AT&T/T-Mobile: Riddled With Regulatory Risk

In the wake of AT&T Inc. (NYSE: T) and T-Mobile US Inc. 's US$39 billion surprise deal that has rocked the US wireless industry, the biggest concern among analysts is how this merger might clear the regulatory hurdles it faces at the U.S. Department of Justice and the Federal Communications Commission (FCC) . (See AT&T to Buy T-Mobile USA for $39B.)

While the sale to AT&T is generally regarded as a good fit and a positive move for Deutsche Telekom AG (NYSE: DT) -- as shown by the surge in the German operator's share price today -- the transaction is not expected to be completed until the first half of next year, which signifies a long legal and regulatory process. (See DT's Shares Rocket on AT&T Deal, What Happens to Sprint After AT&T/T-Mobile Merger? and Could AT&T/T-Mobile Deal Mean an HSPA+ iPhone?)

AT&T's proposed acquisition of T-Mobile would bring together the number two and number four players in the market, a combination that would make AT&T the largest operator in the U.S. with a (current) market share of 43 percent. That potential dominance has left industry and financial analysts wondering what kind of concessions the operators will have to make to get the deal approved.

Here's what analysts are saying so far about the U.S. wireless industry's mega-deal:

  • Credit Suisse Analyst Jonathan Chaplin told the Financial Times that he had "never seen a deal with more regulatory risk be attempted in the U.S.," and while it was unlikely AT&T would attempt such a deal if it thought it couldn't be completed, it will likely require "massive divestitures and concessions" to achieve regulatory approval.

  • Heavy Reading Senior Analyst Gabriel Brown says: "It’s not unheard of in international markets for the lead operator to have 40 percent, or greater, market share by subscribers, but U.S. regulators will inevitably extract concessions if the deal is to be approved. The questions are how deep, and in what regions, it will look to cut the combined operator down to size."

  • Informa Telecoms & Media 's Principal Analyst Thomas Wehmeier believes the deal will actually have the most value for lawyers and bankers during the year-long regulatory approval process. "The concentration of close to 75% of the wireless market into the hands of just two players, AT&T and Verizon, will inevitably draw fire from the US authorities, including the FCC and the Department of Justice," he wrote in an email distributed Monday morning. "If and when the deal is finally approved it will likely not be without significant concessions being imposed upon AT&T by the industry watchdog, such as divesting spectrum holdings, divesting customers or granting access rights to tower sites to smaller players where excessive market concentration is identified."

  • But there are some elements of the deal that could work in AT&T and T-Mobile's favor for regulatory approval, according to this Bloomberg report. Larry Freedman, a partner at law firm Edwards Angell Palmer & Dodge LLP, told Bloomberg in an interview: "One of the interesting things that's going to help them at the FCC is the compatibility of the network. The spectrum crunch would be alleviated because you have complementary networks and the ability to use each other's spectrum. That could be viewed as a positive."

  • Matt Hatton, director of Machina Research, wrote in his blog that this deal could spark more M&A action in the U.S. "A T-Mobile/AT&T tie up creates a GSM powerhouse with 130 million customers. It is likely that the CDMA operators will consider doing the same to give themselves 150m subs and a nearly 50% market share, thus effectively creating a duopoly for services…"

  • Mizuho Securities USA Inc. 's Executive Director of equity research for telecom services Michael Nelson has picked the likely winners and losers from the deal: "We believe Verizon is well-positioned to extend its share of postpaid subscribers. MetroPCS may be the biggest winner with extended share gains, particularly from [T-Mobile USA], and a potential increase in asset value due to the scarcity factor. Infrastructure companies and tower operators may be the biggest potential losers with one less national carrier as a customer."

  • Forrester Research Principal Analyst Charles S. Golvin believes the deal is all about scale for AT&T. "The acquisition, were it to pass regulatory muster (no slam dunk that), addresses a number of scale challenges for AT&T," writes Golvin in his blog. "Most importantly, it delivers the precious spectrum assets needed to deploy a robust, nationwide LTE network… It also delivers a boatload of extant base stations, many fed by Ethernet or fiber backhaul, which will help AT&T bolster its service quality (iPhone owners please don’t hold your breath). And it delivers a skilled radio frequency team that will help the company plan and deploy its next generation network."

    — Michelle Donegan, European Editor, Light Reading Mobile

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    bollocks187 12/5/2012 | 5:09:21 PM
    re: AT&T/T-Mobile: Riddled With Regulatory Risk

    As a consumer we are constantly bing deprivd of choice.

    1) You want to buy the "end device" that meets your needs/wants.

    2) You are willing to pay for the service that matchs your needs/wants.

    3) You want competition in choice to match your willingness to pay.

    Sadly this is counter productive to the service provider and BIG  vendors .g. Apple, Google, Mot,  Samsung etc have  goals that are opposite to the consumer:

    1) They want  to maximize the ARPU from consumers

    2) They want to maintain the ARPU using contracts.

    3) They want to control what your end devic is sinc it is a subsidizd ntity

    4) They "fear" competition





    Duh! 12/5/2012 | 5:09:30 PM
    re: AT&T/T-Mobile: Riddled With Regulatory Risk

    I guess my view is complex and nuanced.

    Some kind of goverment oversight is needed over telecom/wireless/broadcast because there's too much in these spaces that don't behave like classical markets.  Somebody has to adjudicate the tussles, allocate spectrum, foster some simulacrum of competition,  sometimes call the fouls, and hopefully look out for the public interest. 

    My direct experience with the FCC was in the years immediately before and immediately after the breakup of the Bell System (an event which was indirectly precipitated by earlier FCC actions).  Suffice to say, were it not for the CPE rules, along with a variety of more-or-less related "fences" built into the rules, it is doubtful that we would have a consumer Internet, and many of the technological advances of that era that we now benefit from would have died on the vine.

    The FCC is constrained by the Communcations Act and the Administrative Procedures Act, along with various lesser laws and treaties.   At the same time, these limits are open enough to interpretation to give the FCC a lot of leeway.  Except when they get slapped down by the DC Circuit, which happens with depressing regularity.  But at least they always show, even by tortured logic, that their rulemakings are based on authority granted to them by Law, and their process at least creates an appearance of hearing all sides and balancing all interests.

    The other reality of the FCC is that they are supposedly independent, but in reality a creature of Congress.  Presidents have to pick commissioners whom they believe will get confirmed by the Senate, and both houses are continually second-guessing the Commissioners.  That, of course, explains the FCC's zealousness in enforcing the rather silly broadcast indecency rules: F-bombs and fleeting images of aging pop stars' withered nipples (during the holiest of secular holy days, no less) are highly inflamatory to House  Energy and Telecom Subcommittee members who represent the flyover states.

    That said, the Commissioners in recent years have been a truly unimpressive lot.  Easily distracted by shiny objects, stunningly ignorant of technology and economics, apparently incapable of rigorous reasoning, often doctrinaire.   Bureau chiefs and staff, on the other hand, are often excellent at what they do.  Unfortunately, retention of the best and brightest is not a possiblity.  I knew great attorneys who used an interlude of FCC service as a temporary break from the pressures of law firm life, and as a steppingstone to managing partner in their next firm.

    As to this hairball that AT&T and DT just spit up on the Commission?  First, I'm going to guess that DoJ will take exceptional interest in the matter.  Especially after Christine Varney's inaugural speech to the Chamber of Commerce, in which she declared herself the new sheriff in town.  So it might ultimately not become the FCC's problem.  Second, the grass roots seems to be pretty riled up about this, especially with regard to the spectre of upward pricing pressures.   I'd suspect that the guidance from the Congressional masters - even some of the Republican ones, and even some of the recipients of big tranches of AT&T campaign contributions - is going to be colored by the spectre of peasants with torches and pitchforks.  On the other hand, the shiny objects that AT&T keeps waving around - accellerated rural LTE deployment in particular - are going to be awfully tempting.  And AT&T didn't exactly make all those campaign contributions in the interest of advancing good government, either.

    This should be amusing.

    Gabriel Brown 12/5/2012 | 5:09:31 PM
    re: AT&T/T-Mobile: Riddled With Regulatory Risk

    That's a good point. The size of the market matters. The U.K. has reasonably competitive conditions and consumers can buy their own phones, but it's not a big enough market to drive innovation in devices, despite being one of the world's Top 10 economies. Anyway, everyone wants an iPhone, so the point is moot here.

    Funnily enough I was just discussing the "Shanzai" phones here in the office with the Pyramid Research emerging market analysts. These are typically designed in Shenzen on Mediatek chipset platforms and are taking serious share in India, Africa, China, etc. Innovative naming conventions anyway: http://www.mtkphones.com/product/list-customcategory-405.aspx

    WilliamofOccam 12/5/2012 | 5:09:31 PM
    re: AT&T/T-Mobile: Riddled With Regulatory Risk

    Gabriel: I suspect Italy alone is too small a market to promote much innovation. In contrast consider the diversity of phones sold in India and China (and other parts of Asia for that matter). Agreed that these are not smart phones but the principle is the same.

    paolo.franzoi 12/5/2012 | 5:09:32 PM
    re: AT&T/T-Mobile: Riddled With Regulatory Risk I guess my view is really simple. Why do you think a bunch of politicians that are appointed want to help consumers?

    Gabriel Brown 12/5/2012 | 5:09:32 PM
    re: AT&T/T-Mobile: Riddled With Regulatory Risk

    Didn't Google try and sell unlocked devices over the Internet? If I recall they didn't sell many.


    I don't disagree with the point as such. In theory it could be benefical to be able to buy your own device. Tablets look to be going that way.

    But where you can buy unlocked handsets (e.g. UK) and change networks every month, people still get their phones through operators on 18 month contracts. In some markets, Italy I think, the carrier is not allowed to bundle phones, but this hasn't resulted in remarkable innovation.

    Anyway, wasn't it Apple that gave AT&T an exclusive on the iPhone in the U.S.? I don't recall the FCC mandating that.

    bollocks187 12/5/2012 | 5:09:32 PM
    re: AT&T/T-Mobile: Riddled With Regulatory Risk


    Well I like dirty words and do not want the FCC stopping me from hearing them.

    Not to led you down a path but "operators" need to be forced to unlock. By whom is the question. I thought FCC would have juristication on this front since it was so happy to publish and try to enforce an order on the Open Internet ! 





    DCITDave 12/5/2012 | 5:09:33 PM
    re: AT&T/T-Mobile: Riddled With Regulatory Risk

    The FCC's job is, according to the only real legacy of their work, to protect us from hearing dirty words on the radio.

    Seriously, you make an excellent point. Until the lock on networks and devices is broken, the FCC remains the single biggest waste of space ever funded by taxpayers (and voted on by no one).

    bollocks187 12/5/2012 | 5:09:33 PM
    re: AT&T/T-Mobile: Riddled With Regulatory Risk

    This is getting ridiculous. The FCC is just not doing tis job.

    The biggest rip off in the USA is the phones locked to the network provider and their is no defensible reason why this is the case. The cell phone manufacturers can match the 2G/3G/4G no problem. 

    When is the FCC going to mandate that ANY cell phone can work on ANY network and No Contracts.

    This is what they should be working toward if they want to protect the consumer.

    The consumer choice is being eroded and the choices are getting smaller.

    Do your job FCC!


    WilliamofOccam 12/5/2012 | 5:09:44 PM
    re: AT&T/T-Mobile: Riddled With Regulatory Risk


    Gabriel: I believe that, in the long run, empowering consumer choice is the right thing to do. At present (at least in the US and likely in UK as well) consumers have to choose both a phone model and a plan instead of choosing them independently. This implies that consumers cannot efficiently reward and punish with their wallet, a requirement for innovation and growth (think AT&T and iPhone, at least until recently). In the long run, I do believe that breaking up such alliances will benefit consumers.


    Seven: Yes, the merger does not involve Verizon and Sprint (at least until now, for all one knows these two may decide to merge as well). However my point is that now is good time for the US to regulate the market and perhaps the current environment gives the FCC more teeth to enact a change.

    Not that I believe any of what I propose will happen in the short term, but I am just imagining the possibilities!


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