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Thursday, May 12, 2011

The Proposed AT&T/T-Mobile Merger: Would It Create a Virtuous Cycle or a Vicious Cycle?

Charles B. Goldfarb
Specialist in Telecommunications Policy

AT&T has announced an agreement to acquire T-Mobile USA (T-Mobile) from Deutsche Telekom for $25 billion in cash and $14 billion in AT&T stock, subject to the approval of the Department of Justice (DOJ) and the Federal Communications Commission (FCC). Post-merger, Deutsche Telekom would own approximately 8% of AT&T’s stock. AT&T is the second largest mobile wireless service provider in the United States; T-Mobile is the fourth largest. The combined company would be the largest mobile wireless service provider. In recent years, AT&T has been gaining subscribers while T-Mobile has been losing subscribers.

AT&T and T-Mobile state that combining their spectrum holdings and networks represents the most efficient way to alleviate each company’s largest strategic challenge—AT&T’s “network spectrum and capacity constraints” and T-Mobile’s lack of a “clear path” to deployment of 4G Long Term Evolution (LTE) network technology, “the gold standard for advanced mobile broadband services.” They assert that the merger would turn two companies that currently are capacity-constrained into “an efficient capacity-enhancing combination” that would have the incentive to increase output, improve quality, and lower prices. Most notably, AT&T claims the merger “will enable it to deploy LTE to more than 97% of Americans—approximately 55 million more Americans than under AT&T’s current plans” to build out its LTE network to just 80% of Americans.

Critics argue that the merger would result in two firms—AT&T and Verizon Wireless—having more than 70% of the market as well as the lion’s share of the spectrum that provides the highest quality mobile wireless service, which the former Bell companies would be able to leverage in their dealings with device suppliers and others to place other mobile wireless service providers at a competitive disadvantage. These opponents claim that allowing AT&T to own such a large portion of mobile wireless spectrum—especially in conjunction with AT&T’s proposed acquisition of mobile wireless spectrum from Qualcomm—“would further empower an already dominant wireless carrier to leverage its control over devices, backhaul, and consumers in ways that stifle competition.”

These conflicting perspectives reflect the classic debate over the tradeoffs between static efficiency and competition, which in individual cases can only be measured by a fact-driven analysis. The mobile wireless industry is characterized by economies of scale and scope. In a static market, it would be less costly and/or more efficient to build out and operate a single network instead of multiple networks with partially duplicative facilities; to give a single provider use of a large block of spectrum rather than giving a number of providers use of a subset of that block; and to design and mass produce a single suite of handsets rather than making handsets for smaller groups of customers using many different standards and network technologies. In a dynamic market with rapidly changing technology, however, the claims of scale economies must be weighed against the possibility that any lessening of competition will lessen pressure for innovation and cost and price restraint. Consolidation that gives one or two providers a dominant share of the market and of the available spectrum may promote static efficiency, but it may undermine dynamic efficiency. DOJ and the FCC may have to analyze this tradeoff as they weigh the proposed merger.

Date of Report: May 10, 2011
Number of Pages: 24
Order Number: R41813
Price: $29.95

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