If the Justice Department succeeds in blocking the $39 billion merger of AT&T and T-Mobile, the deepest sighs of relief may well come from the executives at Sprint Nextel, the country’s third-largest wireless carrier. Nevertheless, Sprint would face the same daunting problems endemic to the wireless industry if the merger were thwarted, industry analysts say. “It essentially maintains the status quo, which, given the results of Sprint over the last couple of years, is not the best place to be,” said Christopher King, an analyst with Stifel Nicolaus. Mr. King says that Sprint has arguably already lost to Verizon and AT&T.
Sprint itself has acknowledged the difficulties it faces when competing against companies whose scale will allow them to secure better deals on hardware. The company has also argued that the amount of spectrum that a combined AT&T and T-Mobile would control would be anticompetitive. Other analysts are more optimistic about Sprint’s chances, as the company appears to be stemming the loss of subscribers after several years of serious erosion. Even so, its market share of subscribers on contracts dropped to 13 percent in 2010, down from 17 percent in 2008, according to Barclays Capital.
The company reported a net loss of $847 million in the second quarter of this year. Sprint, which sells a number of smartphones using the Google Android operating system, is to a large degree pinning its hopes of attracting more customers on the phone that performed that magic for AT&T and Verizon: the Apple iPhone. Analysts widely expect the two companies will reach an agreement. But the most pressing issue facing Sprint, the analysts say, is its need to build a fourth-generation, or 4G, wireless network. It would give Sprint customers a speedy wireless connection most suited to data-hungry smartphones. Because 4G offers service similar to home broadband Internet, wireless companies want to build out 4G networks as the way to provide data service to compete with established providers. And Sprint is falling behind and faces a daunting row of hurdles just to stay in the game.
Data service is becoming increasingly important to a wireless industry that is experiencing declining revenue from voice traffic. Data charges will account for more than 41 percent of the revenue from contracted wireless subscribers in 2011, according to James Ratcliffe, an analyst at Barclays. That compares with less than 30 percent in 2009. Almost everyone who wants a cellphone already owns one, so the only way for wireless companies to add voice customers is to poach them from rivals. The number of people demanding data service, on the other hand, is growing as cellphone users embrace smartphones, so wireless companies can earn more from existing customers by persuading them to add larger data plans to their voice plans.
Sprint has an advantage in this market because it continues to offer unlimited data plans, while AT&T and Verizon have tiered plans. It could hold that advantage if it aggressively builds out a 4G network that is wider and better than its rival’s 4G networks. But it is not clear that will happen. The company is planning to set out a new strategy for its 4G network next month at its investor conference in New York, and declined to comment before then. All the options the company has at its disposal have flaws, according to experts. Sprint relies on awkward partnerships to secure the amount of spectrum it needs to build a new network. AT&T and Verizon have largely been able to buy outright the spectrum they need. AT&T has cited access to additional spectrum as a major reason it needs to acquire T-Mobile. For Sprint, which lacks the capital of its larger rivals, securing spectrum has been even more difficult. It has set out to patch together what it needs through collaborations. In 2008 it entered a partnership to acquire a large portion of Clearwire, a troubled wireless company that controls a large swath of spectrum. The two companies set out to build a 4G network in tandem, hoping to benefit from a significant head start. This allowed Sprint to market the country’s first 4G network, and it became the first wireless carrier to offer a 4G smartphone, the HTC Evo 4G, in June 2010. But the effort soon slowed, in no small part because of Clearwire’s tenuous financial situation. Verizon has since overtaken Sprint as the nation’s largest 4G provider. Verizon’s network is built on a technology called LTE, which is incompatible with the WiMax technology that Sprint’s network is based on. That presents Sprint with yet another problem because Verizon’s technology is becoming the industry standard. Sprint could soon have trouble persuading hardware manufacturers to build devices for its network. Sprint has said it will shift to LTE. But there will still be eight million to 10 million orphaned Sprint devices running on WiMax by the end of the year, according to Mr. Ratcliffe of Barclays. Sprint will have to support that technology for some time, which adds to its costs.
Sprint’s solution is a deal it reached with LightSquared, a company that sells spectrum to niche carriers. LightSquared agreed to pay Sprint $9 billion to build a 4G network using its spectrum. But Sprint hit yet another barrier. Federal regulators are hesitant to allow the companies to use this spectrum because it interferes with GPS frequencies. Between Clearwire and LightSquared, Sprint should have the spectrum it needs to build its network, analysts say, but it is unclear how it will be able to make the investment to take advantage of this. There is speculation that Sprint will have to buy Clearwire outright, or assemble a consortium of other companies to help it do so. Another option would be a collaboration with cable companies that control spectrum and could be willing to work with Sprint. Charles S. Golvin, a telecom analyst at Forrester Research, thinks that Sprint’s best hope, whether or not the AT&T and T-Mobile merger goes through, is to differentiate itself with unlimited data plans as it builds a reliable network. There is a certain marketing advantage to going against Goliath and saying, “We’re the little guys, we have to try harder,” Mr. Golvin said. “That sort of story could work for them.”
