Dear Feds: Hang Up on a Sprint/T-Mobile Merger

For the past few months, the most annoying relationship gossip in the wireless industry has been the will-they-or-won’t-they chatter about Sprint making a bid for T-Mobile. Were this to happen, the marriage would affect hundreds of millions of consumers. And most likely not for the better.

The possibility first surfaced in a Wall Street Journal story on Dec. 13. It cited the obligatory “people familiar with the matter” as saying that Sprint, newly invigorated after being bought by the Japanese telecom giant SoftBank, was contemplating a purchase of its smaller rival.

The Federal Communications Commission, having helped short-circuit the even larger fusion of AT&T and T-Mobile in 2011, has already told Sprint it would view any merger proposal with serious skepticism. But Sprint’s leadership has pressed on with making a case.

Last week, SoftBank founder and CEO Masayoshi Son went on Charlie Rose to argue that this transaction was crucial to restoring America’s competitiveness in “the most important infrastructure for the 21st century.”

Son said that, today, neither Sprint nor T-Mobile can compete effectively with AT&T and Verizon Wireless. “Here comes two little ones who are not able to fight without enough scale,” he said. “That’s no good. The situation needs to be changed.”

Is it inevitable?
T-Mobile, for its part, hasn’t ruled out the idea of consolidation. “It is not a question of if; it is a question of when,” Chief Financial Officer Braxton Carter said at an industry conference in March.

It is true that we have two tiers of competition in the United States. The research firm Strategy Analytics reported that in the fourth quarter of last year, Verizon Wireless had 121 million subscribers and AT&T had 110 million, while Sprint was back at 55 million and T-Mobile had 47 million.

Three years ago, the FCC and the Department of Justice pointed to numbers like that to suggest that a market consisting of Verizon, an AT&T swollen by T-Mobile, and a far smaller Sprint would quickly collapse to a duopoly. With a Sprint/T-Mobile merger, you could theoretically have three vigorous rivals.

But Sprint’s contention that it would compete aggressively on price and try to steal customers away from the big two (as Son told Rose, “I would like to have the real fight”) faces one problem: T-Mobile is already doing just that.

(Disclosure: T-Mobile’s marketing was persuasive enough in my case, as I switched from Sprint to that carrier last year.)

And T-Mobile hasn’t just cut prices for service at home and abroad; it’s also kicked decades of U.S. wireless orthodoxy to the curb by pricing phone service separately from phone hardware. This carrier doesn’t punish you for buying a phone from elsewhere (by charging you as if it had subsidized that purchase itself), which is a move AT&T has since replicated to a limited degree.

T-Mobile ditching handset subsidies is an enormous step toward a market in which you can buy the phone you want, instead of hoping your carrier decides to buy it for you first.

How bad would it be?
Two industry analysts I talked to disagreed on what a merger might do for consumers.

“A third carrier that could go toe to toe with AT&T and Verizon would increase competition,” said Ross Rubin of Reticle Research. “It’s going from two very strong leaders and two weaker ones with half the subscribers to three potentially strong ones.”

But, he added, “there wouldn’t be anyone even in the ballpark of a strong number four position. It would be a more concentrated oligopoly.”

Phil Kendall, director of wireless operator strategies at Strategy Analytics, said SoftBank’s history doesn’t make him optimistic.

“All the positive impact SoftBank had on the Japanese market came about when it was the challenger trying to revive the network after buying it from Vodafone,” he wrote. But since it’s moved on to bulk up by buying other carriers, “we would suggest the market hasn’t continued to improve from a consumer perspective.”

In a post denouncing the idea of a Sprint/T-Mo tie-up, PCMag.com analyst Sascha Segan noted that having only three major carriers in Canada, rather than four, made that market significantly less competitive.

What could these companies do together that they can’t do separately? Good question. Sprint and T-Mobile don’t even rely on the same wireless technologies: Sprint uses the same CDMA standard as Verizon, while T-Mobile runs on the GSM standard, also in use at AT&T and in most of the rest of the world.

A combined company would have to support both until it could coalesce around the LTE standard both firms employ today for mobile broadband (but not voice) in some markets.

Sprint, unfortunately, hasn’t been a good steward of its own network. Its early lead in “4G” mobile broadband went bust when its WiMax technology proved too slow compared with the LTE everybody else adopted, and then a slow LTE build-out has since left many of its customers stuck with some of the slowest 3G service around.

I don’t see how the massive unification effort required would not distract the company and inconvenience its customers. Corporate executives never sound more optimistic than when they pledge that a merger will be the one where everything goes smoothly for customers, but the history of giant tech tie-ups (not least Sprint’s disastrous union with Nextel) leaves little room for confidence.

Government regulators have two plausible responses to this potential deal.

One is a yes-but answer, where they OK the merger but try to manage its risks by imposing a raft of conditions on the merged company’s conduct.

But complicated rules that require ongoing supervision are expensive to enforce and can be gamed by companies with government-affairs departments practiced in the art of regulatory capture.

That’s about what happened when Comcast sought to buy NBC Universal in 2011. The feds wrote a bunch of rules about online video distribution that some of Comcast’s more skeptical critics thought might actually open up the market. But when I asked some of those same people last month about those conditions, they agreed that they’d been a bust.

The other answer is the one that ended AT&T/T-Mobile: “No.” That response is cheaper, simpler and permanent—and in that case, it gave T-Mobile the chance to reinvent itself and start to rewrite the wireless business. Washington should keep that in mind as it eyes the next round of gigantic telecom mergers.

Email Rob at rob@robpegoraro.com; follow him on Twitter at @robpegoraro.