Entries in T-Mobile (13)

Monday
Dec262011

The Deal is Dead! Now What?

AT&T and T-Mobile Consider Life Post Deal

After enduring nine months of an increasingly hostile regulatory review, AT&T finally threw in the towel and announced it would abandon its efforts to acquire T-Mobile USA.  Back on March 20, 2011, AT&T announced that it planned to acquire T-Mobile in a transaction valued at $39b.  Although there was plenty of opposition to the deal from the very start, most analysts nonetheless expected the deal to pass muster with the Department of Justice and the Federal Communications Commission, provided, that is, AT&T agreed to sell off large swaths of overlapping spectrum and operations.

In fact, word was that AT&T was ready to sell Leap Wireless spectrum and nearly 25% of T-Mobile’s U.S. subscriber base in an effort to gain regulatory approvals.

But the deal started to spiral south in late August when the DOJ filed suit to block the merger.  When, in late November, the FCC concluded that the deal would cause price increases and harm customers, all that was left was for the Fat Lady to sing.  Stick a fork in it, the deal was dead!

Now we begin the healing process and both AT&T and Deutsche Telekom, T-Mobile’s German parent, have gaping wounds to lick.  AT&T is saddled with what has been estimated to be a $6b deal break-up fee.  In addition to the two carriers entering a seven-year roaming agreement, the package requires AT&T to pay T-Mobile $3b in cash as well as spectrum in markets including Los Angeles, Dallas and Boston.

AT&T ceo Randall Stephenson is probably feeling a little vulnerable now that the deal has been killed.  It’s tough enough that Stephenson had to follow in the shadow of former AT&T ceo Ed Whitacre, who transformed the smallest of the Baby Bells, Southwestern Bell, into AT&T through a string of successful blockbuster deals – the culmination of which was the acquisition of AT&T.  Now Stephenson is faced with having to cut a $3b check to T-Mobile and is left with a core operation whose 4G wireless strategy has suffered a major setback while its principal competitor, Verizon Wireless, appears to be lapping the pack. 

Despite the setback, AT&T vows to continue to invest in its networks and encourages the government to free up additional spectrum.  With respect to investing in its network, AT&T will need to work quickly to meet the build-out requirements associated with the $6.6b worth of mostly B-block 700 MHz licenses it acquired during Auction 73 back in early 2008.  B-block licenses must provide service covering 35% of its geographical area by February 2013.   

Regarding spectrum, and perhaps as in a gesture of goodwill following a brutal past nine months, the FCC approved AT&T’s previously announced $1.9b acquisition of D- and E-block 700 MHz licenses from Qualcomm just two days after AT&T officially quit the T-Mobile deal.  The Qualcomm deal gives AT&T as much as 16 MHz of new 700 MHz spectrum and should help the carrier assemble the 20 MHz of contiguous spectrum necessary to provide robust 4G services in many markets.  But it is highly likely that AT&T will once again be shaking the trees for available spectrum, particularly 700 MHz spectrum.

As bad as things seem for AT&T, they’re probably even worse for T-Mobile.  Yes, T-Mobile ceo Philipp Humm will get $3b of cash and some pretty nice wireless licenses to soothe the pain but at the end of the day the spectrum-poor T-Mobile has some serious strategic issues.  There is plenty of speculation that T-Mobile will rekindle talks with Dan Hesse and Sprint.  Reportedly, Sprint and T-Mobile were close to a deal earlier in the year before AT&T threw a wad of cash at Deutsche Telekom.  In fact, just a few days before AT&T announced that it had come to a $39b agreement to acquire T-Mobile, the Wall Street Journal was reporting that Sprint and T-Mobile were closing in on a deal.  Other options for T-Mobile include acquiring Leap Wireless or doing a data deal with Clearwire.  There is even talk that T-Mobile might team up with DISH Networks, which finds itself with a bunch of spectrum in search of a wireless strategy after its acquisitions of DBSD North American and Terrestar Satellite Network. Interestingly, there is also an increasing buzz that AT&T may itself be making a run at DISH.

But it wasn’t just AT&T, T-Mobile and Deutsche Telekom who lost out on the deal.  According to reports, there were seven banks lined up to receive $150m of fees if the deal closed.  No deal means scaled back Holiday plans for a number of “poor” Wall Streeters!

Wednesday
Nov232011

FCC Calls for Hearing on AT&T / T-Mobile Combo

This Deal is Doomed

Eight months after the surprise Sunday announcement that AT&T intended to acquire T-Mobile USA, and three months after the Department of Justice filed a lawsuit against the proposed deal, FCC Chairman Julius Genachowski revealed Tuesday that he opposes the combination. The Chairman circulated a draft Hearing Designation Order (HDO) amongst the other FCC Commissioners which effectively says that the FCC finds the proposed combination not to be in the public interest.

Assuming the HDO is approved by the other Commissioners, a hearing will be scheduled (not before the DOJ’s lawsuit) wherein an administrative judge will consider the facts. According to a note issued by the Rural Telecommunications Group (RTG) last night, the last time the FCC issued an HDO was when DirecTV and DISH Network were trying to merge; the DBS concerns walked away from that deal rather than fight the inevitable.

In my mind the failure of AT&T and T-Mobile’s efforts to merge has been inevitable all along, but especially following the August 31 filing of the DOJ’s lawsuit (never mind similar moves by Sprint and other opponents); the FCC’s action yesterday just confirms my long-held suspicions.  An AT&T spokesperson called the move “Disappointing…”  

Disappointing sure, but surprising?  No way, although clearly AT&T believed it could push the merger through when it announced the deal last March.  My initial response back then was:

“The announcement raises a plethora of issues that will certainly be discussed and debated for the next year or so as AT&T works to get approvals. First and surely foremost is the antitrust review; it remains highly speculative to assume this deal sails through. The FCC and other industry watchdogs have already noted that the wireless industry has devolved into a powerful duopoly and we’ve also been writing on the topic here in our blog. Expect heated debate and ultimately, should approval be granted, major concessions (read divestitures) on the part of AT&T. That said, AT&T has agreed to a particularly hefty breakup fee to DT/T-Mobile should the deal not go through, including a $3b cash payment as well as the transfer of unspecified spectrum licenses. I interpret this to mean that AT&T thinks it can get the deal done.” 

Despite AT&T’s vehement denials that thousands of American jobs would be lost and its promise to bring 5,000 overseas call center positions back home, there’s simply no way that the company could achieve the touted synergies without eliminating a massive number of T-Mobile jobs.  Back in June, my colleague David Selzer analyzed the composition of the $40b in long-term synergies that AT&T told investors it expected and concluded that a HUGE number—as many as 30,000—of jobs would be eliminated in the long run:

“The fact is that a merger like the one contemplated in this case will require a significant work force reduction to achieve AT&T’s publically predicted synergy value…Notice that the NPV of the non-headcount related synergies creates only about $19b in value, which is a hefty sum for sure, but is a far cry from $40b…Factoring in a workforce reduction of just under 85% of the T-Mobile employee base, based on my assumptions, provides about $900m in annual cash savings and another $7.8b in NPV. Combining these figures gets you annual savings in the $3b range and provides a total net present value of nearly $27b. This seems reasonable given that our calculations do not include the value of synergies generated in the first two years of operation after the deal closes, or any spectrum related synergies.”

Basically, Dave’s math concluded that it simply wouldn’t be possible to create that much in synergy value without firing the bulk of T-Mobile’s staff.

But the most obvious reason why I’ve been sure that this deal wouldn’t pass antitrust scrutiny is the fact that AT&T and Verizon Wireless already account for the vast majority of the wireless industry in the United States at this time, and are taking more and more subscribers from smaller competitors each quarter. In the third quarter of this year, AT&T added more net new subscribers than even Verizon Wireless; my analysis of the top wireless providers showed that AT&T and Verizon grabbed more than half of both gross and net adds in the period…and as we noted last summer, “Between 2006 and 2009 the combined share of net subscriber additions for AT&T and Verizon Wireless rose from 59% to 92%…and over the four years analyzed, the top-two carriers accounted for 71% of total net additions. Figures like these speak for themselves.”

The fat lady is about to sing. AT&T may decide to stubbornly fight in court or just walk away (after handing over substantial cash and spectrum to T-Mobile), but either way the deal is doomed. As a consolation prize, however, the FCC did indicate yesterday that it will support AT&T’s pending $1.9b buy of 700 MHz spectrum from Qualcomm.

As far as I’m concerned, Randall Stephenson and other AT&T execs need to seriously consider just walking away from T-Mobile as they consume tomorrow’s turkey. Take the $33b that’s left after paying T-Mobile’s breakup fee and deploy LTE as quickly as possible! How many markets does Verizon Wireless now serve with LTE (including this analyst’s home town)? Oh that’s right…179. And how many does AT&T serve now? 9. Time’s a wastin’. 

Friday
May272011

Sprint Waging War Against AT&T/T-Mobile Combination

State Level Investigations and Excerpts from Dan Hesse's Senate Subcommittee Testimony

I have written here before that I see AT&T’s proposed buy of T-Mobile as a negative, not only for the industry and competition, but frankly, for AT&T and T-Mobile.  From where I stand, the two companies serve fairly different primary constituencies and many, many T-Mobile subscribers are likely to flee once faced with the higher prices that AT&T will eventually demand.  In my mind, this could potentially be a good thing for more price competitive carriers, primarily Sprint (NYSE:S), Leap Wireless (Cricket, Nasdaq:LEAP) and MetroPCS (NYSE:PCS).

Clearly, however, Sprint ceo Dan Hesse and his posse don’t view it quite the way I do…over the past two weeks, Hesse has testified before the Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights, and the company has begun to take its campaign to the state level.  Meanwhile, literally thousands of individuals have filed comments against the deal with the FCC (I searched Sprint’s web site to see if it has a button for people to click right through and file their opposition, but so far didn’t find anything).

While it isn’t really clear whether or not states will have any jurisdiction in the matter, California's PUC announced yesterday that it will open an investigation into the merger.  Sprint has also formally asked Louisiana and West Virginia to look into the matter; Louisiana said a week ago that it would accept public comments.

In reading Dan Hesse’s comments before the Senate subcommittee, I found several comments worth repeating...We've heard many of these arguments before--we've made several of them ourselves. It seems now the question becomes political, with Republicans tending to support the merger and Democrats opposed. 

Excerpts from Dan Hesse's Testimony Before the Senate Subcommittee on Antitrust, Competition Policy and Consumer Rights:

“If…the DOJ and FCC decide to permit the takeover, the wireless industry would regress toward a 1980s-style duopoly. AT&T would become the largest wireless carrier in the country with over 94 million subscribers and approximately 43% of the post-paid market. Coupled with Verizon's over 83 million subscribers and 38% of the post-paid market, the scope and scale of the resulting duopoly, controlling more than 80% of all U.S. contract customers and approximately 80% of all wireless industry revenues, percentages that would likely grow each year after that, would be prohibitive to viable competition from other carriers…This merger would put Humpty Dumpty back together again, and it should be stopped.”

“…[W]ireless communications is a fundamental platform for our entire economy. For example, in 2010 the wireless industry accounted for nearly $160 billion in revenue, approximately $25 billion in capital expenditures, and employed, directly or indirectly, an estimated 3.6 million Americans. If the industry remains competitive, wireless devices and services could generate productivity gains over the next 10 years amounting to almost $860 billion in additional GDP.”

The Wireless Industry and America

“The Mobile Age has arrived. It took 100 years to build one billion fixed phone lines, but only 20 years to add five billion mobile subscribers. At the end of 2010, over 302 million wireless subscriptions were active in the United States, a population penetration rate of almost 96%. And for the first time, the U.S. wireless industry last year carried more data traffic (e.g., email, text, and web browsing) than voice traffic. Robust competition in our industry has resulted in steadily dropping prices for higher quality wireless communications services.”

"More American households are abandoning fixed phone lines and looking to wireless exclusively for voice and data communications...Ironically, because of their landline monopolies, AT&T and Verizon have the least incentive to price wireless service competitively enough to stimulate "cord cutting" of fixed phone lines.”

“If the T-Mobile takeover is approved, AT&T and Verizon would control 88% of all wireless industry profits. Consequently, the disparity between the duopolists and all other providers is likely only to worsen. Going forward, it would be difficult for any company to effectively challenge the Twin Bell duopoly.”

"Moreover, as descendants of the Bell monopoly of local wireline telephone companies, AT&T and Verizon each control a vast wireline infrastructure. Among other advantages, this allows them to obtain backhaul - a critical input of wireless service connecting towers to the larger network - at cost. This point cannot be underestimated. While we look at our handsets and the wireless towers they connect to as "wireless", from that point on, wireless traffic travels by landline, over the legacy wireline networks that are largely controlled by AT&T and Verizon. By contrast, because Sprint and other wireless carriers are not owned by large local telephone companies, we are forced to purchase backhaul service, in most cases from our largest competitors - AT&T or Verizon. Whereas Sprint must pay more than $2 billion a year in backhaul fees to its competitors, AT&T and Verizon earn enormous profits from their control over backhaul. By controlling the availability and price of backhaul, AT&T and Verizon are also able, to a large degree, to control their competitors' costs and quality of service.”

“In 1992, the U.S. General Accounting Office issued a report that concluded "duopoly markets are unlikely to provide a product at a competitively set price" and recommended that the FCC grant commercial wireless (Personal Communications Service) licenses to additional entrants because, "by giving consumers an additional choice, the new PCS provider could spur cellular telephone carriers to improve their services and lower their prices." (U.S. GAO, Telecommunications: Concerns About Competition in the Cellular Telephone Services Industry (July 1992) at 41-42.)”

“According to CTIA data, the average monthly billing charge for cellular services dropped from $97 in 1987 to $39 in 1998, and voice revenue per minute dropped from $0.44 in 1993 to $0.05 in 2008.”

“AT&T claims that its acquisition of T-Mobile will give AT&T the additional spectrum it needs and allow AT&T to extend wireless service to some parts of rural America that are without adequate coverage. This is a myth. Even without this transaction, with the Qualcomm spectrum it is purchasing, AT&T has the largest, licensed spectrum holdings of any wireless carrier. But it does not use that spectrum efficiently. Specifically, AT&T is not using on average 40 MHz of its spectrum across the nation - spectrum that could be used to improve service for its customers - but that AT&T has chosen instead to "warehouse" for future services.”

“AT&T could invest in its network to increase its capacity where necessary and use its spectrum more effectively. AT&T does not face a spectrum crisis, but rather a spectrum deployment problem of its own creation. Verizon has less spectrum and more subscribers than AT&T, but just weeks ago Verizon stated publicly that it has sufficient spectrum to meet its needs until 2015. Increasing demand for data-based communications, such as video and internet content, are not unique to AT&T; all carriers have to use their spectrum assignments efficiently.”

“T-Mobile is already heavily using its spectrum in the same high demand areas where AT&T asserts it needs additional capacity. Thus, the proposed merger would bring little spectrum relief to AT&T where it claims to need it the most. If AT&T invested only a fraction of the $39 billion T-Mobile purchase price into its own network, AT&T could alleviate its alleged capacity concerns, upgrade its network, and deploy advanced wireless technologies, without harming wireless competition."

“AT&T also has attempted to justify the T-Mobile takeover by arguing it will enable AT&T to extend wireless services to rural America. This is a false choice. There is nothing in the proposed merger that changes the fundamental economics of rural broadband deployment. Rural areas do not suffer from any shortage of spectrum given the lower demand for services that results from lower population densities. Rather, rural expansion has been delayed because the lack of population density in rural areas simply makes build-out more expensive per subscriber. The addition of the T-Mobile network to that of AT&T would not change this fact, and would only extend the AT&T network to about 1% more of the population than are already in AT&T's network coverage.”

Local and Regional Carriers Cannot Replace T-Mobile

"AT&T argues that there will be adequate competition after its acquisition of T-Mobile by pointing to regional and local competitors, such as niche prepaid carriers, MetroPCS and Cricket. These smaller prepaid companies provide a viable option for a limited group of customers, principally those who want a low cost phone with fewer options and features, and whose usage is primarily in a limited geographic area. However, these smaller prepaid companies will not be able to keep the Twin Bells from raising prices for the vast majority of consumers who want robust wireless device options, a national footprint and continued innovation."

"Importantly, the smaller companies all rely on competitive access to the national carriers' networks for wholesale roaming service, the pricing of which would be controlled by the Twin Bells following the proposed transaction. And for both domestic and international companies that need GSM, with the elimination of T-Mobile, they would now have no alternate nationwide choice."

“As Chairman Kohl noted regarding the proposed MCI WorldCom/Sprint merger in 1999: "One need not be a rocket scientist - or even an antitrust lawyer - to be wary of a merger which results in just two dominant players in an industry." AT&T's takeover of T-Mobile would entrench two dominant players, just as Chairman Kohl cautioned against.”

“If this takeover is allowed, on what pretense would Verizon not be allowed to acquire remaining competitors?”

Tuesday
May172011

AT&T, T-Mobile Merger – Comments Pile Up at the FCC

Consumer Opposition Mounts

In the last 30 days more than 5,000 submissions have been filed with the FCC in the AT&T/T-Mobile proceeding.  The level of activity in this proceeding is highly unusual and appears to be the result of a grass roots campaign, as the vast majority of these comments are being filed by individual citizens who are subscribers of either AT&T or T-Mobile who are urging regulators to quash the proposed merger.

By comparison, the merger between AT&T Wireless and Cingular Wireless resulted in a total of 274 filings over a seven month period, while the purchase of Alltel Corp. by Verizon Wireless which occurred more recently, generated a total of 318 filings.

Below is a representative list of many of the reasons that are being cited as the basis for the rejection of this transaction:  

 I am strongly opposed to the acquisition of T-Mobile by AT&T Inc for many of the reasons already stated in the comments. Here are a few:

1. AT&T and T-Mobile are currently the only two GSM phone carriers in the USA. The acquisition will create a monopoly of the GSM network in this country. Many customers prefer GSM over CDMA because they can use GSM phones more easily overseas. T-Mobile offers very competitive prices on GSM phones and plans, which would completely disappear and be replaced by a single carrier.

2. The acquisition will result in a reduction of the national work force. There would be too many retail outlets, etc after the acquisition. So it is clear that many former T-Mobile jobs will be cut.

3. Customer satisfaction should be an important factor, and AT&T has historically been on the low end of every customer satisfaction assessment, while T-Mobile has always had high ratings. It would be a major loss to customers to have to lose such a satisfactory carrier. 

4. AT&T plans to repurpose T-Mobile spectrum, making all T-Mobile cell phones obsolete after the acquisition, thus forcing customers to discard their old phones and purchase new ones. This is not only extremely wasteful from an environmental perspective, it is also very expensive and inconvenient for the customer.

It appears that AT&T’s proposed transaction is facing the scrutiny of an engaged public which clearly raises the stakes for both AT&T and regulators alike as the approval process moves forward.  It is difficult to predict if those who are opposed to this transaction can sustain their efforts, and AT&T posseses a well-financed and dedicated political/regulatory team that will not lose focus—but as of now, the fight is clearly on.

Wednesday
Mar302011

Sprint Says It Will Vigorously Oppose AT&T Buy of T-Mobile

The Question is Why?

There are a myriad of reasons why AT&T’s (NYSE:T) proposed acquisition of T-Mobile USA is considered to be anti-competitive and a negative for many smaller wireless operators as well as consumers. But for the life of me, I can’t see why Sprint (NYSE:S) is so upset—from what I see, Sprint might actually be one of a very small number of beneficiaries if the deal goes through (with the obvious exception of Deutsche Telekom).

Sprint issued a press release on Monday formally announcing that it intends to fight the transaction, in Congress, with the FCC and with the DOJ. In the release, Vonya McCann, senior vp, Government Affairs, said, "Sprint urges the United States government to block this anti-competitive acquisition. This transaction will harm consumers and harm competition at a time when this country can least afford it. As the first national carrier to roll out 4G services and handsets and the carrier that brought simple unlimited pricing to the marketplace, Sprint stands ready to compete in a truly dynamic marketplace. So on behalf of our customers, our industry and our country, Sprint will fight this attempt by AT&T to undo the progress of the past 25 years and create a new Ma Bell duopoly."

I don’t disagree with the opposition to a less competitive industry, but let’s face it, we’re already there. Verizon Wireless (NYSE:VZ) and AT&T have been increasingly dominant for the past several years. Sprint has done an admirable job of turning around its performance in the face of two dominant carriers, but T-Mobile has struggled. Merging with AT&T isn't going to make T-Mobile any stronger, in the near-term anyway, but it will make it more like AT&T in the long-run.

It's important to note that both Sprint and T-Mobile have seen the bulk of their growth over the past year or more in the prepaid segment. Prepaid subscriber growth has been higher than the postpaid market dominated by Verizon and AT&T for a number of reasons, including the fact that the credit-worthy postpaid market is already saturated and also the onset of the recession in 2008, which forced more consumers onto prepaid plans.

In 4Q10, Sprint added an impressive 1.4m new prepaid CDMA subscribers. Because it also lost more than 700k iDEN prepaid subscribers, its net growth in prepaid subs for the quarter was 646k—nearly 60% of its total net adds for the quarter. T-Mobile added nearly 300k prepaid subscribers in the period, driven largely by wholesale net adds, but lost 23k subscribers overall; it lost more than 300k postpaid subscribers.

My point is that assuming AT&T folds T-Mobile in and transitions its subscribers to its own (more expensive) price plans, Sprint will have an opportunity as the largest, strongest carrier with more of a focus on budget or credit-challenged consumers. MetroPCS (NYSE:PCS) and Leap (Nasdaq:LEAP) also stand to get some of the overflow, but if I were Dan Hesse, I’d consider this an opportunity to become the number one, nationwide provider of lower cost (or as he would say, higher value) services. 

And while those prepaid subscribers may not be as profitable as postpaid subs, growth is growth. AT&T will be focused on integrating T-Mobile and trying to figure out how to catch up with Verizon in terms of LTE deployment.  Sprint needs to do that too, its Clearwire/WiMAX network isn’t going to cut it in the long run.  But net adds each quarter is what the carriers need to show in order to keep Wall Street happy, and T-Mobile didn’t achieve that last quarter, nor is it likely to this quarter. 

The AT&T/T-Mobile deal is about spectrum, first and foremost.  A lot of carriers will be opposing this deal in Washington as the review process unfolds, for a lot of good reasons, but I don’t agree that Sprint needs to be one of them.