A Stronger T-Mobile Could Help Keep Verizon and AT&T in Check

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T-Mobile and Metro PCS have announced that they intend to combine into a new company. (It's a really complicated transaction and not quite accurate to say that T-Mobile is going to acquire Metro PCS, or the other way around. But the new company will still be called T-Mobile.) The deal needs to obtain regulatory approval--and Sprint might make things more interesting with a bid for Metro PCS of its own. But just looking at the proposal on its own terms, this is a very different situation from when AT&T tried to buy T-Mobile. That transaction would have gutted nationwide wireless competition. The T-Mobile/Metro PCS deal could improve it.

T-Mobile is the fourth largest carrier in the country with 33.2 million customers. Metro PCS is the fifth largest with 9.3 million. Just the difference between those numbers shows how unbalanced and top-heavy the wireless market is. Now consider that Sprint has 56 million, AT&T has 105.2 million, and Verizon has 108 million. Even after this transaction T-Mobile will be number four. (These numbers aren't taking into account MVNOs like TracPhone that resell access to others' networks.) But a stronger number four will be better able to compete with the larger carriers. By combining with Metro PCS, T-Mobile will have more spectrum and more towers, and thus more flexibility. It should be able to offer its lower-cost plans to more consumers, while improving the service of existing Metro PCS and T-Mobile customers.

There are certainly challenges with this transaction. Metro PCS is a CDMA carrier and T-Mobile is a GSM carrier. Combining these networks will not be easy--though it might become easier when voice-over-LTE is finally standardized. (Although only LTE data has been standardized and rolled out, LTE is supposed to replace existing voice networks as well.) Also, it would not be good if existing customers of Metro PCS were forced to upgrade their phones or lose their existing price plans. This transaction should be handled in a way that is not disruptive to existing users.

Additionally, the merger is a bigger deal if you just look at the prepaid market. T-Mobile and Metro PCS together are the largest providers of prepaid phones--so you could view this as a merger of the #1 and #2 providers of those price plans. The prepaid model was pioneered by smaller providers, and some have argued that a larger T-Mobile will have less incentive to serve this market.

However, on balance, this transaction is likely to be good for value-conscious subscribers, including prepaid customers. As the domestic wireless market has approached saturation, even AT&T and Verizon have found it worthwhile to go after prepaid users. Since T-Mobile still positions itself as a "value" carrier, it seems likely that it'll continue to offer the same kinds of plans it offers today. Moreover, a stronger T-Mobile might actually put some pricing pressure on AT&T and Verizon, which would be a big win for consumers overall. If it does turn out that there are particular problems that are not yet apparent--consumers left behind, or local markets were there are competition problems--the FCC should certainly dig into them and use its public interest authority to craft an appropriate remedy.

Of course, normally a merger of the #4 and the #5 competitors in a market is not going to be good for competition or for consumers. It would be better if wireless competition was not in such a sad state--for example, it would be better if spectrum holdings were not so lopsidedly in favor of the dominant providers. This transaction will not change the fundamental problems with the wireless industry, which needs much more competition than even a bulked-up T-Mobile or Sprint can provide. But given the realities of wireless, on balance a stronger T-Mobile would be better for competition, and thus for consumers.

Finally, last night, I put on my Serious Face and discussed this on the Willis Report on the Fox Business Channel. You can watch that segment here.

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