AT&T and T-Mobile: Now What?
With all the best options tied up, it looks like AT&T is going to have to double down on its Wi-Fi bet.
As Martha Buyer points out, AT&T has officially withdrawn its $39 billion bid to acquire T-Mobile USA, and the company has announced a pretax accounting charge of $4 billion in the 4th quarter of 2011 for the break-up fee owed to T-Mobile’s parent Deutsche Telekom. Worst of all, it leaves AT&T right where they started when it embarked on this adventure back in March.
I have felt from the outset that the horizontal combination of the two carriers would not be good for competition. What's more, it would take T-Mobile, consistently the low-cost value provider, out of the picture, and AT&T tried to support their position with arguments that simply defied logic (i.e. it would "create" jobs?). However, I was resigned to the fact that if AT&T was sticking its neck out to the tune of $6 billion to $7 billion in potential fees if the deal didn’t go through, they must have done their due diligence up front and the Wall Street investment advisers would not be steering the company toward disaster.
However the opposition to the deal surprised all of us. Sprint’s CEO Dan Hesse was one of the first to take up the cause, but he was quickly joined by others including former SNL funnyman, now Senator, Al Franken (D-MN). In a letter to the FCC and the Department of Justice Sen. Franken made several arguments against the merger, asserting that it would undermine competition, risk forming a duopoly and would result in substantial public interest harms, higher consumer prices, decreased choice, and job losses while stifling innovation.
The biggest blow came in September when the Department of Justice announced it was suing to block the takeover claiming it would harm competition and likely raise prices for consumers. If that weren't enough in November FCC Chairman Julius Genachowski weighed in saying that he too opposed the merger and his agency might move to block it should the DoJ suit fail to do so.
Trying to put the best face on things, AT&T chairman and CEO Randall Stephenson said, "To meet the needs of our customers, we will continue to invest". He went on to counsel that policymakers “should allow the free markets to work so that additional spectrum is available to meet the immediate needs of the U.S. wireless industry, including expeditiously approving our acquisition of unused Qualcomm spectrum currently pending before the FCC. Second, policymakers should enact legislation to meet our nation's longer-term spectrum needs."
Unfortunately for Mr. Stephenson, the market has been working, as number one provider Verizon snatched up the spectrum holdings of SpectrumCo (a consortium of Comcast Corp. [CMCSA], Time Warner Cable Inc. [TWC], and Bright House Networks) and Cox Communications out from under AT&T's nose. With the cable companies' spectrum out of play and with Sprint having first dibs on Clearwire's considerable 2.5 GHz spectrum holdings, AT&T is clearly in a jam with a weak spectrum position while demand for wireless data services continues to explode. And if they're waiting for legislative changes to improve matters, they're in for a long wait!
In the meantime it's been reported that Mr. Stephenson has received a congratulatory note from Messrs Lazaridis and Balsillie of BlackBerry maker Research in Motion on his surprising come-from-behind win in the "Doofus of the year" competition.
With all the best options tied up, it looks like AT&T is going to have to double down on its Wi-Fi bet. The company does have an extensive network of hot spots in places like Starbucks, and has been experimenting with Wi-Fi offloading in “hot zones”, the biggest one being in midtown Manhattan. Of course, AT&T's Wi-Fi is running in the same unlicensed spectrum as everyone else's, and many users (particularly iPhone users) like to keep their Wi-Fi turned off as it is a major drain on the battery.
This has clearly been one of the biggest business stories of the year, and a major strategic error for AT&T--one that has been capitalized on by its competitors. Clearly the US government has sent a sign that it does not intend to roll over, and has taken a major stand for competition. We can expect the markets to punish AT&T for this "mishap", but we can also expect that AT&T's financial advisors will get to keep their fees--Wall Street never loses.