What’s in the proposed AT&T/T-Mobile USA cell phone industry merger for you? Nothing. That’s nicht, for you T-Mobile subscribers. Big mergers in consumer goods and services rarely help the customers, and frankly this isn’t about you. It’s about a couple of very large telecom companies solving a particularly large strategic issue. Something had to give in the cell phone industry, and it was T-Mobile.
The American mobile phone arm of Deutsche Telekom was a long way from home with a reasonably good, sharply priced product but a small market share. Strategically, it faced the prospect spending lots of money to win incremental business against two large established firms, AT&T and Verizon Wireless (part-owned by Britain’s Vodaphone), that had a lot more money and patience to spend defending their turf. And they were perfectly willing to do it. So T Mobile surrendered, albeit at a high price, to AT&T. (DT is taking an equity position in AT&T in addition to taking $25 billion in cash.) AT&T’s subscribers, of course, are the ones who are going to have the pay for this. The acquisition makes AT&T the boss of the mobile phone business, with 120 million subscribers, silences a pesky competitor and offers the prospect of expanding its network quickly as bandwidth gets harder and more expensive to come by. T-Mobile was busily rolling out its 4G network, which the pretty women in the pink dress in its commercials claimed was the fastest 4G outfit in the nation. AT&T has been desperate to improve its much criticized network, and although it is investing in high-speed LTE (Long Term Evolution) wireless technology it found a quicker solution in buying T-Mobile’s network. AT&T and T-Mobile both use the GSM (Global System for Mobile Communications) mobile phone protocol, meaning that AT&T subscribers could presumably benefit from riding T-Mobile’s U.S. network.
AT&T touts the benefit of the combination as bringing more technology to more places, particularly rural areas, but this not going to make cell phone service cheaper. AT&T now forms an effective duopoly with its hated rival and former Bell System teammate Verizon (once Bell Atlantic.) And that leaves Sprint Nextel scr.., well, in a not great place. Sprint’s best hope, a merger with T-Mobile to form a formidable No. 3, was swept off the table by AT&T’s compelling bid. AT&T and T- Mobile insist that that the hookup won’t hurt competition in the mobile phone business, noting that there are at least five companies in every market. Ok, mobile phone fans, can you name the No. 4 and No. 5 players in your market? Me neither. T-Mobile kept the big boys honest in terms of pricing, and it’s clear that the antitrust folks at the Department of Justice are going to have to give this one a good sniff.
While that scrutiny is happening, there may well be an opportunity of sorts for Verizon to steal customers from T-Mobile. Verizon now has an iPhone to sell, and it could tease T-Mobile customers into switching by asking them if they really want to ride AT&T’s clumsy network. But Verizon would never resort to such tactics, would it? In the short term, while DOJ is evaluating the deal, pricing will probably be locked in place, maybe even get better, as the companies need to keep their customers in case the deal gets nixed. Longer term, though, prices have nowhere to go but up.