Sprint CEO: Wireless merger could increase competition in suburbs

Consolidation in the wireless market could finally result in a third major wireless operator with the network footprint to finally rival AT&T and Verizon, Sprint CEO Dan Hesse said in a CNET interview.

Networks that offer loads of capacity and fast speeds are important when it comes to competing in the wireless market. So is something as basic as network coverage. But covering rural and suburban markets is expensive.

Today, AT&T and Verizon dominate the US wireless industry with more than 73 percent of all mobile subscribers. One key reason for this dominance is the fact that these providers offer service in more markets than either of the two smaller national carriers, Sprint and T-Mobile. And because Sprint and T-Mobile have far fewer customers than either AT&T or Verizon, neither has the revenue or capital to invest in expansion.

"If you have more customers, you can afford to build a larger network," Hesse said during an interview earlier this week following the company's network and product announcements in Chicago. "Only then do you have the revenue to justify building in smaller suburbs and rural areas."

This is one of many reasons why Sprint Chairman Masayoshi Son, who is also CEO of Sprint's parent company SoftBank, has been talking up a merger between the No. 3 national wireless operator Sprint and the No. 4 carrier T-Mobile. But US regulators have been openly skeptical about reducing the number of national competitors in the wireless.

Still, Son has continued to push for the merger. And Reuters reported last week that Sprint has already lined up $40 billion in financing to get the deal done. T-Mobile's parent company Deutsche Telekom is rumored to be onboard with a deal. And it's believed the two companies are close to announcing the merger.

For now, Hesse isn't disclosing specifics of the rumored merger between Sprint and T-Mobile. But in an interview with CNET earlier this week in Chicago, he said a much larger "third" competitor with roughly the same number of subscribers as either AT&T or Verizon would have the capital to expand its network footprint to finally give the two dominant players a run for their money.

Bigger is better

Today, AT&T and Verizon, which have 116 million and 122 million wireless subscribers respectively, cover the largest areas of the country with their mobile networks. Their networks span urban, suburban and many rural markets. By contrast, Sprint and T-Mobile, which are much smaller with 54.6 million and 49.1 million customers respectively, have been forced to build their networks mostly in densely populated cities, where they are more likely to make returns on their investments.

As a result, neither Sprint nor T-Mobile is able to compete against AT&T and Verizon in rural or suburban markets. This is in spite of the fact that Sprint and T-Mobile own spectrum licenses in many of these markets outside of cities. The reason why they don't build these networks in less populated markets is because it's too expensive, says Hesse.

The problem with this approach is that it significantly reduces the addressable market for either Sprint or T-Mobile. Even if consumers live and/or work in urban markets where Sprint or T-Mobile service is available, these customers often travel outside of those markets and still expect network coverage.

In order to serve these customers, Sprint and T-Mobile must rely on expensive roaming relationships with AT&T and Verizon, which have built their networks to more markets. But Hesse admitted that these roaming deals are expensive. And ideally, it would be better if his company had the network in these markets to serve customers.

In some instances Sprint and T-Mobile customers can roam onto networks of smaller regional carriers, which also need Sprint and T-Mobile in metro markets where they don't have coverage. Sprint has already begun working with many rural and regional carriers to roam more often onto their networks instead of Verizon's network. Last week, the carrier announced it had added 12 carriers to this network of roaming partners.

Still, in order to truly compete against AT&T and Verizon, Sprint and T-Mobile need wider network footprints of their own.

"If you live in an urban core, you will have access to AT&T and Verizon and you'll also likely have access to T-Mobile and Sprint," Hesse said. "But when you go to less populated areas, Sprint and T-Mobile might not be there."

But because neither Sprint nor T-Mobile have the revenue base to justify such network expansions, they remain focused on urban markets, even as they upgrade their services to faster speeds.

This is where a merger between the two companies could be a game-changer. While it's difficult for either Sprint or T-Mobile to expand into less populated areas on its own, together the companies would have 103.7 million customers, which nearly equals the customer base of either AT&T or Verizon. Together a combined Sprint/T-Mobile could have the scale necessary to expand the network to markets where neither operates today, Hesse said.

This idea of providing a third national carrier with a footprint that rivals that of either AT&T or Verizon could be used to help convince regulators that such a deal would benefit consumers.

Will regulators buy the argument?

To date, officials at the Federal Communications Commission and Department of Justice, which would be tasked with approving the merger if it were announced, have signaled they are not in favor of such a tie-up. Both the DOJ and FCC have publicly stated that they feel the magic number in terms of wireless competitors is four. If Sprint and T-Mobile were allowed to merge, there would be only three nationwide wireless carriers.

Hesse admitted that regulators may need to be persuaded, but he said that he is encouraged that the FCC chairman has said he will keep an open mind about such consolidation. Meanwhile, he said it would be up to the merging companies to convince regulators that consumers would be better off with a strong third player in the market, rather than two dominant players and two smaller and weaker players.

Another potential hurdle for such a merger is the fact that the FCC and DOJ are already considering two other major communications mergers. Earlier this year, Comcast announced plans to buy Time Warner Cable for $45.2 billion. And AT&T said last month it wants to buy satellite TV provider DirecTV for $48.5 billion. Experts believe both deals are likely to be approved. But some analysts, have speculated a Democratic FCC and DOJ may be unlikely to approve a third major communications merger, such as the rumored Sprint/T-Mobile deal.

Hesse disagreed with this assessment.

"My view is if they are willing to approve these other two deals, it would be more difficult to not approve a merger in wireless."