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AT&T punishes its customers for T-Mo merger’s failure

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Wondering why AT&T(s T) smartphone data rates just went up? Because the operator was denied its acquisition of T-Mobile – at least that’s what AT&T CEO Randall Stephenson implied at AT&T’s financial results call on Thursday. AT&T seems awfully bitter about AT&T-Mo’s failure, and now it appears to be taking it out on its customers.

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(s aapl), which continues to dominate its sales. AT&T’s smartphone penetration among contract subscribers is now 56.8 percent, compared to Verizon’s (s vz)(s vod) 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.

37 Responses to “AT&T punishes its customers for T-Mo merger’s failure”

  1. Tmobile sucks. They shouldn’t even be in business. I am glad that the merger failed. AT&T is doing wrong by passing on their $4 billion dollar to the customer. The government or someone needs to step in and put a stop to this. That’s is totally unfaie to the customer.

  2. T Mobile sucks. I am glad that the merger failed. But that does not give the right to AT&T to pass the expenses of a failed merger on to the customer’s. The government or someone needs to step in and put a stop to this. It’s unfair to the customers. Tmobile needs to be shut down or be put out of business for good. They have very poor service. They are no good.

  3. There would be plenty to upgrade with if they hadn’t tried to force a merger they knew wasn’t recommended. 4 Billion will get some serious infrastructure. As a stock holder, I’d like to know who’s resigning already??

  4. Randall is just keeping his promise. In heated debate, he claimed to the FCC that if the deal fails, it could mean higher rates for consumers. He is truly a man of honor.

    Verizon and AT&T come from two different corporate “orifices”. One’s speeches are headquartered by mouth, the other’s by ass.

    John B.

  5. Somebody has to pay for the screwups and att’s inability to buildout their own network. The marketing alone to tell everyone how great the network is is expensive in and of itself, not to mention the merger. Oh lets not forget how they make their non customers pay for it too by taking the tax right off for a failed merger. This is classic monopoly playbook.

  6. AT&T CEO claims that the FCC lowered the spectrum capacity when AT&T made a bid to purchase TMob. FCC then claimed the merger would give AT&T too much spectrum and that it would be unfair to other providers. However, the recent Qualcomm spec purchase from AT&T was approved using the old spectrum rates. Congress needs to draft legistlation that forces the FCC to be more transparent. CEO hit it on the nose by saying until that point comes, the FCC will be allowed to pick and choose the winners and losers in the wiresless world.

    • Kevin Fitchard

      Hi Ronjon,

      I think there is a big difference between those two spectrum purchases, though, and they should be treated differently. Qualcomm’s 700 MHz spectrum is a unpaired, meaning it can’t be deployed in any normal LTE network. That spectrum might have sat unused for years if AT&T didn’t step up to buy it. It’s in the public’s best interest for the FCC to make an exception. AT&T also only got 6 MHz in most places 12 MHz max in others.

      The AWS and PCS airwaves are different story altogether. Paired bands in clean spectrum. Operators who own those have a distinct advantage over any operator with funky airwaves like unpaired 700 MHz. And we’re not talking about a paltry 6-12 MHz. We’re talking 30-40 MHz in many cases, in some markets more.

  7. I have never held a vendor in such low regard has I do AT&T. As poorly as they treat my friends that have their cell service, they have even worse customer service at the corporate level.

  8. I hate AT&T as much as everyone else, but I stopped reading this article after this sentence: “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 they’re rates are that much cheaper than VZ’s, why shouldn’t they be allowed to raise them? Would seem even logical to do so. I hope that sentence was a type-o.

  9. I’m hoping someone can explain this to me:
    Why does the government “sell” spectrum at all?
    Why not regulate interoperability and then rent the spectrum to anyone willing to pay the price?

    I think it’s asinine that a company is allowed to “own” a radio wave frequency for two way communication. It makes sense with single direction communication like radio where these companies are actually providing content, but not with data connections.

    • Kevin Fitchard

      Hi PhoR11,

      Good question. The simple answer (though not necessarily the right one) is that government makes enormous amounts of money at spectrum auctions. They couldn’t collect the same fees if they didn’t have assurances that they wouldn’t lose that spectrum at some future date.

  10. Chuck Talk

    Thankful to still be with T-Mobile, free from AT&T. Sorry this was ever attempted, but then again, left AT&T because of the service and went T-Mobile for the service. THe thought of being swallowed by AT&T again was not pleasant. Sorry for those who are left behind, but pleased that this was not allowed to occur as it was anti-competitive and we don’t need less choice in the market, we need more choice to create and spur innovation and growth.

      • Just because U had a bad expirience it does not mean everyone else will. I also left at&t because their custimer service ppl are garbage and overpriced plans. The only thing keeping me there was the iphone once i lost it i had no other reason to stay with them. And now im a proud owner of a gs2 im am hopeing a new iphone with a 4″ display clmes out for t-mobile then it will be perfect.

  11. James Bonney

    As a “Teddy Roosevelt Republican”, I think it’s high time that the FTC not only prevent these type of horizontal mergers from ever happening, but to actively bust up those that were rubber stamped by a merger-friendly Supreme Court. AT&T is not “owed” anything for a failed strategy.

  12. Trina Davis

    I see this as a win-win for AT&T and customers. They get more data at cheaper and at the same time AT&T gets more revenue. If AT&T did a netflix, where they raised prices without any incentive to customers, you maybe right, but vindictive might not be the right term for that either. When I see something stinks I call it. And the blogger stinks. I have to agree with Boomer. I question your integrity and objectivity as a blogger.

    • What did Kevin say that lacked integrity or objectivity? And even if he wasn’t being objective, he is a blogger. Go read other blogs, they are all filled with the writer’s opinion. If they don’t agree with your opinion, that doesn’t mean they lack objectivity.

      It’s not a win for ATT customers who don’t need a higher cap.

      ATT is vindictive. They are angry at the government for blocking the merger, and are using it as an excuse to increase prices, even though the failed acquisition had nothing to do with the price increase.

    • Kevin Fitchard

      Hi Trina,

      I actually agree with you. I think a lot of customers will like these new plans, particularly the ones that regularly go over the 250 and 2 GB caps only slightly each month. But overall AT&T is cashing in on the way the tier structure works, guaranteeing its gets a higher revenue stream from most customers each month. That’s a business decision, and I’m absolutely fine with that. And when I wrote about the rate changes, that’s how I covered it.

      But today, AT&T tried to claim that its rate hikes weren’t a normal competitive business decision. It tried to claim that regulators, its competitors and the American public forced it hike rates by not letting it buy T-Mobile. The two have nothing to do with one another and AT&T is linking them solely to make you, me and everyone else think that public policy is to blame: We didn’t get what we wanted so our customers will pay. I call that vindictive.

  13. What else would you expect them to do after paying T-Mobile? They have to get their money from somewhere.

    Of course AT&T is bitter. They thought they were too big to fail – at merging with T-Mobile (getting infrastructure that they evidently badly need).

    • Kevin Fitchard

      Hi Don,

      In my mind, changing your pricing structure to account for a one-time charge is not the best of business decisions especially if you, like AT&T, can afford to absorb it. What if it did buy T-Mobile spending $39 billion? Instead of hiking rates $5, would they hike them $50?

      In any case, if the break up fee is the real reason for the price hike. AT&T should just say that. Instead it’s trying to manipulate the public into thinking this is somehow linked to policy, i.e. if you don’t let us merge prices go up. It’s a gross distortion that its using as a subterfuge for what is obviously a pure business decision. I don’t fault them for making that decision. I fault AT&T for trying to trick the public into thinking its anything other than a business decision.

  14. AskMattHeKnows

    Why not ask the real questions? Throttling was occuring before the FCC killed the merger. Ask any AT&T customer(current or former) that was “Grandfathered” in the unlimited plan. AT&T breached contract with every single one of those customers that they throttled, changed contracts terms on customers during contract periods forcing existing customers to either “bend over” and take it or discontinue service and seek another carrier.

  15. no way. it subsidises smartphones and is losing on smartphones in the hope of attracting new customers. the at&t and verizons subsidising smartphones is what is causing smartphone sales to go up

  16. Kevin 'Boomer' Engelkamp

    AT&T is allowed to say that the 4 Billion dollar expense of a failed T-Mobile merger is being passed on to consumers. Calling it vindictive makes me question your integrity and objectivity as a “journalist”.

    • Kevin Fitchard

      Hi Kevin,

      That’s not what Stephenson said though. He said capacity constraints were forcing AT&T to raise prices and throttle speeds. But AT&T is manipulating its message. If it has capacity constraints it has options. If it really couldn’t handle the traffic why lower the per-MB rate of data plans?

      As for objectivity, I’m not going to argue with you there. We’re a blog, not Reuters. If something stinks, we say it stinks.

    • Boomer, ATT isn’t saying the $4 billion charge is being passed on to their customers. They’re saying they have to raise prices because they are capacity-restrained. Which they are not. They lost the opportunity to inflict over-priced, sub-standard service on T-Mobile subscribers, so now they have to do even more of that to their existing ones. Until they leave.

    • Andrew J Shepherd

      Sure, AT&T is allowed to say almost anything. Action is what counts. And, in this case, it is “vindictive.” In a move that smacks of sour grapes, AT&T management is punishing its subscribers instead of owning up to its mistake of trying to push through (but then abandoning) a merger that was clearly anti competitive.

      In fact, I think that John Taylor has a photo of Randall Stephenson grimacing at the taste of those sour grapes : )