AT&T’s Big Blunder
December 23rd, 2011I suppose the move must have made perfect sense to a lot of AT&T’s executives. After all, the company was a survivor in the aftermath of a long-ago antitrust decision to break up “Ma Bell,” and create a bunch of “Baby Bells.” AT&T’s second coming was the result of mergers and acquisitions, and thus, when they decided to invest $39 billion dollars to acquire T-Mobile, they felt it would sail through.
If this decision were made a few years ago, maybe it would have gotten reasonably quick approval after some pro forma evaluation. The U.S. Department of Justice in the Bush years was more apt to allow large corporate mergers. But the Obama administration should have been expected to be more cautious about such things.
Now AT&T’s excuse for acquiring T-Mobile was all about the customer experience. AT&T has been rightly attacked for having subpar networks in many cities, and buying up another company would give them the spectrum and network capacity they needed to deliver fewer dropped calls on a more reliable network.
The skeptics, including Sprint, the number three U.S. carrier, suggested it was all about killing a competitor, and regaining the number one spot in the market. Remember that AT&T was number one until Verizon Wireless acquired a smaller mostly regional carrier, Alltel, for $28 billion. Since Alltel had a fraction of T-Mobile’s customers, getting the whole kit and caboodle for only $11 billion more than Verizon spent must have seemed a bargain. And if Verizon Wireless could buy their way to the number one position, surely AT&T could do the same.
AT&T’s blissful spin about the benefits of the merger collapsed when a document accidentally posted by the legal firm working on the deal revealed that AT&T could deliver much of what it promised with this $39 billion dollar deal — meaning increasing 4G or LTE network coverage from 80% to 97% — for a “mere” $3.8 billion. The document was quickly pulled from AT&T’s site, but not before prying eyes got to see this critical revelation. It threw AT&T’s excuses for the deal out the window, and, no doubt, cost someone in that law firm a job (though I can’t say that for certain).
Regardless, the bad news kept on coming for AT&T. First the Department of Justice decided to take legal action, after which the FCC said that it would oppose the merger. After mulling over their options for a short while, AT&T took the hint, and gave up on the deal. This meant a $4 billion breakup fee payday for T-Mobile’s parent company, Deutsche Telekom, along with a joint roaming agreement that will give the smaller company more coverage in more places.
Having saved all that money, one hopes that AT&T will do the right thing and invest properly in repairing and expanding their network. If they could afford to spend $39 billion to buy up a competitor, surely they could double that $3.8 investment in network enhancements, spend a bundle on promoting the new service, and maybe return some of the rest in dividends to AT&T’s stockholders.
I suppose the real question is what’s going to happen with T-Mobile. Clearly the owner, Deutsche Telekom, would love to dump it if they can attract a credible offer, but the question is from where would those offers come.
Some suggest Sprint, but the two companies have incompatible networks, and Sprint already ran into serious trouble dealing with that sort of problem when they acquired Nextel some years back. According to Avram Piltch, Online Editorial Director of Laptop magazine, other potential suitors include, believe it or not, such retailers as Radio Shack and Wal-Mart, and, of course, Dish Network.
Did I say Dish Network?
Well, as you know, cable providers have been going after wireless carrier deals so they can offer cell phone service as a bundle to customers. Dish Network recently bought up the shattered remnants of a video rental chain, Blockbuster for a song, so they surely have the cash to make a larger acquisition. Being able to offer wireless phone service might make for a compelling bundle, the better to enhance Dish’s standing as it struggles to compete with the number one satellite provider in the U.S., DirecTV.
But even if Dish Network were to make that offer, that would only represent the beginning of their investment. As it stands, T-Mobile’s network is crippled, because the frequencies they’re saddled with aren’t compatible with AT&T’s GSM network, though that would have been worked out had the merger gone through. But it also reduces the possibility that T-Mobile could get an iPhone. It made sense for Apple to offer CDMA to support Verizon, Sprint, and some other large services around the world. But T-Mobile is not in that position and thus doesn’t offer as compelling a reason to attract Apple.
Even worse, T-Mobile’s churn rate — the number of customers who are leaving the service — is said to be a lot higher than AT&T, even though the latter has had ongoing network problems in some larger U.S. cities.
As for The Night Owl, in Phoenix AT&T delivers decent enough service. Call quality is good, download speeds are decent, and I’ve seen no reason to jump ship even though I have two other options for my next iPhone. But I do hope AT&T, having lost out in their attempt to find a quick route to the number one spot, will hunker down and do it the right way, by building a better service, and maybe even cutting some of the prices here and there.
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When you look at the reasons why this made sense for AT&T, and was the easiest way to scale their network, it’s important to keep in mind that T-Mobile’s 1900 spectrum was the original AT&T Wireless! AT&T had to sell that off as a condition of it’s merger with what was then Cingular. AT&T already has the infrastructure needed to fold the T-Mobile network in. It made sense.
@Guess Who!, As a cost/benefit ratio, if they could build out their network for $3.8 billion and attain the results they say they need, why spend $39 billion, other than to kill the competitor?
Peace,
Gene
Why? Because it is cheaper and faster to buy existing than to build new.
@Andrew, So it would cost AT&T more than $39 billion to build out their own network then? That contradicts that leaked letter.
Peace,
Gene
First, although technically correct this statement is missing information: “AT&T’s second coming was the result of mergers and acquisitions…”. Actually SBC was the company doing all the aquiring. After buying AT&T they rebranded themselves, and renamed Cingular after buying Bell South who they co-owned it with. Make no mistake, it is SBC and their terrible service all the way through, only the name changed (to a more famous one).
Second, “As it stands, T-Mobile’s network is crippled, because the frequencies they’re saddled with aren’t compatible with AT&T’s GSM network…” makes absolutely no sense. T-Mobile’s network is by no means crippled, in fact, I’ve had 4G speeds for over a year. Only Sprint had 4G first and they still aren’t 4G in my market. And saying it is crippled because it isn’t compatible with AT&T’s GSM network is silly, T-Mobile doesn’t need to be compatible. And the 2 networks are mostly compatible.
@Brian, 1: A distinction without a difference. We used to refer to them as “the company formerly known as Cingular.”
2: Sorry, it’s not technically 4G, despite the advertising claim. And, yes, T-Mobile’s network is crippled because they use non-standard GSM frequencies and thus aren’t convenient targets for many hot smartphones, most particularly the iPhone. As a result, T-Mobile is experiencing a higher churn rate than even AT&T.
Peace,
Gene
How much really would it cost for Apple to stick a T-Mobile compatible radio in the iPhone? I think Apple held off on T-Mobile compatibility because Deutsche Telecom (a big iPhone customer) and AT&T (a big iPhone customer) winked and nodded towards Apple to hold off on a T-Mo iPhone so that T-Mobile’s numbers would start to deteriorate and thus make it easier to defend the merger with the Feds. Now that the Feds did not fall for that ploy, and DT will finally ask for an iPhone model for T-Mo, I think a T-Mo iPhone is coming soon.
Why spend $39 billion to acquire T-Mobile instead of $3.8 billion to build the network out themselves? Because AT&T isn’t really buying network capacity with T-Mobile. They’re buying Market Power which is obviously worth at least $35 billion to them.
@Al, It’s a question of building a separate production line for the T-Mobile model, and Apple has to consider potential sales to T-Mobile’s customers, knowing that the same model would not serve any other carrier.
Apple is planning in the tens of millions here.
Peace,
Gene
I do think that T-Mo didn’t get the iPhone because of the uncertainty of its future as an independent carrier. Now that the merger with AT&T is off, and if DT doesn’t sow any more doubts in the coming months, I believe it will have the iPhone 5.
After all, it is just a matter of adding one more frequency to the cellphone’s radio. Also, in some pockets of the country, unlocked iPhones can access 3G service on T-Mobile, as they have acquired sharing agreements with AT&T during this merger dance.
Now about suitors. I think this is a good chance for Apple to get its own wireless carrier. With this acqutision, Apple can start the use of their built-in SIM, over which the carriers had balked. The carriers will have the comfort of knowing that they will have a chance to compete.
Since Apple’s business model is to offer services at almost break-even cost to facilitate hardware sales, a wireless carrier it owns will be less expensive and offer more options to the consumer than the present competition. It would be very disruptive to the current business model of existing carriers, and comparatively easier than trying to disrupt the TV market.
I hope Apple looks at this ‘iMobile’ proposition for the disruption of 2012, for I’m afraid that if it doesn’t, Google or Microsoft may have a go at it.