Why a T-Mobile-MetroPCS merger makes no sense

Updated. If the financial media can be believed, the merger of T-Mobile USA and MetroPCS(s PCS) is actually happening. Both Bloomberg and Reuters have dug up unnamed sources claiming that T-Mobile’s parent Deutsche Telekom is in the final stages of green-lighting a deal for Metro, the largest regional mobile player in the US.

Update: DT and MetroPCS have confirmed they’re in talks to combine to US operations. From Metro’s statement: “There can be no assurances that any transaction will result from these discussions, and the Company does not intend to comment further unless and until an agreement is reached.”

In May, when rumors first arose that DT would buy MetroPCS, I tried to debunk them, pointing out how the deal made no sense. I may be wrong about the rumors being false, but that doesn’t make the deal any less crazy. Merging T-Mobile, a GSM operator, with MetroPCS, a CDMA one, is absolutely insane.

The last operator to have this kind of bright idea was Sprint(s s) when it bought Nextel in 2005. At the time it was considered a mega-merger, but it didn’t change the fact Sprint was forced to run two distinct networks: its original CDMA infrastructure and Nextel’s iDEN systems. It had to maintain separate largely incompatible handset portfolios and manage two separate customer bases. We all know how that turned out, but let’s highlight some of the gorier details:

  • When the deal closed the combined Sprint-Nextel had 43 million customers and 22 percent of the US mobile market share. In seven years Sprint has grown by only 13 million subscribers, while its two biggest competitors, AT&T(s t) and Verizon(s vz)(s vod) have both doubled in size. Sprint’s share of US connections has shrunk to less than 17 percent.
  • Sprint hasn’t turned a yearly profit since it bought Nextel. That’s seven years of annual losses, while customers fled in droves from the Nextel network. Sprint CEO Dan Hesse says he believes Sprint will finally be profitable again in 2014, which happens to be the year after all traces of the Nextel iDEN network are wiped from the map.

T-Mobile and MetroPCS have two things in common: they use the same spectrum bands and they’re both coalescing around LTE as their future network technologies. You could make the argument that eventually these two operators will be technologically in tune offering a unified LTE service. But that transition will take years.

T-Mobile won’t launch LTE until 2013, and while MetroPCS has had 4G live since 2010, the vast majority of its subscriber base is still on its CDMA network. A combined ‘T-Metro’ would be a joint CDMA-GSM operation for years to come. That means enduring many years of operational hell and likely financial losses trying to juggle two separate sets of customers and managing three separate networks.

As for spectrum, MetroPCS has some attractive licenses, particularly in key metro markets like New York City and San Francisco. With its new network overhaul, T-Mobile maintains it’s in a solid spectrum position, but like any carrier it’s on the lookout for strategic opportunities to expand its holdings. Harvesting MetroPCS for its spectrum strikes me as a deal done in desperation, not one of strategy.

T-Mobile could shut down Metro’s CDMA networks completely and refarm their bandwidth for LTE and HSPA. But that would mean letting go of the lion’s share of Metro’s 9.3 million customers. Sure, T-Mobile could offer to switch out those customers’ CDMA phones for GSM-HSPA devices, but it would also require contracts to ensure those customers didn’t immediately bolt. There’s a flaw in that strategy, though: MetroPCS is a prepaid provider, and one of the primary reasons its customers are its customers is because they don’t want contracts.

Paying multiple billions of dollars just so T-Mobile can get its hands on a handful of licenses makes no sense. And T-Mobile has demonstrated there are plenty of other ways to get spectrum for far cheaper. Since its planned merger with AT&T died, T-Mobile has brokered a number of shrewd deals to get the airwaves it needs to launch LTE and increase its 3G capacity. As regulators scrutinize the increasing spectrum holdings of AT&T and Verizon more closely, T-Mobile will only be the beneficiary.

T-Mobile has plenty of spectrum options beyond buying MetroPCS outright, while actually trying to merge the two companies operationally would be a catastrophe. This deal may very well happen, but it will be a disaster in the making.

T-Mobile image courtesy of Flickr user swruler9284; Sprint photo courtesy of Shutterstock user Susan Law Cain; MetroPCS mage courtesy Flickr user Jeremy Brooks.