers.

Someone will have to explain to me how this is competition if the two smaller companies need to pay the two larger ones money to use their networks. Just yesterday a friend of mine mentioned that he will most likely have to drop his Sprint plan because he gets incredibly spotty service where he lives and mostly cannot use is smartphone.

Sprint, however, is still forging ahead with plans for a merger. According to a report from Reuters last week, Sprint has already set aside about $40 billion in financing which is slated to make the merger a done deal. As of now, it does seem that T-Mobile’s parent company Deutsche Telekom is acceptable to the deal and ready to move ahead with the forming a third giant. The question remains as to how the U.S. regulators will vote.

Edited by Maurice Nagle

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