Yellow Streak

Could Sprint Propel T-Mobile US to the Number-One Spot?

It’s been a persistent rumour and now speculation about an impending combination of T-Mobile and Sprint is peaking again.

Let’s remember that this isn’t just vapour. A merger between the two carriers almost took place in 2014, when Japanese SoftBank, owner of Sprint, pursued an acquisition of T-Mobile US from Deutsche Telekom. In the end, conceding that US regulators wouldn’t approve the deal because of anti-trust obstacles, SoftBank ended its pursuit.

But in many ways, the market is very different now. There’s a new president, a new head of the Federal Communications Commission and a new competitive environment. CCS Insight has predicted on several occasions that a combination of T-Mobile and Sprint seemed inevitable (see The Incredible, Inevitable Number Three). We’ll double down on that. Going into a fifth generation of wireless services, carriers will need scale to build out services across a very large country. From a long-term point of view, consolidation would be very advantageous.

Taking a day-one snapshot of a merger between T-Mobile and Sprint shows how Verizon and AT&T, the two leading carriers in the US, would be challenged by the new entity and, by at least one metric, dominate the market.

At the highest level, looking at the total number of connected wholesale accounts and connected devices, all three players would have 137 million lines. From the start, the market would be in a three-way tie. But zooming in shows advantages and disadvantages.

In the prepaid segment, T-Mobile and Sprint would dominate the market with 29 million accounts for their T-Mobile, Sprint, MetroPCS, Virgin and Boost brands. This would be a significant jump over TracFone, a virtual operator that has about 23 million prepaid customers in the US. T-Mobile and Sprint would also tower over AT&T, which has 14 million prepaid lines, and Verizon, which has around 5 million.

But the US is a market dominated by post-paid services, and this is where Verizon and AT&T have a lead. Post-paid accounts churn less and they earn more. In terms of the actual number of accounts rather than connections (there are usually several connections per account), Verizon has about 36 million accounts, AT&T 37 million, and T-Mobile/Sprint a total of 24 million. In this metric, the new company would still be a third-place carrier, well behind the market leaders.

In total post-paid connections, AT&T is the market leader with 112 million, followed by Verizon with 109 million. This includes all devices for which the carriers have a direct billing relationship with the account owner. Here T-Mobile/Sprint would have 68 million connections, again, far behind the top two. Looking at post-paid phone connections, often considered the most important and reliable revenue-generating segment, Verizon leads with 88 million followed by AT&T’s 65 million. T-Mobile/Sprint would have more than 59 million, thus approaching AT&T’s level.

And this is where growth rates come into play. T-Mobile has been adding, on average, 1 million post-paid phone accounts per quarter during the past several years. Sprint has essentially stayed flat during the same period. Assuming that T-Mobile continues its momentum, it could combine with Sprint and surpass AT&T during the coming years. It’s an intriguing thought: two once-struggling players team up to get ahead of one of the most established brands in the global telecom industry.

In reality, growth from here on out will be hard. T-Mobile will have to port in a significant number of accounts from rivals at a time when carriers have been using measures to fight churn. AT&T, for example, is adding proprietary content to its portfolio with the coming acquisition of Time Warner, and creating more loyalty with its connectivity bundles across fixed-line and wireless services. The low-hanging fruit has been picked in the post-paid market.

According to reports by Reuters and Bloomberg, most of the details of a possible merger have been worked out, and T-Mobile’s parent, Deutsche Telekom, is expected to hold a controlling interest in the combined entity. Given the growing value of T-Mobile’s brand in the US, the magenta-coloured logo is likely to be the face of the new company. More news is expected in the coming weeks. As we’ve learned, there are no sure things in this market. But the way things look now, T-Mobile could become a little more yellow in the near future.