Can AT&T buy T-Mobile? Five key factors.

Sean Griffith in The Christian Science Monitor, March 22, 2011

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-Ron Scherer, Staff writer

The proposed merger of AT&T and T-Mobile presents the Obama administration with a major anti-trust dilemma. Federal regulators will consider several factors to determine whether to allow the two telecom competitors to merge:

The public interest

The Federal Communications Commission (FCC) and the Department of Justice – the two major federal agencies that will examine the proposed $39 billion merger – must decide if the combination is in the public interest. That is, they will have to weigh competition against access: whether it’s better to have more competition in a highly concentrated industry or expanded broadband technology in rural and smaller communities, as AT&T argues.

“I think the Department of Justice is going to give this merger a very hard review,” says Sean Griffith, a professor of business law at Fordham Law School in New York. “The level of scrutiny will be substantial.”

Pricing power

Four major players currently dominate the wireless realm: Verizon, AT&T, Sprint, and T-Mobile – which is owned by Deutsche Telekom. If this merger takes place, AT&T will leapfrog over Verizon, leaving Sprint a distant third.

Fewer competitors isn’t necessarily bad for consumers, notes Fordham’s Professor Griffith. “Markets can be competitive with two people as long as they are competing on price,” he says.

In its Sunday announcement, AT&T said that 18 of the top 20 US local markets have five or more providers: “Local market competition is escalating among larger carriers, low-cost carriers and several regional wireless players with nation-wide service plans.”

Citing a report from the General Accounting Office, AT&T said the inflation-adjusted average price for wireless services declined 50 percent from 1999 to 2009 – a period with five major wireless mergers.

However, the FCC may want to study more recent price trends. In mid-2010, the Justice Department revised its merger guidelines. “A big theme of the new guidelines is how much pricing pressures change,” says Tim Tardiff, a principal at Advanced Analytical Consulting Group, based in Boston.

Geographic coverage

One FCC goal is increasing wireless coverage in rural and poor areas of the country.

AT&T argues the combination of the two companies will expand 4G (Fourth Generation) LTE (Long Term Evolution) to 95 percent of the US population – both urban and rural. “Rural and smaller communities will substantially benefit from the expansion of the 4G LTE deployment,” it argues.

Tardiff responds that the issue is really how much of the increased coverage would have happened even if the merger had not taken place.

AT&T says the merger will give it as many new cell towers as five years of construction. More tower sites means fewer dropped calls, a frequent complaint of some AT&T users.

In fact, when AT&T began its ad campaign featuring iPhone “apps,” with the tagline, “There’s an app for that,” Verizon responded with ads saying, “There’s a map for that,” a jab at AT&T’s limited coverage and showcasing Verizon’s own coverage map, says Tardiff.

Product competition

T-Mobile has been running ads that poke fun at AT&T’s network, claiming that it’s a 3G network (hence slower) trying to disguise itself as something else. A sleek young woman (representing T-Mobile) watches as one man (representing AT&T) carries another piggyback. The implication: AT&T’s network slows you down.

Getting a better product might be a plus in the merger, says Tardiff. But at the same time, he points out, the proposed merger eliminates a technology competitor.

Concessions

If the regulators allow the merger to take place, AT&T will probably have to give something up.

For example, in a regional market where AT&T and T-Mobile dominate market share, regulators “could ask for a price break” to ensure local consumers don’t face rate hikes, says Tardiff.

When Denver-based Qwest Communication proposed buying CenturyLink, based in Monroe, La., the FCC required them to offer bargain rates to low-income subscribers in 37 states, says Fred Dickson, chief investment strategist at D.A. Davidson in Lake Oswego, Ore. That deal was conditionally approved on Friday.

“Our feeling is that this [AT&T–T-Mobile] deal is going to happen, but there will be major concessions,” Mr. Dickson says. “The question is, what will they be?”