T-Mobile-Sprint Merger Could Be a Game-Changer for 5G
The New York Attorney General’s office has revved up its investigation of the T-Mobile and Sprint merger that was announced in early April. If the deal survives FCC and antitrust review, it’s sure to have profound impact on the telecom industry and 5G deployment, especially in rural areas. The “New T-Mobile” will finally be able to compete with Verizon and AT&T — companies that currently account for nearly 70 percent of market share. But to help the U.S. maintain its wireless leadership, the combined firm will use its assets to build out a truly nationwide 5G network.
T-Mobile has rapidly gained market share using its famed “un-carrier” strategy. From 2011 to 2017, its market share went from 11 percent to 17 percent — a 54 percent increase. However, this growth from aggressive pricing and novel marketing strategies appears to be slowing down: T-Mobile’s growth rate in the second quarter of 2018 was its smallest gain in two years.
Sprint has its own problems. It has lost money in four out of the last five years. Although the firm owns valuable spectrum assets, it lacks the capital required to use them. According to its own FCC filing, Sprint is the “most highly leveraged company in the S&P 500,” and has amassed $32 billion in long-term debt. If this merger doesn’t go through, many industry analysts suggest the company isn’t likely to survive even a few years.
Of course, Verizon and AT&T are in a class of their own — they aren’t actually competing with T-Mobile and Sprint. As of Q2 2018, Verizon and AT&T had nearly 300 million subscribers among them and together represented a 70-percent market share. On the other hand, T-Mobile had 75.6 million and Sprint a mere 53.7 million.
For some perspective on the differences: Even if the merger is allowed, the combined firm would still have less market share and fewer subscribers than both AT&T and Verizon. In short, as a report published by the research firm Consumer Intelligence Research Partners (CIRP) suggests, T-Mobile and Sprint will have to find growth elsewhere if they are to unseat either AT&T or Verizon as a top-two telecommunications provider instead of just putting pricing pressure on them.
This growth needs to come from 5G, the next generation of mobile internet connectivity. It’ll offer faster speeds and enable a network of devices, like home appliances, to connect with each other via the internet. But this is, by no means, the potential benefit arising from the merger. The deployment of this 5G network is also expected to create up to 3 million jobs and boost GDP by $500 billion. And for T-Mobile and Sprint to be relevant players in this 5G race, they need spectrum within three key frequency ranges (low, mid, and high band) to deliver widespread coverage, from dense urban centers to rural areas. The providers will also need to invest a large amount of capital, about $275 billion by 2024, to build out a network.
It’s not impossible, either. Sprint currently owns a large chunk of mid- and high-band spectrum. It’s 2.5 Ghz holding is unique and can transmit a lot of data quickly. But it requires a dense network to function properly. This, coupled with the 600 Mhz and 700 Mhz holdings T-Mobile spent about $9 billion to acquire, will allow the merged company to build a 5G network that covers all areas. This is critical for the success of 5G, particularly because 5G has the potential to worsen the digital divide — currently 31 percent of rural Americans lack access to high-speed broadband (defined as a 25 Mbps down/3 Mbps up service by the FCC) compared to just 2 percent of urbanites. Unfortunately, most current plans to deploy 5G are focused on urban areas. Deployment is expensive and rural areas simply don’t offer enough incentive for providers to invest in network buildout.
Historically, both T-Mobile and Sprint have lagged in rural coverage. But this merger might reverse the trend and allow them to compete with Verizon and AT&T in rural areas, where the top two are dominating.
What about prices? Opponents of the merger argue that further concentration in the telecom industry, especially going from four to three providers, will lead to fewer choices for consumers and higher prices. But that is simply not supported by data. Despite the increased concentration, revenues for providers are trending downwards. From 2013 to 2017, average revenue per user (ARPU) decreased from $48.79 to $38.66: a sizeable decline of 20.8 percent. In that same period, data traffic grew 10 times, going from 1.4 to 13.7 trillion megabits per year.
Will reducing the number of national providers from four to three reverse this trend? Probably not. As Roslyn Layton, visiting scholar at AEI, has pointed out, Austria and Netherlands had similar 4-3 and 5-4 mergers, respectively, with little price change. Moreover, it’s hard to raise prices when AT&T and Verizon can offer bundles that include both cable and internet.
It’s also important to note that disallowing this merger doesn’t guarantee that four providers will remain intact, as Sprint is struggling financially and has also engaged in merger talks with cable companies like Charter, Comcast, and Dish.
A combined T-Mobile and Sprint would ultimately have enough spectrum assets and capital to deploy a truly nationwide network. The combined firm, too, could compete with the likes of Verizon and AT&T in the 5G race, something T-Mobile and Sprint can’t do separately. And increased competition will likely spur the dominant players to innovate, benefiting consumers nationwide by providing multiple viable options for 5G.
Pranjal Drall is a Young Voices contributor specializing in technology and innovation policy. You can find him on Twitter @PranjalDrall.