22 March 2011

Rethink Telephony Oligopoly

On Sunday, news broke that Southwestern Bell Corporation SBC Communications Cingular  AT&T has launched a $39 Billion bid to buy T-Mobile USA from Deutsche Telekom. If the deal goes through, it will consolidate America's 4th largest cellular carrier with nation's 2nd largest wireless provider thereby creating the largest cellular carrier in America. The company originally was a Baby Bell which thrived through acquisitions. SBC bought sibling Baby Bell Ameritech in 1999, then it gobbled up the shell of  AT&T in 2005 and rechristening itself with MaBell's formal name. In 2007, AT&T bought Baby Bell Bell South for $86 Billion in 2006.

In the abstract, this deal makes sense as both AT&T and T-Mobile USA use GSM providers, which makes network consolidation easier, but T-Mobile subscribers with 3G handsets eventually would have to get new phones.  AT&T significantly benefited from a 3 ½ year exclusive relationship with Apple on selling I-Phones, which gave AT&T at least additional 2.5 Million smartphone subscribers . But now that Verizon can sell I-phones for their network, it is estimated that 25% of AT&T I-Phone users will switch to the perceived better networks of Verizon Wireless. While AT&T is still flush with I-Phone profit cash, it can buy T-Mobile, giving it more subscribers and opportunities to sell the much desired I-phones. Strategically, AT&T pre-emptive strike for T-Mobile makes it difficult for Verizon to grow through acquisition of Sprint. And AT&T's juicy offer puts Sprint's nascent bid for AT&T on the bottom of the decision pile.

Even though Deutsche Telekom stockholders may be happy with retaining T-Mobile International, getting $25 Billion in cash, about $13 Billion in stock (an 8% controlling interest in AT&T) and a seat on the AT&T Board of Directors, the battle is to sell this M&A to Federal regulators. Robert Liton, a Clinton Administration anti-trust attorney, observed that it will be an uphill battle to convince regulators that the merger will not reduce competition. This will be a big battle as there is industry opposition, public interest opposition and concerns from regulators and legislators about the anti-trust issues.

Lately, the Obama Administration has been making overtures that it is business friendly as the clock ticks towards 2012. The Obama Administration has not opposed any major mergers, but aside from the crony capitalism with Chrysler-Fiat and the Comcast-Universal merger, the economy has not been ripe for large private sector acquisitions.

The two talking points that AT&T is initially pushing in favor of the merger are that it will allow for increased access to wireless internet connectivity and wrapping the deal in the Stars and Stripes. By merging with T-Mobile, AT&T will be able to provide high speed wireless to 95% of America, furthering an Obama Administration objective to improve connectivity to rural America. Perhaps AT&T is more interested in T-Mobile's cell towers than its customers. The other tact is to highlight the fact that T-Mobile would be rescued from foreign ownership by AT&T.

Economic nationalism arguments might not carry the cache that it used to in the Age of Obama. After all, the Obama Administration facilitated a sweetheart deal with Italian Fiat Auto to carve up Chrysler's bones with the UAW and the largess of the American taxpayers. Then there is the recent news of President Obama blessing Petrobras doing deep-sea drilling in the Gulf of Mexico.

If anti-trust issues actually matter, the FCC's rationales for rejecting the Echostar (Dish Network)-Direct TV merger in 2002. While the FCC's commissioners may have changed, the soundness of their arguments remains. Commissioner Powell fretted about replacing a vibrant competitive market with a regulated monopoly that could be as best a duopoly in some areas. Other commissioners worried that decreased competition would harm consumers by raising prices and decreasing innovation and quality of service.

The oligarchy issue is problematic. While the big four wireless carriers dominate 80% of the US market, this proposed merger would consolidate 70% of the market in the big two (merged AT&T and Verizon). To smooth over consumers' ruffled feathers, expect the FCC to require open access on the expanded wireless network and that AT&T sacrifice some bandwidth in certain markets for increased competition. Can you hear me now?

There are a few political aspects that could both sway and complicate the proposed AT&T merger. Last year, AT&T spent over $15 Million in Between-The-Beltway lobbying expenses which is the 8th highest corporate total. William Daley, now President Obama's Chief of Staff, was SBC's former president. And according to the Center for Responsive Politics, AT&T's PACs have contributed over $46 Million during the past two decades, which is more than any other company. So there is some compelling corporate pressure on politicians to "bless" this merger. It may be significant that AT&T workers are members of the Communication Workers of America while T-Mobile's employees are non-unionized so there may be a background impetus for labor to expand its membership. But the FCC is an independent agency of the Federal Government and is not subject to political pressures and forays, right?

Congress has an oversight role for mergers. Both House Judiciary Chairman Rep. Lamar Smith (R-TX 21st) and House Energy and Commerce Chairman Rep. Fred Upton (R-MI 6th) have indicated that Congress will scrutinize this proposed merger. However, Upton's initial statement of the AT&T deal linked it with examining the FCC review. The FCC caused considerable controversy when it proffered net neutrality regulations on the internet despite Federal Court rulings which denied that power grab. Moreover, a seat on the FCC will need to be filled by the Obama Administration before any AT&T merger is finalized so political wonks will be engaged about this proposed merger and it will have some political consequences.

Consumers tend to have a love/hate relationship with their cellphones. They seem to love the advantages of ubiquitous instantaneous communications and the strong suit of their carrier, such as coverage (Verizon) technology (previously AT&T for the I-Phone) or deals (T-Mobile and Sprint). But consumers also hate the indifferent customer service, the dropped calls, the expensive lock in contracts, limitations in usage (bandwidth governing, capped "unlimited data plans") and the increasingly expensive monthly bills. It is prudent to let more details emerge when deciding proper telephony public policy, but this proposed AT&T/T-Mobile merger may have consumers rethinking oligopolies.

Via: Knoxvillebiz     Via: Betanews

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