The deployment of 5G competition includes low-band spectrum, mid-band spectrum, millimeter wave and infrastructure development.
- The third-and-fourth largest mobile carriers in the US have proposed an all-stock 40 billion dollars merger in April 2018. In February 2020 the federal judges have approved the merger without intention to appeal
- If the cases go through, T-Mobile’s current product offerings (Millimetre Waves 5G and Low Band 5G) and Sprint’s Mid Band 5G spectrum will combine and allow full 5G capacity to be deployed.
- Investors are optimistic about the merger as Sprint’s stock price has soared from $4.80 to $8.52 (+77.5%) after the announcement. T-Mobile’s stock price has also risen from $84.53 to $94.49 representing an 11% increase.
First and foremost, it is important to understand the competitive landscape of the telecommunication industry as well as the potential impact 5th-Generation network can have in the economy. The dimensional extend from 4th to 5th-Generation provides variety of opportunities for a wide assortment government, business and industrial organizations by accelerating the processing speed and capacity. In a real-life situation, a 5th-generation will enable heavy machinery businesses to capture vast amounts of data from remote sensors a, and then to transfer that information into data centres where artificial intelligence and machine learning methodology can be applied.
5th-Generation network consists of three spectrums: low band, mid bands and high bands (millimetre waves). They represent the three intensity of the 5th generation network, the stronger it is, the more infrastructure it would require. As shown below, millimetre waves do not go through concrete as low-band or 4G network do, which required 5x network stations than 4th to provide network service in a densed area.
Consumers might have pondered if 5G can replicate the success from 4G due to the sufficient network we share at the moment, demand for faster networks diminishes overtime as an average consumer do not process a lot of data in their daily lives. It is correct and the fact that 5G infrastructures were made to target specific Industrial Internet of Things (IIoT) industries as the followings: healthcare providers, urban management, smart buildings, manufacturing and transportation.
AT&T is currently sitting as the largest telecommunication service provider with over 170.72 billion in revenue whereas Verizon, T-Mobile and Sprint followed behind. It is tragic as the nature of telecommunication industry has a high barrier of entry and is priced super competitively. Upon today, there is no one in the industry has full capability to provide 5G network at all spectrums.
T-Mobile, is the 3rd biggest player in the wireless telecommunication industry and had demonstrated a faster growth than AT&T (1st) and Verizon (2nd) in the past 3 years. T-Mobile has outperformed the industry growing at 33.4% comparing to the industry average 23% in net earnings. It serves a diversified range of customers among its branded, unbranded and B2B services, with a strategic goal to achieve 5G before and more efficient than their competitors.
Among the three spectrums, T-Mobile invests heavily on low-band 5G as it demonstrates significant improve comparing to the 4G and it requires less infrastructures to maintain. In addition to their secondary development in millimetre waves spectrum, they have recently begun to offer 5G services in six cities: Atlanta, Cleveland, Dallas, Las Vegas, Los Angeles and New York.
In 2019, T-Mobile has launched “T-Mobile Test Drive”. It was meant to generate feedback loops for the new 600 MHz Extended Range LTE (low band 5G) service plan, American households can register T-Mobile Test Drive online with their personal and household information to receive a pocket-sized hotspot for a 30-days or 30GB of data free trial for their latest service.
Sprint, is the 4th biggest player in the wireless telecommunication industry. Sprint marketed themselves with best values and it suffered from a fierce price competition as sales have went down in 2019 comparing to 2018. Despite its confidence into its 5G development, analysts from Softbank, JP Morgan Chase have lowered estimates which punishes its stock price at historical low point.
Among the three spectrum, Sprint specializes in mid-band 5G as they understand they would not be able to capitalize on millimetre waves infrastructure due to its relatively small capital power or complete directly to T-Mobile with low band 5G technology.
Sprint has also developed a strong network functions virtualization (NFV) which essentially contributed hugely to network management. Through separating the controls of each network planes, Sprint is allowed to centralize the view of the network/operation — optimizing the network services by speeding up the reaction time.
The merger is a great example of growth mergers. Due to the fierce external environment, both companies might be able to capitalize on 5G as they do not have the technology and scale to complete with AT&T and Verizon.
As mentioned, by consolidating T-Mobile’s expertise in land and millimetre waves 5G with Sprint’s Mid-band spectrum capability. The new company is able to offer a full capacity of 5G network service, surpassing Verizon and AT&T, and be able to act as the first company who deploys 5G services commercially to all states in the United States.
Internationally, the United States has fallen behind other countries such as China and South Korea into the 5G development due to United State’s opposition to national security reasons. The US president Trump has signed an executive order earlier in 2019 which involves blocking transactions that involve information or communications technology that “poses an unacceptable risk to the national security.” which was meant to single Huawei’s occupation out in the United States. As a consequence, the U.S 5G development has resulted in a 6–12 months lag behind to China.
However, the merger would incur two major risks as in first resulting to price hikes as decreased competition, second legally and social caution by the United States government as the parent company of T-Mobile and Sprint are owned by Germans and Japanese.
Valuation aside, there is minimal to none downside to the merger because of its product and strategy fits. The new company would be able to offer a variety of network services operating at a better margins, at the same time they can consolidate their pool of customers and obtain better negotiation power in sales & marketing aspects. Furthermore, the pro-forma balance sheet has a strong cash position to dilute T-Mobile’s leveraged position and more cash can be invested towards building the infrastructure needed for 5G developments.
As a result, Sprint’s stocks have risen over 70% and T-Mobile’s stocks have risen over 10% on the next trading day as investors are optimistic about the new company’s prospect as the merger has gone through the deal process and passed the anti-competitive act. Nonetheless, it’d take a few months for integration as it is a 40 billion merger.
One major implication most investors might not have put into consideration was the fact that government has taken a resistant stance into foreign investment and private companies, especially for Bernie Sanders and Elizabeth Warren campaign as they advocate to restrict businesses who have monopoly control. In the future, telecom along with tech giants might have to encounter legal and governmental barriers which would hinder growth.
To conclude, T-Mobile and Sprint made an incredible decision as to merger to avoid getting killed by their competitors at the 5G deployment stage of telecomm development. Investors have shown super optimistic prospects from the merger as it might involve issues that are more than strategic moves and technology impacts.