At the very least, this will now create a massive uphill
battle for AT&T in consummating its merger, and will create significant
delays. At worst, it will prevent the merger from happening entirely, which
will result in a massive breakup fee of several billion dollars and various
other concessions on the part of AT&T. The uncertainty created in the
meantime poses several very difficult decisions for AT&T, especially in
terms of network investments. It will have to decide whether to press ahead
with its own LTE rollout on the assumption that T-Mobile’s network assets and
spectrum will eventually be part of it, or whether to pursue another strategy
for rolling out 4G.

 

All this is happening at precisely the time when AT&T
needs to accelerate its 4G rollout to keep up with Verizon, Sprint and others
who are much further ahead. One option AT&T should immediately pursue is a
network-sharing arrangement with T-Mobile along the lines of similar deals
we’ve seen in Europe and elsewhere. This would provide some of the same
benefits without raising as many concerns on the part of the federal
government, and would arguably have been a better strategy from the outset
given the inherent risks involved in such a major acquisition.

 

The Department of Justice’s (DOJ) arguments against the
merger have significant merit – T-Mobile has acted as a disruptive competitor
in the market, pioneering new service plans and devices and putting significant
competitive pressure on the three largest operators. AT&T’s intention to
acquire T-Mobile was motivated primarily by spectrum and network concerns, but
there is no doubt it also would have alleviated that competitive pressure. The
DOJ advises AT&T to instead invest in its own network, but it is not clear
whether AT&T has all the resources – especially spectrum – in house to do
this.

 

The lawsuit also leaves T-Mobile USA in a difficult
position. Although its “4G” rollout has been somewhat successful, it
has struggled to differentiate itself since smaller regional competitors began
targeting the low-spend and prepaid markets more aggressively on a national
basis. For both T-Mobile USA and its owner Deutsche Telekom, the AT&T
merger was a great way out of this difficult situation, providing a big payoff
for Deutsche Telekom and a way forward for T-Mobile. Now, Deutsche Telekom
faces the prospect of hanging onto its unloved US asset for a while longer with
only the breakup fee for comfort, while T-Mobile USA ends up potentially going
back to the drawing board for a new strategy.

 

This is not the first case to be known as United States
vs. AT&T – an earlier case in the late 1970s and early 1980s led to the
breakup of the then-monopoly AT&T into eight separate companies. AT&T
and other companies have been working hard over the last ten years to put many
of those pieces back together, beginning with the mergers of Pacific Telesis,
Ameritech and Southwestern Bell, and followed by the acquisitions of AT&T,
BellSouth and Cingular by SBC. The fact that the Department of Justice is
stepping in now is a sign that it wants to draw a line in the sand and forbid
further consolidation among major players in the industry, and especially
AT&T.

By Jan Dawson, Chief Telecoms Analyst, Ovum
[email protected]