Last week, the merger of T-Mobile US and Sprint cleared what was widely seen as the last major hurdle to a successful closing: U.S. District Court Judge Victor Marrero rejected the claims of a group of state attorneys-general that the merger of T-Mobile US and Sprint would reduce competition in the U.S. consumer wireless market.
With that ruling, T-Mobile US could be looking at closing the merger as soon as April 1, although there still some moving parts: a separate legal approval for the related Dish Network settlement (which includes asset divestment to Dish of Sprint’s prepaid businesses, some 800 MHz spectrum and access to wireless infrastructure sites so that it can become a fourth facilities-based competitor) and approval from the California Public Utility Commission.
The 170-page ruling by Marrero covers past, present and future: he goes through some of the telecom history that brought both parties to the point of merging, the current competitive state of the industry, the arguments that he found unpersuasive versus what was compelling, the reasoning on which he based his decision, and some strategic points from New T-Mobile’s vision for how it’s going to operate—which ultimately persuaded Marrero that it won’t harm wireless competition in the U.S.
Though commonly used metrics for assessing mergers indicated that the Sprint/T-Mo merger would fall into “presumptively anticompetitive” territory, T-Mobile US and Sprint rebutted the market concentration numbers with three arguments. Those arguments were 1) the efficiencies arising from the proposed merger would cause New T-Mobile to compete more vigorously with its wireless market rivals; 2) that Sprint was a weakened competitor and not likely to continue competing vigorously in that market; and 3) the DOJ and FCC review of and remedies to the merger, and in particular, their efforts to establish Dish Network as a new “vigorous competitor” in consumer wireless, addressed any concerns about anticompetitive effects.
Is the creation of a more efficient single competitor out of two companies, enough to outweigh anticompetitive concerns? Marrero felt so. “The trend among lower courts has … been to recognize or at least assume that evidence of efficiencies may rebut the presumption that a merger’s effects will be anticompetitive, even if such evidence could not be used as a defense to an actually anticompetitive merger.” Citing another case, he said that counter-arguments can include “evidence that the … merger will create a more efficient combined entity and thus increase competition.”
Where does New T-Mobile expect to gain efficiencies? T-Mobile US laid out a number of areas where it expects to gain efficiencies through the merger—some of which it has talked about publicly, others of which it hasn’t been quite so specific about as it was in the courtroom.
T-Mobile US representatives said that they expect to generate “annual consumer welfare gains” in the form of “more aggressive service offers”, which they estimated at $540 million in 2020 and ranging up to $18.17 billion by 2024.
The combined carrier expects to save $26 billion in network costs and another $17 billion in other operating costs while increasing network coverage, particularly in underserved markets; and speeding up its expansion of 5G. Those network savings include $4.2 billion in opex savings from retiring Sprint’s network. New T-Mobile will add Sprint’s mid-band spectrum plus 11,000 cell sites to its network, and those will “provide it with enough additional capacity to meet the markets’ projected growth in data consumption and thus avoid the erosion in quality of service that would result from saturating its existing capacity.”
While T-Mobile US and Sprint executives have touted the merger as “jobs-positive from day one,” the merger ruling indicated that the company does plan to close around 3,000 redundant retail stores. T-Mobile US has said publicly that it plans to build 600 new retail locations and five new customer service centers that will create about 12,000 more jobs, but has been tighter-lipped about store closures.
T-Mobile US told the court that it projected “savings from streamlined advertising, the closing of 3,000 redundant retail stores and reducing the costs and billing and other professional ‘back office’ services, which combine with the network savings for total net cost savings of $43 billion,” Marrero wrote. (Interestingly, the 3,000-store figure was one estimated by Craig Moffett of MoffettNathanson Research back in 2017; at the time, he said that each store closing would mean the loss of five full-time jobs, or an estimated 15,000 retail job losses.)
T-Mobile US has said in press releases about the merger that in its first year, it will have “more than 3,500 additional full-time U.S. employees than the standalone companies would have had, and 11,000 more people by 2024.”
T-Mobile US claimed that merely announcing the merger had already improved 5G roll-outs. The carrier claimed in court that the “mere announcement of the proposed merger has already pro-competitively improved the rollout of 5G services,” saying that “though AT&T and Verizon originally planned to deploy 5G service primarily on millimeter wave spectrum, they have since, in response to the prospective that New T-Mobile would deploy 5G services across its broader-reaching low-band and mid-band holdings, broadened the spectrum that they will use,” Marrero wrote in the ruling.
T-Mobile US also argued that competition was, in fact, likely to decrease if it wasn’t allowed to merge Sprint—because it would run out of capacity. In a footnote in the ruling, Marrero wrote that the carrier “emphasized at trial not only is competition likely to increase because of he claimed efficiencies, but that competition might decrease without them, because T-Mobile could not deliver the same or better quality of service when it exhausts its current capacity. T-Mobile would thus need to choose between either providing lower quality services or raising prices to improve service quality, effectively ending the Un-carrier strategy.”
T-Mobile US also testified that the additional capacity—or “inordinate amount” of new supply of capacity, as CTO Neville Ray put it—was “very important because data-intensive video streaming now accounts for more than 50% of the traffic on T-Mobile’s network.”
Was there another way that Sprint and T-Mobile US could improve their networks and deploy 5G, absent a merger with each other? The state AGs presented a number of options that the carriers could pursue instead of merging: buying more spectrum at auction or in private transactions; deploying more small cells to densify their networks; or even one of the carriers merging with Dish Network rather than each other. Marrero was skeptical about whether each of the proffered suggestions was practical or cost-effective, or would result in the same level of network improvements in the same time-frame that combining the two carriers would. Auctions, he wrote, are rare and the companies could be outbid; the type of spectrum (low or mid-band) that each one most needed may not even be up for auction any time soon, and private transactions usually only involve small amounts of spectrum that license holders are willing to part with. Small cells “would have to be built in the millions to densify enough to capture the same benefit.” And while both carriers are deploying 5G as standalone entities, he cited testimony by T-Mobile US CEO John Legere that T-Mobile needs mid-band spectrum to deploy faster 5G speeds nationwide. Meanwhile, Sprint’s prospects for further 5G deployment are uncertain given its finances.
The state AGs also talked up Dynamic Spectrum Sharing as an option, which Ray has publicly expressed doubts about on T-Mo’s most recent quarterly call. The judge wrote that “the evidence at trial reflected that the technology is experimental, will not be deployed for at least a year and currently results in a 20 to 30 percent loss in usable spectrum wherever it is deployed.”
And merging with Dish drew his skepticism because he noted that both companies have tried that previously, and failed. Plus, Dish has its own plans to enter the wireless market and may not be interested in a merger.
“It may be that defendants are not entirely incapable of improving their networks and services through means other than the proposed merger,” Marrero wrote. “But none of the alternatives appear reasonably practical, especially in the short-term, and neither company as a standalone can achieve the level of efficiencies promised by the proposed merger.”
Stay tuned for Part 3: the Montana network engineering model, and more.