The T-Mobile & Sprint Merger: Problematic or Productive?
In late April 2018, John Legere and Marcelo Claure, the respective CEO’s of TMobile and Sprint, announced a $26bn merger of the two telecommunications behemoths . The motivation for this merger was “to form a new company… that will deliver lower prices, better service and the first and best 5G nationwide network” . In simple terms, the merger would allow the two firms to finally gain enough combined market share to properly challenge the two out and out leaders, Verizon and AT&T.
T-Mobile is the United States’ 3 rd largest telecoms company, boasting 79.7 million subscribers and a market share of around 17.9% . Sprint Corporation lags just behind; subscribers and market share total approximately 53.5 million and 13.5% of the market, respectively .
The announcement was not surprising; talks of a merger between the two firms had been in the works twice before; first, back in 2014, before regulators decided on keeping four competitors in the industry, and second, during the period spanning February and November 2017, which fell through due to disagreements regarding control of the new firm . Throughout this time, industry rumours and speculation kept the idea of a merger afloat; as a result, when talks resumed in early April 2018, a merger was inevitable .
The US Telecommunications Market
The telecoms industry plays a pivotal role in the American economy, with hundreds of millions of consumers utilising services and products supplied by the market on a daily basis, to conduct trade, make business decisions, update social media, play games, store data, and much, much more. In recent years, the market has grown rapidly, thanks to extensive investment by firms. This has led to better services, lower prices, and wider variety for consumers .
The sector is highly saturated and highly regulated; the top 4 firms, namely Verizon, AT&T, T-Mobile, and Sprint, in descending order of market share, regularly dominate over 95% of the market, in terms of subscribers . Although on the surface this might seem an oligopolistic market structure that favours high prices and poor incentives for product innovation, figures from the Federal Communications Commission found that the market, despite displaying initial signs characterising an oligopoly, possessed “effective competition” . The extent of competitive pressures within the industry is so prevalent that firms are going to extraordinary lengths and taking drastic steps to win consumers; there are now innumerable offers, discounts, and add-ons if you join with each company . Furthermore, data from the Bureau of Labor Statistics illustrates falling prices in the industry, which many experts put down to increasing competition driving down prices .
Looking to the future, the market is predicted to keep expanding. This expansion is not so much down to internal advancements; rather, it is due to the success of markets to do with associated technologies (for example the mobile phone sector). As new technologies arrive and existing advancements develop, the rate of technological innovation keeps increasing, and demand for services provided by the telecoms sector remains high.
Implications of the Merger
During the merger’s promotional video, Legere spoke about the benefits of the formation of the new company. His main points centred around “robust competition”, “lower prices”, and “new jobs” across the US. The new company will be the self proclaimed “only company with the capacity to quickly create a broad and deep nationwide 5G network” .
The arguments laid out by T-Mobile and Sprint revolve around the development of 5G, that will enable unprecedented nationwide innovation and technological advancements. Claure himself has likened the switch from 4G to 5G to that of the switch from “black and white to colour television” . The two CEOs explained how important to the American economy the 5G revolution would be; creating economic stimulus and paving the way for the next phase of technological innovation.
These claims however, have been labelled by some as unsubstantiated “marketing nonsense”. Although experts agree 5G is set to drastically improve network coverage and the consumer experience, it is far from a revolutionary technology; rather, it builds upon the foundations of wireless communication, most recently developed by 4G technology .
T-Mobile and Sprint reason that the merger “would create thousands of jobs” . They claim that the new company plans to hire additional workers and invest “$40 billion”, which would have knock-on effects for the American economy, citing 2012’s T-Mobile and MetroPCS merger which tripled the latter firm’s employment levels.
Experts have combatted this job creation claim. BTIG research analyst Walt Piecyk spoke on the matter, saying “it’s hard to calculate how a company can achieve $6 billion in primarily cost synergies while growing the employee base” . Essentially, there is a clash of incentives; how can a firm sustain a growing workforce whilst claiming to cut $6 billion in costs?
Both firms undoubtedly face challenging months ahead in terms of pushing the proposition of the merger through courts and past regulators. Two separate committee sessions in the House of Representatives are scheduled, where lawmakers will question company executives, and regulators will aim to pick holes in the firms’ arguments about the benefits of the merger .
If the merger is carried out, Sprint will cease to operate as a separate entity and instead function under T-Mobile’s name . Thus, regulators will consider the impact of Sprint’s disappearance from the market as the foremost factor affecting competition and consumer welfare.
T-Mobile and Sprint have already encountered opposition to their merger; the Federal Communications Commission recently began accepting petitions opposing the deal, and regulators are taking longer than initially anticipated to come to any conclusive decision regarding the merger’s implications, as consumer advocacy groups question the promises regarding lower prices if the merger is given the go ahead .
Overall, however, as necessary as it is to debate the contributions and drawbacks of the merger to the US telecoms market, it is hard to foresee the exact implications the business deal would have. On one hand, both firms have promised to abide by their claims of low prices, job creation, and better competition. On the other, the necessity of the merger can be called into question: the way markets are evolving, the introduction of 5G is imminent, regardless of the creation of a new company.
As it stands, it is up to regulators and lawmakers to decide whether or not the T-Mobile and Sprint merger occurs. A simple web search yields worrying results for those in favour of the merger; most regulatory bodies have stalled further progress of the deal for fear of the impact the merger would have on competition and prices . Regardless of the deal’s approval, one thing is for certain; the merger’s bearing on the US telecoms market, positive or negative, will be significant.