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Regulatory hurdles have apparently put to rest Softbank’s plans to bid for T-Mobile US, but the potential deal faced headwinds on several other fronts, including go-to-market strategy, coverage and network integration. All in, just like any other deal, the combination of Sprint/ T-Mobile US would not immediately create an all powerful third competitors as there would be be multiple high-stakes challenges to be cleared for the deal to be a long-term success.
A tale of go-to-market strategies
As the companies stand today, Sprint and T-Mobile US have very different brands and value propositions. On the brand front, T-Mobile US has – under the leadership of John Legere – built a brand based on market disruption with differentiated offers and pricing plays that challenge the current wireless ecosystem. The company has continuously evolved its “un-carrier” strategy toward unique offers that generate buzz and attract customers to its maverick style of trend bucking.
Sprint, on the other hand, has approached the market with a classic, value-based attack on unlimited data, content ecosystem (think: Spotify partnership) and wireless family plan extension plays (e.g., Framily) aimed at rebuilding its base.
Current expectations are that the new entity would follow T-Mobile US’ ground game, which clearly has gained traction, while Sprint has been less successful in reclaiming its postpaid wireless market prowess. In my own firm, we have a healthy respect for what T-Mobile US has been able to accomplish since its proposed merger with AT&T fell through, but we also believe it’s prudent to acknowledge ongoing questions of sustainability. Ultimately, a winning play needs to be one that focuses on the long game (i.e. think Sprint Chairman Masayoshi Son’s 300-year plan) to drive sustainable growth and retainable share.
The question of coverage
Both Sprint and T-Mobile US have rapidly rolled out LTE networks across the U.S., focusing on the major cities with heavy population density. This strategy makes sense for an initial network rollout as capturing the low-hanging fruit from markets with dense potential customer bases is a huge opportunity. However, as LTE becomes ubiquitous in tier-one and tier-two markets across the U.S., competition will shift from being able to provide LTE service in major metro areas to providing ubiquitous coverage. As coverage plays a larger role in driving the competitive ecosystem, the question becomes:
–What would a combined Sprint/ T-Mobile US’ play be in tier-four cities and rural America?
–Would the new company extend the edge, acquire spectrum and build network to support deeper coverage (i.e. think Verizon Wireless) or will it simply create an urban corridor player?
Historically, neither operator has effectively solved rural coverage issues. Sprint has identified this as a weakness and recently pushed heavily into finding small, independent network operators to partner with to enhance its coverage. This strategy is in its early stages and it remains unclear to what extent it will drive coverage improvements. Ultimately, in order for the combined entity to have a long-term competitive game, it will be necessary to tackle the coverage issue head on.
The “I” word
With LTE now fully in center stage in the U.S. market, many have lost memory of the second-string networks backing up the latest-and-greatest. Although Sprint and T-Mobile US have adopted a similar flavor of LTE, the 3G networks sitting behind them differ significantly. T-Mobile US’ 3G network is built on GSM technology whereas Sprint’s is based on CDMA. Although many voices are claiming that 3G doesn’t matter anymore, the reality is that in many cases callers still rely on 3G services for connectivity. The main areas of potential pain are the basic voice services that currently are supported by 3G networks and areas where LTE has yet to be established. The different underlying technologies pose a considerable threat to the potential success of the combined entity (Think: Sprint Nextel 2.0.).
Sprint knows this story well following its 2004 acquisition of Nextel from which it took the company eight years to begin true integration with the rollout of its Network Vision plan. It goes without saying that Sprint and T-Mobile US’ networks need to be integrated in order for the deal to be successful, but in this case they will need to be integrated to drive immediate efficiencies as maintaining redundant networks with multiple technologies will negatively impact long-term costs and, as history as shown, holds the potential to negatively impact competitiveness of over time.
The bottom line
The real challenges to a combined company would have been in deal execution as, ultimately, the companies would need to distill their differences in market position, conquer the coverage gap and integrate network technology into a single platform capable of sustaining a long-term competitive edge. If the new company had been unable to conquer these challenges, the U.S. market would have remained one of two strong competitors and a third laggard.
Aaron Blazar works as a VP for Atlantic-ACM on projects ranging from market sizing and forecasting to corporate strategy covering both the wireline and wireless telecom markets. Blazar has a broad perspective on the telecommunications industry and expertise in market segmentation, market analysis, market entry strategies and statistical analysis.
