It’s been a hard-fought battle for T-Mobile and Sprint, but last Friday the U.S. Department of Justice sided with the Federal Communications Commission in granting approval to the merger. There are conditions to the deal: the companies will divest prepaid businesses and spectrum to Dish Network and grant Dish access to the new T-Mobile ’s network and retail locations as it builds out a standalone 5G network. All of this seems reasonable on the surface. Dish holds wireless spectrum at the coveted low and mid bands, and has for some time. It actually risked losing it by 2020 if it made no demonstrable progress towards deploying wireless services. Late last year T-Mobile went on the offensive, accusing Dish of hoarding and pressing governmental agencies to strip the company of its spectrum assets (likely valued at over $30 billion). Several months later, the companies find themselves in an interesting cooperative agreement, and both are invested in the T-Mobile/Sprint union (albeit with different aspirations). A multi-state lawsuit presents one final hurdle before closure. I would like to analyze the arguments and provide insights into why I believe the suit will eventually settle.
Breaking down the key lawsuit arguments
I have several friends that are attorneys, so I know first-hand that understanding legal system proceedings can be confusing. Much could also be said about deciphering the T-Mobile and Sprint merger approval last week. On the same day of the approval, an anti-trust lawsuit and proposed settlement were filed simultaneously by the Department of Justice Antitrust Division and five states’ Attorney Generals (Nebraska, Kansas, Ohio, Oklahoma, and South Dakota). In Section IV of the 13-page filing, the lawsuit argues that the merger would stifle competition for a number of reasons. Let’s analyze each point:
1. The proposed merger would substantially lessen competition and harm consumers.
This is a broad statement and is likely based on the theory that moving from four to three tier one carriers in the U.S. would result in less choice in wireless services. To the contrary, T-Mobile has a demonstrated track record in delivering above average consumer value with its prior One program and current Magenta, Magenta Plus, Magenta Unlimited 55, and Magenta Military plans. Sprint for Business brings a slate of services and a purpose-built IoT network—all of which will benefit from T-Mobile’s market reach and momentum, coming off of consecutive quarters of financial strength and low subscriber churn.
2. Consumers have benefited from the competition between both companies, most recently in the form of unlimited data offerings.
I would argue that T-Mobile first dropped the shoe on unlimited plans, offering a better overall balance of network coverage and pricing than Sprint and forcing AT&T and Verizon to follow suit. Ironically, this caused harm to Verizon’s network and overall subscriber base as it struggled for a few quarters to manage the new network load. T-Mobile has also offered one of the highest data caps in the U.S. market vis-a-vis similarly priced unlimited plans from the other carriers.
3. The companies have intensely competed for prepaid business, driving consumer value in the form of lower prices.
Prepaid wireless services represent roughly a third of the overall subscriber base in the U.S. From my perspective, moving from four to three carriers would not significantly impact rate plan pricing. It’s a market that is historically price inelastic and value oriented, and it doesn’t drive the new smartphone upgrades that are dominant in postpaid subscriber plans.
4. The competition between the companies has led to improvements in quality of devices and subscriber plans.
I don’t buy the argument for improvements in quality of devices. Each carrier independently works with device manufacturers and companies, such as Qualcomm, that develop the core LTE and 5G modems and chipsets to ensure network compatibility and reliability. T-Mobile leads from a consumer subscriber plan perspective in my mind, offering the most entitlements (including Wi-Fi access on airplanes, complimentary Netflix access, and discounts on other goods and services). There’s no indication that the merger will change T-Mobile’s disruptive approach to the consumer market.
5. If the merger were to proceed (without conditions), T-Mobile would have the incentive to raise prices and loss of competition between the companies to sell network access to Mobile Virtual Network Operators (MVNOs) could reduce innovation.
As stated previously, there is no indication that T-Mobile would change its pricing strategy that has delivered consistent financial performance and subscriber growth over the years. Regarding MVNOs, these are companies that don’t own the underlying networking infrastructure. Instead, they buy in bulk or wholesale from the likes of T-Mobile and other mobile network operators and then sell it to their subscriber base. MetroPCS, FreedomPop, and Tracfone are examples in the U.S. Like the prepaid business, MVNOs play down in the value space offering inexpensive devices and cut rate plans. I just don’t buy the argument that the merger stifles innovation because I’m hard-pressed to find any.
I’ve believed since the date of its announcement that the union between T-Mobile and Sprint would be approved. If interested, you can read some further insights here. I believe the lawsuit will settle and the proposed settlement filed last week on the heels of the merger approval will be ratified. T-Mobile has also committed post-merger to hold consumer rate plans static for three years and to support rural deployments. Rural coverage has been a challenge in the past, with smaller carriers such asU.S. Cellular trying to close the gap. Given the combined spectrum holdings of both T-Mobile and Sprint that span from low to high bands, the new T-Mobile is well positioned to deploy a nationwide 5G network that extends from major metropolitan areas to states with larger rural areas—which happens to include many of the states that initiated the lawsuit. I’ll continue to watch with interest.