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

Further Thoughts on AT&T + T-Mobile



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Annie Lowrey thinks that AT&T’s proposed acquisition of T-Mobile will be bad for customers. As I’ve written in this space, I find Zachary Karabell’s analysis closer to the mark. Annie writes:

 

About 10 months ago, the Federal Communications Commission released its annual report on the state of competition in the wireless carrier market. It noted that market concentration had increased 32 percent between 2003 and 2009. It did not see that consolidation as a good thing. Sure, prices for service had fallen, but perhaps not as much as they should have. And virtually every company’s profit margins had increased—in T-Mobile’s case, from 9.1 to 33.1 percent between 2002 and 2009. In a statement at the time, FCC chairman Julius Genachowski said the agency had decided not to “reach an overly simplistic yes-or-no conclusion about the overall level of competition in this complex and dynamic ecosystem.” But for the first time in 14 years, the FCC declined to say there is “effective competition,” much to the chagrin of the carriers.

In the past decade or so, perhaps the industry has struck the right balance between the interests of the companies and the interests of consumers. Wireless carriers have plowed billions into improving service, expanding network reach, and cutting costs. A merger between AT&T and T-Mobile, however, does not seem likely to benefit mobile users. It looks sure to reduce competition, take away an innovative, lower-cost alternative, and inch the wireless carrier market closer to duopoly.

Much else was happening during those years, e.g., a large and growing number of Americans chose to rely exclusively on mobile phones rather than remain tethered to landlines, where VoIP helped drive down prices. The field of competition wasn’t just mobile vs. mobile. Rather, it was “how can I talk to and otherwise communicate with people,” and it’s not obvious that this domain hasn’t become much more competitive in recent years.

It is telling that T-Mobile’s profit margins increased markedly during a time when it differentiated itself as a low-cost carrier, and while its service has been plagued by dropped calls and other symptoms in underinvestment in its network. One gets the impression that T-Mobile’s limited market share reflects a strategic decision to stay small, shoddy, and very profitable rather than to get bigger, better, and somewhat less profitable.

Profit margins for AT&T and Verizon look far less impressive. The latest number I can find for AT&T is a pathetic 3.29 percent, and Verizon is at 5.52 percent. But it’s AT&T that’s making the bid for T-Mobile, not the other way around.

Consider Samia Perkins’s take on MetroPCS:

With T-Mobile soon to be swallowed up by AT&T (probably), MetroPCS will be the most likely choice for many T-Mobile customers looking for a new carrier. That would most likely make Metro PCS the nation’s new fourth-largest wireless carrier, and that is why MetroPCS’s stock jumped up 5% upon the merger announcement. MetroPCS currently has 8.1 million subscribers, up 35% over the last two years (a time period, we should mention, in which T-Mobile lost customers).

MetroPCS targets big city markets and keeps their prices low by only using their own networks in dense urban areas that are cheap to serve. They have been adept at securing roaming agreements to use competitor’s networks in other areas, so their cost to serve 90% of the country is a fraction of what it costs the larger companies. In fact, last year it cost the company only $18.49 a month to serve the average customer. That lets MetroPCS cut its rates to just about half what AT&T and Verizon charge, only $40 per month (including taxes) for unlimited talk, text, and Web, and about $50 per month for the same plan with a 4G smartphone. That’s a pretty impressive profit margin. And since AT&T and Verizon don’t release their cost per customer, but we can bet it’s a lot higher.

In a sense, what we might be seeing is a universe in which the smallest carriers are less able to free-ride on the infrastructure built by the big carriers. This is obviously bad news for customers of the smallest carriers, but it’s not obviously bad news for customers of the largest carriers, which will have more resources to devote to improving the quality of the network in less-dense regions. 

At Fortune.com, Scott Woolley writes:

 

There’s a major difference between competition between separately-owned networks (known in the trade as “facilities-based competition”) and competition between companies who must all lease access from a smaller number of networks. The former tends to work much better than the latter.

In its most recent annual filing with the SEC MetroPCS acknowledges the danger that the networks it now leases could decide to jack up prices. “In some instances, large national wireless broadband mobile services carriers have been reluctant to enter into roaming agreements at attractive rates with smaller and mid-tier national carriers like us, which limits our ability to serve certain market segments, and recent FCC actions to promote automatic roaming do not resolve these difficulties,” the company noted.

Such concerns aside, if T-Mobile, along with some of its budget-priced plans, disappears into AT&T, many of its customers are likely to end up at MetroPCS. No wonder AT&T’s shareholders bid up Ma Bell’s stock a mere 1% on the merger news, while MetroPCS shares jumped nearly 5%.

Sharper competition between two separately-owned networks operating at a really large scale could be preferable to the mismatched competition we see at present, in which Verizon and AT&T duke it out with underresourced — but profitable! — midgets. 

Annie argues that we will definitely see higher prices:

 

Merging AT&T and T-Mobile would reduce competition further, creating a wireless behemoth with more than 125 million customers and nudging the existing oligopoly closer to a duopoly. The new company would have more customers than Verizon, and three times as many as Sprint Nextel. It would control about 42 percent of the U.S. cell-phone market.

That means higher prices, full stop. The proposed deal is, in finance-speak, a “horizontal acquisition.” AT&T is not attempting to buy a company that makes software or runs network improvements or streamlines back-end systems. AT&T is buying a company that has the broadband it needs and cutting out a competitor to boot—a competitor that had, of late, pushed hard to compete on price. Perhaps it’s telling that AT&T has made no indications as of yet that it will keep T-Mobile’s lower rates.

Like Karabell, I also assume that higher prices are inevitable, but not because of the merger: network congestion and the need to invest in expensive infrastructure will drive up costs for all carriers. And again, a larger subscriber base might lighten the load of capital expenditures. 



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