Misguided Faith that an Independent T-Mobile is Healthy

John R. Quain pleased some interest groups this week when he opined that killing the AT&T T-Mobile merger is a good thing.  Beyond taking a huge leap of faith that T-Mobile is a healthy independent company, Quain further argues that a blocked merger would be beneficial even to AT&T and consumers.  But this ignores many inconvenient realities that a blocked merger would likely entail:

  • AT&T pays a breakup fee of $6 billion dollars in cash and assets (spectrum) to Deutsche Telekom.
  • AT&T will be substantially weaker financially.
  • AT&T will have difficulty increasing or even maintaining capital expenditure investments, especially business ventures with low return on investments, such as rural 4G LTE.
  • 55 million rural customers may not be getting an upgrade to 4G LTE because of decreased synergies and unsustainable competition.  Having many competing carriers in urban and suburban areas is desirable but rural areas can barely attract a single carrier, never mind multiple carriers.  Population densities in rural areas are orders of magnitude lower than larger towns and cities.  These rural consumers certainly won’t see any benefits.
  • T-Mobile has already lost more than half a million subscribers in 2011 (and the year isn’t even over) and their profit declined more than 30% since AT&T bid for T-Mobile.  T-Mobile is considered a “problem child” for owner Deutsche Telekom.  Deutsche Telekom is looking for an exit strategy on T-Mobile USA, and it is unlikely they will double down on T-Mobile investments.  T-Mobile will likely continue to slide into obscurity.

Mr. Quain can pretend that a failed merger will be all sugar and spice, but reality looks stark.  It’s almost comical that Quain argues that T-Mobile is cheaper than AT&T or Verizon but goes on to admit that Boost Mobile is even cheaper than T-Mobile.  So not only is Mr. Quain ignoring reality, he’s undermining his own arguments.

Regardless of whether the T-Mobile merger is approved or not, it seems very unlikely that the United States will maintain four healthy wireless competitors.  That’s not necessarily a bad thing — 24 of 25 other developed nations have much higher concentration of market share between their two larger wireless carriers than the United States (see Table One from Ehrlich, Eisenach, and Leighton paper).

The government has been eager to see the development of rural broadband in America, and has even been willing to subsidize the gap between commercial viability and non-viability to kick-start rural broadband.  An AT&T T-Mobile merger would accomplish this important goal without taxpayer subsidies, and would also absorb a business that seems otherwise destined to fail within a short time.  Killing this merger now seems to have no upside and all downside.