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Monday
Apr252011

What's Really Behind AT&T's Acquisition of T-Mobile

Pay No Attention to the Man Behind the Curtain

How will AT&T (NYSE:T) convince the DOJ and the FCC that combining forces with T-Mobile actually serves the “public interest”?  One thing is certain, AT&T won’t justify this deal to regulators based on the actual set of facts that are compelling the deal—to do so would cause regulatory authorities to put the kibosh on the whole matter!  This would in turn jeopardize AT&T’s ability to compete with Verizon Wireless (NYSE:VZ, “VzW”). No, AT&T will likely stick with the tried and true message of enhancements to industry “vitality” and “substantial consumer benefits” and, for a twist, the “national priorities” that will be served by approval.

AT&T’s story is in its seminal stages but the broad outline of what will eventually be spun out to regulators can be seen on the AT&T website at http://www.mobilizeeverything.com/home.php.  Under the banner of “Know the Facts,” AT&T has made available a number of presentations which detail the circumstances and benefits which drive the need for this transaction.  However, in my opinion, none of the information supplied by the company addresses the REAL reasons that AT&T desperately needs its acquisition of T-Mobile to be approved.

The unvarnished truth is that AT&T’s bid for T-Mobile is an attempt to erase several years of strategic miscues which have pushed AT&T to the precipice of a potentially serious drubbing at the hands of its arch rival VzW.  Bluntly stated, during the last four years, AT&T has been unable to position itself to effectively compete in the 4G universe.  Additionally, AT&T failed to take advantage of numerous acquisition opportunities to improve its near-term competitive posture vis-à-vis VzW, which would have allowed AT&T to separate itself from VzW.  Significant failures include allowing its wireless network quality to degrade during the crucial operating years of 2009 and 2010, as well as the loss of significant marketing battles which started in 2008.  Even if AT&T is allowed to internalize T-Mobile, there is no guarantee that it will be able to do so in time for the company to preserve gains made by this transaction.

The general view within the industry is that in order to capture the increased throughput speeds associated with the LTE standard, 4G network launches should be done using a minimum of 20 MHz of spectrum (2 x 10 MHz channels).  Furthermore, because of it superior propagation characteristics, it is preferable that the initial deployment of LTE be accomplished with spectrum that is below the 1.0 GHz frequency.  Currently, manufacturers of wireless devices and network gear are producing products that operate on the 700 MHz and AWS spectrum bands.

The chart below shows the maximum number of contiguous MHz of 700 MHz and AWS spectrum held by AT&T and VzW in the top 25 Cellular Market Areas (CMA).  As you can see, without access to T-Mobile’s portfolio of AWS spectrum, AT&T would be unable to launch a viable 4G product in four of the top 25 markets in the country. (We did just learn that AT&T has a separate spectrum transaction pending with Redwood Wireless which will provide AT&T with 22 700 MHz licenses, including Minneapolis and Milwaukee.)  Nevertheless, without T-Mobile, AT&T is hamstrung in Chicago and Miami.       

AT&T’s inability to secure enough AWS or 700 MHz spectrum to support the launch of LTE is not the result of a broader spectrum shortage.  AT&T had opportunities to purchase spectrum covering these markets in auctions held by the FCC for AWS licenses in 2006 and for 700 MHz licenses in 2008.  In both instances AT&T chose not to purchase the needed spectrum.  AT&T may claim that the spectrum price was too high but: a) they had access to the capital resources to purchase the spectrum and b) the price that would have been paid at auction was nowhere near the $39b that AT&T is willing to shell out now in order to acquire T-Mobile.

As for the network quality issues experienced by AT&T in 2009 and 2010, here again AT&T is no victim of external circumstance.  The problems stem from AT&T’s systematic underfunding of its capital spending program between 2006 and 2009 on the wireless network.  In each of those years depreciation exceeded capital spending, causing AT&T’s embedded capital base to shrink.  Furthermore, in each of those years the average number of AT&T subscribers increased.  The implication is that the value of AT&T’s capital investment in its wireless network was being spread ever more thinly, until it was unsustainable.  What did AT&T think was going to happen? 

Finally AT&T’s competition did not stand still after Cingular’s purchase of AT&T Wireless in 2005.   VzW took a number of actions that have been damaging to AT&T.  There were two acquisitions made by VzW that were particularly hurtful to AT&T’s competiveness on a short-term basis.  First, the acquisition of Rural Cellular Corp. (“RCC”) in 2007 was a small purchase, but on a strategic basis it robbed AT&T of a critical roaming partner in many rural areas of the county.  Second, VzW’s purchase of Alltel simultaneously added significantly to the VzW network coverage area with 850 MHz cellular spectrum and stripped AT&T of its title as the largest U.S. wireless carrier by total subscribers.

Both AT&T and VzW rely heavily on national advertising campaigns to drive their sales efforts.  The use of words like “biggest,” “best,” “exclusive” and “fastest” are the staples which feed these marketing machines, and the ownership of marketing claims is a real source of competition between these two companies.  AT&T’s loss of the “largest U.S. wireless carrier” title in 2009 was real blow because it had been the basis of much its advertising ever since Cingular bought AT&T Wireless. 

There are three claims that stand above all others in the wireless industry: a) Largest or biggest wireless carrier, b) best or most reliable network and c) Fastest data network.  The chart below shows how the marketing claims battle between AT&T and VzW has unfolded over the past several years. 

Certainly AT&T was: a) aware that RCC and Alltel were for sale and b) given the opportunity to participate in those transactions.  At the time of these sales AT&T had plenty of financial flexibility and could have done what was necessary to acquire either or both of these companies.  Now that AT&T is about to lose any and all claim to market leadership, it was compelled to act. And because AT&T has very little chance of grabbing either of the significant network quality claims of VzW, its actions (primarily this acquisition) are aimed at staking out the only attainable brand position left--simply being the largest US carrier.

Given the information above, my conclusion is that AT&T’s proposed acquisition of T-mobile is first and foremost an act of self preservation; it has very little to do with either pursuing the public interest or even the massive synergy value AT&T has associated with the proposed combination.  But, you can lay money down on the fact that when AT&T presents its case to the DoJ and FCC, it will be all about the how AT&T is the victim of circumstance and all the public good that will be created upon approval of the transaction.

Richelle Elberg contributed to this article.

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