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Summary:

The AT&T-Mo saga wasted countless dollars and resources, dominating the attention of regulators and the wireless industry for a year, but AT&T’s failure more than made up for those losses. We now have more fearsome regulation and a greater awareness of the mobile market’s precarious competitive state.

at&t-mobile-merger

The government scored a huge victory for consumers when it defeated AT&T’s acquisition of T-Mobile, preserving a wireless landscape with four nationwide competitors. Now that the dust has settled, though, there’s a lingering question in my mind: Was the fight worth it? Would we have been better off if the AT&T-Mo saga never happened, or are we better off that AT&T tried and failed?

It’s easy to reach the former conclusion if you tally up the enormous amounts of time, effort and money that AT&T, its allies and its opponents wasted fighting for or against the merger. The Hill reported on Monday that AT&T alone spent $20.2 million lobbying lawmakers and regulators in 2011. Operators like Sprint, industry associations like the Rural Cellular Association and numerous public interest groups also devoted considerable resources to opposing the deal before regulators and in the courts. AT&T-Mo weighed down the Federal Communications Commission’s docket for the greater part of a year, and the U.S. Department of Justice spent taxpayer dollars forming its antitrust case against the carriers.

AT&T and T-Mobile could have directed all of that effort and cash to building more 4G networks and expanding the ones they already had. Instead, their consolidation drive actually stymied mobile broadband. On Wednesday Cellular infrastructure maker Ericsson reported a huge drop-off in North American revenues for the fourth quarter, largely because AT&T and T-Mobile practically stopped investing in their networks while they waited on the merger’s outcome. Instead of fending off the outsized ambitions of Ma Bell, the FCC could have dealt with any number of pressing regulatory issues on its plate.

Still, I would argue that we gained plenty from having fought that fight. Those gains may not be as tangible as a new network or cash in the bank, but here are three reasons why the merger’s failure shaped the U.S. wireless market for the better.

1. We know what to watch for

Sprint CEO Dan Hesse summed it up best in an interview last year right before the merger was killed:

When AT&T announced its intention to take over T-Mobile USA, it made me realize the industry has been gradually moving toward being a duopoly and how tenuous the competitive situation is in the U.S. wireless industry. . . . [Before the merger was announced] I could see this gradual creep in size and market dominance of the big two — growing gradually each year, though not to the extent that it became alarming. But the attempted acquisition of T-Mobile set off all sorts of alarms and had you step back and notice what’s been happening each year for a number of years.

With four nationwide operators it’s easy to reach the conclusion that we have a vibrant competitive market, but the reality is there hasn’t been such a thing as a “big 4″ in the industry for some time. While Verizon Wireless and AT&T have grown considerably in the past five years, Sprint has actually shrunk in size and T-Mobile’s growth has been fitful.

As Hesse points out, there is now such a gaping difference in size between the No. 2 and the No. 3 operators that “big 2″ has become a much better characterization of the industry’s top tier. We may not face quite the duopoly that Hesse claims, but there is no questioning that AT&T and Verizon wield enormous power. It took AT&T’s trying to swallow up one of the remaining national carriers for many people, including myself, to realize just how lopsided the market had become.

Regulators, lawmakers and a large part of the public now realize that preserving what remaining competition is left in the U.S. wireless market is vital. Just as AT&T can’t buy T-Mobile, Verizon can’t buy Sprint, and either would face stiff opposition if it tried to pick up a smaller regional operator like MetroPCS or Leap Wireless. And AT&T and Verizon now know better than to try.

2. Regulators have grown fangs

AT&T approached the merger with the attitude that it was inevitable, and it appeared to be right, until the Justice Department filed its antitrust lawsuit on Aug. 31. Much to AT&T’s shock, the government’s free-market cops were in no mood to negotiate. They said the deal was simply anticompetitive and had to be stopped.

The FCC appeared docile at first, but it began asserting itself after the DOJ stepped in. In November, the FCC recommended the deal be killed, and it released a damning report refuting every single claim AT&T made about the merger’s supposed benefits. When a desperate AT&T tried to play the DOJ and FCC against each other, neither agency fell for the carrier’s tactics. Within a month the deal was dead.

After a decade of nearly unfettered consolidation in the wireless industry, regulators took a huge stand against the most egregious anticompetitive deal of them all, showing AT&T absolutely no deference. What’s more, those regulators don’t appear to be returning to hibernation.

The DOJ is now looking into Verizon’s purchase of the cable companies’ unused 4G spectrum. Normally the Justice Department steers clear of deals only involving the transfer of airwaves, leaving licensing matters to the FCC. In a recent interview, John Hane, an antitrust communications lawyer with Pillsbury Winthrop Shaw Pittman, said that we may be witnessing the rebirth of much more aggressive DOJ, one that is willing to examine every telecom deal through a trust-busting lens.

3. Dormant spectrum is finally being put to use

Though AT&T has claimed that the U.S. is facing a spectrum crisis, the deplorable fact remains that it and many other operators have been hoarding frequencies for years. AT&T, Verizon and the cable companies won their advanced wireless service (AWS) licenses at auction in 2006 but haven’t built a single commercial cell over those airwaves for six years. Clearwire and Sprint have nearly 100 MHz of unused 2.5 GHz frequencies they have owned for a better part of a decade.

But as AT&T-Mo died, an astonishing spate of license sales followed. Verizon made a deal with the cable providers to buy their SpectrumCo licenses, giving Big Red a goldmine of 4G airwaves over which it will expand its LTE network. AT&T may have failed in its bid for T-Mobile, but it did land Qualcomm’s 700 MHz FLO TV spectrum, which AT&T has also earmarked for LTE. As part of its breakup fee from AT&T, T-Mobile got a healthy chunk of AT&T’s own AWS licenses, which T-Mobile can put to immediate use in expanding its HSPA+ network.

I do agree with the operators that those airwaves won’t be enough. To meet the colossal demand for mobile broadband, the FCC will have to identify and repurpose hundreds of megahertz of spectrum for 4G use. But the carriers have no business complaining about the oncoming data tsunami when they aren’t using the spectrum they already own. But now it looks like they will be forced to use them. If operators can no longer buy networks from their competitors, they will have to build them.

Cat image courtesy of Flickr user polandeze

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  1. Great piece. You hit the nail on the head.

    1. Thanks Guy

  2. Great article Kevin. In my opinion, at&t’s plan was never to actually win the fight in acquiring T-mobile. It simply was not going to happen. At&t’s main goal in this whole debacle was to further weaken Sprint and T-mobile, which it did.

    Sprint has lost investor confidence heavily since the deal was announced. At the time Sprint had a market cap of 18 billion. Now, they are worth 6.5 billion. At&t also swooped right as “rumor has it” sprint was about to merge with T-mobile. Coincidence? I don’t think so. At&t also, by keeping the process going just long enough, made sprint invest in a new strategy with network vision and Clearwire. Now its hands are tied and practically any acquisition of T-mobile is impossible at this point.

    T-mobile at this point, is now only further behind than it was before. Not only did it stop investing in its network, it was also not allowed to talk to other potential partners. Some customers of T-mobile also left, due to the strategy change and possibility that merger would actually go through. Deutche Telekom(T-mobile’s owner) also stuck its feet in a few traps by giving investors false hope, after telling them it would invest the money in its European operations and pay down debt.

    All in all, I believe At&t got what exactly what it wanted. While some might disagree and say it lost 6 billion dollars in the process, that is a very small price to pay in order to vastly weaken competitors. I do not believe At&t anticipated this move to open the government’s and consumer’s eyes about industry Consolidation. The FCC is now even considering not allowing Verizon or At&t participate in the upcoming spectrum Auctions for the tv spectrum, since they now see At&t and Verizon have enough but sprint, T-mobile, Metro Pcs, leap… do not. While At&t did hurts it competitors, I really think they shot themselves in the foot on this one.

  3. Great article Kevin. In my opinion, at&t’s plan was never to actually win the fight in acquiring T-mobile. It simply was not going to happen. At&t’s main goal in this whole debacle was to further weaken Sprint and T-mobile, which it did.

    Sprint has lost investor confidence heavily since the deal was announced. At the time Sprint had a market cap of 18 billion. Now, they are worth 6.5 billion. At&t also swooped right as “rumor has it” sprint was about to merge with T-mobile. Coincidence? I don’t think so. At&t also, by keeping the process going just long enough, made sprint invest in a new strategy with network vision and Clearwire. Now its hands are tied and practically any acquisition of T-mobile is impossible at this point.

    T-mobile at this point, is now only further behind than it was before. Not only did it stop investing in its network, it was also not allowed to talk to other potential partners. Some customers of T-mobile also left, due to the strategy change and possibility that merger would actually go through. Deutche Telekom(T-mobile’s owner) also stuck its feet in a few traps by giving investors false hope, after telling them it would invest the money in its European operations and pay down debt.

    All in all, I believe At&t got what exactly what it wanted. While some might disagree and say it lost 6 billion dollars in the process, that is a very small price to pay in order to vastly weaken competitors. I do not believe At&t anticipated this move to open the government’s and consumer’s eyes about industry Consolidation. The FCC is now even considering not allowing Verizon or At&t participate in the upcoming spectrum Auctions for the tv spectrum, since they now see At&t and Verizon have enough but sprint, T-mobile, Metro Pcs, leap… do not. While At&t did hurts it competitors, I really think they shot themselves in the foot on this one.

    1. That’s a really interesting point, Grant. I need to think about that more. But perhaps you’re right. Maybe I oversold the benefits or at least didn’t weigh them enough against the harm. I don’t think AT&T wanted this outcome tho, I will say that.

  4. Another great article Kevin!

    Your last two sentences, have value in argument. While some carriers have been sitting on spectrum and haven’t put it to use, I think we can blame the FCC for not towing the line in keeping their mandates in check with these carriers. AT&T had failed in using a nice piece of their spectrum holdings before crying poverty. Now Sprint is claiming that they want to use roaming agreements in areas where they already have spectrum licenses. I understand the demographical reason, but it does not play well with issue at hand. You, I and the public own the spectrum, I would hope that this more aggressive FCC will also be more aggressive in hovering over the carriers to utilize what they license.

    John B.

    1. Thanks John,

      Actually I can’t blame operators for wanting to invest in future capacity so sitting on licenses for several years isn’t necessary a bad thing. But now the wireless industry is claiming capacity is desperately needed and using that as a justification for all sorts of antics. Why don’t they use the spectrum they own?

  5. It sure is funny how quickly att has put the pieces back together after the original suite to break the company up in the 80’s.

  6. From the first salvo fired by Sprint I couldn’t understand why they were fighting the merger. Had the merger gone through, there would have been one ridiculously expensive Nationwide carrier – Verizon, one slightly less expensive Nationwide carrier – AT&T, and one inexpensive Nationwide carrier – Sprint.

    Sprint stood to become THE choice for those on a tight budget, and their numbers prove it. While they have been loosing subscription customers (at a rate which has been slowing slightly), they have actually gained prepaid customers. Prepaid customers represent people that are on such a tight budget that they’re willing to pay a little for the privileged of having a device, but when the time runs out they simply do without until the next month (if they’re lucky enough to have money come it). While we all know that in the long run prepaid costs more for the same service, these customers don’t have the luxury of saving money by spending more. Sprint should have shut up about the merger – or better yet bless it, reminding everyone what cheap rates they had – and wooed the customers fed up with the ridiculous costs of staying with AT&T or Verizon.

    Times are tough now, but I’ll bet that had they gone that route in a couple of years (2014 now predicted as the end of the current recession), if Sprint’s service was competitive (which I assume it is in areas they cover well), they would have started gaining subscription customers from their now loyal prepaid customers.

    But I guess I just don’t understand!

    1. Hey JerryD,

      I’ve often wondered to if Sprint could have made a killing at the low-end of the market if T-Mobile was out of the equation. But ultimately I think Sprint had to fight. Verizon and AT&T may be focused at the high-end today, but eventually the market will become saturated and they will then set their sites at the low-end to grow. Sprint would have a tough time competing with the sheer scale of the Big 2 when they actually started paying attention.

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