Comcast-Sprint Merger?

Implications: Wall Street is talking up the likelihood of a Comcast-Sprint merger.  Such a merger, however, raises a serious of challenging questions and is far from a no brainer for Comcast.  To be sure, such a deal should be acceptable on the regulatory front, but it faces a serious of business challenges that will lead Comcast to think long and hard about whether this combination makes sense.

Analysis:

Last summer, Comcast (along with some other cable operators) entered into a partnership with Sprint to buy licenses to spectrum auctioned by the FCC.  In theory, this partnership will enable the cable firms to re-sell wireless services as part of a quadruple play and to tailor those services to work in conjunction with the cable network.  In practice, however, such a cooperative arrangement is very ambitious and may well leave cable firms (like Comcast) asking whether it makes sense to own Sprint outright.

The possibility of Comcast buying Sprint raises a number of fundamental business and regulatory challenges.  From the business side of the equation, it bears notice that Comcast's bid for Disney cost it dearly--its stock valuation took a hit on the theory that, if Comcast needed to own content, its distribution platform must be wanting.  Similarly, a bid for a wireless platform--on the theory that it needs to own all four legs of the quadruple play--would raise questions as to whether Comcast is less well positioned that, say, Verizon to win the battle of the bundle.  On the operations side, Comcast has executed very well in improving the performance of cable properties it has acquired (think AT&T Broadband), but operating a wireless provider involves a whole new set of challenges.  These challenges are significant insofar as Sprint is concerned given that the integration of Sprint and Nextel involves a myriad of issues that are still being worked out (recall that Nextel engineered a significant spectrum relocation program to address interference issues with neighboring public safety users).  Finally, there is the question of whether Sprint’s customer base—including the proposed arrangements with cable operators other than Comcast—would be comfortable buying services from Comcast.

The regulatory issues raised by a Comcast-Sprint merger are multi-fold.  On the positive side, Comcast need not worry—as it did in the Adelphia transaction—about concerns related to cable concentration.  It still will face, however, concerns that are not necessarily related to the merger itself (say, regional sports programming, indecency concerns, etc.), but such concerns are unlikely to take center stage.  The real issues will involve whether the integration of a standalone wireless operator into a major wireline operator raises competitive concerns.  In approving the AT&T Wireless/Cingular merger, the FCC examined these issues and concluded that issues related to competition between wireless and landline operators did not merit regulatory concern.  In this context, such issues are even less worrisome, as Comcast is still a relative newcomer to landline (in its case, VoIP) telephone service.

The real regulatory issue raised by the merger is broadband competition.  Recall that Sprint has promised to rollout wireless broadband—making a much-ballyhooed Wimax announcement and a commitment to the FCC as part of its merger with Nextel.  Presumably, Comcast would not be interested in promoting a third broadband pipe (that would compete with its cable modem service offering) and thus a merger with it would likely dilute Sprint’s incentives to proceed with that rollout.  For a harbinger of how the FCC would treat such an issue, watch how the BellSouth/AT&T merger is handled.  Like Sprint, BellSouth also owns spectrum that is prime territory for supporting Wimax and thus any required divestiture of such holdings would presumably apply to a Comcast/Sprint merger as well.

For Wall Streeters looking for the next merger, Comcast/Sprint seems like an obvious candidate.  But unlike AT&T/Echostar (see my earlier note), this merger presents a number of business and regulatory complications.  On the simplifying side, this merger does make both business and regulatory sense if viewed as a response to the Bells.  It is not at all clear, however (from both a business and regulatory perspective), that such a response makes sound business sense.  Like the rumors of Google buying an Internet backbone company, why would Comcast need to buy Sprint if it can engineer its plan of renting its services (and sharing spectrum with it)?  To be sure, such a plan may not succeed, but the plan is still in development and it seems premature to declare it a failure and deem acquiring a wireless company a strategic imperative for Comcast.