How Sprint Buying T-Mobile Could Drive Down Mobile Prices
Sprint's (NYSE: S) chairman vows a price war against AT&T and Verizon if his company is allowed to buy rival T-Mobile .
Outspoken Sprint Chairman Masayoshi Son appeared on Charlie Rose's PBS show on March 10 where he did not mince words about his intentions should regulators sign off on a potential T-Mobile deal.
"Once we have enough scale to have a level fight -- a three heavyweight fight. If I can have a real fight I'd gone in with a more massive price war.
There is no deal in place between Sprint and T-Mobile, but Son has made overtures in the past.
Would Sprint be allowed to buy T-Mobile?
The Justice Department and the FCC have said that they're happy with the number of players in the wireless market and don't really want to see it shrink from four to three major carriers,
William J. Baer, an assistant attorney general for the Justice Department's Antitrust Division, said in an interview with the New York Times earlier this year that it would be "hard for someone to make a persuasive case that reducing four firms to three is actually going to improve competition for the benefit of American consumers." FCC Chair Tom Wheeler is also skeptical of a merger, according to a report from Reuters.
Sprint's CEO has lowered prices before
Son, who is also president of SoftBank, the firm that purchased a controlling interest in Sprint in 2013, has caused price wars before.
When Son acquired Vodafone Group Plc's Japan unit in April 2006, the carrier faced a similar situation to Sprint's in the United States, Bloomberg reported. The company had to battle two much-larger rivals and Son decided to lower prices and upgrade the company's network in order to win market share
"What SoftBank did in Japan was to become focused on taking costs out of the business and challenging every line item," Kirk Boodry, an analyst at New Street Research LLC told Bloomberg. "That gives them the flexibility to be more competitive on price and network."
Son does not deny that he will do the same thing in the U.S. should his company be allowed to make a deal with T-Mobile. He discussed his plans with Rose.
Rose: That's your pattern. When you get a stakehold you undersell everybody.
Son: Yes, yes.
Rose: You're willing to postpone profits to gain market share.
Son: Exactly. I want to be number one, right? So if we are number three and if we had enough chance, I want to be number one so I would go in a price competition very much aggressively and network competition to create the world's best network.
Son knows that buying T-Mobile won't be enough, as the combined companies would still be number three in the U.S. He understands that competing and gaining market share requires aggressively changing the business model.
Why not cut Sprint prices now?
Sprint lost $576 million in the fourth quarter of 2013 and $970 million for the full year. That's better than the $1.8 billion it lost in 2012 but it's difficult to justify radical price cuts and expensive infrastructure improvements (even when you do control a majority interest) when you are losing money. It's also a lot easier to justify those network expenses when you control 22% of the U.S. market instead of the 11% Sprint and Nextel each currently have.
Son told Rose that he believed he needed the additional scale to take on AT&T and Verizon.
"There are two huge duopolists and they take more than 100% of the industry's total cash flow. Total industry profit they are concentrated to have 90%," he said.
Let Sprint buy T-Mobile
Though both Sprint and T-Mobile have contributed to recent factors that are driving mobile phone prices lower, neither is doing anything approaching a price war. Similarly both are improving their networks but neither is making the kind of massive investment Son is suggesting he will make if a deal between the two companies is allowed.
It seems a little silly for the FCC and Justice Department to oppose the deal on the idea that less competition is bad. In reality Sprint and T-Mobile are no viable competitors on their own. Both companies lose money and ultimately money-losing companies go away.
A combined Sprint and T-Mobile led by a CEO with deep pockets, a history of spending money, and a stated desire to drive prices down to earn market share can only help consumers. The new Sprint/T-Mobile won't drive AT&T or Verizon out of business, but it could force them to bring consumer costs down. It's hard to see how that's bad for the American consumer.
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The article How Sprint Buying T-Mobile Could Drive Down Mobile Prices originally appeared on Fool.com.Daniel Kline has no position in any stocks mentioned. He is a Sprint customer. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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