TOPICS > Economy

How Will Consumers Fare in T-Mobile, AT&T Merger?

March 22, 2011 at 6:10 PM EST
AT&T announced plans on Monday to buy wireless competitor T-Mobile for $39 billion. If approved, the sale would create the U.S.'s largest wireless carrier. Ray Suarez talks with Jeffrey Silva of Medley Global Advisors and Gigi Sohn of Public Knowledge about the merger's potential impact on consumers and the industry.
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JEFFREY BROWN: And finally tonight, assessing how consumers will fare with a major cell phone company merger.

Ray Suarez has the story.

RAY SUAREZ: A proposed new giant in the cell phone world has people talking and some consumers wondering about the impact.

As one customer put it:

MAN: The market is going to be a little less competitive.

RAY SUAREZ: But:

MAN: I’m getting an iPhone now.

RAY SUAREZ: AT&T, the nation’s second largest carrier, plans to buy fourth-place T-Mobile, in a deal valued at $39 billion. The combined company would become the largest U.S. carrier, with nearly 130 million customers.

AT&T wants to acquire more airways, or spectrum, to support the high-volume data needs of devices like smartphones.

RANDALL STEPHENSON, chairman & CEO, AT&T: The purpose of this transaction is that you have two companies who have very complementary spectrum, which is very valuable in this industry, to bring these services to market.

RAY SUAREZ: But the deal would also reduce the number of national wireless carriers from four to three, with Verizon Wireless currently the largest carrier and Sprint a distant third.

As an industry conference in Florida today, Sprint CEO Dan Hesse said, “I do have concerns that it would stifle innovation and too much power would be in the hands of two.”

And with the proposed company representing 43 percent of all U.S. cell phones, it’s sure to face Federal Communications Commission scrutiny over network access and Justice Department concerns over competition.

For more now about the deal and what it means for consumers, we’re joined by Jeffrey Silva, a senior policy director for Medley Global Advisors, a financial consulting firm that works with telecom companies. Prior to that, he spent more than 20 years covering the industry as a reporter. And Gigi Sohn is president and co-founder of Public Knowledge, a nonprofit group focusing on consumers and communications concerns in the digital age.

Let’s start with price. What’s the immediate impact on consumers if this deal goes through, not only the customers of the two companies in question, but anyone who has a cell phone account.

Gigi Sohn?

GIGI SOHN, Public Knowledge: So, we’re talking about the combination of the second largest and fourth largest wireless carrier, national wireless carrier.

And when you have that kind of combination, that reduces competition. When you reduce competition, it reduces consumer choice. It raises prices. It reduces innovation, and importantly for this administration, it also results in fewer jobs.

RAY SUAREZ: Jeffrey Silva.

JEFFREY SILVA, Medley Global Advisors: I think it’s a mixed bag right now. And I think the jury is still out on what the impact would be.

The combined companies have vowed to extend coverage to areas where it’s economically not feasible right now. And with the added spectrum, service quality could increase as well. And residents who have never had iPhone, haven’t had access to iPhone or iPad, they will gain access.

As far as whether prices go up or down, the trend in the wireless industry has been to date that even as there has been increased consolidation, prices have come down. That doesn’t mean that trend will stay that way, but that’s been the trend in the past decade.

RAY SUAREZ: In the particular case of AT&T taking over T-Mobile, T-Mobile was known as a low-cost provider in this competition of the big national players. By taking out that particular company, does it lift some of the downward pressure on prices?

JEFFREY SILVA: It could.

And I think that will be a flash point in the debate over this merger. I think policymakers, both at the FCC, in Congress, and the Justice Department will look closely at that. And it could be that that is addressed if the merger moves forward toward approval in conditions.

I would note that in recent FCC merger approvals that have involved broadband, the FCC has extracted concessions whereby there are low-cost pricing tiers for broadband for a number of years. And it may be that, in this case, to win approval, AT&T would have to make a similar concession.

RAY SUAREZ: Well, you heard Jeffrey Silva bring up the possibility of improvements in service, in coverage, because there — that’s been a blind spot for both these individual companies, but perhaps as merged ones, they have a more filled-in American map.

Is that a countervailing value here?

GIGI SOHN: I don’t believe so. AT&T could take the $39 billion it wants to pay for T-Mobile and improve its network right now.

So, what they’re doing is they’re taking the easy way out. Instead of taking all their money — and they’ve got lots of it — and putting it into improving their network, building out the spectrum they already have — they have a lot of spectrum they haven’t built out yet, OK — and improving their service, they’re instead buying off a competitor.

And let me talk about the prices that Jeff talked about. He talked about how the GAO did a study showing that cell phone prices had not increased, had gone down in 10 years, even though there was some consolidation. That was for cellular phone service. Nobody uses the phone anymore. The New York Times just had a story about that.

Today, it’s all about broadband. It’s about broadband Internet access. It’s about text-messaging. And there’s no evidence that during times of consolidation, those prices have gone down. In fact, what you’re seeing right now and what AT&T does a lot of is what is so-called broadband caps, so bandwidth caps.

So in other words, it says if you go over five gigabits of usage in a month, you have to pay overage fees. And that turns out to be very expensive if you go over.

RAY SUAREZ: Jeffrey Silva, what about that, that people are using it, yes, as a phone, but also as a way to surf the Web, to play games, to text, to do many other things besides just have a conversation.

JEFFREY SILVA: Well, it’s true that the nature of the industry has changed. It’s all about data. It’s all about multimedia content.

And to some extent, the carriers are underwriting or subsidizing the cost of the equipment in order to get new customers. But there’s no doubt that that is the growth area of these wireless companies.

And as far as the purchase, I would look at that…

RAY SUAREZ: Well, wait, wait. Underwriting the equipment, so that you can subscribe to expensive new services, right?

JEFFREY SILVA: Yes. But there’s choices on tiers, so you’re not tied into any one. You have — they give you some different tiering, different pricing arrangements that you can enter into. And so you’re not locked into one. You have got some choice.

GIGI SOHN: But if I could just add, there are other extra fees that have also occurred. So, if you want to cancel your contract before two years, you have to pay heavy termination fees, sometimes upwards of $200, OK?

So, there’s all these kinds of hidden costs, having a two-year contract to begin with.

RAY SUAREZ: But is that necessarily implicated by this deal? Will that be easier to do or less easy to do, based on the terms of what the federal government says as a referee, OK, you can go ahead with this merger?

GIGI SOHN: Well, as you indicated, you know, T-Mobile has a reputation and a history of being a lower-cost carrier, having unlimited data plans, OK, being more flexible with openness, and, you know, what applications you could use on their network.

They have been a very, very big promoter of Android, which is the Google operating system. AT&T has been the exact opposite. It’s been more closed. It has a long history of blocking applications. I can discuss that, Google phone.

RAY SUAREZ: No, no.

GIGI SOHN: OK. If you don’t want me to do that, it’s fine, no problem.

RAY SUAREZ: I need time for Jeffrey Silva to respond to what you had to say.

JEFFREY SILVA: Well, I think, again, the industry’s – what’s happening here is that AT&T is making a bet on the future. It has spectrum now, but a lot of this deal goes to the issue of what drives a wireless industry. There’s a limited amount of spectrum. The demands on the networks are increasing.

And the fixed-line businesses of telephone companies like AT&T and Verizon, that’s a waning business. And so they’re making a bet on the future. To wait — they need spectrum. And while the Federal Communications Commission is aggressively trying to find new spectrum or free up existing spectrum that other services hold, that is a very long-term endeavor. And I think they realize that. And they went for this deal.

RAY SUAREZ: Jeffrey Silva, Gigi Sohn, thank you both.

GIGI SOHN: Thank you.