The Feds won't approve a Sprint/T-Mobile merger (but they should)

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Sprint let slip to the Wall Street Journal that it's been working on a deal to acquire T-Mobile, which would bring the number of major U.S. wireless carriers down to three. However, this might also create a credible competitor for market behemoths AT&T and Verizon. 

Analyst Craig Moffett says that by leaking the story Sprint was "sending up a trial balloon" to see how T-Mobile and the regulatory communities would respond to such a deal. The DOJ and FCC would have to approve, and there's ample reason to believe they might not.

Moffett believes all the wireless companies would benefit from a merger, and for a simple reason. "A Sprint/T-Mobile deal would also be good news for Verizon and AT&T . . . After all, industry consolidation is almost always good news for the industry." 

Analysts say a combined Sprint and T-Mobile would still be only about three quarters the size (in revenues) of either of the two market leaders, AT&T and Verizon. It would give the combined company 53 million subscribers, compared with AT&T's 72 million and Verizon's 95 million.

On the bright side, Sprint/T-Mobile would own far more wireless spectrum than either AT&T or Verizon. Wireless spectrum is the finite set of licensed radio frequency bands on which cellular service runs.

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Best case scenarios

Beyond those basic facts a Sprint/T-Mobile merger could have a lot of different consequences, but there's a fair chance that it would eventually lower wireless prices for us consumers.

How? In the best case scenario, a merger would bring together the best assets of each company. T-Mobile's best asset might be its maverick role in the market now, and the relish that the company and its executives seem to feel for it.

T-Mobile changed the game in the wireless industry this year by being the first to do away with service contracts under its "Uncarrier" strategy.

The market responded. T-Mobile was regularly losing hundreds of thousands of customers per quarter in 2011 and 2012, but its new approach selling wireless now has the carrier gaining customers every quarter. In the third quarter of this year T-Mobile picked up a million new customers

There are plenty of reasons to like T-Mobile, from its pricing strategy to its devices. But all of it has been undermined by its less-than-consistent voice and data network coverage. Our own tests have shown that T-Mobile typically offers high speeds and solid voice service in some parts of town, but doesn't have the cell tower density to provide consistent and reliable coverage everywhere. And if the network is weak, price and phone selection don't really matter.

Sprint could bring to the table the network infrastructure (cell towers), wireless spectrum resources and backhaul systems needed to buoy up T-Mobile's service levels. Sprint is owned by well-monied SoftBank and is now ready to invest heavily in its network. Sprint has been bogged down in a nationwide network upgrade for a couple of years now.

Outspoken CEO John Legere has been a perfect face for T-Mobile's "maverick" role in the wireless market.

However, because the two companies use two different flavors of 3G cellular service—Sprint uses CDMA while T-Mobile uses GSM—it would take a few years to bring it all together under the same wireless technology and start to realize the benefits. The LTE infrastructure used by both companies would be easier to combine.

Satisfying the Feds

The biggest problem with Sprint buying T-Mobile is getting the regulatory approval to do it. The regulators—The DOJ and FCC—who would have to approve the deal have said numerous times that "four, not three" major wireless carriers are needed in the marketplace. Many of them might be very hesitant to approve a deal if there's a fair chance that the end result was a market with one less player and wireless prices that were higher than ever.

This was the same logic used when the DOJ and FCC blocked AT&T from buying T-Mobile for $39 billion two years ago. And the people at the DOJ who blocked the deal are still doing a victory lap.

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New FCC chair Tom Wheeler may play a key role in the fate of a Sprint acquisition of T-Mobile.

There's good reason to believe this merger would end with the same result. Moffett and his staff conducted an impromptu survey of ex-FCC staffers and other regulatory experts over the weekend (December 11-13) and found that a high number of them mentioned the FCC's oft-repeated conviction that the market is better off with four competitors, not three. 

In light of this, pursuing the merger would be a big risk for both companies. Mergers cost untold amounts of time and money from both the companies involved. The amount of administrative, compliance and other legal work is mountainous. If, after going through all that, the DOJ or FCC decides to block the deal, all that time and money is lost and both companies are worse off than before. For us consumers, the wireless market might be even less competitive than ever. 

But Sprint buying T-Mobile is a completely different picture than AT&T buying T-Mobile. AT&T buying T-Mobile essentially would have created a two-carrier market, with much-smaller Sprint left to wither and die. But a Sprint/T-Mobile coupling might create a competitor of the scale that AT&T and Verizon would really have to worry about and respond to. If Sprint sees this merger as crucial to its future, I believe it could go before the DOJ and FCC and make a strong case.

This story, "The Feds won't approve a Sprint/T-Mobile merger (but they should)" was originally published by TechHive.

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