First Look at the AT&T, T-Mobile Deal

In a development that rocked the mobile carrier space, AT&T announced it will acquire T-Mobile from Deutsche Telekom for $39 billion in a cash and stock deal; Deutsche Telekom will wind up with an 8% stake in AT&T. The combined subscriber base will by roughly 130 million or 43% of the US market, dwarfing current market leader Verizon’s 33%. The deal is subject to regulatory approval, and that may result in regulatory changes that reverberate far beyond AT&T. Such a massive change in the market composition could bring about changes begin moving the mobile industry to a new phase.

Given the market turbulence in the wake of the announcement, it’s clear that people are having a tough time getting their heads around all of the possible ramifications. Deutsche Telekom’s stock jumped 13% on news of the deal, and at mid-day, Sprint was down 16%. Verizon is up 2.5%, but a lot of the mobile driven businesses like American Tower and Crown Castle who would be directly impacted by a network consolidation are down hard.

Getting $39 billion and 8% of AT&T was a pretty good deal for Deutsche Telekom. They acquired VoiceStream Wireless in 2000 for $50.7 billion in stock and cash, and subsequently changed the name to T-Mobile. Since then, they have continued to be an underperformer. In spite of low prices and a great reputation for customer service, in the most recent quarter T-Mobile lost 318,000 customers, a 3.6% churn rate. The AT&T’s offer values each T-Mobile subscriber at $1,147. Other valuations of the company put it at around $25 billion.

The big question at the base of this is, will the deal actually go through? Opinion makers are already weighing in on the fact that consumers might be the biggest losers in this deal. Horizontal consolidation that reduces competition by taking players off the field does not sit well with regulators. If the merger goes through, the top two mobile operators will control over 75% of the market, and there will be essentially one source for GSM services in the US. Optimistically it would take at least a year for the deal to close, and both the Department of Justice and the FCC will have a say in the outcome.

One of the factors driving down Sprint’s price is the assumption that an acquisition by the other CDMA operator, Verizon, would effectively be off the table. It’s bad enough having two suppliers with over 75% market share, but two providers with 93% of the market is unthinkable.

There had been rumors about a possible combination of Sprint and T-Mobile, but the thought of merging a GSM network with Sprint’s CDMA technology would be “painful”. One possible combination to be on the lookout for is Sprint and Century Link. Century Link acquired Qwest last year, and while they are a distant third behind AT&T and Verizon in the local telephone business, they also lack a wireless play. Further down the line you could see Telephone and Data Systems, Inc. (who owns 81% of US Cellular) joining that party.

The one ray of hope coming out of this is the possibility that in allowing the AT&T/T-Mobile combination to go forward, new regulatory parameters are initiated to protect the smaller players. That would indeed be a positive development, as those requirements would almost certainly be targeted at handsets.

Despite the operators’ claims and counter-claims regarding who has the “best,” “most reliable,” “fewest dropped calls,” etc, people are buying handsets. No one operator has really pulled away from the pack with regard to network performance, and the other factors have minor impact. AT&T and T-Mobile’s GSM technology certainly favors international travelers, but frankly that’s a pretty small slice of the market.

Apple’s decision to sell the iPhone through Verizon was a bigger development for most users than the AT&T/T-Mobile merger. The merger would mean that iPhones are now available to over 75% of mobile subscribers in the US, but where does that leave Sprint, Metro PCS, or US Cellular?

With the merger, the mobile carrier market will effectively become a duopoly. Given the importance of handsets in the buying decision, without access to the full range of popular devices Sprint (and everyone further down the line) could effectively be squeezed into oblivion. If it becomes clear that permitting this much industry consolidation would effectively marginalize the smaller operators that could force the regulators to insist on a truly open handset market.

Once that handset genie is out of the bottle, the mobile operators will actually have to start competing on the basis of being “carriers” as opposed to “handset distributors”, and at that moment the whole complexion of the game will change.

The short-term game will revolve around whether the AT&T/T-Mobile combination will get the regulatory go ahead. The real game will be defined by changes to the ground rules going forward.