T-Mobile’s Sprint to First Place

Could T-Mobile USA go from No. 4 to No. 1 in the U.S. mobile phone market?  The same week that T-Mobile announced the launch of 3G service (see MOBILITY), the Wall Street Journal reported that Deutsche Telekom, T-Mobile’s parent, is considering a bid for Sprint Nextel, the No. 3 player.

Telekom is increasingly looking outside Germany to make up for lost ground in its domestic fixed-line business.  The company has seen its greatest revenue growth in the U.S. market; T-Mobile USA added 3.6 million customers last year, boosting revenue to $19.3 billion from $17.1 billion in 2006.  Telekom first entered the U.S. market with its €33 billion acquisition of VoiceStream in 2000.  The acquisition saddled Telekom with €67 billion in debt and caused the company’s stock to lose 90% of its value.  Then-CEO Ron Sumner and his successor Kai-Uwe Ricke were both forced out of the company, in part due to pressure to divest itself of the U.S. unit to reduce debt.

It wasn’t so long ago, less than a year in fact, that rumors were continuing to circulate over the possible sale of T-Mobile USA.  Last June, Deutsche Telekom slowed its overseas expansion and Rene Obermann, the company’s CEO, told the business daily Handelsblatt that Deutsche Telekom had other priorities at the moment.

But T-Mobile USA continued its expansion and, having spent over $4 billion on new spectrum as the top spender in a 2006 Federal Communications Commission auction of new licenses to use the public airwaves for wireless services, commenced significant network upgrades.  Although T-Mobile is arriving late to the 3G party in the U.S., that may be less of a disadvantage than one might presume.  Its competitors have already raised consumer awareness for new and faster data services available with 3G.  T-Mobile, with plans to roll out 3G services across major U.S. markets by year’s end, should be able to benefit from their collective efforts.

T-Mobile also acquired mobile operator SunCom, with 1.1 million subscribers, in September 2007.

Meanwhile, the Sprint-Nextel merger has been a disaster.  Given problems integrating the two companies’ networks and cultures, Sprint has seen its churn rate soar and its stock tank.  Sprint also saw the loss of 800,000 customers as Qwest Communications, a local exchange carrier, switched its customers to Verizon Wireless.

A Telekom takeover of Sprint would be simplified if the company were to shed its Nextel unit (talks to this effect have already been reported in the press) and move ahead with its $12 billion joint venture with Clearwire to provide ultra fast wireless Internet access for mobile phones and laptops.

Unlike T-Mobile USA and T-Mobile in the rest of the world, Sprint’s network, like that of Verizon Wireless, is based on the CDMA standard while T-Mobile and AT&T both use the European-developed GSM standard.  This could be resolved both by gradually migrating Sprint customers over to T-Mobile’s GSM and 3G network in the short term and in the longer term by migrating both to the next generation LTE (3GPP, or 3rd Generation Partnership Program Long Term Evolution) standard.

It’s unlikely that Deutsche Telekom will be satisfied with a No. 4 position (and a distant No. 4 for that matter, as T-Mobile had 28.7 million customers at the end of 2007 compared to Sprint Nextel’s 40 million) in the U.S. for long.  A sprint to first place is not out of the question.

Jonathan B. Spira is CEO and Chief Analyst at Basex.

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