Deutsche Telekom: Downwardly Mobile in the US

Deutsche Telekom has a problem the size of a Buick parked in its backyard. The failed $39 billion deal to sell its T-Mobile USA business to AT&T cost the latter a breakup fee of about $4 billion. But there was a silver lining for AT&T: The uncertainty of the drawn out regulatory process took its toll on rival T-Mobile.

The fallout for Deutsche Telekom could ultimately overwhelm the breakup fee it collected, with the $3 billion impairment of its U.S. assets potentially just the start. T-Mobile USA -- which makes up about a quarter of Deutsche Telekom's revenue -- is subscale versus market leaders Verizon Wireless and AT&T, and is struggling badly. It lost 1.65 million contract customers last year, leading revenue down 8%. The sale of T-Mobile USA to AT&T, agreed to last March but abandoned in December, was intended to solve the latter's spectrum concerns. It would also have solved T-Mobile's spectrum problem. That could now prove expensive to sort out. And it currently means that T-Mobile's network isn't compatible with some new smartphones. After last year's waiting game, Deutsche Telekom is now trying its own fix for T-Mobile: investing $4 billion to launch a fourth-generation "LTE" network that can support devices like the iPhone for the first time. The spectrum it got as part of the AT&T breakup fee will help on that score. But T-Mobile will still need more mobile spectrum in coming years, so its priority needs to be finding another partner. That is likely to take the form of network-sharing, since regulators objected to market consolidation with AT&T.