Thinking More Clearly about the AT&T/T-Mobile Merger

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Now that both AT&T and Sprint have removed the gloves maybe it’s time to step back for a dispassionate look at AT&T’s $39 billion offer for T-Mobile. On the con side, we cite the obvious: consolidation of the second and fourth largest mobile operators could undermine competition and perhaps lead to higher prices. But there’s a less obvious side to the merger. It promises far faster diffusion of 4G technology, which consumers and businesses need for data-intensive apps ranging from video conferencing to remote medical treatment to streaming movies in HD. Hence the merger would probably lead to higher levels of wireless use and better service quality.

Opponents of the merger see disaster in the making -- the combination, they claim, would lead to a “duopoly” in which only two firms (AT&T and Verizon) controlled the market, and potential competitors faced daunting barriers to entry. But that’s not likely: In 2010 (the most recent period for which government numbers are available), 91 percent of the U.S. population lived in census districts served by four or more mobile operators.

Nor, for that matter, are most Americans living outside cities likely to be at the mercy of two mega-carriers. Two-thirds of them can currently buy voice service from at least four companies. The bottom line: even with T-Mobile out of the game, most people in most places would have a choice of at least three providers.

It’s true that in some areas, relatively small carriers such as MetroPCS, Leap and US Cellular are the most aggressive competitors in terms of price. It’s also true that these regionals depend on access to the four national carriers’ networks for “roaming” coverage outside their service areas. And they fear they’ll be overcharged by the big guys with the goal of putting them out of business – or, more likely, to discourage them from trying to build market share.

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There is reason to believe, though, that this concern is overblown. AT&T is actually a net buyer of roaming services, which means, if anything, it has an incentive to negotiate lower roaming rates. Nor is it clear that a merged AT&T/T-Mobile would have more of an ability to increase rates, even if it wanted to.

 In April, the FCC adopted a rule requiring the carriers to charge “reasonable” rates for roaming. This regulatory approach could entangle the FCC in the minutiae of the relationships between the national carriers and the regionals. More likely, though, it will simply serve as a deterrent to predation: the big carriers, which depend heavily on the goodwill of the FCC and Congress, would have a lot to lose in choosing to draw the commission into the business of setting rates.

The critical question, then, is whether three national 4G networks are adequate to sustain vigorous competition. Or, more precisely, whether three viable broadband systems are better than the alternative of a slower, more problematic ramp-up to four systems. High speed wireless is a very expensive game to play: It takes enormous amounts of spectrum and money to build an efficient national network. And it is far from clear that there is enough of either to support more than three networks for the foreseeable future. Indeed, AT&T makes a convincing case that it needs T-Mobile spectrum to have enough to flesh out the very high speed LTE (long term evolution) 4G service it unveiled in the past year.

Moreover, if the merger is blocked, it is not clear that T-Mobile would attempt to build an equivalent network on its own. Deutsche Telekom, T-Mobile’s corporate parent, has its hands full making good on its commitment to provide LTE service in Europe, and is reluctant to raise sufficient capital to build a similar network in the United States.

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The FCC is looking for a way to break the wireless spectrum logjam by liberating the surplus spectrum now controlled by TV broadcasters. But this could take years: Congress, the FCC and the broadcasters need to reach an agreement in which the broadcasters get a cut of the revenues from auctioning off spectrum that they control, but do not own. So spectrum will almost inevitably remain the scarce ingredient in the recipe for high speed wireless for many years, and the carriers will be hard-pressed to deliver on the promise of delivering Internet service at the bandwidth of wired desktop service.

In a better world, free markets – not constraints on spectrum or access to capital – would determine the pace of the diffusion of broadband wireless. In this world, the government must balance the increased risk of the large wireless companies acting anti-competitively against the risk of slowing the availability of broadband anytime, anywhere. And at least for now, we think consumers’ interests lie in opening the way to rapid innovation.    

Robert Hahn is director of economics at the Smith School, Oxford, and a senior fellow at the Georgetown Center for Business and Public Policy. Peter Passell is a senior fellow at the Milken Institute and former economic news columnist at The New York Times. They are co-founders of Regulation2point0.org, a web portal on regulatory policy. The authors have consulted for telecommunications and information technology companies.