T-Mobile (TMUS, Financial) and Sprint’s (S, Financial) merger agreement has raised several discussions on how it could potentially change the market dynamics in case the deal receives a go-ahead from the regulators. If the deal concludes, the U.S. wireless landscape could see a wave of changes. It would reduce the number of national wireless operators from four to three and create a more effective competitor to market leaders Verizon (VZ, Financial) and AT&T (T, Financial). The merger could pose a threat to the larger players and what price changes consumers could expect.
Potential threat to Verizon and AT&T
If T-Mobile and Sprint manage to convince the Federal Communications Commission (FCC) and the U.S. Department of Justice to approve their merger proposal, the combined entity would be able to better contend with Verizon and AT&T. The spectrum portfolio, which is the lifeline of a wireless industry, will improve considerably, including T-Mobile’s 600 MHz licenses that the company recently acquired and Sprint’s 2.5 GHz airwaves. This portfolio is extremely crucial for 5G deployment. The joint effort of building the next generation 5G network would help the combined entity develop a denser network. It would also mean dodging duplications and considerably lowering capital expenditures for building the network infrastructure.
Subscribers of the joint entity will be able to enjoy faster service and a more dependable connections, thanks to the combination of lower and higher spectrum band. This would also mean lower churn rate in the future.
T-Mobile has invested in forming significant brand value in the past few years as compared with the Sprint brand. The joint entity would adopt T-Mobile branding. The retail stores of Sprint would also be rebranded to T-Mobile stores. This would definitely equip the merged firm take on the likes of Verizon and AT&T more effectively.
Pricing remains a concern
Sprint CEO Marcelo Claure has specified that the merger deal would lead to lower prices for services to subscribers. This is because the companies expect to save north of $6 billion in cost synergies, thus allowing them to provide service at more reasonable prices.
There are two sides to what Claure claims. One, it would be mandatory for the combined entity to keep prices lower to retain its subscribers as both T-Mobile and Sprint have the most price-conscious postpaid customer base. Second, increasing market concentration from four to three players typically would lead to increases in service prices as competition is reduced from four to three carriers.
Earlier, T-Mobile and Sprint were competing fiercely with one another to retain their customers from shifting to rival networks by keeping prices down and providing plenty of value-add. In fact, this also resulted in the larger two players following suit to keep their churn rate in check. But the elimination of this competition actually raises doubts regarding prices since carriers would be less aggressive with promotions.
T-Mobile and Sprint could take a different route and play smart. The combined entity could opt for increasing service prices, but keep it lower than Verizon and AT&T’s offering to manage subscriber retention.
What to expect
There’s so much hullabaloo over the merger, particularly with the FCC and Department of Justice approval for the deal. According to market research firm HarrisX consumers would back the combination of T-Mobile and Sprint if they feel it would benefit them. Customers would primarily focus on three key things. One, they would look at the deal from the pricing perspective, expecting service prices to lower because of synergies of combination. Second, subscribers would expect wireless coverage to expand to underserved and rural areas. Finally, the merger should result in economic growth.
Disclosure: I do not hold any position in the stocks mentioned in this article.
