AT&T-Mobile: Merger brings efficiencies, but will consumers see the benefit?

March 21, 2011: 8:26 AM ET

T-Mobile and AT&T say they won't have to raise rates to make more money after the merger, but it's hard to see how they could resist.

AT&T vs. T-Mobile

Image by misterjt via Flickr

At a recent investor conference, T-Mobile's top executives made a point of belittling data plans for smartphone users offered by rivals AT&T (T) and Verizon (VZ). T-Mobile's entry-level data plan costs $10, they pointed out, while AT&T demands 50% more for the same 200 megabyte-a-month plan.  That leads to an awkward question: Now that AT&T plans to buy T-Mobile, what's going to happen to those low cost plans?

Both federal antitrust regulators and the Federal Communications Commission, which has long functioned as an extra layer of antitrust enforcement in the telecommunications industry, will be scrutinizing the $39 billion deal.  The proposal to create America's largest cell phone company, with a record 130 million customers, will also force regulators to revisit an even more fundamental issue. In the cellular industry, how big is too big?

Early reaction to AT&T's bid has split across the predictable fault lines.  Consumer rights groups have denounced it as harmful to competition.  AT&T and T-Mobile have defended it as the product of economic logic and a long-term boon for their customers.

Cellular is a scale business, meaning bigger companies almost always have lower costs. The merger would let AT&T spread the cost of running a nationwide network over more customers, lowering its costs and further improving its margins.  The giant size of AT&T and Verizon already translates into cash flow margins that are often double those of smaller companies like T-Mobile and Sprint (S).

AT&T has promised to spread some of that windfall around. If regulators OK the deal the company said that it will build an expansive 4G networks that will deliver high-speed access to 95% of Americans. The Obama administration is keen on boosting corporate spending and speeding the rollout of rural broadband, twins political currents that will help push the deal along.

Other arguments put forth by AT&T are harder to take at face value.  The company says that the deal will also benefit customers by helping solve AT&T's worst headache: its shortage of wireless capacity.  AT&T's data traffic grew 80-fold over the past four years—mainly thanks to the iPhone swamping its network. The problem even got so bad that T-Mobile launched an ad campaign mocking AT&T for its old and slow network.

And yet T-Mobile recently admitted it wasn't that far away from running short on capacity itself. T-Mobile doesn't have much spectrum, and what it does have is of mediocre quality. (Wireless signals sent on the sort of higher-frequency spectrum that T-Mobile uses have a harder time reaching across long distances or into buildings.) To be fair, there will be some capacity gains from pooling spectrum, but not nearly enough to match the growth in demand.

AT&T says it is confident that the deal will get approved, and backed its talk with a promise to pay $3 billion to T-Mobile if regulators scotch the deal.

Regulators face a tough choice. There's no denying that T-Mobile would be far more valuable as part of AT&T, given the easy cost savings the pair could realize. To realize those profit boosts, the giant company does not need to use the reduction in competition to raise prices. But, if given the chance, would it be able to resist the temptation?

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About This Author
Sophie Wade
Sophie Wade

Sophie Wade is founder and CEO of Flexcel Network, LLC, which provides flex-focused placement services for entrepreneurs and growth companies. Sophie writes and speaks regularly about flexible work and employment issues. She has an MA from Oxford University in Chinese and an MBA from INSEAD.

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