Cellular merger mania: What's it mean to you?

Farpoint Group –

As I write this, the Wall Street Journal is reporting that two of the "big five" cellular carriers, Sprint and Nextel, have reached a tentative agreement to merge. This comes right on the heels of the Cingular/AT&T Wireless deal, and will create another huge (about 39 million subscribers) cellular company. Assuming the merger goes through, the number of nationwide carriers falls to four (in order of number of subscribers: Cingular, Verizon Wireless, Sprint/Nextel, and T-Mobile), and the analysts (and various consumer groups) are buzzing.

Why the buzz? Well, from the analyst perspective, this is likely the culmination (for now, anyway) of a consolidation that began some time ago. Today's cellular industry was largely built around FCC spectrum policy that encouraged a proliferation of carriers - the spectrum-auction process that began around 1992 yielded carriers large and small, and such a variety made at least some sense during the cellular industry's era of high growth - a period that will shortly come to an end if one considers only traditional voice subscribers. In other words, no matter what, as the market for cell phone numbers (but not the phones themselves - there's always an upgrade market) saturates, the carriers can't grow, and they thus need greater economies of scale both to get decent returns and to provide a better financial base to grow into new areas. This is what drives mergers in any industry.

Farpoint Group had predicted a cellular consolidation some time ago, and also predicted that, after the first pickle out of the jar (AT&T/Cingular), the next one would occur somewhat more quickly. The Sprint/Nextel deal is happening even more quickly than I thought the next one would, and I have to confess this combination wasn't high on my list of possibilities. But the most important elements in a merger (management compatibility and financial fit) aren't the ones I personally have the most visibility into, so I have to say I'm not really all that surprised regardless. Indeed, Sprint's fundamentally-consumer focus and Nextel's emphasis on business users (they've got the original and still the best push-to-talk service) produces what might be a nice fit. While this deal could be rejected by federal regulators or fall apart for more other reasons than we can count, I expect it to close given that it's gotten this far. By the way - the resulting company will be primarily wireless; Sprint's local-services business will be spun off into a separate firm.

The federal regulatory angle is important, because I now think it's unlikely that any other mega-mergers will be allowed for the time being. The regulators are sensitive to the need to maintain adequate competition, as well as to the cries of consumer groups that argue (somewhat convincingly) that less competition will bring higher prices, poorer customer service (sometimes I wonder if that's even possible!), and less choice in terms of both products and services offered. While some of the smaller players may yet be picked up, I think the regulators will allow the market to both settle and grow in new directions (like mobile broadband data) before any further consolidation is allowed.

So, what does all this mean to you? I have argued for some time that, given the saturation of the voice market, the carriers must grow into (read: invest in) new areas (again, primarily mobile broadband data) and new markets (including the displacement of wireline service in both the residence and the enterprise). Broadband data involves significant additional investment, and exposure to new competitors. Nextel, for example, has been agonizing over a broadband decision for years. First CDMA (what Sprint uses), then a broadband version of the company's current iDEN technology, then CDMA again, then flirtation with Flarion's FLASH-OFDM(a terrific technology, but now less likely in this case given Nextel's new focus), and now likely back to Sprint's CDMA (they're going with 1xEV-DO). So, they're probably breaking out the Champagne at Airvana and Qualcomm. But for you, no Champagne, just the hope of a more rapid rollout of advanced data services more akin to the xDSL so many have at home (but mobile, of course).

A bigger question takes us back to the concern of the consumer advocates - will the reduction in the number of carriers result in higher prices and lower service quality? I don't think so - there's still more than enough competition to serve the market, even if the Sprint/Nextel merger goes through. And the carriers must roll out new services because, again, the market for their primary and traditional service is saturating. Stagnation means death, so I expect the survivors to work even harder to earn your business.

While I expect the inevitable layoffs that will result from this latest combo won't bring much cheer to some current Nextel and Sprint employees in the new year, the rest of us will see little change. Ultimately, I think these mergers will be of great benefit to customers - and these companies exist in the first place to bring us those benefits, after all.

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