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August 04, 2011

AT&T Purchase of T-Mobile USA Would Dramatically Increase Mobile Market Concentration, Yankee Group Says

By Gary Kim, Contributing Editor

The proposed AT&T purchase of T-Mobile USA will increase market concentration, reduce consumer choice, and open the door for price increases in the most heavily populated U.S. wireless markets, argue Gigi Wang, Yankee Group (News - Alert) chief research officer, and Carl Howe, Yankee Group director.

Perhaps significantly, the analysis uses the same market concentration tests the Department of Justice is using.

That was not Yankee Group’s position in March 2011 when the transaction was proposed. The change of view appears to be driven by further analysis of Yankee Group data, which leads the Yankee Group analysts to “dash cold water on the merger’s promise of benefiting consumers and competition.”

But the latest analysis suggests higher prices and less choice are the likely outcomes of an approved merger, with the likely follow-on of even-greater concentration when Verizon Wireless (News - Alert) buys Sprint Nextel, the analysts argue. That is viewed as “only a matter of time” by the analysts.

AT&T and Verizon each had almost a third of all U.S. mobile subscribers at the end of March 2011. AT&T had 97.5 million customers, or nearly 32 percent market share, while Verizon reported 95 million customers, or just over 31 percent share.

Sprint (News - Alert) (51 million subscribers), T-Mobile (33.6 million) and other smaller carriers offer alternative wireless services that serve 105.4 million, or roughly the other third of the U.S.’ 298 million subscribers.

AT&T has argued any analysis of potential market concentration has to be conducted at a market-gy-market level. But the Yankee Group’s analysis suggests the AT&T buy would increase market concentration in five of the most-populated mobile markets.

Today, in the 27 most-populous CMAs. Today, AT&T has 33 percent or more of the subscribers in nine “cellular market areas,” a category created by the Federal Communications Commission to award mobile licenses.

The proposed merger would give AT&T more than 33 percent of the market in 20 of those 27 markets, and 50 percent market share or more in five of the most-populous areas. But Justice Department attorneys will use the Herfindahl-Hirschman Index to assess market concentration, rather than relying on metrics such as market share.

Using data from its 2010 consumer surveys, and using the HHI index, the researchers argue that before the AT&T/T-Mobile merger, only one of the top 27 CMAs is highly concentrated. If the merger proceeds, however, 17 – or 63 percent – of the top 27 markets would be considered highly concentrated.

Not only would 17 of the top 27 CMAs become highly concentrated, but the HHI concentration scores would jump dramatically. The Dept. of Justice 2010 guidelines state that any HHI increase of 200 points or more is considered significant. “In our analysis, not only did 25 of the 27 CMAs see HHI increases over 200, but four of the CMAs had HHI increases of over 1,000,” say Wang and Howe.

“Once this merger goes through, and AT&T serves 132 million subscribers, it’s only a matter of time before Verizon purchases Sprint and adds Sprint’s 51 million subscribers to its 95 million, thereby creating a national duopoly,” the analysts say.

How well that will work is hard to say. The original cellular duopoly was not, in retrospect, competitive enough if among the outcomes are number of users, handset options, average prices or application innovation. In the fixed-line video or broadband markets, it is harder to object to the prices or innovation.

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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
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