T-Mobile (TMUS 1.58%) and Sprint (S) have faced opposition from federal regulators over their planned $26.5 billion merger. Speculation that the deal may not be approved has led Sprint to send a statement to the Department of Justice saying that if the deal gets denied, it may not be able to survive. Fool contributor Daniel Kline joins Shannon Jones to break that down and to take some time to sort out the streaming video industry.
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This video was recorded on April 23, 2019.
Shannon Jones: Welcome to Industry Focus, the show that dives into a different sector of the stock market every single day. Today is Tuesday, April the 23rd, and we're talking Consumer Goods. I'm your host, Shannon Jones, and I am joined via Skype by Foolish contributor, all around good guy, Dan Kline. Dan, how are you?
Dan Kline: I'm good! Is it that cold there? You're wearing a winter jacket in the studio.
Jones: It depends on where you're at in this building.
Kline: [laughs] So it's cold in the building.
Jones: In the studio, it tends to be a little chilly. But I think we've got 80 degrees outside today. This jacket has no plans on staying on, that much I can assure you.
Kline: It's 80-something here, as always.
Jones: So glad to have you on the show today, Dan. We've got two topics to dive into. The first is what seems like the never-ending saga between Sprint and T-Mobile. And then also, second half of the show, we're going to be diving into and trying to make sense of the streaming wars and who the key players are.
But let's go ahead and dive right in into the merger madness that is Sprint and T-Mobile. These are the third- and fourth-largest carriers in the U.S. They've been attempting to merge a little over a year now, Dan. Regulators are raising some serious concerns, particularly on the end of consumers. Dan, there's a lot on the line right now. This was a $26 billion deal. Just how bleak are things looking for this deal and for Sprint, too?
Kline: Everyone's speculating. We don't entirely know. Federal regulators have not come out and said, "Hey, we're not going to approve the deal." But a lot of the tone, a lot of the political rhetoric, has shifted to, "We're going to deny this deal." This goes back to why the two companies broke up their first attempt at a merger a few years ago. There's this inherent idea that having four wireless carriers is better than having three wireless carriers, but all three of them are really strong. There's a bit of a monkey wrench thrown in here, which is why we're talking about it -- Sprint came out this week and they said, "Hey, look, if this deal doesn't get approved, we might not survive." The company more or less... I don't want to say they restated their earnings, because that's more of an official process, but they came out and said that a lot of the postpaid additions -- the most-watched number -- weren't really paying customers. They were people getting an extra free line, they were people forced into a line they didn't really want or didn't really need. So they more or less admitted that some of their rosy numbers were smoke and mirrors, and that they may not have the ability to continue, or really the money to invest, should the merger not take place.
Jones: And it's not just about Sprint's future here. The other argument they've been pulling out of the hat is really trying to piggyback off of the White House and their administration, focusing on 5G, the race to 5G, specifically trying to compete with China, who is set to, I believe, launch 5G as soon as next month. Sprint has also been saying, "If you want 5G to become a reality for the vast majority of America, you need to allow this merger to go through." Let's dig into that, Dan, because that's kind of complex.
Kline: There's truth to that, and there's a John Legere piece of hype to that, as well. [laughs] You have the problem of, there are two other major wireless carriers. There's Verizon and there's AT&T. Both of them on some level are rolling out 5G. Legere, the CEO of T-Mobile, likes to point out that more or less, they'll have 5G in one neighborhood, then say, "Chicago now has 5G!" They very much overstate where they are. And, they don't have a lot of incentive to do it quickly, because T-Mobile on its own will get there, but they will not get there nearly as fast as if they merge with Sprint. Sprint probably won't get there at all, which is why they'll go out of business.
This is a huge investment. T-Mobile wants to lead the way and push for that, and they're willing to say, "Hey, approve this deal, and we'll get to 5G faster than anyone else." They may, they may not, but they will certainly push Verizon and AT&T -- in fact, they've already pushed Verizon and AT&T -- to move faster.
Jones: Dan, if I'm a consumer looking at this, and I'm thinking, "Reduced competition means more pressure on prices, I'm going to pay more," isn't the fact that with Sprint and T-Mobile, if this merger doesn't happen, Sprint now could very well go to the wayside. You're still losing a competitor either way, whether this merger happens or doesn't. If I'm a consumer, am I looking at this the right way, thinking, "I really am not going to win"?
Kline: What's hard to know is, Sprint is backed by SoftBank. SoftBank, the majority shareholder, has a lot of money. They could fund losses. They could underwrite Sprint for as long as they wanted to, more or less. The question is, are they going to get fed up and say, "Hey, look, none of the cable companies want to merge with us. There's no logical partner. The path to growth is just too expensive." They've survived, or put up acceptable numbers, by being the cheapest carrier. You can be the cheapest carrier, which T-Mobile has been at various points, if you're also a comparable network to everyone else. Right now, Sprint would argue that it is. It runs commercials saying, "Yeah, we don't have the best network, but hey, it's good enough." And it kind of is. But that's going to deteriorate over time.
T-Mobile and Sprint, if they stay separate companies, yes, they might keep prices down. But would you rather pay a few dollars more and have very reliable service and 5G -- 5G might let some people get rid of their internet connection. There's a real value to that. Again, it's hard to know. Sprint is running the red flag. "Oh, my God, we're going to go out of business!" That could just be a tactic. It's important to note that.
But it's very hard to argue that consumers won't be better off by a stronger T-Mobile. T-Mobile has been a very consumer-friendly company. They've helped eliminate contracts, overages. You now actually know what it costs to buy a phone. That may not seem like a good thing, but the old days of getting a free phone, but then your bill was $40 more a month, now it's broken down. You pay $40 more a month. T-Mobile has real pricing. If they say $50 a month, that's $50, including all the taxes and fees. They've done a lot of good, and I have a hard time believing that if they merge with Sprint, all of a sudden, they're going to turn evil and start going back to practices that -- their entire business proposition is being against a lot of the things you'd worry about.
Jones: For T-Mobile, they've added more than a million customers now for I believe it's 23 consecutive quarters, which is pretty impressive. And let's not forget, T-Mobile is also planning to roll out a television service. This merger with Sprint greatly expands that base as well. For T-Mobile, there's so much good happening right now.
Kline: T-Mobile this week unveiled a banking service, which will help people that don't have a checking account not only get easy access to banking, but have a certain level of overdraft protection, no minimum balances, no fees. I've been underwhelmed by their cable offering, but I think that will change when 5G rolls out and it becomes something you use over your phone rather than what we've seen so far as the at-home version, which really looks a lot like cable. But T-Mobile is a company that's constantly trying to find new ways to make consumers happy. AT&T and Verizon... I'll put this nicely, it doesn't feel like that is baked into their DNA.
Jones: [laughs] Very good point, Dan! Totally agree. To close out this segment, where would you put the likelihood of this deal closing? Would you say it's a 50/50 shot at this point? Where are you at?
Kline: I think T-Mobile will make whatever reasonable concessions need to be made to make this deal. If the federal regulators who are looking at it want price guarantees, or a speed of 5G rollout guarantee, or whatever it is, I think T-Mobile is going to be very willing to do that. If they're stuck on the idea that there needs to be four companies, then I think what's going to happen is, Sprint will make the merger happen by the back door of going out of business, and maybe T-Mobile can acquire some of its assets. I think T-Mobile would acquire the vast majority of its customers organically -- which is, frankly, why I have some questions as to the value of this merger for T-Mobile in the first place.
Jones: Yeah, very good point. A lot to watch here in the coming months.
Let's turn our attention to another story that's been ongoing. Dan, I know you and Dylan got the chance to talk about streaming, specifically the new Disney+ (DIS 0.84%) that's set to roll out later this year. But if you're like me and the rest of the world, when it comes to streaming and the streaming wars -- I don't even want to call it "streaming wars," it's just streaming chaos and confusion at this point, because there's so many players. How do you make sense of all the different options that are now being rolled out in streaming?
Kline: It's too difficult. We've talked about this on the show before, with me and you and various hosts. There are so many streaming services. We both have kids. I have a 15-year-old, you have a...
Kline: Nine-year-old. So, both of our kids are probably into Cartoon Network. My son likes some of the comic book shows. He watches DC Universe with me, that's a paid service. When you balance your household and figure out all the different things you need, if you're one person living alone, you might get by with Netflix, and later, Netflix with Disney+. The second you start adding more people to the household, the combination of streaming services I have -- which is like eight or nine different paid services -- it doesn't cost as much as cable, but it does cost a lot. And as more start coming out, it becomes something you have to manage. And then you start saying, "Boy, I wish some company would just combine all these services and I could pay one fee." Oh, wait a minute, that's cable!
I think we're at a weird tipping point. This went from an additive thing, like, "Do I want HBO and Cinemax with my cable package?" to, "All right, now I have Netflix and I'm going to cut the cord. Do I want PlayStation Vue? Do I want Hulu Live? Do I want YouTube TV? Am I going to add HBO, which will be ingrained in those services? Am I going to have these separate services? Geez, I like sports! Do I want the Major League Baseball package separately? My kid's really into anime, do I want this niche anime streaming service?" I think for the average person, it's becoming overwhelming. I think that may actually slow down cord-cutting.
Jones: Very, very good point, Dan! I agree, I think just the vast amount of options makes it really hard to decide. Just like you, we've got multiple streaming services, devices, and platforms in our house. Granted, we are paying much less than what we paid when we had a big cable provider that I will not name that has terrible customer service. But I will say, when you're thinking about just convenience, and even paying the bills, the more you start to add on, the more it just makes you not want to choose any of them. I will say though, and I think you're bringing up this point, that it's not a winner-takes-all market when it comes to streaming. Right now, each one does serve its own niche. You've got Disney with their Disney+ service. They've got this massive vault of content that really has this emotional connection. As a parent, you could probably relate to this, Dan.
This is content you can watch over and over and over again. I can't tell you how many times I've watched Frozen. You have this content that just continues to build upon itself and build out the ecosystem with their merchandise and the parks and everything like that. You've also got these multiple franchises as well that can continue to run. I'm thinking about Marvel, Star Wars, even the Pixar franchise. Disney serves this niche, this family programming that. You've got Hulu on the other side, that's much more to me like your typical TV network. If I want to catch up on the TV show that I missed, I can go to Hulu and easily pull that up. Of course, you've got multiple big-name networks that have stakes in Hulu. Then you've got Netflix and you're just looking for, I hate to say it, weird programming that you typically would not find or go looking for, you go to Netflix for this original content. I think right now, you've got many of the major players just serving their own niche. But the key will be, how are they going to start to bundle that?
Kline: As a consumer, I think you have a default base. You're going to have Netflix. The volume of shows on Netflix just makes sense for you to have it. You're going to have Disney+ for the reasons you just mentioned. They have a huge archive of stuff. I'm super excited about the Star Wars shows they've announced, the Marvel shows they've announced. Then after that, you're going to have to make the decision -- do I want live TV? If you want live TV, I think ultimately, Hulu is going to bundle Disney+ and ESPN+ so you can get them all through one interface, sort of the way Sling TV allows you to have your HBO content and all your other add-ons without having to leave the app and go to another. That becomes a problem for everything that isn't app integrated. We subscribe to WWE Network. I'm a big New York Rangers fan, so if they weren't terrible, I would probably subscribe to the NHL package to get those.
But getting to that content means leaving Hulu Live, which is my prime way of watching TV, and going to those packages. Anything that's on the outside looking in is going to have to be much better. When you look at some of the also-rans -- remember, Sony owns Crackle, which is free, and you still don't have it. It actually has some OK content, but there's no time for it. I think the winners are going to be the integrators -- Disney, through its ownership of most of Hulu and these other services and its ability to eventually maybe offer ESPN or ABC or all the other things it owns and roll it into that; Roku, because they have the player; and to a different extent, Amazon. Although whether Amazon and Apple can make nice is going to be challenging as you have new content coming from Apple. We're in the really early stages. Some of this stuff is going to go away.
Jones: Good point. I was just thinking, as an investor, it's hard to choose between all of the options. Again, it's not a winner-takes-all market. But if I'm investing, I'm probably going to look for a platform device like Roku that is very much streaming service agnostic. Just looking at some of the stats for Roku, Roku has over 27 million active accounts. The number is growing pretty quickly, up 40% last year. Roku basically collects commissions on subscription sales and shares of advertising revenue for these streaming services. They've got a recurring revenue stream there. Even though it doesn't make a profit on its sales, it does an excellent job at monetizing the users. It's going up against Amazon, it's going up against Apple. Of course, Apple had this big star-studded event to talk about their new service, which they'll be rolling out later this year. The competition is fierce. But if you're like me as an investor, I think Roku was one of those companies where whether it be cord-cutting that you're going after or just the streaming wars, I think it's going to win both ways.
Kline: Yeah. And I think Roku is in a position where they're not creating content. If you're Apple and you're going into content creation, is Google going to want to stream your service? Who knows if they're going to even allow Google to stream their service. Amazon creates content. If you're the other platforms, do you want their content to be there? Netflix is completely neutral. It's available on every device. Roku is in a position that it's that way for devices. It can say to anyone, "Hey, come to us!" And I think that is going to be a growth driver. But I do also worry a tiny bit about companies finding ways to not pay that 30% commission, to get people to subscribe on their own. We're starting to see a new level of sophistication of, "We don't just want people to come to us through Roku. We want to sign them up as customers, because why pay a lifetime commission?" And that's almost the entire Roku business model.
Jones: Very true. Very good point. Lots to look forward to. Dan, we'll have to circle back later this year as a lot of these streaming services and platforms get up and running so we can update all of our listeners. How's that sound?
Kline: Let's spend the next few months watching every show we possibly can.
Jones: [laughs] You know I will be tied to all things Disney as soon as that comes out. So sounds like a good plan! We want to thank you, our viewers and our listeners, for tuning in! That'll do it for this week's Industry Focus: Consumer Goods show. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. This show is produced by Austin Morgan. I'm Shannon Jones, for Dan Kline. Thanks for listening and Fool on!