T-Mobile (NASDAQ:TMUS) and Sprint's (NYSE:S) concessions and commitments were enough to win over FCC Chairman Ajit Pai, but the Department of Justice (DOJ) still isn't convinced. The two wireless carriers agreed to divest Boost Mobile, Sprint's prepaid virtual network, and committed to keep prices the same for three years as it builds out its 5G network.
An independent virtual network operator isn't enough for the Justice Department, though. It wants the companies to make structural divestments that would clear the way for the creation of a fourth competing wireless carrier before it approves the $26.5 billion merger, according to a report from Bloomberg.
The report is light on details of what exactly would appease the DOJ: Would selling off wireless spectrum be enough or would New T-Mobile -- as management refers to the result of the potential merger -- have to divest an operational network and customer base? It's highly unlikely New T-Mobile will agree to spin off a fully functional national wireless carrier with its own customers. That would be completely counterproductive to the merger.
What could New T-Mobile be willing to give up?
There are a couple of big things T-Mobile gets from merging with Sprint. It gets the requisite scale in its customer base to produce profit margins more comparable with bigger competitors.
T-Mobile CFO Braxton Carter has said scale is its biggest disadvantage. Adding Sprint's 26.6 million postpaid phone subscribers to its customer base would put it much more in line with the competition on that front and fully take advantage of its fixed costs.
Additionally, T-Mobile would gain the rights to Sprint's spectrum, most of which Sprint doesn't have the financial wherewithal to deploy on its own in a timely fashion. Sprint actually holds more wireless spectrum than all of its competitors, but it's mostly confined to higher bands of wavelength (which don't travel as far as lower bands). As a result, it requires a denser network with more cell sites. That's ultimately more expensive to build out than a network based on spectrum with lower wavelengths.
High-band spectrum is valuable for its speed, however, making it an important aspect of New T-Mobile's 5G plans. New T-Mobile also expects Sprint's spectrum hoard to enable it to offer in-home broadband to over half the country. The two companies made commitments regarding both the buildout of its 5G network and in-home broadband service in order to gain Pai's endorsement.
Despite the importance of Sprint's spectrum to New T-Mobile's network buildout plans, it may be willing to divest some licenses in order to gain approval from the DOJ. Sprint's independent 5G network plans include using some of its excess 2.5 GHz spectrum instead of building or renting more expensive fiber backhaul. New T-Mobile's scaled customer base should provide the cash flow needed to support using fiber if it's required to divest some of Sprint's high-band spectrum.
A new competitor?
Even if New T-Mobile is willing to divest certain spectrum licenses, the question is, who would be on the other end of such a deal?
Comcast (NASDAQ:CMCSA) has notably participated in spectrum auctions in the past and it's quickly building a customer base for Xfinity Mobile. But Comcast only operates its wireless service in its existing cable footprint, where it can offload much of the traffic to its WiFi hotspots.
Other pay-TV operators with wireless options follow a similar strategy. The Justice Department might want to see a nationwide competitor. Some but not all state attorneys general would certainly be disappointed if the number of true competitors went from four to three in their state.
Still, the pay-TV industry remains the likeliest source for a new competitor. Building a customer base from scratch, especially when all the existing competitors already have established wireless networks and customer bases around 100 million, is a herculean task. Pay-TV operators have established customer bases and can use wireless service as a tool to keep subscribers from switching or cancelling services. They also have the cash flow necessary to deploy the spectrum into a true fourth wireless network.
As a result, merely giving up wireless spectrum might not be enough for New T-Mobile to gain approval from the DOJ. Unless the Justice Department is more lenient on what it considers a competitor, or some sort of coalition forms to stitch together nationwide coverage, spectrum divestiture isn't going to get the deal done. And it's hard to see T-Mobile and Sprint giving up more than that to push the merger through.