Deutsche Telekom just strengthened its hand in the United States cellular market: The German mobile giant announced a merger between its T-Mobile U.S. subsidiary and MetroPCS. The move will solidify T-Mobile’s position as the fourth-largest carrier in the U.S., putting it in a better position to compete with Verizon, Sprint and AT&T.
MetroPCS is much smaller than T-Mobile, ranking fifth-largest in the U.S. The deal is structured in such a way that the smaller company is technically swallowing the larger in what it known as a reverse-merger. Deutsche Telekom will retain 74% of the new T-Mobile, but the company will be listed on the U.S. stock exchange, giving the German operator a way to get out of the U.S. market entirely, should it wish to do so, by selling off its stock in the company.
Why would Deutsche Telekom want to get out of the U.S. market? T-Mobile, even with the added customers from MetroPCS, is a distant fourth in the U.S. cellular market with 42.5 million subscribers, according to the Wall Street Journal’s report on the merger. Sprint has about 57 million subscribers, while both AT&T and Verizon have upward of 100 million. Essentially, the U.S. market is saturated, and growth is only found on the hard edges, near the bottom of the consumer market. The cost for Deutsche Telekom to maintain T-Mobile in the U.S. is a drag on the German company's growth, especially considering the daunting task of developing infrastructure for a 4G LTE network.
Note: This article was updated on Oct. 4 at 8:15 a.m. to reflect more accurate Sprint subscribers numbers. The total was previously reported as 70 million. It is actually closer to 57 million as of Sprint's latest quarterly earnings reports.
For mobile users, the pertinent question is whether or not a MetroPCS backbone for T-Mobile will be good for them. The answer is not clear-cut. On one hand, consumers will lose the benefits of MetroPCS and its cost-effective pre-paid mobile plans. On the other hand, those plans might still exist within T-Mobile’s own pre-paid offerings. MetroPCS brings only 9 million or so subscribers to the merger, which is a marginal number in the grand total of U.S. cellular subscribers.
MetroPCS will continue to exist in the short term. T-Mobile CEO John Legere said during a conference call announcing the merger that MetroPCS will transition costumers to T-Mobile over the next few years before shutting down in 2015. The combined subscriber pre-paid base of T-Mobile/MetroPCS will be 14.6 million, third in the U.S. behind TracFone and Sprint. This is an area that the new T-Mobile will focus on for growth while expanding the MetroPCS brand to new areas within the U.S.
Focusing on the pre-paid market is not only a smart track for T-Mobile, it is really the only place where it can push aggressively for growth. The contract-based, post-paid market is a zero-sum game for a company like T-Mobile, especially since it does not have access to Apple’s iPhone and the lucrative two-year contracts that consumers sign to obtain one. Verizon, Sprint and AT&T have been swapping post-paid users for years based on what plans and devices they offer. T-Mobile has been losing that game, shedding contract users for the better part of two years.
Consumers are likely better off with T-Mobile merging with MetroPCS than they would have been if T-Mobile had been acquired by AT&T. That company's attempt to acquire T-Mobile for $39 billion was held up in regulatory battles for more than a year and eventually shot down over concerns of an AT&T monopoly at the top of the market. Regulators prefer a competitive landscape and are likely to approve the MetroPCS merger, as it creates a stronger company at the bottom of the market.
In the end, a stronger T-Mobile will likely be a good thing for consumers. The loss of MetroPCS will hurt, especially for customers at the bottom of the market, but the new T-Mobile will be better able to push the boundaries against its larger competitors, offering cheaper smartphone plans and data services.