Last week, Japanese mobile phone firm Softbank announced that it would be acquiring a 70% interest in mobile phone giant Sprint (NYSE:S). Sprint is the third-largest wireless provider in the United States, but along with any player not in the top two, has been struggling to grow and also remain profitable in what has become a two-tiered industry of leaders and laggards.

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Smaller Players Making Moves
The Softbank (OTC:SFTBF) and Sprint agreement represents the latest attempt by a smaller player to improve its competitive position. Earlier in the month, T-Mobile USA, which is the fourth largest domestic player behind Sprint, announced it would be purchasing MetroPCS (NYSE:PCS) by issuing shares and cash of $1.5 billion. T-Mobile agreed to be purchased by AT&T (NYSE:T) for $39 billion last year, but the deal was nixed by regulators that have decided AT&T and Verizon (NYSE:VZ) have grown so dominant that they could end up putting the smaller players out of business.

Sprint appears to also be worried about its competitive position and agreed to the Softbank deal to gain access to a deeper-pocketed partner. Upgrading cellular networks requires billions of investment dollars. It was difficult for Sprint to support because it is much less profitable than either AT&T or Verizon. Over the past year, Sprint has reported operating losses. In stark contrast, AT&T's operating margin over the past five years has averaged 11%; Verizon's is even better at closer to 12%.

SEE: The Wonderful World Of Mergers

What MetroPCS Brings to T-Mobile
MetroPCS's operating margin is actually quite impressive at around 15%. Its focus on lower-end price points, such as prepaid phones, is a profitable niche. At the end of 2011, it had 9.3 million subscribers. Combined with T-Mobile, the total combined subscribers are estimated at 42.5 million. Sprint is third with an estimated 56.4 million subscribers. Both are still dwarfed by Verizon at more than 94 million subscribers. AT&T is even larger and passed 100 million subscribers during the third quarter of 2011.

Sprint had tried to develop one of the first 4G networks to allow for the faster downloading of content that smartphones demand and did so through a major investment in Clearwire (Nasdaq:CLWR). Clearwire has built an extensive network and Sprint acquired a 48% interest in the firm, but the move failed to win a significant number of new customers. Verizon and AT&T also now offer extensive 4G markets.

SEE: Analyzing Operating Margins

Industry Trends
The recent M&A activity in the industry demonstrates that the smaller players are doing what they can to better compete in the marketplace. There is little denying that their business models are at risk. In contrast, AT&T and Verizon have the profits to pay above-average dividends to shareholders, and invest billions each year to maintain and upgrade their networks.

The U.S. market does appear to benefit customers. A recent academic study found that the U.S. leads the world in terms of offering affordable mobile plans. Some will argue that the value is sufficient, given that some networks have failed to keep up with the data needs of smartphones, but there are a wide mix of plans based on monthly budgets. The study also found that, despite the concentration in the top two players, most consumers have a choice of roughly five providers that must compete for business.

The Bottom Line
Despite the array of plan providers, the study did reiterate that smaller players are struggling to compete. AT&T and Verizon have also been aggressive in acquiring wireless spectrum to support future voice and data bandwidth. They also have the deep pockets to keep acquiring spectrum. Combined with Sprint and T-Mobile, the top four players control an estimated 90% of the market. U.S. Cellular (NYSE:USM) and Leap Wireless (Nasdaq:LEAP) remain two of the few remaining independent players. Softbank may give Sprint the capital to further consolidate the market.

At the time of writing, Ryan Fuhrmann did not own any shares in any company mentioned in this article.

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