The Department of Justice is really turning the screws on T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S) to approve their proposed merger. The DOJ wants the two wireless carriers to divest enough assets to ensure a viable fourth competitor in the wireless industry. Not only do the carriers have to divest those assets, the buyer needs to be in a position to establish a competitive service. The two are reportedly close to a deal with DISH Network (NASDAQ:DISH), which certainly fits the bill.
But the reason DISH Network fits the bill as a viable company for establishing a fourth wireless competitor is what gives it a lot of potential to put pricing pressure on New T-Mobile (i.e., the combined T-Mobile-Sprint business), Verizon (NYSE:VZ), and AT&T (NYSE:T). DISH will use wireless service to bolster its satellite TV business. DISH can afford to take slimmer margins on wireless if it helps maintain the company's legacy business.
Here's how it'll impact the existing competitors.
New T-Mobile wins
Even if DISH or another competitor with an existing television subscription emerges as a fourth wireless competitor, New T-Mobile still ought to see considerable benefits from the merger. T-Mobile's CFO, Braxton Carter, has said the company's biggest weakness is its lack of scale.
The two companies will have to sell off Boost Mobile, Sprint's prepaid brand, and its 8.8 million subscribers, but the new company will still find itself with a comparable number of subscribers to AT&T and Verizon once the merger is complete. That kind of scale will enable New T-Mobile to significantly increase its EBITDA margin as it leverages the massive fixed costs associated with building and maintaining a wireless network.
Meanwhile, the companies have already agreed to keep their prices stable for at least three years, and they've generally priced their plans below comparable plans from AT&T and Verizon. Indeed, the two have been the ones putting pricing pressure on the bigger carriers for the last six years or so. But with considerable scale, there's no need to increase prices in order to improve profitability.
Finally, the merger opens the door for New T-Mobile to offer additional services like home internet and television service that would be difficult for either company to do alone. New T-Mobile will use excess wireless network capacity to offer home broadband to over half the population. That's a high-margin revenue stream unaffected by wireless service pricing.
AT&T won't see much impact
While AT&T has higher prices than Sprint or T-Mobile, its subscriber base is bolstered by its ability to bundle services. AT&T has offered so many iterations of bundles with its wireless service and video packages it's hard to keep up. But with WarnerMedia and DIRECTV assets, the company has a lot to offer its customers.
AT&T is using bundling to attract more subscribers for TV, home internet, and its wireless service, and it's focusing on making all three of those services more profitable by dumping low-value customers and lowering costs. The introduction of WarnerMedia's stand-alone streaming service later this year may present another opportunity for AT&T to bundle its services.
With nearly 24 million TV subscribers, AT&T has a massive ancillary customer base to help insulate it from pricing pressure on its wireless business. Getting customers to take a bundle of services will make them stickier and help AT&T maintain its pricing in the face of competition.
Verizon has the most to lose
Verizon has maintained premium pricing despite competitive pressure from T-Mobile and Sprint over the years, but its ability to expand its margins will face considerable pressure as more low-cost competition enters the market. Verizon has seemingly been hit hardest by the virtual networks operated by the cable TV companies (although it benefits from its wholesale agreement for those services). A similar service from DISH using the New T-Mobile network could hurt even more.
Verizon's biggest competitive advantages -- its network and its brand -- are slowly getting eaten into. If DISH can get its mostly rural subscriber base to take its forthcoming wireless service, Verizon is most likely to get hurt, as its broad network coverage previously gave it an outsize advantage in those markets.
With greater potential for customer losses from new competition and pricing pressure keeping it from raising prices, Verizon may see its profit margins contract if the T-Mobile-Sprint merger creates a new competitor out of DISH.
If the DOJ approves a deal between T-Mobile, Sprint, and DISH, Verizon investors need to pay close attention to the terms and DISH's plans to build its service and subscriber base. It could have a much bigger impact on Verizon than the other two established competitors.