One Way or Another, Sprint Needs Out of PurgatoryOne Way or Another, Sprint Needs Out of Purgatory

The long-running soap opera that is T-Mobile’s proposed acquisition of Sprint took yet another bizarre turn last week when the attorneys general of 10 states, led by New York and California (no surprise there), filed a suit to block the acquisition on grounds of potential consumer harm, as reported by The Wall Street Journal.

The bizarre part of this is that responsibility for judging the potential consumer harm from such a combination is primarily the realm of the federal government, in particular, the Federal Communications Commission (FCC) and the Antitrust Division of the U.S. Department of Justice (DoJ). The FCC has already given its blessing to the deal, with the stipulation that Sprint divest its prepaid division, Boost Mobile, as Bloomberg reported. This makes the move by the state attorneys general appear to be a preemptive strike to force the DoJ’s hand and spur it to block the deal on the grounds that they intend to continue the battle regardless of what the agency decides. (Nevertheless, CNN Business yesterday reported that it has learned that the DoJ “prepared to approve the deal within days.”

The political class has come to the dubious conclusion that a larger number of competitors is by definition always more advantageous than a smaller number. While I would agree that a number greater than one (i.e., a monopoly) is indeed preferred, as it allows the magical workings of Adam Smith’s “invisible hand” of competition, the number four holds no particular value.

The Number of the Day Is Four!

It’s important to remember that the U.S. cellular industry began as a government-mandated duopoly; by region, the FCC granted one frequency license to the local phone company and another to one competitive carrier. Through a process that involved more mergers, acquisitions, asset sales, and name changes than anyone can remember, that original structure eventually devolved to the four-carrier situation we have today. “Four carriers” wasn’t some divine fiat.

Economists refer to a market with a few competitors as an oligopoly, a situation you’d expect to evolve here given the capital-intensive nature of the cellular business, particularly as related to its need to invest in spectrum (i.e., radio licenses). I’ve yet to see any compelling formula that would compute an optimal number of competitors in an oligopoly, but it seems that three would suffice for what essentially amounts to a utility market. Prices have been declining in the cellular market, and there’s no reason to think that competition will abate if the number of providers drops from four to three.

Acquisition opponents claim the combination would drive up prices, cost jobs, and slow the deployment of 5G and other new service capabilities. I really can’t see how they can square that circle. The major job cuts foreseen would be a result of combining the two companies’ redundant retail networks. While Sprint and T-Mobile have instigated the most recent round of price wars, the overall trend in cellular prices is downward. In the most recent cellular optimization I worked on, we were able to cut the bill by 40%.

With regard to slowing new service deployment, you can’t invest in anything if you don’t have money!

Sprint’s desperation marketing strategy of late has been to maintain customer numbers by offering limited-time price promotions; this strategy has only made a bad situation worse. Sprint has $33 billion in debt on its books with an annual carrying cost of $2.4 billion, as noted by a Bloomberg columnist. So, it’s a real bummer for Sprint when a new customer drops it right after that unprofitable promo period ends. (They call that “stepping out” as opposed to “stepping up.”) In the meantime, Sprint reported a net loss of 60,000 lucrative postpaid customers in 2018.

In a capital-intensive business like cellular, size really matters. According to a presentation Sprint made to the FCC last September, the company’s fixed OpEx per customer was 78% higher than Verizon’s, and 33% higher than AT&T’s. Given the nature of radio transmission, however, all carriers need roughly the same number of cell sites to service any given area regardless of how many paying customers they have there.

You can certainly argue that Sprint’s challenging business position is based at least in part on a legacy of poor decisions. In trying to spur the fixed wireless market back in the early 2000s, Sprint backed a technology -- WiMax -- that never really got off the ground. Now the idea of fixed wireless is making a comeback… with 5G.

Clearly, the 2005 Nextel purchase turned into a costly debacle as the push-to-talk market switched to PTT-over-cellular services, which could be provided over any cellular data network. Nextel did bring with it an enormous cache of 2.5-GHz (Band 41) spectrum, which is one of Sprint’s biggest assets. However, you need capital to deploy the equipment to make use of it.

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CATV -- Adjacent Acreage

The far-reaching impact of cellular creates innumerable dependencies and adjacencies, so there are a lot of dogs in this fight. Each dog is understandably taking a position that would trigger a scenario by which it could profit either directly or indirectly. Pay TV providers, of both the cable and satellite varieties, are barking up a storm here.

If market saturation is making things tough in the cellular business, life is even worse in pay TV. Another capital-intensive utility, subscriber growth is key to success for these providers. The cellular carriers have run out of humans to sell to, but the prospects of greater adoption of Internet of Things (IoT) applications poses a great opportunity for mobile operators, particularly if those applications call for WAN support. In the meantime, the pay TV guys are losing subscribers!

Pay TV guys have looked longingly at cellular for some time, the most aggressive being Charles Ergen, executive chairman of Dish Network. Most of the cable companies have offered cellular services on a mobile virtual network operator (MVNO) basis for decades, and we’re seeing more of that activity of late by Comcast, Charter, and Altice, the latter having crafted a unique MVNO arrangement with Sprint (see my recent No Jitter piece, “A New Piece Emerges for Cable Cellular”).

Pay TV providers also seem to look at cellular as a key contributor to many of their problems. First, there’s the whole cut-the-cord thing, where cable subscribers drop their $100 to $200+ cable bill and get by on the video options they can get for free or on selected streaming services like Netflix. The cable companies may still keep them as Internet customers, but now there’s talk of fixed wireless Internet via 5G. In the meantime, consumer choice (now that such a thing exists) is driving more video viewing onto smartphones.

In regards to the FCC’s requirement that Sprint divest Boost Mobile, one potential is that a pay TV provider might buy that asset to move deeper into the mobile business. Dish’s Ergen has previously suggested that his company might be interested in buying Sprint in its entirety to maintain what he deems the four-carrier competitive necessity – and reports coming out this week suggest Dish is poised to buy Boost Mobile.

While Ergen has something of a reputation on the acquisitions front, having tried and failed to acquire T-Mobile, Sprint (twice), MetroPCS, ClearWire, and DirecTV, Dish has gone deeper into wireless than any of its competitors. It has amassed some $420 billion worth of spectrum and is reportedly in the process of building a “bare bones” 5G network focused on IoT applications. Ergen is facing the FCC’s “use it or lose it” mandate on spectrum with a potential deadline in 2020.

Conclusion: What God Hath Wrought

What’s clear out of all of this is that something must happen with Sprint. Left alone, it’s virtually destined for bankruptcy. Once there, we could expect the company’s assets, particularly its extensive and very valuable spectrum holdings in the 2.5-GHz band, to be sold off.

More likely, some buyer would look to pick up the company for a song, while debt holders take a bath on the $33 billion they’re owed. The problem is that the government’s “four-carrier obsession” would have then effectively outlawed any other wireless carrier from buying Sprint, so the most likely acquirer would be a private equity firm or pay TV operator -- with Dish and Altice topping that latter list.

While most of this argument is framed in terms of the consumer cellular market, enterprises clearly have a stake in this as well. From my position on the front lines of the enterprise battle, Verizon and AT&T continue to dominate while T-Mobile usurps Sprint’s role as the number three choice.

While the DoJ envisions a four-carrier market, for the enterprise customer we’re really looking at a market with two providers: Verizon and AT&T. A merged T-Mobile/Sprint, with its combined 600-MHz and 2.5-GHz spectrum, could be the one operator that didn’t have to depend on the as-yet-untested millimeter wave spectrum.

Regulating a field as dynamic and fundamentally important as wireless is a serious responsibility. Overall the wireless industry is going like gangbusters, though most of the profits are going to the devices and apps that make use of the utility infrastructure. The mobile carrier business itself remains highly competitive with falling prices, and carriers desperately searching for new revenue opportunities in the face of an oversaturated consumer market.

In light of what’s going on in this market, who came up with the idea that having three carriers instead of four would make any meaningful difference?