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Could T-Mobile's success doom its merger with Sprint?

T-Mobile won new subscribers in the first quarter, but the company's success in attracting customers might make regulators leery of approving its merger.

T-Mobile Holds Announcement Event In New York

John Legere, CEO and president of T-Mobile USA, says a merger with Sprint will benefit consumers, not harm them.

John Moore / Getty Images

T-Mobile's success could undo its $26 billion bid to buy Sprint.

The Seattle-based mobile carrier continued a run of adding new customers, saying on Tuesday it had grabbed 617,000 postpaid phone subscribers in the quarter that ended in March. Postpaid subscribers are customers who pay their bills at the end of the month. 

The growth was greater than that of AT&T and Verizon, its biggest competitors. Last month, Verizon reported it had only added 260,000 net retail postpaid customers in the first quarter, many of whom were Apple Watch customers. AT&T lost 22,000 postpaid customers. (Sprint reports earnings on Wednesday.)

T-Mobile also beat earnings expectations, posting a profit of $0.78 per share on $10.46 billion in revenue. Analysts polled by Thomson Reuters predicted earnings of  $0.71 per share on $10.35 billion in revenue, according to CNBC.

The company's growth, however, could hurt its chances of consummating a long-awaited marriage with Sprint by reducing competition among mobile carriers. The deal, which was announced Sunday, would bring together the nation's third- and fourth-largest wireless service providers, if completed. Consumers advocates, analysts and some lawmakers say reducing the number of competitors could push prices higher and crimp innovation. It was this reasoning that led the Department of Justice to reject AT&T's bid to buy T-Mobile in 2011.

T-Mobile's efforts following that failed acquisition led to a price war among nationwide carriers, Tim Wu, a law professor at Columbia University, wrote in an op-ed for The New York Times on Tuesday. That's a potent example of the power of competition to benefit consumers, he said.

"The problem for Sprint and T-Mobile is that they themselves have done such a good job of proving the merits of the four-way competition they now seek to eliminate," he said.

Indeed, the deal comes at a time when the US carriers are duking it out to win over consumers with perks like free access to Netflix and unlimited data plans. Sprint is still giving away a year of service for free.

Indeed, the competition has gotten so cutthroat that the CEOs of T-Mobile and Sprint say they need each other to build the next generation of wireless infrastructure, known as 5G. They also promise the merger will position them financially to lower prices and offer better service.

Still, consumer groups, analysts and some lawmakers are skeptical. They're urging regulators to block the merger.

Sen. Edward Markey, a Democrat from Massachusetts and a member of the Commerce Committee, is already calling for Congressional hearings on the proposed merger. On Tuesday, Markey expressed concern the merger may not be in the best interest of consumers.

"The proposed T-Mobile and Sprint merger could present a number of harms to consumers and the marketplace, including higher prices and fewer innovative services," he said in a letter to the committee leadership. "Without sufficient alternatives to the other two major wireless providers, consumers may be left with no option to switch to a provider offering better, more affordable services."

Groups like Public Knowledge have echoed similar concerns.

"If approved, this deal would especially hurt consumers seeking lower-cost wireless plans, as the combined company's plans would likely increase while competitors AT&T and Verizon would have even less incentive to lower prices," Phillip Berenbroick, Senior Policy Counsel at Public Knowledge said in a statement.

But the companies say they are confident that regulators will see the benefits of the merger. They say that Republican FCC Chairman Ajit Pai has assured them he'll keep an open mind in reviewing the deal. 

"We are making a strong suggestion to decision-makers that they not prejudge [the deal]," Legere said during the company's conference call. He and his team were in Washington on Tuesday to meet with FCC officials. "I see across the board a willingness to listen."

The merger will create many benefits for consumers, he said, adding regulators need to look at the competitive landscape differently.

For instance, Mike Sievert, T-Mobile's Chief Operating Officer, outlined plans to use 5G wireless technology as an alternative to fixed broadband services. He said that a combined T-Mobile-Sprint would also push more aggressively into the paid TV market.

"We offer a real opportunity to bring real competitiveness [to this market,]" he said. "We could offer a quad play if that's what the market wants," he said, referring to a bundle of services.

Analysts say that even if the FCC buys into T-Mobile's vision, the bigger hurdle could be the Justice Department, which also must review the deal to make sure it doesn't violate antitrust law.

Wall Street analysts say the deal has a better chance under the Trump administration than it did under Obama, but they're still putting the odds at most at 50 percent of making it through the regulatory review.

"This one is genuinely a tough call," Craig Moffett, an equities analyst with MoffettNathanson, said in a report to investors. "The regulatory question comes down to this: Will consumer welfare be measured by end-user prices in four versus three-player market or by the level of capital investment the two companies can support as one company rather than two?"

First published May 1, 2:01 p.m. PT.
Update, May 1 3:26 p.m. PT: Updates to include comments from T-Mobile's earnings call.

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