The planned merger between nationwide carrier T-Mobile USA and prepaid provider MetroPCS is not a repeat of the failed merger between Sprint and Nextel back in 2005, T-Mobile CEO John Legere said during a conference call with the press today.
This deal, he said, is about gaining more spectrum in an effort to challenge bigger competitors like AT&T and Verizon Wireless.
"This is not a Sprint/Nextel do-over," Legere said. "This deal is not about simply surviving. It's about driving growth. When we add MetroPCS to the aggressive challenger strategy (of T-Mobile) it will accelerate things. This is not about filling in holes."
T-Mobile and MetroPCS both need more wireless spectrum to build out their next-generation wireless 4G LTE networks. And as luck would have it, the companies each own complimentary slices of the same spectrum, that when combined could provide the newly formed T-Mobile an opportunity to build a faster and higher capacity LTE network in many large cities that surpasses even the network of Verizon Wireless, which is today's LTE leader.
On Wednesday, T-Mobile's parent company, Deutsche Telekom, announced plans to buy a majority stake in MetroPCS and combine the company with T-Mobile to create a new publicly traded company that will be branded T-Mobile. When talk of the merger first surfaced months ago, and as those rumors grew louder this week, many pundits and experts said it was crazy and foolish for T-Mobile, a GSM carrier, to combine with MetroPCS, a carrier that uses a different technology known as CDMA.
This is the same scenario that played out in 2005 when Sprint, a CDMA provider, bought Nextel, which was using a technology called iDEN. Over the past seven years, Sprint has seen a mass exodus of Nextel customers. And the company is still trying to recover from the damage inflicted by the merger and network integration nightmare.
But Legere said the situation between T-Mobile and MetroPCS is entirely different. Both companies are already well on their own separate paths toward migrating their current networks to LTE. Legere explained during the call how combining these companies now as they are each refarming or repurposing their existing spectrum to support LTE will mean that they can combine forces to build a network with much more capacity.
Legere emphasized that the focus for the new company is rolling out LTE and not supporting older network technologies, which could cause integration issues.
"The big difference between this merger and the Sprint-Nextel merger is that Nextel's customers saw a loss of functionality," he said. "MetroPCS customers will see more functionality. This isn't about smashing two networks together."
According to Legere and the other executives on the call, the companies will repurpose the MetroPCS spectrum for LTE and retire the old CDMA network by the end of 2015. This will mean that MetroPCS customers will have to get new handsets, but Legere said the majority of MetroPCS's customers buy new handsets every year, which will make this transition easier. As customers upgrade and the spectrum used for CDMA is converted to LTE, customers will gain access to that network as well as to T-Mobile's HSPA+ and LTE network.
An aggressive T-Mobile strategy
The real benefit of this deal is the large amount of complimentary AWS spectrum it will provide to T-Mobile. After its merger with AT&T fell apart at the end of 2011, T-Mobile got spectrum from AT&T as part of its breakup fee. The company plans to use that spectrum, as well as some of its existing spectrum that it's repurposing, to build its LTE network. The company also struck a deal earlier this summer with Verizon Wireless to get even more AWS spectrum. Verizon was facing regulatory difficulties as it tried to close a deal to acquire AWS spectrum from a consortium of cable companies called SpectrumCo.
The MetroPCS deal will now give T-Mobile roughly 50MHz of wireless spectrum in the AWS band in major cities, such as New York, Los Angeles, Dallas, and San Francisco. This will allow the company to build a 20MHz-by-20MHz network, which means it will have 20MHz for download as well as 20MHz for upload. Experts say that this much spectrum is ideal for an LTE deployment because it gives substantial capacity. What this means for consumers is that T-Mobile's LTE network will be faster and will be able to handle more usage.
As a result, Legere said the company will continue to lead the way and differentiate itself from other national carriers by offering unlimited data services. Both AT&T and Verizon Wireless have gotten rid of unlimited data for new customers. But MetroPCS and T-Mobile have each continued to offer unlimited services with some restrictions. Legere didn't elaborate on these plans, but with the increased capacity, it's possible that T-Mobile may be able to offer unlimited with fewer limits or restrictions.
"T-Mobile is moving toward network capabilities that will be superior to others in the industry," Legere said. "This is a place where T-Mobile has never been. And MetroPCS customers will get to take advantage of this too."
The way the migration will work for MetroPCS customers is that the old CDMA network will disappear as customers migrate to devices that support LTE for use on the AWS spectrum, as well as support T-Mobile's HSPA+ and GSM technology, which will use the PCS spectrum. Keeping HSPA+ and GSM will give MetroPCS devices the ability to roam onto networks in other countries, where CDMA has not been used and where LTE is not yet deployed.
A culture of innovation
What will also likely help smooth the transition as these companies merge is the fact that MetroPCS is a very innovative company, which is used to pushing technology to its limits.
The company was the first to launch an LTE service, in 2010. But because of its spectrum constraints MetroPCS was only able to build a network in 3MHz channels. This greatly affected performance, but the fact that the company was willing to take this aggressive step shows it's willing to take risks and make changes to challenge competitors. MetroPCS also recently introduced voice over LTE, which allows customers to make voice calls over the LTE data network. This is a major difference from other LTE providers, such as Verizon Wireless, which still use older 2G/3G networks to carry voice calls.
The fact that MetroPCS has already worked on voice over LTE technology means that when it completes its transition with T-Mobile to LTE, it will be ready to also deliver voice calls, without having to keep its legacy CDMA network fully intact as a voice network.
Though the deal will enhance T-Mobile's and MetroPCS's spectrum positions, it will not expand either network into new markets. And it's clear T-Mobile will likely be looking for spectrum elsewhere to either grow its footprint or increase capacity in markets not covered by MetroPCS.
Leap Wireless, owner of the Cricket brand, is another prepaid service provider that runs a business similar to MetroPCS. Leap operates in different markets than MetroPCS and could be considered as a takeover candidate by other carriers. But it's unlikely that T-Mobile or any other carrier would look to Leap right now as a potential acquisition target.
Unlike MetroPCS, which has a fairly consistent swath of spectrum and was already migrating toward LTE, Leap owns a hodgepodge of spectrum. It has done a series of spectrum swaps with Verizon and AT&T in an attempt to harmonize its spectrum position, but experts say the company is still at least six months away from having a consistent spectrum plan.
The Federal Communications Commission is also putting more lower frequency spectrum on the market. The newly formed T-Mobile will likely be bidding in this auction, which is tentatively scheduled for 2014, to get its hands on lower frequency spectrum. Lower frequency spectrum from TV broadcasters could help T-Mobile expand its footprint into new markets, especially in suburban and rural markets.
The deal between Deutsche Telekom and MetroPCS must still get regulatory approval. But it's likely to be approved by the FCC. The agency noted in its criticism of the T-Mobile deal with AT&T that it wished for the company to remain a competitor in the wireless market. And without more spectrum, T-Mobile's survival is questionable at best. This deal and the deals that are likely to follow in the future will help T-Mobile truly compete against bigger players, such as AT&T and Verizon.
"If anyone had a question about our future, T-Mobile is here to stay," Legere said. "We are here to win, and create the leading-value carrier in the U.S. So if you had any doubts and were waiting to see what happens, you should come over now where you belong."