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Sprint savior? Japan's Softbank could bring badly needed boost

A combination between the two carriers could be a win for customers in the U.S. with the opportunity for better devices and service.

CNET/Marguerite Reardon

Softbank may be the shot in the arm that Sprint Nextel needs to finally be competitive with the big boys in the U.S.

Sprint and Softbank confirmed early Monday that they had agreed to a deal in which Softbank would spent $20.1 billion to take a 70 percent stake in the company. Softbank will pay shareholders $12.1 billion and invest $8 billion in the business.

But the deal underscores an increasingly evident reality for Sprint: that the growing pressures of the wireless industry are too much for the company to handle alone. It already must deal with the financial burden of its network upgrade plan, which includes ensuring enough capacity to meet the obligations of its widely touted unlimited data offer, as well as its large commitment to Apple to sell iPhones. Add to that a shifting mobile landscape and Sprint increasingly finds itself in a bind.

A cash infusion from Softbank is exactly what Sprint needs, and is a big win for consumers. Presumably, the increased size achieved by the combined operations of the two carriers could lead to a better selection of phones, more competitive price plans, and ultimately, better service. In total, it could mean a stronger rival for fellow national carriers Verizon Wireless, AT&T, and T-Mobile USA.

"Incremental funding for Sprint would, in theory, re-invigorate Sprint, amplifying competitive pressure industry-wide," said Craig Moffett, an analyst at Sanford Bernstein.

The deal shakes up the mobile world on both sides of the Pacific, allowing a Japanese company to get a substantial foothold into the U.S. telecommunications business. Indeed, CNET editor David Hamilton floated the notion that Softbank is acquiring Sprint for its spectrum and speculating on its ever-increasing value.

For the first time, three out of the four U.S. nationwide carriers would be partly owned by a foreign company. Germany's Deutsche Telekom owns T-Mobile, and the eventual T-Mobile-MetroPCS combination, while the U.K.'s Vodafone owns a minority stake in Verizon Wireless.

"Global consolidation is inevitable given the maturity of the industry," said Walter Piecyk, an analyst at BTIG Research.

In a tight spot
Sprint just recently felt its options narrow when T-Mobile opted to merge with MetroPCS. Many felt that a merger between Sprint and T-Mobile, despite the technical hurdles, would have made for a stronger No. 3 to compete with Verizon and AT&T.

Chances of such a deal are pretty much dead at this point. T-Mobile/Sprint

Or Sprint could have strengthened its spectrum and prepaid position with the acquisition of MetroPCS, which it reportedly tried and failed to do a few months back.

With few options in the U.S., it was only logical that Sprint would seek aid overseas. A combined company could conceivably be in a better position to make a run at MetroPCS, although T-Mobile and MetroPCS appear to be a lock to complete their deal.

Financially, Sprint continues to see red. In the second quarter, the company posted a net loss of $1.37 billion, and its losses are expected to continue in the third quarter with pressure from higher iPhone sales (like every other carrier, Sprint pays a hefty subsidy for each iPhone sold).

In addition, Sprint is saddled with a ton of debt, some of which was set to mature in the coming months.

Common ties
Sprint and Softbank actually have a lot in common. Softbank, like Sprint, is perennially behind two larger rivals, in this case KDDI and Japanese leader NTT Docomo.

Also like Sprint, Softbank was aggressive in betting on new devices. It was the first to get Apple's iPhone, and had an exclusive on the device until the iPhone 4S showed up at KDDI last year. The two both share an underdog mentality in their respective countries.

Conversely, both lack the network reputation of their larger peers, with Sprint lagging behind Verizon and Softbank trailing NTT Docomo when it comes to wireless service quality.

Softbank Chairman and CEO Masayoshi Son Dan Farber/CNET

Sprint and Softbank also have similar attitudes when it comes to serving the customer and offering unique plans.

"Sprint's tremendous focus on customer satisfaction would fit well with Softbank's approach to the market," said Steve Hilton, an analyst at Analysys Mason. "Use of customer satisfaction statistics to drive improvement -- long the hallmark of Sprint under CEO Dan Hesse -- would fit well with Softbank's approach."

Indeed, Sprint has used customer service to turn its growth around, boasting a few quarters of growth in its more lucrative contract business, finally turning around the losses from its Nextel arm.

The two companies can also combine for better purchasing power when it comes to getting their hands on the latest and greatest handsets and telecommunications equipment.

"The idea that US consumers would have better access to the latest Japanese consumer electronics makes the techie in me salivate," Hilton said.

Potentially, some of Softbank's pricing plans may also make their way stateside. For instance, offers some price plans that go down the longer you stay on the plan, similar to Boost Mobile's "Shrinkage" plans.

"I think new ideas no matter where they come from are a good thing," said Roger Entner, an analyst at Recon Analytics.

Softbank has a track record of turning around businesses, Hesse said, citing the company's experience with Vodafone Japan.

Clearing up the Clearwire mess
There continues to be word that Sprint is attempting to acquire its 4G provider, Clearwire, according to a report by CNBC. Although Sprint and Softbank have said that a Clearwire deal isn't necessary for the completion of their transaction.

Clearwire, which runs a 4G WiMax network but like every other carrier is moving to LTE, has long depended on Sprint, which is both the largest shareholder and customer. It's a complicated relationship, with Sprint owning a majority stake in the company but leaving control of the board and company to Clearwire's own leadership.

After some tension last year, Sprint recommitted to Clearwire as its 4G provider for the next few years. While Sprint has largely abandoned WiMax for its new smartphones, opting for LTE-compatible devices, WiMax remains important for its prepaid businesses Virgin Mobile and Boost.

Because of the nature of Clearwire's spectrum, it is planning on building a network based on TD-LTE, a variant of LTE that isn't the same as what Sprint, AT&T, and Verizon are building.

TD-LTE, however, is the same technology used by Softbank and China Mobile, the world's largest wireless provider. Clearwire has argued that the three carriers combined could bargain for better mobile devices under that technology. Qualcomm, meanwhile, has committed to building chips that are compatible with both versions of LTE.

If Sprint takes full control of Clearwire, it'll be a much cleaner deal for Softbank. Sprint and Clearwire's combined spectrum would make for an attractive target for the Japanese company.

Regardless, Sprint is looking at a new lease on life with the backing of Softbank.

Editor's note: This story was originally published on October 12 at 4 a.m. PT and has been updated with details of the actual announcement from October 15.