There’s something to be said about persistence and ingenuity – as well as striking when the opportunity is hot. Five years ago, Sprint Chairman Masayoshi Son met with then FCC Chairman Tom Wheeler to press the case of a merger with T-Mobile. He was soundly rebuffed. The two companies have been considering it for a while, but regulators were wary of mergers that reduced the number of national wireless carriers from four to three because it harms consumers. In 2011, the Department of Justice sued to block AT&T from acquiring T-Mobile. AT&T gave up months later.
This time, T-Mobile and Sprint are trying again but with a new plan before regulators: Let us merge, and not only will we fast-track deployment of 5G, we’ll help create a new national wireless carrier — Dish Network — so there will still be four players in the market. This out-of-the-box idea is working. Last month, the Justice Department and five states cleared the merger — if Sprint and T-Mobile divest certain assets and help Dish get on its feet. In May, the FCC chairman gave his support. The biggest hurdle left is the lawsuit of 14 states and the District of Columbia.
“That’s actually pretty creative,” said Gerald Faulhaber, Wharton professor emeritus of business economics and public policy, and a former chief economist at the FCC. “I’ve never seen [the Justice Department] do anything like this.” Sprint and T-Mobile’s argument that they have to merge to afford the massive build-out required for true 5G wasn’t enough to sway regulators. “They looked around. This guy (Dish CEO Charlie Ergen) has a lot of spectrum; the satellite TV business is in decline.” So why not help Dish become a fourth carrier? After all, T-Mobile and Sprint “want to go after AT&T and Verizon, and creating a small competitor is probably an easy price for them to pay,” he said.
On the other hand, this idea seems unnecessarily complicated. “That just sounds inherently flawed,” said Joseph Harrington, Wharton business economics and public policy professor. “Wouldn’t it be better just to retain what is the best fourth competitor, which right now is Sprint?” Added Erik Gordon, a University of Michigan professor: “If you want to have four strong competitors, why didn’t you leave things alone? Dish as a fourth competitor won’t be as strong as Sprint for many, many years.” (Both Harrington and Gordon spoke about the deal on a recent segment of the Knowledge at Wharton radio show on SiriusXM. Listen to the podcast at the top of the page.)
According to Faulhaber, Dish faces a “tough” road ahead as a new player in wireless. But then again, he argued, to have true 5G, all the carriers in a sense face the same dilemma of having to install a lot more antennas because millimeter-wave spectrum — needed for true 5G speeds and capacity — only travels short distances. But the build-out will require a lot of capital from all the carriers and take years to deploy. So while the DOJ’s decision to set up Dish as a carrier was “very innovative,” it’s also “risky,” he said.
In the meantime, the carriers are basking in the DOJ win. “We did it,” said T-Mobile CEO John Legere, who will be the CEO of the new company, in a statement. “It may have taken longer than expected by some, but [the DOJ clearance is] a win-win for everyone involved.” Legere — the irreverent, leather jacket-wearing executive who streams his own cooking show on Facebook — pledged to retain T-Mobile’s disruptor mindset after the merger, when it will be about as large as Verizon and AT&T.
“I’ve never seen [the Justice Department] do anything like this.” –Gerald Faulhaber
The New T-Mobile
In April, T-Mobile and Sprint announced that they’re merging in an all-stock deal valued at around $26 billion. The new company, which will retain the T-Mobile name, expects to save $6 billion annually from combining operations, with pro forma service revenue of $53 billion to $57 billion a year. It will serve around 120 million wireless phone customers after divestitures, comparable to AT&T and Verizon. T-Mobile’s biggest shareholder, Deutsche Telekom, will have a 42% stake in the new company, while Softbank, Sprint’s biggest stockholder, will hold a 27% stake.
The carriers agreed to sell most of Sprint’s prepaid wireless business — under the Sprint, Boost and Virgin brands — and its 800 MHz spectrum to Dish for $5 billion. These lines serve about 9.3 million customers. Dish also will get access to their network for seven years and have help transitioning to wireless for up to three years. Dish also has an option to lease their cell towers and retail stores. A court has to sign off on the DOJ’s settlement.
FCC Chairman Ajit Pai supports the merger, but all five members of the commission have to vote on it. So far, sentiment is falling along party lines. Republicans Pai and Commissioner Brendan Carr support the deal while Democratic Commissioner Jessica Rosenworcel opposes it. The states’ antitrust lawsuit, which still hasn’t gone to court, has to be revised because it was filed before Dish came into the picture. This week, Texas joined the lawsuit to stand with California, Colorado, Connecticut, Hawaii, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Nevada, New York, Virginia, Wisconsin and the District of Columbia.
Dish entering the picture complicates the states’ lawsuit, which argues that going from four to three carriers is anti-competitive. The DOJ believes Dish can be a viable fourth carrier. But New York Attorney General Letitia James said in a statement that Dish is not an equal replacement for Sprint. “We have serious concerns that cobbling together this new fourth mobile player … will not address the merger’s harm to consumers, workers and innovation.” Dish, she pointed out, also has no experience building or operating a nationwide mobile network.
Dish as a wireless carrier “does not solve the problem of [bringing] harm to consumers,” noted Harrington. Dish is years away from having the heft to act as a true disruptor. It is starting out with a mere 9.3 million wireless users, which is a pittance compared to Big Telecom. Gordon agreed. “You need to start off with a Dish that’s stronger, not a company that over the course of a decade might become a strong fourth competitor,” he said.
Moreover, “T-Mobile and Sprint are asking Americans to trust that this new mega-corporation will act directly against its own economic interests by helping transform Dish into an independent competitor that rivals” the new T-Mobile, James noted in her statement.
“A real concern here is that T-Mobile, which has been a very aggressive competitor, [will now see its] incentives change a lot with this merger,” Harrington said. It will no longer be the scrappy rival gunning for customers; it will join the club of Big Telecom. “It becomes kind of comparable to AT&T and Verizon.”
Price Signaling
The states’ antitrust rationale in opposing the merger is a classic one for horizontal combinations. The wireless market in the U.S. is dominated by four companies — Verizon, AT&T, T-Mobile and Sprint — that together serve at least 90% of the country. T-Mobile and Sprint combined would “result in an increase in market concentration that significantly exceeds the thresholds at which mergers are presumed to violate antitrust laws,” according to the lawsuit. That means it will lead to “diminished competition, higher prices, and reduced quality and innovation,” the suit said.
“Wouldn’t it be better just to retain what is the best fourth competitor, which right now is Sprint?” –Joseph Harrington
Research studies have shown that going from four to three players in a market with high barriers to entry is anti-competitive, according to Harrington and Gordon. A 2016 study of mobile prices in 25 countries from 2010 to 2015 found that removing a disruptive carrier in a four-competitor market could raise prices by 17.2% to 20.5% on average, according to U.K. telecommunications regulator Ofcom. “From a competitive point of view, the more players the better,” Faulhaber added.
While there are many smaller wireless players such as Tracfone and Google Fi, they lease capacity from big facilities-based wireless carriers that have their own network (cell towers, spectrum, antennas, etc.). To truly replace Sprint, the new player must own infrastructure and spectrum — a big undertaking that takes years to pull off. “It’s a market with very high entry barriers,” said Harrington. That’s why the T-Mobile-Sprint merger “just looks kind of intrinsically very anti-competitive.”
The danger is not only in directly colluding but in what’s called “price signaling,” Faulhaber said. For example, a carrier could raise its prices and it would serve as a signal to others to do the same. Harrington pointed to the market for long distance phone service in years past, when three players dominated — AT&T, MCI and Sprint. AT&T, as the price leader, would set its rates and the other two would match them. “I’m concerned that a similar type of arrangement might emerge” after the T-Mobile merger, he noted.
If the market were left up to the two biggest wireless carriers, the offerings would be very similar. “Verizon and AT&T were very happy not to compete very much,” said Gordon. The two kept prices up, eliminated unlimited data plans and adhered to two-year contracts. Then T-Mobile appointed Legere as CEO in 2012 to shake things up. It lowered prices, got rid of contracts and brought back unlimited data plans, which other carriers matched. “Having that scrappy person fighting to grow is what forced AT&T and Verizon to say, ‘OK, we’ll go back and offer unlimited services. Ok, you don’t have to have two-year contracts,’” he pointed out.
After the merger, T-Mobile will now be one of the fat cats so it’s less likely to act as a disruptor, Harrington said. AT&T and Verizon will tell themselves, “T-Mobile is going to be kind of one of us,” he said. “They’re going to be more accommodating, less aggressive. We can make more money as a result of that.” And Big Telecom will make a show of competing “without competing in a way that significantly benefits consumers,” Gordon added. For instance, they can run many ads to look like they have a diversity of offerings, but the services and prices will all be fairly similar.
A New Era for Wireless?
Legere and Sprint CEO Marcelo Claure argue, however, that it’s not realistic to say there are only four national wireless carriers. They pointed out that Comcast has entered the wireless business – it ended 2018 with 1.2 million subscribers for Xfinity Mobile — and Charter Communications is set to launch its own wireless service this year. Comcast and Charter are the nation’s largest and second-biggest cable TV service providers. Moreover, the wireless market is changing: Telecom, video and broadband are converging. They noted that AT&T is now a major video provider in the country, with its acquisition of DirecTV.
“Verizon and AT&T were very happy not to compete very much.” –Erik Gordon
Secondly, they said the merger would enable faster rollout of true 5G nationally instead of just in select urban areas — claiming that none of the big carriers could afford blanket coverage on their own. And when true 5G arrives, it has the potential to replace home broadband and end cable’s monopoly. “Say goodbye to that hefty $80 or more monthly bill!” they said in a statement. In a letter to the FCC, Legere pledged to freeze prices for three years: “We’re willing to put our money where our mouth is. Period.”
But Wharton’s Harrington argued that 5G deployment will happen even if T-Mobile and Sprint do not merge. “It’s hard to imagine that if we just kept this structure, that they’re not going to go into 5G,” he said. “They’ve gone into every new generation [of telecom protocol from 2G to 4G]. You have to [do that] to be competitive.” At best, the merger would speed up 5G deployment by a few years. But that’s a “temporary gain. You lose that fourth competitor — that’s really a permanent loss” because it’s hard to create another facilities-based carrier, Harrington noted.
Despite the odds, Dish’s Ergen thinks he will succeed in wireless. “We’ve been here before,” he said in a statement. Ergen recalled how Dish launched a satellite service in 1995 despite “entrenched cable monopolies.” But “our substantial investments, constant innovation, aggressive pricing and commitment to the customer led us to become the third largest pay-TV provider,” he said. As a new wireless carrier, Dish pledged to disrupt incumbents with “the nation’s first standalone 5G broadband network.”
Will Dish succeed? It has 10 million satellite TV customers that could sign up for wireless service and quickly ramp up its mobile business. And Ergen is not to be underestimated. “They’ve got a guy who knows how to handle spectrum,” Faulhaber said. “He’s an entrepreneur and he wants to get into this business very badly.” But it will take creativity to get people to switch from their carriers since it can be a big hassle. “They have to convince people they have something the big guys don’t,” he said.
