Sprint, T-Mobile Merger Rumors – No Pain, No Gain?

Deutsche Telekom is reportedly in talks with Sprint Nextel to sell its T-Mobile USA unit. The terms revolve around a major stake Deutsche Telekom would take in the combined entity, according to unnamed sources quoted in Bloomberg, which broke the story.

The negotiations have been an on-again, off-again affair, and there is no certainty a deal will ever be reached, according to news reports. Chief among the sticking points: a mutually acceptable valuation of T-Mobile, which has been bleeding customers of late. Last year it lost about 56,000 customers; during that same period its competitors, Sprint, AT&T and Verizon Wireless all expanded.

Another option T-Mobile may consider, the sources have said, is buying up wireless spectrum from Clearwire. Partnership ideas are also being floated.

Neither Sprint nor T-Mobile responded to the E-Commerce Times’ requests for comment.

For all its vagueness, the wireless market has seized eagerly on the news. A merger between Sprint and T-Mobile, the third- and fourth-largest U.S. wireless providers in the U.S., would produce a behemoth competitive with Verizon Wireless and AT&T.

From that perspective alone the deal makes sense, Rob Enderle of the Enderle Group told the E-Commerce Times. “T-Mobile and Sprint have been struggling for relevance in a U.S. market defined by Verizon and AT&T.”

A Tech Issue

The list of reasons why the deal should go forward, however, stops there, as far as Enderle is concerned.

“Together they might have enough mass to make up for this, but they are based on different technologies, so the merger would be ugly and experience a massive switching cost as one or the other would need to switch off their towers in order to reduce costs and capture the key benefits,” he explained.

Deciding which system to move to would be a problem, said Enderle, as Sprint has better coverage, but T-Mobile is on the more powerful worldwide standard. “Tactically, you’d switch off T-Mobile — but strategically, the opposite would likely be true, and you’d still have to fund out the jump to 4G regardless.”

If it were up to Enderle, he would go tactical, “because if the firm doesn’t survive, there is no strategic future to worry about.”

He would “switch off T-Mobile, putting all the users on Sprint — but given that would require a phone swap, and Sprint is third in choice, they likely would lose half of the installed T-Mobile base on the transition — maybe more.”

The bottom line, said Enderle, is that a merger isn’t justified with that kind of an outlook.

Common Challenges

The incompatibility of the existing networks is very much a problem, despite the immediate advantages a merger could convey, said Azita Arvani of the Arvani Group.

“Both Sprint and T-Mobile need to grow their subscriber base, reduce churn, offer a broad range of mobile devices, and provide higher-speed network services,” she told the E-Commerce Times.

At face value, a combined Sprint/T-Mobile entity would provide opportunities to obtain benefits of 1) increasing market share and 2) creating a single 4G LTE network, suggested Arvani.

However these points won’t help much with the problem of offering a broad range of devices to their customers, she continued.

“Sprint has CDMA and iDEN, while T-Mobile has GSM and HSPA+. So, having increased overall market share will not give them the scale advantage in purchasing power and offering a broad array of devices to their customers in the short term,” Arvani pointed out.

“This would be similar to the thinking during the Sprint and Nextel merger,” she noted. “But combining market share of Sprint’s CDMA network and Nextel’s iDEN network didn’t create much value in terms of scale and offering a broad range of devices to their customers.”

On the other hand, continued Arvani, the second potential benefit — creating a single 4G LTE network — could be a real opportunity.

“Combining the capital, human and spectrum resources of Sprint and T-Mobile USA together to create a single nationwide 4G LTE network is a compelling win for both companies,” she maintained. “They can potentially make it happen faster too.”

That makes her somewhat optimistic about the end result of a merger, though she still harbors plenty of reservations.

“Overall, if Sprint and T-Mobile USA merge, they’d still need to work very hard on growing their subscriber base, reducing churn, and offering a broad range of mobile devices,” Arvani said. “Those problems will not get easier by their merger in the short term. They may even have a harder time trying to manage incompatible networks.”

If they can keep their eyse on the prize, she concluded — a single 4G LTE network — that could help them clear their subscriber and device hurdles.