The telecom industry in the U.S. has recently become very interesting. Few weeks back, the German-based Deutsche Telekom decided to merge its U.S. operations with the pay as you go carrier MetroPCS Communications (PCS). And now, news has broken that Softbank, a Japan-based telecom operator, is putting its hands in its pockets for the third largest telecom carrier in the U.S.
After the management of both Deutsche Telekom AG (DTEGF.PK) and PCS made public the future merger, many thought that Sprint (S) would be sidelined in the latest wave of consolidation. However, Sprint has now joined in the consolidation process with endless opportunities for itself that will definitely help it in its turnaround.
Even though bigger rivals like AT&T (T) and Verizon (VZ) have enjoyed their duopoly for quite some time, Sprint merging with Softbank and PCS merging with T-Mobile will certainly create stronger competitors than they are used to, and will also bring the advantages of healthy competition.
Overall, both above-mentioned deals are a positive for the wireless industry and not so beneficial for AT&T and Verizon. As of the quarter ended June, 2012, both AT&T and Verizon hold almost 80% of the postpaid market share with almost 160 million postpaid subscribers. Sprint is a very distant third with almost 33 million customers, and now with the T-Mobile and PCS merger, the post-merger entity would have a total of 43 million customers, which includes PCS' 9 million prepaid subscribers. Even though both AT&T and Verizon would still hold their duopoly after the mergers, they would certainly face a stiffer competition from the third and fourth largest operators in the region.
Sprint has come a long way in its turnaround efforts. Now Sprint is one of the few carriers to offer the iPhone, which is certainly helps it derive more revenues per customer, evident in its upward trending ARPU, since it started selling the phone late last year. Of course, paying Apple what telecom carriers end up paying for selling its products is a huge setback, but eventually, increased smartphone usage will help in recovering those costs.
More importantly, Sprint will be able to retain the customers it is losing to its Nextel network with more attractive products in its portfolio, and at the same time bring customer growth. Sprint has been posting losses for a number of years now, largely due to its Nextel Network. However, with Softbank putting in so much capital to Sprint can not only help in the company's turnaround. It will also be beneficial for its customers in terms of a wider variety of smartphones, better coverage and cheaper plans.
Sprint is already doing well with its iPhone sales, and what gives it a competitive edge over its rivals is that it is one of the few telecom operators to still offer unlimited data plans to its subscribers, while AT&T and Verizon are staying away from it. Sprint is also the only carrier to offer the new iPhone 5 on an unlimited data plan. Moreover, if we compare the various plans on offer by AT&T, Verizon, PCS and Sprint, the cheaper plans by both Sprint and PCS stand out in that not only are they cheaper relative to what AT&T and Verizon are offering, but they also give the customers an option for no contracts, in the case of PCS, for example, which is an important feature for a lot of customers.
As discussed before, Sprint is in the middle of its network overhaul, deploying the faster 4G LTE and shunning the Nextel IDEN network. With a capital injection of almost $8 billion, the company stands an improved chance of speeding up the overhaul process and expanding its coverage area. Same goes for the company that is going to emerge after the T-Mobile and PCS merger. The combined company would certainly get more airwaves and a wider network, which will help bring back customer growth, helping it compete with bigger rivals on a more even footing.
Another option for Sprint that cannot be overlooked is the possibility of it obtaining a majority stake in Clearwire (CLWR) for its wireless spectrum, with the capital provided by Softbank. Currently it has a 48% stake in Clearwire. Eventually, if Sprint decides to pursue various strategic options, depending on the progress of its network overhaul, it could always try to obtain a majority stake in the company. So it seems like the U.S. telecom industry is heading for some more consolidation in the days to come. Also, Sprint acquiring Clearwire would put the company in a better position, spectrum wise, to compete with the AT&T and Verizon duopoly.
Overall, the recent PCS/T-Mobile deal and now the Softbank/Sprint deal will bring more competitiveness in the U.S. telecom industry, which will benefit not only the smaller carriers, but also consumers in that they would have more choices in terms of products and plans. Moreover, post-merger companies would emerge as strong and well balanced competitors to the existing duopoly.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.