AT&T/T-Mobile merger ups the stakes in battle for US mobile broadband dominance - Proposed new market leader must convince regulators to take a long-term view on landmark tie-up

AT&T's colossal US$39 billion acquisition of T-Mobile USA will create a mobile superpower that will control virtually the entire GSM and WCDMA market in the US. Based on pro forma (Q4 2010) GSMA Intelligence data, the combination of the current number-two operator (AT&T) and number-four (T-Mobile) will create a market leader with a connections base of just under 130 million and a 42 percent market share. The deal will transform the 'big four' nationwide operators in the US into a 'big three', pushing current leader Verizon Wireless into second place (33 percent share) and leaving Sprint Nextel a distant third (16 percent). Based on 2010 data, AT&T and T-Mobile's combined annual mobile revenue would be US$79.8 billion.

The deal appeared to take the industry by surprise. While T-Mobile USA-parent Deutsche Telekom has long been thought to be searching for a solution to turnaround its ailing – but strategically important – US unit, a tie-up with CDMA-based Sprint was considered the most likely move. But from a technology standpoint, the AT&T/T-Mobile merger makes more sense, allowing them to merge their current GSM and WCDMA networks and pool spectrum to prepare for future LTE rollout. The two firms said that the deal will allow them to build-out LTE across 95 percent of the US population – an additional 46 million citizens on top of AT&T's current plans – a greater reach than either operator could manage on its own.

The tie-up also solves spectrum problems for both parties: T-Mobile lacks sufficient spectrum to deploy LTE, while AT&T is struggling to add capacity in order to support rising smartphone data use (it claims its mobile data volumes have grown 8,000 percent over the last four years and predicts an 8x-10x increase over the next five).

As our data shows, the proposed new market leader will account for 99 percent of the country's installed GSM base and 100 percent of WCDMA and HSPA connections. This will provide the combined firm with huge economies of scale in areas such as handset procurement, network infrastructure and distribution. Synergies worth US$3 billion a year are forecast within three years.

In addition, the alliance aims to address some of T-Mobile's current operational and financial weaknesses by rolling the struggling operator into the AT&T fold. T-Mobile's wireless EBITDA margin was 29.2 percent last year - compared to 40.7 percent at AT&T; total yearly churn at T-Mobile was 3.4 percent, more than double the 1.31 percent at AT&T. ARPU is also lower at T-Mobile, including in the key postpaid segment.

The two operators anticipate that it will take a year to close the deal, a lengthy timeframe that suggests they expect US regulators to examine it extremely closely. Indeed, they have already started pitching their arguments to the DoJ and FCC, arguing that the tie-up will solve spectrum shortage problems, extend mobile broadband reach to more rural communities, and support US "high-tech growth [and] innovation." They have also talked up the competitive nature of the US market, claiming that regional carriers such as MetroPCS and Leap are stealing market share from the 'big four' in several key local markets and pointing to major new competitors such as WiMAX player Clearwire and LightSquared, the proposed new wholesale LTE operator.

They also highlight the fact US retail mobile prices declined by 50 percent between 1999 and 2009 despite widespread market consolidation during this period: notably Cingular/AT&T, Sprint/Nextel (both 2004) and Verizon/Alltel (2008).

Will Croft, Analyst, GSMA Intelligence:

As our market share data shows, this deal raises instant anti-competitive flags; so why are AT&T and T-Mobile so confident the merger will be pushed through? If approved today, the Herfindahl-Hirschmann index – a measure of market competition – would shoot up from 2,411 to 3,050 in the US, an increase over the threshold for concern (100 points), and likely to cause regulators to block the deal. The problem, however, is spectrum. For the FCC to block the move, they would need to be able to make rapid progress on the allocation of sufficient new spectrum to allow existing operators room to expand at a rate homologous to usage. Thus, we anticipate that a key tenet of the FCC's investigation will be to focus instead on local US markets in isolation and carve out concessions in order to drop certain assets in particular markets where it sees competitive issues. The process will undoubtedly aim to establish if the remaining rural players – the likes of Cricket Communications (Leap Wireless), MetroPCS and US Cellular – can provide sufficiently aggressive tariff competition to keep individual markets balanced. Finally, the merger puts even greater pressure on Sprint, which is likely to be the most vociferous opponent of the deal. Faced with the prospect of becoming a remote number-three player, Sprint may now struggle to deploy an LTE network on the same scale as A&T/T-Mobile or Verizon (should it choose to adopt the technology). Therefore, partnerships akin to the deal announced this week between Leap Wireless and LightSquared will be key to Sprint's future if it is to remain competitive on coverage.

US mobile connections and market shares: Q4 2010
Source: GSMA Intelligence, company data

¹ Mobile WiMAX (802.16e) only