Mobile Industry Dances Toward Consolidation

Rumors of a tie-up between Leap Wireless and rival MetroPCS are flying again following yesterday’s report in the Wall Street Journal that Leap is seeking a buyer. But will Leap strike a deal with MetroPCS before T-Mobile USA finds a partner in what looks to be a coming wave of carrier consolidation?

The U.S. wireless market has striated into first-, second- and third-tier carriers, and AT&T and Verizon Wireless continue to increase their leads over the rest of the field. The saturated market leaves little hope for Sprint and T-Mobile to turn things around in terms of subscriber adds, plus T-Mobile is in a sticky position when it comes to having enough spectrum and the funds to acquire more for next-generation wireless technologies. In the meantime, there’s pressure from prepaid carriers attacking from below and high fees paid to other telecommunications players for Sprint’s and T-Mobile’s mobile backhaul that’s cutting into profits and revenue.

That’s the case for both Sprint and T-Mobile to find a dance partner, if not to pair off together. A MetroPCS buy of Leap primarily offers cost synergies that would help the two lower their costs for running the network and serving customers. They already have an agreement signed in 2008 that lets customers of each roam onto the other’s network, which was a big step in giving them nationwide coverage. So really what they need is a deal that allows them to cut costs as they try to stay ahead of the brutal price wars in pre-paid.

The reality is that at this stage in the game, finding the right dance partner is a challenge. Deutsche Telekom in November said it was keeping its options open regarding T-Mobile’s fate, leading to speculation about potential tie-ups. A Sprint/T-Mobile merger has long been rumored, but network incompatibilities and antitrust concerns make that scenario unlikely. A merger between T-Mobile and MetroPCS makes more sense. Unlike Sprint, both T-Mobile and MetroPCS are headed down the LTE path, and a tie-up could help T-Mobile compete without setting off antitrust alarms. I’m hoping that this year, we’ll see who finds a partner and who has to sit out as mobile broadband and wireless service drive technological innovation.

Image courtesy Flickr user teo_ladodicivideo.

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