T-Mobile-MetroPCS deal would expand LTE, no-contract services

New company would still be 4th-largest U.S. carrier, but a tougher rival

T-Mobile USA's merger with MetroPCS, announced early Wednesday, promises to create the "leading value" wireless carrier in the U.S., according to officials from both companies.

Their claim is based primarily on the premise that the merger will create a combined and expanded nationwide LTE wireless network -- using complementary spectrum -- and that the new company will offer no-contract, unlimited-data service to customers at a low cost.

The combined entity would still be the nation's fourth-largest wireless carrier in terms of subscribers -- behind AT&T, Verizon and Sprint. The proposed merger poses the greatest threat to third-place Sprint, which has about 56 million customers. The merger is expected to be finalized in the first half of 2013, and T-Mobile's customer base will grow from 33 million to 42 million subscribers when that happens.

By the end of 2013, the nationwide contiguous LTE network of the combined company would be 40% bigger than what T-Mobile could offer alone.

There will be a focus on major metropolitan areas, such as New York, Los Angeles and Dallas, said John Legere, CEO of T-Mobile, who will become the CEO of the combined company.

Also, with the combined resources of MetroPCS and T-Mobile, the new network will be 20% denser, because it will have more coverage that takes advantage of a larger number of towers that use a fatter wireless channel than what T-Mobile's LTE network would have had, he said.

Noting that the merger would close the gap between T-Mobile and Sprint, Legere said in a conference call with reporters: "We're not just here to compete, we're here to win.... This has the potential to be a game-changer."

Later, he said that while the combined entity would offer various service plans to customers, including more traditional two-year contract options, he also vowed that it would be "the leading provider of no-contract services."

In the wireless market, no-contract services are growing at an annual rate that is three times faster than the annual growth rate of contract services, he noted.

Leger also reached out to enterprises wrestling with the trend of employees who want to use their personal smartphones on the job. The various service plans from the merged entity will be combined with bring-your-own-device (BYOD) plans, he said, adding, "We hear [customers] loud and clear."

Some analysts and investors were concerned that by merging with MetroPCS, T-Mobile will incur added costs because it will have to convert MetroPCS's CDMA cell towers to support the GSM service that T-Mobile offers. Both companies are committed to 4G LTE, a common technology platform, but the conversion of 3G CDMA towers to 3G GSM will be necessary in order to support customers who will need 3G service when they can't find a 4G LTE signal.

Also, LTE is a data-only network, which means GSM will be needed to transmit voice calls for a period of time.

Officials said the CDMA-to-GSM conversion effort will start as soon as the merger is finalized in 2013, and all MetroPCS customers will be converted to GSM by the end of 2015. MetroPCS customers get new phones more often than customers of other carriers -- at a rate of 50% to 65% a year -- and that will speed the conversion, Legere said.

"We expect minimal [MetroPCS] customer losses and will be managing this very carefully," Legere said. "To MetroPCS customers: You will not be abandoned."

In the wake of T-Mobile's failed 2011 merger with AT&T, the announcement of a merger with MetroPCS sounded like good news to analysts.

T-Mobile has been losing customers, and gaining spectrum via the MetroPCS merger is a less costly way to expand its network than buying more spectrum on its own, analysts said.

"This merger makes the combined company attractive against Sprint," said Jack Gold, an analyst at J.Gold Associates. "T-Mobile needs more customers but is losing them, and is still just about half the size of Sprint. So it has become a question of spending a ton of money to upgrade to LTE, but how do you recoup those costs without subscribers?"

The merger is "obviously bad news for Sprint," and other no-contract services, even those offered by the two largest carriers, AT&T and Verizon, said Julien Blen, an analyst at Infonetics.

Under the terms of the announced deal, T-Mobile's parent, Deutsche Telekom, essentially retains a 74% share of the combined company and will provide $500 million in revolving credit to help the new entity. In the conference call, DT CEO Rene Obermann said the company remains committed to "creating a sustainable and financially viable national challenger in the U.S." and added that the deal "strengthens our position in the U.S. market."

MetroPCS shareholders will receive $1.5 billion in cash and 26% of the new company.

Legere said the merger will accelerate T-Mobile's rise to prominence in the U.S. wireless market. "This is a deal not about surviving ... This is about thriving," he said.

Matt Hamblen covers mobile and wireless, smartphones and other handhelds, and wireless networking for Computerworld. Follow Matt on Twitter at @matthamblen, or subscribe to Matt's RSS feed. His email address is mhamblen@computerworld.com.

Copyright © 2012 IDG Communications, Inc.

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