The AT&T and T-Mobile Merger

Josh Wright —  21 March 2011

The big merger news is that AT&T is planning to acquire T-Mobile.  From the AT&T press release:

AT&T Inc. (NYSE: T) and Deutsche Telekom AG (FWB: DTE) today announced that they have entered into a definitive agreement under which AT&T will acquire T-Mobile USA from Deutsche Telekom in a cash-and-stock transaction currently valued at approximately $39 billion. The agreement has been approved by the Boards of Directors of both companies.

AT&T’s acquisition of T-Mobile USA provides an optimal combination of network assets to add capacity sooner than any alternative, and it provides an opportunity to improve network quality in the near term for both companies’ customers. In addition, it provides a fast, efficient and certain solution to the impending exhaustion of wireless spectrum in some markets, which limits both companies’ ability to meet the ongoing explosive demand for mobile broadband.

With this transaction, AT&T commits to a significant expansion of robust 4G LTE (Long Term Evolution) deployment to 95 percent of the U.S. population to reach an additional 46.5 million Americans beyond current plans – including rural communities and small towns.  This helps achieve the Federal Communications Commission (FCC) and President Obama’s goals to connect “every part of America to the digital age.” T-Mobile USA does not have a clear path to delivering LTE.

As the press release suggests, the potential efficiencies of the deal lie in relieving spectrum exhaustion in some markets as well as 4G LTE.  AT&T President Ralph De La Vega, in an interview, described the potential gains as follows:

The first thing is, this deal alleviates the impending spectrum exhaust challenges that both companies face. By combining the spectrum holdings that we have, which are complementary, it really helps both companies.  Second, just like we did with the old AT&T Wireless merger, when we combine both networks what we are going to have is more network capacity and better quality as the density of the network grid increases.In major urban areas, whether Washington, D.C., New York or San Francisco, by combining the networks we actually have a denser grid. We have more cell sites per grid, which allows us to have a better capacity in the network and better quality. It’s really going to be something that customers in both networks are going to notice.

The third point is that AT&T is going to commit to expand LTE to cover 95 percent of the U.S. population.

T-Mobile didn’t have a clear path to LTE, so their 34 million customers now get the advantage of having the greatest and latest technology available to them, whereas before that wasn’t clear. It also allows us to deliver that to 46.5 million more Americans than we have in our current plans. This is going to take LTE not just to major cities but to rural America.

At least some of the need for more spectrum is attributable to the success of the iPhone:

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.

On regulatory concerns, De La Vega observes:

We are very respectful of the processes the Department of Justice and (other regulators) use.  The criteria that has been used in the past for mergers of this type is that the merger is looked at (for) the benefits it brings on a market-by-market basis and how it impacts competition.

Today, when you look across the top 20 markets in the country, 18 of those markets have five or more competitors, and when you look across the entire country, the majority of the country’s markets have five or more competitors. I think if the criteria that has been used in the past is used against this merger, I think the appropriate authorities will find there will still be plenty of competition left.

If you look at pricing as a key barometer of the competition in an industry, our industry despite all of the mergers that have taken place in the past, (has) actually reduced prices to customers 50 percent since 1999. Even when these mergers have been done in the past they have always benefited the customers and we think they will benefit again.

Obviously, the deal is expected to generate significant regulatory scrutiny and will trigger a lot of interesting discussion and analysis of the state or wireless competition in the U.S.   With the forthcoming FCC Wireless Competition Report likely to signal the FCC’s position on the issue, and split approval authority with the conventional antitrust agencies, there appears to be significant potential for inter-agency conflict.

Greg Stirling at Searchengineland notes that “AT&T and T-Mobile said that they expect regulatory review to take up to 12 months.”   I’ll take the “over.”  Stirling also notes, in an interesting post, the $3 billion termination fee owed to T-Mobile if the deal gets blocked.  How’s that for a confidence signal?  In any event, it will be interesting to watch this unfold.

Here is an interesting preview, from AT&T executives this morning, of some of the arguments AT&T will be advancing in the coming months to achieve regulatory approval.  Some of the most critical issues to parse out will be previous historical experience with cellular mergers, and whether, in fact, it is likely that the merger will bring about substantial efficiencies and facilitate bringing LTE to new markets.  The preview includes the following chart, suggesting that significant price increases are not likely as a result of the merger based upon past experience.

No doubt there will be further opportunity to comment upon developments here over the next 12-18 months.

3 responses to The AT&T and T-Mobile Merger

  1. 

    I’m concerned and know that AT&T’s bad service and pricing is not going to improve to live up to T-mobile’s standards of really good pricing, service delivery and innovation. I’m sure though that the regulators will insist on concessions before approving this merger and AT&T will probably have to provide open access to smaller competitors allowing them to use the AT&T networks.
    Companies like Tracfone, Net10 and Straight Talk have concessions with the major networks and provide cheap prepaid plans to the consumer so there is still hope for affordable cheap plans on a prepaid basis.
    I’m switching to Net10 prepaid in a few months once my T-Mobile contract expires, so that I can control my monthly phone costs and there’s no extra fee’s.
    Customers really shouldn’t be signing up on contracts with AT&T & T-Mo for the next 1.5 years, you don’t know if the prices will go up or if hidden fee’s will increase due to unread or misunderstood small print.

  2. 
    save_the_rustbelt 21 March 2011 at 12:31 pm

    The feds forced Verizon to divest some rural area accounts after the All-tel deal.

    We were sold to At&T. Ok.

    The “transition” has been going on for six months and no end in sight. We have a box of useless AT&T phones and are still receiving service from Verizon (a sleazy gang to be certain).

    If this is what passes for “management” then we are all in big trouble.

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