Although many analysts have said that T-Mobile US, Inc.’s proposed acquisition of Sprint Corp. would represent a bailout for Sprint, the companies say that T-Mobile would not be able to continue to compete with Verizon Communications, Inc., and AT&T, Inc., if the deal is not approved. The argument contradicts the frequent boasting of T-Mobile’s brash chief executive officer, John Legere.
“T-Mobile’s Un-carrier strategy has worked, but it alone is not enough to overcome the scale and spectrum advantages of Verizon and AT&T,” according to a redacted version of the public interest statement filed by the companies yesterday along with other merger documents in WT docket 18-197. “While T-Mobile has gained some market share, those gains have amounted to only a few percentage points after five years of continuous aggressive implementation of its Un-carrier strategy. And, much of that gain is attributable to its successful acquisition and integration of MetroPCS, rather than taking share through organic gains in the marketplace.”
“Scale differentials, such as the gap between T-Mobile and the much larger Verizon and AT&T, are compounding,” the filing added. “Lacking sufficient scale to spread costs, T-Mobile will fall farther behind, and Verizon and AT&T will continue to be positioned to capitalize on new spectrum acquisition opportunities, whether at auction or in the secondary market.”
Before the merger was announced in April (TR Daily, April 30), Mr. Legere and his colleagues often boasted about T-Mobile’s progress in the past six years and its plans to deploy 5G services nationwide in 2020, saying that they would exceed the commitments made by Verizon and AT&T.
In the redacted version of a declaration filed with the public interest statement, Mr. Legere said, “While we have moved from number four to number three in terms of wireless subscribers, we have not been able to make much of a dent in the about two-thirds market share held by the two leading carriers, AT&T and Verizon. They are much larger than T-Mobile and more diversified so they have a better cost structure. The stubbornness of Verizon and AT&T’s combined share is incredibly irritating to me since we think we offer customers better options and some of AT&T and Verizon’s policies are just dumb — you know my feelings on this if you read my Twitter account. But scale and a top quality 5G network for the future are critical assets to our ability to truly compete on a broader scale with everyone in this market — that is why this transaction is so important to our business, and to American consumers.”
Mr. Legere added, “Scale and a leading 5G network will become even more important since we aren’t just running up against traditional wireless carriers anymore. When it comes to new entrants like cable companies and others, I’ve been somewhat dismissive. In fact, I once referred to Comcast and Charter’s wireless businesses as ‘irrelevant, and . . . irrelevant squared.’ But the truth of the matter is that the numbers are starting to show everyone that they are making progress. In the first quarter of 2018, Comcast added more postpaid phone customers than AT&T and Verizon combined. Some estimates have Comcast and Charter adding five million customers in the next two years. And the net present value of their wireless business has been estimated at $20 billion. So, these companies clearly are striving to be major players in the wireless market, they have the assets to drive forward and they are truly investing together to grow their wireless businesses. Now even DISH has begun to build out its own wireless network and put its considerable spectrum assets into use.”
The public interest statement painted a bleak future for Sprint without the merger. “Sprint has lost share despite its aggressive competitive actions and price moves. While Sprint held a 15.5 percent share of mobile wireless service sales in 2013, its share had dropped to 13.4 percent by 2016. These decreases have a very real practical impact on Sprint’s competitive strength,” the filing said. “Sprint’s loss of subscribers has steadily dwindled the base of customers across which it could distribute costs, exacerbating its scale disadvantages compared to larger competitors.”
The filing said that “Sprint’s standalone future will not be one that allows it to be an effective competitor to Verizon and AT&T on a nationwide basis. And while Sprint has planned network investment over the next several years, such investments will be difficult for Sprint to manage and Verizon and AT&T have announced their intentions to spend nearly as much in CapEx this year alone. Even with accelerated investment, Sprint is still unable to ‘catch up’ from previous underinvestment, much less build a network that achieves parity with Verizon and AT&T (based on Network CapEx per subscriber).
The public interest statement contended that the deal would create synergies that would allow the combined company to invest more than the carriers would individually. “New T-Mobile will use these synergies to invest nearly $40 billion to bring the combined company into the 5G era over the next three years, or approximately three times the amount that T-Mobile would have invested on its own without the merger,” it said. “By 2024, the New T-Mobile network will have approximately double the total capacity and triple the total 5G capacity of T-Mobile and Sprint combined, with 5G speeds four to six times what they could achieve on their own. In the face of this challenge, Verizon and AT&T will need to respond with improved and accelerated 5G network investment and deployment to the betterment of all consumers and the country.”
The companies cited an economic analysis that “concludes that building the nationwide 5G network will provoke competitive responses from Verizon and AT&T that result in as much as a 55 percent decrease in price per GB and a 120 percent increase in cellular data supply for all wireless customers. Consumers get both a dollar and also a data dividend from the merger.”
The combined company’s network “will eliminate the speed and capacity differential between mobile and in-home wired broadband for many Americans, allowing millions more Americans to free themselves from the grip of traditional in-home broadband providers,” according to the filing.
“The merger also will unleash a maverick Un-carrier delivering competition and lower prices for customers of other services,” the filing added. “New T-Mobile will have the scale, spectrum, and financial strength to disrupt the enterprise segment and video marketplace with innovative products and services that will bring much-needed competition, innovation, and consumer choice to these areas.”
“T-Mobile will bring increased broadband coverage to rural Americans, along with improved signal quality and increased network capacity that will enable data-intensive applications and superior rural consumer experiences,” the filing said. “This improved service will be accompanied by enhanced customer service through 600 or more new stores and up to five call centers located to serve rural areas and small towns.”
And, rather than resulting in job cuts, the companies, citing another economic analysis, suggested that the deal would lead to the creation of tens of thousands of additional jobs.
Consumer groups and Democrats in Congress have expressed concern with the proposed deal.
“The basic problem is that going from 4 to 3 competitors in an already-concentrated market results in such a loss of competition that they face an extremely high burden in showing some countervailing consumer or public interest benefit,” John Bergmayer, senior counsel at Public Knowledge, told TR Daily today. “But, after having read through the application, the parties do not adequately explain how the purported efficiencies will ultimately result in consumer savings. Also, even taking their technical claims about 5G, cell sites, and spectrum at face value, they do not adequately explain why a merger specifically is the only way forward.”
But Free State Foundation President Randolph May said, “I’m sure the FCC will give the proposed T-Mobile/Sprint merger careful consideration. But it shouldn’t begin with any preconceived notions about market power and market definition. In a rapidly changing and technologically dynamic marketplace, there simply is no place for simplistic catechisms like 'no 4 to 3 merger’ that purport to dictate the outcome of the market power analysis. With the advent of super-fast, high-capacity 5G networks, it is unlikely the relevant market for analyzing the merger's competitive impact is a bygone legacy ‘wireless’ market as opposed to a multi-platform ‘broadband' market. If Judge [Richard] Leon’s decision in the AT&T/Time Warner didn’t case teach us anything else, it showed that what he called the ’tectonic’ changes in the communications marketplace cannot be ignored. In this instance, the proposed merger may actually strengthen the overall competitive environment and enhance the U.S.’s prospects for 5G leadership.”
“The FCC’s indeterminate 'public interest' standard, by definition, is an invitation for abuse as special pleaders of one sort or another seek to deny, slow down, or condition the merger to advance their own particular interests,” Mr. May added. “It’s hard to blame the special pleaders for trying to use the process for their own ends. But the FCC — especially this reform-minded FCC — should not aid and abet this age-old phenomenon.”
Grover Norquist, president of Americans For Tax Reform, said, “The combination of T-Mobile and Sprint, creates more viable competition in the marketplace for Americans to access affordable, fast, and ubiquitous broadband service. This merger is in the interest of Americans who want faster internet access and propels us forward on the path to 5G wireless technology in an international innovation race."
The National Puerto Rican Chamber Of Commerce tweeted, “Given @TMobile's #investment in #PuertoRico's recovery, combined with its commitment to #invest in next gen #tech in our communities, we think adding @sprint's resources may be a great benefit to our economic development efforts! #5g #broadband #smallbiz”
In a research note, analysts at New Street Research LLP said they were not changing their view that the odds of the deal getting government approval were still only 50/50.
“The [public interest] statement helps clarify how they will present their case to the DOJ and FCC. We aren’t changing our view on approval odds yet, because we believe politics has the potential to be a bigger driver of the outcome than anti-trust analysis,” the analysts said. “TMUS is making the right arguments, and they are well-made, but it remains to be seen whether they sway the administration, and we may not know the administration’s reaction until late in the process.”
The note added that “TMUS has to convince more than just the FCC and the DOJ. In the wake of the AT&T / TWX case, we now know that the DOJ will oppose deals that the administration doesn’t like, irrespective of whether there is an anti-trust case or not. There will be two competing narratives for this deal: investment that will drive lower prices, innovation and more jobs vs consolidation by foreign companies that will kill American jobs. We don’t know which of these narratives will get the attention of the administration in the coming months.”- Paul Kirby, email@example.com
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