A New Monopoly? Breaking Down the AT&T/T-Mobile Merger
By Jessica Binns
Surprise! On the eve of International CTIA Wireless 2011 in Orlando, AT&T announces an out-of-the-blue deal to purchase T-Mobile, the nation’s fourth-largest wireless carrier, for $39 billion from Germany’s Deutsche Telekom. The merger—if it receives regulatory approval—would create the nation’s largest mobile operator with 130 million subscribers, far ahead of Verizon Wireless’ 100 million subs. Buzz about the deal is sure to overshadow any other news coming out of CTIA this week. Keep reading below to find out what the deal means for consumers, for enterprises—and for other players in the industry.
AT&T: The Terminator?
“For more than a decade, the United States has continued to drop behind nearly every other developed economy on broadband speed and build out,” says Larry Cohen, president of the CWA, the union for the information age. “The Federal Communications Commission sounded the alarm more than a year ago with its broadband report, and President Obama in his State of the Union address called for increased efforts to bring the U.S. back to global parity as a key stimulus for economic development.”
“AT&T was broken up and now it’s back with a vengeance,” says Bert Foer, president of the American Antitrust Institute, in a BusinessWeek article. “We have to decide if we’re happy with the idea of going back to monopolistic treatment of the telecom industry. AT&T has come back to monopolistic power just like the Terminator.”
Charles Golvin, an analyst with Forrester Research, tells Reuters that the good news regarding the merger is that high-speed mobile broadband service will improve in quality and coverage, and will especially benefit citizens in rural communities not currently served by terrestrial broadband today.
“The bad news,” he says, is that “the cost of that service won't come down nearly as fast as customers would like, since AT&T and Verizon Wireless combined would own nearly three out of every four wireless subscriptions in the U.S. While clearly troublesome for Sprint and other mobile smaller mobile competitors, it's also bad news for cable operators, whose incipient mobility products will suffer in comparison to what AT&T and Verizon can offer.”
Evan Stewart, antitrust expert with Zuckerman Spaeder LLP, tells Reuters, “the regulatory challenge would be figuring out what the dominant form of communication would be in the future. Nobody can predict where the trending lines are three to five years from now."
“AT&T-T-Mobile is apt to be scrutinized more thoroughly than any other merger to date by the Obama administration,” says Jeffrey Silva, an analyst with Medley Global Advisors LLC in Washington in a BusinessWeek article. “The FCC is expected to come under heavy pressure from consumer advocates, public interest groups and congressional Democrats to block the deal.”
Dan Shey, practice director – enterprise for ABI Research, says that first and foremost, the deal will negatively affect T-Mobile’s current small business customers. “T-Mobile offers value pricing for both voice and data services; that needs to be considered by the FCC and the Justice Department as they consider this merger.”
In a ZDNET article, Piper Jaffray analyst Christopher Larsen says, “We think the fact that 1) AT&T is a U.S. company acquiring a foreign entity, 2) AT&T is a union shop and will open T-Mo to unionization, and 3) it is accelerating its 4G deployment to underserved areas (consistent with Obama’s broadband goal) are all mitigating factors. The large breakup fee ($3 billion plus spectrum) should underscore AT&T management’s confidence in winning the necessary approvals.”
“AT&T said … it plans to rearrange how T-Mobile's cell towers work. The airwaves they use for third-generation services, or 3G, will be repurposed for 4G, which is faster,” says Peter Svensson, AP technology writer. “That would leave current T-Mobile phones without 3G. They would need to be replaced with phones that use AT&T's 3G frequencies. Ralph de la Vega, AT&T's head of wireless and consumer services, said this will happen as part of the normal phone upgrade process.”
An eye on enterprise
"From AT&T's perspective, this is an awesome deal," says Technology Business Research analyst Ken Hyers to eWeek. While not a sexy topic, he adds, "T-Mobile has done a great job with backhaul," laying down not T1 but actual fiber, speeding and complementing AT&T's move to an LTE 4G network.
"T-Mobile has been ahead of the curve, and that's the reason that AT&T is paying such a premium," Hyers said. "They get a ready-made network with 35 million or so customers, they get spectrum, lots of assets, and they're compatible technologies."
eWeek reports that Gleacher & Company analyst Stephen Patel, in his March 21 research note, wonders whether AT&T's broad lineup of BlackBerry smartphones from Research In Motion could become available to T-Mobile customers. The carriers' combined subscriber bases could also be good for Microsoft's Windows Phone, in addition to RIM's BlackBerry OS, he added, explaining that such a vast customer base "could enable a more balanced market share for multiple ecosystems" and make it less likely that two ecosystems—Google's Android and Apple's iOS—take over the U.S. market.
"AT&T's enterprise customers will have a larger, more robust network to roam on," Hyerse told eWeek. "And being a GSM network"—the technology favored abroad over CDMA—"this is going to provide them with larger global roaming capabilities."
Shey agrees. “AT&T is wise to international opportunities,” he says.
“T-Mobile has been the price leader in the enterprise space for some time, and it has often been seen as a good niche provider for users who travelled internationally a lot (although it has still struggled to win significant volumes of business from enterprises), and certainly helped to drive down the pricing of the other three national providers,” write Kevin DiLallo & Ben Fox of No Jitter, a blog covering enterprise IP-telephony, unified communications and converged networking world.
“Assuming merger approval, once existing T-Mobile contracts expire, former T-Mobile customers can expect their rates to increase to the levels in AT&T's standard plans, which are not only more expensive, but also include a concept foreign to T-Mobile subscribers—data/smartphone usage caps,” write DiLallo and Fox.
The fallout for Sprint
“The key question is whether Sprint will gain from this deal, by being able to attract new ex-T-Mobile customers and position itself as the market price leader, or whether it will find itself viewed as the weakest player with enterprises preferring the ‘safer’ option of AT&T or Verizon Wireless,” write DiLallo and Fox.
Shey agrees. “I’d be looking beyond this deal at what happens to Sprint. Can Sprint grow without T-Mobile? They could pick up some business customers because there are some T-Mobile customers who don’t want to go to AT&T or don’t like their pricing.”
Sprint probably lacks the resources, customer base, and spectrum to make the inevitable move to LTE quickly and comprehensibly enough to be relevant and competitive in the upcoming large 4G procurements, DiLallo and Fox add.
“For Sprint, it needs to continue to invest in its business and grow, and part of that is growing its 4G network. Growing its network based on its current spectrum is taking a long time. Verizon and AT&T have the resources and will grow their networks tremendously,” Shey says. “If you have two really strong players—Verizon and AT&T—and you have Sprint who is trying to continue to come out of the slump they’ve been in—is this [merger] really a good thing? You have to ask the question: will the market continue to maintain three nationwide carriers? Is Sprint going to stick around when you have these two much larger players?”
Shey says Sprint already has been positioning itself as the value carrier among the wireless operators, which may be critical to its survival in the wake the merger. “Sprint has more business customers than Verizon and AT&T. Because of push-to-talk via iDEN, that has boosted up its share of business customers relative to total base. It has been aggressive in that area. A lot of business customer contracts are 5-10 years. But can Sprint continue to grow network and services?"
Sprint could try to bolster its position by building up its cloud services and developing a strong set of partners to help enterprises, adds Shey.
Meanwhile, Verizon Wireless CEO Daniel Mead tells Reuters that the company isn’t opposed to the deal and has no interest in a merger of its own with Sprint.