AT&T is overlooking its best argument for the T-Mobile merger

September 1, 2011: 9:35 AM ET

The Department of Justice and AT&T have one thing in common: neither side wants to talk about the real rationale for the T-Mobile takeover.

FORTUNE -- When AT&T bet $39 billion that it could acquire T-Mobile -- including $6 billion it won't get back even if regulators kill the deal -- it gambled on a clever strategy that suddenly seems too clever by half.

AT&T (T) advertised the benefits of the merger in high-minded, almost patriotic terms. The merger will create jobs, the company vowed, and it will bring broadband to rural America. Even yesterday, after the Justice Department sued to block the deal, AT&Ts retort focused on jobs and network upgrades. It ignored the classic economic argument that consolidation would make the industry dramatically more efficient, slashing the cost of providing wireless service to its customers.

It seems a peculiar omission, since over the last 30 years the cellular industry has repeatedly demonstrated just that link: the more users you put on a cellular network, the less it costs to serve each one. It's practically an iron law of mobile communications business: Bigger means cheaper.

Even the antitrust lawyers at the Justice Department acknowledge the bigger-cheaper link in several sections of their complaint. For instance they argue that because of "scale economies that arise from having tens of millions of customers" brand new entrants would find it nearly impossible to compete with today's Big Four carriers.

While the DOJ's wording implies that those benefits peter out after 20 to 30 million customers, in practice even bigger companies have proven to have even lower costs. The two companies with close to 100 million customers, Verizon (VZ) and AT&T, are much more efficient and profitable than mid-sized companies like T-Mobile and Sprint (S), which have 34 million and 52 million subscribers, respectively. The logic is pretty simple: if you have to build a nationwide network, you might as well get as many people to use it as you can.

On page 51 of a long filing with the FCC in support of the merger, AT&T did get around to describing how the deal would save it $3 billion a year starting three years after it was complete. One of the ways will be "optimizing" the combined company's retail and distribution networks (a process that traditionally involves more firing than hiring).

It's easy to see how AT&T got in this pickle. Back when the company first announced the $39 billion takeover, its biggest stumbling block appeared to be regulators at the FCC. So, perhaps not surprisingly,  the company tailored its arguments to appeal to the political climate, promising to increase spending and create jobs. This week the company even vowed to bring 5,000 call center jobs back to the U.S. if the merger goes through.

Now a federal court date is AT&T's biggest problem and while promises to hire call center workers won't sway a federal judge, blunt arguments centering around economic efficiency might. Courts must balance the rights of consumers and corporations according to a "rule of reason" in which "anticompetitive consequences of a challenged practice are weighed against the business justifications upon which it is predicated."

The Justice Department argues that AT&T "cannot demonstrate merger-specific, cognizable efficiencies" that outweigh the harm to consumers. A judge will ultimately assess the validity of that statement. Right now, AT&T's doesn't seem to have a problem "cognizing" the merger's actual benefits. Verbalizing them is a different matter.

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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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