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Sprint T-Mobile: New mega-carrier or four-network nightmare?


Wall Street claims T-Mobile is eyeballing financially weakened Sprint, but would integrating Sprint’s alien network technologies into its global GSM footprint be more trouble than it’s worth?

Merrill Lynch analysts have pegged T-Mobile USA’s owner Deutsche Telekom as the latest company interested in buying the floundering Sprint in an effort to grow its own U.S. footprint as well as avert a price war. But while such a deal might make financial and strategic sense, analysts said Sprint could become an operational nightmare for its new owner.

In a research note, Merrill Lynch said Sprint’s operational problems would cause it to dramatically cut prices, horning in on the lower-cost market T-Mobile has largely built its business on. A takeover bid would not only avert such a price war, but considering the low value of Sprint’s stock (at about $7 a share) and the high value of the Euro in which Deutsche Telekom trades, a deal would be attractive.

Acquiring Sprint would instantly propel T-Mobile into the mega-carrier ranks in the U.S., almost tripling T-Mobile USA’s subscriber base of 28.7 million and outpacing the country’s largest operator AT&T by more than 10 million subscribers.

However, Deutsche Telekom would inherit not only a company in financial straits, but also a mish mash of networks that bear no relationship to its GSM/UMTS footprint. One of the reasons often cited for Sprint’s poor operational performance has been the difficulty of integrating Nextel’s iDEN network with Sprint’s CDMA systems. Since the acquisition of Nextel in 2005, Sprint has been running two networks under two separate brands, triggering a stream of disappointing quarterly financial performances that have resulted in post-paid customer losses on both the Nextel and Sprint business units. Furthermore Sprint has had to dig deeply into its pockets to buy up its former affiliates when Nextel brought Sprint into their territories.

To add to the confusion, Sprint is launching a third network this year, using a different technology, WiMAX; a new brand Xohm; and a new business model, wholesale open-access. Integrating those disparate networks with T-Mobile’s GSM infrastructure and new UMTS systems, scheduled to come online this year, is just asking for headaches, said Current Analysis’s Peter Jarich.

“If three networks are too much to run, then five networks must be just right,” Jarich said—he even counts GSM and UMTS as separate systems. “The only way I think it makes sense is for T-Mobile to turn around and sell everything but the 2.5 GHz spectrum. Or, perhaps, split up Nextel and Sprint and let them run on their own.”

Even if Deutsche Telekom had such an ambition, it’s questionable whether a foreign operator would get the green light to own so much of the U.S.’s increasingly critical wireless infrastructure, Jarich said. The sheer size of the venture wouldn’t be the only problem, Jarich said. “Given the role of Nextel in public safety, you can be sure that there would be issues,” he said.

Skyline Marketing President John Celentano said that Merrill Lynch`s premise of T-Mobile heading off a competitive price war is far-fetched, but the possibility of Deutsche Telekom making a bid for Sprint--while speculative--is entirely possible. Sprint shares are so low, DT may look at it as a long-term investment. While suffering, Sprint has a huge customer base and some very valuable spectrum assets in its 2.5 GHz frequencies, both of which would be very attractive to the German operator, Celentano said.

DT would have to run the CDMA and GSM networks separately--though it may unify marketing under the T-Mobile brand--and it would can Sprint`s WiMAX plans, Celentano said, but down the road it could make Long Term Evolution the unifying network. With Verizon Wireless opting for LTE as it`s future 4G path, there is a definite precedence for CDMA operators moving under the LTE umbrealla. That means dual-mode CDMA-LTE handsets to compliment GSM-LTE handsets--and a definitive roadmap for linking two disparate technologies, Celentano said. The only sticking point would be the iDEN network, which DT would likely spin off into a separate company, he said. Celentano added if DT isn`t weighing a move on Sprint, Verizon Wireless almost certainly is.

"LTE could be become a single unifying broadband wireless standard across the world," Celentano said. "If T-Mobile is interested, it would be a long-term play with LTE in mind."


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