MetroPCS Merger Puts T-Mobile in Strong Competitive Position

By Wayne Rash  |  Posted 2013-05-01

MetroPCS Merger Puts T-Mobile in Strong Competitive Position

When T-Mobile CEO John Legere rang the opening bell at the New York Stock Exchange on May 1, he signified more than a new listing—TMUS on the NYSE. Legere's bell ringing also opened up a new period of competition by a company that had always been the fourth-largest in the United States and by many measures was slowly shrinking.

By combining with MetroPCS, the company has grown overnight to 43 million subscribers. But what's perhaps more critical, the company has added a significant amount of Advanced Wireless Service spectrum currently occupied by MetroPCS Code Division Multiple Access (CDMA) customers, but which will be converted to Long Term Evolution (LTE) spectrum for both companies.

In the short term, T-Mobile will work to transfer existing MetroPCS customers to its network, but this won't be a quick process. MetroPCS plans to keep its existing customers on their current service for the immediate future, but will upgrade to phones that work on the T-Mobile when it's time for its customers to upgrade. T-Mobile customers won't see any differences, although eventually they'll see their access to LTE expand.

But that's not all that will change. In an interview with CNBC immediately after the NYSE bell ringing, Legere said that he plans to grow the combined companies so that "No. 4 becomes No. 3." Clearly he has his sights set on financially struggling Sprint. He's also said that the merger with MetroPCS isn't the end of T-Mobile's growth plans.

Legere said he plans to bargain from a position of strength. By this he clearly was aiming his remarks at Dish Networks, which is currently in a battle with SoftBank to buy Sprint. But before Dish went after Sprint, the company held discussions with T-Mobile's owner Deutsche Telekom, only to be rebuffed until after the merger with MetroPCS had closed.

Well, now the merger is closed and Legere has said that he'd love to talk to Dish CEO Joseph Clayton. However, now Legere isn't interested in talking to Dish as a potential buyer for T-Mobile. Instead he's more interested in working with Dish about getting access to the company's spectrum.

The difference is that T-Mobile can't sell itself to Dish. As a part of the merger deal with MetroPCS, Deutsche Telekom agreed to maintain its current level of ownership in T-Mobile for at least another 18 months. In addition, it's not clear that T-Mobile or DT is willing to settle for the $25 billion that Dish seems to have available. Nor would it go for a highly leveraged buyout that Dish would have to carry out to get T-Mobile. As it is, Dish's proposed merger with Sprint requires the creation of a great deal of new debt.

MetroPCS Merger Puts T-Mobile in Strong Competitive Position

Meanwhile, Legere is planning to operate the new T-Mobile as a stand-alone company, and potentially acquire other smaller carriers in the process as a way to gather more spectrum and subscribers. If Sprint doesn't find a way soon to stop the financial bleeding, then T-Mobile could become the No. 3 carrier anyway.

At this point, the future looks very bright for T-Mobile. The company now has 43 million subscribers; it's got access to an expanded portfolio of LTE spectrum, which is enough to give it at least 20MHz across most of the United States. In addition, its majority owner, DT, seems committed to letting T-Mobile U.S. grow as an independent wireless service provider.

That commitment isn't a minor deal. Deutsche Telekom is already the 500-pound gorilla in global telecommunications. The company has vast resources and wields great market power. T-Mobile's weakness in the U.S. market seems to have been due more to DT's attention being elsewhere.

But now, with T-Mobile having adopted a European-style pricing and hardware structure, and having gained a new level of competitiveness, DT seems more interested in seeing that its 74 percent ownership in TMUS pays off in a big way. To accomplish that, T-Mobile has broadened its customer base to include the prepaid customers of MetroPCS, a new postpaid plan that's contract-free and much less expensive than the competition. And it's offering a wealth of new phones to customers.

While MetroPCS isn't talking much about its plans for the future except that it will support current customers, it's a sure bet that those MetroPCS customers will also have access to the new T-Mobile phones, including the iPhone 5 and the BlackBerry 10 series when they upgrade. MetroPCS hasn't announced those new phones yet, but the company has already begun selling new phones from the T-Mobile product line.

It's much too soon to know the details of how the merger between T-Mobile and MetroPCS will play out. Right now the two companies are planning to operate as separate brands within T-Mobile. This makes sense because T-Mobile wants to keep its customers, and changing names right away would add to customer confusion. So for now, MetroPCS customers will still be MetroPCS customers and T-Mobile customers will stick with their accustomed carrier.

How long the distinction between T-Mobile and MetroPCS will remain is still open to question. It makes sense that MetroPCS customers may slowly become T-Mobile customers as they upgrade phones or as the AWS spectrum they were using becomes LTE spectrum. But for now, we simply don't know. What we do know is that with the merger, T-Mobile is even more invigorated than it was already. This in turn means more real competition in the wireless market and that's a good thing.

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