The Sprint/T-Mobile Merger Is Huge—But a Lot of Questions Remain

Sprint may soon be no more. Today the venerable telecommunications company announced plans to merge with T-Mobile in an all-stock deal. If regulators give the go-ahead, the new company will be called simply T-Mobile, and T-Mobile’s current chief executive officer John Legere will be its CEO.

That’s a big if. Although the Trump administration is generally seen as more friendly to the telco industry than the Obama administration was, it has taken issue against some mega-mergers, most notably AT&T’s bid for Time Warner. The combination of T-Mobile and Sprint, the third and fourth largest mobile providers respectively, would bring the number of major cellular carriers down from four to three, which could attract a lot of scrutiny.

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Assuming the deal moves ahead, the new company would have a combined total of around 127.2 million wireless subscribers, putting it within striking distance of AT&T’s 141.6 million subscribers and Verizon’s 150.5 million subscribers.

The two companies will exchange stock at a rate of 0.10256 T-Mobile shares per Sprint share and 9.75 Sprint per T-Mobile share, valuing the combined company at $146 billion.

T-Mobile owner Deutsche Telekom will own 42 percent of the new company, and the Japanese conglomerate SoftBank, which acquired Sprint in 2013, will own 27 percent. The remaining 31 percent will be held by the public. SoftBank CEO Masayoshi Son and Sprint CEO Marcelo Claure will serve on the board of the new company.

The new outfit will be headquartered in T-Mobile’s home of Bellevue, Washington with a second headquarters in Sprint’s home of Overland Park, Kansas. How and whether the new company will use the Sprint brand will be decided after the deal closes.

The merger is a long time coming. AT&T tried to buy T-Mobile in 2011, but scuttled the deal when it became clear that regulators wouldn’t approve it. T-Mobile then tried to sell to Sprint, but the merger was called off in 2014 when it became apparent regulators would block that deal as well. Another round of negotiations between T-Mobile and Sprint followed the 2016 election and the appointment of the more telco-friendly Federal Communications Commissions chair Ajit Pai. But the two companies couldn’t reach an agreement and called off the talks last November.

What the Merger Means

In an announcement, T-Mobile and Sprint claimed the combined company would create lower prices in part by achieving economies of scale. It also claims the merged company would employ more people than the two businesses employed previously, creating thousands of jobs to support a $40 billion investment into the transition to 5G, the next generation of mobile wireless technology.

“The new company will be able to light up a broad and deep 5G network faster than either company could separately,” the announcement says.

Critics of the deal say it will result in less competition and higher prices. Since AT&T dropped its bid for T-Mobile, the company has greatly simplified its pricing, dumped annual contracts, and passed Sprint to become the third largest carrier. T-Mobile’s consumer friendly practices led the way for other carriers to likewise stop forcing consumers into long-term contracts and to resurrect unlimited data plans (T-Mobile has simplified its pricing, disposed of annual contracts, and routinely gives its customers free pizzas and movies).

“Both [T-Mobile and Sprint] have been feisty competitors to the two biggest national mobile wireless carriers, Verizon and AT&T, introducing consumer friendly pricing and data plans that have pushed the big two to lower their prices and expand their data offerings,” former FCC lawyer Gigi Sohn said in a statement. “This combination will not only result in less choice for consumers, it will provide greater incentive for the three remaining companies to act in concert.”

Defenders of the deal, however, argue that a combined T-Mobile and Sprint could put even more pressure on AT&T and Verizon. “While I’m not prepared to take a bottom-line position on whether this merger ultimately should be approved or not, I certainly don’t agree there should be any iron-clad rule, like the one Obama administration FCC Chairman Tom Wheeler articulated, against going from four to three nationwide mobile providers,” Randolph May, founder of the free market think tank Free State Foundation, said in a statement. “That is the wrong way to analyze the market.”

The Trump administration, and the FCC in particular, has a generally more laissez-faire attitude towards both the telco industry and mergers. But the administration also has a populist streak that could foil, or at least slow down, this merger. It has also blocked foreign companies from acquiring US companies out of national security concerns. Most notably, President Trump blocked Singapore-based chipmaker Broadcom’s acquisition of Qualcomm earlier this year, out of fears that a consolidated chip market would give China’s ambitions in the industry an edge. T-Mobile and Sprint are both already foreign-owned, which might reduce concerns. Then again, the Trump administration is anything but predictable.

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Viewers Are Ditching Cable For Streaming Faster Than Anyone Expected

“Cord cutting” has been a kind of ghost story for cable providers for much of the past decade—a tale that, while foreboding, didn’t seem entirely real. But consumers are abandoning traditional cable for streaming services faster than ever, turning what had been an ominous prediction into a clear and present danger.

Three major pay-TV providers last week reported dramatic declines in subscribers to traditional cable and satellite television packages. Some of the losses were more than double what Wall Street analysts expected, and stocks in major TV providers have fallen off a cliff. Those dismal results followed reports of huge subscriber growth at streaming services like Netflix, leaving would-be defenders of legacy TV with nowhere to stand.

The numbers tell the story in no uncertain terms. Charter Communications, which offers cable service under the Spectrum brand, announced on Friday that it lost 122,000 TV customers in the first quarter of 2018. That massively exceeded Wall Street projections, which the Wall Street Journal said averaged about 40,000 lost subscribers ahead of the earnings report. Charter’s stock dropped as much as 15% Friday.

That collapse followed similarly grim reports from other legacy providers. Comcast announced Wednesday that it had lost 96,000 customers for the quarter, its fourth straight quarter of subscriber losses, and slightly worse than analyst projections. AT&T’s DirecTV satellite service lost 188,000 customers in the same period, driving down video revenue by $660 million despite growth of its own online streaming service. AT&T stock tanked as much as 7% the day after its report. Comcast notched healthy earnings from its increasingly diverse business, but even it couldn’t fight the headwinds, with its stock draining more than 7% by the end of the week.

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The reports continue a strong trend away from traditional cable services—total cable subscriber numbers declined 3.4% over the course of 2017, a faster decline than in 2015 and 2016. The fact that the latest numbers so dramatically underperformed even grim Wall Street expectations suggests the dropoff is continuing to accelerate.

At the same time, streaming services, also known as “over the top” or OTT services, are showing gains that are even more dramatic. Netflix, the 800-pound gorilla in the sector, reported earlier this month that it had added a net 1.96 million subscribers in the first quarter. Perhaps even more worrisome for cable providers are services like HBO Now, which deliver what had been exclusive cable content directly to subscribers, and whose growth is also accelerating.

There are a lot of factors driving the dramatic transition. Arguments about the appeal of “unbundling,” or the ability to pay only for the content a subscriber specifically wants, are widespread. In terms of user experience, the sheer convenience of browsing shows without being bound to a broadcast schedule—or worrying about programming a DVR—makes traditional cable feel downright prehistoric. Cable services have also spent years digging their own graves with bad service and opaque billing—both Comcast and Charter have regularly been among American companies most hated by their own customers.

For years, it was thought that live sports would keep many subscribers from ditching cable, but that dam has cracked in half. Both broadcast networks and ESPN are available through services including Sling and Hulu. And a standalone ESPN streaming service, ESPN+, launched this month, at a stunningly low $4.99 a month rate that seems likely to deepen cable’s losses further.

The impacts of the switch to streaming packages are still unclear, but they’ll be complex. Done right, the transition could channel more revenue directly to creative powerhouses like Disney, which is planning to launch its own OTT service, packed with Star Wars and Marvel IP in addition to animated films. But the decline of cable could be tough for smaller players, such as niche channels which currently get a share of cable fees but might not be able to attract subscribers on their own.

It’s more than likely that cable providers will find some role in this reshaped future. But it’s clearer than ever that their glory days—when they had the leverage to do things like tack on steadily rising fees—are over.