Home Faculty AT&T and T-Mobile Consolidation: Bane or Boon?

AT&T and T-Mobile Consolidation: Bane or Boon?

August 31, 2011

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What can consumers expect with the AT&T and T-Mobile merger? PHOTO: MrVJTod/Flickr.com

Telecommunications giant AT&T’s $39 billion acquisition of T-Mobile USA Inc.— which is expected be completed in 2012 pending regulatory approvals and other issues — has sparked concerns over market competition and regulatory issues, chiefly centering on the question of whether the loss of a key company—leaving Verizon and Sprint Nextel Corp. as the only big-player alternatives—will mean higher prices for consumers.

But if the deal goes through its significance could go far beyond that issue, according to faculty from Emory University’s Goizueta Business School.

“I have my doubts about whether or not regulators will approve it,” says Ramnath K. Chellappa, an associate professor and area doctoral coordinator in information systems and operations management at Goizueta. “There would be too much market concentration. Right now, things are all right with the big four of AT&T, Verizon, T-Mobile and Sprint.”

He acknowledges that federal regulators gave their blessing to significant consolidation in another big industry, airlines, but says the Obama administration might not be so comfortable with limiting the market.

“Clearly there would be some issues,” Chellappa notes. “Anytime you reduce competition, there’s a reduction in social welfare.”

The collateral damage wouldn’t be limited to residential customers, he adds.

“Business customers might be at risk,” says Chellappa. “Right now T-Mobile’s data rate tends to be higher than AT&T’s, so business customers have some choice. If AT&T takes over T-Mobile, the odds are that the data rates would be raised to T-Mobile’s level.”

Some equipment manufacturers might also be hurt, Chellappa adds,

“T-Mobile and AT&T both use GSM carrier technology, while Verizon and Sprint use CDMA technology,” he observes. “If AT&T gets a monopoly, they could probably squeeze the equipment manufacturers who specialize in GSM.”

But another Goizueta professor thinks the transaction will likely be completed.

In fact will be followed by further consolidation, will actually mean more consumer choice, and in any case was almost inevitable in a world where more and more content is being transferred to wireless Internet, suggests Jagdish N. Sheth, a chaired marketing professor at Goizueta.

“On a global basis, telecommunications companies have been evolving as the convergence, or the unity, of telecom, cable and Internet, progresses,” he says. “After the AT&T and T-Mobile merger is completed, they will continue to evolve and expand to capture economies of scale.”

AT&T had to make a bid for T-Mobile, says Sheth, because if it didn’t, “a non-U.S. carrier like Vodafone or Telefonica, or an investor like Carlos Slim, would have likely bought the company as a way to quickly gain significant market share in the U.S., boosting its global presence.”

That move would have placed AT&T, Verizon, and Sprint in jeopardy, according to Sheth, since U.S. carriers have been slow to expand their global capability.

“Right now, American consumers are being hurt because the U.S. carriers have not yet integrated their coverage with that of the global market,” Sheth says. “That’s why when Americans travel overseas and use their iPhones or other smartphone devices, they’re usually saddled with a huge bill. A globally integrated company could avoid the roaming fees that are behind those kinds of big bills.”

But in the telecommunications category, at least, consolidation isn’t driven solely by issues of worldwide coverage—and that’s why Sheth anticipates that the next big deal will involve two domestic companies: Sprint and Comcast.

“Increasingly, companies are placing more kinds of content on the Web,” he says. “Print media has been forced to increase their Web content, and even television broadcasters are looking to stream more of their content on the Web and across mobile devices as a way to boost revenue. The pipeline, or means of getting it there, is irrelevant as long as the content is there and is reaching consumers across all channels of communication.”

Thus, he says, “the real race among telecommunications firms is not simply who can provide the best and most extensive wireless coverage but is instead a struggle to see who will emerge as the major content provider across industry lines.”

That means the race will be between wireless and cable providers, Sheth adds.

“So if the AT&T and T-Mobile deal was a defensive one to protect AT&T’s U.S. territory from a global competitor, the next logical deal will be between Comcast and Sprint, as an offensive move to become a stronger, more comprehensive provider of content.”

The move among providers to deliver more content will benefit consumers, Sheth says, even though the pricing models may change.

“These developments all follow the Rule of Three,” Sheth notes, referring to a theory he developed to help explain the rise and fall of companies. “During the early growth stage of just about any industry, there are many competitors. For example, there were close to three hundred automobile manufacturers in the U.S. by 1915.”

But as an industry matures, three firms that are better able to adapt will survive and thrive, typically commanding 70 percent to 90 percent of the market share, according to the Rule of Three. In the U.S., Chrysler, Ford, and General Motors evolved to dominate the auto market.

“Three companies typically become the generalists that each have more than 10 percent market share,” Sheth explains. “They co-exist with numerous product/market/niche specialists that each have no more than five percent of the market share.”

He sees the telecommunications market maintaining a flat-rate pricing structure but believes it will evolve into a hybrid one that takes a page from the utilities model.

“As more content requiring greater bandwidth is generated, telecommunication providers will probably begin offering peak and off-peak rates, much as they did in the early days, to incentivize consumers to spread out their usage and reduce peak demand,” Sheth says. “Utility companies, for example, have long provided day rates and night rates.”

He also thinks that more telecommunications providers will enter the market as large companies lease out space on their broadcast spectrum.

“You’ll see the big three engaging in more wholesale (or spectrum-lease) activity, as well as retail (direct delivery),” he says. “That will mean more consumer choice and will likely keep a lid on pricing. I believe that, as predicted by the Rule of Three, you’ll also see more niche players like Jitterbug that market their products to a specific group, such as the elderly.”

As more content is delivered through Web and mobile pipelines, the telecommunications landscape is likely to continue to change, Sheth adds.

“But consumers don’t need to worry about the change,” he advises. “In the long run they’ll benefit from it.”