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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

AT&T + T-Mobile = Decent Service?



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My Twitter comrades are mostly skeptical about AT&T’s proposed purchase of T-Mobile, but I’m all for it. Sam Gustin summarizes the potential regulatory obstacles and John C. Abell gives some insight into AT&T’s motivations:

 

 

If it passes regulatory and shareholder approval, the tie-up will consolidate the only two remaining GSM providers in the United States — AT&T acquired Cingular in 2007 after a complicated string of mergers among the former Baby Bells — and would likely improve available spectrum for both.

That’s an especially urgent need for AT&T, which has seen an 80-fold increase in its wireless-data usage since the launch of the iPhone on its network in 2007. The increase in demand has led to widespread connectivity issues and a massive perception problem, which AT&T can only address by increasing its coverage. Acquiring T-Mobile is a relatively inexpensive way to do that.

That sounds rather more encouraging, and it leads us directly to Zachary Karabell’s argument, which I agree with wholeheartedly: 

 

Cell service in most countries is dominated by near or total monopolies. The capital outlays for networks are immense, and with the pace of innovation to faster networks capable of handling the massive amount of data that today’s smartphones carry, those capital expenditures aren’t plateauing any time soon. Smaller players simply cannot build the robust networks necessary, and even large ones such as AT&T and T-Mobile in America have been unable to build truly national coverage given the size of the U.S.

Consolidation can be constructive. The monopolies Karabell describes tend to be heavily regulated, but the existence of three carriers will mitigate the need for it. 

 

Then there is the issue of price and customer service. The cable industry in the United States offers a less-than-happy example. Most people have no choice of cable carrier, and find escalating prices and declining customer service. But before you start worrying about being offered a window of 9 to 4 for someone to help you with your dropped calls, it’s worth noting that cable operators control both the hardware (the boxes) and the service, whereas cellphone operators do not service those iPhones and BlackBerries.

What’s more, though T-Mobile USA has been woefully deficient in coverage (and as a long-suffering subscriber, I have watched as my Verizon and AT&T friends chat away blithely while I linger in no-bar hell), it has had decent customer service. AT&T has been widely criticized for its customer relations. It is possible, of course, in a merger, that service will dwindle, but in a duopoly with Verizon in a market that isn’t adding subscribers, customer service becomes ever more important. AT&T may fail to realize that, but it will do so at its peril when customers will still easily be able to switch to Verizon. Customer service isn’t just something customers want and need: In a tight and competitive marketplace, it is an imperative for companies. [Emphasis added.]

 

I also wonder if it’s worth considering that new competitors could emerge from left-field, e.g., if WiMax technology improves, Internet-enabled devices using Skype or Google Voice could do an end-run around the existing cell networks. I could be too optimistic about this, as the main WiMax provider at present has been engaging in bandwidth throttling. And besides, it’s owned by Sprint. But it is easy to imagine the cost of building out a WiMax network declining over time. 

What about prices? Karabell warns that prices will have to go up as the demand for data grows, thus spurring a need for heavy capital investments and tiered pricing:

AT&T isn’t taking on substantial debt to pay for the deal, so it won’t be in a position where it must raise prices to make the deal feasible. Consumers are rightly suspicious. Prices have been on a long and steady decline, and at some point, those declines will slow. New data requirements and increased capacity necessitated by smartphones will change the cost-structure, and cell carriers are likely to move ever more to a stratified system of charging heavy users more. Those trends are in place regardless of the deal, but warnings that an enhanced market position will allow AT&T to increase fees willy-nilly is at odds of the experience of cell carrier monopolies throughout the world. Fees will not be static, but nor can AT&T and others just charge what they wish.

Net-net, in terms of coverage, quality of service and cost, this is a rare deal that may be good for corporate America and good for consumers.

I tend to think that these deals aren’t quite so rare, but I take Karabell’s point.



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