Some Random Thoughts on AT&T / T-Mobile Merger

by on March 21, 2011 · 8 comments

Here are some quick thoughts on the proposed AT&T – T-Mobile merger, mostly borrowed from my previous writing on the wireless marketplace. First, however, I highly recommend this excellent analysis of the issue by Larry Downes, which cuts through the hysteria we’re already hearing and offers a sober look at the issues at stake here.  Anyway, here are a few of my random thoughts on the deal:

* The deal will likely be approved: First, to cut to the chase.. After much wrangling, the deal will probably be approved primarily because of two factors, both of which help political officials as much as AT&T: (1) The deal delivers upon the National Broadband Plan promise of getting the country blanketed with wireless broadband; and (2) it “brings home” T-Mobile by giving an American company control of a German-held interest. As Larry Dignan of ZNet says, it is tantamount to “playing the patriotism card.”

* One reason it might not be approved: Some Administration critics, especially from the more liberal part of the Democratic base, could make this a litmus test for Obama administration’s antitrust enforcement efforts. In the wake of the Comcast merger approval — albeit after several pounds of flesh were handed over “voluntarily” to get the deal approved — some of the Administration’s base will be looking for blood. I remember how the Powell FCC was under real heat to “get tough” on mergers back in 2001-02 and during that time blocked the proposed DirecTV-EchoStar deal, possibly as a result of the pressure. The same thing could happen to AT&T – T-Mobile here.

* It’s all about spectrum: From AT&T’s perspective, this deal is all about getting more high-quality spectrum, which is in increasingly short supply. Indeed, as Jerry Brito noted earlier, this merger should serve as another wake-up call regarding the need to get spectrum reform going again to ensure that existing players can reallocate their spectrum to those who demand it most. (Hint: Incentivize the TV broadcasters to sell... NOW!) But, in the short-term, this deal helps AT&T built out a more robust nationwide wireless network. Over the long-haul, that should help T-Mobile deliver better service to its customers.

* For T-Mobile… it survives!: What’s in the deal for T-Mobile and its customers?  Well, at this point, the company must just be relieved they made it this far and that someone wanted to buy them! Seriously, did anyone think T-Mobile would make it this long as a stand-alone operator?  I certainly didn’t. And many industry analysts have express surprise that it to this long for Deutsche Telekom to put them on the table and find a buyer. If the DOJ moves to block the deal, would it be on the hope of T-Mobile continuing to be a stand-alone #4 competitor?  That seems like a very risky proposition to me.  I suppose the better argument would be to block the deal based on the hope that T-Mobile might eventually hook up with Sprint to create a more formidable #3 operator. But, on that point…

* Standard compatibility helps: AT&T is a good fit for T-Mobile going forward because of their mutual reliance on HSPA+ for wireless broadband. That should smooth the integration process. Sprint, by contrast, would have made a lousy merger partner in this regard because of the different standards the firms have picked for next-generation wireless broadband.

* The market will still be quite competitive: I can’t see there being a major antitrust problem here in light of lower HHI in U.S. compared to international markets. As I noted in my essay on “Wireless Networks & Lemonade Stand Economics,” surveys have shown that the U.S. wireless market is much more competitive than most Asian and European markets. Even with this merger the HHI will still likely be much lower than those other countries.

* We need to accept the fact that the market is maturing. But as I also made clear in that “lemonade stand” essay last year, in a high fixed cost, low margin cost industry like broadband, it’s impossible to have hundreds (or even dozens) of competitors. This is particular true for the wireless sector. Rolling out a sophisticated and reliable wireless architecture is incredibly costly and labor-intensive. Just siting all the towers, for example, can be cumbersome and get quite expensive.  And then there are the endless “truck rolls” to fix tiny problems and upgrade facilities. Thus, like so many other mature industries, the “Rule of Three” was bound to kick in for wireless. From baby food to burgers, from candy bars to credit cards, and from tennis shoes to blue jeans, the story is the same: almost every mature industry usually shakes out to just a handful of providers. There are usually two or three large operators serving the entire sector, and then a few niche providers.  In this sense, AT&T and Verizon are the Coke and Pepsi of wireless broadband. And as with the soda market, there will be other smaller competitors and entrants at the margin, but none with the size the deliver the underlying product across the nation in a ubiquitous, highly competitive fashion. Thus, Sprint, US Cellular, Cricket, and MetroPCS will be the niche players of wireless, serving unique regions or offering unique plans (like Metro’s recent announcement of a lowest-cost wireless plan announced to date, but with various limitations on service). This is the way capitalism works.

* Don’t forget about Clearwire & the cable guys: Seems like a lot of folks are writing off Clearwire and WiMax technology already, but that could be a mistake. It’s a unique consortium approach to next-gen wireless and includes investment from major cable operators Comcast, Time Warner Cable, and Brighthouse.  Of course, Sprint is a major partner in Clearwire and this could be the company’s chance to do something really exciting with those deep-pocketed backers in the cable industry.  There’s no guarantee it will pan out, but with names (and money) like that involved, I wouldn’t write it off just yet.  And their very presence in this landscape helps ensure that the market remains contestable.

* Don’t forget about Apple, Google, Microsoft, BlackBerry etc:  The mobile ecosystem is remarkably dynamic and features many different layers and players. A recent report by Mary Meeker and Matt Murphy of Kleiner Perkins Caufield & Byers on “Top Mobile Internet Trends” revealed that roughly 10 Billion mobile Internet devices will soon be upon upon us. That’s truly amazing. What’s equally amazing to me is how all the innovation in this space is changing the competitive dynamics of the wireless marketplace. In particular, the most interesting thing about today’s mobile marketplace is how the network infrastructure guys cower in fear of the big OS guys — Apple and Google in particular. The providers of the underlying infrastructure who supposedly have all the power sure don’t seem like it when it comes time to line up new smartphones. As the iPhone wars make clear, the carriers are falling all over themselves in a scramble to land the best devices out there and would pretty much do whatever Apple and Google want them to in order to get them. And don’t forget about the actual device makers, like Motorola and HTC! And the chipmakers! And the app makers! The reason this is important is because those providers in other layers of the mobile ecosystem increasingly exert enormous pressure on the network providers and act as a check on their power.

* Expect some Net neutrality “voluntary concessions”: The FCC will use the approval process to engage in some good ol’ fashion merger extortion and force all sorts of “voluntary concessions.” Some sort of Net neutrality provision(s) will likely be among them. Because AT&T has attempted to impose some limits on tethering and has recently crafted new data plans, you can expect that NN advocates with lead with sweeping restrictions on T’s ability to manage their service offerings and they might even push for formal price controls on new tiering or metering schemes.

* Markets are better at sorting out good vs. bad deals through experimentation: I have elsewhere written about the hysteria that so often accompanies media and communications mergers. There’s always a Chicken Little crowd that tells us the sky will fall. Reality usually plays out quite differently. To the extent the sky falls, it isn’t on consumers but on the companies themselves. Many mega-deals unravel or never live up to their initial billing. Sometimes that’s simply because the merging entities can’t unearth those oh-so-illusive “synergies” that they are looking for. But usually those deals don’t pan out as hoped because markets are ongoing experiments and others — other rivals, new entrants, investors, consumers, etc — respond to those experiments and innovate around incumbents. Do you remember the phone you carried around in your pocket just a few years ago? It made calls and it… well… it made calls. Think about how far we’ve come in such a short time. I am giving serious consideration to canceling my home wireline broadband plan once Verizon comes out with the right 4G smartphone for me. Hell, the 3G phone I carry around right now in my pocket is close to becoming my primary computer as it is. I already use it to write blog posts, to Tweet, to text, to email, schedule events, play games, and sometimes I even use it to make phone calls! The degree of innovation in this space never ceases to amaze me. Thus, when it comes to deals like AT&T – T-Mobile, we should avoid the static snapshot mentality and should instead be patient and see how things play out.  It isn’t the end of the story, it’s just another chapter in what has so far been an amazing journey.


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