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Thursday, September 15, 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

In March 2011, AT&T 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). Postmerger, Deutsche Telekom would own approximately 8% of AT&T’s stock. AT&T is the secondlargest 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. On August 31, 2011, DOJ filed a complaint with the United States District Court for the District of Columbia seeking to permanently enjoin (block) the merger. AT&T responded that it would “vigorously contest” the complaint. Under the terms of the agreement, if the merger is not consummated AT&T would have to pay Deutsche Telekom and T-Mobile a breakup fee of $3 billion in cash plus access to roaming and spectrum valued at an additional $3 billion.

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.

DOJ claims the merger likely will lessen competition for consumer mobile wireless telecommunications services – from the perspective of consumers, in 97 local markets, and from the perspective of suppliers, in the national market – and also will lessen competition in the national market for enterprise and government wireless telecommunications services. It claims actual and potential competition between AT&T and T-Mobile will be eliminated; competition in general likely will be lessened; prices are likely to be higher than otherwise; the quality and quantity of services are likely to be lower than otherwise due to reduced incentives to invest in capacity and technology improvements; and innovation and product variation likely will be reduced. DOJ asserts that the merging parties cannot demonstrate merger-specific, cognizable efficiencies sufficient to reverse the acquisition’s anticompetitive effects.

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 subsets 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.

Date of Report: September 2, 2011
Number of Pages: 25
Order Number: R41813
Price: $29.95

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