The most popular trend in the wireless industry is that the big players buy the smaller ones in order to grow. In fact, each and every player in the industry has undergone a merger to expand its presence as well as its subscriber base. This seems to happen once again when Sprint (S) acquires T-Mobile (TMUS) in the coming months.
Scenario after the deal
If Sprint buys T-Mobile then the former will continue to be in the third place. However, its subscriber base will increase substantially, almost nearing the second one, which is Verizon (VZ). AT&T (T) is the biggest player in the industry with the wireless subscriber base of 110.4 million. Verizon stands second with a total of 102.8 million subscribers. Sprint currently has 53.9 million subscribers and will reach 100.6 million if it adds T-Mobile to its business.
This will make competition stiff between the three prominent players. If Sprint plays it well, it might take Verizon’s place in the years to come. Earlier AT&T too had tried to acquire T-Mobile in 2011, but the deal was not approved by the government since it felt that it was important to keep the competition healthy among the four players. The deal would have made AT&T an undisputed leader and difficult to compete with.
T-Mobile has been doing very well because of its marketing campaign, which affected all the players. Its offers included cutting on international roaming charges, dropping contracts as well as offering a pay of $650 to competitors’ customers for switching over to T-Mobile.
This forced AT&T to offer $450 to T-Mobile customers who switch to AT&T. In fact, even Verizon and Sprint resorted to price cuts in order to attract customers and stop them from switching to T-Mobile. Also, they have started eliminating two-year contracts in order to overcome competitive pressures from T-Mobile.
If Sprint succeeds in adding T-Mobile to its business it will be able to save $6.6 million on costs related to network, equipment and other operating costs.
However, the biggest problem which Sprint will face is to provide steep discounts in order to match up to T-Mobile’s reputation. Providing discounts would hurt Sprint’s top line, resulting in lower share price.
In fact, there is quite a difference between the spending of a Sprint customer and a T-Mobile customer. T-Mobile customer spends a total of $50 per month, whereas Sprint customer spends $62.
However, Sprint needs to go ahead with this acquisition since it is witnessing declining sales because of degradation in its quality of phone calls. This made customers switch to other players. In fact, Sprint lost 2.5 million customers in the last 5 years.
On the contrary, T-Mobile has been merrily adding customers mainly because of its steep discounts and new marketing initiatives which are attracting customers in hordes. However, it has been hurting T-Mobile’s bottom line, resulting in a loss of $151 million.
Although there are benefits for Sprint if it acquires T-Mobile, but the fact that it will have to resort to discounts and its “uncarrier” marketing strategy is worrisome. The company might not be able to keep up with T-Mobile’s strategy and might end up in a worse situation. Further, if the government does not approve of the deal, it will be a waste of time. Therefore, one should stay on the sidelines until Sprint declares to crack the deal.