Sprint/Nextel merger passes final regulatory hurdle

The FCC on Wednesday gave Sprint its blessing to proceed with its $36 billion acquisition of Nextel Communications, which along with the Federal Trade Commission offering no objections, clears the way for the companies to close their deal, creating the country’s third mega-carrier with more than 43 million wireless subscribers and a 22% national market share. The FCC placed only one condition on the deal: Sprint Nextel will have to launch service over their combined 2.5 MHz spectrum in four years, offering a service footprint of at least 15 million people.

Sprint, of its own accord, agreed to spin off its local exchange carrier operations, paring the company down to its core IXC and wireless businesses. Otherwise the FCC did not impose any spectrum divestiture requirements on Sprint and Nextel as it has done in the past with other large-scale mergers. Cingular’s acquisition of AT&T Wireless, approved last year, required the combined company to give up licenses in 16 markets and agree to abstain from bidding in future auctions on markets where it held significant spectrum. But the FCC found no specific problems in its market-by-market analysis of Sprint and Nextel’s combined spectrum holdings, and instead agreed to transfer all of Nextel’s 800 MHz and 900 MHz specialized mobile radio (SMR) and PCS licenses to the carrier without conditions.

“I am pleased that we do not impose extensive and unnecessary conditions on our approval,” Commissioner Kathleen Abernathy said in her post-ruling comments. “It would be a mistake to hamstring the merged entity’s ability to provide the anticipated pro-competitive services to U.S. consumers.”

Commissioner Michael Copps said the FCC’s analysis found that the combined carrier would be the market leader in only a small number of markets, and in most of those markets there will be at least four active competitors where either Sprint or Nextel was already the market leader. Despite those conclusions, Copps still expressed concern that the growing merger trend would affect the competitive landscape.

Vice president of chief architect for consultancy group InCode Wireless Robert Sanchez had another perspective though. “They got off very easy,” he said. “If you look at the assets Nextel and Sprint bring to the table, they rival the combined assets of Time Warner and SBC. …They got off squeaky clean.”

Copps was alone among the commissioners in stating he wanted more conditions placed upon the deal, pointing to Nextel’s earlier admission that it would miss the FCC’s year-end deadline for 911 public safety compliance by an “alarming” two years. The FCC’s guidelines require that 95% of a carrier’s customers have handsets that allow public safety agencies to locate a caller when he or she dials 911. Copps said the commission should have conditioned the approval on Nextel either meeting the deadline or obtaining a waiver from the FCC. As it stands now, Copps said Sprint Nextel must either reach compliance by the end of the year or face enforcement action from the FCC.

“While this merger does not create market dominance in any particular market, it is part of a trend that merits close and continuing monitoring by the Commission,” Copps said in his statement. “In less than a year mergers have reduced the number of national wireless competitors by one third… While I am sensitive to the arguments that six national competitors could not have been forever sustained in the wireless market, I am also concerned about what this substantial reduction in the number of competitors may mean for wireless consumers. The FCC will have to take a hard look at whether we have gone about as far as we can go.”

Commissioner Jonathan Adelstein also expressed some reservations about recent consolidation trends among the Tier I operators, but he said he supported the Sprint/Nextel merger because it created a strong independent carrier to counter the influence of RBOC-controlled Cingular and Verizon Wireless. “Approving this merger will better balance the competitive landscape by granting Sprint Nextel similar scale and scope to the nation’s largest nationwide carriers,” Adelstein said in his post-ruling comments.

While not a Bell Company, Sprint is a powerful incumbent LEC in its own right, operating the largest local network in the U.S. after the four regional bell operators. Adelstein Sprint’s agreement to spin-off it’s local business and position itself as an independent IXC and wireless operator was a critical step to making the deal work.

Sprint did not set a timeline for closing the acquisition, saying only the merger would be finalized “shortly,” after which the combined company would begin trading on the New York Stock Exchange under the ticker symbol S. After divesting its local network, it must begin the arduous process of combining two disparate networks. Unlike the Cingular/AT&T Wireless merger, Sprint and Nextel’s networks use different technologies--Sprint, CDMA, and Nextel iDEN. Sprint and Nextel are expected to eventually unify the networks under CDMA, but until then they will effectively be operating two separate services. Sprint and Nextel have also taken divergent approaches to 3G. Sprint is now deploying a nationwide EV-DO network and plans to upgrade to EV-DO release A and full VoIP. Meanwhile Nextel has been testing various broadband technologies over its 2.5 GHz spectrum, including Flarion’s Flash-OFDM and IP Wireless’s Time Division CDMA.

The future of Sprint and Nextel’s combined 2.1 GHz and 2.5 GHz Broadband Radio Service (BRS) licenses is murky. Sprint has been toying with the spectrum for years, including a failed attempt to launch commercial service over the frequencies using Multichannel Multipoint Distribution Service (MMDS) technology in 2001. Sprint is now planning to test Mobile WiMAX over the spectrum. The FCC’s conditions require Sprint to have a service available to 15 million people in four years and to 30 million in six years. While the FCC’s order says that there will be enforcement action if those guidelines aren’t met, it did not specify what that action would be. The FCC also gave the company some breathing room, saying it would not have to meet the set milestones if “circumstances beyond its control” prevent it from meeting them.

But InCode’s Sanchez said the new Sprint would not only have little trouble meeting those requirements, it has every incentive to far exceed them. Creating a 15 million pop. Footprint is as simple as putting up a massive basestation in a market like New York, but newly freed from competitive pressures from a divested LEC business and still seeking a technology for the next phase of 3G, Sprint will want to launch service in that spectrum as quickly as possible to launch data and voice services, Sanchez said. Sprint basically exchanged a modest local exchange network for a robust, nationwide broadband access alternative, to which it controls 80% of the available licenses, Sanchez said. “Who cares about Las Vegas and Orlando?” Sanchez said, referring to two of Sprint’s current local exchange markets.