AT&T Mobility's plans for T-Mobile USA set to cause uproar across industry

Wondering what the topic of conversation will be at this week’s CTIA event in Orlando, Fla.? Wonder no more.
AT&T Inc. (T) announced plans over the weekend to acquire the domestic industry’s No. 4 player T-Mobile USA Inc. in a $39 billion deal that if approved will create the domestic industry’s largest player – by a sizeable margin – with more than 120 million wireless customers. AT&T Mobility is currently the nation’s second-largest operator with more than 95.5 million “connections,” just behind current No. 1 Verizon Wireless with 102.2 million “connections.” T-Mobile USA is currently a distant No. 4 with approximately 33.7 million subscribers.
The news would seem to puts to rest recent rumors about a possible tie-up between No. 3 operator Sprint Nextel Corp. or its majority-owned partner Clearwire Corp., and T-Mobile USA.
The purchase, which has been approved by both boards of directors, will give T-Mobile USA’s parent Deutsche Telekom AG DTEGY) an 8% interest in AT&T, as well as a healthy return on its initial $30 billion purchase of the former VoiceStream Wireless Corp. assets 10 years ago.
Perhaps fearing that the Department of Justice or the Federal Communications Commission – both of which have to approve the deal – may find the merger anticompetitive, or force the companies to divest some assets in markets where the government feels there is too much concentration, which happened when Verizon Wireless bought Alltel Wireless Communications L.L.C., the press release announcing the proposed deal takes special notice of how the combined operations would benefit President Barack Obama’s National Broadband Plan.
“With this transaction, AT&T commits to a significant expansion of robust 4G LTE (Long Term Evolution) deployment to 95% of the U.S. population to reach an additional 46.5 million Americans beyond current plans – including rural communities and small towns,” the company said in the press release. “This helps achieve the Federal Communications Commission and President Obama’s goals to connect ‘every part of America to the digital age.’”
The 95% coverage “commitment” would be 2% less coverage than the carrier currently touts for its network.
Dan Hays, director at PRTM, put the chances of the deal getting approved with minimal divestitures at around 50%, but said that with some government-mandated cuts, the deal has a good chance of being approved.
AT&T Chairman and CEO Randall Stephenson continued: “This transaction represents a major commitment to strengthen and expand critical infrastructure for our nation’s future. It will improve network quality, and it will bring advanced LTE capabilities to more than 294 million people. Mobile broadband networks drive economic opportunity everywhere, and they enable the expanding high-tech ecosystem that includes device makers, cloud and content providers, app developers, customers, and more. During the past few years, America’s high-tech industry has delivered innovation at unprecedented speed, and this combination will accelerate its continued growth.”
AT&T Mobility has said it plans to begin rolling out LTE services this year, covering 75 million potential customers with the service by year’s end. Verizon Wireless began rolling out its LTE network late last year and currently covers more than 110 million pops with plans to cover its entire CDMA footprint, or more than 280 million pops by the end of 2013.
Both AT&T Mobility and T-Mobile USA have tapped LTE as their eventual next-generation network migration, though they have also pushed the “4G” tag with their current HSPA+ services. T-Mobile USA has been hamstrung with its LTE plans due to a lack of spectrum, while AT&T Mobility has been very aggressive in acquiring spectrum assets in the 700 MHz and 1.7/2.1 GHz band to support its LTE plans. AT&T Mobility has said it plans to begin rolling out LTE services later this year.
Despite the obvious network synergies between AT&T Mobility and T-Mobile USA, AT&T has not been considered a strong player for T-Mobile USA due to regulatory concerns. Instead, most recent talk has been around a possible tie-up between Sprint Nextel and T-Mobile USA. Both carriers have struggled to compete against their larger rivals and despite the current network technology incompatibility, both have talked about eventual migration to the LTE standard.
AT&T Mobility had been the nation’s largest operator until Verizon Wireless bought Alltel for $28 billion. As part of that deal, Verizon Wireless had to divest spectrum assets in 105 markets.
The combined AT&T Mobility/T-Mobile USA operations will have a strong spectrum position across the 700 MHz band, which AT&T Mobility has spent billions of dollars bolstering as the core pipe for its LTE plans; 850 MHz bands that have been the backbone of AT&T Mobility’s voice operations as well as a minor position in T-Mobile USA through past acquisitions; the 1.7/2.1 spectrum bands, also known as the AWS spectrum, that T-Mobile USA spent more than $4 billion to acquire and is the backbone of its current HSPA+ network, as well as spectrum in that band acquired by AT&T that has not yet been utilized; and the 1.9 spectrum “PCS” spectrum that T-Mobile USA relies on for its legacy GSM/GPRS/EDGE services and that AT&T Mobility has used extensively to bolster its 850 MHz operations as well as for its HSPA services.
The deal would also seem to marry AT&T Mobility’s postpaid-heavy customer base that has been bolstered by its recently ended monopoly on Apple Inc.’s iPhone together with T-Mobile USA’s increasing emphasis on the prepaid market.
Rate plan pricing could be a sticking point as AT&T Mobility has been a leader in rolling out tiered data pricing models in the wake of network congestion issues blamed on rabid iPhone users, while T-Mobile USA has stuck by its unlimited data plans that instead rely on throughput throttling to manage network capacity.
Competitive pressure turned to 11
In the collateral AT&T put out in announcing the deal, the carrier notes that the combined operations would only just surpass the spectrum position of Verizon Wireless in regards to megahertz per subscribers, and still be considerably behind the current position of Sprint Nextel/Clearwire, MetroPCS and Leap.
AT&T also highlighted the current competitive position of the domestic mobile space by stating that 18 of the nation’s top 20 markets have access to at least five mobile operations, presumably the nation’s top four and at least one from a regional player like MetroPCS Communications Inc., Leap Wireless International Inc. or U.S. Cellular Corp. Following this deal that will drop to at least four options.
AT&T does not note that of the nation’s approximately 295 million wireless customers, this deal would place more than 220 million, or roughly 75%, under the operations of the largest two operators, an increase from today’s 63%.
PRTM’s Hays noted that this deal could be a new tipping point for further industry consolidation.
“This deal tells everyone else in the industry to either go big or go home,” Hays said.
Hays noted that the deal could make a combination of the remaining two “nationwide” operators and their predominately CDMA-based operations tempting, or for fear of government disapproval could force Verizon Wireless and Sprint Nextel to look elsewhere in an attempt to
bolster their operations.
Verizon Wireless could be in a difficult position if it’s looking for significant expansion through acquisition as the
government is sure to frown upon a hook up with Sprint Nextel. The carrier has been in a back-and-forth game with AT&T Mobility over the No. 1 crown, with Verizon Wireless’ acquisition of Alltel putting Verizon Wireless in the top spot.
Sprint Nextel’s options are likely more open, though now more forced. Hays explained that the move puts even more pressure on Sprint Nextel and Clearwire over the current tension between the companies regarding a pricing dispute as well as their plans for expanding Clearwire’s current WiMAX network, or take the plunge and move ahead with Clearwire’s recent trials of LTE services.
Sprint Nextel could obviously make a move to buy out its remaining partners in the Clearwire operations that would allow the carrier to bring Clearwire’s vast 2.5 GHz spectrum holdings in house and could fuel an aggressive move into next-generation network services.
Sprint Nextel could also make a move to align itself with LightSquared and its LTE plans that include both terrestrial and satellite operations.
Hays noted that the conditions attached to LightSquared’s use of satellite spectrum for terrestrial operations could hinder any potential tie-up with the start up. Hays also noted that with T-Mobile USA basically out of the game in regards to an external source for its future network needs, LightSquared’s list of possible partners is now more limited.
The greater chance for acquisition targets for both players would be some of the larger regional players like MetroPCS Communications Inc. or Leap Wireless International Inc. that have sizeable customers bases, but more importantly spectrum assets that could help fuel further expansion. Or the deal could force the larger regional players, including U.S. Cellular Corp., to turn to each other in an attempt to bolster their position against their larger rivals.
All operators could also benefit from the spectrum chum thrown into the water from government-mandated spectrum or market divestitures that are likely to be required for the AT&T/T-Mobile USA deal to gain final approval.
Hays added that the proposed deal will likely raise the ire of rural operators and the Rural Cellular Association that have already been fighting a battle to sway regulators to mitigate the impact of the industry’s increasing consolidation amongst large players.