Will The Collapse Of The Sprint/T-Mobile Merger Usher In A U.S. Price War?

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The unraveling of Sprint's (NYSE: S) bid to merge with T-Mobile US (NYSE:TMUS) could spark a new round of price cuts in the U.S. market, according to financial analysts. That could lead to lower costs for consumers but it could also especially pressure Sprint, which is working to upgrade its LTE network.

Both Sprint and T-Mobile executives had talked in recent months about how greater scale via a combination of Sprint and T-Mobile could help them better compete with Verizon Wireless (NYSE: VZ) and AT&T Mobility (NYSE: T), each twice the size of Sprint and T-Mobile in terms of subscribers. However, now that that prospect has been extinguished for the foreseeable future, price levers are the ones the smaller carriers are likely going to pull to remain competitive.

Sprint is likely going to introduce new pricing at some point soon–outgoing CEO Dan Hesse confirmed late last month that the carrier is testing new pricing plans, though no timeline has been set for any changes. He said that Sprint's Framily plan has become less competitive at certain price points and that Sprint "may need to make some adjustments to our pricing levels based on what we learn" in the trials. Hesse also has said unlimited data for smartphones continues to be a key differentiator in the market.

"I would be very surprised if we did not continue unlimited offers in addition to what we'll call metered offers," he said. CNET has reported that Sprint is testing a shared data plan in select cities, as well as discounted versions of its Framily and individual plans. The job of deciding which plans to change and how is just one of the tasks that will greet incoming Sprint CEO Marcelo Claure, who starts on Monday.

"Without the ability to compete on scale they are going to have to compete on price, so the two smaller competitors may become increasingly desperate to maintain market share and could become irrational in pricing, which could cause disruptions in pricing in the industry," Mark Stodden, an analyst at Moody's Investors Service, told Reuters.

T-Mobile itself, with its low-cost Simple Choice no-contract plans and offers to pay off the Early Termination Fees of customers who switch and trade in their phones, has been leading the way in undercutting its rivals. Sprint may feel compelled to follow T-Mobile in lowering its own prices, which could cause more turmoil in the market.

"Sprint could take the same road and try to compete more aggressively on price, which could have the effect of restarting subscriber growth," Matthew Goodman, analyst at ITG Investment Research, told Reuters, saying he sees few short-term alternatives for Sprint.

Those potential price cuts could cause Sprint to lose revenues at precisely the moment when analysts and investors are clamoring for Sprint to increase capital expenditures to boost its network. "You're likely to have lower prices at least, even if you don't get demonstrably better service quality from Sprint," MoffettNathanson analyst Craig Moffett told Bloomberg.

Sprint is moving forward with the next phase of its network deployment, called Sprint Spark, which features tri-band LTE service. Sprint expects Spark, which uses 800 MHz, 1900 MHz and 2.5 GHz spectrum, to cover 100 million POPs by the end of the year. Claure will need to help guide that process and help stanch the bleeding in Sprint's subscriber base.

Then there is the role of French carrier Iliad, which has made a $15 billion offer for 56.6 percent of T-Mobile. Although T-Mobile and its parent Deutsche Telekom reportedly think the current offer is too low, other reports have indicated that Iliad is considering partnering with other companies to increase the bid, perhaps for a larger stake in the company, according to Bloomberg.

A T-Mobile deal with Iliad could bring benefits to U.S. consumers as well–Iliad previously sparked a price war with its cheap wireless service in France. "It has a reputation of being very consumer conscious and aggressively cutting prices," John Simpson, privacy project director at Consumer Watchdog, told Bloomberg. "If they go through with their proposal and are allowed to make the buy, it would be good for consumers."

For more:
– see this Reuters article
– see this Bloomberg article

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