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AT&T and T-Mobile Merger: Its Good For You!

Written and Edited by Gregory Bartolomei
In recent news, AT&T Inc. (AT&T) announced that it planned to buy T-Mobile USA Inc. (T-Mobile) in a purchase that would amount to thirty-nine billion dollars in cash and stock swaps. AT&T is in the American communication services industry and is currently one of four firms [the other three being Verizon Communications Inc., T-Mobile, and the Sprint-Nextel Corporation] that offers national coverage to American consumers. The merger would be the largest in the industry and one of the largest mergers in recent business. The move would increase AT&T’s network density and signal strength with the infrastructure gained from the merger. The increase to the infrastructure, which would happen over five years, would be significantly faster than if AT&T was to build the infrastructure independently. Also, AT&T would gain all of T-Mobile’s customers putting their market share to almost 1/3 more then its largest competitor Verizon. Sprint-Nextel will come far behind in third.Upon the announcement for this purchase, American government regulators -namely the Federal Communications Commission (FCC)- contested the legality of the purchase. The FCC is concerned that the purchase will result in a duopoly in the industry and that this duopoly will result in a price war hurting consumers. Based on a similar case the FCC looked at in 2007, the merger of Sirius Satellite Radio Inc. and XM Satellite Radio Holdings Inc, (which changed a market from a duopoly to a monopoly) it can be expected that the FCC will allow the merger of AT&T and T-Mobile. Also, because AT&T and T-Mobile made their deal public, risking market reactions in both firms’ stock prices which could potentially change the value of the deal, the firms are clearly confident that the merger will be executed. Also, in the American State of the Union Address February 11th, 2011, President Obama called for a National Wireless Initiative that would bring wireless technology to 98% of Americans. He also stated that a national wireless network would promote student learning, business growth, and security across America. Given the prior ruling of the FCC, the public announcement of the deal, and President Obama’s initiative, AT&T should be allowed to execute the merger.

Regardless of the FCC’s decision on AT&T’s and T-Mobile’s merger, the move shows wisdom from AT&T’s management both tactically and strategically. Given the way the communications market has developed in recent years, any firm in communications should be interested in capturing as must infrastructure as possible. Doing so will prevent competition from having infrastructure, from allowing them to improve their current services, and from expanding their abilities to reach more consumers. However, the most important advantage AT&T can gain from this merger is due to the size of its network; the company will be a target for R&D firms trying to sell their new technology. As a target, these firms will be on the leading edge of developing the technology, which is an important position that would allow AT&T to capture any and all possible competitive advantages from future technologies.

AT&T was already able to capture a competitive advantage in leading edge technological development when Apple Inc. (a producer of consumer electronics with products such as Macs, iPhones, iPods, and recently the iPad) selected AT&T to be the sole carrier of its smartphone, the iPhone, when Apple first rolled out the product. This allowed AT&T to dominate the smartphone market (the iPhone was, and still is, the market leader) and grow the firm.

The concern of the FCC and many consumers in the market that AT&T will use monopoly pricing is justified. Wireless technology is not substitutable and it is clear AT&T will be the market leader. However, there are many local (city or regional) wireless providers that can compete with AT&T. For example, SafeLink Inc. in Miami, Florida competes for consumers. The presences of this firm and many others like it around America preclude AT&T from becoming a monopoly.

All things being equal, there seems to be a general trend in the market towards wireless communications. With the American government encouraging the development of wireless technology, AT&T poised to eliminate a competitor, and every consumer electronic product produced in recent years having connectivity to wireless, perhaps now is a good time to buy stock in AT&T or evaluate an index in communications services?

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**Due to technical difficulties we recently had to switch domains and transfer all of our website content.  Please keep in mind that while we have been publishing articles for two years, the published dates shown may not reflect the initial publish date.

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