First, there is the potential merger of the number three and number four carriers in the US, which has some positive and negative impacts on the two leaders. Verizon (NYSE: VZ) is also making deals that would threaten a firm like Akamai (NASDAQ: AKAM), but also show how it is refocusing on becoming a leading technology company, not just a leading telecom company.
Verizon Buys Edgecast
Verizon will purchase Edgecast for around $350 million according to reports. Edgecast is a start-up content delivery network (CDN) and a competitor of Akamai. The backing a deal with Verizon presents some substantial threats for Akamai and likely means the end of Verizon’s reseller agreement with it.
Edgecast is expected to have sales of about $100 million in 2013, and the backing of Verizon can finance a more rapid expansion of the business and make Edgecast. It can also allow Edgecast to compete on price, also bad for Akamai and other CDNs. Positively for Verizon, it can combine the CDN with media broadcast capabilities from Verizon Digital Media Services allowing it to bundle services, similar to what Level 3 has already done. The deal will accelerate Internet media consumption, online business performance and further demonstrates that management is trying to be more than a mobile phone company.
T-Mobile & Sprint Proposed Merger Impact
T-Mobile (NYSE: TMUS) is again the center of merger talks, this time with Sprint (NYSE: S). Sprint is reportedly considering making a bid for T-Mobile. Previously, the Department of Justice and FCC blocked the proposed merger with AT&T (NYSE: T). The two regulators felt the merger would create too much consolidation with the industry and be bad for consumers. The deal with Sprint would bring together its 54 million customers that are under Sprint, Virgin Mobile USA, Boost Mobile and Assurance Wireless, and the 45 million under the T-Mobile umbrella. The total number of customers in the combined company would approach 100 million putting in the same range as Verizon and AT&T. AT&T has 108 million subscribers and Verizon has 101 million retail customers. The financial and other backing for the merger would likely come from Softbank, the primary owner of Sprint.
Over the past few years, T-Mobile has aggressively went after new customers by breaking the pricing and other structural molds in the industry. The backing of Deutsche Telekom has allowed it to take the risks, which have paid off. It is uncertain if a combined firm would move forward with this innovative approach.
The impact on the industry and competitors like Verizon and AT&T is somewhat uncertain. On the negative side, it would create a third major player to go head-to-head with both of these firms. Each would lose any advantage gained through size. However, it may actually be positive for pricing and customer retention.
T-Mobile has expanded its customer based over the year by offering deals that separate phone payments from service payments, allow users to bring their own phones, and offer discounts for buying larger amounts of data. Until the recent past, Verizon and AT&T did not do this but have been forced to adjust their pricing models behind the share loss to T-Mobile. T-Mobile’s CEO recently stated he has more planned for 2014 that will continue to turn the industry on its head. It is uncertain if a combined Sprint and T-Mobile would focus on aggressive customer growth via similar methods or would protect margins and the current pricing and industry structure. If the merger would result in T-Mobile’s efforts stepping back, it could allow AT&T and Verizon to catch their breath and leave their models unchanged. Furthermore, it could be an opportunity for one of those two firms to lead the industry in innovation.
All this said, this deal will also face challenges from the DOJ and FCC again. Its likelihood of gaining approval is greater than the deal with AT&T since it would merge the number 3 and 4 players. The fact that T-Mobile gained share throughout 2013, had a positive impact on prices for consumers and also acquired MetroPCS, probably hurts versus helps a possible deal. Regulators are aware the deal could mark an end to what it views as positive industry developments. Last, there are upcoming wireless spectrum auctions in 2014 and 2015. The government is planning to sell spectrum and raise capital to fund the first-responder public safety wireless network and for deficit reductions. Fewer players could hurt the amount of revenue the sale would generate. A deal can still close but some of these challenges have to be addressed to sway regulators and/or the Courts.
The positioning for growth of Verizon and T-Mobile are possibly the best for the industry. T-Mobile can continue its strategy of disruption in the near-term as a deal with Sprint will take some time to sort out. Investors should be cautious because an acquisition premium is in the share price of T-Mobile and if a deal falls apart, that premium comes out and the stock goes down. For Verizon, a merger is of Sprint and T-Mobile is possibly a net positive as it can bring down the cost of spectrum and lead to less aggressive customer acquisition tactics in the sector. In addition, Verizon is thinking ahead and taking steps to be more than just a telecom. It can lead technology development in the industry.