March 2011

AT&T's $39 billion bid to buy Deutsche Telekom AG's T-Mobile casts doubt on the US government's ability to swiftly deliver policy to meet the booming demand for wireless services.

Wireless companies have long lobbied for help to deal with what they see as a looming "spectrum crunch" as more consumers turn to mobile devices. AT&T -- the No. 2 U.S. mobile carrier often criticized for dropped calls and slow connection speeds -- is not waiting for government remedies intended to free up airwaves for mobile broadband to help it meet ever-growing demands for video and data. But the move could slow legislation needed to free up spectrum for auction to wireless carriers, a potential thorn in the Federal Communications Commission's agenda. "The way things work in Congress, there's competition for what issues get the lawmakers' time and resources," Medley Global Advisors analyst Jeffrey Silva said. Top lawmakers have already signaled an interest in scrutinizing the large-scale transaction. Paul Gallant, an analyst with MF Global, said AT&T's bid for T-Mobile puts a dimmer outlook on the likelihood of lawmakers moving spectrum legislation this year. But the "win-win-win outcomes" of incentive auctions freeing up airwaves, funding a public safety network and reducing the deficit will prompt lawmakers to act by 2013, Gallant predicted. A senior FCC official, who spoke on condition of not being named, said any potential shifting of existing spectrum among wireless companies does nothing to solve the fundamental problem of making more spectrum available to ease the crunch the wireless industry faces.

Interesting tidbits about the proposed purchase of T-Mobile by AT&T:

1. When Cingular bought AT&T Wireless, they were required to divest spectrum as a condition of having the deal approved. T-Mobile bought a lot of it. So AT&T will have to re-divest spectrum it had already divested -- or it will get to keep spectrum the Federal Communications Commission already found would give it too much market power.
2. House Republicans have gone on the record calling for strong antitrust oversight of the telecommunications market, as an approach they prefer to regulation. Will they continue to press for enforcement of the antitrust laws when it comes to this merger? Mergers like this one “potentially raise significant competitive concerns and often warrant scrutiny.” This is magnified when you consider how difficult it is to enter the wireless market, since you need to wait for the FCC to free up spectrum. There’s little chance that some wireless upstart will come out of nowhere and steal AT&T’s lunch money.
3. Pointing to regional carriers to prove the wireless market is competitive is laughable. Companies like Cellular South serve their customers very well. But T-Mobile by itself is bigger than every other small or regional carrier combined.

An anonymous FCC official said that the proposed AT&T buyout of T-Mobile would very likely go through major changes if it were to be approved at all.

He was careful to note the deal hadn't yet been under formal investigation but was confident FCC chair Julius Genachowski would either require conditions or ban the deal. The WSJ didn't learn which of the two was the more likely but was told a greenlight was a virtual impossibility. "There's no way the chairman's office rubber-stamps this transaction," the FCC staffer said. "It will be a steep climb to say the least."

[Commentary] AT&T has enough spectrum today to deliver about 150 megabits from most towers, most of which deliver less than 10-12 because of backhaul. Some of the spectrum is also used for 2G voice, and can easily carry twice as much voice when AT&T switches to voice over LTE/IP. Some goes for 2G/3G data carrying a fraction of what the same spectrum carries with LTE. Across the vast bulk of the country, AT&T has plenty of spectrum not used at all right now. Upgrade inefficient uses and put the fallow spectrum to use, and AT&T can easily handle four times the current demand and probably ten times. More spectrum is a good thing, but engineers at AT&T, Verizon, and almost all the other big carriers are confident they can handle anything likely for years without breaking the budget. FCC sources tell Burstein there's a massive efficiency improvement possible if more carriers shared spectrum, but none were willing. AT&T Wireless & Cingular did a joint build in New York City that saved $100s of millions according to CFO Ron Dykes. AT&T and T-Mobile could do the same and get most of the spectrum advantage of the merger while staying independent.