Competitive Implications of DOJ Approval for T-Mobile-Sprint Acquisition - Part 1

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Part 1: T-Mobile and Legacy Competitors

Context

T-Mobile is buying Sprint for $26.5 billion. In the face of antitrust concerns that removing a national carrier would reduce competition and raise consumer prices, the DOJ mandated that T-Mobile sell Sprint’s prepaid brands and 800 MHz spectrum to DISH. Several states attorneys general are still suing to block the deal; T-Mobile expects to settle the suits before closing later in 2019.

Part 1 of this report covers T-Mobile and legacy competitors. Part 2 moves to DISH and its potential.

Competitive outlook

While it is usually foolish to prejudge mergers, buying Sprint should significantly improve T-Mobile’s competitive position. T-Mobile gains valuable mid-band (2.5GHz) spectrum, economies of scale from adding 45 million Sprint postpaid subscribers, and it loses Sprint as a competitor. Even if DISH does eventually become a viable fourth network, it will be paying T-Mobile wholesale rates for the privilege to get there and for several years beyond. The technical risk of moving Sprint’s CDMA/LTE network to T-Mobile’s GSM/LTE is not insubstantial. However, while T-Mobile CEO John Legere likes to talk trash, his management team is solid, and CTO Neville Ray has proven his ability to launch enormously complex network deployment projects. I fully expect T-Mobile to meet its commitment to quickly launch a national 5G network on low band (T-Mobile’s 600/700/1700/1900 and additional 1900 from Sprint) and mid-band spectrum (Sprint’s 2.5GHz), with some mmWave (24GHz) deployments in dense urban environments. That network should cover 97 percent of the country by 2022, and 99 percent by 2025 and deliver average speeds of 100 Mbps everywhere except rural areas, where speeds will still hit 50 Mbps. T-Mobile is counting on the new network’s ubiquity and relatively high speeds to expand into fixed-mobile broadband and streaming TV services. 

The deal with the DOJ promises that T-Mobile will not raise wireless prices for at least three years, and T-Mobile President and COO Mike Sievert says that T-Mobile plans to use its new network to lower costs, not raise them. If the management team stays the same, I expect some prices will drop, but not necessarily today’s family plans with wireless voice/data. Instead, T-Mobile will exploit its new combination of higher average speeds (vs. 4G) and broad coverage with unique plans that combine mobile voice and data with fixed data and TV. Those plans should be highly competitive, especially where broadband options are limited. Another area ripe for disruption is enterprise services, where Verizon and AT&T are entrenched.

T-Mobile’s new network will need devices with extremely flexible modems and multiple antennas expressly designed for T-Mobile’s unique “layer cake” network. However, Qualcomm should have the requisite chips and RF components in production by next year, and with over 100 million subscribers, T-Mobile will present device manufacturers a large enough target to justify the investment.

AT&T, Verizon, and the Loss of Sprint

AT&T and Verizon have been forced to react to T-Mobile pricing and plan initiatives, but they have shown little interest in pushing the envelope beyond various upgrade plans and occasional device promotions. Sprint was a fierce price competitor, but only because it was behind on network and lacked a compelling brand story. As a result, Sprint’s competitors felt safe simply ignoring whatever promotions Sprint came up with. Removing Sprint from the market is a loss in terms of pure pricing innovation – no healthy company does some of the things Sprint did to fill its underutilized network (like offering a year of free service). T-Mobile will inherit some of those deals, and there may be an uptick in churn as they expire. Or perhaps not – T-Mobile’s prices are still lower than those at AT&T or Verizon.

DISH will be competitive with AT&T’s Cricket brand, but AT&T and Verizon have already shown a willingness to cede individual subscribers (as opposed to those on family/company plans). The cable operators pose a bigger challenge to legacy carriers, because Charter and Comcast have been focusing on their most profitable households with strong triple-play and quad-play offers.

AT&T and Verizon will have an easier job defending their strongholds in the enterprise. Corporate customers are likely going to want to see proof that the new T-Mobile is competitive before making a switch, so AT&T and Verizon need to do whatever it takes to lock voice and data customers into long term contracts now. They can use the merger transition period as a point of FUD. Separately, AT&T and Verizon need to invest in helping enterprises set up interior 5G base stations and private 5G networks. Even once it gets its public 5G network fully deployed, T-Mobile will not be able to support private 5G networks without a robust enterprise service and support organization – an area where T-Mobile is currently behind. Any company that is building private 5G networks with AT&T or Verizon will be natural customers for that carrier’s public network as well.

To discuss the implications of this report on your business, product, or investment strategies, contact Avi at avi@techsponential.com or +1 (201) 677-8284.

Avi Greengart