One of the US’ most successful mobile broadband providers is acquiring a struggling, smaller competitor, but it needs government approval of the merger. To make their case, the merging companies tell regulators that they can’t fully upgrade to the next generation of wireless technology as standalone firms. They must join forces, or US wireless consumers won’t benefit from an upgraded network, the companies say.
That description applies equally well to AT&T’s attempted takeover of T-Mobile USA in 2011 and to T-Mobile’s just-announced plan to buy Sprint. Obama administration regulators rejected the AT&T/T-Mobile claims in 2011 and forced the companies to continue operating separately. Each one thrived on its own.
Trump administration regulators might see similarities between the network upgrade claims of AT&T in 2011 and T-Mobile today. They could even look at statements made by T-Mobile and Sprint just a couple of months ago, when each company said it was on track for a huge 5G deployment—without any mention of needing a merger. But the Federal Communications Commission’s new Republican leadership is far more friendly to telecoms than Democrats were, and it could approve the T-Mobile/Sprint combination without much fuss.
The failed AT&T/T-Mobile merger
After calling off their merger in December 2011, both AT&T and T-Mobile completed the jump from 3G to 4G. AT&T has maintained its dominant market position along with Verizon Wireless. T-Mobile leapfrogged Sprint to become the nation’s third-biggest carrier and routinely claims (whether accurately or not) that its network is even better than AT&T’s and Verizon’s.
But suddenly, after years of boasting about how its network is the best in the US, T-Mobile says it can’t possibly make an effective move from 4G to 5G unless it is allowed to buy Sprint. The change in rhetoric might be less surprising if T-Mobile’s previous claims about its network had been limited to its ability to deploy 4G. But as recently as two months ago, T-Mobile said it would “build out 5G in 30 cities this year” and that it would deliver “a truly transformative 5G experience on your smartphone nationwide.”
“T-Mobile is in a unique position with 5G, with its unpopulated spectrum holdings and multi-spectrum strategy,” the company said on February 27. “While other wireless companies must kick customers off their congested LTE networks to build out 5G, the Un-carrier is building 5G on wide-open airwaves.”
Sprint CEO Marcelo Claure, meanwhile, told investors in February that Sprint’s “strong spectrum assets” will enable “Sprint to be the leader in the true mobile 5G.” Sprint kept up the positive notes on 5G on February 27, claiming it would “deliver the nation’s first 5G mobile network in the first half of 2019.”
Something must have changed dramatically in the past nine weeks. When announcing the merger on Sunday, T-Mobile and Sprint said, “Neither company standing alone can create a nationwide 5G network with the breadth and depth required to fuel the next wave of mobile Internet innovation in the US and answer competitive challenges from abroad.”
AT&T in 2011: T-Mobile has no “clear path” to LTE
AT&T made similar arguments in 2011. “T-Mobile USA does not have a clear path to delivering LTE,” AT&T said in its merger announcement. AT&T’s description of the public interest benefits of the merger further questioned T-Mobile’s ability to deliver any LTE coverage at all, saying, “T-Mobile USA has already dedicated its current spectrum to UMTS/HSPA+ and GSM technologies.”
AT&T promised that if the government allowed the merger, it would deliver 4G LTE “to 95 percent of the US population to reach an additional 46.5 million Americans beyond current plans—including rural communities and small towns.”
FCC staffers did their analysis and concluded that AT&T’s claims were exaggerated. AT&T on its own “would have sufficient spectrum for LTE deployment,” the FCC said in a report that helped doom the merger.
“There is ample documentation on the record that AT&T was planning a robust rollout of LTE prior to the announcement of the proposed transaction,” FCC staff wrote.
T-Mobile’s path from 3G to 4G was less clear, but FCC staff thought there was at least a chance that T-Mobile on its own could deploy an LTE network.
“While LTE deployment is less certain but not impossible for T-Mobile, we also find ample documentation in the record to at least question whether or not LTE penetration is appropriate as a model input for T-Mobile,” the FCC said at the time.
We know what actually happened after the AT&T/T-Mobile merger died. AT&T today says it covers more than 317 million people with LTE, about 97 percent of Americans—higher than the 95 percent that AT&T said it could achieve if it combined with T-Mobile.
Although AT&T cast doubt on T-Mobile’s ability to upgrade to LTE at all, T-Mobile’s LTE coverage surpassed 300 million Americans in October 2015 and 322 million by the end of 2017. (The failed merger did help T-Mobile because AT&T had to pay a $4 billion breakup fee that included $1 billion in spectrum rights. T-Mobile also spent $8 billion in a spectrum auction last year.)
Sprint also tried to buy T-Mobile in 2014 but dropped the deal after objections from the Obama administration. T-Mobile passed Sprint in total subscribers in 2015 and has since widened the gap between the third and fourth biggest carriers.
Appealing to Pai
Sprint’s weak financial position today is similar to T-Mobile’s position in 2011. We can’t predict what Sprint’s network and customer base will look like several years down the road if the T-Mobile/Sprint merger is blocked. But even Sprint’s own public promises about deploying 5G from February contradict any argument that it can’t deploy a vast and powerful 5G network without being absorbed by T-Mobile.
Still, the T-Mobile/Sprint argument is tailor-made to please US regulators. FCC Chairman Ajit Pai is focused on “reducing regulatory barriers” to encourage upgrades from 4G to 5G wireless networks. Wireless industry lobbyists have been arguing that China and South Korea could beat the US in “the race to 5G” unless the government enacts more industry-friendly policies.
The FCC is required to review whether mergers benefit the public interest, and Pai could point to T-Mobile’s 5G claims as justification for approving the deal. The deal also needs approval from the Department of Justice, which is trying to block AT&T’s takeover of Time Warner Inc.
“We think the rise in the government interest in creating an attractive investment climate for 5G deployment improves the odds for the deal’s approval,” New Street Research analyst Blair Levin wrote in a note to clients before the deal was announced, according to .
Consumer advocacy groups want the government to block the merger, saying customers are better off with four nationwide wireless carriers than with three. To counter the 5G claims, they could point to the aftermath of AT&T/T-Mobile.
“Executives of both [T-Mobile and Sprint] have previously said that they would offer [5G] service across the country and that their networks would be the best in the industry,” wrote in an editorial yesterday. While T-Mobile and Sprint claim that their combined 5G wireless will be good enough to compete against home Internet service, “there is a long history of telecom executives failing to deliver on grand promises about abundant and cheap broadband.”