Why Regulators Shouldn't Touch the T-Mobile-Sprint Merger

Why Regulators Shouldn't Touch the T-Mobile-Sprint Merger

Wireless carriers T-Mobile and Sprint announced on April 29 that they had agreed to merge, closing a deal the two companies started negotiating in 2014. If approved by regulators and shareholders, the merger will fuse the United States’ third and fourth largest wireless service providers into one company comparable in size to industry titans Verizon and AT&T.

Before the two companies can complete their merger, however, they must win over antitrust regulators in the Department of Justice (DOJ) and the Federal Communications Commission (FCC), who historically have struck down such deals. In fact, one of the critical reasons T-Mobile and Sprint did not merge back in 2014 was their assumption that antitrust regulators would nix the move. Some onlookers have no doubt that regulators will reject the merger now. But considering the FCC declared in September that the wireless market is competitive for the first time since 2009, regulators may lend an ear to T-Mobile and Sprint’s case.

Any time two massive companies try to merge and consolidate a market, customers fear the market is becoming anticompetitive and exploitative. By combining their resources, however, T-Mobile and Sprint increase their ability to compete with Verizon and AT&T. Consequently, permitting the merger is the competitive, pro-consumer policy.

One reason is that the openness of the wireless market fosters competition even as carriers have consolidated over time. Among the signs of a competitive market is that there are many buyers and sellers of whatever the product is — in the case at hand, cell phone service. When there are countless sellers of a product, no single seller can afford to raise its prices. Customers would simply leave and buy from a competitor. The presence of competition keeps prices down and, in theory, the reduction of sellers removes this competitive effect. 

But if the number of sellers determined price and competition on its own, then we would expect prices to have skyrocketed as the wireless service market consolidated over the years. In reality, even though wireless market power has only concentrated over time, service prices have dropped by over 30 percent since 2000. Far from being exploitative, carriers have given consumers more and more for less and less. The number of sellers alone is not a reliable predictor of a market’s price and competitiveness. Technological innovation and the threat of new market entrants (such as Comcast) all pressure sellers to provide a quality product at a low price.

Likewise, mergers are not simply business deals that conspire against consumers. To win over customers in a competitive market, businesses have to offer more at a lower cost than their competitors, all while maintaining profits that will keep stakeholders invested. Sometimes, the best way to achieve all this involves pooling resources with another company and benefiting from one another’s strengths.

In the case of T-Mobile and Sprint, the two companies will find the transition to 5G networks difficult if they remain independent. Right now, Sprint owns a dominant portion of high-band frequencies, which are ineffective in transmitting wireless signals long distances but are able to carry a lot of data. High-band frequencies are not especially useful for the 4G networks used now, but because higher-speed 5G networks require so much data, high-band frequencies and their superior data transmission will be in higher demand when 5G implementation gets under way. Unfortunately for Sprint, its high-band assets mean little to investors given the company’s poor financial record; Sprint has lost money for years, accumulating $32 billion in debt, $6 billion more than the company’s current value.

T-Mobile is in a healthier financial state, and its customer base has grown significantly in recent years. Its numbers appear to be plateauing, however, and without the right broadband infrastructure, it will struggle during the transition to 5G networks. T-Mobile tried to purchase Straight Path Communications and its trove of licenses for high-band frequencies, but it could not compete with Verizon and AT&T. The two giants paid $184 per share, over six times higher than Straight Path’s initial valuation. Although the FCC will be auctioning off more high-band frequencies in the near future, the Straight Path auction indicates T-Mobile will struggle to compete.

Independently, Sprint is a well-endowed company that is doing little more than treading water in the wireless carrier market, and T-Mobile is a hot brand that will become a fad of the past if it does not obtain competitive high-band spectrum. Together, Sprint’s assets are freed from poor financial management and bad branding, and T-Mobile has the resources to continue its growth into the next era of networks.

Without the merger, it is plausible that both T-Mobile and Sprint will become irrelevant under the shadow of Verizon and AT&T. A higher quantity of carriers does not necessarily mean more competition. If competitiveness and pro-consumer interests are the goals of the FCC and DOJ, they should approach the T-Mobile and Sprint deal as more than two big companies merging. Instead, regulators could adopt a long-term perspective and consider the “new T-Mobile” an expansion from two wireless titans to three. The merger is good for tech, and it is good for wireless customers. But for anyone to benefit, regulators must leave the T-Mobile and Sprint deal untouched.

John Kristof is a Research Fellow at the Sagamore Institute and an Advocate for Young Voices who writes frequently on fiscal and regulatory issues. Follow John on Twitter @jmkristof.

Show comments Hide Comments

Related Articles