Sprint and Nextel Make It Official
By Carlo Longino, Wed Dec 15 19:15:00 GMT 2004

The two carriers have announced that -- as expected -- they will combine to create the third-biggest operator in the US with some 38 million subscribers.

Following last week's rumors, the two companies officially said today they plan to merge under the unique name of "Sprint Nextel", a company with about $40 billion in combined revenue that solidifies Sprint's number-three position in the US. The new entity will become a pure wireless company by spinning off Sprint's wireline business, which had revenues of about $6 billion in the last year.

There's no doubt this is a big deal, but it's unlikely to be an earth-shattering moment in the US mobile market. There are three main motivations for the companies to do a deal: Sprint wants Nextel's customers, particularly its high-ARPU business users, as well as the company's spectrum, while Nextel needed an upgrade path for its unique iDEN network. Joining forces with Sprint will save Nextel the several billion dollars it would have to spend to build a new network based on CDMA2000 EV-DO or Flarion's Flash-OFDM technology, since it will now be able to shift over to Sprint's EV-DO network when it's completed in a few years.

One company with a lot on the line is Motorola. It is Nextel's exclusive handset and network equipment provider, and Nextel is responsible for 20 percent of Motorola's handset and network gear revenue. Nextel's CEO said on a conference call today, though, that the iDEN network will be around until 2007, and Motorola will develop handsets that will operate both on it and the new operator's CDMA network. One analyst is already saying the merger will propel Samsung to be the top handset vendor in the US.

The deal also puts pressure on T-Mobile, whose US operation is now a distant number four in the market with 16.3 million customers. With Nextel's upgrade problem solved, it will highlight T-Mobile's spectrum squeeze -- a problem that's seriously hampering its efforts to roll out 3G. While T-Mobile has a large gap to make up, and one that will be even bigger when (if?) its UMTS network is up and running in two years' time. But the doomsday scenarios that popping up aren't likely to be fully realized.

While it's true that T-Mobile is now the smallest of the country's national operators, some commentators forget that T-Mobile worldwide is 109 million users strong -- dwarfing any of the American carriers and giving it a lot of purchasing power in both handsets and network gear. The fact is that T-Mobile's been operating quite successfully in the current US market, and this deal won't change that landscape appreciably, at least in the short term. It's quite possible, likely even, that T-Mobile will benefit from the consolidation of Sprint and Nextel, as well as the new Cingular. The machinations of integrating the companies could be a strategic distraction and stabilize prices. Also don't forget that T-Mobile USA has been the key growth driver for T-Mobile as a whole, and in turn, its parent, Deutsche Telekom, so they won't be keen to sell out and will take action to ensure T-Mobile USA remains competitive and successful.