Merging T-Mobile USA and MetroPCS makes sense on many fronts. For stakeholders, René Obermann, Chief Executive Officer of Deutsche Telekom, explained this merger “feels like unboxing a new smartphone to you” – discovering all the benefits. Strategy Analytics looks at some of the potential benefits—starting with spectrum as the main driver:

Spectrum:

Both companies needed additional spectrum for stronger LTE deployments, and their contiguous AWS spectrum makes a good fit. As MetroPCS chairman stated in a call to go over the merger details, this deal allows for “minimum cost, time, and risk associated with acquiring spectrum”. For T-Mobile, they also get the benefit of PCS spectrum in some of their most spectrum constrained markets. The combined spectrum position, which will allow for 20x20 MHz LTE deployments in many markets, was noted by company leaders as “fundamental to deliver enhanced customer experience.”

Seamless Migration and Network Evolution, not Disaster of Combining Disparate Networks:

Both companies were very clear that they are not planning to “smash together two networks”. The companies will focus on migrating MetroPCS customers to T-Mobile’s HSPA+ network, which has sufficient capacity, in order to refarm MetroPCS spectrum, with a target to close the MetroPCS network by the end of 2015. With T-Mobile network upgrades already underway for its LTE launch in 2013, the timing is also good for migrating MetroPCS subscribers to TMO-US LTE as it is launched.

With 60-65% of MetroPCS customers upgrading their handsets each year, the new company will use this rapid upgrade cycle to their benefit to have customer-driven transition. They anticipate heavy users will self-migrate first, freeing up spectrum for refarming faster, and expect some need for incentives in the last 12 months to encourage remaining customers to upgrade, but most of upgrades will be driven by customers.

Of the US $6-7 billion in synergies identified, 5-6 billion will be in the network - decommissioning of redundant sites as refarming occurs is big part of that savings.

Personally, I agree with them calling Neville Ray, CTO of TMO-US, a “rock star” – he has done a lot of work on refarming TMO 1900 spectrum for HSPA+  to target iPhone owners, planning for LTE upgrades with newest technology innovtions, and did a superb job of tackling backhaul upgrades to support 4G RAN evolution.

It will be interesting to see how the combined entity leads network innovation to support new services, as each had key strengths:

• TMO-US: strengths in refarming and preparing for industry leading LTE migration based on release 10 and using remote radio heads and strong fiber backhaul
• MetroPCS: network innovation focused on maximizing minimum spectrum with DAS, early use of six sectors per cell site,  and world leading VoLTE launch to migrate voice to LTE to support spectrum refarming

With less urgent need to migrate to VoLTE to move voice to LTE to be able to refarm PCS spectrum (a main driver behind MetroPCS early VoLTE launch), the new company should be able to focus  on how to use VoLTE along with RCS and IMS to create service value propositions,  particularly for SME focus of TMO-US and the high-tier users at MetroPCS—who have been  used to having extra content/services bundled into their unlimited.

Marketing and Target Segments:

For TMO- US, the merger with smaller MetroPCS has several main benefits in terms of market positioning:

• closes half the gap in subscriber base to number 3 operator Sprint, by going from TMO’s current 33M subs to 42M combined subs for the new company
• more importantly, should go a long way to support the rebuilding of T-Mobile’s brand equity in the US after its failed merger with AT&T
• should help to stem some of its customer losses to AYCE offerings
• prepares it for stronger LTE play
• positions both companies to continue to drive unlimited as a key differentiator (and target Sprint head-on)

DT and TMO suggest looking at contract, no-contract as a continuum of offerings and highlighted that the new company will have wider range of offerings including SIM-only  for bring-your-own-device and  handset financing plans (see the TMO blog)

For MetroPCS, the merger will stem churn based on users moving outside of their network areas. It will also will extend the value proposition of MetroPCS AYCE plans to more people—a benefit  TMO identified as an “upside” to the merger, stating that probably only 25% of the US has benefitted from MetroPCS plan innovation and they will be able to provide wider distribution.

As a combined company, the ability to position as an aggressive challenger is one of the main competitive benefits of the proposed merger. As company leadership noted, “we haven’t fired all our weapons yet…we will be a very innovative, edgy marketing machine, especially as our [LTE] networks come up.”

Impact on the Industry:

For vendors: Ericsson should be in a relatively good position, as a main vendor to both companies as LTE deployment work continues and as a main vendor behind VoLTE rollout at MetroPCS. NSN could benefit the most, as TMO was its first LTE win in US and it has a strong play with Liquid Net and refarming support.  Most impacted could be microwave vendors, as MetroPCS was playing catch-up with backhaul upgrades and had planned to focus on microwave.

For Other Carriers: Sprint could find itself the most affected, as it has been focusing on its unlimited LTE play. AT&T and Verizon Wireless may find they now have a stronger competitor in the SME and M2M space, particularly as TMO has its HSPA+ network to back up its leading-edge release 10 LTE deployment, and may also find it harder to grow in the prepaid arena. Smaller carriers like Leap’s Cricket service and US Cellular may also find themselves struggling more to retain customers with a stronger value player in town. MVNOs in the US may find they have another network that looks more appealing for wholesale, but could also find it harder to carve out a niche as an AYCE no contract play.

-Susan Welsh de Grimaldo, Director, Mobile Broadband Opportunities

On April 27^th.several competing operators - Cincinnati Bell Wireless, MetroPCS, NTELOS, the Rural Cellular Association (RCA), the Rural Telecommunications Group, and Sprint Nextel Corporation all requested the FCC to consolidate into a single proceeding the upcoming review of the T-Mobile acquisition (11-65) and the earlier Qualcomm MediaFLO Spectrum acquisition filing (11-18).

“In the proposed Qualcomm transaction, AT&T seeks to acquire Qualcomm's six Lower 700 MHz D Block (6 MHz) licenses, which collectively have a nationwide footprint, and five Lower 700 MHz E Block (6 MHz) licenses in five large markets. The T-Mobile transaction includes the acquisition of an additional 50 MHz on average in the same geographic areas covered by the proposed Qualcomm transaction. Obviously, with such an overlap, these two transactions should be examined together, rather than separately.”

In Appendix B. Competitor Chart of AT&T’s April 21^st. Filing there are 567 pages of Competitor Charts for 700 MHz, Cellular, and SMR Licensees that show the Qualcomm D & E Block Spectrum alongside the AT&T Consolidated Spectrum. A Selected example for San Francisco, San Mateo and Washington DC is shown below.

As seen in the above example AT&T’s own Appendix B strongly supports the case for examining the joint impact of the two acquisitions.
AT&T may now regret not having waited to settle the Qualcomm acquisition before seeking to acquire T-Mobile. [Note: Appendix A shows the Spectrum to be consolidated between AT&T and T-Mobile.]

So now the FCC may need to review the competitive and market impact of AT&T's aggregation of spectrum in both proposed transactions on nationwide mobile telephony and broadband services.

AT&T may have trouble establishing that it really needs all the additional Spectrum.

RCA President and CEO Steven K. Berry has called AT&T’s acquisitions a ‘spectrum grab’ and said, “It is clear that AT&T is doing everything possible to gain market dominance by making not one but two major spectrum grabs in the proposed Qualcomm and T-Mobile transactions.”

AT&T is now getting increasingly unfavorable publicity – as Broadband DSL Reports notes “Press (Are) Not Buying AT&T Spectrum Claims”. The chart below is being used in multiple publications to exemplify AT&T’s overreach. It is easy visually to add together either the green 3G columns or the blue 4G columns to estimate the consolidated spectrum of AT&T and T-Mobile. It is apparent they both far outstrip Verizon.

Delay may cause problems for AT&T unless it divests properties rapidly.

The clock is running on the AT&T T-Mobile merger since the FCC established the Pleading Cycle for the AT&T T-Mobile Acquisition (WT Docket 11-65) as follows:

Filings                        Due

Petitions To Deny     May 31, 201

Oppositions                June 10, 2011

Replies                        June 20, 2011

 Despite this aggressive FCC timetable, it is increasingly likely that extensive negotiations will be required – both nationally and state by state. AT&T will probably have to divest sufficient properties to ensure competition in each market on a case by case basis to create even stronger competitors than shown on its website.

The agreement with Deutsche Telekom (DT) however, states that AT&T does not have to agree to divestitures and other regulatory conditions that would have an adverse effect greater than USD 7.8 Billion; only half of subscriber or spectrum sales value is counted towards that sum. AT&T has stated that it is prepared to divest up to 40 percent of the number of T-Mobile subscribers or approximately 13.149 million subscribers - based on the stated value of USD 578 per subscriber. But the likely buyers are AT&Ts competitors who have no incentive to move quickly or to pay full price .

But AT&T’s acquisition agreement with DT for T-Mobile USA has a ‘drop dead’ date of March 20, 2012 after which either AT&T or DT can chose to terminate the deal.

If the deal terminates because of a failure to obtain regulatory clearance there is a provision that A&T must pay DT up to USD3 Billion in cash; enter into a roaming agreement; and “transfer to Deutsche Telekom certain wireless AWS spectrum that [AT&T] does not need for its initial LTE roll-out.”

The growing opposition to AT&T may well push the deal to the fall of 2012 as we predicted in an earlier Insight ’AT&T T-Mobile Acquisition: How long will it take to close?’