Analysis: Market monopolies?

09 May 2011 | Kavit Majithia

AT&T’s proposed acquisition of T-Mobile USA is still no closer to resolution as industry experts and competitors alike express concerns of the risk of duopoly.

If AT&T’s $39 billion acquisition of T-Mobile USA goes through, it is a deal that threatens to turn a once competitive and aggressive US mobile market into a straight out spar between market dominators AT&T and Verizon, according to a range of industry experts. Since its announcement on 20 March 2011, diverse opinions and different permutations have formed on the likely impact of the acquisition, and the deal has been sent for review to the Federal Communications Commission (FCC) and the Department of Justice (DoJ).

What the industry does know for sure is that AT&T taking control of T-Mobile USA, presently a wholly-owned subsidiary of Deutsche Telekom, will give the company a 43% market share with over 129 million subscribers. It will also relegate Verizon Wireless to the position of second biggest cellco in the country and Sprint Nextel to third in a market of three, not four, with Sprint currently holding 16% of the market in the US. Sprint has already expressed its opposition to the deal, claiming approval “would create a combined company that would be almost three times the size of Sprint in terms of wireless revenue and would entrench AT&T’s and Verizon’s duopoly control over the wireless market.”

“Sprint stands ready to compete in a truly dynamic marketplace,” said Vonya McCann, SVP of government affairs at Sprint. “Sprint will fight this attempt by AT&T to undo the progress of the past 25 years and create a new Ma Bell duopoly.”

McCann’s reference to a Ma Bell duopoly relates to AT&T’s position in the US telephone market pre-1984, with Verizon as its only real competitor. Fears that this market dominance could be recreated are frequently referred to when AT&T makes a major acquisition, as it did in 2006 after a deal to acquire regional player BellSouth was subject to extensive antitrust hearings before approval.

Comptel, a leading trade association for competitive communications, had reservations about the BellSouth deal and filed comments in opposition to the FCC. This time, the organisation’s position is clear, with Jerry James, CEO at Comptel warning of “devastating economic consequences” if AT&T is again allowed to dominate. “Since its divestiture in 1984, AT&T has been on a mission to regain its monopoly dominance through mergers and acquisitions,” he said. “The concentration of network assets in the hands of one company will have a chilling effect on the growing wholesale marketplace – there is no question that it should be rejected.”

There must be a certain amount of perspective with AT&T’s latest deal because the “horse has already left the barn,” according to William Stofega, senior analyst at IDC. “The FCC and regulatory bodies have always had a look at mergers and given them a green stamp, whether it is a liberal or conservative administration,” he says. “The main argument AT&T has is establishing the difference between acquiring additional spectrum and acquiring a company that has that spectrum. Telecoms is a scale business and if you have a platform and scale it, the main aim is to add more traffic.”

Indeed, AT&T points to the concentration of network assets and the consolidation of subscribers in the wireless market as the reason this deal should be approved, considering its commitment to expand 4G LTE networks as a result. AT&T claims acquiring T-Mobile USA accommodates President Obama’s and the FCC’s goal to provide faster broadband services to all Americans by increasing the accessibility of basic services to rural areas and bridging the connectivity gap. In February 2011, the FCC identified 39 states that have areas without access to basic broadband, equating to approximately 24 million people. AT&T says, under plans post-acquisition, the company commits to deploying LTE to 95% of the US population, reaching an additional 46.5 million Americans and serving specific rural areas. “[The transaction] will improve network quality, and it will bring advanced LTE capabilities to more than 294 million people,” said Randall Stephenson, CEO at AT&T. “During the past few years, the US’s high tech industry has delivered innovation at unprecedented speed, and this will accelerate its continued growth.” The company declined to comment on the subject of duopoly, market dominance and regulatory approval.

“Everyone likes to make these promises about the unwatched masses, but it seems to be an entirely regulatory case,” says Stofega. The admission of focussing on rural areas and connecting the unconnected is an important issue in US telecoms, but the fundamental costs involved, and the potential low rate of return has thus far prevented telcos from addressing the digital divide. Stofega draws on the situation of communications carrier Qwest, post-acquisition by CenturyLink, as an example.

“Qwest had huge density of customers from states like Montana and North and South Dakota but no one wanted to touch it until recently,” he says. “Rural is interesting but the economics do not work and no one really wants to be a rural carrier – even wireless and broadband carriers have avoided it. Extending networks to one person every 10 miles is not the best way to use resources.”

The argument of AT&T’s commitment to roll out 4G nationwide as a result of this deal is also flawed, according to Jan Dawson, chief telecoms analyst at Ovum, because “it has made this argument as if no other player were deploying 4G nationwide, whereas this is not the case.”

“Verizon and Sprint are both aggressively rolling out 4G and have more coverage than AT&T already,” he says. “Verizon will complete its nationwide LTE roll-out by 2013 so AT&T won’t add any coverage to that and will merely become a second or third carrier where services are already available. We’re really seeing an exchange from four carriers with decent coverage around the country to three carriers with blanket coverage for 4G. Whether that’s an improvement or not is open for debate.”

The fundamental business strategy of the larger telecoms companies in the US is an important issue to address. When comparing the US to the Indian market – where network, wireless and spectrum sharing is done to curb intense competition – the business model and the finances make sense. In the past, there have been attempts by US telcos to create a type of network sharing using a Competitive Local Exchange Carrier (CLEC) model. “But this failed miserably because no one wanted to play ball and people were still using regulation to prop up artificial business models,” says Stofega. “The notion that you always have to build out your network is a huge inhibitor. Consortia are still not a route to market in the US, and in AT&T’s case monopolies are not illegal.”

The FCC and the DoJ are clearly faced with a difficult decision. What is sure is if the deal is approved there are likely to be a significant amount of concessions attached. To address such market dominance, the FCC ruled in April 2011 that AT&T and Verizon must open up their networks to allow access for increased roaming and promote competition with the country’s smaller competitors.

“It is possible that either the FCC or the DoJ will block the merger considering the concern about the gradual shrinking of the market,” says Dawson. “If this happens, AT&T will have to pay a significant break fee to T-Mobile USA and it will have wasted a lot of time and resources. The company will be forced to rethink its 4G strategy and, all in all, it will be a terrible outcome for both companies. There is a lot of uncertainty at present in the market.”