What can be said about a merger between Sprint and T-Mobile?
It won’t happen, that’s what.
Let me dive into the heart of an announcement I’ve been
mulling over for the past few days. Recently there has been small-talk in the
wind about a potential merger between T-Mobile US and Sprint, whom are the
fourth and third largest wireless carriers in the United States respectively.
This announcement comes on the heels of an already-completed merger between
MetroPCS and T-Mobile US which was finalized at the end of 2013. Both Sprint
and T-Mobile US have expressed an interest in merging forces to take on ATT,
who (despite direct marketing attacks against them from T-Mobile) still
continues to show positive growth in last year’s 4th quarter
earnings.
Although I can see the logic in another merger by T-Mobile
US (especially a merger with a company larger than themselves) I don’t see the
sense in choosing Sprint. Granted, T-Mobile US is aware that they have a lot of
ground to cover in order to regain lost market share; prior to the merger with
MetroPCS, poor management and advertising led to a sharp drop in new subscribers which ultimately forced the hand of T-Mobile US’s parent company,
Deutsche Telekom, to either drastically re-invest in the American portion of their
market or bail. Their ultimate decision was to go balls-to-the-wall and reinvest. Deutsche Telekom bought US prepaid carrier MetroPCS as their first move in a hard push to rebuilt their American market.
It seems the MetroPCS merger worked out well for T-Mobile US, so why don’t I see any sense in choosing Sprint as the next
merger-buddy? Although it isn’t common
knowledge (or perhaps as common as it should be), Sprint and T-Mobile are currently
operating on two completely different and incompatible wireless technologies.
Let me explain. There are three major technologies in
wireless phones right now: GSM, CDMA, and LTE – the last of which you have
probably heard of, if nothing else. What these acronyms stand for is
essentially irrelevant; what is important to know is that each carrier uses
either CDMA or GSM services as their backbone and then LTE service is applied
on top of the backbone to provide next generation (or 4G) service.
For example, Verizon uses CDMA service as their backbone.
CDMA provides Verizon customers with talk service, and 2G/3G data. From there,
Verizon has applied LTE service on top of their CDMA service. When you’re in
range of a Verizon tower that has had LTE service added to it – boom! You have
4G speeds.
It is important to note that carriers can only have one
backbone. In other words (going back to our Verizon example) if Verizon uses
CDMA as their backbone, their devices cannot detect or use GSM towers. This
seems to be silly, but the two technologies are so completely different that
there just isn’t enough room in phones to build in a radio for both services (Nerd moment: there are, of course, some exceptions to this rule and I'm sure one or two tech-savvy people will point that out to me. I'll squash that argument now by saying that if a carrier were to hypothetically use two backbones, it would need all of its phones to be dual-SIM and those phones would be financially unfeasible to market. Therefore, arguing that Sprint and T-Mobile could migrate over to a dual-SIM environment is not an option).
There are a lot of reasons for this including the way in which the receivers
are constructed and the frequency that each service uses in the air, but we won’t
get into any of that here. After all, knowing why the two technologies aren't compatible isn’t necessary to understand
why a Sprint and T-Mobile merger makes no sense.
Anyway, GSM and CDMA each have their own unique advantages.
GSM uses SIM cards, meaning that you can easily carry your number from one
phone to another and even from one carrier to another assuming that carrier
uses GSM technology. CDMA, however, does not use SIM cards and therefore
carrying your phone to another carrier is virtually impossible on a CDMA service.
Additionally, GSM has greater 3G speeds and is the only of the two technologies
that has the capability to talk on the phone and use data at the same time. CDMA,
however, is cheaper to implement and can therefore cover a much broader area
with much lower maintenance costs. This explains why Verizon has been able to
advertise their reliability for so long – they simply have more towers because
their towers are cheaper to mass produce – and why AT&T has been able to
advertise the speed of their data network for so long.
(If you’re not a tech nerd who didn’t already know that,
some lights should be going on in your head regarding all the confusing
commercials you’ve seen about wireless service – but let’s get back to the
point)
So, hang on a minute here – as far as “customer
satisfaction” goes, GSM sounds like its superior. Even though CDMA is cheaper,
shouldn’t every carrier be using GSM?
When CDMA was introduced it promised the ability to lock
down a phone to a carrier – something Verizon really wanted to do. Why, you ask?
The answer actually has to do with the way phones are sold in America. In the
United States, carriers offer phones at low prices by locking you into a
contract which brings down the price of the phone. We are the only country in
the world that does that (and if you’re curious as to why, it can be found in
my blog post here). Although this helps American customers to get very
expensive devices at a low cost, it has proved to cause one major problem: if a
subscriber cancels his service early, the carrier actually loses money on the
deal. This happens because of the way contracts are structured and can be
clarified by reading the blog post linked above. Although I could give you a
clear explanation here, the reality is that I’ve rambled enough already. So,
suffice it to say that subscriber cancellation in America = a loss of money,
and losing money is bad.
So what does this mean for us? Since every cancellation in
America is a net loss, carriers want to give as few reasons as they can to subscribers
that would be an incentive to cancel their service, and CDMA carriers use an
inability to transfer your phone to another carrier as a cancellation
deterrent. It sounds kind of underhanded, but it’s true.
Let me get to the point. There are two CDMA carriers in the
United States: Verizon, and Sprint. Everyone else uses GSM (and prepaid
carriers just mooch off of the towers that the big carriers put up, so they don't count). Everyone,
including T-Mobile US, uses GSM. This means that Sprint and T-Mobile US would
be merging two mutually exclusive networks and trying to somehow duct tape them
together to make one network.
How would they do this? The only logical answer is to use
the LTE service.
The only way to make a Sprint and T-Mobile US merger work
would be to not merge their services, but instead share capital and patents to
work towards a massive-scale LTE rollout.
Clarification: LTE, although currently being used as a
service laid on top of either a CDMA or GSM backbone, can operate as a
standalone backbone itself. LTE service has the ability to handle phone calls,
data, and anything else a subscriber can throw at a mobile network. Therefore,
Sprint and T-Mobile US would only have one reason to merge – to surpass
Verizon’s coverage and then make a massive push to phase out their CDMA and GSM
services altogether and migrate their network solely to LTE.
In the end, I just can’t see this happening. LTE rollouts
are a massive undertaking. If they weren’t, we would have it everywhere by now.
For Sprint and T-Mobile to try and make some kind of underdog push from behind
and then magically become so efficient that they could beat Verizon to a full
LTE conversion would be one heck of a feat – a feat that I just can’t see
happening.
In my opinion, if either of them actually had the internal
structure to take on Verizon’s rollout-pace they would have done it already.
So the verdict in all of this? Two wrongs won’t make a
right. There is no way that a T-Mobile and Sprint merger would be financially
or operationally feasible and to stand behind the notion that a push for a full
LTE rollout would be a valid reason for a merger is not only lacking in common
sense, but it’s something that the FCC will never buy. After all, the same
argument was made just last year when AT&T tried to buy T-Mobile and the
FCC didn’t buy that, even for two companies who would have to do far less work
to successfully merge, as they already currently run on the same backbone.
The
long and short is simple: let’s not get our hopes up. My prediction is that Sprint and
T-Mobile US will see the FCC’s early skepticism and come to their senses, and that will be the end of that.Image source can be found here
