The AT&T/T-Mobile Merger Report

September 1st, 2011

I have to admit this one caught me by surprise. On Tuesday, AT&T made assurances that they’d be bringing 5,000 offshore support jobs to the U.S. if their proposed merger with T-Mobile was approved. What’s more, they also promised that, although there would be those expected staff reductions to eliminate “duplication,” such reductions would come largely as the result of attrition. That means, employees who were discharged for other reasons, quit or retired.

That is the sort of promise that was designed to satisfy the concerns of people who believed a merger of that sort was a potential job killer. But certainly the possibility of eliminating one of the four largest wireless carriers hasn’t gone over well with the public (particularly consumer advocates), politicians, and certainly not with Sprint, the third largest wireless service.

Now it appears that the U.S. Justice Department agrees, and so they’ve filed a civil complaint in the United States District Court for the District Columbia to block the proposed $39 billion merger. In that complaint, the DOJ alleges that “AT&T’s elimination of T-Mobile as an independent, low-priced rival would remove a significant competitive force from the market.” The complaint also claims that, if the merger isn’t blocked, “customers of mobile wireless telecommunications services likely will face higher prices, less product variety and innovation, and poorer quality services due to reduced incentives to invest than would exist absent the merger.”

This is serious business. The DOJ has, in recent years, rarely moved to stop mergers. Usually they demand concessions to allow a deal to go through. But this time, they are going the whole nine yards, which, for all practical purposes, will probably doom the deal.

Now in deciding to acquire T-Mobile from its current owner, Deutsche Telekom, AT&T claimed the merger was necessary to improve the company’s troubled network and deliver fewer dropped calls and superior quality connections. But merger plans always include buzzwords about the benefits of the corporate marriage. Another is “synergy,” which is something that rarely occurs. Usually a merger is designed to rid the industry of a competitor, as HP did with Compaq some years back.

In the case of the telecom industry, you have seen AT&T rebuilt from the mergers of regional carriers, or Baby Bells, in effect undoing a fair amount of the Ma Bell breakup of the 1980s. Verizon is the other former Baby Bell still standing, along with Qwest, now part of CenturyLink. But nobody expects AT&T and Verizon to even consider a merger. No one in their right mind would approve that one.

AT&T has requested an expedited hearing in an effort to overturn the government’s action, and attempt to persuade the courts to accept their merger proposal. I would even imagine they might present additional concessions, perhaps selling off even more wireless spectrum than they have already offered, and perhaps guaranteeing that T-Mobile’s discount contract prices would remain intact. But if AT&T divests itself of assets at the same time claiming that the pooling of assets of two companies is necessary to improve service to customers, you end up with one huge logical contradiction.

Now after the lawsuit was filed, Sprint announced it’s pleased with the action. The FCC continues to examine the merger proposal, but is clearly skeptical.

If the merger were ultimately approved despite the lawsuit, and I am not going to predict how the courts might react, Sprint would be the odd one out here. Smaller than the other two remaining large carriers, they’d struggle even harder to build a decent market and overcome previous problems that have resulted in customers leaving the company. But the arrival of an iPhone would surely help.

While the courts can be unpredictable, it seems, on the surface, that the DOJ’s action ought to be sufficient to put the kibosh on this deal.

Besides, it’s not as if such a merger, if granted, would magically transform AT&T’s sputtering network overnight. For one thing, the two networks, while using the same GSM protocol, also support different frequencies for 3G service. It could take months or years to install upgrades that make both networks fully compatible and allow the system to support all existing mobile hardware seamlessly. Glitches will be inevitable. I can’t imagine such things happening overnight.

But if AT&T were to put the same amount of cash on the table to invest in building out their own network, particularly in regions where service is nonexistent or troublesome, they’d probably get far more bang for the buck. Besides, an independent T-Mobile would be able to continue to tout lower prices and other advantages. Regardless, it will probably take weeks or months for this matter to be settled. AT&T is clearly girding for a fight.

Either way, nothing stops Apple from adding a T-Mobile version of the iPhone this fall, not to mention one for Sprint. Besides, I see nothing harmful in having a robust competitive landscape for wireless service in the U.S. It’s not as if customers clamored for the AT&T/T-Mobile merger, and maybe these two companies will come to realize that, at the end of the day, this was not a marriage made in heaven.

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7 Responses to “The AT&T/T-Mobile Merger Report”

  1. dfs says:

    Good thing. If the merger went through we’d lose the cool girl in the T Mobile ads.

  2. DaveD says:

    One of the biggest fallacies about mergers is the talk of lower prices that come from economics of scale. CenturyLink taking over for Qwest here in Washington State has resulted in price increases.

  3. Kaleberg says:

    In other words, breaking up Ma Bell was a mistake. Just as the regulators in the 1930s claimed, telephony is a “natural monopoly” and most efficiently delivered by a single entity, and as it is a monopoly it must be heavily regulated. Horror or horrors, we might wind up with something like Bell Labs again and have to deal with real innovation. (We’ve been coasting since the Bell, Xerox, IBM era in the 50s & 60s for the past N decades.)

  4. John Lockwood says:

    The Government bodies responsible for overseeing competition and mergers have generally done a very poor job (I include both the US and UK in this). As a result there are now many large industries with literally just a handful of players and as a consequence have led to effectively no competative pressure to improve value or quality for customers. This has also led to the ‘too big to allow to fail’ situation.

    Industries would include energy, oil, finance, big corporate consultancies, big corporate auditors (often the same thing), movie studios, music studios, and of course telecoms.

    One could argue four players is already far too few. (In the UK we have O2 aka. Telefonica, Vodafone, Everything Everywhere aka. Orange+T-Mobile, and Three – that’s also just four.)

    The irony is that in the long term, such mergers almost always result in lower value to shareholders.

  5. dfs says:

    You are all writing as if the federal government’s main objection is that it would encourage a monopoly. And yet the way the press is playing this story, it woulds seem as if the feds are at least equally worried about the potential for such a merger meaning the termination of something like twenty thousand jobs because of the redundancies that would be created. Since unemployment is the principal obstacle to Obama’s reelection, they certainly don’t want to see that happen.

    • @dfs, AT&T claims that 5,000 support jobs would be restored to the U.S., and that job losses from “redundancies” would come from attrition. If that’s true, it shouldn’t be a problem. But you have to believe AT&T, and that may be a larger issue.


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