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AT&T, T-Mobile Merger: A Regulatory Quagmire?

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AT&T’s (s t) announcement that it would buy T-Mobile for $39 billion in cash and stock is by no means a forgone conclusion, despite the assurances in the press release that it would close within the next 12 months. In fact, consumer groups are already calling the deal “unthinkable,” referencing a former FCC chairman’s comments from 1997 about a rumored deal by AT&T to acquire SBC, a regional Bell operating company. Ironically, in 2005, SBC acquired AT&T in a deal that was no longer unthinkable.

So is the $39 billion acquisition of the nation’s fourth largest mobile operator by the second largest mobile operator unthinkable? That’s the question industry watchers and regulators are asking themselves in the hours after the deal was announced.

Several sources in Washington D.C. were divided on the idea that the Department of Justice would approve AT&T buying T-Mobile. One source who has held multiple roles in telecommunications politics pointed out that this deal is a vertical horizontal integration that can clearly show a decline in competitiveness, so it should be easy for the DoJ to stop, especially since the FCC last year clearly documented how concentrated wireless ownership was becoming, using an index the Department of Justice actually uses to determine the concentration of mobile wireless service providers: the Herfindahl-Hirschman Index.

Under that index, the FCC found that the average HHI increased in 2008 relative to prior years. The weighted average of the HHIs was 2848 in 2008, an increase from 2674 in 2007. The weighted-average HHI has increased by nearly 700 since the FCC first calculated this metric in 2003. The industry has become more concentrated, leading to lowered capital expenditures and higher profits for the largest two players according to the report.

Chetan Sharma, a wireless analyst, has calculated that this merger would increase the HHI by about 600 to 700 basis points nationally, and notes that DOJ antitrust scrutiny is applied to a merger if it would trigger an increase in the HHI of 100 basis points or greater. However, he said the FCC and DoJ may look at the markets on a regional basis, which could change the equation and result in AT&T giving up some of the T-Mobile assets. That’s in line with those who think the DoJ and FCC will approve the deal.

Some sources think DoJ won’t scuttle the deal, in part because T-Mobile is a fairly weak player in the current wireless industry, and isn’t likely to last without a buyer. That would mean the competitive results would boil down to the conditions set by the Federal Communications Commission and the DoJ as part of their approval of the deal. As Derek Turner, research director at the Free Press, notes in an email, “That’s the key question. Is this industry trending towards natural duopoly and is there a mix of oversight and regulations that can make this devolution not create antitrust problems? Having two companies control three-fourths of the market plainly won’t lead to optimal outcomes for consumers or innovators who use the platform.”

What concessions are we likely to see? My hunch is that the FCC will likely have AT&T disgorge some of the T-Mobile spectrum, might try to enforce some network neutrality provisions on the combined wireless network and could possible try to gain some kind of special access provisions from AT&T that could benefit rural carriers and Sprint (s s). Special access fees are what operators pay to connect their towers back to the main Internet: pipes provided by AT&T and Verizon (s vz) in most markets. A spokesman for the FCC replied to my request for comment with, “We may have something soon potentially.”

23 Responses to “AT&T, T-Mobile Merger: A Regulatory Quagmire?”

  1. AT&T is being sued by the EEOC because they are not letting people who had left or were pushed out of AT&T with certain packages apply for work.. and I mean even contracting work. These packages clearly stated that the people could return and many of them did. Though a couple of years ago AT& decided to make their own rules and took the SSNs of each of these people and have tagged their SSNs as not being fit for work. Nothing they did and no viable business reason for the behavior. What most of these people had in common was that they are over 40 and can not apply for work no matter how skilled they are with AT&T. Now with this takeover they are even more closed out of their industry.

  2. Not good. TMobile is already in pretty weak shape though, and letting them go bankrupt would be a worse end than letting them get bought but enforcing some heavy regulation on the deal. Net neutrality and handset compatability? Yes please.

  3. This would be terrible. T-Mobile has good service and AT&T sucks.
    AT&T is on there way to monopoly, and their new bandwidth policy just underlines it.
    Didn’t AT&T get broken up 20 yrs ago for just this reason?

  4. So what net neutrality regulations has the FCC imposed on wireless carriers? The FCC has basically said wireless is different than wired, and has allowed the carriers to place limitations on wireless broadband usage, including caps and throttling.

    The FCC should insist that the wireless carriers un-bundle equipment from service, just like they did with the landline companies in the 80s. T-Mobile is the only company that will separate equipment from service costs, by offering lower monthly prices for customers who provide their own phones. By not applying the landline rules to wireless, the FCC has given ATT and Verizon a big advantage over the smaller companies, who don’t get manufacturers to build phones specifically for them.

  5. Great article. Many people seem to be putting up articles based on the news, but this is one of the few well-considered, recent, and relevant ones.

    The antitrust issues you raise with the HHI are important, but the DOJ approval seems to be one small portion of what should happen now. The FCC really needs to step in and show some backbone in setting standards for consumer protection similar to what CFPB and Warren will be doing with the financial industry.

    They should immediately pressure AT&T and T-Mobile to rescind early termination fees. Just like cable and satellite, the move by one would likely eliminate all via commercial pressure.

    After they do that they should look at data caps. Data caps are a regressive and socially harmful means of network management. They discourage the most interesting and modern uses of networks.

    Then they should begin a program of closely monitoring heavy-handed bundling practices and device lock-downs. It is in consumers’ interest that devices, their extensions commerce tools (stores, etc), and carrier settings be unlocked for widest applicability to any networks and applications.

    And finally, FCC should make AT&T responsible for proportionally high quality of broadband user experience. That is to say, they should have to maintain a quality level that tracks with their percent access to spectrum. Traditional usage of spectrum models contain language of that sort for technology, but rarely possess the teeth to monitor impact and effectiveness.

    The additional spectrum they are being given with this acquisition is a big deal. Historically no price paid for spectrum has turned out to be as wildly overpriced as it seemed in that moment. There is no reason to believe this time will be any different.

    The nature of radio waves and spectrum makes them seem ethereal, abundant and never-ending, but reality shows that nothing could be further from the truth. This isn’t Mexico by Carlos Slim and it shouldn’t strive to become that. FCC needs to show strength in the face of a corporate giant looking for even more angles and advantages than they already have; after all the people are their real boss.

    • I don’t know what universe you’re living in, but I’m living in the one where the DOJ approved the ridiculous LiveNation/Ticketmaster merge with no real concessions by the company.

      Granted, telephony is a little more serious than sporting events and concerts, but I don’t know if the importance of competition within the GSM type of cell-phone service is enough to force the DOJ to grow a pair.

      I guess we can only hope.

  6. excellent article, lots of people have put something out there, but this one is thoughtful and backed by real, recent and relevant data.

    antitrust and doj aside, the hhi changes reflect a major need for fcc to step in and provide meaningful consumer protections, ala cfpb and warren in banking.

    first step should be to make at&t and tmo rescind etfs immediately, that would commercially force verizon and everyone to do the same. second step should be mandatory unlimited data packages at a reasonable tariff, licensees of public spectrum owe the public reasonable plans. third step should be open device access, including carrier unlocks. fourth step should be elimination of platform bundling for components like application stores, platforms like android should be allowed to move forward without excessive interference from monopolistic forces.

  7. In the smart phone age, American consumers need 2-3 strong, competing networks using the same (LTE) technology with vast bandwidth and spectrum while carriers need large networks for scale.

    If the government will ban carrier phone-exclusivity and require that all cell phones sold be multi-carrier devices, this deal makes sense for American consumers, as would a consolidation of Sprint and Verizon. Better yet, Apple is rumored to be working on sophisticated software with switching and accounting technology that may allow phone calls to automatically be handed off between compatible carriers as well as towers. If its real, this could dramatically reduce weak signals and dropped calls on all networks. But we need strong, compatible phones and networks for this to become a reality.

    Innovations like this, and service ideas being floated like the new LightSquared network that is ramping up, make carrier consolidation easier to accept.

    When consumers can easily switch networks (at the end of a reasonable, two-year contract period) without having to purchase a new phone, the carriers will be forced to innovate and compete on price.

    • “at the end of a reasonable, two-year contract period”

      I do believe that signing away my soul to telecom for two years does seem pretty reasonable to me! I, for one, support our new oligarchial communications overlords!

  8. a random high school student...

    I’m quite sure AT&T is not going to by T-mobile. I believe AT&T is going to BUY T-mobile, but I am just some high school student. What do we know?

  9. If this deal is allowed to go through, it would be one of the most anti-competitive mergers in US history. T-mobile is the only wireless carrier that charges less for service if you bring your own phone. You can buy an unsubsidized phone to use on ATT’s network, but they charge the same price, so you would be subsidizing a phone you never get. This practice was abolished by the government for landlines in the 80s, and should be stopped for mobile devices.

    Also, I don’t know if ATT sells any pure android phones like T-Mo does. I don’t want to buy a phone with their proprietary UI on it.

    this would also give ATT a monopoly on GSM service in the US. Yes, we could still get CDMA service from VZ or Spring, but if I want a phone that works here and in Europe, I would be forced to get ATT service.

    This merger should never be allowed. The fact that ATT is willing to pay $3 billion to DT if the government stops it sounds like they have already paid off the right politicians in DC to keep it from happening. They can’t be that stupid to make a $3B bet, right?

    • Vzw & Sprint have the option to buy phones that work on both networks as a Sprint customer I was able to switch from cdma to gsm through my settings on the phone & as a VZW employee I would activate the sim cards when customers were going to a gsm network its all about the phone look for ones that say “global capable” in the specs ;-)