A Sprint/T-Mobile Merger: Keeping it Simple — Minded!

June 10th, 2014

This story has been getting a lot of traction in recent days. Supposedly Softbank, a Japanese company that owns Sprint, is in talks with Germany’s Deutsche Telecom, owners of T-Mobile. If the proposed $32 billion merger deal comes to pass, the third and fourth largest wireless carriers in the U.S. will be one. The combined number of subscribers is estimated at 102.7 million, which will put the company just behind Verizon Wireless, with 103.3 million subscribers.

Number one these days is AT&T, with 116.0 million subscribers, now involved in a merger with a satellite TV company, DirecTV. But this article is not about that merger, or on whether it’ll succeed, except for one thing. AT&T once tried to buy T-Mobile, which would have left Sprint the poor handmaiden in such a deal, and the regulators said no. In turn, T-Mobile used the billions of dollars in breakup fees to fund network expansion.

So these days T-Mobile is on roll in terms of adding subscribers. Some 2.4 million joined up in the first three months of this year, lured by the “uncarrier’s” promise of lower prices, free international roaming, and getting an up to $650 refund to pay a rival carrier’s early termination fee.

Now the customers of the other other three major wireless carriers in this country are trying to get into the act and, more or less, match to come close to T-Mobile’s offers. Indeed, in recent months, I’ve been able to move to cheaper family share plans on AT&T, where I’ve been a customer for the past seven years. Funny how someone else’s cheaper prices and the implied threat to leave can do wonders.

But while AT&T and Verizon are profitable, Sprint and T-Mobile aren’t. T-Mobile’s efforts to sign up as many customers as possible meant a loss of $151 million for the first quarter of the year. That’s compared to $20 million in the year-ago quarter. Now T-Mobile spends billions to enhance their network, so a hundred million or two won’t kill the company so long as cash flow is good.

Sure, it’s also clear that Sprint and T-Mobile can’t lose money indefinitely. All right, Amazon has survived for years with losses or minuscule profits, but they appear to exist in an alternate reality where such questionable numbers actually impress Wall Street.

Now I wouldn’t presume to guess whether this merger, should the deal be made, will pass muster with the Department of Justice or the FCC, though I expect plenty of skepticism, As separate companies, they aren’t likely to ever get close to toppling the two market leaders. But T-Mobile’s CEO, John Legere, is a one-of-a-kind and often outrageous spokesperson who knows how to grab an audience. In a combined company, with Sprint calling the shots, what’s his place going to be? Sprint CEO Daniel R. Hesse is a credible talking head for his company, but he’s nowhere near as flamboyant as Legere. So how would that work out?

But the reason I consider the discussions about the merger to be rather simple-minded is because the largest obstacle of all isn’t getting near as much attention as it should While both Sprint and T-Mobile are busy rolling out their answers to LTE, the former uses CDMA technology, same as Verizon, and the latter uses GSM, mostly similar to the network structure at AT&T.

Thus, on Day One of this merger, the 53.6 million Sprint customers and the 49.1 million T-Mobile customers will have handsets that are incompatible, and the two networks will be incompatible. Job number one, therefore, would be to decide which network to favor, and how to phase out older equipment as the hardware is upgraded.

The integration process will be costly, there will be customer service issues, and I suspect an unknown number of customers would prefer to jump ship rather than put up with any aggravation. No doubt AT&T and Verizon will offer increasingly attractive incentives to convince Sprint and T-Mobile customers to come on board even if each conversion is expensive. Suddenly, the combined company will be slimmed by at least a few million bodies who decided they just couldn’t wait.

Now Sprint has already played the network incompatibility game with the 2004 acquisition of Nextel. It wasn’t so pretty for Nextel customers; the iDEN network the service used was ultimately shut down.

Even if a workable integration or migration plan is devised, how long will it take to complete? Two years? Three years? During that time, marketing messages will be muddled, and no doubt thousands of employees will find their jobs redundant or obsolete in the New Order. Mergers and acquisitions almost always result in slimmer employee rosters.

So there are clearly more obstacles involved in such a deal than getting the authorities to give the OK. I know if I had actually made the switch to T-Mobile, I’d be disappointed, and perhaps feel betrayed, particularly if there were rough patches over finding the promised synergies between the two companies.

At first, I actually believed T-Mobile might try to go it alone after the merger with AT&T fell through. But it’s also clear the telecom industry remains in a state of flux. In the end, if all the obstacles can somehow be resolved, having three wireless carriers that are similar in size could make for a more competitive landscape. But coming out of a predictably difficult integration process, it’s likely that Sprint/T-Mobile won’t be near as strong as AT&T and Verizon. If it happens, this merger is going to be very difficult to accomplish. Unfortunately, not so many tech outlets are considering all the obstacles.

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