AT&T and T-Mobile Withdraw Merger Request; Spectrum Is Key Issue

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AT&T Wireless and T-Mobile have withdrawn their application to the Federal Communications Commission (FCC) to merge the two wireless carriers into a single U.S.-based company that would exceed the dominant subscriber base of current market leader Verizon Wireless.

The move to withdraw the application came last Thursday, the day after the FCC's chairman, Julius Genachowski, announced a second move to block the proposed merger: besides an antitrust lawsuit brought by the U.S. Department of Justice and scheduled to be held in February, the FCC's chairman is requesting an administrative law judge review the proposed merger and set a hearing date to determine whether the proposed merger would impact competition in rural areas.

AT&T said the FCC's position is disappointing, and that it plans to look at all available options. The tone was a bit more muted, however, than it was when an AT&T spokesperson lashed out at the Department of Justice in September regarding the antitrust suit. At that time, vowing to vigorously contest the lawsuit in court, the company's position was that the DoJ had the burden to "prove alleged anti-competitive affects."

During AT&T's Thanksgiving Day announcement, the company said it would spend the next few months preparing for the antitrust trial and that AT&T would take the $4 billion "break-up" charge that it will now pay to T-Mobile as a result of the scuttled deal.

The next move will be watched closely, both in terms of AT&T's willingness to find common ground with the DoJ and FCC as well as the FCC's policy around wireless spectrum. The need for spectrum is somewhat of a truism, given the growth of online video and the wild popularity of smartphones and tablets powered by either the Android OS or Apple iOS.

AT&T's Next Move

It appears the company may be willing to sell off assets to rivals in order to gain a bigger spectrum block.

In a nod to what may be AT&T's strategy going forward, journalist Steve Lohr conjectured in Sunday's edition of The New York Times that AT&T may be willing to sell off some of T-Mobile's spectrum assets to smaller competitors in order to erase the competitive argument. 

"Rethink possible is both AT&T's marketing slogan and an apt summary of the challenges it now faces," wrote Lohr of the proposed $39 billion merger. "To address the objections of the Justice Department and FCC that a merger would be anticompetitive, AT&T could agree to sell off 40 percent or so T-Mobile's assets to wireless rivals."

Selling off spectrum, however, would run counter to AT&T's central argument for the merger, namely that it needs the spectrum that T-Mobile possesses. The company wants to eliminate any visions of the ghost of Marley where AT&T was burdened down by the chains of insufficient bandwidth during the early stages of its role as the sole U.S. wireless carrier with the Apple iPhone.

FCC Position on Spectrum

Many broadcasters will be watching the outcome of the FCC's administrative law review, as AT&T could then increase pressure on the FCC to push forward with the "voluntary spectrum auctions" that the FCC chairman has been vocal about. Broadcasters are being pressured to give up some of their "excess" spectrum, a move opposed by the National Association of Broadcasters partially on the grounds that some broadcasters plan to use part of their television spectrum allocation for local or regional advertising-based multicast streaming initiatives.

"We need to free the spectrum up before the crunch hits," said Genachowski, at the CTIA show in March 2011. "Spectrum can be voluntarily released, and the proceeds will be shared with the broadcasters who give up the spectrum. We haven't seen a good response in the healthy debate as to why we shouldn't move forward with voluntary spectrum reallocation." 

While the FCC has not moved forward with the voluntary spectrum reallocation, broadcasters may well use the FCC's opposition to the AT&T and T-Mobile merger as leverage, arguing that even AT&T acknowledges that spectrum is available for purchase within the wireless industry, in the form of T-Mobile's underused spectrum.

Competitors' Positions on Proposed Merger

The potential of a spectrum sale to Sprint, one of the companies that adamantly opposed the merger, would breathe new life into a company that has made a $20 billion gamble on the iPhone, only to be plagued with bandwidth problems of its own when customers chose to adopt Sprint's unlimited phone, text, and data plans in record numbers.

Sprint's CEO, Dan Hesse, who was this year's CTIA chairman, has vocally opposed the tie-up between AT&T and T-Mobile, starting the day after the proposed merger was announced. At the CTIA show where the FCC Chairman spoke, Hesse said it would put other carriers -- such as Sprint, the fourth-largest US wireless provider -- at a disadvantage.

Analysts are now saying that Sprint's gamble might pay off, as T-Mobile has limited cash to build out its current spectrum. On the flip side, Sprint's commitment to $20 billion in iPhone inventory may leave it without the necessary cash flow to build out the additional spectrum. The company has a dubious history of merging dissimilar spectrums, as witnessed in the Nextel-Sprint merger, and the addition of T-Mobile dissimilar spectrum could cause additional headaches.

Verizon Wireless, on the other hand, seems unphased by all the merger talk. Verizon leads in terms of the number of total U.S. subscribers, a position that could be threatened by the merger, but the company's CEO sees the spectrum crunch as such an important need that it makes the merger almost "too big to fail" in the long run.

"I have taken the position that the AT&T merger with T-Mobile was kind of like gravity," said Lowell McAdam, Verizon Wireless CEO at a September analyst meeting. "You have a company with a T-Mobile that has the spectrum but doesn't have the capital to build it out. AT&T needs the spectrum, they don't have it in order to take care of their customers, and so that match had to occur."

McAdam, according to BoyGenius Report, also said that governmental "blocking of the proposed merger, without providing a solution to the current spectrum crunch, will ultimately harm American consumers". 

Benefit to T-Mobile?

For the time being, the spectrum specter may turn out to be a cheerful ghost of Christmas present for T-Mobile: even if the AT&T merger doesn't go through, the $4 billion cash  infusion from the "break-up" clause in the AT&T merger deal might breathe new life into the number four U.S. wireless carrier.

T-Mobile and its parent company, Deutsche Telekom, may use the capital to build out the spectrum, although with the uncertainties in Europe, it may be that the assets go into a contingency fund. T-Mobile is the only one of the top four U.S. wireless carriers that lacks the ability to sell the Apple iPhone, which could cause customer churn and impact fourth quarter earnings, now that the iPhone 4s is available on AT&T, Sprint, and Verizon Wireless.

In an earnings call in early November, the company's CEO said T-Mobile would focus on its spectrum as a key differentiator, regardless of whether or not the deal were approved.

"We will focus on making smartphones affordable to all Americans," said Philipp Humm, CEO of T-Mobile's USA subsidiary, "through our unlimited Value plans, improvements to our 4G network, and an expanding portfolio of 4G devices."

T-Mobile's Value Plans are a marked shift toward a growing segment of T-Mobile's business, those who buy a pay-as-you-go SIM card.  The plans are more  in keeping with many European prepaid plans -- like Virgin Mobile's -- that now offer one or two gigabytes of data along with a set number of minutes on a pre-paid SIM card, and T-Mobile is seeing a significant rise in customers opting for these no-contract plans.

Whatever the outcome of the February antitrust trial, and the proposed merger of AT&T and T-Mobile, one this is certain: the specter of spectrum allocation isn't going away any time soon.

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