Can T-Mobile and Sprint's merger ease their 5G anxiety?

According to media reports, US telecom operators T-Mobile and Sprint announced a merger in an all-stock transaction worth US$26.5 billion, and the US Department of Justice finally approved the merger transaction.

According to CNBC: Sprint will divest Boost Mobile, Virgin Mobile and Sprint's prepaid mobile phone business. Sprint and T-Mobile will divest some wireless spectrum for Dish Network and provide the company with at least 20,000 cell sites and hundreds of retail stores. In addition, Dish needs to be able to access the merged new company's network for the next seven years.

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5G anxiety, drama lead to successful T-Mobile-Sprint merger

In the past, in order to prevent industry giants from forming monopolistic industry interest alliances through large-scale mergers and acquisitions and infringing on consumer interests, the US judiciary has generally been opposed to mergers of large companies, especially telecom operators.

For example, AT&T tried to acquire Time Warner and T-Mobile, and T-Mobile tried to sell to Sprint, but both were not approved. Since 2015, there have been rumors of a merger between T-Mobile and Sprint, but in mid-2017, the two sides broke down again.

This time, T-Mobile and Sprint were successfully merged, and the reason given was the 5G competition between China and the United States. T-Mobile's CEO announced that the United States has fallen behind China in the development of 5G, and this merger will be beneficial to the United States' competition with China in the 5G field.

It can be said that T-Mobile and Sprint just hit the shortcomings and anxieties of the US telecommunications infrastructure, and this merger was therefore dramatically approved.

The major shareholders of T-Mobile and Sprint are Deutsche Telekom and Japan's SoftBank Group, respectively. Deutsche Telekom holds about 62.3% of T-Mobile's shares, while SoftBank holds about 83% of Sprint's shares. An important reason why the two companies have not been able to reach an agreement before is that SoftBank believes that the merger agreement is too biased towards T-Mobile, and Sprint will lose control of the US market after the merger is completed.

The benefits of the merger are obvious. On the one hand, from the perspective of the transaction structure, this is more like a merger than an acquisition, that is, it is not a merger of one company by another, but a disguised establishment of a new company that integrates the assets of T-Mobile and Sprint. After the merger, T-Mobile and Sprint will become the third and fourth largest operators in the United States. After the merger, the two will surpass AT&T to become the second largest operator in the United States.

Second, the new company after the merger will have more network spectrum, including T-Mobile's 600 MHz and 700 MHz and Sprint's 800 MHz and 2.5 GHz, which will obviously be beneficial to its 5G network development coverage and new network deployment and planning.

But this may set a bad precedent. In the past, the U.S. Department of Justice believed that large-scale mergers and acquisitions would significantly weaken market competition, inhibit innovation, and may cause consumers to pay higher fees. However, judging from the current case, the merger of the two parties has been approved by the U.S. Department of Justice, although the transaction still faces antitrust lawsuits from the attorneys general of 13 U.S. states and the District of Columbia, where Washington is located.

However, due to antitrust considerations, the US Department of Justice requires T-Mobile and Sprint to divest some assets, including Sprint's Boost Mobile, Virgin Mobile and other prepaid phone businesses, as well as some of Sprint's wireless spectrum, and sell them to satellite TV giant Dish Network for US$5 billion.

In other words, after the merger, both parties will have to create a new competitor within their own networks to share the telecom operator's cake, because after the merger, the three major US operators have already captured 95% of the US market share.

The current merger of the two has actually brought troubles and hidden dangers to the antitrust review of the US market. As an industry insider mentioned, if large-scale US mergers and acquisitions want to convince the US antitrust review, the reason of competing with China can almost become a universal key.

T-Mobile and Sprint merge to survive together

In fact, judging from the current situation, whether T-Mobile and Sprint will merge is actually a matter of survival for both parties. On the one hand, the overall environment is that the current communications industry is in a cold winter, and the 5G era is approaching. T-Mobile and Sprint, which do not have an advantage in strength, have no advantage in the competition with the top two operators in the United States. The US operator market is likely to lead to a pattern where the strong will always be strong.

In addition, the United States uses millimeter waves for 5G, and T-Mobile and Sprint are facing sharply rising costs. Only by merging can they keep each other warm and even have hope of survival.

The merged company will have more than 80 million users and an overall enterprise value of approximately US$160 billion. The market landscape will change: the merged new T-Mobile will be able to compete with the top two US telecommunications giants, Verizon and AT&T.

If the merged New T-Mobile builds a lower-cost, larger-scale 5G network, it will have the opportunity to further promote market competition and reduce market rates.

Therefore, I think there are three reasons why T-Mobile and Sprint have passed antitrust review in the United States:

First, their mergers and acquisitions can ensure the stability of the communications job market.

Second, their merger will not only not create a monopoly, but will avoid the creation of a market monopoly because for T-Mobile and Sprint, both will benefit if they merge, but both will suffer if they separate.

In the 5G era, if they fight alone, they do not have enough strength to compete with the first and second largest operators in the United States. If they continue to follow the current trend, it will lead to a monopoly between the first and second largest operators. Only a merger of the two can make the US telecommunications market more balanced.

Third, the anxiety of losing the lead in 5G is the catalyst for the merger of T and S. In the United States, AT&T and Verizon may not be able to lead the United States in 5G to a leading advantage.

The United States needs to introduce more high-quality players to the 5G race. This is actually similar to Tencent's horse racing mechanism. Multiple teams compete with each other. The competitive effect will stimulate the market to produce more innovation and better product experience. The market vitality brought by the competition between two strong teams is not as strong as that brought by the three-way competition. In the United States, in addition to AT&T and Verizon, there is obviously a need for a more viable and evenly matched competitor.

The 5G problem in the United States cannot be solved by operator mergers

Whether in China or the United States, 5G may face the difficulties of unequal cost input-output and profitability. First, the cost of 5G construction for operators is high. Second, the terminal price is high, and users have little motivation to change their phones, making it difficult to popularize it in a short period of time. 5G investment is too large, and it faces the dilemma of a significantly extended cost recovery cycle. Only by quickly completing large-scale user group coverage can it reduce operating costs and achieve a positive cycle of input and output.

At present, the 5G problem in the United States cannot be solved by the merger of the two major operators.

One is that the US telecommunications industry is in a clear recession. In the 5G era, the United States does not have a telecommunications equipment supplier that can compete with Nokia, Ericsson and Huawei. Wireless communications company Cisco used to be a well-known telecommunications equipment provider, but later its business increasingly shifted to software and network security and cloud services, rather than building its own core communications network.

In short, there are no companies in the United States that can manufacture high-quality 5G telecommunications equipment.

Operators such as AT&T, Verizon and Sprint still need to rely on partnerships with Nokia, Ericsson and Samsung to provide them with telecommunications equipment.

Bill Huang, a Chinese-American telecommunications industry expert, once said that the United States once led the telecommunications industry for a long time, but in the past 20 years, the United States has transformed from a leader in the telecommunications industry to almost completely withdrawing from the telecommunications equipment manufacturing industry. So far, no American company has been able to manufacture the equipment needed to build a new generation of wireless networks.

Second, the United States is seriously lacking in fiber optic infrastructure, and 5G cannot achieve ultra-high-speed data transmission without the strong support of fiber optic cables. The 5G frequency band is much higher than 3G and 4G, with a smaller coverage area, requiring a large number of small base stations.

AT&T previously estimated that it would take ten years to complete the deployment of the 5G network. Previously, an AT&T engineer said that the US 5G network will mean the most expensive, complex, and spider-web-like dense fiber optic network in history.

Therefore, the fiber optic infrastructure construction in the United States is relatively lacking. Starting to invest at this time means that it will still need to go through a long period of infrastructure construction and invest huge human, material and financial costs.

Third, it requires cooperation with local governments and the layout of fiber optic pipelines, which will seriously slow down the progress of 5G construction. Especially compared with optical fiber cables, the construction and price of optical fiber pipelines will also slow down the construction of 5G networks.

Compared with the United States, China has been quietly and strongly deploying its fiber optic infrastructure in the past decade. It currently accounts for more than 50% of the global fiber optic cable usage. In China, a fiber optic network covering the entire country has basically taken shape.

China has covered almost all high-quality frequency bands from low frequency, medium frequency to high frequency, and the 5G frequency bands are allocated.

Operators in the United States and Europe are mainly focused on 28G millimeter waves. On the one hand, they need to pay billions of dollars to the government for the use of frequency bands. On the other hand, millimeter wave technology requires the use of devices similar to repeaters as intermediate nodes to extend the signal, which will lead to increased costs and affect network transmission speeds.

In comparison, China's 5G network construction may be faster because its infrastructure construction is relatively complete.

Previous data showed that China will complete full coverage of 5G networks in 2023, with a share of 30% in 5G standards. It has also begun to take the lead in technologies such as large-scale antennas, ultra-dense networking, and TDD system design. The number of base stations is already 10 times that of the United States.

Therefore, based on the commercialization path of 5G and the risk of falling behind, allowing T-Mobile and Sprint to merge is more like a 5G strategy for the United States.

After all, T-Mobile and Sprint have committed to and emphasized their rural network coverage, narrowing the 5G network coverage gap between rural and urban areas (in fact, it is similar to the "Village-to-Village" program that the three major domestic operators have played in the past), and promised that the 5G services deployed within three years will cover 97% of the US population and achieve 99% coverage within six years. This is in line with the US's 5G strategy of moving fast.

Therefore, from this perspective, the merger of T-Mobile and Sprint may trigger a catfish effect, which will help promote the progress and scale of 5G network construction in the United States and reduce market charges.

But to sum up, it can concentrate resources and funds to build a large-scale 5G network, but the decline of the US telecommunications industry itself is an fait accompli, and it has fallen behind in infrastructure construction. It is not realistic to catch up in a short period of time. The merger of the two is similar to the effect of a sedative. It can temporarily alleviate 5G anxiety, but it is not an antidote to solve the root cause of the US 5G problem.

About the author: Wang Xinxi, senior TMT commentator, WeChat public account, hot micro comments (redianweiping)