Spectrum-or Lack of It-Remains the Problem with AT&T-T-Mobile

For all the talk about preserving competitive prices and quality service, opponents of the AT&T-T-Mobile merger won’t answer the most compelling argument for the merger-how else are wireless service providers going to get the spectrum capacity they need to support the bandwidth demands next-generation services are creating?

The irony is that critics say AT&T’s growing service complaints should be a point against its merger-that a company with a poor service reputation shouldn’t be allowed to gobble up a company with a better one. But AT&T’s acquisition of T-Mobile is a direct response to those service problems–namely to gain ownership of enough spectrum to support the voracious data needs of all those iPhones and iPads its customers keep buying.

And despite President Obama’s call for more a more widespread broadband infrastructure, the Federal Communications Commission shows no sign of moving forward with any sort of plan to reallocate spectrum currently held by broadcasters.

Policy is at loggerheads. The Department of Justice’s suit presents a simple choice: Attempt to preserve the competitive status quo, or allow market players to gain the economies of scale they need to deliver quality service. You can’t have both. Kevin Pritchard at Connected Planet, who confesses his own misgivings about the merger, summed things up very well last week in a thoughtful piece. The whole post is here, but this is how it wraps up:

Despite AT&T’s claims, no new capacity will be created from its merger with T-Mobile. We’re talking about a redistribution of spectrum-concentrating it among a few large operators, rather than dividing it among multiple smaller ones. In fact, AT&T has misrepresented a lot about what the merger would accomplish. Buried among its talking points, however, is a key argument: By concentrating spectrum assets, operators can achieve economies of scale they simply wouldn’t be able to achieve given their current resources. Of course, every monopoly has economies of scale. The big danger is that a larger operator won’t pass its savings on to consumers, instead using its new market power to raise prices and double its profits. That result is entirely possible under a merged AT&T-T-Mobile.

Regardless of how AT&T would exercise those economies of scale, there’s no question they would exist. AT&T could build much more high-capacity networks by combining it and T-Mobiles’ advanced wireless services (AWS) spectrum. It could build that high-capacity network on a single infrastructure, rather than divide it among two separate network builds. That network could not only support greater connection speeds to the device, but it could support many more of those connections simultaneously-all at a lower cost per bit.

We’re so enamored of the bright shiny new networks being deployed today, we tend to ignore the fact they have half-lives. Verizon Wireless is sitting pretty atop a 20 MHZ LTE network today, but it realizes that it will use up that capacity sooner or later (given the enormous demand for mobile data, sooner is more likely). That’s why Verizon isn’t opposed to AT&T’s acquisition. VZW knows it will be back in the acquisition market soon enough, looking for the spectrum it needs to grow. Ironically the sole operator in a spectrum position to exercise outsized influence in the market is Sprint, the operator that supposedly would be hurt most if the merger were to pass. Through its control of Clearwire, Sprint has more than 100 MHz of spectrum in the major markets, making it the only operator prepared to take the mobile broadband revolution head on (CP: Which operators emerged as winners and losers in the DOJ-AT&T fallout).

I may sound like I’m preaching doom and gloom here, but I do realize that the networks of Verizon, AT&T, Sprint and T-Mobile will be perfectly adequate to meet the smartphone and tablet Web surfing and app download demands of today. It’s a question of what the mobile data services of the future will be. If your idea of a mobile broadband future involves streaming a Netflix movie to a tablet–without paying $30 a pop in data fees–then the networks being built today just won’t cut it. The mobile devices and applications being built and designed have voracious appetites. They’ll need to be fed by massive networks.

Regulators face a quandary. They can preserve choice and competition in the market by banning any future operator mergers, but then they risk saddling consumers with mediocre networks. Or they can allow consolidation, creating the massive networks the administration so craves.