AT&T Goes Phone Shopping

In the AT&T and T-Mobile merger, cui bono?

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Steven Cherry: Last week, AT&T went phone shopping. It bought T-Mobile, for $39 billion.

The German parent company, itself a subsidiary of Deutsche Telekom, is the 11th largest cellular company in the world, but when you look at just the U.S., T-Mobile was an also-ran. Now the numbers are kind of complicated, because around the world lots of people are on prepaid phone plans, while in the U.S. most people subscribe to a monthly service that starts with a contract. But anyway, Verizon and AT&T were 19th and 20th in the world; in the U.S. they’re No. 1 and 2, roughly tied in the low 90 millions. Sprint is a distant third with about 50 million, and T-Mobile was fourth with something less than 40 million. The deal still has to pass the scrutiny of various government agencies, probably including the Federal Trade Commission, the Federal Communications Commission, and the antitrust division of the Justice Department, but if and when it goes through, it will make AT&T by far the nation’s biggest cellular provider.

The two obvious questions are, why is this a good thing for AT&T—and for Deutsche Telekom—and is this a good thing for cellular users in the U.S.? Is it good for AT&T’s existing customer base? What about for T-Mobile’s customers, who will be going from one of the top-rated providers in terms of customer satisfaction to one of the worst? And what about for everyone else, who now have fewer providers to choose from in a market that’s looking more and more like what the antitrust theorists call a duopoly?

My guest today to answer those questions is Phil Solis, who is the research director of mobile networks at ABI Research in Oyster Bay, N.Y. He joins us by phone. Phil, welcome to the podcast.

Phil Solis: Hi. Thank you.

Steven Cherry: What does AT&T have in mind here? Are they buying customers? Wireless spectrum? Base stations? Backhaul? What’s the big reason here?

Phil Solis: So it’s definitely a combination of things. I think it’s three main things. They’re looking to add customers, and that gives them more immediate revenue and that also allows for greater economies of scale when it comes to purchases and devices. They’re also buying T-Mobile for its spectrum, because they only have, I guess, a relatively shallow amount of spectrum to use for LTE, right? And they’re also buying T-Mobile for its base stations, which are newer than AT&T’s.

Steven Cherry: Yeah, let’s just remind our listeners: LTE is what some people are calling 4G, and those networks are just being built right now, and that’s in effect the most valuable spectrum to have going into the future. Is that right?

Phil Solis: That’s right. 3G only provides you up to a certain speed, and what T-Mobile and AT&T are doing are increasing that speed with faster versions of HSPAC+, but as they shift to LTE—LTE will provide more efficient use of the spectrum—they can handle a greater number of users and at higher speeds and with lower latency.

Steven Cherry: Okay. I guess some people say there’s already a lot of unused spectrum in the U.S., but most of it is not this valuable LTE spectrum. Is that right?

Phil Solis: That’s right. I mean there’s spectrum that some of the cable companies and some of the mobile operators are holding that they’re not using right now, but it’s not so simple as just that the spectrum is there and they’re not using it.

Steven Cherry: Now some people have wondered, Why actually buy the company when carriers often have agreements that help them out in some of the same ways? They allow roaming across their networks in some places, and these base stations can handle multiple radios, and it’s possible for somebody to attach a radio onto somebody else’s base station. So why did AT&T actually have to go out and buy T-Mobile?

Phil Solis: Like I said, I think it’s for multiple reasons. It’s to gain more subscribers and gain better buying leverage of devices and it’s also to gain more spectrum to roll out LTE. So if you look at the change in some of their plans, initially they had targeted in the range of maybe 40 to 50 percent of people in the U.S. to be covered by LTE over the next few years, but now if the T-Mobile acquisition is allowed they’re targeting 95 percent of people to be covered by LTE several years out.

Steven Cherry: Now that’s a huge difference, and so really it sounds like it’s the rise of the data side of things and not voice that’s driving AT&T’s interest here. That brings us to this question of backhaul. Maybe you could just start by reminding us of what backhaul is and then tell us maybe how it figures into this deal.

Phil Solis: So backhaul is the telecom, the wired telecom, connections everywhere between base stations and any aggregations of those base stations, and all the way back to the mobile operators core network. And that’s a very important part of the network because it backhauls all the traffic. It has to be able to handle enough speeds to be able to handle the traffic from the base stations. Especially when you move from 3G to LTE, you’re going to get a lot more traffic.

Steven Cherry: So the idea is T-Mobile’s backhaul is going to improve AT&T’s existing network? Is that going to make a big difference for AT&T?

Phil Solis: I don’t think it’s going to make a huge difference. It might be part of the equation here. AT&T can also just improve the backhaul at its own sites whether that’s with fiber or metro Ethernet or with putting up microwave connections.

Steven Cherry: Just to get back to this question of devices for a minute because you’ve mentioned it several times: The way it works in the U.S. is a carrier like AT&T or T-Mobile will, like, buy a bunch of phones or smartphones or now iPads as well from a company like Samsung or Apple. And they’re the ones that sell that device to the end user with a contract, often at a discounted price—in the U.S. at least.

Phil Solis: Right, so they’ll buy it for a wholesale price, and they’ll say what the retail price is, and if you’re buying off contract and you just want to upgrade your phone, you’d have to pay, like, full retail price. But most of the time consumers renew and they want a two-year contract, and then they get the phone at a discount. So you could call it subsidizing or just that the mobile operator is offering the phone for less to enable them to attract new customers and also to renew existing customers on contract.

Steven Cherry: So it’s fair to say that to the extent that this is better for AT&T—they have sort of more buying power—it’s bad for the Apples and Samsungs and Motorolas of the world: They have fewer customers.

Phil Solis: Exactly. That’s true.

Steven Cherry: Okay. Stepping back for a minute from these details, what does this mean for customers? For one thing, now in the U.S., are we really headed for a two-carrier world?

Phil Solis: So if you look at the landscape today, you know people consider that there are four tier 1 companies, right? Verizon, AT&T, Sprint, and T-Mobile. And if this acquisition is allowed to go through, then you’re left with AT&T and Verizon, which will both have over 100 million subscribers, and then much further down is Sprint, which is—you can look at them as a small tier 1 or maybe a tier 2 player—and then you have a small number of tier 3 players that have, like, less than 10 million subscribers, so from one aspect it does look like this puts the U.S. market in a position where there are two strong players and one medium player.

Steven Cherry: You know from an antitrust point of view, AT&T needs to argue that there’s still plenty of competition and that there’s plenty of choice for consumers among wireless carriers. You know they make a big deal in the U.S. about the fact that besides these four, or soon to be three, giant providers, there’s still a lot of local carriers in the mix. Is that a fair response from AT&T’s part or are they being kind of disingenuous?

Phil Solis: It’s more or less fair. I mean these are very small carriers, and they compete mostly on price and the way that they bundle the offers. But they’re not where most of the subscribers gravitate to, right? They don’t have the advertising power or the same, like, purchasing power of devices, so they don’t have the same breadth of devices that the other carriers have.

Steven Cherry: Now some of them—like Virgin Mobile looks like an option for people, but really that’s just the Sprint network sort of rebranded. In fact if Sprint goes away one way or another, a lot of that choice is going to disappear. What are Sprint’s prospects here?

Phil Solis: Well, some people are talking about the potential for Verizon Wireless to buy Sprint, although I don’t think that would happen, though. Verizon is pretty big as it is. I don’t think it would need to buy Sprint to compete well in the market, right? And Verizon Wireless’s competing method going forward would be to cover most of the market, like closer to 100 percent of people in the U.S. with LTE by the end of 2013, right? That’s their goal, so I don’t think they would need to buy Sprint.

Steven Cherry: And then, paradoxically there’s this weird thing going on where AT&T and Verizon use different protocols but they’re both going to end up with LTE. Sprint and Verizon have always used the same protocol, but now in the 4G world, they’re diverging. Verizon is going to be with LTE, and Sprint is using something else called WiMax. right?

Phil Solis: Right. So yes and no, right? So Sprint owns a little bit more than half of Clearwire, which rolls out the WiMax network, right? Which is a different flavor of 4G. But that doesn’t preclude Sprint from being involved with LTE, and there are different paths forward to that. Clearwire itself has a lot of spectrum, more than any other mobile operator in the U.S. actually. It just has problems with funding, but that’s another issue. But Clearwire itself can roll out LTE.

Steven Cherry: Okay, so let’s cut to the bottom line—who is this good for? Is this good for AT&T customers? Is it good for Verizon customers? Is it possibly good for T-Mobile customers?

Phil Solis: It could be good for Verizon customers in that Verizon has a stronger competitor out there in the market. It could be good for AT&T and T-Mobile customers in terms of the scale that the new AT&T would achieve, and they could get more devices, they can subsidize them more, price them more competitively. It could help AT&T and T-Mobile customers with higher-quality network and more expansive. It could hurt consumers in a way if there’s not enough choice. You know T-Mobile is looked at as being an alternative out there that has very competitive pricing, so there’s that side of it as well.

Steven Cherry: And better customer satisfaction.

Phil Solis: Right.

Steven Cherry: Well, thank you very much. It’s been a pretty complicated deal to try and figure out.

Phil Solis: Okay. Thank you.

Steven Cherry: We’ve been speaking with market analyst Phil Solis from ABI Research about the AT&T–T-Mobile merger and what it means for cellphone users in the U.S. For IEEE Spectrum’s “This Week in Technology,” I’m Steven Cherry.

This interview was recorded 30 March 2011.
Segment producer: Ariel Bleicher; audio engineer: Francesco Ferorelli

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