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Does T-Mobile Need Sprint to Scale?

Dan Jones

Does it actually make sense for T-Mobile to merge with Sprint?

That question popped up a couple of times from finacial analysts in the question and answer session at the end of the operator's second quarter earnings call Thursday morning.

Here's the basic concern: T-Mobile US Inc. is, as CEO John Legere said on the call, "the fastest growing wireless company in America." The company added more than 1.5 million subscribers in the quarter to top 50 million subscribers. Sprint Corp. (NYSE: S), meanwhile, continues to lose subscribers -- albeit at a slower place -- with 220,000 jumping ship in the second quarter. Sprint actually lost 646,000 phone users in the quarter, but regained some ground with tablet adds. (See Sprint Seeds Market with LTE-A Handsets.)

Interestingly, Legere also questioned the idea that T-Mobile is just getting new customers as people defect from Sprint. "A significant amount of them are former AT&T customers," he claimed.

So should T-Mobile -- a brand that appears in the ascendent -- tie itself to Sprint, which Legere described as "bleeding" subscribers?

"T-Mobile is doing everything that's necessary to organically and inorganically grow this company," Legere said, while refusing to comment directly on the prospects of a Sprint/T-Mobile merger. (See Sprint, T-Mobile Settle on $32B Price and DT Asks for $1B Prenup for Sprint, T-Mobile — WSJ.)

He stressed that T-Mobile has "multiple versions of things" it can do to grow "inorganically" and doesn't need to rush into anything. "This company is not in need of doing something to be successful in the short or medium term," he said.

Nonetheless, even Legere admits that in the long-term, T-Mobile needs to grow to compete squarely with AT&T Inc. (NYSE: T) and Verizon Wireless . "If you look at the long-term of the wireless industry, it is a scale game," he stated.

More spectrum acquisition is definitely one possibility for expansion. An AWS-3 auction is coming on November 13, and the spectrum incentive auction is expected in 2015. (See FCC Chief: Keep Spectrum Open for Smaller Carriers.)

For more on LTE and spectrum, visit Light Reading's dedicated LTE channel.

"We're more than comfortable that we have the flexibility to participate in these upcoming auctions," said CFO Braxton Carter.

Spectrum would certainly be part of the major raison d'etre for any Sprint merger. And it would be a major task to integrate the two competitor's network into a cohesive whole. (See Sprint & T-Mobile: A Tale of Two Maps.)

On the whole, I just thought it was interesting call. A Sprint/T-Mobile deal has been reported almost as a done deal in the business and trade press recently, but Legere certainly wasn't going there.

And the carrier certainly does have options, as Thursday's $15 billion bid by French operator Iliad for a 56.6% stake in T-Mobile proves.

— Dan Jones, Mobile Editor, Light Reading

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User Rank: Light Sabre
8/11/2014 | 4:14:59 PM
Re: ?????
Milan03--it does make sense.  Churn, by its definition, is a percentage greater than 0.  Sprint has initiatives to reduce churn, but churn (again by definition) exists.  Whether it's 2 or 5 percent, an effort to reduce churn simply slows the leak.

Conversely, and the part that doesn't make sense, is that Sprint has always been a company that tries to hold onto it's existing (business) customers rather than investing in pure acquisition.  The cliche there is that it more expensive to get a new customer than hold onto one.

Yet, if in doing so, you write down your revenue to keep the customer and, further, fail to realize that others are targeting your customers even if you aren't targeting theirs, any kind of "churn taskforce" will have limited return.

That's the point. 

I do agree that the move wouldn't have paid off--and, in fact, feel pretty good about my comments before the CEO change.  I think Sprint's problems grew over the past week.  They need a culture change but neither their CEO nor the chairman has done that before.  They may be geniuses in building a start-up or in aquisitions, but managing a turnaround--there's no track record.  I sadly (former Sprinter) agree with T-Mobile that Sprint is destined for number four in the market, and soon.
User Rank: Light Sabre
8/6/2014 | 3:14:16 PM
Now that Sprint and T-Mobile will not be getting together any time soon, I think T-Mobile doesn't need Sprint to continue its strategy of growth at all costs... unless it starts running out of money to re-invest in its coverage.

I don't think Sprint would have really helped T-Mobile's coverage spread that much -- and the overlap might have even been hindering.
User Rank: Light Sabre
8/3/2014 | 1:19:20 AM
Re: ?????
"Sprint--churn numbers aside--would always hold onto a customer rather than get a new one."

That doesn't make much sense, does it? The truth is Sprint isn't really acquiring much customers, nor keeping them. Can't ignore their churn as it's the highest in the industry.

Merging Sprint with T-Mobile would ultimately be a terrible move, aside from financial scale they'd have to figure out technology synergies, and that would become one innefficient and bloated network. They wouldn't even gain much rural coverage as two networks for the most part overleap.
User Rank: Light Sabre
8/2/2014 | 7:17:45 PM
Re: ?????
It seems to be a sensical merger. Sprint has high capacity data - but not great coverage. T-Mobile's data is not as fast - great coverage is also a problem.

But the two could work together - leveraging T-Mobile's marketing prowess - to compete with Verizon and AT&T. 
User Rank: Light Sabre
7/31/2014 | 10:05:21 PM
Re: ?????
T-Mobile seems to be more about aquiring customers rather than working/mining a base of customers.  Sprint--churn numbers aside--would always hold onto a customer rather than get a new one.

So, T-Mobile is more likely to be on a growth curve. If you are not chasing other company's customers--while trying to mind the store in a business that bleeds customers naturally--many of your best customers still are going to get poached, you won't have the aggressive mindset to get new, high-value customers, and this story line has played out at Sprint for years, first on the wireline side and now on the wireless side.

So, does T-Mobile gain competencies with Sprint?  Not really.  Spectrum? Yes, but that doesn't seem to be holding T-Mobile back right now.  Brand presence? Not really if we are to believe that T-Mobile would be the surviving brand name.  A deeper leadership bench? Doubtful.

Now, if the question is truly, "Does T-Mobile Need Sprint to Scale?" the answer is no in that it's questionable that Sprint would be enough for T-Mobile to scale to the breadth of AT&T and Verizon.  But if the question is "Does T-Mobile Need Sprint at All" I think the answer isn't as resounding, but is still a no.
User Rank: Light Beer
7/31/2014 | 5:12:43 PM
Re: ?????
I think a T-Mobile-Sprint merger is a very bad idea. See this post: http://www.rcrwireless.com/article/20140715/opinion/reality-check-will-wireless-competition-disappear/
User Rank: Light Beer
7/31/2014 | 4:58:36 PM
Re: ?????
If you're the fastest growing carrier and you lose money on every sub, you will also be the fastest to go out of business. You can't simply look at Gross Add number. You need to look at the Churn Rate and Net Add number. It's a delicate balance to achieve profitability. If you're bleeding with every new sub, you will eventually need to change direction or shut the doors (which is exactly where Legere led his last company, Global Crossing). You don't achieve profitability through no-contract and ETF-payoff offers. These are costly tactics that will grow your sub numbers, but are just not profitable. All show, no dough! Here's a big challenge with a Sprint-T-Mobile merger: two different network technologies. While Sprint has shown that it can manage two different networks, it is really not where you want to be as an operator - ever, let alone do it twice. When you merge, one goal is to achieve cost efficiency and you can't do that when the units are not fully integrated It takes a lot of time and money to migrate to a nationally consistent technology and supporting infrastructure and that's more than a challenge when you have a base that's not profitable. It would take a merged Sprint-T-Mobile a long time (if ever) to approach the profitability of its competitors. When it comes to mergers like the proposed Sprint-T-Mobile deal, you can't assume it's a "done deal". The AT&T acquisition of T-Mobile made a lot more sense (at least from a business standpoint) and look what happened to that. T-Mobile does have a very profitable business in collecting break-fees to bolster the bottom line, though.
User Rank: Blogger
7/31/2014 | 3:26:59 PM
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