The FCC may need to approve a Sprint/T-Mobile merger. But not yet.

December 16, 2013

(Photo by Joe Raedle/Getty Images)

If you're a T-Mobile customer (Hi Mom! Hi Dad!), you may be wondering whether your account is in danger of being taken over by Sprint. The nation's third-largest carrier reportedly wants to buy up its next-smallest competitor in a deal that would cut the number of national wireless carriers from four to three.

As I pointed out on Sunday, a merger that effectively eliminates T-Mobile as the Uncarrier would be a shame in light of the company's recent steps toward recovery. But although consumers may have benefited from T-Mobile's existence, history tells us we may actually be on an inexorable slide toward more consolidation, not less.

One of the major hurdles facing Sprint right now is whether federal regulators would even approve a T-Mobile merger. Back in 2011, the Federal Communications Commission rejected AT&T's own bid to buy out T-Mobile over concerns that it would put too much power in the hands of the country's strongest phone companies.

A deal involving Sprint would be a little different, and it's been cited as one reason why the FCC might change its tune this time. But observers say that even with a new chairman at the agency's helm, the government still isn't likely to smile on a deal right away.

"No one's in a distressed situation right now," says telecom analyst Jeffrey Silva. "They may want to see how T-Mobile and Sprint fare, having improved themselves on a number of levels recently."

But that could change in the future, Silva adds, particularly if either company winds up faltering. That might seem obvious, particularly given how vulnerable T-Mobile looked just a few years ago when it was considering AT&T's offer. What's different now, however, is that T-Mobile has regained a great deal of momentum. It won a big infusion of cash as a result of the AT&T deal falling through. It recently launched a nationwide LTE service. It purchased a bunch of new airwaves from Verizon in 2012, and may be considering buying another chunk soon in a deal that would affect roughly 150 million people.

In short, a failure by T-Mobile to convert even these wins into subscribers would be seen as evidence that the market can only reasonably support three major carriers. There are barely more wireless subscriptions than people in the United States, meaning that all the companies are competing for essentially the same customers now.

"With 70 percent smartphone penetration, organic industry growth is getting harder to come by," analyst Mark Lowenthal argues. "Most of the business consists of trying to get existing subs to increase their data 'buckets' and taking share from other carriers."

The market, in other words, is really saturated — a function of the costs of entering the wireless industry (it costs a lot to put up towers and buy spectrum). Meanwhile, companies that have already built out their infrastructure enjoy natural advantages of scale that don't benefit upstarts, though some companies are trying alternative business models that circumvent this problem.

Consolidation can sometimes bring efficiencies; in the first half of the 20th century, for instance, AT&T and its R&D outfit, Bell Labs, took it upon themselves to churn out many of the technical advances that made modern telephony what it is. Smaller companies didn't have the resources or the incentives to develop those on their own.

Consolidation is a pattern we've seen before in the telecom industry. The breakup of the Bell monopoly in the 1980s created a handful of what came to be called Baby Bells, but over the years, even those wound up getting folded into larger firms. Now we're back to just a handful of major phone companies. Even if the FCC shoots down a merger between Sprint and T-Mobile today, it's not hard to see something like it passing muster down the road when both companies have had a little more time to (dis)prove themselves.

Brian Fung covers technology for The Washington Post.
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