A funny thing happened in the wake of this weekend’s news that Sprint and T-Mobile had announced plans to merge the country’s No. 3 and No. 4 wireless carriers under the T-Mobile brand: Sprint’s share price fell.
Normally when one company announces plans to buy another, which is essentially what’s happening here, the target company’s share prices rise. After all, a merger announcement means that the target company’s stock is going to get bought at a premium price, meaning share prices go up.
Sprint is bucking the rule because Wall Street is skeptical the deal will ever happen. And it’s skeptical with pretty good reason: The two companies proposed merging as recently as 2014, only to be told no by both the Justice Department’s Antitrust Division and the Federal Communications Commission, with both agencies taking the position that reducing the number of nationwide wireless carriers from four to three would mean less competition and worse outcomes for consumers.
Despite the precedent, Sprint and T-Mobile are pressing ahead with their plans. On the legal and economic merits, they argue that the deal will in fact be pro-competitive — fostering the creation of a new rival to Verizon and AT&T, the big two wireless companies that currently dominate the market. On the politics, they are hoping that the generally business-friendly Trump administration will simply take a brighter view of their proposal.
This means the merger review will be a key test both for competition policy in the United States and for our larger understanding of the Trump administration. At the end of the day, very little has changed about the economics of this merger since it was rejected in 2014. Will that fact carry the day, as the markets currently expect, or will a long-term campaign of political persuasion undertaken by the CEO of Sprint’s parent company pay off in the form of regulatory favors?
More broadly — in light of the Trump administration’s vigorous efforts to block AT&T from acquiring Time Warner, a new deal that is anti-competitive in a more obvious way raises the question of whether antitrust enforcement in the Trump era is on the level.
Fiercer competition for Verizon and AT&T
The case for the merger argues that, fundamentally, we don’t really have four national wireless carriers to start with, so there’s no question of going from four to three. What we have instead is a Verizon/AT&T duopoly, but letting Sprint and T-Mobile team up could let them form a third offering.
Verizon and AT&T combined for 68 percent market share when the Obama administration scuttled the earlier proposed merger, and they’ve only grown slightly more dominant today by ticking up to 69 percent. T-Mobile’s growth from 15 percent to 17 percent market share has come exclusively at the expense of Sprint, which has slipped from 16 percent to 13 percent. Meanwhile, Sprint keeps losing money — staying in business by selling junk bonds and aggressively cutting costs in an effort to regain profitability. That leaves it in sorry shape as the industry prepares to transition to future “5G” network technology.
Technology analyst Ben Thompson makes the case in his (subscription-only) newsletter Stratechery that a combined Sprint–T-Mobile entity could build 5G and offer a third competitor to the two wireless giants:
That sort of cost-cutting is increasingly untenable as the industry moves to 5G; the standard is still a few years out from widespread deployment, but Verizon and AT&T are already starting deployments initially focused on fixed broadband: the standard, still in flux, isn’t quite ready to deal with mobile devices. Traditionally, the most valuable spectrum for cellular service has been lower frequency, the better to travel long-distances and through physical objects. 5G, though — and this is very high-level overview, no pun intended — may be best implemented at higher frequencies: the tradeoff is that high frequencies, for all their problems, have much more bandwidth. The distance and physical object problem could be overcome in two ways: first, base stations will have hundreds of (relatively smaller) antennas capable of beam-forming (phones will have similar capabilities on a smaller scale), and second, more — again, smaller — antennas will be deployed, particularly in urban areas.
This represents two distinct problems for Sprint and T-Mobile, respectively: for Sprint, the company just doesn’t have the money to invest in keeping its current network up-to-date, much less building out a next-generation 5G network. T-Mobile, meanwhile, has a lot of spectrum in the 600MHz range, which is very low-frequency and much less useful for 5G. Verizon and AT&T are betting on super high-frequencies called “millimeter-wave spectrum”, but the company that might end up having the best of both worlds is…Sprint! The company owns a huge amount of 2.4GHz spectrum from its acquisition of Clearwire; it just can’t afford to develop it.
In short, there are a lot of compelling reasons to do this deal: the usual synergies (which, contra T-Mobile’s claims, will almost certainly mean a lot of job losses, not just in headquarters but also retail stores), spectrum and investment capabilities, and, more generally, the scale to actually compete with AT&T and Verizon.
That’s the case the companies themselves offer for the deal (minus the massive layoffs at retail stores), and it gets something important right — if you assume the corporate leadership of the two companies is determined to try to unseat the top dogs of the industry, they have a better shot of doing it together than separately.
But are they?
Sprint and T-Mobile are part of giant international conglomerates
If you view Sprint’s problem as fundamentally one of being spectrum-rich but cash-poor, then it certainly makes business sense for the company to sell itself to someone and for regulators to allow the sale. But that “someone” doesn’t need to be a rival US-based mobile network operator. It could be anyone with big ambitions and cash to spend. Perhaps even a foreign mobile network operator that has experience in the industry and is looking to crack the US market.
But in fact, Sprint is already majority-owned by the Japanese technology conglomerate SoftBank Group (No. 38 on Forbes’s 2000 list of the world’s largest public companies), which is, among other things, a major mobile network operator in Japan.
The reason Sprint lacks the financial resources to make a big investment in 5G capabilities isn’t that the company doesn’t have access to funds; it’s that Sprint’s owners don’t believe in making the investment. SoftBank has an enormous $98 billion “vision fund” that it invests in speculative ventures ranging from Uber to a dog-walking startup called Wag to a construction company called Katerra. It’s not pumping cash into Sprint’s 5G buildout because it doesn’t believe in the ROI, not because it doesn’t have the money.
T-Mobile, meanwhile, is the US subsidiary of Deutsche Telekom, a huge German telecommunications company that operates mobile networks across Europe and around the world. But officials back home in Bonn decided years ago that they no longer believed in a strategy of investing heavily in the US market to challenge the top two companies’ dominant position. That’s why they tried to sell T-Mobile to AT&T back in 2011, only to be blocked by antitrust officials. The decision to preserve a fourth carrier paid dividends as T-Mobile adopted its “uncarrier” strategy — making contracts more flexible, adding features, dropping prices, and ultimately forcing the entire industry to follow suit.
Now they say they want to buy Sprint to more effectively challenge the big two. But a merger could also more effectively let them rest on their laurels.
Sprint/T-Mobile competition matters
T-Mobile’s aggressive moves on pricing have helped the company grow, but that growth has come at the expense of Sprint rather than the big two that lead the industry and dominate market share.
But that doesn’t mean the T-Mobile/Sprint competition is irrelevant to the majority of Americans who subscribe to AT&T or Verizon. On the contrary, the reason T-Mobile hasn’t been able to poach many customers from the market leaders is that they have followed their smaller rival’s lead in offering more generous contracts. Standard phone plans now routinely feature unlimited talk and texting, and unit costs for data have tumbled.
Gobbling up Sprint will be a golden opportunity for the merged entity to, first and foremost, cut costs by closing now-redundant retail stores, reducing back-office headcount, and possibly securing some efficiencies on marketing and deals with suppliers.
It will also mean that T-Mobile obviously no longer needs to pursue a strategy of aggressive price-cutting in order to poach Sprint customers. And that, in turn, would mean that AT&T and Verizon no longer need to worry about matching T-Mobile’s moves with price cuts of their own. Verizon and AT&T are already being investigated for anticompetitive collusion, which would be easier to pull off with only one other competitor in the field rather than two.
It’s conceivable that Telekom and SoftBank, who will together own the newly enlarged T-Mobile, will respond to the company’s enhanced profitability by changing their minds and deciding they suddenly want to make a huge investment in the North American market. But it’s also conceivable that they’ll stick to their longstanding aversion to that idea and simply pocket the extra profits while continuing to pursue what they see as better growth opportunities. And it seems noteworthy that, at a minimum, the big two wireless providers do not appear to be lobbying against the deal or otherwise acting as if they are alarmed about this competition.
Are Verizon and AT&T competitors at all?
Regardless of where the government ultimately comes down on the Sprint–T-Mobile deal, the relationship between the two market leaders in this industry is an object lesson in one of the newest issues in the antitrust policy debate — one that regulators have thus far been hesitant to directly address.
The core problem here is that while Verizon and AT&T are separate firms and, ostensibly, each other’s major rivals in the wireless space, they are also largely owned by the exact same people. As long-established companies (Verizon is the corporate descendant of Bell Atlantic and AT&T is the descendant of Southwestern Bell, both of which were spun off from the old AT&T monopoly when it was broken up a generation ago), both are primarily owned by institutional shareholders rather than by founders or venture capitalists.
Specifically, the three largest shareholders in Verizon are Vanguard, Blackrock, and State Street, while the three largest shareholders in AT&T are ... Vanguard, Blackrock, and State Street. Two additional Vanguard-managed mutual funds are on the top 10 for both companies.
This isn’t a conspiracy. The two companies are genuinely similar, so they appeal in similar ways to institutional investors pursuing similar diversification strategies. But this kind of situation (which also exists in the airline industry and other sectors that are dominated by a small number of widely owned companies) raises the question of how much competition really exists, over and above any questions of explicit collusion.
Eric Posner, Fiona Scott Morton, and Glen Weyl have proposed that antitrust authorities force institutional shareholders in oligopolistic industries to essentially pick just one player to invest in, thus ensuring real separation of ownership. Policymakers have, thus far, shown little interest in the topic. But until they do, it seems like competition will be relatively muted in the wireless industry regardless of what happens with Sprint and T-Mobile. The regulatory fate of the deal will, however, be an important indicator of the integrity of policymaking in the Trump era.
Is Trump-era antitrust enforcement on the level?
The most striking thing about the legal status of the proposed merger is, of course, that the exact same merger was rejected in 2014 by both the Justice Department and the FCC.
Very little has changed factually since then, so any hopes for merger approval would necessarily need to rest on the changed political situation in the United States. And, indeed, SoftBank CEO Masayoshi Son has been aggressively courting the Trump administration on a political level since the lame-duck era, when he lavished praise on Trump and gave his election win credit for all the company’s investment plans in the United States.
Masa (SoftBank) of Japan has agreed to invest $50 billion in the U.S. toward businesses and 50,000 new jobs....— Donald J. Trump (@realDonaldTrump) December 6, 2016
Masa said he would never do this had we (Trump) not won the election!— Donald J. Trump (@realDonaldTrump) December 6, 2016
At the same time, on a policy level, the Trump administration is suing to block AT&T’s proposed takeover of Time Warner — a deal that’s structurally similar to a merger between Comcast and NBCUniversal (which, full disclosure, is one of several main investors in Vox Media) that the Obama administration approved. There’s a plausible argument on the merits for Trump’s actions here, namely that the Comcast-NBC deal was only approved contingent on the merged company making a lot of promises about its conduct that have proven difficult to enforce in practice, but also a suspicion that this is simply Trump lashing out at CNN, which Time Warner owns.
For the administration to flip-flop on a relatively straightforward merger question would greatly undercut the notion that the Time Warner suit is simply about inaugurating a new era of more vigorous enforcement, and greatly bolster the idea that Trump’s personal affection (or lack thereof) for merging companies is what’s driving Trump-era antitrust enforcement.
Regulatory policy, of course, has never been entirely devoid of politics. But one of the biggest questions of the Trump era, from day one, has been whether he will move policy beyond the venal corruption of using his office to extract extra hotel profits to the systemic corruption of turning the entire regulatory state into an extension of his personal whims. Thus far, the latter fear has not really come to pass. But American institutions are tested anew on a regular basis these days, and, more than a question of mobile data prices, the Sprint–T-Mobile deal is in part yet another test of their basic integrity.