To gain federal approval of their $26 billion merger, T-Mobile and Sprint have spent years promising a universe of incredible benefits, from lower prices to better rural wireless coverage. So far, agencies like the Federal Communications Commission have been more than happy to believe them.
“The merger will promote robust competition in mobile broadband,” FCC chairman Ajit Pai said in a recent statement. “Consumers will directly benefit from improvements in network quality and coverage, which in turn will foster innovation in a wide variety of sectors and services.”
But US telecom history suggests you shouldn’t believe a word coming out of their mouths. From AT&T’s 2006 merger with BellSouth to Comcast’s 2011 merger with NBC, telecom megadeals are routinely accompanied by any number of promises that are promptly ignored once the deal ink is dry. Instead, consolidation routinely delivers terrible customer service and ever-higher prices.
Take Sprint’s 2005 $35 billion merger with Sprint Nextel, which combined the then-fifth and third largest wireless carriers, for example. Sprint’s government filings from the period promised that the integration of the Sprint Nextel networks would be largely seamless, popular features like Nextel’s “push to talk” iDen network would be painlessly duplicated, and the company would deliver nationwide service in the 2.5GHz band reaching even the most distant rural markets. A press release heralded the creation of a “premier communications company” that would revolutionize the telecom sector, thanks to “efficiencies” and “synergies” that would be hugely beneficial to American consumers.
Then, like now, FCC leaders took the promises at face value.
“This action will ensure that consumers continue to receive the benefits of wireless competition, such as reduced prices and increased coverage,” former FCC boss Kevin Martin said in a statement approving the deal. “In addition, consumers can expect improved service quality and more advanced services.”
But the deal became a colossal disaster. Difficult integration of discordant technologies resulted in network and billing problems that drove millions of angry customers to the exits. Sprint’s promises of a nationwide 2.5GHz network would never even come close to materializing. By 2008, Sprint was using the spectrum to push another doomed joint venture with a company named Clearwire. By the time the Clearwire expansion ended in 2011, it had reached less than 44 percent of the public. By 2015, Clearwire would be shut down entirely.
Sprint’s promises that it would implement a copycat version of Nextel’s popular push to talk technology on its 1xEV-DO Rev A platform also went nowhere. Trials for the company’s QChat service didn’t go well, and by 2008, the project was shuttered to the annoyance of users.
There were also familiar predictions that consolidation would help the market and Sprint itself. In filings, Sprint promised that the merged company would have the “highest average revenue per user (ARPU) in the wireless industry and be positioned to lead the industry in sustainable revenue growth.” With T-Mobile not yet a serious player, the Nextel deal left Cingular (fresh off its similarly hyped 2004 merger with AT&T Wireless), Verizon, and Sprint as the three dominant major carriers.
Many analysts lauded the reduction in overall competitors. “Three major carriers can help keep prices low for customers, expenses lower for the companies and innovation high,” telecom analyst Jeff Kagan proclaimed. “The wireless industry needed this wave of consolidation, and this merger will help the market.” At the time, the FCC agreed, insisting the deal would provide vast consumer benefits including lower prices.
In reality, the deal was a financial catastrophe, with Sprint’s revenues dropping every year from 2005 to 2008. In 2005, each company had a market cap of $33 billion; just three years later, the combined company’s entire value would be $25 billion. It wouldn’t be until 2013 when Sprint was able to reach the revenue levels it saw in 2005.
Employment promises were just as hollow. Government filings had promised the FCC that the deal would “generate economic growth and jobs in the United States.” Then-Sprint CEO Gary Forsee told media outlets in 2005 that employees “shouldn’t expect to see a headline that there’s thousands of jobs that are going to be cut on the first of November or any time along the way.” By the end, more than 8,000 employees would lose their jobs.
It’s a troubling sign for the T-Mobile-Sprint merger, which is counting on the same magic of synergy and consolidation to make good on its promises. Hal Singer, an economist at Georgetown University, is one of seven antitrust experts that recently warned the government that the deal should be blocked. He told The Verge that when determining the harm of a potential merger, economists look to predictive metrics like upward pricing pressure and diversion ratios to simulate a merger’s impact. In the case of T-Mobile and Sprint, the data clearly suggests that the deal will raise prices.
It doesn’t really matter that T-Mobile has cemented a reputation as a trash-talking consumer-friendly company (even if the latter reputation is often skin deep). If the opportunity to raise rates is there, companies are obligated to their shareholders to take full advantage.
“Given the 4-3 nature of the merger the diversion ratio is off the charts and so are the predicted price effects,” Singer said. Because T-Mobile and Sprint target a lot of the same customers (budget-conscious and prepaid users), the effects are even worse than usual, he added.
While the Department of Justice and FCC have approved the deal, T-Mobile still faces a multistate lawsuit aimed at derailing the merger. Singer said legal precedent means the courts won’t look kindly upon T-Mobile’s claims that expanded 5G coverage in rural America — assuming that even happens — is enough to offset broader harm to other areas of the country.
“This bogus offset argument worked at the FCC,” he said. “But it shouldn’t hold up in court.”