Justice Department Shouldn’t Second-Guess Shareholders in T-Mobile-Sprint Merger

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T-Mobile and Sprint—the third and fourth largest mobile carriers in the United States, respectively—are in the process of merging into a single company under the T-Mobile brand. Together, T-Mobile–Sprint would have roughly 127 million subscribers, meaning the merged firm would for the first time rival the nations’ two largest wireless companies, Verizon Wireless and AT&T, which have long led the pack among U.S. carriers. But before the transaction is consummated, the firms must secure approval from the Federal Communications Commission and prevent (or prevail in) antitrust litigation brought by the Department of Justice.

What’s the point of the deal? According to the two carriers, the merged company could cut costs by $6 billion annually while increasing its profitability. The firm’s enhanced scale would allow it to offer lower-priced plans while investing more in its fifth-generation 5G wireless network. 5G technology, though still nascent, is expected to enable consumers to access the Internet at far higher speeds and with fewer usage limits compared to existing 4G networks. But the technology that underlies 5G entails increased density of cell sites—in other words, to make 5G a success, carriers will need to install more wireless towers and other connection points within a given geographic area.

Since 2010, U.S. wireless carriers have invested about a quarter of a trillion dollars in capital. Between this year and 2010, carriers will likely need to invest another $100 billion in their networks—in large part to deploy first wave of 5G networks. Nationwide investment on this scale is not feasible for most companies, unsurprisingly; in the United States, only the four largest wireless carriers are expected to deploy 5G networks at scale. Even four nationwide networks is a lot—in nearly every other developed country, two or three wireless networks predominate, even though most developed countries are geographically smaller (and thus easier to cover) than the United States.

If the merger doesn’t go through, Sprint’s future as a major national carrier may be in jeopardy. The carrier posted a net loss each year from 2014 to 2016 (though it managed to post significant earnings in 2017 due in large part to the Tax Cuts and Jobs Act). Although Sprint could, in theory, turn itself around on its own, it’s more likely that an independent Sprint would gradually fall behind its larger, better-financed rivals—especially in the lucrative postpaid market, in which consumers tend to prefer reliable and speedy networks to keep up with ever-improving mobile devices.

Will the FCC and the Department of Justice give the transaction a green light? Given the intense interest by FCC commissioners in fostering a bright future for 5G, hopefully the agency recognizes that the deal is likely to benefit consumers. The head of the Department of Justice’s Antitrust Division told reporters in June that he doesn’t see a reduction in the number of national mobile carriers from four to three as inherently problematic. He’s right about that: the number of firms competing in any given market is not a reliable indication of how well that market will serve consumers. Some markets work well when dozens or even hundreds of firms compete, while others function at their best when just one firm has a market share of 50 percent or more.

Federal officials shouldn’t force this transaction into regulatory limbo for years. Instead, they should allow the deal to go through, and we’ll see if the merged company can achieve the cost reductions and lower prices that the carriers are predicting. Big acquisitions don’t always pan out, to be sure—sometimes, they fail spectacularly, and companies break up into smaller units or sell their assets to rivals. But even if T-Mobile and Sprint can’t ultimately figure out how to make their transaction a success, that doesn’t mean consumers will suffer in the process. And the most plausible alternative—a slow decline for Sprint—won’t be any better. The government’s ability to predict the outcome of the deal is inferior to that of the firms’ shareholders, whose capital is at stake in the transaction. Meanwhile, the upside of the transaction—a third major company capable of keeping up with Verizon and AT&T—could be quite beneficial to consumers.