Rumors are afoot that Deutsche Telekom-owned T-Mobile USA and Kansas-based Sprint Nextel are in advanced talks about combining their wireless operations in the United States to narrow the gap with two larger rivals.

A merger would combine the third and fourth-largest U.S. wireless providers, both struggling to grow market share behind AT&T Mobility and Verizon Wireless.

The reported talks, which neither operator has confirmed, come as wireless operators seek to craft winning strategies around next-generation wireless networks, dubbed 4G.

Taking a chance

The move to new high-speed wireless networks, however, will require billions of dollars in acquiring spectrum and building infrastructure as well as developing and marketing new services. And the payback is all but clear.

For operators like Sprint and T-Mobile that have been playing catch-up for years, sharing costs - and risks - by merging their operations could be one option, analysts agree.

"The telecommunications market is shifting more toward competition at the service level than at the infrastructure level," Camille Mendler, a telecoms analyst with Informa in London, told Deutsche Welle. "Network outsourcing and network sharing are strategies now used successfully by several operators in Europe and India but not in the US so far. The move to 4G networks could certainly trigger more sharing."

The telecoms business is also a numbers business: Size counts. "If there is any truth to the merger talks, and I believe there is, then they're being driven by scale," said Gabriel Brown, a UK-based analyst with the telecoms industry research group Heavy Reading. "You need the coverage and the customers to compete successfully long term."

In the United States, AT&T and Verizon lead the pack, each with around or slightly over 95 million customers, followed by Sprint with 50 million. T-Mobile is a distant number four with just under 38 million. Combined, Sprint and T-Mobile’s respective networks and customers would give their larger rivals a run for their money.

But plenty of hurdles line the way toward a merger before it could become reality. One of them may be the price Sprint is willing to pay and the stake Telekom would have in the combined entity.

Wireless crossed

Another one is technology. The two operators use several different wireless technologies, which aren't all compatible. T-Mobile USA uses compatible cellular systems based on the Global Systems for Mobile Communications (GSM) and Universal Mobile Telecommunications System (UMTS), which are widely deployed around the world. And its 4G strategy envisions using the cellular-based Long-Term Evolution (LTE) technology.

Sprint, by comparison, operates a Code Division Multiplex Access (CDMA) network and a proprietary network based on the iDen "walkie talkie" or push-to-talk technology inherited through its acquisition of Nextel. The operator has also begun to roll out a 4G network based on WiMAX technology. All three technologies are incompatible with the GSM-UMTS-LTE standards.

Sprint, however, appears keen to overcome its network technology compatibility issue. For one, its CEO, Dan Hesse, has said in earlier interviews with the media that while the operator remains committed to WiMAX, it may consider adding LTE in the future.

Strike a deal

For another, Sprint is deploying advanced software-based systems to help bridge those gaps.

"Sprint is installing new software-defined radio technology across its networks that will provide greater flexibility," Heavy Reading analyst Brown said. "This technology will make it much easier for the operator to integrate different networks."

If talks with Sprint should fail, Telekom may try to strike a deal with LightSquared, an ambitious new firm in the process of building 4G infrastructure in the U.S., analysts say. But they are quick to warn that such a deal, while giving T-Mobile necessary spectrum, would bring no customers and hence no scale.

That means Deutsche Telekom will likely push hard to reach an agreement with Sprint. But if history means anything, the German-backed operator should be prepared for a roll-coaster ride. In the 1990s the two operators intensively pursued a merger but eventually settled for a global network service alliance, which Sprint later abandoned.

Maybe they'll have more luck this time.

Author: John Blau
Editor: Matt Hermann