T-Mobile, the wireless operation of Deutsche Telekom, probably will never recover from a failed takeover bid by AT&T (NYSE: T). The FCC and the U.S. Department of Justice killed the deal, and all DT got was a $4 billion breakup fee. The German company said it will invest the money in its American business. The sum will not be nearly enough. T-Mobile has started to bleed customers like its larger rival Sprint-Nextel (NYSE: S). Neither has the capital or marketing prowess to stave off AT&T and Verizon Wireless. The problem is worsened by the fact that the total U.S. wireless market is not growing at all. T-Mobile is in the midst of a battle it can only lose.
T-Mobile’s customer base is about 35 million. Sprint’s is 50 million. AT&T and Verizon (NYSE: VZ) have about double the Sprint count. AT&T Wireless and Verizon Wireless have rich parents, each of which can draw money from their dwindling but profitable landline businesses, as well as wireless subscriber units that also have high margins. Each can afford to pay for aggressive infrastructure expansion of 4G ultrafast wireless networks. Each easily can afford to pay Apple (NASDAQ: AAPL), the most important chess piece in market share battles, the subsidies it demands for the iPhone.
T-Mobile has just announced it will cut 900 positions. The cuts will continue. DT is not likely to want to support a business that it must already know has no future.
Sprint and T-Mobile are faced with the difficult reality that each is too small and has no ready chance to grow. The technologies of the two companies are not entirely, or even partially, compatible. This makes a merger between them unlikely. Either could marry with smaller MetroPCS (NYSE: PCS). Sprint was close to such a deal, which would have cost $8 billion, but its board of directors rejected the plan as too risky and expensive.
There will be no foreign buyers for Sprint or T-Mobile, although several huge telecom companies in Europe and Asia could afford to make offers. They have watched Deutsche Telekom, one of the world’s largest carriers, struggle to keep T-Mobile afloat without any success.
T-Mobile’s presence in the United States probably will continue for years, as it becomes orphaned by its parent and slips inexorably toward ever greater loses.
Douglas A. McIntyre