Most Smaller Carriers Likely to Be Absorbed, But ‘Creative’ Ones Can Do Well, Analysts Say

Leap thinks consolidation would benefit the industry and lets smaller players “compete more effectively against the large incumbents,” a spokesman said by email. “We believe that carriers can work together to reduce the number of networks currently operating in the US through network sharing or other strategic transactions.” Leap’s focus “is on improving the customer experience, capitalizing on the value of our assets, increasing the Company’s margins, be on a demonstrable path to free cash flow and return to growth over time,” the spokesman said.

SoftBank/Sprint is significant, but doesn’t represent a similar instance of carrier consolidation, said Stifel Nicolaus analyst Christopher King. “Sprint is still Sprint, albeit with deeper pockets.” The “smaller independent carriers have always been under some pressure to consolidate,” King said. “It’s not, in our view, a sustainable long-term business to compete with the [Big Four] carriers.” T-Mobile/MetroPCS is “a double-edged sword, because while it may have pushed some carriers forward, it was not a huge premium by anyone’s estimation,” King said. Smaller carriers like Leap and U.S. Cellular will probably eventually be acquired by the “Big Four,” said Guggenheim Partners analyst Paul Gallant. “That’s just the natural economics of the business."

Some smaller carriers may have an opening to retain customers by being creative and localized in a way that the nationalized Big Four carriers cannot, Gallant said. “Longterm, the scale nature of the business makes it hard for the small carriers to go head-to-head with the biggest players.” The smaller carriers have an inherent disadvantage when it comes to providing the best handsets for customers or buying equipment, Gallant said. But they can form partnerships with local organizations, just as TV stations participate in their communities to create brand equity, Gallant said. “It’s hard to walk around Chicago and the Midwest without seeing U.S. Cellular integrated into those markets, for example,” he said. King said the smaller carriers’ best-case scenario is to retain their current customer base, but at a lower profit margin.

Few of the remaining smaller independent carriers are “big enough to matter” as targets for acquisition by top carriers, King said. “Unless you're a shareholder for one of these smaller wireless companies, I'm not sure it matters, quite frankly.” Leap Wireless and U.S. Cellular offer decent amounts of spectrum for one of the Big Four if they acquired either company, King said, but “neither of those is going to change the U.S. wireless industry.” Both T-Mobile and Sprint have been seen as possible suitors for Leap, but the prepaid carrier may yet “be left out in the cold,” Sanford Bernstein analyst Craig Moffett said. MetroPCS had been seen as the most natural carrier to acquire Leap, but with it now on its way to merging with Sprint Nextel, none of the other carriers is a great fit, he said. U.S. Cellular declined to comment.

Dominance of the U.S. wireless industry is becoming a “two-man” race between No. 1 carrier Verizon Wireless and No. 2 AT&T, King said, though a future merger of No. 3 Sprint Nextel and No. 4 T-Mobile could change that dynamic over time. “But that’s a long way down the road,” he said. “There would be a lot of regulatory issues, so I'm not sure that deal goes through. And with SoftBank/Sprint, that puts such a deal off a year -- closer to two -- even under the best-case scenario.”