Sprint and T-Mobile 4G Math: Does 3+4=3?

by: Yankee Group

By Chris Nicoll

The expectation of 4G being a game changer is already proving to be true. In countries such as Sweden, Norway, Germany and the U.S., 4G is doing things that previous technologies couldn’t or wouldn’t do. It is bringing broadband to rural areas in Germany, capital cities in Sweden and Norway are getting wireless broadband speeds approaching the magical 100Mbs, and in the U.S. 4G may end up altering the math for the operators. Can the long rumored No. 3 Sprint (NYSE:S)/No. 4 T-Mobile merger actually happen now?

The quick answer is still just a "maybe," but it's closer to a "yes" than it was a year ago. When the financial houses start writing about a deal as they are this one, maybe there is something more than just smoke this time. Here are three reasons why this merger might go:

  1. 4G, in terms of HSPA+ and LTE, provides a clear path forward
  2. The customer bases overlap, but also provide expansion
  3. A strong No. 3 is more appealing to regulators than weaker No. 3 and No. 4 operators

Let’s start with the idea that 4G provides a path forward. Much has been written over the past year (yes, this has been rumored for at least this long) about the technical challenges faced by a Sprint/T-Mobile merger. Sprint is finally addressing its platform and network operation challenges with its Network Vision campaign, pulling all of its non-4G networks into one platform, giving the company some flexibility and breathing room for its next network move. Operationally, running multiple networks is expensive. However, having hopefully finally addressed its multi-technology conundrum of CDMA/iDEN/WiMax and perhaps LTE, Sprint now risks performing the same act again by trying to merge HSPA+/GSM from T-Mobile. Or do they?

T-Mobile has moved out of its 3G funk and has taken on a somewhat uncharacteristic aggressive marketing move by promoting its 4G leadership position with an aggressive device portfolio. The company has a strong backer in parent company Deutsche Telekom (OTCQX:DTEGY) but still needs to find the scale to grow, resulting in rumors of a tie-up with Lightsquared. Although T-Mobile is a strong HSPA+ advocate, the company has also been vocal in its support for LTE. The two positions are not as opposite as they may seem. But Sprint has one technology base and T-Mobile another. Does it matter anymore?

Operators around the globe are addressing a dual 4G strategy, pulling together HSPA+ and LTE into what is envisioned to be a seamless mobile experience. LTE is utilized in the denser urban areas, utilizing 800Mhz (Sprint’s spectrum for example) while HSPA+ providers broader suburban/rural coverage with higher frequency spectrums (such as T-Mobile’s 1.7/2.1Ghz bands). This is one time Sprint and T-Mobile would not have to go it alone. The others pursuing this strategy? AT&T (NYSE:T), Telstra (TLS) and TeliaSonera (OTCPK:TLSNF) to name three, so the emerging HSPA+/LTE device ecosystem already has some legs.

The next possible success factor comes from our look at the respective operators' customer bases. In our North American Mobile Carrier Monitor, Dec. 2010, we’ve noticed that while there are the expected overlaps in the major metropolitan areas – which is good news for the operators – there are also places in the second tier areas where this overlap is not nearly as strong. This bodes well for brand expansion and broadening the overall customer base. Urban overlaps present opportunities to reduce costs through reduction in infrastructure and sales channel costs. The rural areas represent net adds to both operators in areas where one or the other was not operating in strength before.

But aside from the technical and subscriber map details, I believe U.S. regulators have to be supportive of creating a much stronger No. 3 operator to offset the 1-2 of Verizon Wireless (NYSE:VZ) and AT&T and create a more attractive option for application developers and device manufacturers. The numbers support this conclusion:

In 3Q 2010 (the last quarter we have numbers for) T-Mobile gained approximately 130k and Sprint 640k subscribers while AT&T gained 2.6M and VZW 1.1M subscribers, respectively. The scale difference is huge. Adding the T-Mobile and Sprint numbers together and hoping for stronger subscriber support still puts the combined operation in a No. 3 slot. But the market share and overall subscriber numbers show a brighter picture.

Assuming the numbers do not change significantly, Sprint/T-Mobile would have 30.8% of the market compared to 34.5% and 34.7% for AT&T and VZW respectively. That is a strong No. 3. Ditto on the revenue side: Sprint/T-Mobile at $12.5B vs AT&T and VZW at $15.2B and $16.2B. And helping further on the device side are subscriber numbers that equal out the equation as well: 82,500 Sprint/T-Mobile subscribers’ vs 92,700 and 93,100 subscribers. The new venture would follow T-Mobile’s ability to tap into the expansive HSPA+ device ecosystem of over 2,000 devices, while also moving into the emerging LTE ecosystem and moving away from a slower growing WiMax device program. Not to mention the emerging HSPA+/LTE device ecosystem.

Absolutely key questions do remain: What happens to the Clearwire (CLWR) network/spectrum in a merger is the 800lb gorilla and could make or break the deal. What role can Lightsquared play in providing additional spectrum? What is the FCC’s stance on the merger? Questions remain, and rumors abound, but the picture is looking better than it did a year ago.