Sprint's (NYSE:S) ambitious plan to acquire T-Mobile (NASDAQ:TMUS) might get some more legs. Regulators have already voiced public skepticism that such a deal would help competition, and as such, the rumored merger may face an uphill battle against antitrust scrutiny.
SoftBank Chairman Masayoshi Son has already promised to wage a "massive price war" against AT&T (NYSE:T) and Verizon (NYSE:VZ) if Sprint is allowed to merge with T-Mobile. As the majority owner of Sprint, SoftBank and Son can and will influence Sprint's strategic direction.
Son believes he can put together a viable competitor to the two top dogs, and needs scale to do so. Actions speak louder than words, though, and the hard part for regulators will be whether or not they believe Son will keep his word. This is where investors might find clues by looking to Japan to gauge SoftBank's behavior.
SoftBank has just said it will cut smartphone feeds and offer a flat rate for unlimited voice calling combined with affordable data rates. While that could be evidence that SoftBank wants to compete aggressively, it's only doing so in response to regulatory criticism that Japan's big three carriers aren't doing enough to lower prices. SoftBank is the smallest of the big three compared to NTT DoCoMo and KDDI, so it should have the most incentive to be aggressive.
That puts SoftBank in a similar competitive position: battling two larger rivals.
Wireless carriers face extraordinarily high fixed costs, and they need scale to spread out those capital expenditures over a larger customer base to bring total average cost lower. Combining would give Sprint/T-Mobile greater scale, but in order to fully realize cost synergies, it would need a seamless network integration.
Sprint operates a CDMA 3G network; T-Mobile uses GSM for 3G. The companies use different LTE technologies on different spectrum bands, and neither has strong low-frequency spectrum holdings compared to AT&T and Verizon. Ma Bell and Big Red already control nearly two-thirds of low-frequency spectrum, which offers greater penetration and propagation characteristics. That allows carriers to build networks that are less dense, requiring less capital outlay.
Sprint is still healing from previous network technology wounds (Nextel and WiMAX), and merging with T-Mobile would be a painful reminder of how challenging and expensive network integrations can be. Son has undoubtedly considered all of this, but he may be overconfident in executing the integration. Merging the networks would require considerable attention at a time when the combined should be focused on how to increase competition.
It's not just a question of whether or not a combined Sprint/T-Mobile wants to remain aggressive, but also if it can.
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Evan Niu, CFA, owns shares of Apple and Verizon Communications. Evan is long a bullish call spread on Apple. The Motley Fool recommends Amazon.com and Apple. The Motley Fool owns shares of Amazon.com and Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.