Sprint And T-Mobile US - A Winning Proposition

| About: Sprint Corporation (S)

There has been quite a lot of chatter these past few days regarding the potential merger between the new Sprint (NYSE:S) and T-Mobile US (NASDAQ:TMUS). The vast majority of the articles I have read argue the deal will have significant difficulties to pass the regulatory requirements of the FCC, will decrease competition and will ultimately fail on its promises to consumers. The issues with having only three major operators instead of four and with having a combined company controlling over two-thirds of the prepaid market are not palatable to many bureaucrats, politicians or consumer advocacy groups. I have also read articles arguing the reasons T-Mobile is not a good fit for Sprint largely due to the incompatibility of the network technologies. On the surface the two networks seem inherently disparate (see the chart below) with a mélange of different frequency bands and technologies. Ordinarily, I would concur with the majority opinion that a merger between these two companies would stymie the competitive fires that drive innovative services and disruptive pricing plans. Moreover, I would tend to agree that even the mere thought of a consolidation of these two networks bears a striking affinity to the Sprint/Nextel network consolidation "difficulties".


Radio Technology Technology Generation Frequency Band
FDD-LTE 4G 1900 MHz PCS 25
FDD-LTE 4G 850 MHz ESMR 26
TDD-LTE 4G 2500 MHz BRS/EBS 41
CDMA/1+RTT/EV-DO 3G 1900 MHz PCS 2
CDMA2000 1x 3G 850 MHz ESMR 10

T-Mobile USA

Radio Technology Technology Generation Frequency Band
FDD-LTE 4G 1700 MHz AWS 4
FDD-LTE 4G 1900 MHz PCS 2
CDMA/1+RTT/EV-DO 3G 1700 MHz AWS 4
CDMA/1+RTT/EV-DO 3G 1900 MHz PCS 2
GSM 2G 1900 MHz 2

Over the next several paragraphs, I will create a scenario for an acquisition of T-Mobile by SoftBank/Sprint that will be both positive for consumers and palatable for the regulators alike. The four part strategy: 1) Management transition and transformation of network operations; 2) Radio network share; 3) Mobile broadband consolidation; and 4) Full network ecosystem consolidation. However, and before I layout my strategy, I propose that the acquisition of T-Mobile by SoftBank/Sprint should not follow the traditional M&A model. My proposal is that after purchasing the controlling interest of T-Mobile US from Deutsche Telecom, the newly acquired asset will remain as an independent and separate company from Sprint. Since Sprint and T-Mobile will be independent entities, SoftBank will need to be resourceful to create synergies between the two companies especially in regards to network management and operations, which leads us into the first part of the strategy.

The first part of the strategy, the management transition and transformation of network operations phase, will require SoftBank to create a new company that will be tasked with network management and operations for both the Sprint and T-Mobile networks. The concept would be to create a company similar to Mobile Broadband Network Limited (MBNL) in the United Kingdom. If you are not familiar with the company, MBNL is the management company that currently manages the operations for the shared network of Three UK and Everything Everywhere which was formerly owned by T-Mobile UK. The new company will be independent from Sprint and T-Mobile and will effectively consolidate the network operation activities of both operators with the prime goals of driving down OPEX and bringing operational efficiency to both networks and to execute the network consolidation strategy.

The second part of the strategy, the radio network share phase, will be to roll out a shared FDD-LTE radio network by implementing a software feature called Multi-Operator Core Network (MOCN) - not to be confused with a Mobile Virtual Network Operator (MVNO) strategy. Since Sprint and T-Mobile will remain separate entities each operator will keep their own Evolved Packet Cores separate and will implement the MOCN feature in their respective networks which allows a LTE capable device from a Sprint customer to set up a terminating packet call on a T-Mobile radio base station and vice versa. The end user will know exactly which network he or she is connected to because the device will display the Public Land Mobile Network (PLMN) of the particular operator. The feature allows the consumer to keep their current subscriptions while having access to a far better mobile broadband experience as they will enjoy improved coverage and capacity.

The third part of the strategy, the mobile broadband consolidation phase, will mark the start of the network ecosystem and vendor consolidation phase. This phase will create value for the consumers by offering faster network speeds and the operators will be able to offer alternative value-added services to their customers. Mobile broadband networks are capital intensive and take a considerable amount of time to build out. Although Sprint has more spectrum than AT&T and Verizon combined, it suffers because it does not have enough cell sites to truly compete with the big two and the same can be said of T-Mobile. It is a painfully long process in the United States to build out new Greenfield and/or Brownfield sites so by acquiring physical site locations, in this case from another operator, saves both time and precious capital. The shared FDD-LTE network will not only add new physical site locations (improved coverage for both operators) but will also allow for even faster data speeds. Carrier Aggregation is one of the main features of LTE-Advanced which essentially combines the bandwidth of multiple frequencies (up to 5 different frequencies) for a theoretical maximum of 100 MHz of spectrum (the current LTE technology only allows up to 20 MHz of one frequency to be transmitted). One main focus point in order to implement carrier aggregation in the consolidated FDD-LTE network will be to quickly decide on a network vendor strategy early in the process. Sprint contracts to Ericsson, Samsung and ALU while T-Mobile contracts to Ericsson and Nokia (Sprint also has chosen Nokia for its TDD-LTE Spark network). One issue (besides having to redesign and construct the sites, e.g. new antennas) is that carrier aggregation not only requires both the collocation of frequency bands but it also requires that the baseband unit must be from the same vendor i.e. a Sprint cell site with Ericsson hardware must be collocated on a T-Mobile cell site with the same Ericsson hardware. It will become vitally important for SoftBank to take quick action regarding its network equipment vendor strategy in each of its regional markets because at the moment there is not much overlap between the current network equipment vendors in each of the two separate operators' networks.

The fourth and last part of the strategy, the network ecosystem consolidation phase, will phase out the 2G and 3G networks which will free up even more valuable spectrum for its LTE-Advanced and future 5G networks. Sprint's 200 MHz of spectrum combined with T-Mobile's 76 MHz of spectrum will give the combined network a total of 276 MHz of spectrum which is 34% more spectrum than both AT&T and Verizon combined. SoftBank through its innovation center in Silicon Valley along with chip makers, device manufacturers and the network equipment vendors will work to build a viable ecosystem of integrated devices that will create a world class end-user experience in an attempt to lure even more customers away from its rivals. Also, as HetNets begins to be rolled out nationwide with the integration of macro, pico and femtocells connecting everything in our daily lives, this new form of network will improve coverage, capacity, speed and value which will be the defining factors for customers in determining their network provider.

In conclusion, an acquisition of T-Mobile by SoftBank/Sprint using the proposal presented above will ultimately create a new paradigm in the US mobile telecoms market, assuage the apprehension of both regulators and consumers and improve the overall end-user experience for the approximately 100 million customers and future customers alike. The execution of the strategy will be crucial to the overall success and the players involved will always need to put the demands of their customers first and foremost. Mr. Son knows very well that by increasing his total subscriber base, spectrum holdings and the number of base stations, he will be able to improve his bargaining power over device manufacturers and equipment vendors which is both good for him and his customers. He also knows that by acquiring more spectrum he can build better and faster networks which means a better and less costly experience for his customers. He also knows that by increasing the amount of cell sites, his network will persuade even more potential customers to join his mobile broadband empire.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.