AT&T, T-Mobile and a Maturing Wireless Industry

As AT&T is braces for a battle royale with regulators over its move to acquire T-Mobile from Germany’s Deutsche Telekom for $39 billion, it might be wise to remember that cellular phones, although still perceived as “new,” are nearing the end of their third decade.

Modern wireless phone service launched commercially in 1984, the wake of AT&T’s historic divestiture. At the time, there were still seven Bell operating companies that had wireless operations scattered in major markets across the U.S. In each market, there was a “non-wireline” competitor, usually a local company, for which the FCC had carved out room.

Several waves of consolidation, plus the availability of more spectrum, brought us to where we are now: four major national service providers and a number of regional players. The AT&T/T-Mobile deal would indeed reduce the national field to three, but the contention, as voiced by Public Knowledge’s Gigi Sohn, that the result will be “higher prices, fewer choices, less innovation,” the same chorus heard with AT&T merged with BellSouth, is highly debatable for several reasons.

Despite what the FCC may think, the wireless industry is highly competitive. Prices continue to fall, value per dollar continues to rise, and consumers enjoy more options. Those worried over lack of innovation need only look at the hoopla over Verizon’s rollout of Apple’s iPhone. Add that to the sniping over service and coverage, and a picture emerges of a group of companies engaged in an aggressive battle for consumer mindshare, something that doesn’t happen in a monopolized market.

It seems that you can’t turn on TV without seeing a wireless ad. Metrics prove the perception. Verizon was the most advertised brand name in 2009, according to Advertising Age, spending more that $2.2 billion with U.S. media. AT&T was second with more than $1.9 billion in spending. Amid rumors of a T-Mobile-Sprint hook-up, After referencing these numbers, AdAge earlier this month projected that such a combination move it ahead of Walmart into third place total media spending.

It’s true that long-term contracts and early termination fees get negative press, but it’s also an open secret that a consumers, especially families looking to port three or four accounts, can easily cut a deal with a new carrier that will cover any penalty for switching.

Service providers are not driving the industry. The chief concern behind antitrust is the fear that company dominant in one sector could leverage that dominance to unfairly control another. With AT&T/T-Mobile, there might be more heft to this worry if service providers were still the most influential segment of the wireless ecosystem.

While this might have been true up to a few years ago, I would argue that companies like Apple and Google are in the drivers’ seat and have pushed service providers into a reactive position.

Right now, Apple’s iPhone and iPad, and Google’s Android operating system, are doing more to stimulate demand for wireless broadband products and applications than anything the service providers can deliver. The biggest rap against AT&T lately have been customer complaints that its network couldn’t handle the data communications loads the iPhone placed. Indeed, much of the company has spent the last several years trying its upgrades on pace with iPhone uptake. One motivation for T-Mobile’s sale is that it lacks the spectrum to make a timely upgrade to the next generation wireless technology, known prosaically as Long Term Evolution (LTE).

If AT&T and T-Mobile remain separate, innovation may actually suffer (more on that in a moment). As smartphones, tablets and e-book readers become more prevalent, the technology demands the end-user equipment places on the network all but requires that service providers be well-capitalized. A combined AT&T and T-Mobile will be much stronger in this respect.

Economies of scale will matter for rural service delivery. Expansion of rural broadband remains the industry’s biggest challenge, and even President Obama has recognized that wireless, once derided as “poor man’s broadband,” will have a major role.

But rural buildout will occur faster if service providers have better economies of scale. Here again, the merger reduces the risk while increasing the incentive. The value and utility of a network increases with each connection. With more subscribers and coverage, a merged AT&T/T-Mobile will be able to push out into low density areas with greater efficiency and gain a better and faster economic payoff.

What are T-Mobile’s alternatives? Competition will not be served by allowing weaker players to wither on the vine. As noted, T-Mobile has little groundwork in place for 4G LTE in markets where AT&T is moving ahead. T-Mobile and Sprint were reportedly in talks, but their network technology is incompatible. And although AT&T’s customer satisfaction problems got widespread coverage, it’s been T-Mobile that’s been losing ground.

Here’s some analysis from today’s New York Times dealbook page:

But not even its reputation for sterling customer service could compensate for its much smaller coverage area and less robust phone lineup. Of the four major American carriers, T-Mobile often suffered the highest rate of customer defections, known within the industry as churn. For the fourth quarter last year, the unit reported a 3.6 percent churn, up both from the previous quarter and from the same period a year earlier.

Ultimately, T-Mobile was “not a good investment,” one fund manager told Bloomberg News earlier this month, adding: “Deutsche Telekom had been a tepid player at best, and their dedication to the market was never all that strong.”

The U.S. wireless service provider industry is maturing. With maturity comes consolidation. The FCC and FTC should be recall missteps made in the past, such as the decision to block the merger between brick-and-mortar rental chains Hollywood Video and Blockbuster, which resulted in the demise of the former and the bankruptcy of the latter. There might not as bad an outcome here, but it’s important for regulators need to see past simple numbers (4 vs. 3; regional vs. national) and consider the best route to keep the wireless industry both competitive and robust. Seen in this light a AT&T and T-Mobile combined may be of far more benefit to consumers than they would as separate entities.