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The Impact of AT&T Buying T-Mobile

A giant corporation in a mildly competitive industry buying a smaller but significant firm never bodes well for prices. AT&T’s plan to purchase T-Mobile still must pass hurdles at the Justice Department (due to antitrust and other issues), the Federal Trade Commission, and the Federal Communications Commission. But assuming it goes through, we can expect higher prices — and better phone and data service.

From a technical and business standpoint, the acquisition makes sense. T-Mobile has lagged as the fourth player in the market for years, behind Verizon, AT&T, and Sprint Nextel, before and after Sprint acquired Nextel. Although its push into HSPA+ (a super-fast 3G flavor being advertised meaninglessly as 4G) put it ahead of the curve for a while, T-Mobile lacks sufficient spectrum and resources to compete on the same footing as the big boys.

AT&T and T-Mobile both use GSM technology for 2G, 3G, and 3G+ (HSPA+) networks, and AT&T has already spent billions to buy new spectrum for a closer-to-real-4G network that will use LTE. From a business standpoint, neither AT&T nor T-Mobile has any peculiarities, like the old networks and unusual technologies that still drag down Verizon and Sprint. (Those two companies use CDMA. Verizon is moving to GSM with its 4G LTE network. Sprint also runs another standard, iDEN, for its Nextel customers, and put its money into WiMax for 4G, which is proving to be the wrong horse to have bet on.)

With the merger, AT&T and Verizon Wireless would even more clearly rank as the giants of the U.S. mobile landscape. Sprint Nextel has many liabilities that prevent it from being nearly as competitive on price or services as T-Mobile is (or was), and it will have a smaller voice and 3G footprint than either a combined AT&T/T-Mobile or Verizon as well. There’s plenty of speculation that Verizon might buy Sprint, but Sprint doesn’t bring enough value to Verizon.

As a customer, you’re not likely to see any price benefit from the AT&T acquisition. T-Mobile has some of the cheapest national pricing for voice, data, and texting plans in any combination, sometimes $20 to $30 less each month than the cheapest competing plan. AT&T’s pricing tends to be in line with Verizon’s, and we’ll likely see most T-Mobile plans age out and new users or purchasers of newer phones be required to switch to higher-priced offerings.

That stinks, because as we already know, carriers charge a mix of reasonable prices for infrastructure-intensive services, like carrying voice and data, and egregious prices that are nearly pure profit for things like texting (which costs as close to zero as one may calculate), and mobile hotspots, which have no additional cost on metered or tiered plans. (Verizon may have a point in charging for a mobile hotspot on the iPhone because it offers unlimited service only on its phone-based data plan, and allots a separate data pool for tethering and mobile hotspot.)

The good news is that AT&T and T-Mobile customers will see an immediate and notable improvement in call quality and coverage area once the merger is approved. Both companies keep users on home networks as much as possible in areas where they provide service. Roaming happens only when one carrier lacks coverage, as was the case with AT&T in large parts of the Midwest and Northeast, among other areas. (In 2009, AT&T spent billions to buy spectrum in rural areas that Verizon was obliged to sell when it bought the number five carrier at that time, Alltel.)

T-Mobile’s 3G network rollouts were accompanied by a lot of high-capacity backhaul to the towers. The company most likely has a far greater percentage of its 3G-and-beyond network with the bandwidth necessary to handle the amount of traffic that’s possible. AT&T had lagged, and is still working incrementally to increase its backhaul capacity. Leaning on T-Mobile’s network will mean faster service for existing AT&T customers.

The two companies promise 95-percent coverage for 4G, which is far more than AT&T’s initial plans (or license requirements) for LTE deployment, scheduled to start in mid-2011. Verizon had already signaled its intent to reach into the hinterlands, bringing 5 to 12 Mbps downstream rates to people in fairly small towns and rural areas as well as the country’s metropolitan areas. Oddly, the greatest competition could be outside urban areas, where small wireless service providers, satellite Internet operators, and AT&T and Verizon would contend for customers.

The bottom line is that this merger will put more money in the pockets of cellular companies as a whole. If you already pay AT&T or Verizon Wireless prices, you likely won’t see a difference in the foreseeable future. But it also makes AT&T into a stronger competitive force against Verizon, which has used its larger network footprint to counter the faster speeds of both AT&T and T-Mobile’s smaller networks.

The acquisition could have an unintended consequence — but AT&T is pushing this message, so it may be wishful thinking. It could cause an increase in competition from regional mobile providers like Cricket, Leap, MetroPCS, and US Cellular, among others. These firms often have cheap prices and advanced features that work only in a limited number of urban areas. Roaming is expensive, if available. Still, many people may prefer the cheaper price as a tradeoff if they aren’t often outside of a home service area. The big providers became behemoths by providing everything to everyone. Niches emerge when the dinosaurs ignore the incoming meteor while furry mammals scurry around their feet.

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