Over the course of the next year, AT&T and its opponents will be in the ring, duking it out in a war of words in attempt to convince the government that a $39 billion takeover of T-Mobile by AT&T should or should not take place. Consumers have the most to win or lose here, yet we are resigned to watching from the sidelines as both sides lob countless facts and stats at each other like volleys in a tennis match.
If you look at the merger process as a stairway to climb up, AT&T is still near the very bottom. Every rung will be full of intense scrutiny as it is: if the two companies are allowed to merge, the national GSM market becomes a monopoly, and the wireless industry as a whole would shift to only three national players plus a handful of less-influential regional carriers. The carrier's going to blow as much as $6 billion if the merger is not approved -- almost enough to buy Skype -- it can't just expect to put up some feel-good facts and stats to win the hearts of the decision-makers.
AT&T has be absolutely sure it'll come out victorious in the war, else it risks losing the trust (and money) of its shareholders. But to accomplish such a feat, it has to be on top of its game. There was no better time to show off what it's made of than last week's Senate Judiciary Committee hearing conducted by the Subcommittee on Antitrust, Competition Policy and Consumer Rights. When the Committee entitles a hearing "Is Humpty Dumpty Being Put Back Together Again?," it's either exercising a sense of humor or a preconceived notion of the merger due to the implication that Ma Bell is simply reforming. CEO Randall Stephenson appeared as a sacrificial lamb, going before Congress and his opponents to explain his side of the story, answer hardball questions, and endure a hard-hitting round of criticism. Continue reading as we take you topic by topic and examine what he -- and his opponents -- had to say about the merger.
The hearing lasted for over two hours and involved six witnesses -- three in support of the merger, three in opposition -- all of which allowed to present their viewpoints under oath. Each of the contestants prepared a written statement prior to the meeting and was given five minutes of time to give opening remarks. Following this, each Senator had the opportunity to question and grill whomever they wanted. Continue reading as we take you topic by topic and examine what these witnesses had to say about the merger.
For the merger:
Randall Stephenson Phillip Humm Larry Cohen
CEO, AT&T CEO, T-Mobile USA President, CWA
Against the merger:
Dan Hesse Victor H "Hu" Meena Gigi Sohn
CEO, Sprint CEO, CellularSouth; President, Rural Cellular Association President and Co-founder, Public Knowledge
The idea of businesses and consumer advocacy groups speaking to Senators about corporate mergers is enough to induce sleep. But let's not underscore the importance of these types of hearings. The Department of Justice and FCC are the two government bodies responsible for putting the stamp of approval on the merger, so the Judiciary Committee isn't even directly involved; however, the hearing still provides us with a few benefits.
First, the acquisition is now in the public forum. We don't have a say in this matter, right? Wrong. Whether you agree with the merger or not, you're probably going to be affected by it in some way, and it's important to know that you have a voice -- and the FCC wants to hear it. Second, it encourages healthy discussion between both sides of the issue, and open debate could bring several facts and stats to light that were not mentioned in the one-sided document AT&T submitted to the FCC. Don't think for a second that both decision-makers weren't watching the hearing with intense interest. Third, the Judiciary Committee does have oversight over the DOJ and could potentially use this power to influence the department's decision if the members felt strongly enough.
Though the coverage at the hearing reached a broad range of subjects in relation to the merger, a few topics in particular were touched upon more often and were the point of focus for the Committee hearing: The spectrum crunch, effects of the merger on competition, rural coverage, LTE deployment, job creation/loss, and a possible duopoly in the US. There's a lot to cover, so we give you permission to sneak in a snack in between topics.
Spectrum is not a limitless resource
We estimate that in 2015 we will carry the same amount of mobile data traffic by mid-February that we carried for the entire year in 2010. Just about the only thing that can slow down this cycle of innovation, investment and growth is lack of capacity to meet this demand – and that's why there is such a focus on spectrum. This transaction will increase overall network capacity beyond what the two companies had separately, because it allows for more efficient use of existing spectrum and network assets. Our two companies have extraordinarily complementary assets. We use the same technologies. We hold spectrum in the same bands.
One of the primary concerns in the hearing was determining whether or not AT&T actually has enough spectrum on its own. Think of spectrum like the number of lanes on a busy highway: during rush hour these highways get clogged up and causes traffic to slow to a crawl, but when more lanes are added, more traffic can be accommodated. Stephenson argues that one of the major reasons his company needed to purchase T-Mobile is to have enough spectrum to properly build out its upcoming LTE network.
As data usage continues to explode, spectrum is becoming a constraint to our business, with T-Mobile facing spectrum exhaust over the next couple of years in a number of significant markets. Moreover, our spectrum holdings will not allow us to launch LTE. With the acquisition by AT&T, T-Mobile will be able to offer to nearly all its customers full access to 850 MHz AT&T spectrum, which will significantly improve deep in-building coverage to its customers. As T-Mobile already uses chipsets supporting 850 MHz, customers will be able to take advantage of these improvements shortly after the transaction closes.
Humm paints a depressingly dire picture of his company's future throughout his remarks; in this instance he asserts that there is no way T-Mobile can launch LTE with the amount of spectrum it has available. When combined with AT&T's spectrum, however, T-Mobile customers will enjoy LTE and 850 MHz coverage, all of the grass will grow green, and lost kittens will be rescued.
...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.
Hesse goes on to mention that 40 MHz of AT&T spectrum is left unused, because the company has chosen instead to "warehouse" -- stockpile -- for future services such as LTE. It's a good point, but we're curious to hear if 40 MHz enough to launch and maintain the LTE network if the merger does not go through.
AT&T does not face a spectrum crisis, but rather a spectrum deployment problem of its own creation... 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.
We're hoping to see an improvement in areas of historically bad AT&T coverage, such as San Francisco or New York, but what about rural areas? Will this merger actually give them all of the much-needed spectrum capacity they claim to require in order to actually hit 97 percent of Americans?
Sohn (Public Knowledge):
There are no spectrum shortages in rural America...and completely unused is ⅓ of its spectrum in the top 21 markets...
How much unused spectrum does AT&T have in these rural markets, if there are no spectrum shortages? How much of rural America will be blanketed with LTE?
If AT&T were concerned about spectrum inefficiency, it could stop operating 3 different systems.
So AT&T's commitment to 2G, 3G and HSPA+ is causing too much constraint on its spectrum holdings.
We don't have enough spectrum to deploy nationwide, but what we do have is unused because we're building it.
Stephenson goes on to mention his company is aggressively moving to launch LTE service this summer, but in order to make such a landmark move, enough space has to be cleared out and reserved specifically for that network. It did the same thing when moving to 3G. In other words, if it appears as though AT&T is "warehousing" spectrum, that's because it actually is.
This is a tough argument to figure out. How much spectrum does AT&T actually need to properly deploy a nationwide 4G network, and can this be achieved without purchasing T-Mobile? AT&T has been planning to launch LTE this summer regardless, with or without the merger; however, if the company truly is limited in its spectrum, it may have to divert spectrum away from other resources such as 2G or HSPA+. If the FCC and DOJ determine AT&T has enough to do the job without T-Mobile's aid, a good chunk of its argument would be completely flawed and less credible as a result.
The merger's effect on competition
No doubt, this transaction would have profound impacts on the wireless industry, but as of yet is one of the biggest unknowns of the entire deal. On one hand, the merger's proponents argue there is sufficient competition already, and wireless innovation is trucking along at a pace that cannot be stopped. Meanwhile, opponents say innovation will slow down because the "Twin Bells" won't have any incentive to compete against anyone else. Let's read on.
The vast majority of American consumers have a choice of at least five facilities-based wireless providers ... Any concern that the wireless industry is or could be dominated by AT&T, Verizon and Sprint merely because they have the largest subscriber bases today should be put to rest by 1Q 2011 results recently reported by MetroPCS and Leap, which together gained more than a million net customers in the last quarter alone.
Stephenson throws out some numbers to ensure his captive audience understands the smaller guys offer a relevant amount of competition. And we can see his point, but when you've merged together and become a force of 130 million, will a net gain of a million subscribers be worth your time and money in competitive focus?
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.
When the competition is paying you to provide their roaming coverage, as many of these regional and prepaid carriers are doing, you have an incredible amount of leverage against them.
"The wireless industry is intensely competitive and will remain so after the AT&T / T-Mobile merger. In 23 of the top 25 US markets, for instance, there are currently five or more facilities-based wireless competitors, including Verizon, Sprint, low-cost no-contract carriers like MetroPCS and Leap, and regional carriers such as US Cellular and CellularSouth that offer nationwide service plans."
With the exception of Cellular South, all of these competitors are CDMA carriers. AT&T would still have all of the control over GSM manufacturers wanting to sell their devices in the US.
"This is the most competitive wireless industry around the globe. Just look at pricing -- voice pricing in this industry has come down 50 percent. Just in the last four years since we launched the iPhone, the price for a megabyte of data has come down 90 percent."
However, this was the past, and the industry would likely be much different post-merger. Mr. Hesse, what was the cause of those dropping prices?
"Robust competition in our industry has resulted in steadily dropping prices for higher quality wireless communications services."
Ah, so having intense and robust competition amongst the four carriers resulted in dropping prices and more innovative services. How will the prices be affected post-merger?
"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 control their competitors' costs and quality of service."
Talk about leveraging power. We mentioned this earlier: with AT&T having so much power over the smaller companies in terms of roaming agreements, and controlling (alongside Verizon) all of Sprint's backhaul, it sounds as though AT&T and Verizon already hold all the bargaining chips, and eliminating one more serious competitor would make it even more unbearable.
"By contrast, without the deal, a spectrally constrained AT&T and a spectrally and capital constrained T-Mobile would be able to provide much less vigorous competition separately than would the more efficient, combined company."
If T-Mobile is struggling financially and cannot actually deploy LTE due to lack of spectrum, does this really make for worse competition than not having T-Mobile around at all? Can it be much worse if AT&T loses and T-Mobile sticks around, earning $2 billion worth of spectrum in the process? Sounds like a win-win for T-Mobile.
So competition is robust at this very moment, resulting in lower voice and data rates among all of the major networks. How will this be affected by the merger? The critics mention that allowing the merger to occur would result in the Twin Bells dominating 80 percent of the US market, causing a virtual duopoly. In the past, they argue, duopolies hindered progress and stifled innovation, which sped up rapidly after these duopolies (Ma Bell, for instance) were broken apart. Tell us more, panel.
The power of a duopoly
As expected, the merger's advocates remained completely tight-lipped on the subject of duopoly. The opponents, however, brought the subject up as often as possible in order to emphasize that this would be the end result of approving this transaction.
As history has amply demonstrated, we should not expect the two reconstituted Bell companies to actively compete with one another. They would effectively eliminate the robust competition that has served America so well for nearly two decades... The difference in size between the top two and any other competitor would become too great, which would marginalize the ability of Sprint and the remaining local and regional carriers to influence the level of innovation in the industry ecosystem.
We could easily see Sprint and the smaller carriers making the worst out of a bad situation and stopping innovation, but it's very likely that with less nationwide choices, it would be easier for Sprint to stand out of the crowd with innovative services and win back unhappy AT&T or Verizon customers. Even now, Sprint is courting unsatisfied T-Mobile customers by offering to buy out their contracts to switch over. Well played.
In a duopoly, the market can quickly reach equilibrium and, if both providers are reasonably happy with their position, innovation stagnates and prices rise.
If innovation slows down and the Twin Bells don't do anything to improve their position, and don't remain competitive, they might alienate shareholders that aren't satisfied with the status quo, and frustrate consumers who get upset by sub-par customer service as well as not having the latest and greatest handsets available. Sprint has a lot of great opportunities here, and the merger could definitely help it gain subscribers if it continues playing its cards right.
Sohn (Public Knowledge):
Sprint will have just 16% of the market and instantly become a takeover target.
This is a scary thought. Sprint has been a takeover target in the past, so what's stopping potential buyers like Verizon from giving it a go? Not to mention we have a hard time swallowing the idea of that kind of merger getting pushed through the DOJ and FCC. Going from four to three national carriers will be difficult enough to finalize, so how much slimmer are the chances three would whittle down to two?
Is rural coverage ever coming?
Another cornerstone in AT&T's explanation for needing to purchase T-Mobile is to pick up spectrum for rural coverage, allowing businesses there to take advantage of broadband speeds they had never been able to access before. Here comes the defense.
In particular, LTE networks deliver higher speeds and much-reduced latency, which means that we will see many new innovative wireless services that offer real-time interaction. LTE will give businesses located in rural America the same powerful tools enjoyed by those located in major cities. And, rural consumers will particularly benefit from real-time access to a wide range of resources that would not otherwise be as readily available. ...the transaction will allow us to bring these benefits to rural and urban areas alike, creating the information infrastructure needed to improve education, health care and public safety and to boost businesses, create jobs, and lower costs.
Other than re-emphasizing the need to build out LTE, he doesn't mention how the merger will help expand its coverage to rural America. The benefits are great, but tell us how you plan to get there. In rebuttal:
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 percent more of the population than are already in AT&T's network coverage.
If it only expands AT&T's coverage out to an additional 1 percent of the population, and if rural buildout is slowed only by abnormally high expenditures, how is it going to hold to its promise of rural expansion?
Meena (Cell South):
There's nothing in the T-Mobile deal that makes building out rural any easier than it is today. One of the big challenges we have is trying to get a roaming agreement on AT&T. We've been told "the roaming person is out of town."
Meena makes it sound as if his company only called AT&T once, left a message with the front lobby, and waited around for their call to be returned. This merger would certainly not become any easier for regional carriers to set up roaming plans with AT&T. Unless, of course, this means AT&T&T would have two roaming people.
Creating or losing jobs
Do mergers create or destroy jobs? It's hard to say: additional hands would be needed to help bring the two networks together, deploy LTE, and assist with other various tasks associated with the merger. However, it's not likely that every single T-Mobile employee will still have a job with AT&T. Here's what the heavyweights have to say about it:
During implementation of the...merger, CWA will work closely with AT&T to ensure that there will be no involuntary job losses and that any workers adversely affected by the transaction will be able to transition into other similar or better jobs with the company. Indeed, we believe in the long term that AT&T...will be in a stronger position to create jobs because it will be better able to expand and extend its business than either AT&T or T-Mobile could have done as separate entities. The expansion of AT&T's 4G LTE network that will result from the merger holds the potential to create thousands of new jobs. More than 20,000 T-Mobile employees will be able to work for a company that respects workers' rights and enjoy improved working conditions.
One would assume a primary duty of workers' unions is to ensure little or no job losses, and we don't disagree it will be the same case with this merger. The only question: since T-Mobile employees don't work under unions, is the CWA concerned at all about seeing to the needs of those new employees? Does it care about T-Mobile employees? We imagine the answer is yes, since 20,000 new employees would mean more revenue for the CWA from workers' dues.
Sohn (Public Knowledge):
If AT&T wants to create jobs, it could do so without buying a competitor. It's hard to find a merger that creates jobs. The merger will result in jobs lost in every area where AT&T and T-Mobile have redundant staffing, competing retail stores, overlapping call centers, and other facilities...AT&T..has shed approx 28,000 jobs over the last 21 months.
It could be true that redundant staffing will be cause for job losses, although network expansion may alleviate some of those losses. We don't know if it will actually create jobs so much as balance them out with the gains, and that all remains to be seen.
All the major unions are in support, and they don't usually support things that cut jobs. You create jobs where you invest. It's in our shareholders' interest to deploy 700MHz LTE, and it's an $8b investment.
Certainly the $8 billion will go back into the economy in one way or another, and additional jobs would be required to deploy this network. But how many jobs? Will it counter those jobs lost from redundant staffing, or at least match that number?
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