T-Mobile, MetroPCS Tie-Up Could Be a Nightmare

By Tara Seals Comments
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Tara SealsFresh from the glow of a $4 billion LTE network build announcement and all gussied up with new AWS spectrum from AT&T, T-Mobile USA is apparently looking like a pretty good dance partner to a new would-be suitor: MetroPCS. However, the deal could be a nightmare.

Bloomberg is reporting that T-Mo parent Deutsche Telekom is reviewing options for the company and is in talks for a potential merger with the smaller carrier, which is known for affordable, flat-rate rate plans and advanced 4G service and phones. MetroPCS was one of the first in the U.S. market with LTE, ahead of Verizon and AT&T by months with an initial launch in Las Vegas. It now reaches 14 of its markets with 4G, with about a 5 percent penetration rate in terms of uptake within its overall customer base of 9 million subscribers.

From a positioning standpoint, the two companies could make a lot of sense together. At CTIA, T-Mobile CEO Phillip Humm talked up T-Mobile's new brand identity as having a "focus on affordability but also the cutting edge 4G technology. We are now making cutting-edge 4G affordable." That sounds suspiciously like ... MetroPCS.

Also, Humm said that T-Mobile is sticking with flat-rate plans, but noted that they are "intelligent" flat-rate plans. Which means that they aren't really flat-rate plans at all. The 2.5G data is unlimited, but anything that runs over the HSPA+ network (and the future LTE network) is capped at 2MB. MetroPCS meanwhile is struggling with its flat-rate strategy in the face of escalating traffic, and recently raised its cost to $70 per month. A move to a hybrid rate plan could be an important strategy for the fifth-largest U.S. wireless company.

Humm said earlier in the week that T-Mobile's results this quarter would be good and it did show increased profit of 8 percent year-over-year. It added more prepaid subs, which somewhat offset the not-great news that it lost 510,000 contract customers in the quarter. Overall, the generally positive financial profile, coupled with the 4G technology plans, make T-Mobile an attractive M&A target, despite the FCC's quashing of a planned tie-up with AT&T earlier this year.

But that's where the good news stops. First and foremost, there are significant technology challenges at play — and they are the same ones that reportedly made a long-discussed T-Mobile-Sprint tie-up unfeasible. MetroPCS 3G is based on CDMA, and T-Mobile is a GSM carrier, making for an absolute morass when it comes to harmonizing their networks. And, T-Mobile plans to be in 25 markets with LTE by the end of next year, while MetroPCS is in the aforementioned 14, but even so, it will take years for the combined carrier to even come close to matching AT&T and Verizon's 4G coverage, meaning that 3G network coverage and roaming between the two plants will be critical to giving consumers competitive coverage options. So the 3G integration would have to happen fast, and it would be messy and expensive.

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