Uncommon Wisdom

Apr 7 2011   7:17PM GMT

AT&T/T-Mobile deal: What reality lurks below the surface?

Tom Nolle Tom Nolle Profile: Tom Nolle

With a lot of interesting and potentially pivotal happenings in tech, perhaps the most interesting thing is that the real meanings are more important than the surface topics. AT&T wants to buy T-Mobile, which is no surprise given that DT has been looking for years at selling its U.S. property and that AT&T wants to own the world in the mobile space.  What is a surprise is that Verizon seems resigned to the deal getting regulatory approval, which suggests it’s not actively lobbying against it. So why would Verizon consent (or at least acquiesce) to its biggest competitor getting even bigger? That’s one of those below-the-surface points; two, in fact.

One guess at the biggest reason is that T-Mobile and Sprint are the two players most likely to consider pushing the FCC to create reasonable, open, broadband roaming requirements. All the smaller cellular operators would like that, but only two have deep enough pockets to fund a campaign, and clearly T-Mobile is one of them. Remember that the appeals of FCC orders on unbundling were funded by the IXCs until the RBOCs bought them? The same dynamic could be at work here.

As a related point, healthy competition is key to regulators in the U.S. wireless market. It may be that Verizon reasons that neither Sprint nor T-Mobile can make an effective go of competing. Problems with the financial position of the second-tier players could then spur regulators to act. Obviously T-Mobile’s stability and endurance wouldn’t be in question if AT&T bought them. Could Sprint then capitalize on the new dynamic? Would a cable company, or even Verizon, buy them? Could the FCC accept a duopoly instead of its cherished notion of three key players?

Or could Verizon just be bluffing? That’s the second point here. By asserting they think the deal could go through, Verizon might hope to marshal public policy groups’ opposition to the deal. Regulators are certainly uneasy about this kind of consolidation. Which brings both issues to the same point; competition. 

There’s a fundamental problem here in that telecom is very expensive and has a relatively low rate of return on investment. That makes it an industry that isn’t naturally competitive. To demand that there be three or four major competitors isn’t realistic if that number can’t be sustained by the available revenues or by the trends in return on infrastructure. The FCC may now have to face reality: Multiple parallel wireless networks are always going to be more costly than one single network, or two.

For the equipment vendors, this should be a stark warning. The investment in wireless or wireline infrastructure depends on making a profit on that investment, not on the “traffic demands” of the network. Consolidation is a signal that ROIs are falling, that network equipment sales will likely be impacted by the ROI trends, and that differentiation is moving elsewhere.

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