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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* LinkedIn (LNKD) reported better-than-expected profits of four cents a share on sales of $121 million for its most recent quarter, as well as a 61% jump in users to 115.8 million. Colleague Jessi Hempel spoke with CEO Jeff Weiner about the company's future. (Fortune)
* Former Microsoft (MSFT) exec MOREJP Mangalindan, Writer - Aug 5, 2011 3:30 AM ET
Bloomberg Television is still stuck in Siberia in the Comcast channel lineup, and it's right to ask the FCC to step in.
FORTUNE -- One of the main worries surrounding Comcast's (CMCSA) merger with NBC Universal was that Comcast would use its cable platform to favor its own programming at the expense of competitors. From the beginning, the financial news organization Bloomberg has issued perhaps the loudest complaints about the situation. MOREDan Mitchell, contributor - Jun 15, 2011 11:11 AM ET
On April 14, 2011 Fortune's Adam Lashinsky interviewed Julius Genachowski, chairman of the Federal Communications Commission, in Mountain View, Calif., at an event sponsored by the Commonwealth Club of California. The chairman danced around the most prominent item on his agenda, the proposed acquisition of T-Mobile by AT&T. He also discussed spectrum re-allocation, his pragmatic approach, and what it was like being a law school classmate of President Obama. An MOREAdam Lashinsky, Sr. Editor at Large - Apr 26, 2011 12:07 PM ET
The AT&T/T-Mobile mega-merger was supposed to be too big for regulators to ever accept. Then came the wild success of industry upstart MetroPCS.
Among the many people who mistakenly dismissed the idea of AT&T (T) buying out T-Mobile as a never-gonna-happen, count T-Mobile's very own top executives. How else to explain their snarky ad campaign that razzed AT&T for running an old, slow and unreliable network?
How so many well-informed people got MOREScott Woolley - Mar 22, 2011 1:24 PM 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 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 MOREScott Woolley - Mar 21, 2011 8:26 AM ET
Use Skype on your iPhone's 3G network, or Google Voice? You wouldn't if the government hadn't stepped in.
By Chadwick Matlin, contributor
It took Skype two years to finally make its way to the iPhone. And when it did, it only allowed calls over a Wi-Fi connection—talking to friends over 3G was strictly prohibited. AT&T's (T) network, we were told, could barely handle regular phone calls, let alone ones that took place over the MOREJan 5, 2011 12:52 PM ET
A curated selection of the day's most newsworthy tech stories from all over the Web.
Today, the FCC votes on Internet regulations that would mandate that companies treat all kind of Web content equally -- though as they are now, the rules would not apply to wireless data. Venture capitalist and former California State Controller Steve Westly explained why the net neutrality proposal announced by FCC Chairman Julius Genachowski is a must-have. (CNN MOREJP Mangalindan, Writer - Dec 21, 2010 6:00 AM ET
Despite criticism, a venture capitalist and former California State Controller explains why the Genachowski net neutrality proposal is a must-have for industry, the FCC, and the public.
By Steve Westly, contributor
Nobody likes being stuck in traffic or choosing the slow checkout line at the grocery store.
Now imagine if you were faced with the choice of being forever stuck in the digital slow lane or paying even higher fees for faster access MOREDec 20, 2010 8:52 PM ET
A presentation slide illustrates why telecom industry's plan to scrap Net Neutrality to increase profits will hurt consumers.
It doesn't get any clearer than this:
Feel sorry for that poor guy hammering away on that tablet above? He's getting charged a separate additional fee for each different web service he's using. Additionally, each different service coming over the air is being throttled according to the rules the telecoms set up. Notice that Vodafone's services MORESeth Weintraub - Dec 20, 2010 11:14 AM ET
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