Potential Sprint, T-Mobile marriage threatens consumer gains

Introduction

Sprint Corp. and T-Mobile USA Inc., which only weeks ago were arguing that the government should increase competition in the wireless market by allocating new airwaves to smaller companies like them, are switching sides and looking to join the giants through a merger.

Sprint’s plan to buy T-Mobile for $32 billion is aimed at making the combined company a more formidable competitor to giants Verizon Communications Inc. and AT&T Inc., which together claim 68 percent of U.S. wireless subscribers, respectively. The purchase of T-Mobile would almost double Sprint’s market share to about 30 percent.

Just last month, T-Mobile and Sprint succeeded in convincing the Federal Communications Commission to ensure that smaller wireless companies had a shot a buying valuable new wireless airwaves by limiting how much Verizon and AT&T can buy at an auction next year.

Now the rules that Sprint and T-Mobile fought for may come back to hurt them. Adding T-Mobile’s spectrum holdings with Sprint’s may put the combined company over the limit that bars it from bidding on the reserved portion of spectrum, which comprises prime frequencies that can travel long distances and penetrate buildings. The Center for Public Integrity reported on the high stakes of the spectrum auction in March.

The Sprint purchase of T-Mobile “certainly would impact the combined company’s ability to bid,” Matt Wood, policy director at Free Press, an advocacy group in Washington, D.C., that supports the spectrum limits, said in an email.

Jeff Silva, an independent telecommunications analyst in Washington, D.C., agreed that the merger could make Sprint too big to bid on the reserved frequencies.

“That means they won’t get as much spectrum,” he said.

The purchase would also eliminate T-Mobile, the one company that has put pressure on carriers to lower prices. In the last year T-Mobile has cut prices, eliminated two-year contracts and roaming charges, and offered to pay early termination fees for customers who switch from a competitor. Since the company began offering the promotions in the second quarter of 2013, the number of its subscribers increased 11 percent to 49 million compared with a 3.2 percent growth to 122 million for Verizon and a 7.5 percent increase to 116 million for AT&T during the same period, according to data compiled by Strategy Analytics, a technology consulting firm.

Despite the possibility of less competition, the FCC may be enticed by Sprint to approve the purchase with a sweetener, such as a guarantee that it will spend billions of dollars in the spectrum auction, said Todd O’Boyle, program director for media and democracy at Common Cause, an advocacy group in Washington, D.C., that opposes wireless industry consolidation.

That’s what AT&T did last month when it pledged to spend $9 billion in the auction if the FCC approved its proposed purchase of DirectTV. The promise is aimed directly at FCC Chairman Tom Wheeler, who views the success of the auction as the determining factor on how his chairmanship will be judged, analysts say. And the auction’s success will not be based on whether it promotes competition, but rather how much money is raised, O’Boyle said.

“Wheeler has said over and over again that his mantra is ‘competition, competition, competition,’” O’Boyle said. “But it’s likely that he would be willing to allow less competition if he had a guarantee that the auction would be a success.”

Next year’s spectrum sale, together with a previous auction held this year and another scheduled in November, needs to bring about $30 billion for the FCC to meet the goals Congress set in the law authorizing the sale, telecommunications analysts said. The FCC expects to raise about $11.5 billion from two auctions this year. Add to that AT&T’s promise to spend $9 billion, and the agency can reach a total of $20 billion.

“If Sprint puts a serious $10 billion commitment on the table, you are home free,” O’Boyle said. “Whatever Verizon and other smaller carriers and hedge funds bid on for the remaining spectrum goes straight to the Treasury, and Wheeler can then tell Congress what a great job he did. They will all be happy with him. That kind of promise from Sprint may sway Wheeler to approve the deal.”

The merger, if approved, may cause the FCC to rewrite the auction plan altogether. In the rules it adopted in May, the commission said if there were “a proposed transaction … affecting the top four nationwide providers and their spectrum holdings, we will revisit our decisions here regarding the reserved spectrum provisions.”