Wednesday, May 9, 2018

If Vodafone Believes "Mobile Only" is Not a Sustainable Strategy, Why Do Sprint and T-Mobile US Believe Differently?

Vodafone's proposed acquisition of Liberty Global cable TV assets in a number of European markets is the latest step in Vodafone’s shift from a “mobile-only” service provider to an “integrated” provider built on use of both mobile and fixed network assets.

Perhaps that shift should be kept in mind when evaluating the proposed Sprint merger with T-Mobile US, which would create a substantially-larger mobile company in the U.S. market, perhaps eclipsing even AT&T’s mobile share.

If Vodafone is correct, and a “mobile-only” strategy no longer makes sense, can the same mobile-only strategy make sense, longer term, for Sprint and T-Mobile US?

And, if so, will a much-larger new mobile asset be an easier, or harder match, for any future combination of assets? The answer seems clear enough: a much-bigger Sprint-plus-T-Mobile US would be a harder asset for most companies to envision acquiring.

In principle, one might presume that the bigger mobile company could be the acquirer of substantial fixed and other assets. But, as a practical matter, T-Mobile US (assuming that is the surviving brand) probably does not have the capital to acquire a substantial fixed network presence in the U.S. market.

Charter Communications, for example, has a market capitalization in excess of $100 billion. Charter is the second-largest U.S. cable TV operator. Comcast facilities pass about 41 percent of U.S. homes. Charter passes about 33 percent of U.S. homes.

The point is that even if T-Mobile eventually wanted to acquire substantial fixed network assets, it probably could not afford to do so. It would spend in excess of $100 billion to reach just a third of U.S. households.

The merged Sprint plus T-Mobile US might have a valuation of perhaps $140 billion, making it a tougher acquisition target itself.

In other words, if “mobile only” is not a sustainable strategy, the Sprint merger with T-Mobile US only creates a larger company with an unsustainable strategy and also becomes a harder acquisition target for any other large firm in the app, platform or device area.

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