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Impact on Enterprise Customers of AT&T Acquisition of T-Mobile
AT&T's proposed acquisition of T-Mobile USA will, if approved, significantly degrade the competitive landscape in the wireless services market. When all is said and done it could effectively reduce the number of significant providers not by a quarter but by half. The combined market share, spectrum holdings, and network infrastructure of AT&T and T-Mobile will further marginalize Sprint Nextel, and call into serious question Sprint's independent survivability.
On the other hand, if the merger is approved, it should enable AT&T to do what it has thus far been unable to achieve: Build a network that rivals that of Verizon Wireless. Randall Stephenson, AT&T’s Chairman and CEO, said this morning that this merger will accomplish in a year what it would have taken AT&T five years to do: increase cell site density in urban areas by 30% and expand 4G data coverage to an additional 46.5 million POPs, or 95% of the US population, by 2015. The Department of Justice and FCC will surely weigh these service improvements and public benefits against the reduction in competition and likely effect on prices when deciding whether or not to approve this merger.
In the short term--that is, during the next year when opposing interest groups clash over these issues in Washington regulatory proceedings--we should not expect either AT&T or T-Mobile to invest much in expanding their networks. They've already announced that the merger would result in network redundancies that would have to be eliminated to achieve the projected $40 billion in savings; it would make no sense for either to forge ahead with new construction at this stage. Moreover, AT&T is putting up $25 billion in cash for the purchase ($20 billion of which will be financed by a one-year loan from JP Morgan Chase); this is not the time for AT&T to be spending money on new tower leases, network equipment, construction, maintenance, and taxes.
As far as contracting is concerned, Rene Obermann, Chairman and CEO of Deutsche Telekom, T-Mobile's parent, told CNBC this morning that T-Mobile intends to continue vigorously competing with AT&T until the transaction is consummated. Experience shows, however, that in other cases of proposed mergers, until the deal is approved and consummated, account and bid teams typically lose a lot of impetus and hunger once an announcement has been made that their company is being acquired. Thus, we may see T-Mobile become must less involved and aggressive in enterprise procurements almost immediately.
If T-Mobile's account teams can be engaged, we encourage enterprise customers aggressively to pursue contracts with T-Mobile, who is the price leader among the top 4 wireless carriers. While T-Mobile is still making deals, enterprises should lock in its low prices by including rates in the contract--something both T-Mobile and AT&T have historically been reluctant to do. While we generally favor shorter term wireless contracts, in this case, a three- or four-year term would be a good idea, assuming T-Mobile agrees to put the rates in the agreement. It is critical, however, to include a standard contract clause providing that the agreement will be binding on each party’s successors and assigns, which will shield the customer from AT&T's abrogation of the contract post-merger.
T-Mobile has been the price leader in the enterprise space for some time, and it has often been seen as a good niche provider for users who travelled internationally a lot (although it has still struggled to win significant volumes of business from enterprises), and certainly helped to drive down the pricing of the other three national providers. Assuming merger approval, once existing T-Mobile contracts expire, former T-Mobile customers can expect their rates to increase to the levels in AT&T's standard plans, which are not only more expensive, but also include a concept foreign to T-Mobile subscribers--data/smartphone usage caps.
The regulatory drama that will unfold in the next 12 months will be exciting to watch, and it is interesting that Wall Street analysts are of one mind--the merger will be approved--while Washington insiders, including former FCC Chairman Reed Hundt, are far less sanguine. A Sprint-T-Mobile combination would have been far better for customers than increasing the size and market power of one of the biggest providers still further, and removing the fourth, and most price competitive, player.
And what does this bode for Sprint? The wireline space is already regarded as close to a duopoly between Verizon and AT&T, not least because Sprint gets continually weaker over time. But that has, to a certain degree, been because Sprint has focused so much on its wireless business, somewhat to the detriment of its wireline business. Once T-Mobile disappears, the enterprise wireless industry will be close to mirroring the wireline industry, with AT&T and Verizon at the top of the tree, and Sprint far behind. The key question is whether Sprint will gain from this, by being able to attract new ex-T-Mobile customers and position itself as the market price leader, or whether it will find itself viewed as the weakest player with enterprises preferring the "safer" option of AT&T or Verizon Wireless. It is possible that Sprint could position itself as an attractive wireless price leader, but that is a thin reed strategically and is well down the road. It is more likely that this merger, if approved, will leave Sprint in an even more desperate situation than before. It has already hinted to customers and Wall Street that it is just about through with iDEN and WiMax, despite past statements. Without T-Mobile, whom Sprint had reportedly been wooing, Sprint probably lacks the resources, customer base, and spectrum to make the inevitable move to LTE quickly and comprehensibly enough to be relevant and competitive in the upcoming large 4G procurements. The purchase price and terms (including a $3 billion penalty payment by AT&T to Deutsche Telekom if regulators don't approve the merger) are significant, and signal that a key part of AT&T’s agenda is to further undermine Sprint and hit it while it is already down. There is some value to AT&T of reducing its effective competition to one.
As far as AT&T’s customers are concerned, would the merger mean a quicker path to LTE? Probably not. Even if the large cash outlay AT&T will make for the acquisition does not reduce its network investment plans, AT&T will have its hands full integrating its HSPA+ network and ordering and billing platforms with T-Mobile's; it will be a Herculean feat simultaneously to migrate all those cell sites (over 60,000 of them) to LTE. Thus, the likely impact of this merger on 4G will be a delayed migration by AT&T to LTE while Verizon Wireless plunges ahead with its LTE deployment.
Ben Fox is a Managing Director of TechCaliber Consulting, LLC, a global technology and telecom consultancy that advises the world's largest companies on strategies for reducing their costs for telecom and technology products and services. Kevin DiLallo is a partner in Levine, Blaszak, Block & Boothby, LLP, the leading firm representing large users in the negotiation of network services and related agreements. Ben and Kevin can be reached at [email protected] and [email protected], respectively.