Will four into three go ahead? Thoughts on the AT&T/T-Mobile deal
by Dr Windsor Holden on March 25th, 2011
Back in the day, when I was a callow youth, I cut my telecoms teeth in updating a database which detailed the activities of mobile network operators on a regional, national and indeed local basis: at the time, there was a far greater prevalence of smaller players, often proudly holding half a dozen licences with a combined population coverage of six humans and sixty thousand cattle.
You may have noticed that times have changed. In December 1999, there were eight operators with a market share of 5% or greater – for the record, they were AirTouch with a 17% market share), SBC Wireless (13%), AT&T (11%), Bell Atlantic (9%), GTE (8%), Sprint (7%), BellSouth (6%) and ALLTEL (6%): this in a total market of around 86 million users. There was then a general upheaval over the next year or so – AirTouch, Bell Atlantic and GTE combined to form Verizon, while SBC and BellSouth merged to become Cingular Wireless. So then there were five. And that was pretty much how it remained for the next few years, although the nomenclature and structure of the five in question would change somewhat, thanks to the entry into the market of T-Mobile: five latterly became four when Verizon Wireless acquired Alltel in 2008.
And then there were three. Or, possibly. Earlier this week AT&T announced that it was seeking regulatory approval to acquire T-Mobile from Deutsche Telekom, in a cash and stock transaction valued at $39 billion. So what would this mean: well, firstly, for those of you around the globe whose task it is to update cellular KPIs, your job would get a little simpler, in that when we’d look at significant market share there’d just be AT&T (with 43% of the market once T-Mobile’s subscribers were factored in), Verizon (31%) and – some way off the pace – Sprint (17%). It would also mean that the two largest players between them controlled 74% of the market between them, when their wholesale subscribers are included (contrast 1999 when that figure was 30%).
Now, a tri-cornered market is of course by no means unique: a three-player model has pre-dominated across various major markets for several years including France and China. But it is the scale of concentration within the top two players that might provide cause for concern: although it remains below that in France (where Orange and SFR account for around 77% of the market), it is higher than Spain (73%), Italy (70%), the UK (68%) or Germany (67%).
Furthermore, in other markets where there are currently four major players, the prospect of further consolidation has made regulators uneasy: in its consultation documentation on the format of 4G auctions, published this week, UK regulator Ofcom was explicit in stressing that it wanted the auction structured in such a way that four players, not three, walked away with spectrum at the end of it.
Hence the rumours that the FCC – whose chairman Julius Genachowski was reportedly not informed of the planned merger in advance of the announcement – is eyeing it somewhat warily: an anonymous source was quoted by the Wall Street Journal as saying that “”There’s no way the chairman’s office rubber-stamps this transaction… It will be a steep climb to say the least.” Meanwhile Sprint – which was itself interested in acquiring T-Mobile – seems likely to object to the merger being approved.
The upshot would appear to be that, even if approval is given, it will be a long time coming, and it is distinctly possible that there will be a welter of conditions attached regarding divestiture of assets (including spectrum). In short, four will not become three for a while yet…
Tags: AT&T, Deutsche Telekom, FCC, M&A, Mergers & acquisitions, Sprint, T-Mobile
Ah, Dr H. Those were the days… and I’m still waiting for that final draft of the AirTouch report, my boy.
On a more serious note, though, I think we will see this deal go through in one form or another. AT&T wouldn’t be willing to pony up a US$3bn (plus spectrum) break-up fee if they didn’t think there was little chance of the deal going through. I expect AT&T and T-Mobile will be asked to relinquish overlapping assets, such as network infrastructure, points of presence and, of course, spectrum in order to get the deal past the FCC and the DoJ. At least, that’s what usually happens – some of those assets have been traded more times than bootleg Pink Floyd CDs on eBay. But I digress.
The most vociferous opponents will, of course, be Sprint (flying the anticompetition flag while conveniently forgetting they’d been sizing up T-Mobile themselves) and certain state regulators with a vested interest in not seeing Sprint sidelined any more than they already are.
Clearwire – Sprint’s WiMAX partner – have already started wailing about the deal, but we’d have expected no less considering the parlous financial state of Clear/Xohm/whatever it’s being called these days.
Verizon, you’ll have noticed, is mum on the deal. I should think they’d be happy for the deal to go through because they’d be in a favourable position to pick up any assets the AT&T/T-Mobile business will be divesting. Also, if the deal gets regulatory approval, they can then mop up some of the remaining players under less intense scrutiny or perhaps plead for special consideration when bidding for additional spectrum as and when the FCC releases it. They may also be anticipating picking up some disgruntled T-Mobile customers loathe to transition to higher AT&T fees.
It’s an odd move for AT&T to have made – though it follows in the time-honoured tradition for US cellcos to target growth through scale – because as its own data show, the combined entity doesn’t create an appreciable increase in spectrum per customer. If the company then has to lose spectrum in order to meet with regulatory approval, then the net gain will be negligible. And then there are the differences between the average speeds of the two companies’ networks… Heigh-ho, I suppose it will all balance out once they’ve moved on to LTE… in about 10 years’ time!
I remember a conversation we once had – when we were both callow youthful telecoms analysts with full heads of hair between us (and can I have mine back, please?) – about the MCI-WorldCom merger… it still went through in the end, after much posturing from all involved.
Ah, I’ve just remembered what happened there…