Offering low-cost data plans with LTE service, Sprint may become a disruptive force in U.S.

Telecom Lead America: Offering low-cost data plans with LTE service, Sprint may become a disruptive force in U.S.

Japanese company Softbank has acquired a 70 percent stake in Sprint Nextel.

The deal creates a group with a total of 96 million mobile subscribers, as well as yearly revenues of $32 billion, making the newly merged entity the third largest wireless carrier worldwide.

The Softbank/Sprint deal represents the second major transaction announced this month in the U.S. wireless market, following the agreement between T-Mobile and MetroPCS. Both of these agreements are intended to bolster the competitive positioning of relatively small wireless carriers in the North American wireless market, which increasingly is being dominated by the AT&T/Verizon duopoly.

By offering low-cost unlimited data plans with long term evolution (LTE) service, Sprint could become a disruptive force in the U.S. wireless segment. AT&T and Verizon have followed a premium-pricing strategy when it comes to data services, leveraging their superior networks. However, a resurgent Sprint with a strong network and low-cost unlimited data plans could put pressure on AT&T and Verizon’s wireless margins.

The similarities between the U.S. and Japanese wireless markets should create economies of scale for Softbank/Sprint. This will allow the two companies to cut their costs for network and handset purchasing, and pass on these reductions to subscribers. Such a move could make Sprint a strong competitor in the U.S. value market.

Verizon and AT&T together accounted for nearly 59 percent of North American wireless service subscribers in 2011, as presented in the table below. This was up from slightly more than 47 percent five years previously, according to an IHS iSuppli Wireless Communications Mobile Infrastructure Special Report. By 2016, the combined share of the two companies will rise to almost 63 percent.

Sprint in 2011 was the third-largest U.S. carrier with a 15 percent share of subscribers. The company is in the second phase of its turnaround plan, which involves heavy investment after an initial phase of recovery. Sprint has pledged $8 billion in new capital to accelerate plans to roll out its LTE network. Sprint currently offers LTE service in 15 markets and is soon to extend it to another 22. The carrier also plans to shut down its iDEN network in mid-2013, saving it an extra $1.5 billion in cost from running two different networks.

Sprint has improved its performance in terms of revenue, average revenue per user and post-paid growth. The extra cash injection will help the carrier to develop its new LTE network more quickly, allowing Sprint to compete better with AT&T and Verizon.

Sprint also could become a stronger player in the U.S. spectrum game through new investments, and could be a competitor not only to AT&T for future 700-megahertz (MHz) sales but also to all carriers with broadcast incentive auctions. The carrier will likewise look to develop its enterprise business, taking advantage of Softbank’s experience, especially in the machine-to-machine (M2M) market.

The Sprint acquisition does carry some risks, especially as Softbank paid a premium for the deal, with the two companies now accruing debts of more than $25 billion.

Furthermore, overseas investments in the U.S. market have not always been successful. This is especially a risk for Softbank, which has little experience of investing outside Japan. However, Sprint provides a good opportunity for the Japanese carrier to expand, and the deal could kick-start a series of further consolidations  in the U.S. market—and possibly more competition—as the arrival of a new, stronger player leads to better services at lower prices for consumers.

The Sprint deal also could set the stage for Softbank to engage in further acquisition activity in the future.

 Sprint is a major investor in Clearwire, and the carrier owns a significant amount of spectrum in the 2.5-gigahertz (GHz) band, which Clearwire plans to use for its future TD-LTE network. Softbank has launched TD-LTE using a similar band, and the two carriers could potentially partner to create a stronger ecosystem, especially on the device side, as there will be more scale for manufacturers and greater buying power.

Dexter Thillien, senior analyst, mobile communications at IHS
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