AT&T-Mobile Makes Google-ITA Antitrust Issue Look Trivial

The big tech news of yesterday was the announced $39 billion acquisition of T-Mobile USA by AT&T. In less than 24 hours almost every potential angle has already been covered at length. Both AT&T’s and Deutsche Telekom’s boards have already approved the deal. So now it’s on to the regulatory drama.

If approved by US regulators, AT&T would become the largest wireless carrier by a wide margin. It would have roughly 30 million more customers than Verizon. Suddenly the Google-ITA deal looks trivial and almost meaningless by comparison to the potential antitrust implications of “AT&T-Mobile.”

Calling all regulators

There have been several articles about “winners and losers” that speculate about the relative fortunes of the iPhone and Android in a potentially changed wireless landscape. While it’s unclear exactly how the deal would affect Android there’s already been some speculation that AT&T and Verizon might try to exert greater control over Android and the Android Market going forward. While that remains to be seen, putting more control over wireless networks and mobile internet access in the hands of fewer companies is not good for consumers.

It appears that Congress, the US Department of Justice and the Federal Trade Commission will all be involved in reviewing the proposed transaction. And so they should be; this is a very big deal (literally and figuratively) that removes the number four wireless carrier from the market and leaves three major competitors: AT&T, Verizon and Sprint.

Yet Sprint is puny by comparison to AT&T and Verizon, with roughly half the subscribers of each of the other two. Indeed Sprint would probably have even more trouble competing against two much larger rivals than it does today, especially in the rollout of 4G services, notwithstanding its head start. Sprint has already acknowledged the trouble it would have competing in a statement made yesterday reacting to the announcement:

“The combination of AT&T and T-Mobile USA, if approved by the Department of Justice (DOJ) and Federal Communications Commission (FCC), would alter dramatically the structure of the communications industry. AT&T and Verizon are already by far the largest wireless providers. A combined AT&T and T-Mobile would be almost three times the size of Sprint, the third largest wireless competitor.”

Supersized networks

Here are the current subscriber counts for each of the four major US wireless carriers:

• AT&T: 95 million
• Verizon: 94 million
• Sprint: 49 million
• T-Mobile: 34 million

Verizon and Sprint will now both feel pressure to get larger, and there’s been speculation that Verizon might try to buy Sprint. Regardless Sprint, which had been considering buying or merging with T-Mobile, will now feel compelled to make some move to respond to this (as its statement implies). Accordingly we may see more deals announced during the regulatory review period.

AT&T and T-Mobile said that they expect regulatory review to take up to 12 months. As others have pointed out, both AT&T and T-Mobile expect the deal to be approved or they wouldn’t have done it. However if it gets blocked T-Mobile gets a $3 billion “kill fee” apparently.

Competitive on paper

Sprint and T-Mobile have used discounted pricing to compete with the two larger carriers. By removing a “value carrier” from the market there will be fewer checks on price increases.

AT&T clearly sees pricing and competition as the primary line of attack against the deal and so tried to address the issues head-on in its press release. The company argued that wireless market in the US is fiercely competitive:

The U.S. is one of the few countries in the world where a large majority of consumers can choose from five or more wireless providers in their local market. For example, in 18 of the top 20 U.S. local markets, there are five or more providers. Local market competition is escalating among larger carriers, low-cost carriers and several regional wireless players with nationwide service plans. This intense competition is only increasing with the build-out of new 4G networks and the emergence of new market entrants.

While it may technically be true that multiple carriers exist in most markets the smaller local and regional players can’t truly compete with the larger ones. Over the past several quarters subscribers have been flowing to AT&T and Verizon and away from T-Mobile, Sprint and other smaller carriers.

Should we blame the iPhone?

AT&T is buying T-Mobile to gain access to more coverage and more spectrum. We could essentially see the deal as AT&T buying wireless spectrum first and a revenue stream second. Here’s what AT&T said in the press release:

This transaction quickly provides the spectrum and network efficiencies necessary for AT&T to address impending spectrum exhaust in key markets driven by the exponential growth in mobile broadband traffic on its network. AT&T’s mobile data traffic grew 8,000 percent over the past four years and by 2015 it is expected to be eight to 10 times what it was in 2010. Put another way, all of the mobile traffic volume AT&T carried during 2010 is estimated to be carried in just the first six to seven weeks of 2015. Because AT&T has led the U.S. in smartphones, tablets and e-readers – and as a result, mobile broadband – it requires additional spectrum before new spectrum will become available.

AT&T’s reputation has taken a beating among iPhone users because of poor reception and dropped calls in major metro areas in the US. The company obviously sees a future where more devices put more strain on its network and buying T-Mobile is the fastest way to bolster that network in the company’s mind.

We’re no “dumb pipe”

The simplified version of the antitrust analysis is this: by removing competition from the market will prices go up for buyers or consumers? Opponents of the Google-ITA deal make this argument but the line between ITA’s absorption by Google and higher travel/airfare costs for consumers is dubious.

By contrast, we can imagine an emboldened AT&T facing fewer competitors raising prices for consumers on data plans. This is what so-called tiered or usage-based pricing is about: increases for heavy mobile internet users. Both Verizon and AT&T are trying to eliminate unlimited data plans, while Sprint and T-Mobile have maintained them. AT&T’s imposition of data caps on fixed internet connections may be a taste of things to come on the mobile side.

Voice revenues are declining in the US market according to Strategy Analytics and others. Data revenues are increasing but price competition has thwarted the efforts of carriers to boost data revenues with impunity. By removing one of the consumer bulwarks against price increases AT&T will be freer to raise prices going forward. And as wireless carriers convert to 4G higher pricing will come; it already has for those with 4G-capable handsets in many cases.

AT&T and Verizon are desperately seeking to avoid becoming “dumb pipes” and just providing ISP-like access to mobile users. With greater numbers and clout AT&T will potentially escape that fate by exerting influence and control across the spectrum, so to speak, with handset OEMs, app developers and advertisers.

As you can tell I’m fearful that less competition will mean worse service and higher prices — and harm the mobile internet as a whole. AT&T doesn’t agree but it will have a very tough sell to make its case to both regulators and the public.

(Image: Warner Bros.)

Postscript: ZDNet and others have coverage of the conference call this morning in which AT&T made its case to analysts and expressed confidence that the deal would be approved ultimately. A somewhat surprising argument being made by AT&T wraps the deal in economic patriotism:

[T]his transaction represents a major investment and a major commitment by a US company to advance America’s leadership in mobile broadband. And that’s very important because we’re at the very beginning of a major industry shift here to build powerful LTE networks which will prove to be the critical infrastructure in the United States economy.

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