Insights from the Sprint/T-Mobile US merger ruling (Part 4)
Last week, the merger of T-Mobile US and Sprint cleared what was widely seen as the last major hurdle to a successful closing: U.S. District Court Judge Victor Marrero rejected the claims of a group of state attorneys-general that the merger of T-Mobile US and Sprint would reduce competition in the U.S. consumer wireless market.
With that ruling, T-Mobile US could be looking at closing the merger as soon as April 1, although there still some moving parts: a separate legal approval for the related Dish Network settlement (which includes asset divestment to Dish of Sprint’s prepaid businesses, some 800 MHz spectrum and access to wireless infrastructure sites so that it can become a fourth facilities-based competitor) and approval from the California Public Utility Commission.
The 170-page ruling by Marrero covers past, present and future: he goes through some of the telecom history that brought both parties to the point of merging, the current competitive state of the industry, the arguments that he found unpersuasive versus what was compelling, the reasoning on which he based his decision, and some strategic points from New T-Mobile’s vision for how it’s going to operate—which ultimately persuaded Marrero that it won’t harm wireless competition in the U.S.
Here is the third installment of a series documenting key highlights, tidbits and testimony from the trial, as outlined in the judge’s ruling. (You can also read Part One, Part Two and Part Three.)
T-Mobile US based its merged-network efficiency claims on a modified version of its own Network Engineering Model, dubbed the Montana Model. T-Mo’s own NEM, as described in Marrero’s ruling, is used to predict which of the carrier’s cell sites will become congested and require upgrades. It’s updated yearly and forecasts network traffic over a five-year period (although a T-Mobile US exec said that predictions don’t vary much from one year to the next). It incorporates information from the carrier’s marketing teams and studies on likely future consumer applications and data demands, and T-Mobile employees testified that the regular NEM “predicts capacity needs at over 99% accuracy in the ordinary course of business.”
A special version of the NEM, the Montana Model, was developed for the merger process to account for both the advent of 5G and the benefits of the merged company’s network compared to the two carriers’ standalone networks. It predicted congestion thresholds in terms of speed. Overseen by T-Mobile US’ VP of Network Technology Ankur Kapoor, the model was completed in September 2018. Since T-Mobile US’ NEM model didn’t have actual data on 5G speeds at the time, the Montana Model relied on calculations based on the most advanced LTE handset- and cell-site capabilities, plus predicted spectral efficiency gains from 5G. It assumed likely consumer use cases of 4K video streaming and augmented/virtual reality, and required that 4G sectors be upgraded to 5G if customers with 5G-capable handsets were present in the sector but experiencing speeds lower than those normally provided in a 5G sector, because, as Marrero wrote, “‘leakage’, or customers transitioning from a higher quality sector to a low er quality sector, is actually the highest driver of T-Mobile customers’ churn.”
The model enabled the calculation of marginal costs required to solve network congestion, and compared the New T-Mobile to each of the carriers on its own, and it quantified the value of increased network speeds by extrapolating from a 2012 study on fixed in-home broadband services, which was described as a reasonable basis because of increasing convergence between mobile wireless and wired network technologies.
The Montana Model also incorporated assumptions about Sprint’s network based on the company’s five-year plan from 2018. While T-Mo has its NEM, Sprint “does not do any similar modeling in the ordinary course of business,” according to the ruling, and the state AGs arguing against the merger pointed out that Sprint wouldn’t actually follow that 2018 plan if the merger didn’t occur; that T-Mo’s NEM was updated every year and the Montana Model wasn’t updated after being completed; and it was prepared specially for the merger, not used in the regular course of business. Marrero dismissed those arguments, saying essentially that it was close enough to the regular NEM, adding that the fact that “T-Mobile now uses the Montana Model in the ordinary course of business … confirms that it essentially tracks the logic of the undisputedly reliable NEM.”
The Montana Model calculated that New T-Mobile’s network marginal costs would be 1/10 of standalone T-Mobile and the value of its increased speeds would be more than $15 per month per subscriber.
T-Mobile US’ track records with the MetroPCS acquisition played into the judge’s assessment of corporate behavior. He pointed out in the ruling that after T-Mobile US acquired MetroPCS in 2013, that merger resulted in larger-than-expected network synergies of $9-$10 billion rather than the $6-$7 billion that T-Mobile US had initially expected, and were realized in two years rather than three. Metro’s customer base has since more than doubled, while unlimited plans decreased in price rom $60 to $60, and “the integration of Sprint would be very similar … on a larger geographic scale,” but “might actually be easier in the sense that over 80% of Sprint customers already use handsets compatible with T-Mobile’s network,” unlike with the Metro merger.
The carriers successfully painted a dire picture of Sprint as a standalone competitor. Marrero said that while the argument that a competitor in a merger is weakened should only apply in narrow circumstances, he felt that this was one of them: that Sprint’s “network and product offerings hae been distinguished for years for poor operational quality and negative customer perception”, with a Net Promoter Score that is less than a third of Verizon’s and “similarly far behind the other two MNOs”, with a churn rate about twice its competitors’. The judge wrote that for about the past 15 years, Sprint has made “multiple ill-advised technology and business decisions which resulted in a chronically underdeveloped network that is inconvenient for customers to use.” He cited the decision to use CDMA rather than GSM as one such decision, along with Sprint’s failure to realize the benefits it had expected from the Nextel merger, and a history of underinvesting in its network.
By the time Marcelo Claure joined the company in 2014, Sprint had $33 billion in debt, was losing $5 billion yearly and couldn’t afford the estimated $25-$30 billion it would take to bring its network up to parity with its competitors, Marrero wrote. So Claure proposed using a non-traditional approach of small cell deployments and “low-rent alternatives to cell towers called monopoles.”
That plan, Marrero wrote, “failed massively.” Sprint, he went on, “installed only 2,000 of its projected 75,000 small cells and only one of its projected 35,000 monopoles, which was also removed in short order.” While that effort was failing, Sprint was only spending about $1.3 billion in traditional network investments, he said, while competitors were putting at least $6 billion each on their respective networks. In addition, Marrero wrote, Sprint is currently underperforming on its five-year infrastructure plan from 2018: it has deployed only 14,000 of a projected 24,000 small cells and only 200,000 of its projected 776,517 Magic Boxes. In 2019, it underspent the five-year plan’s network investment by about $1.5 billion.
Sprint’s attempts to revive itself under Claure resulted in aggressive pricing offers between 2015-2017, including lower-priced unlimited data plans and offering to customers that they could pay half their existing plan cost, if they switched to Sprint. Marrero said that Sprint’s pricing plans “deserve some consideration for their pro-consumer posture. But in retrospect, they reflect a desperate and ultimately unsuccessful effort to stay relevant rather than a sustainable long-term business strategy.” And, Marrero wrote, 5G isn’t necessarily offering a springboard back to relevancy. He cited internal Sprint documents which said that without the merger, Sprint will be forced to “de-prioritize” 51 of the 99 local markets it competes in, and that “will lead to Sprint losing the nationwide 5G race.”
Marrero wrote that Sprint also continues to have a poor financial position and its cost-cutting measures included laying off “many network engineers,” resulting in even poorer network quality; and its five-year plan of 2018 required the company to grow revenues at five-times its usual historic rate of about 1%. Marrero said that the company achieved profitability in fiscal 2017 was “small comfort” against the rest of its financial woes and the “limited financial success seems too little, too late.” When the state AGs noted that Sprint is making technology changes that have increased its speeds and that could improve its network’s perception in a year or two, he wrote that the court “cannot place much confidence in these suggestions” given the carrier’s current investments and network perception. And, he added, it’s unlikely that Sprint could afford much new spectrum when it didn’t participate in the 600 MHz auction because it determined that it could not afford to spend billions on spectrum and then on upgrading its network to build that spectrum out.
There was at least a possibility that Softbank, Sprint’s controlling owner, might pay off Sprint’s debt; the state AGs cited “an email from Softbank Chief Executive Officer Masayoshi Son to that effect.” But the judge said that between banking limitations on how much Softbank can lend to Sprint and Softbank’s debt and potential shareholder skepticism of that move, it was questionable as to whether that would actually happen.
Marrero wrote that he was “substantially persuaded that Sprint does not have a sustainable long-term strategy and will in fact cease to be a truly national MNO,” citing additional testimony from Sprint’s Jay Bluhm, VP of network development, that Sprint would not be viable within two years; and from Claure that the carrier was likely to reduce its holdings and morph into a regional operator. Sprint’s “Plan B” if it was not permitted to merge with T-Mobile US, Marrero wrote, was to de-prioritize 51 of its 99 local markets—not abandoning them altogether, but further reducing investment so that network quality was likely to deteriorate even further.
Stay tuned for the next installment: Dish as the new, fourth competitor.
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