In any mature market, there comes a point where the biggest players simply are not allowed to get any bigger. That might be the case for the U.S. mobile industry, in the wake of the U.S. Department of Justice decision to sue to block the deal.
Department of Justice Acting Assistant Attorney General Sharis A. Pozen says, “the conclusion we reached was clear: any way you look at this transaction, it is anti-competitive.”
“T-Mobile has been an important source of competition among the national carriers through innovation and quality enhancements,” Pozen says. “Unless this merger is blocked, competition and innovation in the mobile wireless market, in the form of low prices and innovative wireless handsets, operating systems, and calling plans, will be diminished and consumers will suffer.”
A combination of AT&T and T-Mobile would reduce the number of nationwide competitors in the marketplace from four to three, and the DoJ appears to believe that is anti-competitive, at least this particular pairing.
There’s always a bit of strategic thinking when an acquisition as large as the AT&T purchase of T-Mobile USA is proposed. It has been clear that the U.S. mobile market is approaching the point where regulatory and antitrust issues rise to the fore.
In the past, the U.S. cable industry basically reached a point of resistance at about 30 percent market share for any single contestant. Though the formal bar to further subscriber growth, set at 30 percent, eventually was struck down, a rational executive would be leery of any growth strategy that calls for additional basic subscriber growth that would put any single firm above 30 percent.
That might be one reason, though not the only reason, for Comcast to grow by acquiring NBC Universal (News - Alert), rather than buying more subscriber share. In a transaction as big as AT&T’s bid for T-Mobile USA represents, there might be a couple lines of reasoning.
Contestants might conclude that one such blockbuster transaction would gain regulatory clearance, but not a second transaction. In other words, by moving first, AT&T might hope to gain heft where a second deal, such as Verizon Wireless buying Sprint (News 
- Alert), might fail.
The other line of reasoning might be that if regulatory authorities do approve the first deal, there might be a way for the second transaction to occur, as regulators might be signaling that the increased size is not going to trigger anti-trust concerns. That’s a bit of longer shot, to be sure.
Yet another view is that, though AT&T would gain greatly if successful, it might, despite the $6 billion break-up fee, still “win” if the deal ultimately is blocked. In that view, the prolonged legal reviews would make impossible any attempt by Sprint to merge with T-Mobile USA, which would create three roughly equivalent-sized contestants at the top of the market.
Since AT&T is virtually certain to counter-sue, a lengthy period of uncertainty still awaits. Some might argue AT&T can make concessions and yet win approval. Others will counter that it is tough to see how AT&T might repackage the deal to pass regulatory muster, since the real issue is anti-trust concern.
AT&T could offer to divest all the T-Mobile customers, and only keep the network assets. You can make your own decision about whether that even makes any sense, or is practical.
Deutsche Telekom AG (News - Alert) earlier in 2011 had reportedly held talks to sell its T-Mobile USA unit to Sprint Nextel Corp. in exchange for a major stake in the combined entity, Bloomberg said. “In general, all options are open in the U.S. – the sale of the whole business or of parts,” Deutsche Telekom Chief Financial Officer Timotheus Hoettges said.
Talks had been on and off, and observers had noted the high risk of integration, with any new entity operating multiple different networks (GSM, CDMA, iDEN, WiMAX). Of course, Sprint has said it will shut off the iDEN network, and has indicated it would build a new Long Term Evolution network. Any integration strategy would rely on eventual merging of the GSM-based T-Mobile USA network with the Sprint CDMA and WiMAX network on an LTE (News - Alert) common foundation.
Granted, it is typical for any major carrier to support at least two networks concurrently. Supporting four networks would be quite challenging, in terms of gaining scale economies from any merger of T-Mobile USA and Sprint, but Sprint already had said it is shutting down iDEN, meaning the legacy networks would include GSM, CDMA and WiMAX.
Bernstein Research analyst Craig Moffett has noted that the U.S. wireless market is “crying out for consolidation.” In most local markets, there are as many as seven different price actors, Moffett said. Most observers say that amount of competition in a capital-intensive business such as mobility is not stable over the long term. A merger of Sprint and T-Mobile USA would in principle create three major facilities-based providers, allowing the new entity to compete more evenly with AT&T and Verizon Wireless.
The main issue is whether we simply have arrived at a point, as the U.S. cable industry has, where it is unwise for any contestant with roughly 30 percent market share to try and expand horizontally, be acquiring more customers.
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Gary Kim (News - Alert) is a contributing editor for TMCnet. To read more of Gary’s articles, please visit his columnist page.
Edited by Jennifer Russell
