With spectrum partnership, Sprint and T-Mobile figure out a way to collude without colluding

Sprint(s s) and SoftBank have sent every signal short of an official press release that they want to acquire T-Mobile US(s tmus). Once the official Federal Communications Commission filing comes down, though, the three companies will be presented with a very interesting problem.
While they go through the merger process, the FCC will conduct a key spectrum auction in the 600 MHz band, the results of which could dictate U.S. carriers’ mobile network plans for years to come. The problem is that with a merger deal pending, T-Mobile and Sprint wouldn’t be able to coordinate their activities in any way.

Japan's SoftBank Corp. founder and President Masayoshi Son speaks during a press briefing to announce the company's financial results in Tokyo on February 12, 2014. SoftBank said February 12 its nine-month net profit soared 58 percent thanks to strong iPhone sales, but third-quarter earnings suffered because of losses in its newly acquired Sprint Nextel unit. KAZUHIRO NOGI/AFP/Getty Images

Japan’s SoftBank Corp. founder and Sprint Chairman Masayoshi Son aims to merge the third and fourth largest carriers in the U.S. As part of that plan he is said to be willing to fund a joint venture that can bid in the upcoming incentive auction. (Photo: KAZUHIRO NOGI/AFP/Getty Images)

So how do collude without actually running afoul of anti-collusion laws? Why, you form a joint venture of course. According to the Wall Street Journal, Sprint and T-Mobile plan to form a separate bidding entity – funded with 10 billion of SoftBank’s dollars – that would allow the two companies to participate jointly in the auction.
This acquisition could easily face regulatory scrutiny for over a year, and there’s a good chance either the FCC or the Justice Department – or both — will reject it as they did AT&T-Mo(s t). The incentive auction is scheduled for mid-2015, meaning Sprint and T-Mobile could be forced to bid in the auction without knowing their eventual fate.
Spectrum joint ventures are nothing new. The big cable operators and Sprint formed one in 2006 so they could bid jointly on a nationwide Advanced Wireless Services licenses (airwaves they sold to Verizon in 2013), and the major operators often participate in auctions under separate bidding entities. But a Sprint/T-Mo bidding entity would be unique. It would act in the auction presumably in the best interest of a combined carrier, but there’s no guarantee that those two carriers wouldn’t remain direct competitors after the auction ends.
When the final auction gavel bangs, Sprint and T-Mobile might not know if they will share their winnings or be forced to split it

When the final auction gavel bangs, Sprint and T-Mobile might not know if they will share their winnings or be forced to split it

If the merger fails, Sprint and T-Mobile would have to divide up the spoils, and the Journal’s sources were at a loss at exactly how that would be handled. What happens if the JV only gets a single 10 MHz license (the minimum for an LTE network) in New York City or San Francisco? They can’t split it down the middle.
This is a big fight waiting to happen, but T-Mobile and Sprint probably feel it’s worth the risk. The incentive auction won’t just hand out any old spectrum. The 600 MHz UHF broadcast frequencies are low-band airwaves that propagate far and wide and can punch through barriers that T-Mobile and Sprint’s current mid-and high-band frequencies can’t penetrate.
Perhaps there’s little need to coordinate or collaborate on license-by-license or market-by-market basis. Both carriers probably figure that their goal in the auction is to get as many 600 MHz frequencies as they can afford.