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October 2011

What Large Telecom Acquisition
Could Mean to You

AT& T, the nation’s second largest cellphone provider, is trying to acquire T-Mobile, the nation’s fourth largest wireless cellphone provider for $39 billion. AT&T argues that a combination of the two industry giants would provide significant consumer benefits because AT&T would be able to use T-Mobile’s existing cell towers and airwaves to improve cellphone service quality across the country. AT&T also says the merger would lead to a $40 billion reduction in costs, the savings from which could be passed on to consumers.

However, the U.S. Department of Justice (DOJ) recently filed suit in federal court to block the merger because, according to DOJ, “Tens of millions of consumers all across the United States would face higher prices, fewer choices and lower quality products for mobile wireless services.” In its complaint, DOJ states a completion of the deal would lead to less competition in 97 of the country’s top 100 cellphone markets.

DOJ’s August 31 press release accompanying its suit states that T-mobile is an industry price leader that is “aggressively competing” in the cellphone marketplace. In other words, DOJ is concerned AT&T is attempting to eliminate T-Mobile’s competition because T-Mobile is providing higher quality cellphone service at a lower cost and thereby cutting into AT&T’s profit margins. DOJ’s press release also says, “Consumers across the country, including those in rural areas and those with lower incomes, benefit from competition among the nation’s wireless carriers, particularly the four remaining national carriers. This lawsuit seeks to ensure that everyone can continue to receive the benefits of that competition.”

Besides AT&T and T-Mobile, the other top four cellphone carriers include Verizon and Sprint. Sprint, the nation’s third largest provider, called the DOJ lawsuit “a decisive victory” for consumers and competition. Of course, here in Wisconsin, U.S. Cellular is a strong regional competitor and a number of local telephone cooperatives also provide high quality service at a competitive price.

T-Mobile is owned by Deutsche Telekom. Despite being profitable with $18.7 billion in wireless revenue in 2010, it is reportedly unwilling to continue re-investing in the capital-intensive U.S. wireless cellphone industry and has recently been losing customers. By contrast, AT&T is a much larger and profitable company with $53.5 billion in wireless revenues in 2010. If the deal is not completed, AT&T will owe T-Mobile a $6 billion penalty payment.

The DOJ lawsuit by itself does not end the potential merger. If the federal court does not stop the merger, the Federal Communications Commission (FCC) would still have to decide whether the merger could be completed. The Wall Street Journal noted in an early September article that the FCC has never approved a merger that DOJ opposed. Moreover, FCC Chairperson Julius Genachowski has already declared his concern about the potential negative consumer impact of a merger between two of the four largest cellphone providers in the country.

Would a merger lead to less competition and higher prices? Is there a tradeoff between price competition and increased quality of service? Is it worth losing one to gain the other? Or, is this really a false choice and you can have both? We should hear soon from the federal court on what it thinks are the real answers to these important questions. Whatever the outcome, this will have a significant impact on Wisconsin cellphone users. 

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