AT&T T-Mobile merger: Why it's a bad deal for consumers.

Commentary about business and finance.
March 21 2011 7:15 PM

Hold the Phone

Why the proposed merger between AT&T and T-Mobile is a bad idea.

Also in Slate, Jack Shafer voices his support for the AT&T and T-Mobile merger.

Randall Stephenson, CEO and president of AT&T. Click image to expand.
Randall Stephenson, CEO and president of AT&T

On Sunday, AT&T announced its intention to purchase the U.S. arm of T-Mobile from Deutsche Telekom for $39 billion in cash and stock. In a statement, AT&T touted the synergies and billions in annual savings the merger promises, arguing that the acquisition will make wireless-spectrum use more efficient. But the company also put forward a vision of a market filled with sharp-elbowed participants and suffused with vigorous, cost-cutting competition. "Wireless competition will continue to flourish," AT&T said, arguing that the "transaction is in the public interest." Nothing to see here, regulators!

But compare AT&T's story with the government's take on the industry. About 10 months ago, the Federal Communications Commission released its annual report on the state of competition in the wireless carrier market. It noted that market concentration had increased 32 percent between 2003 and 2009. It did not see that consolidation as a good thing. Sure, prices for service had fallen, but perhaps not as much as they should have. And virtually every company's profit margins had increased—in T-Mobile's case, from 9.1 to 33.1 percent between 2002 and 2009. In a statement at the time, FCC chairman Julius Genachowski said the agency had decided not to "reach an overly simplistic yes-or-no conclusion about the overall level of competition in this complex and dynamic ecosystem." But for the first time in 14 years, the FCC declined to say there is "effective competition," much to the chagrin of the carriers.

In the past decade or so, perhaps the industry has struck the right balance between the interests of the companies and the interests of consumers. Wireless carriers have plowed billions into improving service, expanding network reach, and cutting costs. A merger between AT&T and T-Mobile, however, does not seem likely to benefit mobile users. It looks sure to reduce competition, take away an innovative, lower-cost alternative, and inch the wireless carrier market closer to duopoly.

If you live in a sufficiently dense neighborhood in the United States, you do have a choice of carriers. Indeed, in 18 of the top 20 markets—home to a "large majority" of Americans—you probably have your pick of at least five. There are the big four: Verizon, AT&T, Sprint Nextel, and T-Mobile. After that, there are scads of smaller competitors, like Leap, TrackFone, Cricket, MetroPCS, and Qwest. But the four big companies essentially control the market, even if AT&T says "intense competition [is] increasing with new entrants." Currently, Verizon has about 101 million subscribers, while AT&T has 96 million, Sprint Nextel 48 million, and T-Mobile 36 million. All of the other players have less than 10 percent of market share combined. That's not enough to threaten the big guys.

Merging AT&T and T-Mobile would reduce competition further, creating a wireless behemoth with more than 125 million customers and nudging the existing oligopoly closer to a duopoly. The new company would have more customers than Verizon, and three times as many as Sprint Nextel. It would control about 42 percent of the U.S. cell-phone market.

That means higher prices, full stop. The proposed deal is, in finance-speak, a "horizontal acquisition." AT&T is not attempting to buy a company that makes software or runs network improvements or streamlines back-end systems. AT&T is buying a company that has the broadband it needs and cutting out a competitor to boot—a competitor that had, of late, pushed hard to compete on price. Perhaps it's telling that AT&T has made no indications as of yet that it will keep T-Mobile's lower rates.

Granted, Verizon and Sprint could enter into a price war with AT&T, much to the benefit of the average smartphone user on the street. Low-cost carriers like Leap and MetroPCS could chip away at the big companies' business. But it seems unlikely to change the dynamics for the average consumer. Wireless is a resource-intensive business with serious barriers to entry, making it hard for small and local companies to compete at a national level. Carriers tend to lock customers into years-long contracts with complicated fee structures. That would make it hard for AT&T and Verizon to steal each other's customers on the basis of price alone. And though a merger between AT&T and T-Mobile would seem to leave three healthy competitors, one might not survive for long: The merger probably means Sprint needs to acquire or be acquired to thrive.

Thus the downside of the deal seems obvious, despite AT&T's protestations. And a variety of market participants have already started pushing back. Sprint, for obvious reasons, hates the deal. "If approved, the merger would result in a wireless industry dominated overwhelmingly by two vertically-integrated companies that control almost 80 percent of the U.S. wireless post-paid market," it said in a release. Consumer groups have also started raising red flags.

For those reasons, the FCC might not approve the AT&T and T-Mobile merger—or, at least, might force AT&T to make significant changes or divestments in order to complete the deal. One way or another, it proves the point: A surfeit of competitors does not mean there's real competition going on.

Video: AT&T buys T-Mobile

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