AT&T, T-Mobile Deal May Spur Regs

Getting the U.S. government to sign off on the acquisition may lead to more rules for telecoms.

AT&T Inc.’s pursuit of U.S. government approval for its proposed $39 billion purchase of T- Mobile USA Inc. may lead to more regulation for the telecommunications industry.

If the Federal Communications Commission and the Justice Department sign off on the transaction, they could require AT&T and Verizon Wireless to keep prices from rising, said Carl Howe, an analyst at Yankee Group, a Boston-based research firm.

Regulators also might create a new mobile service provider by combining smaller competitors or requiring the combined AT&T-T-Mobile to sell part of its customer base to a mobile virtual network operator such as TracFone Wireless Inc. or Tru, according to a Yankee Group report.

“Once you have a monopoly, you have pricing power, you need rules,” Howe, the report’s co-author, said in an interview. Without more regulation, “your choice is lawlessness.”

“The wireless marketplace is intensely competitive today, and it will remain competitive after this merger,” said AT&T spokesman Michael Balmoris in an e-mail. “More regulation would be unwarranted, unwise and unproductive.”

The possibility of more stringent FCC oversight is a concern for Verizon, the company’s chief executive officer, Lowell McAdam, said last month at the Fortune Brainstorm Tech conference in Aspen, Colorado conference.

AT&T will “agree with what the government needs them to agree to,” McAdam said. The issue is how those agreements affect Verizon, he said.

 

Below 50 Percent
Fewer than half of 32 observers questioned since early July believe the deal will be approved, Stifel Nicolaus & Co. analysts Rebecca Arbogast and David Kaut said in an Aug. 11 note. The Washington-based analysts said that opposition to the transaction by Democratic Senator Herb Kohl of Wisconsin, who heads an antitrust subcommittee, may be contributing to the negative outlook.

Last month, the FCC suspended its 180-day informal timeline for reviewing the acquisition after Dallas-based AT&T provided new economic assessments to show the deal’s public benefits.

Investigators at the FCC and Justice Department worry that merging the second- and fourth-largest wireless carriers may harm competition, said a person familiar with the matter. The person, who lacks authorization to talk about the reviews, asked for anonymity.

“The depths of the probe and the breadth of the information that the FCC has sought shows that they are really questioning the underlining assumption of the merger, not looking at possible conditions” for approving it, said Harold Feld, legal director of Public Knowledge, a Washington-based consumer group that opposes the deal.

 

First Quarter
AT&T executives have said they expect to receive regulatory approval in the first quarter of next year.

Regulation of the telecommunications industry has vacillated from the breakup of AT&T in 1984 to a renewed period of consolidation starting with passage in 1996 of the Telecommunications Act. If the T-Mobile merger goes through, it may signal a renewed era of regulation of the sector, Yankee Group’s Howe said.

The deal would leave 17 of the top 27 wireless markets in the U.S. “highly concentrated,” according to the Yankee Group report, co-authored by Gigi Wang.

With the acquisition, AT&T would displace Verizon Wireless, which is owned by Verizon Communications Inc. and Vodafone Group Plc, as the No. 1 U.S. wireless carrier. Together, AT&T and Verizon control 80 percent of profits in the market, according to the FCC’s annual wireless report published June 27.

 

Sprint Nextel
Sprint Nextel Corp. would be a weakened third-place player that would be bought by Verizon, “creating a national duopoly,” the Yankee Group report said. Sprint lost 101,000 customers on monthly contracts in the second quarter after dropping 114,000 in the previous three-month period.

The FCC will need to cap what a combined AT&T-T-Mobile and Verizon could charge rivals’ customers for access to their networks for data transmission, Howe said.

The FCC requires providers of data-roaming services to offer access to other providers “on commercially reasonable terms and conditions” under an order that went into effect in June.

“Just because there’s an order doesn’t mean the regional carriers feel the prices are accessible or that the FCC is enforcing it,” Howe said.


 
Limited Charges
Wireless-service charges also might be limited by the FCC, he said. That would make it harder for Verizon or ATT-T-Mobile to undercut competitors by selling cheaper packages of wireless services that include their less popular offerings, such as land-line telephone access, broadband Internet and pay TV.

The Yankee Group report is “flawed” because it doesn’t account for wireless prices falling as the industry consolidates, said Leslie Marx, an economics professor at Duke University in Durham, North Carolina.

Wireless prices have fallen 33 percent since 1999, Marx said, citing U.S. Bureau of Labor statistics.

Marx made the comments in a study commissioned by the Communication Workers of America, which supports the merger.

The FCC may force AT&T to sell some of T-Mobile’s spectrum to help Sprint and other rivals build next-generation cellular networks, said Kevin Smithen, a New York-based analyst at Macqarie Group Ltd.

 

Widening Gap
“The gap between AT&T and Verizon and the other players in the industry is widening,” said Smithen, who rates AT&T and Verizon “neutral” and “outperform,” respectively.

AT&T and Verizon have generated $10 billion annually in “excess profits” from overcharging rivals for the land-line access, according to a May economic analysis prepared by the Ad Hoc Telecommunications Users Committee that was filed with the FCC. The group represents businesses that spend from $2 billion to $3 billion a year on telecommunications services.

Past action on telecommunication acquisitions shows the government is focused on keeping prices low and preserving competition.

The FCC in 2005 approved mergers between Verizon and MCI Inc. and AT&T and SBC Communications Inc., in exchange for the companies agreeing temporarily not to raise rates or deny customers Internet access.

The Justice Department required the companies to lease fiber-optic networks serving business customers to at least one competitor in cities including New York, Los Angeles and Chicago.

The government will demand more concessions from AT&T this time, said Henry Levine, a partner at Washington-based Levine, Blaszak, Block and Boothby, which represents large companies in telecommunications cases.

“If this merger gets though at all, it will be with much more onerous, stricter conditions than what we saw in Verizon-MCI and AT&T-SBC,” he said.


 

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