Impact of the Sprint Nextel Merger

Mergers of large corporations come as a rather controversial issue to consumers and government officials alike. Many are afraid of the monopolistic outcomes of such an occurrence; however, like anything else, it must be put into perspective. With the Sprint and Nextel merger which took place in the middle of 2005, we have to look to the specifically at the telecommunications industry and assess whether the effects were efficient and positive or negative.

With regards to the combination of network platforms, protection for the respective companies, and the previous merger which was granted we find that the Sprint/ Nextel merger was in fact beneficial to the market and the consumers. The first advantage of the merger would the uniting of the two company’s cellular network platforms. Sprint would get access to Nextel’s large base of business customers while Nextel would get an opportunity to expand faster since it was approaching a multi billion dollar investment decision to upgrade its network infrastructure in any case.

(1) Nextel boasts the largest all-digital wireless network in the country based on Motorola’s IDEN (Integrated Dispatch Enhanced Network) which has very few takers outside of Nextel. (2) Sprint has also begun development on a similar walkie-talkie feature and it on the other hand uses Sprint’s network based on CDMA, a technology developed by Qualcomm that is supported by about a fifth of the world’s cell phone operators.

(3) With Sprint/Nextel and Verizon both on CDMA and ATT/Cingular and T-mobile on SGM, the nation will be one more step closer to completely uniting its cellular platform and achieving the same freedoms of travel as the Europeans, who don’t have to worry about anything to use their cell phones throughout the continent. With the industry’s leader and runner up having such a big market share over the rest of the companies, this merger will soften the sharp attacks for both Sprint and Nextel.

After the completion of the deal, the companies said that Sprint’s local telecom business, the third largest in long-distance service, would be spun off to the combined company’s shareholders. (1) The local-phone segment, which serves 7. 7 million access lines, generates $6 billion in annual sales. Analysts have estimated that Sprint Nextel would earn at least $19 billion for that business, more than half the cost Sprint is paying for Nextel.

(4) The companies say the value of the combined company is expected to be around $70 billion. They also say that their net cost savings, after reduction in marketing and other expenses, should come to between $1. 2 billion and $1. 5 billion in 2006, about $800 million to $900 million in 2007 and then about $1. 8 billion to $2. 2 billion a year starting in 2008. Besides all that, they say their customers are worth more than competitors’ subscribers, with the highest average revenue per user, which is greatly due to Nextel.

According to Gorbatenko, Sprint’s revenue per customer is about $61 a month, just above the industry average, while Nextel’s average revenue comes to about $71 a month. (5) Now with that type of savings, these to individual companies have much more ammunition to fight and the recover from the blows from their industry leaders. Looking at the graph, if you notice the difference between P1 and P2 on the demand curves shows the savings the merger passes on to its customers.

Finally, the simple reason that the Sprint/Nextel merger was an automatic approval in my mind is because the FCC already granted the ATT/Cingular merger which gave them the largest market share by far with about 46 million customers. On the same token, Verizon Wireless, a joint venture between Verizon Communications and Vodafone Group, has about 42 million customers. (5) Whereas, the Sprint/Nextel merger would create an entity of around 38 million wireless subscribers with only 22% national market share.

Some say that the decrease in the number of industry rivals from five to four might reduce the players’ drive and incentive to cut prices. Then again, maybe not: The continued existence of just three competitors in the long-distance phone market has been enough to spur rigorous price wars. This was a strong argument as to why federal regulators were unlikely to block Sprint/Nextel on antitrust grounds. With the combination of Sprint/Nextel being ranked 3, Verizon and Cingular could hardly claim them to be a fierce competition in the U.

S. Even though the merger won’t instantly ease all the competitive challenges facing the respective companies, it is clear that the companies are at a greater disadvantage on their own, given the size of their rivals. (6) After having learned about the telecommunications market and seeing the irregularities of its market holders’ proportions we see that it would have been negligible to not have let the companies merge.

With the regards to the benefits including the hopeful future introduction of a single wireless network platform and the amount of savings the two companies contribute to the merge to produce more effectively and thus more cheaply to the public, we see that the FCC’s regulation was in fact a good idea. Also without the introduction of a significant competitor into the industry, the respective companies would be in a perilous state by themselves. WORKS CITED 1) http://www. cbsnews.

com/stories/2004/12/11/tech/main660486. shtml 2) http://www. consumeraffairs. com/news04/sprint_nextel. html 3) http://news. com. com/Mixed+marriage+for+Sprint+and+Nextel+techn ologies/2100-1037_3-5491623. html? tag=nl 4) http://www. marketwatch. com/news/yhoo/story. asp? source=blq/yhoo &siteid=yhoo&dist=yhoo&guid={64C41511-2F60-493A-A937- 1BC4B8E86B5D} 5) http://money. cnn. com/2004/12/15/news/fortune500/sprint_nextel/ 6) http://www. businessweek. com/technology/content/dec2004/tc20041213_3595_tc024. htm