DoJ and FCC take conflicting views of Sprint/TMO merger approval

It will take more than a limp wave of support from FCC chairman Ajit Pai to convince the Department of Justice (DoJ) to approve the $26.5bn merger between T-Mobile and Sprint, despite the two telcos offering a number of concessions. A source speaking to Bloomberg last week claimed the DoJ top dogs are in favor of blocking the deal, citing anti-competitive implications.

As pointed out in the report, the FCC and DoJ have never before locked horns over a major merger. But the coming months could include a war of words between Pai and DoJ chief Makan Delrahim, who famously sued to block the merger between AT&T and Time Warner back in 2017. Of course, that was a cross-industry merger and therefore far more likely to receive approval than T-Mobile and Sprint.

Pai argued the case for 5G coverage, echoing the promises made by TMO. “The companies have committed to deploying a 5G network that would cover 97% of our nation’s population within three years of the closing of the merger and 99% of Americans within six years. This 5G network would also reach deep into rural areas, with 85% of rural Americans covered within three years and 90% covered within six years. Additionally, TMO and Sprint have guaranteed that 90% of Americans would have access to mobile broadband service at speeds of at least 100 Mbps and 99% would have access to speeds of at least 50 Mbps,” said Pai.

Supporting broadband and multiplay services like video are key to TMO’s case in point. “Moreover, the companies have offered specific commitments regarding the rollout of an in-home broadband product, including to rural households. This would give many Americans another option for home broadband service,” he added.

We now know TMO and Sprint are considering a sale of the prepaid business Boost Mobile as a concession for earning regulatory approval in the $26.5bn merger to form ‘New T-Mobile’. Selling spectrum licenses and setting up a fourth carrier were reportedly two less attractive options than the aforementioned sale. The companies have also committed to freezing prices for three years.

But clearly this isn’t where the Justice Department sees the red flags planted, in a business of 1.1m subscribers, adding 69,000 in the last quarter, which wains in comparison to the behemoth of a postpaid business approaching 39m subscribers.  In Q1, TMO once again exceeded a million customer additions in a single quarter, recording 1.65m net adds, which boosted revenue by 7% to $11.1bn for the quarter.

But while TMO has used marketing expertise and canny pricing to leapfrog its would-be merger partner, Sprint has suffered years of customer defections, caused by network failings and poor customer service. Despite big investments in these areas in recent years and a major change of management, its fiscal fourth quarter results were depressingly familiar, with 189,000 postpaid customers leaving – a sad reversal of the year-ago quarter, when Sprint reported net additions of 55,000.

None of this bodes well for its 5G future, especially if regulators prevent its proposed merger with TMO. Sprint brings its only unique asset to that marriage – its plentiful supply of 2.5 GHz spectrum, the kind of midband airwaves that are ideal for 5G capacity, without the risks of millimeter wave, and which the larger operators lack. It would complement TMO’s national 600 MHz spectrum very well, supporting a balance of coverage and capacity.

“It’s also important that the companies would suffer serious consequences if they fail to follow through on their commitments to the FCC. These consequences, which could include total payments to the US Treasury of billions of dollars, create a powerful incentive for the companies to meet their commitments on time,” warned Pai.

The deadline for a decision regarding the formation of New T-Mobile was recently extended to July 29, allowing extra time to seek regulatory approval.