AT&T-Mobile: AT&T Buying T-Mobile's US Assets in $39B Transaction

AT&T and Deutsche Telekom AG the parent of T-Mobile just announced that AT&T (not Sprint) will buy the business of T-Mobile USA "in a cash-and-stock transaction currently valued at approximately $39 billion." Both companies boards have approved the deal; now the US must also do so. 

T-Mobile's growth has been stalled and the company has been exploring strategic options (mimicking what the company did in the UK with Orange). There was considerable speculation that Sprint and T-Mobile USA might combine or that Sprint might buy its assets directly -- to form a third equal player to compete with Verizon and AT&T. I had said under that scenario there would be a "big three" carrier configuration in the US. Now it looks pretty much like a "big two" -- if the deal is approved.

I suspect there will be a substantial review by the US FTC or Justice Department of the competitive implications of the acquisition. In my view there's a 50% chance that the deal would get blocked. If does happen AT&T becomes the largest US carrier by about 35 million people, with a total of approximately 130 million subscribers. That puts pressure on both Sprint and Verizon accordingly. 

Here are the current US carrier subscriber numbers, based on the most recent publicly released information: 

  1. AT&T: 95 million
  2. Verizon: 94 million 
  3. Sprint: 49 million
  4. T-Mobile: 34 million 

The two companies' "common network technology" (GSM) is cited in the release as one factor behind the decision. And in this technical respect AT&T is a much better fit, in the short term, for T-Mobile than Sprint (CDMA). Longer term it wouldn't matter, given the shift to 4G technologies. 

AT&T addresses the competition issue in the release very directly:

The U.S. wireless industry is one of the most fiercely competitive markets in the world and will remain so after this deal. The U.S. is one of the few countries in the world where a large majority of consumers can choose from five or more wireless providers in their local market. For example, in 18 of the top 20 U.S. local markets, there are five or more providers. Local market competition is escalating among larger carriers, low-cost carriers and several regional wireless players with nationwide service plans. This intense competition is only increasing with the build-out of new 4G networks and the emergence of new market entrants.

In contrast to these statements the market becomes much less competitive if this deal is approved. Local or regional carriers are, as a practical matter, not in a position to compete with AT&T and Verizon for most consumers. 

There will be three large carriers with any scale. And then the US market really becomes a battle between AT&T and Verizon. Sprint will probably have an increasingly difficult time competing with the other two because of their much greater scale and revenues. If the deal is allowed, however, there will (or should) be serious conditions attached. 

Carriers are trying -- so far relatively unsuccessfully -- to raise prices for consumers with tiered data plans, as voice revenues flatten and start to fall. The announced acquisition would potentially directly impact the pricing of data services in the US because it would effectively diminish choice and competition among carriers in the US market.

AT&T would be freer to raise prices, especially as we enter the 4G era and the company argues it must recoup its investments. 

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