T-Mobile USA and Sprint announced they would merge on Sunday. The combined company will be named T-Mobile, which says it “will be a force for positive change in the U.S. wireless, video, and broadband industries. The combination of spectrum holdings, resulting network scale, and expected run rate cost synergies of $6+ billion, representing a net present value (NPV) of $43+ billion will supercharge T-Mobile’s Un-carrier strategy to disrupt the marketplace and lay the foundation for U.S. companies and innovators to lead in the 5G era.”
T-Mobile said in that same referenced press release:
The New T-Mobile will have the network capacity to rapidly create a nationwide 5G network with the breadth and depth needed to enable U.S. firms and entrepreneurs to continue to lead the world in the coming 5G era, as U.S. companies did in 4G. The new company will be able to light up a broad and deep 5G network faster than either company could separately. T-Mobile deployed nationwide LTE twice as fast as Verizon and three times faster than AT&T, and the combined company is positioned to do the same in 5G with deep spectrum assets and network capacity.
The combined company will have lower costs, greater economies of scale, and the resources to provide U.S. consumers and businesses with lower prices, better quality, unmatched value, and greater competition. The New T-Mobile will employ more people than both companies separately and create thousands of new American jobs.
While T-Mobile (AKA “the un-carrier”) has been growing quickly, Sprint has been recovering from its worst days. It’s still growing slowly and bleeding cash, with 54.6 million users across its various brands. “This deal is probably more necessary for Sprint than T-Mobile,” said Amy Yong, a research analyst at Macquarie Capital.
“All the stars have aligned,” Marcelo Claure, Sprint’s chief executive, said in an interview. He added that the deal “allows this company to offer the best product at better prices, lower prices.”
Putting together the country’s third- and fourth-largest mobile service providers would be one of the most significant consolidations in the U.S. wireless market in years. A combined T-Mobile and Sprint, with almost 100 million retail subscribers as of Dec. 31st, would put it ahead of AT&T, with 93.6 million, and not far behind Verizon’s 116.3 million. (Or, as the colorful Mr. Legere put it, the transaction would help it better compete against the companies that he has previously referred to as “dumb and dumber.”)
Behind the Merger — Funding the 5G Infrastructure Build-Out:
A huge part of T-Mobile and Sprint’s push is emphasizing the future of 5G. Proponents say the superfast wireless standard (in late 2020 IMT 2020 standard by ITU-R WP5D is scheduled for its first release) would not only make downloading movies faster, but underpin huge advances in autonomous vehicles, internet-connected devices and more.
Wireless network operators are preparing to spend billions of dollars to expand their pre-standard “5G” infrastructure. Sprint and T-Mobile would have much more difficulty than competitors in funding that “5G” build-out. Sprint has about $32 billion in debt on its books, while T-Mobile generates a small fraction of the cash that Verizon and AT&T do.
Again, quoting from T-Mobile’s press release:
Neither company standing alone can create a nationwide 5G network with the breadth and depth required to fuel the next wave of mobile Internet innovation in the U.S. and answer competitive challenges from abroad.
Traditional wireless telecoms (like AT&T and Verizon) now find themselves competing against newer contenders looking to chip away at their wireless market share. Comcast and Charter Communications are cable companies/MSOs each with a large installed base of broadband cable Internet customers that have begun offering wireless service plans to their subscribers, mostly as MVNOs.
As pre-standard 5G is first being positioned for fixed wireless broadband access, the unified T-Mobile and Sprint would ostensibly compete against cable providers like Comcast and Charter in addition to wireless mega telcoms AT&T and Verizon. While the IMT 2020 forthcoming ITU-R standard doesn’t implicitly acknowledge “5G fixed broadband access” there is some justification for the combined company to compete with MSOs/Cablecos, AT&T (U-Verse and AT&T Fiber) and Verizon (FiOS).
In addition to varying coverage maps, the two wireless carriers have wide swaths of spectrum that only sometimes overlap (Sprint has the 800MHz and 2.5GHz bands, while T-Mobile has 600MHz and 700MHz). You could see more comprehensive coverage from the merged entity (the new T-Mobile). Moreover, there’s no question that gigabit bandwidth and low latency make that a more of a viable option for fixed broadband internet access. The first “5G” deployments are focused on replacing broadband, not upgrading the smartphone, other mobile gadgets or IoT devices.
T-Mobile CEO John Legere took it further saying, “Global tech leadership in the next decade is at stake. And only the new T-Mobile will have the network and spectrum capacity to quickly create a broad and deep 5G network in the first few years of the 5G innovation cycle, the years that will determine if American firms lead or follow in the 5G digital economy.”
The China Factor:
The hidden agenda here from T-Mobile and Sprint is that failure to keep up in 5G would give China and Chinese firms a huge competitive technology edge. The Trump administration has called 5G a “national priority” and hinted at building a nationwide 5G network, primarily to compete against China (that rumor was later denied).
In March, the Trump administration blocked a hostile bid by Singapore-based Broadcom for San Diego-based Qualcomm, citing national security concerns. Some analysts questioned whether the predominantly foreign ownership of the combined company — including SoftBank, which has business ties to Chinese companies like Huawei — posed possible national security risks.
“They kept pointing to China on the call, but that is just a nice way to grease the skids,” said Will Townsend, an analyst with Moor Insights and Strategy, a research firm based in Texas, referring to a T-Mobile conference call with reporters and analysts on Sunday.
The focus on China does raise tricky questions for Sprint’s controlling shareholder, the Japanese conglomerate SoftBank, which buys telecom equipment from Chinese manufacturers. Still, most experts agree that the deal would produce a healthier company, one with more financial resources to pursue 5G. And where the rivalry in advanced industries between the United States and China is concerned, the prize is significant.
Many pundits (but not this author) say that 5G will impact a huge set of future economic and technological opportunities — from self-driving cars to smart cities and factories to virtual and augmented reality requiring huge amounts of bandwidth and/or low latency.
“It’s hard to argue that 5G is not key to the next five to 10 years,” said Chris Lane, a telecom analyst in Hong Kong with Sanford C. Bernstein. “Strategically, if you’re the U.S. and you’re trying to plan industrial policy, this deal makes sense.”
Mobile carriers in China have already announced bold plans to roll out 5G networks, and it is unlikely that the creation of a new American wireless giant would affect them. China Mobile, which has nearly 900 million wireless customers, is aiming to begin large-scale 5G trials in several Chinese cities this year.
Other Chinese companies are still vulnerable to American pressure, though. In particular, the United States government has placed restrictions on one giant Chinese supplier of the equipment that will make those new networks possible, and is investigating another.
For years, Huawei and ZTE have been unable to sell to large American wireless operators over security concerns. But the Department of Commerce recently went further, blocking ZTE from using American-made components for seven years, saying the company had failed to reprimand employees who violated American sanctions against Iran and North Korea.
ZTE now faces the prospect of being unable to manufacture network gear during the years in which wireless providers in China and elsewhere will most likely be building 5G networks. Huawei, meanwhile, faces an ongoing inquiry related to violations of American trade controls.
Serious disruption to either company’s business could mean a boon for their main rivals in telecommunications equipment, Nokia of Finland and Ericsson of Sweden.
It could also put SoftBank in an awkward position.
“SoftBank has been working with ZTE in Japan, but now they have to try to find other partners,” said Tsutsumu Ishikawa, an independent expert in Tokyo who covers the mobile industry.
As T-Mobile and Sprint seek Washington’s blessing for their union, the Trump administration might even require that SoftBank drop Huawei and ZTE as suppliers, said Mr. Lane of Bernstein. Masayoshi Son, SoftBank’s founder, has also cultivated personal ties with President Trump.
“If the administration for whatever reason doesn’t want Chinese suppliers of network equipment in Japan, either — and it’s possible — then I’m sure Masa would be willing to compromise,” Mr. Lane said, using Mr. Son’s nickname. “I think he’s quite pragmatic.”
“A lot of people are genuinely struggling to figure out, ‘What is the business case for 5G?’” said Ramakrishna Maruvada, a telecom analyst in Singapore with Daiwa Capital Markets. “Most operators do not think faster consumer broadband is a good enough reason to be pursuing a huge leap in technology.” [This author absolutely agrees. However, low latency is probably more important than bandwidth for many “5G” applications like real time control of IoT devices/equipment, autonomous vehicle to vehicle communications, and virtual reality/augmented reality.]