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Going deep on AT&T-T-Mobile merger: How will it really impact wireless competition?(Connected Planet Via Acquire Media NewsEdge) Industry analysis reports don’t usually generate that much controversy, but the Yankee’s Group recent examination of how the merger of AT&T and T-Mobile would affect competitive pricing in the wireless industry hit a nerve with AT&T – while also yielding important insights into how the deal is likely being reviewed, and the impact it could have on the market if approved. The report’s key finding: in several major markets AT&T’s share of overall subscribers would exceed 50%, creating concentration levels among the remaining providers that would drive prices higher for all consumers. Furthermore, the study analyzed the effect of former T-Mobile customers churning off of AT&T, abandoning their relatively low-cost T-Mobile plans and gravitating toward higher-dollar plans offered by other providers. The result, Yankee concluded, would be an increase in the average bill in many major markets, in some cases in excess of $5 a month by 2015. AT&T asserts that the study is bunk and has attacked its methodology and conclusions. “The only thing the Yankee Group got right was that the merger will result in ‘better coverage and performance’,” AT&T Senior Executive Vice President and General Counsel Wayne Watts said in a statement. “Beyond this, the report ignores so many facts and is so analytically flawed that it cannot be taken seriously.” For its part, the Yankee Group says its analysis is based on the same sorts of traditional metrics and analysis that regulators are likely to use to measure the impact of the deal. And the impact, they claim, will be major in many markets. Obviously, Yankee and AT&T don’t see eye-to-eye here. Let’s get into it. Next: What is HHI? And what does it mean for the merger? What is HHI? And what does it mean for the merger? The Yankee Group study is split into two parts, the first examining market concentration using Yankee’s own survey data and U.S. Department of Justice antitrust methodology to determine the competitive impact of the merger. The second uses its survey data again to examine the impact of T-Mobile’s cheaper service plans disappearing over time. AT&T’s biggest complaint about the study pertains to the first section, particularly to Yankee’s use of a DOJ metric called the Herfindahl-Hirschman Index (HHI). The HHI is used to gauge market concentration, and significant changes in the HHI due to a merger or acquisition would raise red flags among regulators that closer study of a deal’s effect on local competition is warranted. A market with an HHI score of 2500 or greater would indicate it is highly concentrated. According to Yankee’s analysis of 27 largest markets, only one of those markets would be considered highly concentrated today under the HHI, but post-merger 16, or 63%, of those markets would earn that distinction. A few of those markets are already on the cusp of being designated highly concentrated, according to Yankee’s analysis, so only a slight nudge from the merger would knock them over boundary. For that reason the DOJ also tracks increases in HHI produced by the merger, deeming any increase over 100 points to raise competitive concerns while an increase over 200 would indicate the merger is likely to raise the remaining competitors’ market power. ankee found that the HHI increases created by the proposed AT&T-T-Mobile deal were by no means small. All 27 markets in its survey passed the 100-point threshold, while all but two exceeded 200. In four markets Dallas, Houston, Miami and Seattle the increase was over 1000 points. The Yankee Group concludes that those high HHI increases indicate a significant concentration of market power among the remaining operators in each market, which in turn would reduce pricing competition and boost the average monthly bill of all subscribers (not just AT&T’s). In an interview, Yankee Group research director and report co-author Carl Howe acknowledged that the index numbers weren’t an absolute determinant of reduced market competition or increased prices, but changes in the market indices especially to this degree is certainly going raise warning flags with regulators. “These are not little changes that no one is going to notice,” Howe said. Next: AT&T’s response: Wireless market is just different AT&T’s response: Wireless market is just different AT&T, however, said that the market concentration analyses have absolutely no bearing when examining a telecom or wireless merger for the simple reason that wireless bucks the established trends when it comes to the analysis of mergers and acquisitions. As the industry has consolidated in recent years driving up the HHI index in all markets AT&T argues that prices have actually gone down. AT&T pointed to a U.S. Government Accountability Report that stated wireless service prices have fallen 50% since 1999, a period in which every major U.S. operator acquired or merged with a competitor. AT&T also supplied a raft of data from the FCC and other analysts showing that per-unit costs of all mobile data services have dropped dramatically. According to the FCC’s June report on wireless competition the average price of a voice minute has dropped 18 cents to 5 cents between 2000 and 2009, while an SMS message from an average of 4 cents in 2005 to 1 cent. Mobile data demonstrates that trend most dramatically. AT&T says the average revenue it collects from a MB of data has fallen 90% between 2007 and 2010. “[The Yankee Group’s] assumptions are directly disproven by historical fact: telecom prices have fallen, often dramatically, after significant mergers,” AT&T’s Watts said. “And the report disregards the vibrant competitive local market where, according to the FCC, 90% of consumers today have a choice of five or more wireless providers.” AT&T’s strongest evidence, though, is data showing that overall revenues per subscriber have dropped during the U.S. wireless industry’s period of mass consolidation, even though the average consumer used more minutes sent more text messages and consumer more data. Overall average revenue per user (ARPU) in the industry has fallen from $49.41 a month to $48.45 between 2004 and 2009, according to the FCC report. Much of that drop is attributable to the enormous explosion in prepaid services in last half of the decade. Non-contract services brought millions of subscribers into the wireless fold as well as provided lower-cost outlets for more budget-minded consumers a good indication of a healthy competitive market place. But Yankee Group chief research officer and the report’s other co-author Gigi Wang said that Yankee Group’s survey of 15,000 consumers found that the average wireless bill has been increasing in recent years, largely due to the smartphone and exploding data usage. Much of that is explained by increased usage. Before the smartphone, data use on a handset was insubstantial, but the iPhone triggered a mad rush to mobile data plans. But Wang said that data adoption is only part of the story. A lot of bill increases are due to the way operators bundle services. Every smartphone comes not just with a data plan but a required minute bundle, often far in excess of what a customer could use. AT&T provided the perfect example of this kind of creative bundling today by eliminating its final tiered messaging plan last week (CP: AT&T to ‘streamline’ texting plans by essentially doubling fee). Customers either pay $20 a month for unlimited texting, or they can pay for messages a la carte at a rate of 20 cents per SMS and 30 cents per MMS. At 20 cents, an AT&T text message outside of a bundle is effectively 20 times the cost that of the 1-cent industry average AT&T is touting, and five times higher than the average price at 2005 levels. It’s important to note that AT&T was the first operator to introduce tiered smartphone data plans, which effectively cuts the price of mobile data for most of AT&T’s customers since only a small percentage of them consume more than the 2 GB of its highest tier plan. For customers that adopted them, that represents a $5 to $15 savings each month so long as they stay within their 200 MB or 2GB allotment. Other carriers have followed in AT&T’s footprints, offering tiers of their own. But those plans will also serve as the mechanism for bill increases in the future, Wang said. As average mobile data consumption moves beyond 2 GB a month, customers will find themselves paying far more for more data than they would have under previous unlimited plans. Next: Will the AT&T-T-Mobile deal drive wireless prices higher? Will the AT&T-T-Mobile deal drive wireless prices higher? While AT&T primarily went after the market concentration conclusions of the Yankee Group’s report and provided plenty of evidence to refute it, it wasn’t that part of the report that produced Yankee’s boldest assertions. Wang and Howe’s conclusions that average bills would increase by as much as $8 in some of the country’s biggest market were drawn from a separate analysis that had nothing to do with DOJ market concentration or HHI methodology. Instead, Yankee examined what would happen to the average bill if the lowest-cost national operator were gradually removed from individual markets. AT&T has promised that all current T-Mobile subscribers can hold on to their current plans which generally undercut AT&T’s plans as long as they remain customers. Any new subscribers, though, would sign up to whatever current batch of plans offered. So as previous T-Mobile subscribers left through natural churn, AT&T would replace them with customers who could only choose from AT&T’s post-merger plan options. “You will eventually have everyone paying AT&T prices, and guess what? AT&T has higher prices than T-Mobile,” Wang said. Those departing T-Mobile customers would choose between the other competitors in the market, which generally also have higher prices than T-Mobile. Meanwhile, customers churning off of other operators would no longer have the low-cost choice of T-Mobile. The end result is a slow gravitation toward higher bills closely tied to T-Mobile customers’ churn rate, Wang said. Based on Yankee’s survey data and using T-Mobile’s average churn rate (it stood at 3.3% last quarter), Wang and Howe concluded more than half of T-Mobile’s existing subscriber base would depart in the next three years. That subscriber reshuffling wouldn’t result in higher average bills in every market, though. The study found that in two markets, Chicago and Denver, T-Mobile customers pay slightly higher rates than AT&T customers. The result would be an incremental less than $1 drop in average bills in those markets among all operators by 2015. But in the seven other markets the Yankee Group studied, prices would increase. In some markets like Miami, the increase was tiny, but in others the change was quite dramatic. In Houston the average bill would go up by more than $8 by 2015, while in Seattle the increase would be more than $7, the report found. T-Mobile’s churn rates are high for the industry, primarily due to its high percentage of prepaid subscribers. AT&T has implied that it can tamp down that rate, pointing to Cingular’s 2004 acquisition of AT&T Wireless, which saw postpaid churn rates drop considerably after the merger. But after the merger, Cingular which later became AT&T once again reported only combined churn rates, so there is no way of breaking out departures by former AT&T Wireless customers from the overall customer base. Postpaid churn is also considerably lower than prepaid churn since postpaid customers are bound by contract. T-Mobile’s prepaid customers will likely leave at a much faster rate than its contract customers, and since there will be no new prepaid customers to replace them, the churn rate for the former T-Mobile customer base will gradually fall over time. Still it’s entirely possible AT&T will improve on T-Mobile’s metrics by offering them more coverage and eventually a better 4G network. Some customers may stick around if they know there’s no coming back to T-Mobile’s cheaper rates. But AT&T won’t be able to eliminate T-Mobile’s churn entirely. Eventually operators recycle nearly all of their customer bases. Even if AT&T was able to cut T-Mobiles churn rate in half, it would only be prolonging the inevitable, Wang said. The price increases would take twice as long to fully go into effect, but they would occur, Wang said. No one knows exactly what will happen after the $39 billion acquisition goes through, so the Yankee Group’s analysis is just one interpretation – though it is one of the few so far based on crunching available data rather than informed speculation. Even AT&T own plans either stated or unrevealed could change dramatically depending on the prevailing market conditions. Many analysts expect Sprint to supplant T-Mobile as the nationwide budget operator for voice and data (a path it’s already started down). If Sprint bills scale down to match those of the former T-Mobile, it could lessen the average bill increases that the Yankee Group predicts. But the merger would also considerably reduce Sprint’s market power relative to AT&T and Verizon. If AT&T or Verizon rather were to assume the budget mantle, the impact on pricing could be huge. But as the Yankee Group’s market concentration analysis implies neither Verizon nor AT&T would have any incentive to do so given their newfound post-merger pricing power. © 2011 Penton Media |