Greg Rosston Examines the Competitive Implications of the Proposed Acquisition of T-Mobile by AT&T Mobility

By TAP Staff Blogger

Posted on May 18, 2011


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Last week saw the first Senate hearing on AT&T's $39 billion acquisition of T-Mobile USA. Chairman Herb Kohl named the hearing, “The AT&T/T-Mobile Merger: Is Humpty Dumpty Being Put Back Together Again?” –a title that raises the question of a potential emerging wireless monopoly similar to the one AT&T had decades ago in the traditional land-line world.
 

For a look at the antitrust issues inherent in this proposed acquisition, Gregory Rosston and his colleague Roger Noll prepared a policy brief, "Competitive Implications of the Proposed Acquisition of T-Mobile by AT&T Mobility." Key points from the brief have been re-published below with permission from the author.
 

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AT&T’s announced acquisition of T-Mobile’s U.S. wireless communications business raises important competition policy issues that require careful analysis by the agencies that must approve the acquisition, the Federal Communications Commission (FCC) and the Antitrust Division of the U.S. Department of Justice. The United States currently has one of the most competitive and best-performing wireless communications industries in the world. Four carriers (AT&T Mobility, Verizon Wireless, Sprint, and T-Mobile) provide service to almost the entire nation, and several smaller carriers provide regional service, at least one of which operates in each of the major metropolitan areas. American consumers benefit from competition as prices in the United States are substantially below prices for comparable services in other nations. As a result, American consumers are among the world’s most intensive users of broadband wireless communications.
 

Superficially, the proposed acquisition appears to run seriously afoul of the merger policy of the antitrust enforcement agencies. The first step in merger analysis is typically to measure concentration—an indicator of the extent of competition.


Based on the high concentration of the industry, the Antitrust Division will try to determine if the merger would cause an increase in consumer prices. Another concern of the Antitrust Division will be the effect of acquisition on competition in specific local markets.
 

Entry and Expansion to Discipline Price Increases

The next question for competition policy will be the possibility that new entry or expansion by existing providers could thwart an attempt by the combined companies to raise prices. Scarcity of the best spectrum for wireless communications, already a problem in large metropolitan areas, is becoming worse as more consumers acquire smart phones and tablet computers that access the Internet using wireless connections. Spectrum scarcity is an immutable barrier to entry and expansion if no additional spectrum becomes available.


Justifications
If the acquisition substantially increases concentration in an already concentrated industry with substantial barriers to entry, what other factors might cause government watchdogs nevertheless to approve it? 
 

AT&T executives offer three arguments in favor of the acquisition:

1 -Efficiencies

If a price increase seems to be a plausible consequence of greater concentration, the parties will argue that efficiencies from joint operation of their networks will reduce costs so dramatically that the net effect of the acquisition will be to reduce prices to consumers regardless of the anticompetitive effect.


The FCC and the Antitrust Division must determine the validity of the claim that a very large company is more efficient than two already large companies in managing a fixed amount of spectrum.
 

Spectrum Allocation

The relevance of economies of scale also hinges on whether additional spectrum will be made available for wireless communications. In principle, more spectrum could be made available to wireless by reallocation from existing uses.


The brief goes on to discusses potential sources for spectrum: reallocation of government spectrum though national security agencies resist reassigning some of their spectrum for private use; and over-the-air TV, but broadcasters prefer to keep the spectrum they have in order to provide new services.


The outcome of the political battle over future spectrum allocation is uncertain, but AT&T’s acquisition of T-Mobile is likely to shift the odds.
 

2 -Nationalism

AT&T’s second argument to justify the acquisition is an appeal to nationalism. The principal owner of T-Mobile is Deutsche-Telekom, the largest telecommunications company in Germany. AT&T CEO Stephenson claims that a reason to support the acquisition is that “above all else, this transaction represents a major investment and a major commitment by a US company to advance America’s leadership in mobile broadband.


3 -Rural Buildout

AT&T states that it will provide 4G service to 95 percent of the country if the deal is approved. The Antitrust Division is unlikely to give this commitment much weight, as it is not germane to its competition policy mandate. The FCC may consider the promise of coverage extension in its broader mandate to assess whether the acquisition is in the public interest.


Conclusion

Although the justifications for the acquisition do not seem particularly strong, and anticompetitive effects appear to be plausible, the deal still may be approved. In recent years, the antitrust agencies have approved mergers that took an industry from four to three firms. This acquisition may not be as bad as other four-to-three mergers because of the presence of small carriers that are significant in many markets. Because of the potential for conflicting views, the process for evaluating the acquisition could drag on for a year or more.
 

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To read the complete brief, please see “Competitive Implications of the Proposed Acquisition of T-Mobile by AT&T Mobility” on the Stanford Institute for Economic Policy Research (SIEPR) website.


Greg Rosston is Deputy Director and a Research Fellow at Stanford Institute for Economic Policy Research (SIEPR) and Visiting Lecturer in Economics at Stanford University. His research has focused on industrial organization, antitrust and regulation.


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