In the aftermath of the failed merger attempt between Sprint and T-Mobile US, (NASDAQ:TMUS), the two are, once again, fierce competitors. T-Mobile now has its focus squarely on overtaking Sprint and becoming the third-largest wireless telecommunications carrier in the United States.
The merger activity may not end there, however. The rumor mill is gearing up, once again, and it appears a new potential suitor for T-Mobile has emerged. Satellite television provider Dish Network Corp. (NASDAQ:DISH) seems to be the front-runner for T-Mobile, now that a deal with Sprint is off the table. Indeed, there are several potential benefits for Dish that make a lot of sense for the two companies to join forces.
Dish is the second-largest satellite television provider in the country. But not all is well; in fact, during the past several months, cord cutting among consumers has gone from anecdote to clear-and-present danger. Because of this, stand-alone pay-TV providers face a real threat. That was the impetus for DIRECTV partnering with AT&T, and it's for that same reason that Dish covets T-Mobile.
It's all about self-preservation
Consumers have griped about their outsized cable TV bills for some time. With few alternatives, however, there wasn't much that could be done about it. Since the birth of Netflix, Hulu, and others, consumers now have an abundance of ways to get their favorite TV shows and movies. Reliance on cable TV providers is a thing of the past, and management teams across the industry are finally taking notice.
Dish lost 44,000 net pay-TV subscribers last quarter. By partnering with a wireless carrier, Dish and T-Mobile can form the bundled packages that cable companies crave. These are very lucrative for companies like AT&T that offer both cable television and wireless service, because they allow for higher-margin packages that significantly increase revenue per user. For example, AT&T boasts its high-margin U-Verse service, where average revenue per user for its triple-play customers exceeds $170 per month. The triple play is a bundle in which AT&T offers a landline phone, cable television, and broadband Internet.
If Dish successfully acquires T-Mobile, the combined entity could create a similar business model for itself. Dish would be able to expand into the wireless business, and create a long-term growth opportunity in the form of providing broadband to its video customers.
Cable companies are finding themselves in an environment of declining total users. Therefore, the rational solution is to increase the amount of revenue generated from each remaining user. Bundled services are a perfect way to accomplish this.
Dish ready to pounce
While the Sprint and T-Mobile merger was still a distinct possibility, Dish Chairman Charlie Ergen stated at the time his reluctance to getting involved in an expensive bidding war. Instead, he preferred to wait it out, and hoped to pounce if and when the merger failed.
That vision has now materialized. Shares of T-Mobile have come well off their high this year, dropping from $34 per share during the merger talks to its current level of $29 per share. This makes the deal more attractive from a financial perspective, and it already makes a lot of sense from a strategic perspective. That means there's no better time to launch a bid.
The Foolish conclusion
Now that Sprint and T-Mobile won't be joining forces, Dish has a great opportunity to step in. On the surface, it might seem like Dish simply wants to add customers. That's certainly true, and an added element would be the ability to offer the highly lucrative bundled packages that pay TV and wireless providers love.
These bundled packages are prized by cable companies because they produce high revenue per user. Since pay TV companies are losing customers, they're eager to make up for it by generating more money per user. This is the real reason Dish wants to acquire T-Mobile.