Update: A spokesman from the FCC Chairman’s office declined to comment on the Journal story.

Genachowski replaced Kevin Martin (and interim FCC chairman Michael Copps) in 2009 after being nominated by Obama. Genachowski worked on Obama’s first presidential campaign as chairperson of his Technology, Media and Telecommunications Policy Working Group. The working group germinated the seeds of Obama’s National Broadband Plan, which Genachowski oversaw when he took over the reins of the commission.

Since then Genachowski has been in the spotlight on many occasions, advocating the need for more cellular spectrum and proposing the reallocation of TV airwaves for mobile broadband use. Some of those spectrum proposals, however, landed Genachowski and the commission in hot water, such as the conditional waiver -– later retracted — they granted LightSquared to use its satellite spectrum for a terrestrial LTE network.

Perhaps the most controversial period of his tenure, though, was the nearly one year that the FCC weighed and eventually quashed AT&T’s planned acquisition of T-Mobile. The decision is considered a victory for the competitive market and consumer choice after a long period of unfettered consolidation in the telecom industry.

Not all of the commission’s decisions have been so consumer friendly under Genachowski. The commission let pass Verizon’s spectrum deal with the cable operators, which has big implications for competition in the residential broadband market.

Genachowski’s retirement, if true, doesn’t come as a huge surprise. News reports have indicated that the forthcoming departure of Republican FCC Commissioner Robert McDowell clears the way for Genachowski’s departure as well, as it leaves the commission with a 2-1 Democratic majority.

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Sprint’s acquisition of Nextel two years earlier was a heavy albatross around its neck. Its customer service had gone down the tubes, employee morale was low, and the company culture fractured; worst of all, Sprint’s once loyal subscribers were fleeing in droves. Hesse knew he was taking over a struggling company, but in an interview with GigaOM he admitted that even he didn’t realize the magnitude of Sprint’s troubles until he arrived. “When I took over the assignment the problems were more severe than I anticipated,” he said.

Hesse staring in one of many Sprint “Simply Everything” commercials

Fast forward five years, and it’s plain to see Sprint has turned several corners. Its net subscribers totals are increasing rather than shrinking, helped along by the iPhone. Its improved financials have sent Sprint’s stock skyrocketing, its share price more than doubling in value in the last year. Its customer service is now consistently scoring the highest marks in surveys conducted by J.D. Power and other agencies.

Sprint hasn’t fully recovered from the dark days of the last decade. Seven years after the merger it’s still dealing with the fallout of Nextel, it still has more work to do to repair its brand, and during the several years Sprint was healing its wounds, its biggest competitors AT&T and Verizon Wireless took advantage of Sprint’s problems to become bigger and more formidable.

But it’s fair to say there’s a lot more upside than downside to Sprint these days. Japan’s Softbank certainly thinks so. It’s investing $20.1 billion to take control of the country’s third largest carrier.

A few days before his fifth anniversary at Sprint, Hesse sat down with GigaOM to discuss his tenure as CEO and the five years of trials and tribulations Sprint has endured on its path to recovery.

Why AT&T is to thank for Sprint’s new identity

We asked Hesse what the most significant moment of his tenure was, and we were surprised by the answer: AT&T-Mo.

“The most important decision that has been made in the five years I’ve been here was the decision to fight the acquisition of T-Mobile by AT&T,” Hesse said. “It fundamentally defined the industry, which in turn defined Sprint in terms of who we are is and what our role in the industry is.”

Echoing thoughts he gave in an interview with GigaOM last year, Hesse said that the AT&T’s failed attempt to consolidate two of the Big 4 made him realize that there was no longer such a thing as the Big 4. The industry had bifurcated into the Big 2 and everybody else.

“Through a combination of acquisitions of spectrum and acquisitions of other companies, as well as organic growth, AT&T and Verizon together became a much larger percentage of the overall wireless market,” Hesse said. “Five years ago I wouldn’t have called them a duopoly. Today they’re darn close. If AT&T had been allowed to acquire T-Mobile than we would have clearly had a duopoly.”

Sprint can’t take credit for killing AT&T-Mo, though its vociferous opposition to the deal likely influenced the Federal Communications Commission and Department of Justice’s decisions to quash it. More significantly, the deal helped shape Sprint’s identity. Hesse said it made Sprint realize that many of its interests were now more closely aligned with smaller competitive carriers rather than the Big 2.

Sprint began defining much of its strategy by focusing on services and policies the market was demanding but AT&T and Verizon weren’t delivering. Ma Bell and Big Red killed unlimited plans. Sprint embraced them. They concentrated on contract plans. Sprint dived whole-hog into prepaid. While Verizon and AT&T are still keeping mobile virtual network operators (MVNOs), Sprint has become a hero to the virtual operator. Sprint had started down that path before AT&T-Mo ever happened, but Hesse said the attempted merger reinforced the notion Sprint was on the right track.

While AT&T-Mo’s approval would have stifled competition, it’s failure had the opposite effect. The government has made its position clear: it wants to see strong third-and fourth-place operators to keep the Big 2 in check, and that has spurred new interest in the likes of Sprint and T-Mobile.

“Investment into the U.S. wireless industry would dry up if you had a government sanctioned wireless duopoly,” Hesse said. “Softbank has said publicly it wouldn’t have invested a thousand dollars in the U.S. if that merger had gone through.”

The Nextel problem

The biggest problems Hesse has been forced to fix were not of his own making. When he took over in late 2007, his predecessors had made two significant decisions that still haunt the company to this day: the acquisition of Nextel and the embrace of WiMAX as Sprint’s future 4G technology.

“With 20/20 hindsight, the Nextel merger was a mistake,” Hesse said. “The synergies, if you will, that we had hoped for and planned for didn’t materialize.”

In fact, Hesse may be just a few months away from shedding that Nextel albatross for good. June 30 is the date he’s set for shutting down Nextel’s iDEN network, at which point Sprint will start refarming its airwaves for LTE. It will be a painful six months. There are still 3.1 million Nextel and Boost Mobile subscribers on iDEN, many of them clinging to the Direct Connect push-to-talk service that originally made Nextel so popular. So far, Sprint has been able to convert a fair amount of iDEN customers into CDMA customers, though, and has managed to attract 1 million subscribers to its new CDMA version of Direct Connect.

As for WiMAX, Hesse isn’t quite ready to call it a failure, even though the rest of the wireless industry has dismissed it. Hesse isn’t blind. He knows LTE is the future — and Sprint is in the early stages of a nationwide LTE rollout — but Hesse also maintained that Sprint got more out of WiMAX than the industry gives it credit.

“One of the big decisions I had to make early on whether to mothball and shut down the WiMAX business and take a big write off,” Hesse said. At the time Sprint simply didn’t have any money to invest more in a new network strategy, Hesse said. Its choices were making its fateful deal to merge WiMAX operations with Clearwire — or do nothing at all. The Clearwire deal did give Sprint the country’s first 4G network, though lack of funds prevented Clearwire from completing more two-thirds of its network, and Verizon Wireless quickly caught up with LTE.

“Time will tell,” Hesse said. “It’s too early to say whether [WiMAX] was a good call or a not so good call.”

A lot of history’s judgment will probably be based on the eventual fate of Clearwire. A day after our interview with Hesse, Sprint made a bid to buy out Clearwire completely. (Update: Sprint and Clearwire revealed on Monday that the Clearwire board has agreed to a $2.2. billion takeover deal.)

Becoming the carrier that isn’t hated

If Hesse wants Sprint to be perceived as one thing, it’s as “the good guy” in the U.S. wireless industry. While AT&T and Verizon Wireless increasingly make moves that go against the desires of their customers and trends in technology, Hesse said, Sprint will try to become the most pro-consumer and open carrier out there.

Hesse (third from left) and the CEOs of AT&T, Verizon and T-Mobile at CTIA Wireless

There are the big ticket items, such as pricing structures like its unlimited data Simply Everything plans. But there are small moves as well, such as opting to use Google Wallet as a mobile payments solution, rather than inject itself forcibly into the NFC commerce chain. It’s also tried to claim the mantle as the country’s greenest operator.

Still, Sprint is having a hard time explaining its new role to consumers. Hesse said that its current customers know the new Sprint and like what they see, as indicated by its stellar rise in the consumer survey rankings. But for customers who have never owned a Sprint phone or left angrily during its rebuilding period, the name Sprint still has plenty of negative connotations.

“A brand can be tarnished very quickly, but it takes a long time to rebuild it,” Hesse said. “That’s the issue we had. The company had let the customer service and customer experience deteriorate, and we really have to work hard to change that perception. … We have changed the perception of Sprint customers very quickly because they have noticed how much we’ve improved. It’s more difficult to change the perceptions of non-customers.”

Sprint logo photo courtesy of Shutterstock user Susan Law Cain

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CCA President and CEO Steve Berry said the organization isn’t abandoning its rural carrier roots, rather it’s acknowledging the new reality: that big nationwide operators like Sprint and T-Mobile have more in common with their tiny regional counterparts than they do with the country’s two wireless superpowers. The sum of the subscribers supported by the RCA’s members is about 100 million, which is pretty much the size of either Ma Bell or Big Red individually.

Sprint and T-Mobile won’t be able to dominate the organization, Berry said. “We are one carrier, one vote, and we have a board that reflects our composition,” Berry said. And conflicts between the big and small contingencies should be minimal given how their interests are now closely aligned, Berry said. They share the common goals of ensuring equal access to new 4G spectrum, interoperability between the bands, and mutually beneficial roaming agreements, he said.

So why now? Verizon and AT&T have long been the dominant carriers in the industry.

Berry said the differences between AT&T and Verizon and the rest of the market became most pronounced in recent years as acquisitions swelled their size. Verizon’s 2009 purchase of Alltel eliminated the single largest regional operator in the US, but it was AT&T’s attempted purchase of T-Mobile that really rallied the remaining wireless carriers against the Big 2. In an interview last year, Sprint CEO Dan Hesse said that the merger attempt woke the industry up regarding the “gradual creep toward becoming a duopoly.”

Photo courtesy of Shutterstock user Everett Collection

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As has been the case for the last two years, T-Mobile’s contract customers are departing. The problem is T-Mo couldn’t replace with them prepaid customers fast enough. T-Mobile lost 557,000 contract subscribers between April and June, offset by 227,000 net new prepaid subscribers.

The U.S. subsidiary of Deutsche Telekom also added 95,000 machine-to-machine connections, linking to its network to everything from point-of-sale payment devices to ice machines, and it gained 30,000 wholesale customers from its mobile virtual network operator partners such as TracFone’s Straight Talk. But both numbers were far below the M2M and wholesale gains it reported in previous quarters.

In all, T-Mobile is a smaller operator today than it was a year ago, having shrunk by about 400,000 subscribers since June 2011.

The bright spot for T-Mobile is that its customers are taking to T-Mobile’s ultra-cheap data plans. It sold 2.1 million smartphones in the last quarter, a 31 percent increase over last year’s second quarter. Those new smartphones drove up the  average revenue per user (ARPU) spent on data by 14.6 percent for contract customers, though overall ARPU in postpaid increased only slightly to $57.35 a month. The continued shift of smartphones to prepaid plans, however, increased prepaid ARPU by 13.6 percent to $26.81 a month.

The lack of the iPhone is still weighing heavily on T-Mobile. Though it isn’t working outright miracles for Sprint since it arrived on its network last fall, the carrier has leaned on the iPhone to deliver quarterly subscribers boosts. The Apple device is responsible for many of the defections to Sprint from other carriers.

T-Mobile has made no official announcement on the iPhone, but it is in the process of overhauling its network, which will make its network completely iPhone-compatible by next year. The sooner it gets the device, though, the sooner it has a key weapon in fighting off its much larger competitors.

If you want to learn more about T-Mobile’s aggressive network plans, check out GigaOM’s Mobilize conference next month where T-Mobile CTO Neville Ray is speaking on Sept 21.

T-Mobile image courtesy of Flickr user swruler9284

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T-Mobile CTO Neville Ray

T-Mobile isn’t just launching a sizable LTE network in 2013, it’s becoming the Grim Reaper for 2G technology as we know it. In an analyst conference call on Thursday, T-Mobile unveiled a plan to radically reshape its networks, shutting down the majority of its 2G GSM capacity so it can focus almost entirely on 4G. As a result T-Mobile will get a bigger, badder mobile broadband network and, to boot, will almost certainly land the iPhone.

With this new network configuration, T-Mobile is pulling a technological coup. Though it is spectrum-poorest operator of the Big 4, it will wind up with a higher-capacity LTE network than Sprint and one with comparable capacity to AT&T, while still being able to milk a massive HSPA+ network for years to come. In the process, T-Mobile is calling into question the so-called spectrum crisis. While other operators are desperately searching for new airwaves, T-Mobile found its future growth spectrum sitting right under its nose. Consumer groups and regulators are almost certainly going to ask why AT&T and Verizon Wireless don’t do the same.

The network numbers T-Mobile CTO Neville Ray revealed at the call were surprising: 90 percent of the carrier’s data traffic and 50 percent of its voice traffic are running over T-Mobile’s HSPA+ networks. That means its GSM networks are languishing even though they occupy half of T-Mobile’s average 54 MHz of spectrum per market. T-Mobile’s answer is to shut them down, clearing the way for LTE and more HSPA+.

T-Mobile plans to sunset between two-thirds and three-quarters of its GSM channels in the PCS bands leaving, only a modicum of 2G bandwidth left for older phones that don’t sport 3G or 4G radios and to support basic data services for its machine-to-machine communications business. All of that capacity would then be turned over to HSPA+, creating a mobile broadband network on PCS almost as large as the one it currently runs on its advanced wireless service (AWS) frequencies. Moving HSPA+ to PCS opens up many doors for T-Mobile, most notably the ability to support any iPhone Apple makes for the U.S. market.

But T-Mobile won’t shut down HSPA+ at AWS completely. It will turn off some of that capacity and combine the remnant airwaves with the AWS licenses it took from AT&T as a consolation prize for their merger’s failure. It would then use that capacity to build a 10MHz-by-10MHz LTE network over 50 percent of its mobile broadband footprint. That would give it the same capacity as Verizon’s LTE network today and double that of the LTE network Sprint plans to launch this summer. In the remaining half of its network T-Mobile can only support a 5MHz-by-5MHz carrier, which would make its capacity configuration similar to AT&T’s. But keep in mind, T-Mobile has a fraction of the customers of Ma Bell and Verizon – it can make 5×5 go a long way.

Ray and CEO Phillip Humm said T-Mobile USA is still on the hunt for more spectrum, and ideally it would like to lock down more AWS airwaves to create a massive 20MHz-by-20MHz LTE network. That seems unlikely considering that its competitors are quickly scooping up what unused airwaves remain in the market, but T-Mobile is also challenging those deals.

Though Humm and Ray didn’t discuss it in the call, there’s always the possibility of repeating its network cannibalization feat at a later date to capture even more mobile broadband capacity. As more voice traffic moves to HSPA+, and more data traffic moves to LTE, T-Mobile could shut down its GSM network almost entirely and continue the HSPA’s shift down to PCS, which would in turn clear more AWS airwaves for LTE.

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T-Mobile USA may have had a horrible fourth quarter while its merger with AT&T suffered its death throes, but the operator is definitely taking advantage of the aftermath. T-Mobile is using the breakup fee and spectrum it won from AT&T to funnel $4 billion into LTE. The 4G service will go live in 2013, but only after T-Mobile goes through a rather complex process of shifting its networks among its different bands.

The news emerged early on Thursday morning when T-Mobile’s parent company, Deutsche Telekom, reported earnings, its first since its $39 billion sale of its U.S. operations to AT&T was canned. T-Mobile shed 802,000 net contract customers in the fourth quarter, which the company ascribed to huge competition from the new iPhone 4S. T-Mobile is now the only major U.S. operator without an iPhone to offer its customers, but it made do with the smartphones it does have. An astonishing 92 percent of all device sales were 3G and 4G smartphones, totaling 2.6 million device activations in the quarter.

That increasing shift away from text-and-talk devices to smartphones is driving up data plan sales as well as data consumption. So T-Mobile has decided to go for broke and build the LTE network that until now seemed so out of reach. Getting to LTE won’t be easy, because the operator doesn’t have the unused spectrum set aside like its competitors AT&T and Verizon Wireless. Instead, it will have to carve out chunks of frequencies that are being used by its HSPA and GSM networks.

T-Mobile is helped by the huge shift in its customer base to 3G and 4G devices. Those devices connect primarily to its HSPA and UMTS networks, which support voice services as well as data and thus take traffic off its GSM networks. T-Mobile will start shutting down parts of its GSM networks and move portions of HSPA+ networks into the gap left behind. Moving some of its HSPA+ off the advanced wireless service (AWS) band will make room for LTE.

T-Mobile will also benefit from the treasure trove of spectrum it won from AT&T as part of its breakup fee. The AWS isn’t in one consistent nationwide block, but it will go a long way to adding capacity to the fledgling LTE service.

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AT&T is petitioning the Federal Communications Commission to impose network buildout conditions on Dish’s satellite spectrum –- requirements that would be passed onto AT&T if it acquired the satellite TV provider. Meanwhile, Dish insists it plans to use that spectrum to build a commercial LTE network to challenge the reigning nationwide mobile operators, including AT&T. These are hardly the actions of two companies about to tie the knot.

What we’re witnessing here is some very cynical pre-nuptial gamesmanship. According to TMF Associates satellite communications analyst Tim Farrar, Dish is playing AT&T off its competitors by threatening to partner with MetroPCS to build a nationwide LTE network over its satellite broadband and 700 MHz spectrum. To muck up Dish’s plans, AT&T is insisting to the FCC that the satellite TV provider face the same strict rollout requirements the commission imposed on fellow satellite spectrum holder LightSquared: An LTE rollout covering 100 million people in 33 months and 260 million in less than 6 years.

As Farrar wrote in his blog:

This submission is a blatant attempt by AT&T to put a thumb on the scales, as the FCC weighs up the appropriate balance between buildout mandates and clawback of any windfall. The reason for AT&T’s action at this very late stage in the process appears to be that DISH is trying to play off AT&T’s prospective bid against a potential venture with MetroPCS. MetroPCS would certainly be unwilling to commit to a 260M POP buildout, so if the FCC conceded AT&T’s demands, they would be the only game in town and DISH would lose its leverage in price negotiations. We’ll find out soon enough if AT&T’s gambit succeeds, but few would bet against [Dish chairman] Charlie Ergen’s poker playing skills after the events of the last year.

AT&T may seem like the bad guy here, but Dish’s motives are just as suspect. In an FCC filling Thursday, Dish maintained it plans become a competing mobile operator, launching an LTE network that would compete with the big 4:

The overly aggressive and unrealistic schedule AT&T advocates would likely set DISH up for failure or force DISH into unfavorable business arrangements with large Commercial Mobile Radio Service (“CMRS”) carriers.  It would erect artificial barriers to DISH’s plan to construct a new mobile broadband network on its own or consideration of partnerships with smaller companies, and could threaten DISH’s ability to roll out a retail service.  In short, an impracticably tight schedule would be a triple loss for consumers, the Commission, and DISH.

But as my colleague Stacey Higginbotham wrote when Dish first applied for permission to build LTE, Dish’s proposal sounds more like a financial gamble to cash in on the skyrocketing value of mobile broadband spectrum, rather than a legitimate bid to become a wireless competitor. One big clue is Dish’s insistence on deploying an LTE-Advanced network in order to “enter the market for the first time with the most advanced technology.” Of course, LTE-Advanced was just finalized as a standard so Dish claims it will have to wait several years before commercial equipment is available.

That’s absolute malarkey. LTE-Advanced is an iteration of LTE technology, not a completely new network. Claiming that you must wait until LTE-Advanced equipment is available before building a network is kind of like insisting you can’t move into a house before the shag carpeting is installed. There’s nothing stopping Dish from building an LTE network this year and evolving it into an LTE-Advanced network in 2013 or 2014.

Supposedly we face a spectrum crisis, but no one is acting like it. Instead of using public airwaves to deploy real networks, operators seem to be playing high-stakes poker with their licenses. AT&T’s motives may be self-serving, but maybe in this case it’s right. If it forces strict rollout guidelines on Dish’s spectrum and then buys those licenses, we may actually get a new mobile broadband network – rather than a bunch of operators whining about how they don’t have the spectrum to build them.

Poker Image courtesy of Flickr user Ross Elliott
Tower Image courtesy of Flickr user Nikhil Verma

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After blasting the Federal Communication Commission for “picking winners and losers” in the wireless industry by scrutinizing every deal, Stephenson claimed AT&T is now in a mobile capacity-constrained environment which has forced it to raise prices and manage connection speeds (aka throttle) for its highest volume subscribers.

This is just plain vindictive. There definitely is correlation between capacity and pricing: the same correlation that exists between supply and demand. But AT&T isn’t following supply-and-demand logic. While AT&T raised its overall smartphone data plan rates last week, it actually lowered by 20 percent the prices customers pay for a gigabyte of data on its most popular mid-tier mobile data plan.

Stephenson claimed AT&T was the carrier most affected by the explosion in mobile data usage because it was the first operator to get the iPhone, which continues to dominate its sales. AT&T’s smartphone penetration among contract subscribers is now 56.8 percent, compared to Verizon’s 44 percent, yet AT&T’s mobile data rates are 50 percent cheaper than Verizon’s.

If AT&T were really that constrained by network capacity, it wouldn’t be lowering the price it charges to deliver each byte. AT&T’s price hikes are simply a revenue play. By raising the prices of its data plan tiers, it’s guaranteeing it will get $5 more a month on each new smartphone customer, but it won’t be limiting their usage. Instead, it’s actually encouraging its customers to consume more.

To meet this supposed capacity crunch, Stephenson claimed AT&T has been forced to milk as much performance out of its current networks as possible. It’s deploying distributed antenna systems to push its coverage into more nooks and crannies, splitting cells so it can reuse its cellular and PCS spectrum in more places. It also expanded fiber and Ethernet backhaul links to the majority of its cell sites, so 80 percent of its mobile broadband traffic is riding over 14 Mbps HSPA+ connections. The implication is AT&T wouldn’t have to take such drastic measures if the government had let it buddy up with a competitor.

But AT&T began experiencing its huge ramp-up in network data traffic in 2008 when the iPhone 3G was introduced. AT&T saw this data tsunami coming almost four years ago. Why didn’t the company invest in LTE sooner, or use the AWS spectrum it has been sitting on for nearly six years?

Stephenson had answers to those questions as well. He said AT&T can only expect 30 percent of its mobile data traffic to move to LTE in the near term, meaning its HSPA+ network will have to bear its capacity burden for some time. That’s true; Verizon is experiencing similar problems. In its fourth-quarter earnings, Verizon revealed that the vast majority of new smartphone customers are still signing up for 3G-only plans, largely because the iPhone lacks LTE support.

But T-Mobile wouldn’t have solved that problem. AT&T planned to shut down T-Mobile’s HSPA+ so the operators could consolidate their AWS spectrum in order to launch a massive LTE network. If the merger had succeeded, AT&T’s HSPA+ network would have had to pull double duty, handling both carriers’ 4G customers while AT&T transitioned to LTE. I’m not refuting that AT&T’s network is running hot, but its problems seem to be largely of its own making, and buying T-Mobile wouldn’t have solved any of its immediate capacity needs.

Finally, Stephenson lambasted the FCC over what AT&T considers the commission’s arbitrary rulemaking, and he repeated AT&T’s call for Congress to start setting spectrum auction policy. Ironically, today’s more vigilant FCC is AT&T’s own Frankenstein creation. As I wrote in a post earlier Thursday, AT&T’s consolidation ambitions lit a fire under regulators, which had been content to let every major wireless deal slide for the last decade. The FCC and U.S. Department of Justice are now more aggressive, and we have AT&T to thank.

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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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T-Mobile didn’t get new spectrum nationwide but it certainly got some valuable licenses in key cities. What’s more, Shepherd found that AT&T had fork over all of its AWS holdings in some pretty valuable markets, including Boston; San Francisco/Oakland; Washington, D.C.; Houston; Baltimore; Atlanta; San Diego; Seattle; Kansas City, Mo.; San Jose, Calif.; San Antonio; and Salt Lake City. While those losses must sting AT&T, the operator was very careful about which markets it chose to relinquish.

AT&T is launching its LTE over both 700 MHz and AWS frequencies, and in all of the biggest cities, AT&T only gave up spectrum where it had enough 700 MHz backfill to get at least a decent-sized LTE network up and running, Shepherd said. In some big cities AT&T will only have enough 700 MHz to launch networks half the size of Verizon’s current LTE setup. But AT&T will be able to boost its capacity considerably when it moves to LTE-Advanced, incorporating the new 700 MHz spectrum it bought from Qualcomm. In the biggest markets such as Chicago, AT&T wouldn’t part with any of its AWS licenses even though it had other spectrum to fall back on.

As for T-Mobile, it made out like a bandit in some of the nation’s most important cities, giving it between 60 MHz and 80 MHz of combined AWS and PCS airwaves in many of the markets involved in the transaction. That will allow T-Mobile to expand its HSPA+ 42 Mbps footprint in some areas and add more 4G capacity in others.

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