AT&T/T-Mobile: AT&T has a tough sell. Its plan to acquire T-Mobile USA for $39 billion must persuade regulators the deal will improve wireless service and won’t harm competition. There are some solid public benefits to the combination, such as more efficient use of scarce spectrum. But a merger is forever, barriers to entry are high and the market is already a functional duopoly.
Even seller Deutsche Telekom looks worried. The German parent company negotiated a break fee worth nearly eight percent of the deal’s value. And that’s only the cash component. AT&T also would surrender valuable spectrum and roaming rights if regulators quash the takeover. The willingness to agree to such terms may reflect AT&T’s certainty here, but acquirers don’t give away insurance for free. Combining the firms probably would result in better service. To use limited spectrum efficiently and have enough customers in a given area to support costly new infrastructure, it’s better to have fewer providers. Adding T-Mobile to AT&T’s mix would mean fewer dropped calls on iPhones in urban areas and more next-generation services in rural ones.
Yet market concentration reduces competition. That’s where the deal’s tough questions arise. If it goes through, Verizon Wireless and AT&T would have more than three-quarters of all subscribers. Furthermore, margins are highly correlated to market share. The two big firms already account for 92 per cent of the industry’s free cash flow, according to Sanford Bernstein estimates. AT&T argues that consumers still have plenty of choice on a local level. Sprint is still there. And, companies such as TracFone have picked up customers, especially in the market for cheap prepaid service.
Increasing returns to scale mean, however, that AT&T and Verizon already have vastly more money for marketing, capital expenditure and acquiring the hottest handsets. Moreover, upstart firms rely on buying up excess capacity on networks such as Sprint’s. The market already took a dim view of Sprint, sending its shares down 13 per cent on news of AT&T’s deal. Constructing a new network to rent out, as LightSquared is doing, also looks less viable if T-Mobile isn’t a potential customer.
AT&T may have an answer to regulators’ questions on quality, but it hasn’t presented a convincing one on competition.
