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What T-Mobile gains from a MetroPCS merger: Surgical spectrum

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Within hours of making their merger plans official on Wednesday, T-Mobile and MetroPCS(s pcs) started selling their grand plan to investors, customers, the media and the world. On a conference call with analysts and press, T-Mobile’s new CEO John Legere painted a picture of a new hyper-competitive carrier that would dominate the prepaid and budget mobile markets and offer the country’s most powerful 4G network in the biggest metro markets.

In short, the new carrier – which the companies are referring to as NewCo while waiting for regulatory approval – would be much greater than the sum of its parts, according to Legere, who would take over the helm of the new carrier. “When you add MetroPCS to an already aggressive challenger strategy, it acts as an accelerant,” he said.

T-Mobile USA CEO John Legere

From a consumer’s perspective, there’s a lot to like in combined T-Mobile and MetroPCS assuming they can pull their complex transition plan off. Its 42 million subscribers would still leave it the No. 4 carrier in the U.S. rankings, but it will have closed considerable distance with No. 3 Sprint(s s). What’s more, those two subscriber bases would match up almost perfectly, Legere said.

T-Mobile already has a sizable prepaid customer base, but the merger would allow it to expand Metro’s highly successful contract-free business model beyond its regional footprint of a dozen big cities. The companies’ combined networks and economies of scale would allow them to get even more aggressive with mobile data pricing. Legere said NewCo would be able to offer unlimited data plans not just to contract customers but prepaid ones as well.

During the call, however, it quickly became apparent what T-Mobile parent Deutsche Telekom saw as the biggest advantage of the deal. It all comes down to spectrum.

The Big Apple gets big LTE

T-Mobile will be able to bulk up its 4G airwaves in some of the key cities where bandwidth is in highest demand, such as New York City, San Francisco and Los Angeles. In the top 25 markets, T-Mobile will see its average spectrum holdings increase from 63 MHz to 76 MHz, and much of those gains will be in the Advanced Wireless Service (AWS) band where both companies are launching LTE.

T-Mobile currently has the spectrum to launch a 20 MHz network in half of its metro markets, but it would only be able to support a 10 MHz network in other regions. Metro’s licenses certainly don’t fill in all of those holes, but in 11 major cities the combined company will have more 50 MHz of AWS spectrum, enough for NewCo to launch a mammoth 40 MHz network. That’s double the size of any 4G network AT&T(s t) or Verizon(s vz)(vod) has today.

Those gains are nothing to scoff at, but it’s important to note that they’re only in handful of markets. For every New York and LA, there’s a Chicago or Washington, DC, where T-Mo’s position remains unchanged. Also it will take time for NewCo to clear those airwaves. Right now MetroPCS has both 2G and 4G in the AWS band, so the band will have to be cleared of CDMA before its capacity can be repurposed entirely for LTE. According Legere, that transition would be complete by the end of 2015. That leaves three years in which the carrier will be running two separate, incompatible networks.

This is no Sprint-Nextel

On Tuesday I compared the merger to Sprint’s(s s) ill-fated acquisition of Nextel. Forced to run two separate networks and manage two separate customer bases, Sprint has been far worse for the wear for the last seven years. Legere, however, bristled at the comparison.

“The sound-byte that this is a Sprint-Nextel do-over is absolutely completely wrong,” he said. “Nothing could be further from the truth.”

Legere’s point is that Sprint and Nextel launched into their ill-advised marriage with the aim of running separate networks. T-Mobile’s aim is to shutter Metro’s CDMA systems as quickly as possible and create a unified network. As soon as the merger is complete, NewCo will begin selling as HSPA-LTE devices to MetroPCS’s customer base, and given Metro’s prepaid model turnover will be very quick.

Legere said 60 percent of Metro’s customer base switches out handsets on an annual basis. If those trends hold, the majority of Metro’s 9.3 million customers will have HSPA devices in two years. At that point, NewCo will have to offer incentives (read: free handsets) to the remaining holdouts before the CDMA kill date arrives, he said.

I still think T-Mobile and MetroPCS are being overly optimistic. The new company may not have to endure Sprint’s 7 years of operational hell, but it still faces three years of such hell. T-Mobile has two conflicting objectives here: to harvest Metro’s spectrum and the keep Metro’s customers. I’m not saying it can’t accomplish both, but its certainly not going to be easy. Even if it meets its timeline, NewCo will still spend several years managing two disparate networks while transitioning 10 million subscribers to a new technology.

The question is whether all of that hassle is worth the relatively limited gains. Remember we’re not talking about a new nationwide network here. We’re only talking about boosted 4G capacity in a dozen major markets.

Handshake image courtesy of Flickr user buddawiggiNYC skyline photo provided by Shutterstock.

19 Responses to “What T-Mobile gains from a MetroPCS merger: Surgical spectrum”

  1. Isaac Brown

    T-Mobile’s core fan base (not just customer, but fan) has always been people that want to buy phones without subsidies and without carrier software while not being forced to pay a phone subsidy they didn’t use, no other major carrier in the US offers this. Unless they drop the non-subsidy plans, or raise their prices to AT&T levels, they will be fine. The focus of the merger is the AWS LTE spectrum (of which they will acquire even more from the Verizon cable company deal), not MetroPCS customers (which I’m sure they do want to keep if they can). The CDMA and 2G parts of the spectrum WILL be re-purposed on schedule.

    • Kevin Fitchard

      Hi Issac,

      Okay, let’s assume this is really a spectrum transaction for T-Mobile, and the customers are secondary. Isn’t then a ridiculous premium to pay for a handful of licenses (they’re attractive licenses but they’re nowhere close the nationwide)? They’re giving away a third of the company, paying $1.5B and committing themselves to a long-term restructuring that’s only going to cost it more money.

  2. College

    I’m leaning on the opinion of Kevin Fitchard… I don’t see how the new company cannot experience a mess during the transition and see huge flight of consumers fleeing.

    Remember, T-Mobile is in dire straights with hundreds of thousands of consumers already fleeing every quarter… because they no longer want to have service with them and their phones….

    • College

      I will… I don’t care about personal bias or preference (about starting a whole Android war)…. who cares.

      This is business. And financials are showing T-Mobile is already in the midst of a massive exodus of their current customer base because of one reason…

      The business question is how do you prevent starting a new mass exodus while also stopping the current exodus already taking place…. HINT: listen to the customers leaving and fix that one problem… (it’s hard and expensive yes – but welcome to the free market!)

  3. College

    The question is how are they going to transition the existing customers to new compatible phones? If they simply offer phones in their current portfolio and then ask them for a 2 year contract commitment… customers will leave. Just how T-Mobile customers have been leaving in droves quarter after quarter.

    The new company needs “Entice” the existing customers with incompatible phones to sign a commitment for 2 years with a phone they actually want. It’s clear that they want the iPhone.

    I don’t see how they can prevent lots of Metro PCS customers and T-Mobile customers to leave and to instead stay an additional 2 years with a new contract without offering an iPhone. Again if you were a Metro PCS or T-Mobile customer that is already looking to switch to another carrier for the iPhone, why would you then sign a new 2 year contract and pay some up front cost for a phone you don’t want??? It doesn’t make sense.

    T-Mobile has been bleeding what 500,000-600,000 customers because of the iPhone before… how will offering a new 2 year contract with the same phone lines be any different to stop the bleeding?

    • Kevin Fitchard

      Hi JK,

      Actually, AT&T cingular saw a huge flight of former AT&T customers from the combined carrier, it created a mess of both their networks, and delayed the rollout of their 3G network for God knows how long. And they were using the same TDMA-GSM technologies.

  4. The gain is that T-mobile will eventually be its own publicly traded entity rather than a private subsidiary of DT. Obviously DT wanted to get rid of its US operations. The first option was to sell out to AT&T, which of course failed. This new merger with MetroPCS will leave T-mobile in a much better position because it saves them from having DT kill them off completely, which would result in a loss in a major competitive US carrier. Initially DT will hold the majority share in the merger but they will eventually sell back those shares gradually to MetroPCS in which MetroPCS will then own the “NewCo” thus allowing DT to leave the US market.

    • Kevin Fitchard

      Good point, Dan. I bet the execs at T-Mobile would love to get out from DT’s shadow. They board will still be DT controlled, but in many cases (like AT&T-Mo) parent and child seem to be working at cross purposes.

  5. College

    The most important question and determinant for the success of the combined 2 companies is and always will be the iPhone.

    How does these 2 non-iPhone players combine and get the iPhone… will their new combined and refarmed spectrum be compatible to carry and then sell the iPhone?

    If no to all these questions, then this deal is simply delaying the inevitable – and the combined 2 companies will fail in 2-3 years.

    • Kevin Fitchard

      Hi Frank,

      It seemed like T-Mobile was formulating a pretty good plan for going it alone before this. I’m not sure a “grow at any cost” mentality would serve them better. Admittedly if they can put all of the pieces together, they’ll be the better after this merger, but it doesn’t solve many immediate problems and introduces a lot of complexity into their operations for the next few years.

  6. Sumit Mittal

    T-Mobile’s parent company wanted to get rid of the US subsidiary. If MetroPCS and T-Mobile merger goes through then chances of T-Mobile sale will be far less (primarily due to regulatory concerns and stuff). Does this mean Deutsche Telekom is now going to keep T-Mo USA?