Monday, March 21, 2011
AT&T + T-mobile = Store closings; lower smartphone fees? (Update)
AT&T's proposed $39 billion purchase of Deutsche Telecom's T-Mobile service would be good for AT&T and great for Verizon; but it will give phone users fewer choices, and probably higher prices, and that will make it tough to get past the Justice Department, Bernstein Research analyst Craig Moffett told clients in a report today.
The proposal pre-empts a would-be Sprint-T-Mobile combination, and just about forces Sprint to rely on new investments for its Comcast-backed partner, Clearwire (owner of the high-end Clear mobile service), if it wants to stay in business, Moffett adds. Excerpts:
"A T-Mobile/Sprint deal would have turned a four player market into a three player oligopoly, a very attractive outcome for Verizon.
"An AT&T/T-Mo deal turns a four player market into a de facto duopoly, an even more attractive outcome for Verizon," which may also be able to buy divested assets that AT&T sells to pay for the deal, on the cheap.
"The primary question, of course, is whether the deal can achieve regulatory approval."
Moffett runs the deal through Justice's crude Herfindahl-Hirschman Index for measuring market compensation (square the percentage market share of the combined company, subtract each square for the pre-merger partners, and compare the difference) shows "the deal would take a post-paid industry that is already highly concentrated (2800 HHI) up by 750 points, to 3,500. By revenues, the increase would be only slightly smaller, from 2600 to 3300."
The Justice Department shoots down two deals of this level of concentration, for every one it approves, Moffett warns. But: "Divestitures in key markets, particularly in the Mid-West, can be offered as a meaningful
concession."
And: "AT&T is already arguing that the deal advances key Obama Administration objectives. They are committing to 95% LTE coverage [improved service] as a door-opener. And they will argue that genuine spectrum constraints (well illustrated by AT&T's long and very public iPhone problems) can only be alleviated by a combination of spectrum assets like this one.
"They will also promise unionization of the entire combined wireless workforce in an appeal to Democrats who would otherwise be expected to be the deal's principal opponents.
"Moreover, the substantial cost synergies leave room for reduced consumer rates, something that they would likely be willing to promise as a regulatory condition."
So who's this bad for? Besides Sprint, "the implications are negative" for communications-towers owners; handset suppliers (who'd face "a more concentrated US market"); and satellite TV-mobile phone combinations, whose prospects "are now all but zero."
Writes David Strasser at Janney Capital Markets: "Consolidation from top four to three companies in the telecom space is not necessarily a good thing... It does
eliminate choice for consumers. However, consumers' buying decision has clearly shifted to the hardware, away from the carrier - so the impact will be somewhat minimal..."
That's the goal: "move T-Mobile customers to smart phones, which have higher monthly fees," as AT&T boss Randall Stephenson says in the press release. So "we should see an uptick in smartphone conversion" if the deal goes down as planned.
Bad news for retail salespeople and landlords: "There will be store closures."
It should take six months to a year for the Justice Department and FCC to review the deal with a "rigorous, extremely fact-intensive examination of the effect of the deal on consumers," and on local wireless competition, says Michael Weiner, co-chair of law firm Dechert's antitrust and competition group.
He says the business has been consolidating quickly, citing the purchases of Alltel and Rural Cellular by Verizon Wireless in recent years, and AT&T's purchase of Centennial Communications. Philadelphia-based Comcast was also a major wireless-phone player in the 1990s, before it sold the low-profit business to concentrate on cable, Internet and video programming