AT&T Acquisition of T-Mobile Seen As Boon for Customers, Competitors

Published March 28, 2011

AT&T’s proposed $39 billion acquisition of T-Mobile faces hurdles, including shareholder votes and approval by the U.S. Justice Department and the Federal Communications Commission.

Shareholders are likely to approve the merger because it will benefit both companies and AT&T will incur a $3 billion cancellation payout if the deal isn’t completed. Government approval will prove more problematic. “There’s no way the chairman’s office rubberstamps this transaction,” an unnamed FCC source was quoted in the Wall Street Journal as saying. “It will be a steep climb, to say the least.”

The deal presents benefits for the customers of the two companies and even to present and future competitors, says Jim Lakely, co-director of the Center on the Digital Economy at The Heartland Institute, which publishes Infotech & Telecom News. He argues complaints about the merger reducing competition in the industry are unfounded.

“Those harping over this merger operate from a bizarre anti-business mindset,” said Lakely. “They have convinced themselves that it is the goal of every business to gobble up as much market share as possible, just so it finally has the power to abuse its customers,” he said.

“But no merger—not even one as large as this between T-Mobile and AT&T—repeals the corrective influence of free markets in the digital economy,” Lakely added. “As a result, no company is eager to ruin its brand, no matter how big it gets.”

‘Merger Good for Start-Ups’

The combined company will realize a potential 40 percent share of the wireless market, said Hunter Newby, CEO of Allied Fiber, LLC, New York. Although at first blush that might make the deal look anticompetitive, that kind of market concentration is exactly what investers need to see in order to justify investing in fiber and other technologies needed to improve network coverage and service, he says. Once such a firm makes the necessary investment in infrastructure, smaller start-ups will be able to enter the market, piggybacking on the installed infrastructure, which increases competition in the industry.

The same trend has occurred with other telecom technologies, Newby said. But the carriers won’t be willing to make that initial investment unless they have enough market share to justify it. At their pre-merger sizes, neither AT&T nor T-Mobile can keep up with consumer demand for service, he said.

“In order to compete in telecommunications, you need to have large, well-capitalized tech companies involved,” agrees Robert A. McTamaney, chair of the corporate practice at Carter Ledyard & Milburn LLP in New York. “A few pennies more per month is a reasonable price to pay for better coverage. This reminds me of the breakup of AT&T in the early 1980s.”

That breakup led to a number of “fictional competitors”—undercapitalized firms that quickly failed and were only in business because of government support—said McTamaney, noting there were many strong competitors as well.

Forced Concessions Likely

The government will likely seek some concessions to approve the AT&T-T-Mobile merger, says McTamaney. If the concessions are too draconian, fictional competitors will arise again, which would not be good for the market, he said.

Although large population centers such as New York, Los Angeles, and Chicago possess sufficient population density to support future competitors, the government should not reject the merger to assist competitors in sparsely populated areas where there aren’t enough potential customers to justify expensive capital buildouts, explained McTamaney.

“Because one or both of the companies may have to divest spectrum to gain regulatory approval, another carrier such as Sprint could benefit,” said Stephen M. Goodman, co-director of the mergers and acquisitions practice at New York law firm Pryor Cashman.

‘More Competition, Not Less’

“The potential AT&T/T-Mobile merger is nothing any strategically innovative competitor need fear,” agreed Mark Faust, author of Growth or Bust! “While there are potential synergies, the threat will only motivate Verizon and others to become all the more competitive.”

Faust added: “Consumers and even governments and taxpayers will benefit as a result [from] better products, jobs, savings reinvestment, all rolling back into the economy and benefiting families, rich and poor. Even if smaller competitors were to die as a result, the fact is they were probably already dying a slow death due to a lack of innovation and creative competitive positioning.”

With the merger, Newby says the combined company can move forward with that innovation: “The gift for American consumers is that with this near-term control, AT&T will be able to justify [an] increase in spending to get a proper 4G backhaul network in place,” he said.

Newby says this arrangement will allow other companies to enter the market with only enough capital to lease towers rather than the enormous sums and navigation of local zoning hurdles necessary to build them.

“That’s the gift,” he said. “As the fiber penetration increases, it seeds the towers for future mobile operator entrants that will not have the same mountain to climb. This is a huge savings and what mobile operators in ‘fiber-developed’ countries around the world enjoy today,” he said.

More Broadband Buildout Expected

Goodman agrees the merger would increase the buildout of broadband in currently underserved areas.

But the potential benefits of the merger could erode quickly if the government waits too long in giving its approval, Newby said.

“A dollar today is worth more than a dollar in the future, so it would cost a lot more to make [infrastructure] investments a couple of years in the future than it does now,” he said.

“Speed is important; we’re in a war with other countries as far as providing advanced telecommunications services,” Newby concluded. “This investment needs to be made yesterday.”

Phil Britt ([email protected]) writes from South Holland, Illinois.