The going gets tough for AT&T’s T-Mo plans

Updated: The Federal Communications Commission said it would combine the review of AT&T’s purchase of spectrum from Qualcomm (s qcom) with the agency’s review of Ma Bell’s purchase of T-Mobile.

Update: The FCC can however, conclude its reviews independently. The FCC’s decision on Monday night could be seen as the agency’s taking a careful view of consolidating so much spectrum in the hands of one company, which could be a blow for AT&T’s (s t) plans to buy the No. 4 player in the U.S. market.

We’ve long said this deal is bad for consumers and bad for innovation, but in the last few weeks a few other reports have come out that indicate our initial reaction might be correct. And perhaps with its decision on Monday, the FCC is really listening.

For example, last week the Yankee Group issued a note that said it believed wireless prices would rise by $35 in six major cities if AT&T were to buy T-Mobile. AT&T disputes this. Last month consumers (with the help of an enterprising law firm) filed a suit seeking arbitration to stop the merger. Also in July, Senator Herb Kohl, the Democratic chairman of the Senate Judiciary subcommittee on antitrust matters, came out strongly against the deal, as did several other Democratic senators. However, two powerful Republican senators, including John Cornyn from the state of Texas, where AT&T’s headquarters are based, praised the deal.

However, not everyone seems upset. AT&T hired consulting firm M+R to do its own analysis on T-Mobile. The paper, by M+R economist Allen Rosenfeld, argued that regulators are focusing somewhat on the wrong issue — not what happens if AT&T buys T-Mo but what happens if AT&T doesn’t buy T-Mobile. The paper posits that without AT&T’s big bucks, T-Mobile will fail, leaving consumers with less choice in the market anyhow.

It says that many analysts are making a mistake by comparing apples to oranges, with the oranges being the current 2010 pricing environment and the apples being the 2012 post-merger pricing environment if the T-Mobile buy occurs. So instead of comparing today’s real prices, the paper suggests that the economically rational thing to do is compare the imaginary apples of the 2012 time frame if the deal happened versus if the deal did not happen.

At the core of the flawed apples-and-oranges comparison is an implicit assumption that, in the absence of the proposed merger, T-Mobile USA’s current pricing structure would continue to be available to consumers. In the most-general sense, that assumption implies a continuation of the status quo for T-Mobile USA for the foreseeable future. More specifically, it assumes that T-Mobile USA’s overall customer strategy, driven by plans priced lower than AT&T’s and Verizon’s, could be sustained for years to come. A close look at the industry and the competitive outlook for T-Mobile USA, however, casts serious doubt upon the validity of the assumption that T-Mobile USA, going it alone in the absence of the merger, would be able to sustain its pricing strategy and that consumers would be better off if the merger were not approved.

This perspective may explain why AT&T’s executives on the company’s second quarter results call shared last month that they were confident in the merger going through. But with the latest review by the FCC, it certainly doesn’t look like it can take its $39 billion purchase for granted.

Update No. 2: Qualcomm isn’t pleased with the FCC delay in approving its sale of spectrum to AT&T. The chimaker emailed the following statement:

The FCC should approve the pending AT&T-Qualcomm spectrum sale now because of the clear benefits to the public from the sale that stand on their own and are totally unrelated to the proposed AT&T-T-Mobile merger. Approval now will foster the public policies that the FCC correctly deems so vital for the American public. Approval now will re-purpose unused 700 MHz unpaired spectrum for mobile broadband, thereby easing America’s spectrum crunch and helping to meet the FCC’s goal of reallocating 300 MHz for mobile broadband over the next five years. Approval now will also allow Qualcomm to invest in a new, spectrally efficient technology (supplemental downlink) and enable the first worldwide deployment to occur in the U.S., thereby fostering U.S. economic growth and job creation and enhancing U.S. global leadership in wireless technology.