- DISH may offer the solution for approval of a Sprint/T-Mobile merger.
- The FCC would probably like to see more competition for AT&T and Verizon, but is concerned about a reduction to three major competitors.
- DISH is the only likely new competitor - facilitating the company's entry could improve the odds of merger approval.
It's no secret that Sprint (NYSE:S) and T-Mobile (NYSE:TMUS) have been exploring a potential merger and that there are significant concerns over whether such a merger would be approved. Sprint and T-Mobile argue that the US wireless market is a near-duopoly dominated by AT&T (NYSE:T) and Verizon (NYSE:VZ) with a combined market share of approximately 61%. Sprint and T-Mobile have approximately 18% and 12% market share, respectively, and the remaining 9% of the market is split between approximately 100 smaller carriers. The argument is that by combining, Sprint/T-Mobile would have economies of scale needed to more effectively compete with AT&T and Verizon. They argue the significant synergies ($1.5 to $2.0 billion annually) would allow them to offer higher speed data and other advanced services and/or reduce prices in ways they otherwise could not afford.
Many market legal observers are understandably skeptical the FCC will accept this argument (Note: communications industry mergers require both DoJ and FCC approval, but FCC approval is generally considered harder. This because the FCC has a more nuanced "public interest" standard for approving a merger). In particular, a merger that involved a reduction from four major participants to three is often hard for regulators to accept. This is particularly under Democratic administrations and for mergers involving consumer services.
DISH to the Rescue?
DISH Network (NASDAQ:DISH) may offer the solution assuming the FCC would like to see more competition to AT&T and Verizon, but is concerned about a reduction to three major competitors in the wireless industry. DISH, or someone working with them, is probably the only viable new entrant in the mature US wireless industry. DISH has 14 million existing customers they are billing. They already have relationships with critical retail distribution channels and hardware manufacturers. And DISH has approximately 55 MHz of spectrum nationally. Moreover, the DBS industry is seeing its subscriber base shrink because it lacks a broadband option that a wireless service might offer.
It's also clear the FCC would like to see DISH as a new entrant to the wireless industry. The FCC has bent over backwards to give DISH terrestrial use of the AWS-4 spectrum at no additional cost, and then an option to convert all of it to downlink if they bid for the H-Block spectrum (an auction that more resembles a negotiated bid than an actual auction).
Despite these advantages, DISH appears hesitant to enter the highly competitive wireless market. But what if Sprint/T-Mobile threw DISH a lifeline to enter the market in order to get approval for their own merger? Sprint/T-Mobile could offer DISH preferred roaming rates on their networks until DISH completed its network rollout, sharing of other facilities for a similar period, ensure that phones built for Sprint/T-Mobile also worked on DISH's frequencies and a host of other benefits to facilitate DISH as a rapid new entrant. The prospect of DISH as a strong rapid new entrant to maintain four major players just might be enough to convince the FCC to allow the Sprint/T-Mobile merger.
The obvious question is whether supporting a new entrant is too much for Sprint/T-Mobile to offer to get a merger approved? With synergies of roughly $1.5 to $2.0 billion annually, they would be motivated to make some significant concessions. Also, if DISH decides to enter later without these advantages, perhaps motivated by a desire to offer broadband to stem subscriber losses, they may need to enter aggressively with very low prices. Thus, from a Sprint/T-Mobile perspective, it might be better to support DISH's entry in an orderly fashion sooner, rather than risking a highly aggressive "scorch the earth" entry a year or two later.
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.