The New T-Mobile… to be or not to be..

The USD 26.5 Bn merger between T-Mobile and Sprint seems to be facing a bit of headwind with the FCC having paused the 180 day clock for deal review just over a month ago. With a pro-business administration in place, one would have believed that by the end of this month, we would have a “new T-Mobile” — in fact, the “old T-Mobile” seems to have the website all setup; however, one should not forget the myriad special interest groups who have been tirelessly lobbying against this merger. Among many of the for and against arguments that I have read, SeekingAlpha provided one of the clearest insights into the minds of the folk on both sides of the table.

Coming from the consumer’s perspective, and having spent some time in this industry, I have a nuanced view on the same; full disclaimer — i do work for a Deutsche Telekom subsidiary, but the views below are my own. The glasses may be tinted magenta — but I will attempt on making a fact based opinion.

It all comes down to three aspects — spectrum, subscribers and stakeholder support…

Spectrum — where … and how much

If you go through all the arguments, you will quickly come to the realization that it is all about 5G. This fact is relevant — very, very relevant. One of the most interesting analysis of this was aggregated by FierceWireless which pointed out a couple of interesting details.

• AT&T and Verizon had prime positions in the low and mid-band spectrum; T-Mobile was a late arrival having secured significant holdings in 600MHz
• Sprint had a large holding in the higher bands

Lower frequency bands have been quite lucrative till date since they are best suited to cover a large area (distance covered is inversely proportional to frequency) and provides better coverage indoors. While T-Mobile may have the 600 MHz band, till date there are fewer devices that operate on this band. Sprint on the other hand has a big swath of spectrum in the 2.5 GHz region. This spectrum is very well suited for capacity.

In order to efficiently roll out 5G, operators need both — low band spectrum to cover a broad surface area, and lots of mid/ high spectrum to be able to realistically offer the promise of 10X the LTE data rates as marketed. In the absence of this, an operator would be hamstrung to offer r a compelling 5G proposition; independently, both Sprint and T-Mobile would not be able to offer a competitive proposition.

While it may be true that combined, the joint spectrum holding would be the largest in USA — it does not negate the fact that

• Until date these operators suffered from insufficient spectrum AND
• Spectrum divestments could be a way to ensure more a more equitable allocation to level the playing field

Customers — lowering the unit economics

The second is the subscriber base (and the kind of subscribers that the operators have) — both of which matter.

The telecom business in the end comes down to one of unit economics. There is a significant CAPEX and OPEX in order to provide service, and more customers you have, greater is the ability to

• Spread these costs across a greater subscriber base
• Negotiate more favorable terms with your suppliers (including handset vendors)

The other advantage that AT&T and Verizon have long had was that they could offer compelling bundles — starting from triple play (voice, data, internet) and now moving into quadruple play (think of AT&T and Dish as an example). This has traditionally appealed to both business customers and created a lock-in effect with families. While T-Mobile has been able to chip away at this business — it has done so with aggressive pricing and other strategies which have eroded value for the industry as a whole. Oddly enough, the operator to bear the largest brunt of this assault was Sprint; perhaps it is the very same reason which allows a discussion about a merger in the first place.

As a consumer on the other hand, I am delighted about this outcome — since it implies a better service at a competitive price. There are fears that the consolidation would lead to higher prices as implied by a higher HHI index. However, the presence of 3 carriers in a market with similar market power would present a parity for competition. I would also argue that looking purely at “human” subscribers while ignoring the fast growing IoT market presents a skewed picture. There is an immense potential in this space and having 3 healthy operators would enable healthy competition, drive faster innovation and accelerate the 4th industrial revolution.

Supported by regulators …. And new entrants

The FCC has also taken a proactive stance in 5G, streamlining policies for small cell deployments. Given that these would be regional, a simplification and accelerated timeline of the approval process would encourage operators to deploy 5G — a move that would benefit all the major players.

There is one other dark horse in the picture — that of increased competition provided by Cable operators — led by none other than Comcast and Charter. While they currently may only operate MVNO’s (piggybacking on T-Mobile and Verizon networks), they could end up being formidable competitors — with Comcast being able to immediately go into a quadruple play offering fixed, mobile, internet and entertainment via its assets. In more ways than one, Comcast is turning out to be a direct competitor to AT&T, following a similar strategy.

The flip side…..

Are they valid concerns which need to be addressed? Sure — they are and should be considered. On the heels of the sizeable layoffs by Verizon, and increased use of automation (think chatbots, robotic process automation etc.) the writing is on the wall for the telecom industry as large employers. This is simply a fact that we have to reconcile ourselves with — as hard as it maybe.

Second — mergers are hard; very very hard and can be painful. One does not easily forget the USD 35Bn fiasco that became Sprint-Nextel. Google reminds me of this realisation that as I type Sprint-Nextel, it gently auto-fills “failure” as an autocomplete suggestion. This is not only a merger of networks, but also people, processes and mindsets. None of these are easy and requires dedicated work on both sides to make it work.

Rounding up

I do hope this merger works — I really really do. 5G has been a promise, and we need to have compelling and competing propositions in the market to make it a reality. Having 3 strong players in a similar weight class will drive this in direction it needs to go!