AT&T Inc.'s pursuit of U.S. government approval for itsproposed $39 billion purchase of T- Mobile USA Inc. may lead tomore regulation for the telecommunications industry.

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

Regulators also might create a new mobile service provider bycombining smaller competitors or requiring the combinedAT&T-T-Mobile to sell part of its customer base to a mobilevirtual 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 needrules,” Howe, the report's co-author, said in an interview. Withoutmore regulation, “your choice is lawlessness.”

“The wireless marketplace is intensely competitive today, and itwill remain competitive after this merger,” said AT&T spokesmanMichael Balmoris in an e-mail. “More regulation would beunwarranted, unwise and unproductive.”

The possibility of more stringent FCC oversight is a concern forVerizon, the company's chief executive officer, Lowell McAdam, saidlast month at the Fortune Brainstorm Tech conference in Aspen,Colorado conference.

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

Below 50 Percent
Fewer than half of 32 observers questioned since early July believethe deal will be approved, Stifel Nicolaus & Co. analystsRebecca Arbogast and David Kaut said in an Aug. 11 note. TheWashington-based analysts said that opposition to the transactionby Democratic Senator Herb Kohl of Wisconsin, who heads anantitrust subcommittee, may be contributing to the negativeoutlook.

Last month, the FCC suspended its 180-day informal timeline forreviewing the acquisition after Dallas-based AT&T provided neweconomic assessments to show the deal's public benefits.

Investigators at the FCC and Justice Department worry thatmerging the second- and fourth-largest wireless carriers may harmcompetition, said a person familiar with the matter. The person,who lacks authorization to talk about the reviews, asked foranonymity.

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

First Quarter
AT&T executives havesaid they expect to receive regulatory approval in the firstquarter of next year.

Regulation of the telecommunications industry has vacillatedfrom the breakup of AT&T in 1984 to a renewed period ofconsolidation starting with passage in 1996 of theTelecommunications Act. If the T-Mobile merger goes through, it maysignal a renewed era of regulation of the sector, Yankee Group'sHowe said.

The deal would leave 17 of the top 27 wireless markets in theU.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 GroupPlc, as the No. 1 U.S. wireless carrier. Together, AT&T andVerizon control 80 percent of profits in the market, according tothe FCC's annual wireless report published June 27.

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

The FCC will need to cap what a combined AT&T-T-Mobile andVerizon could charge rivals' customers for access to their networksfor data transmission, Howe said.

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

“Just because there's an order doesn't mean the regionalcarriers feel the prices are accessible or that the FCC isenforcing it,” Howe said.

Limited Charges
Wireless-service charges alsomight be limited by the FCC, he said. That would make it harder forVerizon or ATT-T-Mobile to undercut competitors by selling cheaperpackages of wireless services that include their less popularofferings, such as land-line telephone access, broadband Internetand pay TV.

The Yankee Group report is “flawed” because it doesn't accountfor wireless prices falling as the industry consolidates, saidLeslie 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 theCommunication Workers of America, which supports the merger.

The FCC may force AT&T to sell some of T-Mobile's spectrumto help Sprint and other rivals build next-generation cellularnetworks, said Kevin Smithen, a New York-based analyst at MacqarieGroup Ltd.

Widening Gap
“The gap between AT&T andVerizon and the other players in the industry is widening,” saidSmithen, 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 HocTelecommunications Users Committee that was filed with the FCC. Thegroup represents businesses that spend from $2 billion to $3billion a year on telecommunications services.

Past action on telecommunication acquisitions shows thegovernment is focused on keeping prices low and preservingcompetition.

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

The Justice Department required the companies to leasefiber-optic networks serving business customers to at least onecompetitor in cities including New York, Los Angeles andChicago.

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

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

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