You probably have seen one or more versions of the advertisements touting the consumer benefits in the Sprint-TMobile merger.  While never explaining why they could not achieve pro-social goals individually, the companies claim that collectively they can bridge the digital divide, generate more competition and make us all proud of our 5G supremacy.  The companies offer not one speck of empirical proof that anything good actually will occur other than make it easier for them to satisfy Wall Street and Main Street investor expectations.

            I can accept that Sprint and TMobile want to make lemonade out of their sorry performance in the marketplace.  On the other hand, I cannot accept the unquestioning boosterism of FCC Chairman Ajit Pai and others who ought to know better.  These government officials also offer not one piece of empirical evidence of the “win-win” value proposition where the companies and consumers benefit without any harm to the marketplace.  I will question their motivations, because I know these people are smart and fully able to pose uncomfortable questions if their had incentives to do so.  Sadly, the public interest falls far down the list when there are doctrinal, political and personal stakes involved.

            Yet again “tilting at windmills,” I offer some forward looking, but evidenced based tests for assessing the marketplace and consumer impact of the Sprint-TMobile merger.

Status Quo Extrapolation of Tower Sites, Available Bandwidth and Capex Versus Merged Company Performance.

            Chairman Pai has emphasized the need to inject ostensibly non-partisan economics and empirical data in the FCC’s ongoing oversight.  Great idea, but somehow, I do not see the swamp drained with clear-headed analysis.  On the other hand, we can do a back of the envelop analysis that shows how empiricism works if you care to use it. All one has to do is compile a list of current performance factors for the two companies.  How many tower sites do the companies have individually?  How much bandwidth do they use now and how much do they have in reserve? How much did the companies individually invest in previous years?

            Surely Chairman Pai understands the veracity and importance of these variables, even though they too can be politicized and misrepresented.  The Chairman has touted a party line that network neutrality regulation, or at least the prospect of it in the future after completion of judicial review, creates all sorts of investment disincentives for incumbents and market entrants alike. 

So, what exactly would industry consolidation do? It does not take any leap of faith to conclude that measurable statistics will show a reduction relative to what two standalone, competitors would generate.  For example, when Sirius and XM merged, over time they could reduce the total number of satellites needed to provide service, i.e., less total bandwidth.  Their operational efficiency gains generally accrued by reducing the number of employees.  The merged company did not need two groups of lawyers, accountants, network engineers, salespeople, etc.

Average Revenue Per User

            Even as senior management at Sprint and TMobile would never admit it, the merger will make it easier for the combined company to generate greater returns for shareholders and the stock options and profit sharing for employees.  The merged company will have less need to devote sleepless afternoons innovating, solving digital divides and enhancing the value proposition of their service.  Can anyone show me how the combined Sirius-XM offers so much more than what either of the two prior companies was able to offer?  Bear in mind that while one could make the argument that one or both of the digital satellite operators might face bankruptcy, neither wireless carrier lacks sufficient access to debt and equity financing.

            Wireless carriers in the U.S. generate some of the highest ARPUs in the world.  They have declined of late, but one should expect this outcome in a maturing industry nearing saturation and commodification.  The carriers have responded by upselling with bundles of video, audio and other content as well as zero rating.

            What is the likely impact on industry ARPU from the merger?  One can generate a quite likely scenario by examining revenue and profit statistics in the broad information, communications and entertainment marketplace as well as other industries, such as commercial aviation.  Generally, industry consolidation enhances the prospect for both revenue and profit growth.  Surely the current performance of airlines, pharmaceuticals and hospital groups offer empirical evidence of growth, arguably at the expense of consumer welfare.

Health of MVNOs

            Mobile Virtual Network Operators provide consumers with a pre-paid, often cheaper competitive alternative to post-paid service.  As noted in the prior blog entry, the Justice Department considers the MVNO option as important, so much so that merger approval may be contingent on the ongoing viability of Boost Mobile.

            When markets concentrate, facilities-based incumbents may have less incentives to “off load” product to resellers.  In the wireless marketplace, AT&T and Verizon are less than aggressive resellers, because they do not want to cannibalize their service.  What percentage of wireless consumers even know that AT&T owns Cricket?

            Will 3 national wireless competitors have any interest in offloading bulk minutes of use and bandwidth to unaffiliated vendors?  Why should they support lower priced competitors?

Out of Pocket Consumer Costs

            Anyone blessed with the opportunity to travel abroad quickly notices 2 major differences in the wireless experience. Consumers outside the U.S. typically pay far less for more data and voice minutes, plus they have far more opportunities to use multiple SIM cards options.

            U.S. carriers still manage to play cute with questions about unlocking phone even for ones that the consumer owns and has fully paid all installments.  While the number porting process has become routine, you might find it quite difficult to simply pull out your existing SIM card and replace it with one you purchased from a reseller.  The U.S. carriers want to make switching carriers as difficult as possible and I do not see the FCC doing anything to sanction such behavior.

            If competition on price is rather meek in the U.S. right now, exactly what good will result when two separate companies join forces?  It does not augur well when the best that the merged company will offer is not to raise prices for three years.  Curiously, that is exactly what Sirius and XM offered followed by sizeable rate increases and proliferating fees.

            This deal does not pass empirical tests, or one’s common sense of smell.