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T-Mobile & Sprint: Marriage Made in Hell

Iain Morris
4/30/2018

End of the golden age
That obviously includes customers. Legere insists the deal will not hinder competition, partly because of rivalry from cable operators developing mobile services, and even says it will force AT&T and Verizon to reduce their prices. But consolidation is generally understood to have the opposite effect. Legere would hardly deny that T-Mobile in its current shape has been responsible for much of the pricing pressure on the market leaders. If a merger with Sprint makes T-Mobile a less disruptive player, this pressure seems likely to ease.

For industry employees, the impact will undoubtedly be greater. Based on their last annual results, T-Mobile and Sprint together would generate annual revenues of $73.9 billion with around 79,000 workers, or roughly $935,500 per employee. This would already make the new-look T-Mobile far more efficient, on this basis, than either AT&T or Verizon, which made per-employee revenues of about $632,000 and $811,000 respectively in 2017. Yet job cuts are evidently planned, with Deutsche Telekom eyeing cost "synergies" worth $43 billion.

Revenues Per Employee ($)
Source: Companies.
Source: Companies.

Union representatives have lashed out at the plans. In a statement published last year, when the operators failed to agree merger terms, Communications Workers of America issued a statement warning that at least 20,000 jobs would go following a tie-up. "The massive job loss that this merger would cause is not in the public interest," said CWA President Chris Shelton in a statement at the time. "The Sprint, T-Mobile merger would enrich a few corporate owners and investors at the expense of workers and consumers."

With just 59,000 employees, the enlarged T-Mobile would generate as much as $1.25 million per worker, assuming revenues stayed the same. Such metrics would be comparable with figures from Internet giants like Facebook and Google. That could put some pressure on AT&T and Verizon to further shape up, although both, it must be noted, operate more than just mobile networks. Between them, AT&T and Verizon cut more than 20,000 jobs in 2017, but still employed nearly 410,000 people at the end of the year. (See Efficiency Drive by Major Telcos Has Claimed 74K Jobs Since 2015.)


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The planned merger also looks bad from the perspective of network equipment vendors such as CommScope Inc. "For the equipment vendors, it's clear that overall industry capital spending is maximized in an environment where there are a lot of operators in a competitive market environment," said George Notter, an analyst with Jefferies, in a research note. "The scenario, in theory, motivates each operator to build networks less efficiently [and] overall spending is higher." For CommScope, which is estimated to have derived about 5% of its sales from T-Mobile and Sprint last year, Notter sees the deal as a "modest, long-term negative."

About the only justification for this deal is that it would reduce wasteful expenditure on parallel 5G networks. And the 5G investment burden could be considerable. Barclays has previously estimated that building a nationwide 5G network based on very high-frequency airwaves might cost as much as $300 billion in the US. Even with lower-range spectrum, the 5G bill for T-Mobile could be around $25 billion, according to Ovum Ltd. analyst Daryl Schoolar. Countries do not have parallel railroads or sewage systems. So why let operators build duplicate infrastructure at such immense cost? (See How Much Will 5G Cost? No One Has a Clue.)

Unfortunately, this argument is not justification enough for allowing one of the biggest US retailers of telecom services to vanish. A "carrier neutral" approach, whereby one wholesale network supports a multitude of service providers, might address the problem. Such networks are already in deployment in Australia, Mexico and other parts of the world. But they have encountered criticism as well as support, and are not taken seriously in the US. (See Europe's Backhaul Black Hole Looms Above 5G, Can Mexico's Wholesale 4G Plan Defy the Odds?, Australia's NBN Seeks More Govt Cash to Cover Loss-Making Rollout and Trump's 5G Plan Is Not as Bonkers as They Say.)

T-Mobile and Sprint first began talking about a merger in 2013, when Sprint still led T-Mobile on market share. Those talks fell apart when it became clear that regulators would oppose a deal. The change in administration has given encouragement to the deal's proponents, who see a more investor-friendly figure in Donald Trump than they did in Barack Obama. For the sake of the broader US telecom industry, one must hope the regulators have not changed their tune.

— Iain Morris, International Editor, Light Reading

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mendyk
mendyk
5/2/2018 | 1:54:14 PM
Re: Increasing competition
The comments from the TMob CEO so far have been aimed at one particular individual who's seen as being the Great Decider on whether this proposed merger happens or not. More jobs. We beat China in 5G. Prices will go down. Etc. None of this has to be true -- and you can make a pretty strong case that none of it will pan out. It just has to get past the scrutiny post.
Michelle
Michelle
5/2/2018 | 1:41:57 PM
Re: Big risk that could pay off appropriately
Indeed. There's always a transition period (sometimes layoffs). There's still plenty of time... 
DanJones
DanJones
5/2/2018 | 12:26:34 PM
Re: Increasing competition
Legere said it himself on the call, so take that as you will. They did admit that there would be some eventual re-org but that the combined company (200,000 employees in the US right now) would be much bigger by then.

I find it hard to believe there won't be any job cuts when they combine existing Sprint and T-Mobile stores in city areas though, just seems highly unlikely.

 

DJ
mendyk
mendyk
5/1/2018 | 4:49:21 PM
Re: Increasing competition
Sounds semantical. The combined three and four would be more competitive with one and two, but arithmetically there is less competition. So, no.
Clifton K Morris
Clifton K Morris
5/1/2018 | 4:42:34 PM
Re: Increasing competition
A Director for The Washington Center for Equitable Growth is referencing HHI as a fair justification for this to be blocked:

https://twitter.com/Michael_Kades/status/990674900770844672

"First, merger is presumptively illegal under the 2010 Merger Guidelines. Based on data from Statista, (reference: https://www.statista.com/statistics/199359/market-share-of-wireless-carriers-in-the-us-by-subscriptions/ ) HHIs will go from 2825 (already a highly concentrated market) to 3258. The 400+ increase more than double what triggers presumptive illegality.”

It still begs to ask why legal counsel at these companies allowed them to pursue merging.
Mitch Wagner
Mitch Wagner
5/1/2018 | 2:38:24 PM
Increasing competition
I saw a comment on this - and I can't remember or find the source - that this merger would actually increase competition. 

Most mergers reduce competition and are bad for customers. But in this case, we have a field of two giants and two much smaller companies. Post-merger, there would be three companies of comparable scale. More competition, not less. 

What do you think?
mendyk
mendyk
5/1/2018 | 2:06:33 PM
Re: Big risk that could pay off appropriately
Also, a business merger doesn't mean that the two networks magically become one. So T-Mob users can expect to enjoy at least a few more years using their phones in the great outdoors. Even if Mr. Legere suggests otherwise.
Michelle
Michelle
5/1/2018 | 1:59:34 PM
Re: Big risk that could pay off appropriately
"...it could well mean better reception inside buildings for T-Mobile customers, so that sounds pretty dandy to me! ;)"

I'm sure this is buried deep in the purchase documents...
FbytF
FbytF
5/1/2018 | 9:16:46 AM
Merger Headcount
I agree with your comments about a headcount reduction, most mergers involve a reduction based on redundancies in operations. But T-Mobile/Sprint is saying they will actually add headcount, thousands of new jobs. See attached video. https://www.youtube.com/watch?time_continue=66&v=1nsbmtwMrgY

Could just be paving the way for regulatory approval.
FastCache
FastCache
4/30/2018 | 2:35:07 PM
M&A
The regulator will take a close look at this merger. The combined forces of T-Mobile and Sprint will still only ranking them third behind Verizon and AT&T.  Also the big two are clearly making moves to add content services into the mix using their scale.  Taking all this into consideration there may be little reason to block the deal.
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