39 Comments

Summary:

We’ve said it before and we’ll say it again: Combining T-Mobile and MetroPCS — two carriers with completely incompatible network technologies — defies reason. According to the financial media, the deal is set to happen, but it will be a disaster in the making.

Updated. If the financial media can be believed, the merger of T-Mobile USA and MetroPCS is actually happening. Both Bloomberg and Reuters have dug up unnamed sources claiming that T-Mobile’s parent Deutsche Telekom is in the final stages of green-lighting a deal for Metro, the largest regional mobile player in the US.

Update: DT and MetroPCS have confirmed they’re in talks to combine to US operations. From Metro’s statement: “There can be no assurances that any transaction will result from these discussions, and the Company does not intend to comment further unless and until an agreement is reached.”

In May, when rumors first arose that DT would buy MetroPCS, I tried to debunk them, pointing out how the deal made no sense. I may be wrong about the rumors being false, but that doesn’t make the deal any less crazy. Merging T-Mobile, a GSM operator, with MetroPCS, a CDMA one, is absolutely insane.

The last operator to have this kind of bright idea was Sprint when it bought Nextel in 2005. At the time it was considered a mega-merger, but it didn’t change the fact Sprint was forced to run two distinct networks: its original CDMA infrastructure and Nextel’s iDEN systems. It had to maintain separate largely incompatible handset portfolios and manage two separate customer bases. We all know how that turned out, but let’s highlight some of the gorier details:

  • When the deal closed the combined Sprint-Nextel had 43 million customers and 22 percent of the US mobile market share. In seven years Sprint has grown by only 13 million subscribers, while its two biggest competitors, AT&T and Verizon have both doubled in size. Sprint’s share of US connections has shrunk to less than 17 percent.
  • Sprint hasn’t turned a yearly profit since it bought Nextel. That’s seven years of annual losses, while customers fled in droves from the Nextel network. Sprint CEO Dan Hesse says he believes Sprint will finally be profitable again in 2014, which happens to be the year after all traces of the Nextel iDEN network are wiped from the map.

T-Mobile and MetroPCS have two things in common: they use the same spectrum bands and they’re both coalescing around LTE as their future network technologies. You could make the argument that eventually these two operators will be technologically in tune offering a unified LTE service. But that transition will take years.

T-Mobile won’t launch LTE until 2013, and while MetroPCS has had 4G live since 2010, the vast majority of its subscriber base is still on its CDMA network. A combined ‘T-Metro’ would be a joint CDMA-GSM operation for years to come. That means enduring many years of operational hell and likely financial losses trying to juggle two separate sets of customers and managing three separate networks.

As for spectrum, MetroPCS has some attractive licenses, particularly in key metro markets like New York City and San Francisco. With its new network overhaul, T-Mobile maintains it’s in a solid spectrum position, but like any carrier it’s on the lookout for strategic opportunities to expand its holdings. Harvesting MetroPCS for its spectrum strikes me as a deal done in desperation, not one of strategy.

T-Mobile could shut down Metro’s CDMA networks completely and refarm their bandwidth for LTE and HSPA. But that would mean letting go of the lion’s share of Metro’s 9.3 million customers. Sure, T-Mobile could offer to switch out those customers’ CDMA phones for GSM-HSPA devices, but it would also require contracts to ensure those customers didn’t immediately bolt. There’s a flaw in that strategy, though: MetroPCS is a prepaid provider, and one of the primary reasons its customers are its customers is because they don’t want contracts.

Paying multiple billions of dollars just so T-Mobile can get its hands on a handful of licenses makes no sense. And T-Mobile has demonstrated there are plenty of other ways to get spectrum for far cheaper. Since its planned merger with AT&T died, T-Mobile has brokered a number of shrewd deals to get the airwaves it needs to launch LTE and increase its 3G capacity. As regulators scrutinize the increasing spectrum holdings of AT&T and Verizon more closely, T-Mobile will only be the beneficiary.

T-Mobile has plenty of spectrum options beyond buying MetroPCS outright, while actually trying to merge the two companies operationally would be a catastrophe. This deal may very well happen, but it will be a disaster in the making.

T-Mobile image courtesy of Flickr user swruler9284; Sprint photo courtesy of Shutterstock user Susan Law Cain; MetroPCS mage courtesy Flickr user Jeremy Brooks.

  1. Patrick Kabir Tuesday, October 2, 2012

    what about the tech MetroPCS has been trumpeting where they can choose what network they can roam on, presumably they could choose for the fallback net to be T-Mobile HSPA and cannibalize Metro’s CDMA infrastructure to use that spectrum for T-Mobile’s LTE rollout.

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    1. Kevin Fitchard Tuesday, October 2, 2012

      Hi Patrick,

      What about the 9.3 million CDMA phones on its network that don’t have HSPA+ radios? MetroPCS has a market cap of $5 billion. DT will have to pay a premium on that precisely because of its customers, none of whom are under contract. They switch networks, those customers leave.

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  2. James Hancock Tuesday, October 2, 2012

    It makes sense because MetroPCS has bandwidth in 1900mhz where T-mobile is rolling out 3g for Iphones and 1700mhz which is covered by the iphone for LTE and they have it in areas T-mobile desperately needs.

    This isn’t about customers. They’ll give the customers new phones and get them off of CDMA quickly and take that hit.

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    1. Kevin Fitchard Tuesday, October 2, 2012

      Hi James,

      I just don’t think it’s as easy as you make it sound. T-Mobile isn’t going to give away 9 million free phones, especially with no guarantee they’ll stay. These customers aren’t on contract. They’ll just leave.

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      1. Phantom Harlock Tuesday, October 2, 2012

        CDMA is being killed by all of the operators to make room for Voice over LTE, Kevin, you need to learn about network engineering. Also, you are comparing apples to oranges, Sprint’s deal with NexTel failed due to incompatibilities of spectrum with iDen tech, with this deal, spectrum is spectrum, and customers will have to purchase new tech either way. TMobile will give the MetroPCS customers another year, then they will be integrated correctly, and Tmobile will have the extra spectrum for VOLTE. This article doesn’t make much sense.

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      2. There is precedent for this though.

        When At&t bought all the divested Alltel markets they gave customers a 6 month notice to trade in their phones for equivalent ones and very quickly turned off CDMA.

        I think since the industry is more data focused than it was when mergers in the past occurred, the spectrum matters much more than handset technology. In this case, it lines up perfectly with what T-Mobile needs. AWS for LTE. Also PCS for HSPA+ so they get better coverage for unlocked iPhone users.

        Sprint/Nextell isn’t a fair comparison. People NEEDED push to talk handsets and couldn’t use that feature by switching to a cdma Sprint device. T-Mobile offers much better devices on the cheap and already have national trade in offers so I can’t imagine exchanging your metro device for an equivalent T-Mobile one would be so far out of the question.

        Ultimately though I believe ,in the way the industry is currently, it makes LESS sense for Sprint to acquire Metro even though they are CDMA because they would be acquiring spectrum bands they don’t even USE currently. That’s a BIGGER waste. Who cares if they are both CDMA? Sprint doesn’t need yet another band.

        With T-Mobile, if they close the metro transaction, they’ve essentially accomplished what at&t tried to do when they bought them. Think about all the spectrum gains they have made so far: At&t break up spectrum, Verizon cable spectrum, Leap spectrum exchange, and now Metro.

        It also seems like someone else will buy Metro if T-Mobile doesn’t and with all the fewer places to get AWS spectrum these days they may be backed into a corner. Not that it’s TOO bad of a corner. With pretty much the ONLY hurdle being the customer base using CDMA phones. But let’s face it, what’s left in the US that doesn’t use CDMA? If T-Mobile’s parent is trying to expand that issue seems like an inevitable hurdle regardless.

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      3. Now wait a minute Kevin, it could be that simple. Think about it in this manner, a offer that is pre-paid with so many months up front that fits T-mo’s formula. It isn’t a guarantee but it is calculated with their formula to entice them to stay. Because in the end it is about monthly satisfied customers isn’t it?

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  3. They can do what ATT did with Altel. Send out fliers to all Metro PCS Customers, offer steep discounts and/or free phones giving them 6 months to come in and get their new phone. After that, anyone left will call in and find they need to get a new phone to continue getting service.

    It’s not pretty, but effective. My parents got several mailers and a few calls from Altel, so they had plenty of notice.. Its not the cheapest way, but its fast, and effective.

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  4. The assertion that new handsets require contracts is strange. The CDMA devices that Metro sells are strictly very-low-end, disposable handsets. There’s no reason T-Mo couldn’t do an at-cost swapout of lower-cost GSM handsets to preserve the lion’s share of the customer base.

    T-Mobile today will sell you one of their portfolio of low-end pre-paid GSM smart devices today at a very competitive cost. Most of those devices are better than the comparable Metro offerings.

    As for the idea that “customers will just leave,” where would they go? Any departure would require them to get another device anyway, and chances are that the other prepaid offerings won’t be any more competitive than what the combined T-Mo/Metro offering would be. I doubt that someone paying $55/month for an unlimited prepaid plan would ditch a comparable T-Mo offering to go to one of the Big Two for two or three times the same cost.

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    1. Kevin Fitchard Tuesday, October 2, 2012

      Hi Brian,

      A lot of Metro’s customers have switched over the Android devices. They may not be sporting Galaxy S III, but I don’t think T-Mobile can get away with offering these guys low-end talk-and-phones.

      As for your second point I agree that T-Mo would probably have the more attractive rates. But I also think that T-Mo suddenly saying “Your phone will no longer work. Either buy a new one or sign a contract” will have big consequences.

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      1. You should take a look at T-Mobile’s monthly 4G offerings. Almost all that stuff is better than the majority of devices Metro offers… also all Android. On the prepaid side T-Mobile sells some 3.2 inch screen android phones for $100 and 4G phones starting at $200 like the Galaxy Exhibit… that guy has a front facing camera, 3.7 inch screen and all.

        Even the Nokia Lumia 710 Windows Phone 7 is $200 on T-Mobile prepaid. I don’t think even Metro has that kind of selection of devices and device pricing. It looks like a total win for Metro customers. I also don’t see it being out of the question for T-Mobile to offer Metro customers additional discounts on top of that and let them keep their existing plan.

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  5. You are being short sighted

    Metro has gotten 1 million people to purchase LTE phones and have already activated VoLTE on their network. They have already started refarming spectrum and are shutting down cdma and replacing it with lte. If T-mobile buys metro they will quickly gain 1 million lte subscribers and a 17 market lte network. They could start releasing phones that supports Metro’s LTE network and Tmo’s gsm network. They could set a date for CDMA death and work on getting people to use GSM/LTE phones.

    Metro only has 9million customers which is small. This isn’t the Sprint Nextel merger where both entities were equal. If tmo buys metro their combine customer base will be 40million and 32million of them will be using a global standard.

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    1. Correct,the key to this merger is spectrum to roll out LTE not who uses GSM or CDMA,when that happens those using Metro’s CDMA will eventually migrate to LTE,which will be the new standard for data,and has been already demonstrated possibly for voice too.

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  6. To add to what I just posted.. While free/discounted phones is not cheap, letting it turn into a Nextel-Sprint fiasco is MUCH more expensive.. They need to spectrum as much, if not more, than the new 9m customer base. You need to remember, they are must more likely interested in the spectrum than the customers.. But if they can have their cake, and eat it too, by offering new phones on value plan contracts, or prepaid, you can bet they will try.

    Also remember, they have just made a spectrum swap deal with Verizon, Leap, and the tower sell off for $2.4 billion in funds. If metroPCS is a reality, they will not wait to ‘convert’ towers. They will clean people off the CDMA frequency’s and repurpose them quickly.

    Not pushing to get them on HSPA phones quickly would be death.

    Big image here people.

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    1. Kevin Fitchard Tuesday, October 2, 2012

      Hey Tim, I agree with you that the strategy is sound, but I think it will take a longer and a lot more hassle to execute than worth T-Mo’s while. There are other options for spectrum out there paying a premium on $5 billion market cap company with limited licenses. If it’s buying customers then T-Mobile is going to spend a lot more money keeping them than its worth.

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  7. Huh ? They have the same AWS bands & Metro PCS is moving from CDMA as fast as they can . It makes a lot of sense actually as far as building a LTE network goes .

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  8. These type of mergers are the tombstone of capitalism and open up to a new era of corporativism. These mergers that concentrate strategical industries in the hands of a few players, killing competition, should be illegal. We saw it with the banking industry, the giants like Bank of America buying up other banks, falsely boasting improved service, while we witnessed quite the opposite. I was a proud Cingular customer before AT&T bought it and started my era of phone nightmares…unending jacked up prices, hidden costs, strange incoming calls and texts…I went from paying $60 a month to $120 a month for a far worse service. Now I have MetroPcs and can’t believe that once again some corporate giant will further merge and concentrate the market…if the prices of MetroPcs will rise because of it, then I will sadly migrate once again. I was going to get the Samsung Galaxy S3 with MetroPcs, but now will wait to see the development of this merger, before getting stuck with a new provider that I would hate.

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    1. Actually I would argue this kind of merger is GOOD for competition. The US wireless market currently has Verizon and At&t’s with the lion’s share of control… they just have this crazy lead in customer base and their interests usually align… look at how they both moved to more expensive shared data plans. Combining Metro and T-Mobile would still leave at&t with more than DOUBLE the customer base of the combined two but it gives them a better chance to compete with those bloated giants.

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    2. Hey don’t knock it until you’ve tried it. I was a satisfied T Mo customer in their prepaid for so long I signed that elusive contract and am still quite satisfied. 50 a month for unlimited talk/text/250MB data at high speed then unlimited 2g (which will soon be phased out and all tmo data will reportedly be 3g anyway) so give it a shot – you might find yourself happy – they’re better than boost or virgin anyway lol.

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  9. So would Verizon’s or Sprint CDMA iPhones run on MetroPCS’s CDMA network? If they would, the deal would make a lot of sense for T-Mo, which can’t get the iphone. They are the only major carrier that charges less for people who bring their own phones. People can’t really bring their own iphones to T-Mo, because they don’t get 3G data. But if they could get 3G CDMA data on used iphones, and then 4G on LTE, the deal would make sense.

    I had 3 Android phones on my T-Mo plan. My 2 sons want iphones, so those will be moving to Sprint. I can see why T-Mo would want to be able to offer the iphone, as I’m sure my experience is not isolated.

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    1. You can just buy it unlocked from the Apple store and then switch to Tmo’s Value Plans which are cheaper because you don’t get a device subsidy. You’ll come off cheaper than Sprint even though you pay full price for your phone and you’ll get some good data speeds once they refarm the network.

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      1. Yes, but if you buy an unlocked iphone that works on ATT today, it won’t use T-Mo’s 3G/4G networks (at least not everywhere). I was wondering if the CDMA phones sold for Sprint and Verizon would work on MetroPCS’ 3G/4G network; if they do, then T-Mo could support those customers. It would also make the used iphone market more valuable, as people could buy phones from VZ or Sprint subscribers and use them with the new T-Mo.

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    2. Sorry, but it won’t work. The CDMA phones won’t work on MetroPCS network because much of it works on a spectrum band called AWS, which the iphone does not support. The phones are also locked…

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  10. I agree this is probably the probably the first step to phasing out of cdma by T mobile. DT is well on the way to becoming EU’s AT&T. While the play a 3rd role in the US many forget how strong DT actually is.

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