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What's next in wireless?
A Sprint-Nextel merger could be announced soon. Will a deal be bad news for consumers and investors?
December 13, 2004: 1:00 PM EST
By Paul R. La Monica, CNN/Money senior writer

NEW YORK (CNN/Money) And then there were four?

That's how many national wireless carriers would be left if speculation is right about an imminent merger between Sprint (Research) and Nextel (Research).

There were six carriers earlier this year, before Cingular's purchase of AT&T Wireless.

A Sprint-Nextel combination would be the third largest in terms of overall subscribers, trailing Cingular and Verizon Wireless.

There has been talk that Verizon could be interested in Nextel or Sprint as well but a purchase by Verizon (Research) would probably face much heavier regulatory scrutiny from the Department of Justice and Federal Communications Commission, analysts said.

Still, analysts expect the urge to merge to continue in the ultra-competitive wireless industry.

Many have argued that there was no need for so many wireless carriers and the result has been cut-throat pricing...which is obviously great for consumers but not for the companies or their investors.

"Companies are merging because they don't like this price deflation in wireless," said Allan Tumolillo, chief operating officer with Probe Financial, an independent telecom research firm.

But would a deal between Sprint and Nextel really make a difference in terms of pricing?

Merger won't change much

Even though a merger would lead to fewer national wireless carriers, there are still many regional wireless companies, such as Alltel, US Cellular and Western Wireless.

In addition, more companies are cropping up that are offering wireless plans even though they don't have their own network. That's because Sprint is selling access to its network through wholesale agreements with companies that want to offer their own branded wireless service.

Sprint has such resale agreements with companies ranging from telecoms Qwest and AT&T to Richard Branson's Virgin Mobile. Sprint recently inked a wholesale deal with Disney's ESPN as well so that the sports network can launch its own wireless service next year.

On the one hand, this strategy makes sense because it allows Sprint to generate even more revenue from its network. But the problem with wholesaling is that it leads to aggressive pricing.

"It's hard to determine whether the wholesale strategy is a mark of genius or desperation," said Tumolillo.

So there probably needs to be a pickup in consolidation among regional players and an abandoning of Sprint's wholesale model before pricing pressure in wireless would begin to lift.

"You have a variety of local players and a host of resellers. There would still be significant competition even if this merger was consummated," said William Power, an analyst with Robert W. Baird.

Along those lines, Power said Alltel or U.S. Cellular could eventually be takeover candidates. But Alltel, for now, seems more intent on making acquisitions.

In fact, Alltel recently acquired some wireless assets from U.S. Cellular and is in the process of buying some assets that Cingular was forced to divest as a condition of its merger with AT&T Wireless.

That's great news for consumers but it illustrates just how difficult it is to eke out high levels of profitability in telecom in general, even for wireless companies, which lately have at least enjoyed healthy levels of subscriber and revenue gains.

The wireless business has quickly succumbed to the same types of problems that traditional landline companies are facing, namely they are selling a commodity.

More consolidation needed

Longer-term, the wireless companies could gain an upper hand if there is even more consolidation.

Thomas Friedberg, an analyst with independent telecom research firm TWF Consulting, said he expects there to eventually be just two nationwide wireless carriers, with Verizon eventually scooping up a Sprint-Nextel combination and Cingular purchasing T-Mobile.

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But this scenario is several years away from materializing, Friedberg thinks. Complicating matters are regulatory issues. There's also the fact that for now, T-Mobile's parent company, Deutsche Telekom, has maintained that it is not interested in selling.

What's more, even if there were only two national wireless carriers, these companies would still face intense competition from other companies offering telecom services, such as cable firms and the regionals, Friedberg says.

The old wireline companies are still a presence as well, especially now that many are starting to offer Internet telephone services.

"The proper way to look at concentration in telecom is wireless versus wireline and cable. You would have robust oligopolistic competition," said Friedberg.

So all in all, it's probably a better time to be a consumer of wireless services than an investor in the companies that own the wireless carriers.

Analysts quoted in this story do not own shares of the companies mentioned and their firms have no investment banking ties with the companies.  Top of page

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