2011 Lane Reports

AT&T, Deja Vu?

The Lane Report, May 2011
Monday, May 2, 2011 6:00 am
by Gevorg Azizi

AT&T's recently proposed acquisition of T-Mobile has awakened not so distant memories of when, prior to its breakup 1984, AT&T enjoyed a virtual monopoly in the telecommunications industry. The combination of these companies presents a host of issues that range from antitrust implications to the questionable benefits and relative costs to consumers as well as the telecommunications industry as a whole.  Although economic theories suggest that the economies of scale resulting from a merger of this magnitude will produce cost saving synergies that will translate into lower prices paid by the consumers, real world cases have provided mixed results. A number of industry participants have made public their opinions on the subject.  Their views range from Verizon's CEO proclaiming that the deal would not adversely affect competition to Sprint's CEO describing the acquisition as anticompetitive. This article reviews the issues regulators must consider in their approval process and looks at the benefits arising from the acquisition as well as the negative implications that would result from it.

In the late nineties the Telecommunications Act of 1996 was enacted to “open the industry to greater competition, particularly in the local and long-distance phone markets” through means of deregulation. AT&T's proposed combination seems, however, to fly in the face of that legislation as it will provide them with a 42% subscriber market share. The acquisition will not come cheaply as it will cost AT&T an estimated $39B and give T-Mobile/Deutsche Telekom an 8% ownership stake in the newly combined entity. The deal will also allow AT&T to obtain 20%-40% more cell sites resulting in better service (fewer dropped calls and faster data speeds). When Verizon acquired Alltel a few years ago they were required to make concessions, divesting subscribers where they had over 50% in market share. As the industry is currently price competitive, and considering that this combination has the potential to upset that balance, it will be interesting to see if the regulators believe it necessary to follow a similar course with AT&T.

 Issues Facing the Acquisition

Deal Size

  • The combined market share of AT&T and T-Mobile (42%) and Verizon's (34%) share will account for 76% of the total subscriber market. Sprint Nextel will follow with 15% and MetroPCS, Leap, US Cellular, and others each enjoying a market share of about 2%.
  • The acquisition will result in a shift in the makeup of the telecommunications market by allowing 76% (AT&T and Verizon) to be concentrated in the high-end of the market and 3% (MetroPCS and Leap) in the low-end, taking away the 11% contribution to the low-end market formally provided by T-Mobile.

Barriers to Entry/Telecommunications Act of 1996

Argument against the acquisition: The consolidation and high concentration of market share will result in extremely high costs to entry for emerging competitors seeking to enter the telecommunications industry. Given this logic, it is appropriate to conclude that such an acquisition will adversely affect competition and may violate the Telecom Act of 1996.

  • Large companies in a heavily concentrated market generally have the ability to compete more aggressively in terms of pricing, providing them with a higher degree of leverage than a niche player could muster creating substantial barriers to entry in this market.

Argument for the acquisition: According to a recent Oppenheimer report however, the deal will provide for a competitive landscape that “balances scale and competitive requirements”, and consumers will still have the option to choose from one of several niche wireless providers. Furthermore, the CEO of AT&T's wireless business, Ralph de la Vega, said that the company was willing to agree to the rather large $3 billion breakup penalty in the event the deal is blocked as AT&T believes regulatory officials recognize that the combination makes the US more globally competitive in the long-run.


Political Interest

With the 2012 presidential election nearing, Washington insiders believe the AT&T deal will provide the Obama administration with the incentive to favor the deal as it attempts to highlight itself as pro-business, especially when considering that AT&T's workforce is unionized.

  • The Democrats have lost seats in the most recent election, increasing political pressure to promote decisions that are pro-business in an effort to regain lost ground.
  • The decision will also claim to fulfill the administration's promise to increase broadband speed and capacity.

Consumer Viewpoint

  • Arguments against the acquisition: Consumers are afraid that the past will repeat itself with respect to higher prices and reduced quality as has been witnessed in other acquisitions where they were found to have monopolistic control over a market. The risks are further emphasized when one remembers the collusion charges Archer Daniels Midland Inc. and Ucar International were found guilty of.  Furthermore, a higher concentration in the telecommunications market leads to fewer options available to the consumer, especially when one considers the lower end of the market.
  •  Argument for the acquisition: The acquisition will allow for mutually beneficial synergies that will enhance both AT&T as well as T-Mobil customers' experience. The cost saving synergies can be redeployed into research and development bringing about further innovation and better customer experience.

This case has left regulators, telecom companies, and consumers alike searching for a black and white answer to a gray issue. Regardless of your perspective, one thing is clear: this deal will eliminate a significant price leader in the mobile market and shift the overwhelming majority of market share to the high-end spectrum. Yet to assume that such an impact will have negative and unlawful consequences is merely an assumption and should be left in that context. The economic principles guiding the acquisition seem to favor both the industry and its consumers as noted previously. However, if theories fail to translate into economic benefits and AT&T is found acting unlawfully with the intention of monopolizing once again, laws and precedents will prevail over time. This was the case with Standard Oil, AT&T, and Microsoft, where the government successfully prosecuted these companies and implemented actions that restored a competitive market and eliminated their monopolistic advantages. Unless the FCC wants to end up with a two-company industry, they should arguably force AT&T to first make substantial divestitures prior to approving this acquisition. Consumers deserve a competitive environment in the wireless marketplace. Whether or not a forced divestiture will succeed in maintaining competition in the telecommunications industry, however, won't be apparent for a number of years.

Gevorg Azizi is an Assistant Portfolio Manager and ESG Research Intern for Marc J. Lane Investment Management, Inc. Gevorg is currently studying Finance and Economics at DePaul University and is expected to receive his Bachelor of Science degree upon graduation in June 2011.

The Law Offices of Marc J. Lane, A Professional Corporation
180 North La Salle Street
Chicago, Illinois 60601-2701
(312) 372-1040
Nationwide: (800) 372-1040
Facsimile (312) 346-1040

Websites: www.MarcJLane.com

Send this page to a friend

Announcing Marc J. Lane's 35th Book:

The Mission-Driven Venture: Business Solutions to the World's Most Vexing Social Problems

More About The Book
Our monthly newsletter