Summary
While Sprint's financial weakness may not be as bad as any other US carrier, Deutsch Telekom, T-Mobile's parent, is under intense financial pressure that may be leading them to focus more on the US market. The best strategy for Deutsche Telekom to grow T-Mobile may be to merge; a strategy that certainly worked for Verizon taking over Alltel. While the technical problems facing integration of the two carrier's networks may be the biggest hurdle to this merger, it offers T-Mobile an opportunity to offer new services and attract new customers and expand Deutsche Telekom into an ever important US market.
Analysis
The financial position for all four major wireless providers in the US are depressed. Sprint reported a Q4 net loss as well as a 14% drop in operating revenues over the prior year period. However, if you look at this more closely, Sprint's financial losses are similar to those found in the rest of the industry; for example loss per share is about what you see at AT&T. This suggests that Sprint may be hurting but not necessarily worse than anyone else.
The issue of financials is much more important to T-Mobile's parent, Deutsche Telekom (DT). The May 1, 2009 online Financial Times reports that DT is under intense pressure to divest itself of its UK operations, possibly to allow them to focus more on the US market. If that is the case, a merger with a US carrier is their best strategy. While T-Mobile USA is the fourth largest carrier, it has not been able to compete effectively for customers because it is playing catchup to its competition. A lack of compelling products/services keeps T-Mobile from competing as effectively as they could. Merging with an existing carrier is the fastest (and perhaps the only) way for T-Mobile to grow in today's market.
However, the biggest hurdle a Sprint/T-Mobile merger would face is technical. The incompatibility of the GSM and CDMA networks is not a trivial matter; the issue of customer handsets alone would create a nightmare for any integrated network. Years after its merger with Nextel, Sprint is still dealing with the aftereffects of a poor integration of their two network technologies that resulted is great customer churn. Attempting to integrate the Sprint and T-Mobile networks would present far greater challenges than that. I believe that an actual fast, forced integration of the networks would not take place but rather they would be run in parallel with "Sprint-TM" migrating its customers over time to GSM.
Despite the headaches, such a merger would be of great benefit to DT. Additional subscribers would help revenues and provide T-Mobile an opportunity to offer some new products that might attract new customers. For example, Sprint has a more attractive selection of handsets in the ever more important smartphone market. Also, T-Mobile lacks a viable 3G network presence. The T-Mobile 3G network is small and still rolling out years behind their competition. This is a big limiting factor in T-Mobile's ability to sell advanced (and profitable) services like streaming anything. For T-Mobile, the 3G battle may already be lost but merging with Sprint, which has a good 3G network and is well on its way to 4G, would allow T-Mobile to move quickly into the 4G space.
Bottom line: This is an opportunity for DT to expand in the US market. Financially, Sprint is probably not that bad off and offers a decent sized customer base along with some product strength. Whether DT is willing to handle the headaches of such a merger will be a big indicator of how important Deutsche Telekom views the US market.
