How Many Wireless Networks Can the U.S. Support?

Sprint (s s) and T-Mobile are reportedly back at it again, talking about a possible deal that would have Deutsche Telekom selling T-Mobile USA to Sprint in exchange for a stake in the combined company. And if the story wasn’t T-Mobile in talks with Sprint, it would likely involve one or the other in talks with LightSquared, the startup network backed by Harbinger Capital Partners, Clearwire or even MetroPCS (s pcs). In fact, you can pretty much shuffle the players around and still find a story about them in some sort of talks or negotiations around spectrum or an outright merger.

So why are you reading the same essential story time and time again? It’s about spectrum and the growing demand for mobile data access. In order to meet the needs of movie-streaming tablets, constantly updating smartphones and even the plain vanilla demands of voice, operators need access to airwaves. Fundamentally, a mobile operator can only cram so many bits of data into one megahertz of spectrum, and there are only so many megahertz to go around. So while AT&T (s t) and Verizon (s vz) have a huge swath of spectrum, other providers such as T-Mobile and Metro PCs are relative paupers when it comes to the airwaves. T-Mobile says it’s fine for the time being, but future iterations of LTE will call for even more spectrum blocks.

Meanwhile, Clearwire through its joint venture with Sprint, and maybe LightSquared have spectrum to spare. However, Clearwire doesn’t have cash; Sprint doesn’t have a lot of cash, and LightSquared has some troubles associated with its spectrum that have it looking for new airwaves instead. Plus, it doesn’t have a network yet. So the folks at these companies and their assorted bankers and advisors are circulating a never-ending parade of leaks about deals in the hopes of pushing the other players into action.

However, the fundamental question here is: What can the U.S. market support, both in terms of carriers and in terms of the amount of spectrum available? The FCC clearly isn’t worried about Verizon and AT&T, judging by its wireless competition report released last year, but how many more nationwide networks will survive?

The latest deal report comes from Bloomberg, which said that Sprint and T-Mobile have resumed talks. Deutsche Telekom Chief Financial Officer Timotheus Hoettges told Bloomberg that “all options are open in the U.S. — the sale of the whole business or of parts.” The sticking point appears to be putting a value on T-Mobile, which lost subscribers last year.

For Sprint, the challenge is to sort out its network plans. It announced its Sprint Network Vision blueprint back in December, outlining a new network of base stations that could handle multiple bands and could eventually support LTE. The goal would be to find one network to standardize on. By buying T-Mobile, it could pick up some more momentum in a migration to LTE, unifying under one technology. But it would mean some tough years in the interim as it supports CDMA, WiMAX through Clearwire and T-Mobile’s HSPA network. That was a huge headache that emerged with the Nextel acquisition, something it has dealt with for years, until it announced that it finally retiring iDEN last year.

But the deal could ultimately be worth it, allowing Sprint to compete with rivals Verizon and AT&T. Adding more subscribers and T-Mobile’s HSPA+ network could ensure that Sprint can offer great 4G coverage if it elects to go with LTE as well as give it a backup 3G network that’s faster than its CDMA network. And some added heft in subscribers could also help in getting more hot devices like the Apple iPhone (s aapl).

The question is what happens to Clearwire? The provider, which counts Sprint as a majority owner, is looking at selling off some of its spectrum. T-Mobile is reportedly talking to Clearwire about buying some spectrum, which means it could perhaps make it as a standalone entity even as data demands skyrocket. We’ve discussed the merits of Sprint buying Clearwire. But if Sprint were considering a deal with T-Mobile, it might explain why it hasn’t invested more in Clearwire in the last year as Clearwire looked for cash.

But ultimately, the latest rumors confirm that the wireless market is evolving quickly and what worked before — four national carriers with a gaggle of smaller competitors — may not work in the future as spectrum becomes more difficult to find and data usage booms. T-Mobile and Sprint may be today’s speculative couple, but this is a high-stakes game with a lot of players running down the clock waiting to see who they will team up with before their cash runs out.

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