Reed Hundt, the former chairman of the Federal Communications Commission, used the word “unthinkable” in 1997 to describe the potential merger of SBC, then a local telephone company created from the break-up of the old Bell System, and AT&T, then the long-distance company created from the break-up. (It wasn't until 2005, during the telecommunications great merger wave during the Bush years, that SBC was able to buy AT&T, and then confuse everyone by taking on the name of the former parent. That's today's AT&T.)
This deal is similarly “unthinkable,” but for a different reason. It would, very simply, combine the second and fourth largest national cellular companies into one company that would be one-third larger than Verizon, the next-largest. In one deal, one-fourth of AT&T's national competition, a competitor that has spent millions on its own network, would disappear. AT&T would be able to fill in the gaps of its network with facilities and radio spectrum that T-Mobile now owns. That's why AT&T wants the deal and the end of the discussion about who wins.
The discussion about who loses, and the reasons why this deal is “unthinkable,” is much longer. Start with T-Mobile's 33.7 million subscribers who like the feisty smaller carrier's rates and flexibility with its handsets, to say nothing of the commercials which constantly poked AT&T over the famously lagging performance of the larger carrier's network. While T-Mobile has been at the top of the list of customer satisfaction in the cellular services, AT&T is at the bottom.
If anything, the larger picture is even more distressing. Every cellular customer stands to lose because prices will rise as a result of a consolidated industry. Competition is supposed to restrain prices, but with two giant carriers (AT&T and Verizon) and one smaller, Sprint, all that are left in the national market, prices will inevitably start to climb. And it’s not only prices for service – prices for smartphones, other phones and data plans also will increase.
Even now, the wireless business is very concentrated. The FCC found last May that, “Over the past five years, concentration has increased in the provision of mobile wireless services. The two largest providers, AT&T, Inc. (AT&T) and Verizon Wireless, have 60 percent of both subscribers and revenue, and continue to gain share (accounting for 12.3 million net additions in 2008 and 14.1 million during 2009).” The report also found investment in networks has declined as a percentage of industry revenue. AT&T could have taken the $39 billion it is paying for T-Mobile and invested the money in its own network without buying out a competitor.
The notion of what constitutes “competition” will be hotly debated. In a simple count, there are other cellular companies. However, a simple count isn’t so simple. If Wal-Mart and 10 mom-and-pop stores exist in one town, one could say that the big store has 10 “competitors,” even if Wal-Mart’s sales are many multiples of the sales of all the little stores put together.
The same facts exist in the cellular industry. The size of the others drops off dramatically after the big two, AT&T and Verizon, and even more after the second two, Sprint and T-Mobile. The loss of T-Mobile to the national scene will alter the competitive landscape not only by removing a big national competitor, but also put Sprint into jeopardy as an independent company. There are smaller, regional carriers but they have weak networks, second-tier handsets and lack the resources to compete on a national level. They will be squeezed even further with more market consolidation.
So consumers lose by losing another competitive option along with the specter of higher prices for services and for equipment as AT&T consolidates its hold on the GSM standard for cellular service. Verizon and Sprint use another standard. Other losers include makers of GSM-capable cellular equipment and of network equipment for the same reasons. They lose customers and business leverage. Those are the vaunted “efficiencies,” which usually amount to lost jobs, not only for those working the company being acquired, but particularly in this case for the consolidated wireless market that will result.
This deal cannot withstand antitrust scrutiny. It is a classic horizontal merger that does nothing but combine companies in the same business.The Obama Administration has to step up to see the reality of the situation and enforce a strong antitrust policy. The Department of Justice should reject this deal out of hand.
Gigi B. Sohn is the president and co-founder of Public Knowledge.