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Strong Evidence T-Mobile/Sprint Merger Will Cause Prices to Rise, Innovation to Sink

Despite rosy predictions from Sprint and T-Mobile executives that the two companies joining forces will result in plentiful competition, lower prices, and more advanced service, the results of prior mergers in the wireless industry over the last 20 years delivered increasing prices, reduced innovation, and a lower customer service experience instead.

Few markets show the stark results of consolidation more than the telecom industry. Monopoly cable rates, barely competitive wireless domination by AT&T and Verizon — both with a long history of adjusting wireless rates and plans to closely match one another (usually to the detriment of the consumer), and politicians and regulators that acquiesce to the wishes of the telecom industry have been around even before Stop the Cap! got started in 2008.

When a market disruptor begins to challenge predictable and stable marketplaces, Wall Street and investors quickly get uncomfortable. So do company executives, whose compensation packages are often dependent on their ability to keep the company’s stock price rising. That is why T-Mobile USA’s “Uncarrier” campaign, which directly challenged long-established wireless industry practices, created considerable irritation for other wireless companies, especially AT&T and Verizon.

The two wireless industry giants initially ignored T-Mobile, suggesting CEO John Legere’s noisy and confrontational PR campaign had no material impact on AT&T and Verizon’s subscriber base and revenue. Ironically, Legere was named CEO one year after AT&T’s 2011 failed attempt to further consolidate the wireless industry with its acquisition of T-Mobile. A very generous deal breakup fee and accompanying wireless spectrum provided by AT&T after the deal collapsed gave T-Mobile some room to navigate and transform the company’s position — long the nation’s fourth largest national wireless carrier behind Sprint. It is now in third place, poaching customers from the other three, and has repeatedly forced other carriers to change their plans and pricing in response.

T-Mobile’s “Uncarrier” promotion.

T-Mobile invested in its network and delivered upgrades, but the real inroads for subscriber growth were made by throwing out the typical wireless carrier business plan. T-Mobile brought back unlimited data and made it a key feature of their wireless plans starting in 2016, a feature AT&T and Verizon had successfully banished, ended the traditional two-year contract, scrapped junk fees and surcharges that customers hated, and ran regular specials that dramatically cut family plan rates. If you lived in an area with solid T-Mobile coverage, the scrappy carrier quickly became a viable option among those contemplating ditching Verizon or AT&T. T-Mobile also benefited enormously from disaffected Sprint subscribers that spent years riding out frequent promises of an in improved network experience that frankly never matched the hype in many areas. Price conscious customers that could not afford a plan with AT&T or Verizon moved even more readily to T-Mobile’s network.

In contrast, AT&T and Verizon have spent the last 20 years consolidating the wireless industry by acquiring regional carriers that had a reputation for good service at a fair price, with the promise that the acquisition by a richer and larger competitor would accelerate network upgrades and improve service. But customers of long-gone or diminished carriers like Alltel, Leap Wireless’ Cricket, MetroPCS, and Centennial Wireless (there are others) that either no longer exist or remain alive only as a brand name on a larger company’s network, noticed higher bills and eliminated coveted features that helped them manage their data and voice plans and costs.

In Europe, recent industry consolidation in some countries has reduced major carriers from four to three, similar to what T-Mobile and Sprint would do in the United States. Pal Zarandy at Rewheel compared consolidated markets in Germany and Austria and discovered gigabyte data pricing where consumers had three options almost doubled in price in Germany and Austria. Austria was 30% less expensive than a control group of six neutral countries when it had three competitors. Today, with two, it is 74% more expensive than its European counterparts. In Germany, prices went from 60% more expensive to nearly triple the rates charged by control group countries.

The merger of Sprint and T-Mobile will dramatically reduce competition in several ways:

  1. It will end the pervasive price war for lower-income consumers on postpaid plans. Sprint and T-Mobile directly compete with each other to secure customers that skip AT&T and Verizon Wireless because of their more expensive plans and accompanying higher-standard credit check.
  2. Each of the four current national carriers have had to respond to aggressive price promotions for hardware (Sprint, T-Mobile), plans (T-Mobile, Sprint), and loyalty-building rewards (T-Mobile Tuesday). With a merger, those promotions can be scaled back.
  3. AT&T and Verizon have been forced to reintroduce unlimited data plans as a direct result of competition from Sprint and T-Mobile. Incidentally, Sprint and T-Mobile’s unlimited data features are different. T-Mobile offers zero rating of lower-resolution videos from selected websites while Sprint offers unlimited access to HD video. In fact, Sprint’s unlimited plan marketing campaign casts T-Mobile’s version in a negative light and was designed to beat T-Mobile’s plan to attract new customers.
  4. Since Sprint and T-Mobile are market disruptors, merging them means no new aggressive campaigns to out-disrupt each other to the consumer’s benefit. Instead, they will target the conservative plans of AT&T and Verizon, which requires less innovative marketing and less significant price cuts.

Sprint’s marketing points to differences between its plans and those from T-Mobile, Verizon, and AT&T.

In 2015, the OECD released a definitive study demonstrating the impact of consolidating telecom mergers among top industrialized countries, including the United States. The results were indisputable. If you reduce the number of national carriers to fewer than four, prices rise, service deteriorates — along with innovation and investment, and consumers are harmed. In Canada, where three national carriers dominate, the former Conservative government made finding a fourth national wireless competitor a national policy priority. While Americans gripe about their cell phone bills, many Canadians are envious because they often pay more and live with more restricted, less innovative plans.

This February, market research firm PwC published its own findings, “Commoditization in the wireless telecom industry,” showing that North America remained the most “comfortable” region in the world for wireless carriers looking for big revenue and profits, but that was starting to change because of disruptive marketplace changes by companies like T-Mobile and Sprint.

“In this zone, there is a greater than 50 percent spread in market share and ARPU between highest and lowest market players indicating that commoditization is far off,” PwC notes. For wireless carriers, “commoditization” is bad news. It means the amount of money a carrier can charge for its services is highly constrained because multiple competitors are ready to undercut another carrier’s prices or engage in all-out vicious price wars. In these areas, commoditization also means consumers treat each competitor as a viable player for their business.

In France, four national providers —  OrangeSFRBouygues Telecom and Free, have been in a price war for years, keeping France’s wireless prices shockingly low in comparison to North America. The price war in the United States is just beginning. PwC notes as the U.S. market becomes saturated — meaning everyone who wants a cellphone already has one — companies will have to compete more on price and service. T-Mobile and Sprint have been the most aggressive, and the effect is “meaningful competition.” In Canada, where three national carriers exist, competition is constrained by the domination of three large national companies and some regional players. Instead of cutting prices and expanding plan features, many Canadian providers are now trying to bundle their cable, phone, and wireless customers into a single package to “protect [market] share and increase stickiness.” In other words, Canadian wireless carriers are designing plans to hold the line on pricing while keeping customers loyal at the same time.

While average revenue per customer is now around $30 a month in North America, it is less than half that amount in virtually every other region in the world. PwC shows the direct impact of competition starting around 2014, when T-Mobile and Sprint got particularly aggressive about pricing. Wireless carrier ARPU was no longer a nearly flat line from 2009-2013. Now it is dropping faster than every other region in the world as AT&T and Verizon have to change their pricing to respond to competition pressures.

Sprint and T-Mobile’s CEOs launch their PR blitz. (Image: Cheddar)

While reports are likely to surface arguing the alleged pro-consumer benefits of the Sprint/T-Mobile merger, it will be critical to determine who or what entities funded that research. We expect a full-scale PR campaign to sell this merger, using industry-funded astroturf groups, industry-sponsored research, and industry-connected analysis and cheerleading.

In 2011, the Justice Department definitively crushed the proposed merger of AT&T and T-Mobile. It cited strong and convincing evidence that removing a competitor from the wireless market will lead to consumer harm from reduced competition and higher prices. If one substitutes Sprint for AT&T, the evidence still shows Sprint’s own aggressive marketing and promotions (and its competitors’ willingness to match or beat them) will be missing from a marketplace where Sprint no longer exists. That cannot and should not be allowed to happen.

T-Mobile and Sprint Announce $26.5 Billion Merger; New Company Will Keep T-Mobile Name

T-Mobile USA and Sprint have agreed to a $26.5 billion all-stock merger, creating the second largest wireless company in the country with 70 million customers, rivaled only by larger Verizon Wireless with 111 million customers and potentially-third-place AT&T with 78 million.

The merged company will keep the T-Mobile name and its maverick CEO, John Legere. The board will include SoftBank CEO Masayoshi Son, who took control of Sprint several years ago but failed to change its status as the fourth largest carrier in the country.

“This combination will create a fierce competitor with the network scale to deliver more for consumers and businesses in the form of lower prices, more innovation, and a second-to-none network experience – and do it all so much faster than either company could on its own,” Legere said in the statement.

T-Mobile’s owner, Deutsche Telekom, will control 42% of the company, with SoftBank retaining a 27% ownership stake.

This is the third time Masayoshi has attempted a merger of Sprint and T-Mobile, first failing over regulators’ antitrust/anti-competition objections during the Obama Administration, and a second time over arguments about which company would ultimately control the merged operation.

Wall Street is likely to applaud the deal because of the major cost savings the merger would bring. Tens of thousands of job losses are likely at both companies, delivering significant savings.  Sprint has already slashed its workforce from 40,000 in 2011 to fewer than 28,000 today in a series of cost cutting moves. T-Mobile is bloated by comparison, with 50,000 employees as of 2017, leaving much room for layoffs. Overlapping coverage areas could also be consolidated to reduce equipment and cell tower expenses.

Investors are also concerned about the future rollout costs of 5G wireless technology. Reducing the number of competitors offering the service would allow for higher prices and faster return on investment. But company officials are promoting the merger with claims it will accelerate the deployment of 5G networks and attract new investment. Both companies have complained about profit-draining competition, so removing one competitor to leave just three national choices for wireless service will allow carriers to boost prices and ease price wars. Executives have also worried that as the wireless marketplace gets saturated with smartphones for everyone, growing the business in the future has become a major challenge.

Legere

Consumer groups are reading between the lines of the business case for the merger and argue the reduced competition that will result will lead to higher prices, less aggressive competition and upgrades, and big layoffs. Most observers expect activists will seek to block the merger on anti-competition grounds.

“Unlike good wine or a good movie, this long-rumored deal only gets worse with age and repeat viewings. No one but T-Mobile and Sprint executives and Wall Street brokers wants to see this merger go through. Greed and a desire to reach deeper into people’s wallets by taking away their choices are the only things motivating this deal,” said Free Press policy director Matt Wood. “What we know about the wireless market is that customers actually win when mergers are blocked. That market has been relatively competitive in recent years, but only because the FCC and DoJ signaled they would block AT&T’s attempted takeover of T-Mobile in 2011, along with T-Mobile and Sprint’s several previous attempts to combine.”

Wood notes that because of fierce competition from Sprint -and- T-Mobile, their larger rivals AT&T and Verizon have been forced to reintroduce popular unlimited data plans, cut prices, and get rid of onerous multi-year service contracts.

“The notion that this deal would produce better wireless services is a flat-out fiction. We’ve seen the results from the tax cuts and other destructive deregulation in the Trump era,” Wood added. “The combined entity here would just use this deal to line its own pockets, pay down the massive debt these companies carry, and reward shareholders with more stock buybacks. It would fund further acquisitions of content companies, too, as wireless carriers like Verizon and AT&T rush to join the race for targeted advertising revenues built on privacy abuses like those already built into Facebook’s and Google’s ad models.”

So far, the Trump Administration’s record on mergers is mixed. The Justice Department has shown surprising resistance to blockbuster corporate telecom mergers, and is currently suing AT&T and Time Warner, Inc. to unwind their merger proposal. But Trump’s FCC has bent over backwards in favor of mergers involving the administration’s political allies, notably Sinclair Broadcast Group’s local station acquisitions which have received favorable treatment from FCC Chairman Ajit Pai.

“The legal standard for approving giant horizontal mergers like this is not whether Wall Street or President Trump and his cronies likes it. Communications mergers must enhance competition and serve the public interest,” said Wood. “This deal would do just the opposite: It would destroy competition, eliminate jobs and harm the public in numerous irreversible ways. So unless Ajit Pai wants wants to add yet another blemish to his already disastrous tenure at the helm of the FCC, the chairman should speak out and show us he’s willing to do more than rubber stamp any harmful deal that crosses his desk.”

The merger is expected to get significant regulatory scrutiny.

Sprint and T-Mobile Rekindle Merger Talks (Again)

The Wall Street Journal today reported Sprint has rekindled merger talks with Deutsche Telekom’s T-Mobile USA, the third time such merger discussions have taken place in the last four years.

The newest round of preliminary discussions begin five months after earlier negotiations collapsed over the issue of which merger partner would ultimately control the combined company.

Analysts are uncertain if the latest round of talks will amount to anything, especially after watching the Trump Administration’s Justice Department aggressively fight the merger of AT&T and Time Warner, Inc., on antitrust grounds.

If Sprint and T-Mobile combine, it would create three large national carriers competing with each other and an assortment of smaller regional wireless carriers, possibly leading to price increases for consumers who have benefited from the last few years of aggressive sales and promotions launched by market disruptor T-Mobile USA and, to a lesser extent, Sprint.

A Sprint/T-Mobile combination would have nearly 100 million customers, making it America’s second largest wireless company just ahead of AT&T, which had 93 million U.S. subscribers at the end of 2017. Verizon Wireless would continue to be the nation’s largest wireless company with 116 million customers.

The FCC Four: The Top Special Interests Lobbying the FCC

March was a big month for lobbyists visiting the Federal Communications Commission, which opened the doors to wireless special interest groups for “ex parte” meetings with agency staffers that, in turn, brief the three Republicans and two Democrats that serve as FCC commissioners.

Last month’s ex parte filings reveal strong evidence of a coordinated, well-financed campaign by America’s wireless operators and cable companies to get the FCC to ease off regulations governing forthcoming 5G networks, particularly with respect to where tens of thousands of “small cell” antennas will be installed to deliver the service.

Four industry trade groups and companies are part of the concerted campaign to scale back third party control over where 5G infrastructure will end up. Some want to strip local governments of their power to oversee where 5G infrastructure will be placed, while others seek the elimination of laws and regulations that give everyone from historical societies to Native American tribes a say where next generation wireless infrastructure will go. The one point all four interests agree on — favoring pro-industry policies that give wireless companies the power to flood local communities with wireless infrastructure applications that come with automatic approval unless denied for “good cause” within a short window of time, regardless of how overwhelmed local governments are by the blizzard of paperwork.

Here are the big players:

The Competitive Carriers Association (CCA)

The CCA is primarily comprised of rural, independent, and smaller wireless companies. In short, a large percentage of wireless companies not named AT&T or Verizon Wireless are members of CCA. The CCA’s chief goal is to protect the interests of their members, who lack the finances and political pull of the top two wireless companies in the U.S. CCA lobbyists met ex parte with the FCC multiple times, submitting seven filings about their March meetings.

CCA’s top priority is to get rid of what they consider burdensome regulations about where members can place cell towers and antennas. They also want a big reduction in costly environmental, tribal, and historic reviews that are often required as part of a wireless buildout application. CCA lobbyists argue that multiple interests have their hands on CCA member applications, and fees can become “exorbitant” even before some basic reviews are completed. The CCA claims there have been standoffs between competing interests creating delays and confusion.

Costs are a relevant factor for most CCA members, which operate regional or local wireless networks often in rural areas. Getting a return on capital investment in rural wireless infrastructure can be challenging, and CCA claims unnecessary costs are curtailing additional rural expansion.

NCTA – The Internet & Television Association

The large cable industry lobbyist managed to submit eight ex parte filings with the FCC in March alone, making the NCTA one of the most prolific frequent visitors to the FCC’s headquarters in Washington.

The NCTA was there to discuss the Citizens Broadband Radio Service (CBRS) band, which is of particular interest to cable companies like Charter Communications, which wants to get into the wireless business on its own terms. Cable lobbyists, under the pretext of trying to avoid harmful interference, want to secure a large percentage of the CBRS band for their licensed use, at the expense of unlicensed consumers and their wireless industry competitors.

The cable industry wants CBRS spectrum to be wide, spacious, and contiguous for its cable industry members, which should open the door to faster speeds. The lobbyists want to make life difficult for unlicensed use of the band, potentially requiring cumbersome use regulations or costly equipment to verify a lack of interference to licensed users. They also want their traffic protected from other licensed users’ interference.

CTIA – The Wireless Association

The wireless industry’s largest lobbying group made multiple visits to the FCC in March and filed 10 ex parte communications looking for a dramatic reduction in local zoning and placement laws for the next generation of small cells and 5G networks.

The CTIA has been arguing with tribal interests recently. Tribes want the right to review cell tower placement and the environmental impacts of new equipment and construction. The CTIA wants a sped-up process for reviewing cell tower and site applications with a strict 30-day time limit, preferably with automatic approval for any unconsidered applications after the clock runs out. Although not explicitly stated, there have been grumblings in the past that tribal interests are inserting themselves into the review process in hopes of collecting application and review fees as a new revenue source. Wireless companies frequently question whether tribal review is even appropriate for some applications.

Sprint has had frequent run-ins with tribal interests demanding several thousand dollars for each application’s review under the National Historic Preservation Act (NHPA), which is supposed to protect heritage and historical sites.

In Houston, Sprint deployed small cells around the NRG Stadium, but found itself paying fees to at least a dozen Indian Tribal Nations as part of the NHPA. The NHPA opens the door to a lot of Native Americans interests because of how the law is written. Any Tribal Nation can express an interest in a project, even when it is to be placed on public or private property that is not considered to be tribal land. In Houston, Sprint found itself paying $6,850 per small cell site, not including processing fees, which raised the cost to $7,535 per antenna location. Those fees only covered tribal reviews, not the cost of installation or equipment. Some tribes offered better deals than others. The Tonkawa Tribe has 611 remaining members, mostly in Oklahoma. But they sought and got $200 in review fees for the 23 small cell sites deployed around the stadium. The Kiowa Indian Tribe of Oklahoma, not Texas, charged $1,500 for the 23 applications it reviewed.

Sprint complains it has paid millions in such fees over the last 13 years and no tribe to date has ever asked to meet with Sprint or suggest one of its towers or cell sites would intrude on historic or tribal property.

“Tribal Nations are continuing to demand higher fees and designate larger and larger areas of interest,” says Sprint. “At present, there are no constraints on the amount of fees a Tribal Nation may require or the geographic areas for which it can require payment for review. The tribal historic review process remains in place even in situations—such as utility rights-of-way—where the Commission has exempted state historic review.”

The CTIA wants major changes to the NHPA and other regulations regarding cell tower and antenna placement before the stampede of 5G construction begins.

Verizon

Verizon has been extremely busy visiting with the FCC during the month of March, filing 10 ex parte communications, also complaining about the tribal reviews of wireless infrastructure.

Verizon argues it wants to expand wireless service, not effectively subsidize Native American tribes.

“The draft order’s provisions to streamline tribal reviews for larger wireless broadband facilities will likewise speed broadband deployment and eliminate costs, thus freeing up resources that can, in turn, be used to deploy more facilities,” Verizon argued in one filing.

Verizon has also been carefully protecting its most recent very high frequency spectrum buyouts. It wants the FCC to force existing satellite services to share the 29.1-29.25 GHz band for 5G wireless internet. Verizon has a huge 150 MHz swath of spectrum in this band, allowing for potentially extremely high-speed wireless service, even in somewhat marginal reception areas.

“Verizon assured the commission that even when sharing with other services, we would be able to make use of the 150 MHz of spectrum in this block to provide high-speed broadband service to American consumers,” said one filing.

Times of London: Sprint Parent SoftBank Lays Groundwork for Takeover of Charter/Spectrum

Softbank CEO Masayoshi Son

Japan’s SoftBank “has laid the groundwork” for a $100 billion bid to acquire Charter Communications, better known to its customers as Spectrum, and merge it with Sprint, the American wireless company it controls, according to a report this morning in the Times of London.

London financial district sources leaked information early Monday morning that SoftBank’s billionaire CEO Masayoshi Son has already quietly purchased nearly 5% of Charter Communications stock, a prerequisite for launching a takeover bid. By purchasing a solid stake in Charter, the company hopes to be to taken more seriously about its proposition to combine America’s second largest cable company with the country’s fourth largest wireless carrier.

This isn’t the first time SoftBank has expressed an interest in a merger with Charter. Late in 2017, Masayoshi approached both Charter and its largest shareholder, Dr. John Malone, about the prospect of a merger. Malone was reportedly lukewarm about the deal, while Charter CEO Thomas Rutledge and the rest of his management team opposed the deal. But apart from Malone and Rutledge, many of Charter’s top shareholders were in favor of a merger — particularly the Newhouse family, which sold its interests in Bright House Networks, a mid-sized cable operator, to Charter in 2016.

Masayoshi has been a strong advocate of consolidation in the wireless industry, and has repeatedly lobbied for permission to acquire T-Mobile USA to combine it with Sprint. But regulator concerns during the Obama Administration made such a deal impossible. By targeting the acquisition of a cable operator, SoftBank can argue the transaction will have no material impact on competition because Sprint and Charter Communications operate different businesses.

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