An industry orphan?

Sprint CEO Dan Hesse probably rues the day his Board of Directors pulled the plug on a merger deal that would have combined MetroPCS and Sprint back in February. The merger was abandoned after board members openly worried the transaction would distract Sprint from its network improvement project — dubbed Network Vision — then just getting underway.

The deal with T-Mobile and MetroPCS may have limited Sprint’s takeover options, although analysts say a hostile counteroffer for MetroPCS could still take the small carrier away from T-Mobile.

Hesse himself is a proponent of additional wireless industry consolidation. He believes the current market has too many wireless carriers and the two dominant providers — AT&T and Verizon — enjoy economy of scale Sprint cannot hope to achieve in its current position.

Hesse

Wall Street was more pessimistic about Sprint after the T-Mobile/MetroPCS merger was announced, suggesting they may be an industry orphan, pushed into a corner and running out of options.

Shares of Leap Wireless, the owner of Cricket, rose as much as 17 percent after the T-Mobile deal was announced, signaling Cricket is likely an endangered species. Leap’s cellular network is similar in scope to MetroPCS, although the two companies largely serve different markets. Wall Street’s favorite dance card has Sprint and Leap Wireless as future partners, and Sprint may be forced to acquire the smaller carrier to save face. Leap operates its own modest network of cell towers and has plans to roll out LTE 4G service to its customers. That spectrum could become important to Sprint, especially in the larger urban areas Cricket targets.

An endangered species.

Some Wall Street analysts say deals with MetroPCS, Leap, and other small regional carriers are small potatoes. Many advocate for a much larger merger between Sprint and T-Mobile to more realistically confront the de-facto duopoly of AT&T and Verizon Wireless.

Regulators under the Obama Administration may take a dim view of a merger that combines the third and fourth largest nationwide carriers, but nobody expects much regulatory resistance approving mergers that wipe out MetroPCS and Cricket.

“The problems that Sprint and T-Mobile have are they are not as big as AT&T and Verizon,” Piper Jaffray’s Chris Larsen told Bloomberg News in a phone interview. “They don’t have the scale so therefore it is harder to compete. Increasing your size 25 percent, it helps. But when you are less than half as big as your rival, getting 25 percent bigger narrows the gap, but it does not close the gap.”

[flv]http://www.phillipdampier.com/video/CNBC MetroPCS Down on Merger Reports 10-3-12.flv[/flv]

CNBC reports the T-Mobile/MetroPCS deal reignites wireless consolidation and leaves Sprint in a potentially difficult position.  (5 minutes)

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Bloomberg News reports T-Mobile needs more subscribers, but some Wall Street analysts think the company is making a mistake focusing on the prepaid market.  (1 minute)

Deutsche Telekom AG, parent company of T-Mobile USA today confirmed it was in talks with MetroPCS Communications, Inc., to merge their two wireless businesses to achieve the greater scale both need to compete with Verizon Wireless and AT&T.

Bloomberg News reports DT’s supervisory board will meet tomorrow to approve the transaction.

The sixth largest wireless company in the U.S. is about to merge with the fourth largest, according to news reports.

The combination would inject an additional 9.3 million current MetroPCS customers (the sixth largest wireless carrier) into the T-Mobile USA family. That would more than make up the 2.76 million former T-Mobile contract customers that fled the carrier during the last two years, especially after learning the company was planning to merge with AT&T.

But some challenges are likely to remain after the merger gets government approval:

• T-Mobile remains largely a postpaid, 2-year contract-oriented company while MetroPCS operates a no-contract, prepaid offering. T-Mobile could transition its prepaid division to MetroPCS’ branding, or fold MetroPCS into T-Mobile and eventually discontinue the MetroPCS brand;
• MetroPCS operates a CDMA network incompatible with T-Mobile’s GSM network. Both carriers are moving towards adopting 4G LTE service, but legacy customers will not be able to use existing phones on each other’s networks.

MetroPCS currently offers home coverage in 19 metropolitan markets and surrounding areas including New York City/Northern New Jersey, Atlanta, Bakersfield, Boston, Dallas, Detroit, Jacksonville, Las Vegas, Los Angeles, Miami, Orlando, Philadelphia, Providence, Riverside, Sacramento, San Francisco, San Bernardino, San Jose, Shreveport, and Tampa.

[flv]http://www.phillipdampier.com/video/CNBC T-Mobile Deal For PCS in the Works 10-2-12.flv[/flv]

CNBC reports on the planned merger of MetroPCS and T-Mobile USA, the first major wireless merger deal since the rejected merger of T-Mobile USA and AT&T.  (3 minutes)

[flv width=”360″ height=”290″]http://www.phillipdampier.com/video/Bloomberg Sprint Liquidity Doesnt Fix Company 9-26-12.mp4[/flv]

Sanford Bernstein’s Craig Moffett is back on Bloomberg News dismissing Sprint’s business strategy and lamenting the cost of subsidizing Apple’s iPhone 5 for existing customers who don’t really ‘need’ a new phone. Moffett sees all downsides for America’s third largest carrier (in May he gave the company a 50-50 shot of landing in bankruptcy court), trying to compete against a virtual duopoly successfully maintained by AT&T and Verizon. He thinks iPhone subsidies and purchase guarantees cost Sprint too much, their 4G LTE network is too little, too late (and will never perform as well as larger competitors who have lower frequency spectrum available for better reception), and their stock is overvalued. Wall Street routinely brings out analysts cheerleading additional mergers and acquisitions for further consolidation in the wireless market. By cutting down Sprint, Wall Street continues to emphasize it has already picked winners (AT&T and Verizon) and losers (Sprint, T-Mobile, everyone else).  (6 minutes)

T-Mobile is proving once again that as an independent cell phone provider, it is prepared to be a scrappy competitor for your wireless dollar. America’s fourth largest cell phone company today announced it was getting into an emerging “unlimited data” war with its larger competitor Sprint and smaller contender MetroPCS, announcing it will bring back a truly unlimited data plan for its customers.

“We want to double-down on worry-free (marketing),” said Harry Thomas, T-Mobile’s director of marketing. “We want to eliminate the situation of ‘Do I want to stream Netflix for kids or worry about data overage?’ ”

Starting Sept. 5, T-Mobile’s Unlimited Nationwide 4G Data plan will be available for $20 per month when added to a Value voice and text plan or $30 per month when added to a Classic voice and text plan. For example, a single line Value plan with unlimited talk and text combined with unlimited nationwide 4G data will cost $69.99 or a single line Classic plan with unlimited talk, unlimited text and unlimited nationwide 4G data will cost $89.99.  The plan cannot be combined with Smartphone Mobile Hotspot/tethering. Customers who want to share their phone’s data service with other devices will have to choose between a 5GB or 10GB add-on option instead.

TmoNews obtained this screen shot courtesy of an anonymous employee at T-Mobile USA.

T-Mobile says their new unlimited 4G data plan comes without tricks or traps, promising no data caps, speed limits/throttles or bill shock from overlimit fees. But like every provider, T-Mobile will have a provision in its terms of use that allows it to cut the data usage party short in cases of exceptionally extraordinary usage, but the company says it will enforce that only in the most extreme cases.

“We’re big believers in customer-driven innovation, and our Unlimited Nationwide 4G Data plan is the answer to customers who are frustrated by the cost, complexity and congested networks of our competitors,” said Kevin McLaughlin, vice president, marketing, T-Mobile USA.  “Consumers want the freedom of unlimited 4G data. Our bold move to be the only wireless carrier to offer an Unlimited Nationwide 4G Data plan reinforces our value leadership and capitalizes on the strength of our nationwide 4G network.”

T-Mobile doesn’t consider Sprint’s “truly unlimited” plan in the same class, because it currently operates on a much slower “4G” standard called WiMAX, which Sprint is moving rapidly away from. Many T-Mobile customers use the company’s 4G-like HSPA+ network for data, which offers respectable speeds if your phone supports the standard (the Apple iPhone, for example, does not.) T-Mobile is moving forward on its own upgrade to 4G LTE starting in 2013.

T-Mobile’s announcement comes one day after MetroPCS, a regional carrier, announced its own limited-time promotion offering unlimited talk, text, and data for $55 a month (up to three additional lines can be added for $50 a month each). Once a customer signs up for the unlimited service promotion, they can keep it as long as they remain a customer.

The two attention to unlimited data plans from the three carriers are in marked contrast to AT&T and Verizon Wireless, which have both moved to curb unlimited use plans — switching customers to usage allowances and overlimit fees. Both companies, considerably larger than any of their competitors, claim unlimited data is impossible to offer because of wireless spectrum shortages and the expense of continually upgrading networks to meet demand.

But this does not seem to pose any problem for Sprint, T-Mobile, or MetroPCS.

Wall Street believes the new interest in unlimited data is a marketing move to differentiate the smaller companies from the two dominant providers.

Wells Fargo analyst Jennifer Fritzsche wrote in a research note to her investor clients that T-Mobile is strategically re-positioning itself in the market to attract new customers.

“We believe T-Mobile felt the need to make some change in order to attract attention,” wrote Fritzsche.

Other analysts believe T-Mobile needed a “game-changing” marketing move to help it recover from its ongoing losses of contract customers. The company has been losing just over 500,000 “branded” contract customers every quarter for the last year.

The pricing and service changes may require Sprint to revisit its current rates.

Sprint’s $109.99 Simply Everything plan offers unlimited data, text, and voice — and runs $20 higher per month than T-Mobile’s forthcoming offer, $55 more than MetroPCS.

History repeats itself. In 1889, it was railroads, steel, iron, and energy. Today it is telecommunications.

My first introduction to the concept of corporate doublespeak — designed to cushion the blow of bad news behind a wall of barely-comprehensible babble came in October 1987 when I heard one Wall Street analyst refer to the great stock market crash that had just befallen the financial district as a “fourth quarter equity retreat.”

Holy euphemism, Batman!

You weren’t fired — you were “made redundant.”  The bankruptcy of Detroit automakers and the layoffs that followed were not as bad as they looked. It was merely “a career-alternative enhancement program.”

And, no, Verizon and AT&T are not engaged in should-be-illegal marketplace collusion on pricing and services. They are just practicing some harmless “price signaling.”

That’s the awe-struck view of management consultant Rags Srinivasan, who just gushes over the marketing “stroke of genius” that threatens to give customers a stroke when they open their monthly bill.

Srinivasan’s piece, worthy of the Wall Street Journal editorial page, turns up instead on GigaOm, where it gets some pretty harsh treatment from tech-lovers who hate the rising prices of wireless service.

Price signaling has always existed between the number one and number two players in any market. Agreeing to not engage in a price war is truly a win-win for the market leaders. Since outright price fixing is illegal, market leaders resorted to signaling to tell the other company their intentions or send a threat about their cost advantages.

But traditionally, it was more like flirting — ambiguous enough that the underlying intentions could be denied. Why are these two not shy about admitting to flirting now? The simple answer is the iPhone.

Not too long ago we worried about running out of talk minutes and paying overage. Service providers offered us tiered plans that offered more minutes for a higher price and unlimited minutes for an even higher price. With the additional revenue flowing directly to their bottom line, these higher priced plans were real cash cows.

For those who have any doubt about the profits from unlimited plans, I’d point out that the costs of a mobile service provider are sunk with zero marginal cost for additional minutes. And texts don’t even consume traffic channels — they piggyback on control channels.

[…] In another genius pricing move, Verizon Wireless is presenting this $100 mobile service plan to customers in a bundle — talk minutes plus data. In the past, around $70 was allocated to talk because consumers valued it more. Now subscribers pay only $40, but they still pay the same $100 total price. This is nothing short of pricing excellence, protecting customer margin while also using strong price signaling to make sure that the next biggest market share leader follows suit.

What Srinivasan calls “business at its best” and “pricing excellence” we call collusion at its most obvious. The GigaOm author says he does not want the government tinkering with this kind of marketplace “signaling,” and it does not appear likely he has much to worry about. AT&T and Verizon executives have grown increasingly brazen (and obvious) with their near-identical pricing and “me-too” plans which leave little to differentiate the two carriers from a pricing perspective. The likely result will be at least 100 million cell phone customers eventually stuck paying for unlimited voice and texting services they neither want or need.

Wireless Wonder Twins Powers Activate: Shape of anti-competitive marketplace for consumers; form of collusion.

True, AT&T charges Cadillac prices but has the customer service image of a used 1995 Kia… but they did have the original exclusive rights to the Apple iPhone and Apple devotees proved they will endure a lot. Verizon Wireless has a better network and has always charged accordingly.

Unfortunately for consumers, the also-rans Sprint and T-Mobile (and the smaller still) depend on AT&T and Verizon for roaming off the city highway and into the countryside, and they are often stuck with devices that are a step down from what the bigger two can offer.

Srinivasan would have a better argument if the wireless marketplace had not become so consolidated. Had AT&T had its way with T-Mobile, America would have just a single national GSM network — AT&T. Verizon does not consider its CDMA competitor much of a bother either, and Sprint Nextel CEO Dan Hesse has to divide his time between fighting with Wall Street over why the company has not already sold out to the highest bidder (and now wants to spend a fortune upgrading its network) and customers who consider Sprint too much of a trade-off in coverage and its dismal “4G” Clearwire WiMAX network too slow for 2012.

Srinivasan is probably too young to understand AT&T and Verizon never invented “price signaling.” A century ago, the railroad robber barons did much the same, leveraging their anti-competitive networks-of-a-different-kind to maximize prices in places that had few alternatives. Where competitors did arrive, they were typically bought out to “maximize savings and eliminate market inefficiencies.” The same was true in the steel and energy sector of the early 20th century.

The result is that consumers were turned upside down to shake out the last loose change from their pockets. Eventually, government stepped in and called it marketplace collusion and passed antitrust laws that began a new era for true competition.

How soon some forget.