Does Google's Wireless Move Pave the Way for a Sprint/T-Mobile Merger?

By Markets Fool.com

Google has partnered with Sprint and T-Mobile to launch a wireless service.

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The deal, which could turn the search giant into a fifth major wireless carrier, makes it possible for the company to sell inexpensive voice, text, and data service directly to consumers. The move should help the company sell more phones using its Android operating system and it could potentially cut into the customer base served by AT&T and Verizon .

Perhaps more importantly, the deal creates new competition within the oligopolistic wireless industry and it might cause the Federal Communications Commission to drop its opposition to a Sprint and T-Mobile merger. SoftBank, which owns the majority of Sprint, stopped pursuing the idea of combining the number three and number four wireless carriers in August, which FCC Chairman Tom Wheeler expressed his approval of in a statement.

"Four national wireless providers are good for American consumers," Wheeler wrote. "Sprint now has the opportunity to focus their efforts on robust competition."

The question now is whether Wheeler and the FCC consider Google's wireless efforts, which won't involve building out an expensive network of cell towers, a fifth player in the field.

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Google's efforts could disrupt the entire wireless industry. Source: Google

How the Google service will work
Google won't be building a traditional wireless carrier as the costs and infrastructure needed for that would be prohibitive even for the tech leader. Instead, the company will be offering a service that sends data, text, and voice over Wi-Fi networks when possible and Sprint and T-Mobile's networks when it isn't.

The service will be similar to ones offered by super-low-cost carriers, such as FreedomPop and Republic Wireless.

"It's a very aggressive move," Dave Fraser, CEO of Devicescape, a company that is stitching together a network of millions of Wi-Fi hotspots worldwide, told The Wall Street Journal. "You can imagine Google driving down the price to be disruptive and paying for it with revenue from other services that the company already provides, like search and advertising."

Though the idea of primarily using Wi-Fi to deliver wireless service may seem far-fetched, it has been around for years -- albeit through smaller companies which have struggled to gain traction.

"Resellers, or people leasing the network from carriers, have been around for 15 years," Verizon Chief Financial Officer Fran Shammo said on a call with analysts after the Google announcement. "It's a complex issue."

How will the FCC see it?
Wheeler and his commission have not made any comment on the Google offering and it's likely that they will only take it seriously as competition to the big four wireless carriers if the service builds a significant audience.

Google certainly has the reach to do that. But it's likely that the search leader would have to sign up at least close to the 50 million plus customers now served by T-Mobile, the fourth largest carrier, for the FCC to consider it a player. That's a huge number, but Sprint seems to believe that Google could become a factor as it had a usage cap added into its contract with Google that would allow the company to renegotiate its deal if Google's service catches on,The Journalreported.

It's a question of growth
The challenge for Google is growing a service that benefits its partners enough that they don't decide to turn off the tap. Google needs Sprint and T-Mobile (or either AT&T or Verizon) or else it would have to build its own network.

Because a Google offering would leach customers from its partners as well as AT&T and Verizon, it seems unlikely that Sprint and Verizon will allow the company endless access to their networks. At some point the carriers will either shut off the spigot or raise prices to the point where it no longer makes sense for Google.

Of course, if consumers like the service, the FCC could find a way to help Google. It's unlikely the federal agency would force AT&T or Verizon to sell the search giant access to their networks (at least at the cheap price required to make the deal worthwhile to Google). It could, however, force Sprint and T-Mobile to allow unlimited expansion of their current deals with the tech company as a condition of allowing a merger.

This could solve a problem for the FCC
The FCC has opposed the Sprint and T-Mobile merger because it would lessen choice for American consumers. Having Google become a fourth choice while Sprint and T-Mobile join to become a much stronger number three could appeal to the federal agency.

It's also possible that the FCC will realize that neither Sprint nor T-Mobile will have the resources to keep up with AT&T and Verizon without combining forces.

Deutsche Telekom CEO Tim Hoettges, whose company owns the majority of T-Mobile, recently told Re/Code that despite the company's recent subscriber gains it still needs "greater scale in the U.S. to battleAT&T and Verizon."

"I was intrigued by the idea of having a combination with Sprint and being the 'super-maverick' in the market," Hoettgestold the website. "I hope that the political environment will change at one point in time."

Hoettges remarks, while complimentary about the strides T-Mobile has made under CEO John Legere, acknowledged that the company would not spend forever.

"The question is always the economics in the long term ... and earning appropriate money," Hoettges said. "You have to earn your money back at one point in time."

This could happen
The FCC wants at least four major U.S. wireless carriers and Hoettges remarks suggest that it's not crazy to think that without a merger T-Mobile could ultimately go away. If Google ultimately needs more spectrum than an independent T-Mobile and Sprint want to sell it, then the FCC has its answer.

Allow the merger but force the combined company to make an unlimited, long-term sharing deal with Google at a good price. That would make the search giant a real player and would given Sprint and T-Mobile the resources to compete.

The American public would have four major carriers and AT&T and Verizon would have real competition.

The article Does Google's Wireless Move Pave the Way for a Sprint/T-Mobile Merger? originally appeared on Fool.com.

Daniel Kline owns shares of Apple. He tends to use Google as his search engine. The Motley Fool recommends Apple, Google (A shares), Google (C shares), Netflix, and Verizon Communications. The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.