UPDATE: DOJ Throws Roadblock in AT&T's March to Monopoly

By  Jessica Binns — August 31, 2011

The U.S. government is taking action to block AT&T’s controversial $39-billion proposed merger with T-Mobile USA, which would create the country’s largest mobile carrier but increase prices, reduce competition, and decrease the quality of services for consumers.
 
Tthe U.S. Department of Justice (DOJ) filed a complaint on Aug. 31 with Washington’s U.S. District Court, citing T-Mobile significance in shaping competition in the wireless industry.
 
“T-Mobile has been an important source of competition among the national carriers, including through innovation and quality enhancements such as the roll-out of the first nationwide high-speed data network,” said Sharis A. Pozen, Acting Assistant Attorney General in charge of the Department of Justice’s Antitrust Division in a statement. “Unless this merger is blocked, competition and innovation will be reduced, and consumers will suffer.”  
 
Dan Shey, practice director, enterprise for ABI Research, was surprised by the move. “The challenge for the merger going through was the impact on the small business market,” he said. “I thought on the consumer side you could probably find justification for the merger going through. AT&T would then have to address concerns on the business side, but they’re a savvy group—they’d probably figure out how to do that.
 
“There must have been enough influence to say ‘This is not a good thing,’” he added.
 
“We were pleased that the DOJ didn’t bow to the political convenience of rubber-stamping this deal,” says Carl Howe, director for Yankee Group’s consumer research group. “If the DOJ were to approve this deal as-is, they would be claiming exception to the rules that they publish themselves, and they’re pretty transparent in their criteria for judging the merger.
 
“Most of the major geographies in the U.S. would move from being moderately to heavily concentrated,” Howe continues, indicating decreased wireless choices for consumers. Yankee Group’s research found that if the merger is approved, 17 of the top 27 most populous markets would be heavily concentrated—a significant jump from just one urban center with little competition.  
 
“If the DOJ approves this merger, all they’d do is buy themselves another merger,” adds Howe, suggesting that Verizon Wireless likely would swallow up Sprint in what would be an even bigger takeover—larger by 20 million customers.
 
Howe expects the Justice Department to ask for some kind of modification to the proposed deal. “The DOJ’s basic conclusion was ‘Yes, we see all these benefits that AT&T is claiming but they’re not great enough to compensate for the removal of competition.’ AT&T can achieve those benefits without wiping out the fourth-largest carrier,” he says.
 
What’s more, competition would decrease not just for domestic consumers but also for individuals traveling to the U.S. from abroad. “The vast majority of the world uses GSM,” says Howe, which is the wireless standard that powers AT&T's and T-Mobile's 3G networks; Verizon and Sprint run on 3G CDMA. “If you combine AT&T and T-Mobile, and anyone from outside U.S. wants to use their phone here, they’d have to bow to monopoly. ‘No choice’ would be the result of the merger.
 
“We processed a lot of data, prices changes, etc., just to confirm the obvious,” says Howe, noting the seemingly self-evident notion that decreased competition is not good for anyone. But it was critical for the Justice Department to review available data and make an informed decision in a case this significant. “When you’ve got $39 billion on the table, going with your gut instinct is not an option,” adds Howe.
 
Howe says the proposed merger faces serious obstacles but isn’t dead in the water just yet. “The DOJ has filed a suit to block it; I don’t think that says, “We’re just going to roll over,’” he explains. What’s more, if AT&T makes some major modifications—divests some of its network, focuses solely on 4G—it could create a more appealing proposal that doesn’t necessarily establish a new monopoly, according to Howe.
 
The DOJ’s action may be most beneficial to the nation’s fourth-largest carrier. “In many ways, this lawsuit increases the value of T-Mobile,” explains Howe. “I think a lot of people thought T-Mobile was dead but they just became a lot more valuable.”
 
Companies such as Comcast or Google could be potential suitors for the carrier, Howe speculates. “A lot of people said Google would never buy a handset company; maybe they might buy a wireless operator,” he says. “Imagine if they bought T-Mobile, set up all-IP data connections for every phone via Google Voice, and offered unlimited calling. It’s for a different customer base, but if they priced it attractively, it could have potential. It would totally disrupt the existing status quo because voice is heavily regulated but there isn’t as much regulation on wireless data.” 
 
Howe also suggests that—as far-fetched as it sounds—the federal government possibly could be interested in acquiring T-Mobile. “People keep complaining that government agencies can’t talk to each other,” he explains. With its own proprietary wireless network, the government could establish a secure, encrypted communications system interoperable among disparate agencies.
 
No matter the final outcome of the proposed merger, the DOJ seems to have made the right move, according to Howe.
 
“To our government’s credit, this is a case where laissez-faire doesn’t work,” adds Howe. “It’s a situation where free markets don’t create the right answer; they create an answer. And one of government’s proper roles is to guarantee choice.”

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