What are the Odds of Sprint Bid for T-Mobile US Being Approved?

Moffett Nathanson estimates there is only a 10 percent chance that the Justice Department and the Federal Communications Commission will approve any Sprint-T-Mobile merger.

Others disagree, arguing the odds could be as high as 50-50, in part because, as Sprint and
T-Mobile US believe, the other big deals will change the market.

Some might argue the future opportunities both Sprint and T-Mobile US each might have to survive in the U.S. market as independent companies will hinge on the regulatory response.

The argument in favor of a merger is that Sprint and T-Mobile US simply lack the scale and financial resources to catch AT&T Mobility and Verizon Wireless.

The argument against such a deal is that the U.S. mobile market already is too concentrated. But U.S. communications markets are changing, in ways that change market dynamics.

The instability is that Comcast is chasing a deal that would make it the supplier of 40 percent of U.S. fixed network high speed access connections. AT&T wants to vault from five percent share of the U.S. video entertainment market to about 27 percent.

At the same time, Dish Network will enter the market soon as a facilities-based mobile provider, while Comcast will do so as well, probably using a strategy similar to that used by Illiad’s Free Mobile, which rapidly gained significant market share in the French mobile market.

Much of the recent speculation has focused on the potential FCC decision, on the assumption that Sprint has to win over only a single commissioner to put together a three-vote win.

The Department of Justice might  be the tougher obstacle, as DoJ normally relies on a market concentration standard that already is above the permissible limit.

The Justice Department will generally investigate any merger of firms in a market where the Herfindahl-Hirschman Index (HHI), a test of market concentration, exceeds 1000 and will very likely challenge any merger if the HHI is greater than 1800.

The U.S. market has an HHI of about 2500. Some would argue that any deal in a market with an HHI over .230 will be heavily scrutinized and most likely rejected.

The issue, some would say, is that most mobile markets eventually consolidate to just three leading players over time, no matter what regulators prefer.

Looking at the biggest 36 mobile markets globally, analyst Chetan Sharma found that the average HHI score of a  typical market ranks 3440 on the scale.

Developed markets have an HHI of 3270. The U.S. market HHI is 2500, between “heavily concentrated” and “moderately concentrated” markets. The U.K. market is the notable exception.

Sharma found 30 of the 36 markets over that level.

Whether any of that will weigh on thinking at the Justice Department, or the FCC, is the issue.

Any Sprint deal to buy T-Mobile US will occur in the context of a rapidly-changing market, featuring both consolidation and the emergence of new competitors.

Whether either firm will survive long term, if a merger is rejected,  is the issue.

Some might also argue that one’s perception of the odds--at least at the FCC--likely hinges on how one views the politics of three bit mergers being proposed at the same time.

Sprint thinks its chances are better because two other big deals are proposed. Moffett Nathanson thinks odds, conversely, are worse.

"Approving all three would be untenable for the left,” Moffett Nathanson says. “Rejecting all three would be untenable for the right.”

“At least one of the three would have to be rejected,” Moffett Nathanson concludes. Sprint is the likely loser.  

Successful Sprint Acquisition of T-Mobile US is the Beginning, Not the End

If Sprint does make an acquisition offer for T-Mobile US, and if Sprint somehow manages to gain approval from the Department of Justice and Federal Communications Commission, and if its management is able to execute in the manner of T-Mobile US, rather than Sprint, the new company still will trail Verizon Wireless and AT&T Mobility, but close the gap significantly.

The combined company still will face issues, ranging from integrating the two firms operationally to somehow getting the historically sluggish Sprint operation to move as fast a T-Mobile US has proven recently.

Anyone familiar with Sprint will recognize the longer-term issue, namely a corporate culture that historically has been slow-moving and "traditional," compared to most other firms of its size in the industry. 

So even if air interfaces, network coverage, a rationalized retail sales network and other operational issues are resolved over a few years, and even if a more-agile leadership is put into place, some might wonder how fast the traditional Sprint culture can change. 

Softbank already seems to have encountered the problem, which might explain why Sprint has not attacked as aggressively as many believed would happen after the Softbank acquisition of Sprint, essentially losing the initiative to T-Mobile US. 

If an acquisition offer emerges, and if it is approved, the challenge of catching AT&T and Verizon still will remain. Doubtless, there will be continuing questions about whether Sprint actually can change enough to sustain a disruptive and successful challenge. 

Culture, not just scale and financial assets, matter. 


source: Business Insider

Will Sprint Gamble on T-Mobile US? How Soon?

Speculation now is growing that Sprint and T-Mobile US will launch a risky merger effort in 2014, a move that has been debated and rumored about for a decade and a half.

It might be argued the bid is driven fundamentally by weakness, not strength, sometimes an unpromising portent of future success.

A bid would signal in part that favorable bidding rules in the upcoming 2015 auction of 600-MHz spectrum will not, in fact, help either company enough to survive over the long term.

Nor, Sprint seems to believe, can T-Mobile US sustain its blistering and so-far successful attack on industry packaging and pricing, with clear gains in subscribers, over the longer term. In fact, some already are predicting a slowdown in T-Mobile US subscriber gains.

Opponents of any such merger will undoubtedly point to the significant subscriber gains T-Mobile US has made since early 2013, a period where T-Mobile US reversed its customer losses and gained more than two million coveted postpaid customers in 2013.

But neither Sprint nor T-Mobile US executives seem presently to believe they can survive--and that is probably an accurate term--over the longer term unless they combine.

That is going to run head on into antitrust resistance, as Department of Justice officials already have signaled a preference for four leading mobile service providers. But that might ultimately be unsustainble, as French regulators now believe.

More importantly, there is some reason to believe a majority fof Federal Communications Commission commissioners might agree.

So Sprint and T-Mobile US think their gamble is worth an effort, now. The firms think the large mergers proposed by Comcast (to buy Time Warner Cable) and AT&T (to buy DirectTV) give a Sprint bid to buy T-Mobile US a bit of regulatory cover.

With other parts of the industry consolidating, Sprint will position its own deal as an effort to keep up. Without the merger of Sprint and T-Mobile US, the U.S. mobile market effectively will become a duopoly, advocates will argue.

But market structure issues are complicated. Dish Network still is planning its own entry into the market, as is Comcast, and both will do so using their own facilities and assets.

Even with any Sprint merger with T-Mobile US, there still could be four to five leading providers, eventually.

The bid is a clear gamble, as both antitrust authorities and members of the Federal Communications Commission have signaled discomfort with any such deal.

To be sure, large transformative acquisitions and mergers in the U.S. market always involve some elements of “gambling,” as antitrust authorities and the Federal Communications Commission, though generally supportive of past mergers in a prior couple of decades, have recently concluded that markets are about to become too concentrated, or already are too concentrated.

Despite an almost unbroken record of approval of transactions in the mobile, cable TV and telecom business for a couple of decades, just two major refusals can be noted: the rejection of AT&T’s effort to buy T-Mobile US in 2011, and the refusal to allow a merger between DirecTV and Dish Network in 2002.

Those two deals are notable because both would have reduced the number of suppliers in the mobile or satellite TV markets, as the Sprint deal would also accomplish.

And all three big deals--Comcast buying Time Warner Cable; AT&T buying DirecTV and Sprint buying T-Mobile US--would remove a supplier from the market.

To be sure, Comcast argues that there are no competitive complications, since Comcast does not presently compete with Time Warner Cable.

And there are strategic reasons why all the mergers might in some sense be viewed as defensive in nature. Virtually nobody disagrees with the premise that linear video subscription services, sooner or later, are going to be displaced by over the top alternatives.

Virtually nobody disagrees with the notion that voice and text messaging revenues are declining.

The number of fixed network voice lines purchased by customers will continue shrinking, while mobile operator text messaging and voice revenues likewise will be limited in the future.

Also, the number of potential leading providers in the mobile market is going to increase, no matter what happens with Sprint’s bid for T-Mobile US.

Dish Network is preparing to enter the U.S. mobile market, and Comcast is sure to follow.

Almost parenthetically, both Sprint and T-Mobile US seem to discount the strategic importance of bidding rules for the upcoming auction of 600-MHz spectrum that are designed to favor both Sprint and T-Mobile US.

Launching an acquisition in 2014 would effectively remove both Sprint and T-Mobile US from such favored bidding in the upcoming auction of 600-MHz spectrum.

That, in turn, is a signal, and not the only sign, that both firms think their future prospects--and even survival--hinge on gaining scale, soon, and not on additional low-frequency spectrum they might win in the 600-MHz auctions.

One might accurately characterize the motivations behind AT&T’s effort to buy T-Mobile USA, and Sprint’s effort to buy T-Mobile US, as fundamentally different.

AT&T, already a market leader, was making a bid to reinforce its leadership, at the same time closing off any effort by Sprint to gain scale by making its own bid for T-Mobile US.

Sprint and T-Mobile US are making a defensive move, hoping to gain enough scale to compete, and essentially acknowledging that neither firm, alone, is going to catch up to AT&T and Verizon, no matter how many brave words are uttered to that effect.

In fact, some believe the T-Mobile US assault, which has netted important subscriber gains, is unsustainable in the long run. Not only does T-Mobile US need to keep adding new customers at a very high rate, it eventually will have to turn from sacrificing profits, in order to gain customer share, to earning profits.

In other words, the problem with the “compete your way to growth” strategy--for either Sprint or T-Mobile US--is that it already might be doomed. Neither firm has the financial resources to sustain a long campaign to grab share by undermining the industry structure of prices and packaging.

Hence, the necessity of a gamble on a big merger. In fact, it is hard to say which firm loses more if an acquisition fails. Sprint probably would have to pay a breakup fee to T-Mobile US, so T-Mobile US gains, at the margin.

A vote at the FCC would be close. But Sprint and T-Mobile US both believe they have a shot at convincing a majority of commissioners to approve a deal, in part because as many as three of five commissioners might be receptive to the argument that robust competition is sustainable, long term, if there are three strong firms, nearly evenly matched, rather than two leaders and two smaller firms.

Also, the Comcast deal to buy Time Warner Cable and the AT&T bid for DirecTV might help Sprint make the case that on-going major market consolidation now forces Sprint and T-Mobile US to combine.

And even success is no panacea. Ask yourself: would you switch from AT&T or Verizon to Sprint, after a merger with T-Mobile US, if all offers from the combined company were about as they are now at T-Mobile US?

And do you think either AT&T or Verizon, or both, would not move to match those offers, to keep your account?

More significantly, would either AT&T or Verizon stand by while important postpaid multi-line accounts were taken?

​Comcast vs. Netflix: Net Neutrality or Just Intrerconnection?

Net neutrality and network interconnection, it is necessary to repeat, are different processes and issues, even if lots of people think they are the same. 



As Maggie Reardon at CNet rightly notes, "the dispute between Netflix and Comcast is not a Net neutrality issue because it does not have to do with how Comcast is treating Netflix's traffic once it's on the Comcast broadband network. Instead, it stems from a business dispute the two companies have over how Netflix is connecting to Comcast's network."

FCC issues 600-MHz Auction Rules, Which Suggest No Sprint Bid for T-Mobile Until Late 2015, At the Earliest

A useful rule of thumb for assessing the “neutrality” any proposed Federal Communications Commission regulation or policy is that if both larger service providers and small service providers are somewhat unhappy--but not super unhappy--about the guidelines, the FCC probably has managed to get the new policies just about right.

That might well be the case for FCC rules about upcoming 600 MHz spectrum auctions, which will get spectrum set-asides for smaller carriers (AT&T and Verizon opposed that measure; Sprint and T-Mobile US supported the measure), and also prevent “package bidding” favored by AT&T and Verizon, but were considered unfavorable for smaller providers.

Package bidding would have allowed "all-or-nothing" bids for groups of licenses.

By barring such bidding on blocks of licenses, the Commission hopes to encourage smaller carriers to bid on rural licenses with a higher chance of success.

But Sprint and T-Mobile US would find themselves unable to bid on the reserved spectrum if any merger bids between the two companies occur before the auction process.

Some think that means there will be no Sprint bid to acquire T-Mobile US until after the auctions are completed, sometime in 2015.

Price War Will Limit AT&T Mobility Revenue Gains, Even as Subscriber Gains Accelerate

One of the classic signs that a communications market is in a  more-competitive phase is that leading service providers start to trade away average revenue per account to gain net subscriber share. And that appears to be what AT&T Mobility is doing.

AT&T predicts that in its second quarter of 2014, AT&T will add a net 800,000 postpaid customers. At the same time, AT&T Mobility expects “no service revenue growth”  in the second quarter.

That is a consequence of wider adoption of AT&T Next and Mobile Share Value plans, which  shift revenue away from “services” and to “device revenue,” and also lead to lower per-account revenue for multiple-device accounts.

About half of the company’s postpaid smartphone customer base will be on no-device-subsidy Mobile Share Value pricing plans, growing to approximately 66 percent by the end of 2014.

At the same time, about half of smartphone sales now use the “Next” installment plan. All those changes will limit second quarter earnings, AT&T says.

If AT&T does gain 800,000 net postpaid accounts, it would be the biggest net gain of subscribers since the fourth quarter of 2009.

Those gains will come at the expense of revenue growth, however.

T-Mobile US has the same strategy.

What is not yet so clear is whether Verizon Wireless and Sprint will do so, as well. Up to this point, Verizon has resisted that strategy, for the most part, as has Sprint.

On the other hand, Verizon Wireless already has warned that a shift of revenue from services to device revenue will start to happen after the first quarter.

The other angle is that tablets are driving net account additions at all the top four national carriers.

Verizon Communications, for example, added a net 539,000 postpaid subscribers in the first quarter of 2014. But those figures include a net gain of 634,000 tablet accounts, meaning Verizon Wireless actually lost handset customers.

Some observers fear a widening price war, while a few have argued there is either no price war, or that the price war is having little impact.

Financial reports will settle the matter.

AT&T DirecTV Acquisition Shows Power of the Bundle

As U.S. Federal Communications Commission officials weigh a number of high-profile proposed mergers, the definition of “relevant market” will arise. It might seem obvious that Comcast buying Time Warner Cable is a simple matter of consolidation within the video entertainment or cable TV market.

That might not be the case. If the transaction is approved, Comcast would have 40 percent market share of the high speed access market.

If AT&T’s bid to buy DirecTV is approved, AT&T would instantly become the second-biggest provider of subscription linear video entertainment services, but would not see its voice, high speed access or mobile segment market share change at all.

Any future proposed consolidation in the leading ranks of mobile service providers likewise would directly affect the mobile provider segment, and might change multi-play services market share.

The point is whether it makes sense to regulate cable TV, video, mobile, high speed access and voice as discrete industries and markets.

Consider that 97 percent of AT&T customers bundle their video subscription service with other AT&T services.  Cable providers have 75 percent or more of their subscribers on a bundle of video and broadband, AT&T notes.

About 41 percent  of Comcast’s customer base bought triple play packages in 2013, for example. And that is a global trend.

Aside from free cash flow, subscriber mass and the value of video entertainment services, AT&T sees upside from new bundling capabilities as a result of the DirecTV acquisition.

All considered, AT&T sees the opportunity to gain new customers through the effective bundling of video, fixed network high speed broadband and wireless services to at least 70 million locations.

AT&T also sees upside from the ability to bundle linear TV and mobile service to another 45 million U.S. customer locations.

Depending on how one wishes to characterize such a bundle, it is a dual-play package(mobile plus entertainment video) or a triple-play offer (video, broadband Internet access and voice).

One example of how the mobile-plus-video package represents new ground for AT&T is the fact that about half of AT&T retail stores do not currently sell a subscription TV product. After the merger, all AT&T stores can sell a dual-play or triple-play bundle.

Overall, the DirecTV acquisition allows AT&T to sell a conventional triple play service to at least 70 million fixed network locations (perhaps 24 million fixed network locations than originally foreseen for Project VIP) and a mobile-plus-video bundle to another 45 million locations.