With Verizon Wireless and AT&T firmly entrenched as the top two carriers in the United States, rumors are swirling that Sprint and T-Mobile USA are considering a merger.

Despite significant investments in rival WiMax 4G technology, Sprint Nextel CEO Dan Hesse said that the No. 3 carrier will consider embracing LTE at CTIA Wireless in May and reiterated that stance in a recent interview. That has rekindled speculation about a potential merger with No. 4 carrier T-Mobile.

?Sprint is smartly looking toward how to upgrade its CDMA/EVDO network, and LTE would be a natural choice,? said Susan Welsh de Grimaldo, senior analyst at Strategy Analytics, Boston. ?I wouldn't rule out a Clearwire move to add LTE to its network at some point as well.?

In fact, a Clearwire executive discussed that very possibility, also at CTIA Wireless in May.

Meanwhile, Comcast has expanded its WiMAX wireless-broadband service to 10 more markets under wholesale agreements with service provider Clearwire and its partner Sprint.

Clearwire expects WiMax to cover more than 120 million consumers by year?s end.

However, Sprint underestimated demand for its Android-based HTC Evo 4G handset and supplies have been short in many areas of the country.

SprinT-Mobilextell USA
The competition among the carriers has reached a fever pitch, with Verizon Wireless and AT&T going head to head over maps versus applications and Droid X versus iPhone 4.

T-Mobile?s parent company Deutsche Telekom has considered acquiring Sprint in the past, but was not interested in jumping on the WiMax bandwagon.

Still, Sprint merging with T-Mobile USA would make sense in that it would create a carrier that could compete more effectively against the two behemoths.

?In terms of a Sprint Nextel-T-Mobile USA merger?a SprinT-Mobile??there are reasons for a rumor, namely that the two carriers have been struggling with churn lately and losing ground to the top two carriers, and T-Mobile needs to eventually find a spectrum path to LTE,? Ms. Welsh de Grimaldo said.

A combined Sprint/T-Mobile would have close to 82 million subscribers and $11 million annual service revenues, based on current size, putting it roughly 11 million subscribers behind No. 1 Verizon Wireless and 5 million behind No. 2 AT&T, according to Strategy Analytics.

?Yet with both Sprint and T-Mobile currently running at more than two times the average monthly churn of the top two carriers?at over 3 percent versus under 1.5 percent?and slightly lower ARPUs, there would be much work to be done to catch up with the top performers,? Ms. Welsh de Grimaldo said.

And even with LTE in common, there would be a lot of challenges with legacy network technologies that would make successfully executing on a merger even more challenging than pulling together Sprint and Nextel.

?With the lack of a common 3G technology, a merger would not create a solid footprint to rival Verizon Wireless' network coverage,? Ms. Welsh de Grimaldo said.

?If Sprint and T-Mobile can individually continue to deliver on efforts to improve their brands and leverage their current network upgrades and improving coverage?with WiMAX through Clearwire and HSPA+ upgrades, respectively?I think we will see some metrics improvements,? she said.

However, a merger any time soon might just detract from the focus needed to turn around performance and create a differentiated market play, particularly as the big rivals catch up with HSPA+ and LTE deployments and the strength of their flagship smartphones.

?Eventually T-Mobile will need to define an LTE strategy, but in the meantime it has a new HSPA+ network ripe for adding new data users,? Ms. Welsh de Grimaldo said.

Another analyst's take
Mobile Marketer's Dan Butcher interviewed Philip Solis, research director of mobile networks at ABI Research, Oyster Bay, NY. Here is what he had to say:

Given Sprint's focus on WiMax and the EVO 4G handset, what do you make of Dan Hesse's recent comments on LTE?
In the very long term, 10 years out or more, all networks will be 4G or higher.

Sprint has spectrum it is currently using for 3G (EV-DO Rev A) in the 800 MHz and 1900 MHz bands, and Clearwire and Sprint control a large amount of 2.5 GHz spectrum as well, of which only a fraction is being used for WiMAX right now. 

The two companies have options because of this. Clearwire can both expand the amount of spectrum being used for WiMAX while at the same time deploy an LTE network. 

Most of Clearwire?s base stations can easily support the addition of LTE cards to enable LTE.  Most of the equipment and backhaul is already in place. 

Sprint can eventually start refarming its 3G spectrum to be used for 4G in phases. 

The two companies can leverage both technologies ? perhaps WiMAX for more demanding applications by a fewer number of devices and LTE for more general use by many more devices, for example. 

Both companies are interested in supporting both technologies in the medium term, while they are both fully committed to WiMAX for at least the short term. 

Using both major 4G technologies, each on different spectrum, gives them a best-of-both-worlds scenario. The more spectrum a company has, the better position they are in.

How likely do you think a Sprint-T-Mobile USA merger is? Would such a merger make sense for both parties?
Never say never, but I think because Sprint and T-Mobile are using different 3G technologies that a merger is not that likely. 

However, multi-mode chips such as those from Qualcomm and software-defined radios make this a little more feasible today than it was the last time this merger talk came up a few years ago.

I think some sort of partnership makes more sense ? but a partnership between Clearwire and T-Mobile.

Also, the more both companies shift to LTE, the more the merger makes sense.

Clearwire is shifting to a wholesale model ? they want to be an enabler of MVNOs, and they can do that with both WiMAX and LTE.

However, Sprint owns 56 percent of Clearwire, so there is an mix of cooperation and competition that comes into play between Sprint and T-Mobile if T-Mobile were do work with Clearwire . . . which would actually add more credence to a merger between Sprint and T-Mobile.

If such a merger were to happen, where would that place a combined Sprint-T-Mobile USA in relatio n to AT&T and Verizon Wireless?
Verizon Wireless: 93 million
AT&T: 85 million
Sprint: 48 million
T-Mobile: 34 million

Sprint plus T-Mobile would put them at about 82 million, right behind AT&T as a very strong third-place carrier and put them in the position of being able to become second.