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Wednesday
Mar302011

Sprint Says It Will Vigorously Oppose AT&T Buy of T-Mobile

The Question is Why?

There are a myriad of reasons why AT&T’s (NYSE:T) proposed acquisition of T-Mobile USA is considered to be anti-competitive and a negative for many smaller wireless operators as well as consumers. But for the life of me, I can’t see why Sprint (NYSE:S) is so upset—from what I see, Sprint might actually be one of a very small number of beneficiaries if the deal goes through (with the obvious exception of Deutsche Telekom).

Sprint issued a press release on Monday formally announcing that it intends to fight the transaction, in Congress, with the FCC and with the DOJ. In the release, Vonya McCann, senior vp, Government Affairs, said, "Sprint urges the United States government to block this anti-competitive acquisition. This transaction will harm consumers and harm competition at a time when this country can least afford it. As the first national carrier to roll out 4G services and handsets and the carrier that brought simple unlimited pricing to the marketplace, Sprint stands ready to compete in a truly dynamic marketplace. So on behalf of our customers, our industry and our country, Sprint will fight this attempt by AT&T to undo the progress of the past 25 years and create a new Ma Bell duopoly."

I don’t disagree with the opposition to a less competitive industry, but let’s face it, we’re already there. Verizon Wireless (NYSE:VZ) and AT&T have been increasingly dominant for the past several years. Sprint has done an admirable job of turning around its performance in the face of two dominant carriers, but T-Mobile has struggled. Merging with AT&T isn't going to make T-Mobile any stronger, in the near-term anyway, but it will make it more like AT&T in the long-run.

It's important to note that both Sprint and T-Mobile have seen the bulk of their growth over the past year or more in the prepaid segment. Prepaid subscriber growth has been higher than the postpaid market dominated by Verizon and AT&T for a number of reasons, including the fact that the credit-worthy postpaid market is already saturated and also the onset of the recession in 2008, which forced more consumers onto prepaid plans.

In 4Q10, Sprint added an impressive 1.4m new prepaid CDMA subscribers. Because it also lost more than 700k iDEN prepaid subscribers, its net growth in prepaid subs for the quarter was 646k—nearly 60% of its total net adds for the quarter. T-Mobile added nearly 300k prepaid subscribers in the period, driven largely by wholesale net adds, but lost 23k subscribers overall; it lost more than 300k postpaid subscribers.

My point is that assuming AT&T folds T-Mobile in and transitions its subscribers to its own (more expensive) price plans, Sprint will have an opportunity as the largest, strongest carrier with more of a focus on budget or credit-challenged consumers. MetroPCS (NYSE:PCS) and Leap (Nasdaq:LEAP) also stand to get some of the overflow, but if I were Dan Hesse, I’d consider this an opportunity to become the number one, nationwide provider of lower cost (or as he would say, higher value) services. 

And while those prepaid subscribers may not be as profitable as postpaid subs, growth is growth. AT&T will be focused on integrating T-Mobile and trying to figure out how to catch up with Verizon in terms of LTE deployment.  Sprint needs to do that too, its Clearwire/WiMAX network isn’t going to cut it in the long run.  But net adds each quarter is what the carriers need to show in order to keep Wall Street happy, and T-Mobile didn’t achieve that last quarter, nor is it likely to this quarter. 

The AT&T/T-Mobile deal is about spectrum, first and foremost.  A lot of carriers will be opposing this deal in Washington as the review process unfolds, for a lot of good reasons, but I don’t agree that Sprint needs to be one of them.

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