Why The AT&T/T-Mobile Merger Should Not Come To Pass

Pacman AT&T T-Mobile

Even though the growth of the modern mobile computing market is moving at whirlwind speed, one of the main reasons why it didn’t happen earlier was because of the control that conservative wireless carriers exerted over devices running on their networks. Should AT&T (NYSE: T) be allowed to acquire T-Mobile, wireless carriers will get even further control over the distribution and makeup of the hardware and software that is changing the way we interact with computers, and they’ll likely charge us more for the privilege.

There’s really nothing else to conclude following a week in which AT&T CEO Randall Stephenson attempted to convince an incredulous Congressman that his company didn’t compete with T-Mobile, which AT&T has proposed to acquire for $39 billion, despite the fact that AT&T lists T-Mobile on a Web site dedicated to evangelizing the deal in a section called “Know The Facts: Competitive Landscape.” When you’re reducing to making those kinds of arguments in hopes of convincing the skeptics, it’s a sure sign that you’re low on ammunition.

The simple truth is that the proposed AT&T/T-Mobile merger would place far too many mobile computing customers under the control of a single corporation that has not shown particular strength in network performance or customer service but is very adept at cutting exclusive deals for the best handsets. There were 302.9 million wireless subscribers in the U.S as of December 2010, according to the CTIA, representing 96 percent penetration. Should T-Mobile’s customers be forced into a shotgun marriage with AT&T, the combined entity would serve 130 million customers.

AT&T says it wants this merger to go through because without T-Mobile, it won’t have enough spectrum to build a national 4G network. What it really wants is the market power that comes from being the biggest carrier in the hottest mobile market in the world.

When AT&T executives discuss the merger, they usually paint a very broad picture of the wireless market in general, describing a fiercely-competitive landscape in which scrappy underdog carriers like U.S. Cellular, MetroPCS, and Cellular South challenge the four main national carriers on a local basis. If you were looking at mobile phones exclusively as voice devices, that might actually be true.

However, when you consider the competitive landscape for data devices, which we can all pretty much agree is the future of the mobile market, things look a little different.

The latest and greatest phone offered by MetroPCS in my area is the Samsung Galaxy Indulge, a version of the Samsung’s Galaxy S models. CNET’s review of that phone states “However, the specs pale in comparison to its more-premium Galaxy S cousins, like the Samsung Epic 4G.” U.S. Cellular is promoting the Samsung Mesmerize, which is basically the same as the Galaxy Indulge with a few more bells and whistles, while Cellular South has the Galaxy S Showcase; same deal.

There’s nothing wrong with those phones, but they are not the kind of devices which will draw customers into your store if you are one of those carriers. Those types of devices–the iPhone, the Atrix, the Thunderbolt–require heavy subsidies in order to make their prices palatable to consumers, which also allows wireless carriers to justify locking customers into two-year contracts ensuring they can’t leave for another provider without paying a hefty fee. Smaller carriers don’t necessarily have the funds or the market reach to compete with the bigger carriers, who can offer deeper subsidizes and make it up on volume. The nascent tablet market is playing out a little differently, but it’s too early to tell whether similar subsidies will be needed to really jump-start tablet demand at the mass-consumer level.

People shopping at carriers other than The Big Four are those motivated by price and coverage quality in their local area, and when they inquire about smartphones they are essentially getting three slightly different versions of the same Samsung Android phone, rather than a choice between competitive devices. (Most carry other low-end Android phones, BlackBerries and even still a few Windows Mobile phones, but BlackBerry has been decreasingly competitive against iOS and Android, even according to Research in Motion’s co-CEO.)

People looking for innovative mobile computers–the type of smartphones and tablets that are fueling the growth of a mobile software and services industry–don’t shop at those carriers. That’s because new phones and tablets debut on the biggest carriers or national chains like Best Buy for obvious reasons: manufacturers, software makers, and application developers are motivated by volume.

So AT&T is proposing that it be allowed to achieve that kind of critical mass (which it already has, in truth) in one fell swoop, as opposed to spending $39 billion on a quality network and growing its user base through a combination of compelling devices and excellent customer service. Should the merger come to pass, the mobile industry would be simply unable to avoid AT&T if they wanted to do business in the U.S.: it would be too limiting otherwise to make business sense.

And Verizon, which has been nearly silent on this issue, is very likely to respond knowing it would be very difficult for anyone to block a major acquisition on its part after AT&T’s proposal was allowed to pass. Sprint (NYSE: S) CEO Dan Hesse basically put his company up for sale during the hearing this week, saying that if the merger went through Sprint would be in a very tenuous position. Verizon and Vodafone (NYSE: VOD), which operate Verizon Wireless (NYSE: VZ) and its 102 million customers as a joint venture, would be the most likely suitors, leaving U.S mobile customers with two choices when they are looking for high-end or even mid-tier data-driven mobile computers, neither of which is known for affordable pricing.

It may well be in the best long-term interests of U.S. wireless consumers to have access to a fast nationwide wireless network, as AT&T argues. But this is not the way to get there: spectrum can be made available from other sources, such as broadcasters, and existing spectrum can be used more efficiently.

The last thing the mobile industry needs just as all the pieces start to fall into place is a narrowing of the choices for how these fabulous devices and applications will connect to the Internet. And the federal government should consider this deal very carefully, because if it is allowed to pass, the net neutrality debate over whether wireless Internet providers should be subject to those rules will triple in magnitude.

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