How the AT&T-T-Mobile Merger Went Bust

By Covering Business     April 30, 2012

By Sun Huixia
Columbia Journalism School ‘12

When AT&T’s bid to acquire rival T-Mobile was derailed by regulators in December, it cost the company a $4 billion break-up fee, but by at least one measure, consumers came out ahead.

T-Mobile’s independence meant wireless customers would retain the option of a cheap carrier with a national footprint. At $60 a month, T-Mobile offers the least expensive monthly plan with unlimited talking and text messaging.

Had the $39 billion takeover been given a green light, AT&T would have leapfrogged its archrival Verizon to become America’s largest wireless company. Although the number of competitors in the national wireless market would have been cut to three, the transaction would have raised prices for many T-Mobile customers and created what critics described as an effective duopoly in the wireless market.

Verizon and the combined AT&T-T-Mobile business would have accounted for more than 70 percent of wireless subscribers, according to data compiled by Bloomberg.

The buyout could have led to further consolidation. Sprint, the third largest wireless provider, would have been left “vulnerable” to a takeover, the company said in a complaint filed with the Federal Communications Commission.

What Regulators Saw

Even with an independent Sprint, regulators said a merger between AT&T and T-Mobile would have left the national market for wireless service far more concentrated than is acceptable for an industry to remain competitive.

In the U.S., regulators gauge potential shifts in market concentration using the Herfindahl-Hirschman Index, a number derived from market shares of the relevant players. These scores, while not conclusive, often are used by antitrust investigators as starting points in a probe.

An analysis of the companies’ market shares as measured by Bloomberg shows the merger would have raised HHI of the national wireless market to 2,762 from 2,202. Any score above 2,500 suggests a highly concentrated market, and an increase of more than 200 points is “likely to enhance market power,” the Department of Justice says on its website.

AT&T argued the deal should have been reviewed on a market-by-market basis, instead of a national one. However, regulators said local wireless markets also would have been negatively affected by the acquisition. Among the largest 100 U.S. markets, the merger would have left only Omaha, Neb., with significant wireless competition, according to a FCC report. In Miami, AT&T would have held 53 percent of the market share, up from 39 percent. In Dallas, AT&T’s market share would have climbed to 54 percent from 40 percent; in San Francisco, 52 percent from 44 percent.

AT&T argued that consumers in many cities had a choice of five or more operators and said it was ready to give up market share in some localities where the merger would have made it dominant. AT&T also said it needed more wireless spectrum, or airwaves, to avoid dropped calls.

Critics said AT&T was exaggerating its need for more resources. “AT&T has more spectrum, more licensed spectrum, than any other carrier in the country,” Sprint Vice President of Government Affairs Larry Krevor said in a June interview with NPR. The Justice Department said AT&T did not need to buy T-Mobile to remain competitive and that the company could instead invest in its own network.

A Defense Denied

The challenge for AT&T was to prove to regulators that cost efficiencies brought about by the T-Mobile acquisition could be passed on to consumers and outweigh the adverse impact on competition. The company argued that by making better use of the firms’ combined infrastructure, it could improve the quality of connections. It also said the merger would make the industry more competitive by making AT&T a stronger rival to Verizon. Consumers everywhere would have a choice between two strong national companies. The question for the Justice Department was whether two is enough.

Other countries had appeared eager for a wider playing field. In Canada, the lack of competition had contributed to pricey call rates, so the nation had made efforts to promote new entrants. In the U.K., the FCC’s British counterpart had planned to manage its 4G spectrum auction to guarantee consumers have at least four operators nationwide.

By the end of August, the Justice Department had made its decision. The merger was struck down on the grounds that it would raise prices, reduce the quality of service and discourage technological innovation. Three and a half months later, after AT&T had reviewed its options for a modified bid, the company chose instead to walk away from the merger, leaving T-Mobile and its market share intact.


This article was written for the Columbia Journalism School’s seminar on business journalism in the spring of 2012.

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