Original URL: http://www.theregister.co.uk/2011/03/21/when_dinosaurs_mate/

When dinosaurs mate: AT&T and Deutsche Telekom

FCC weighs up a Big One

By Andrew Orlowski

Posted in Broadband, 21st March 2011 17:11 GMT

Soon there may be only once place to go for Americans who want to use their phone abroad: the monopoly GSM supplier will be AT&T Wireless. This is not just any old monopoly, though. It has a special place in American infamy.

People who think they understand the United States, but only visit and have never lived there, are taken aback when they being to realise the deep-rooted antipathy of consumers towards the company they called the "Death Star". Loathing of AT&T really crosses all social boundaries, classes and tastes. Americans would throw garlic and make the sign of the cross at the mere mention of AT&T or one of the RBOCs (Regional Bell Operating Companies), such as PacBell. It's easy to forget that the "People of the United States" spent almost 60 years fighting the Bell monopoly. Yet, in barely 30 years since the Supreme Court-ordered breakup in 1982, it has mechanically reconstituted itself – a bit like two giant, animatronic doner kebabs. And one of these even has the brazen cheek to call itself AT&T. Well, that was 60 years of litigation well-spent ...

As a punter, I found AT&T Wireless never quite lived up to the horror billing. Energy utilities and even newspapers were even more incompetent. Of course, the company was always marked by the institutional decrepitude that goes with any former state monopoly, but that was no surprise. In Europe, we'd all grown up with them.

In the Bay Area, I was one of the first happy subscribers on AT&T Wireless' newly revamped GPRS network in 2002, in spectrum still used by its GSM-that-wasn't-GSM technology, TDMA. Of course it was a great network – nobody else was using it. It was so new, the paint was still wet. It got even better as TDMA was gradually turned off.

For me, the problems only started when another of the RBOCs-turned-kebab acquired ATTW through gravitational attraction. SBC took over, and for three years the operation was called Cingular. Prices went up and quality fell through the floor, and all of a sudden we started to hear how the Bay Area was a "challenging topology" for mobile network operators. It had been strangely fine before. Just it was fine for Verizon and the CDMA operators, at least in the urban counties. Maybe dozens of new hills had sprung up in San Francisco – and nobody had noticed.

But as AT&T Wireless got going in the 850Mhz spectrum, there was a glimmer of competition of sorts. Deutsche Telekom launched in 2002 with the T-Mobile brand. There was now somewhere to go if you wanted a GSM phone. The problem was DT was the worst of the debt-laden operators, so it made the most of very little. It had the PCS 1900Mhz spectrum, which was not as prime as the 850Mhz frequencies used by ATTW. It concentrated on a select few areas – actually building up a decent reputation in New York. But it didn't challenge with tariffs or a wider choice of better handsets.

When I last returned to the Bay Area, T-Mobile had become much sharper – learning that competition means something other than standing around and winning custom by default. It has made much more serious capital investment, building out an 3.5G HSPA network it calls 4G. Some of these improvements were simply ancient European ideas that nobody had brought along before, such as prepay. Or prepay SIMs. But I'm surprised today to read that people say they're surprised, because T-Mobile has never made the kind of ambitious noises that suggested it was ever going be anything other than a contended Fourth Player awaiting a takeover. T-Mobile always looked like an acquisition target to me – and there was only ever going to be one acquirer.

It's easy to blame the FCC – but who else do you blame?

If the takeover is approved, then, the implications will ripple out to consumers for years to come. The regulator will most likely approve the deal, setting the seal on 30 years of chaotic and contradictory policy making.

In the mid-1980s the Federal Communications Commission opened spectrum via lottery – a change from the technocratic beauty contests of the past 50 years.

Three-hundred-and-twenty thousand lottery tickets were issued, and while canny speculators made a fortune by "flipping" their tickets, everyone else lost. The taxpayer lost out on a bonanza from the true market price of the spectrum being realised; the administrative costs to operators were huge, as they sought to buy up the tickets they needed – costs that were naturally recouped from higher bills from consumers. The lottery cost left the taxpayer $300m worse off: the estimated cost of administration at the FCC. And it left the landscape fragmented. It was never attempted again. In the 1990s, the industry tried auctions, and lucky winners who overbid but were undercapitalised (notably NextWave) did not pass go, and went straight to the bankruptcy court.

Just as there's no such thing as a free lunch, there's no such thing as a free tax windfall. Operators that managed to extend their credit lines to win the dot.com era of auctions went on to recoup the money from punters, so tariffs stayed higher for longer, and capital expenditure picked up the burden; older 2.5G and (in the US) 2.75G networks stayed around longer than anyone expected. Where we saw smatterings of 3G, it was (with the exception of pure play 3G networks) under-provisioned and underwhelming. Then the US mobile market caught up with the rest of the world and overtook it – and all operators were creaking under the strain.

Particularly AT&T, which had further enhanced its historical affection by being the "Operator That Ruined The Magical iPhone Experience". Until a few weeks ago, if you wanted an iPhone that worked on US 3G, you needed to go to AT&T.

So the AT&T-T-Mobile USA merger is all about sites, spectrum and squeezing competition. And the guiding light of the FCC is again cloaked in confusion. To oversimplify it crudely, the FCC traditionally favoured an anarchy over homogeneity, believing a diversity of local choice would be better for competition. Recent beneficiaries of this have been ClearWire and LightSquared, the latter is a clever and ambitious idea to wholesale (proper, LTE) 4G network capacity off spectrum available to satellite networks.

The FCC has now all but given up, and will read the rites for its guiding principle if it approves the merger. It will make a few concessions – a few noises about Open Spectrum for the Google lobbyists – and declare that it's happy with three nationwide operators. But why not say so all along?

And I'm amazed to discover that if the FCC rejects the merger, Deutsche Telekom walks away with $3bn and spectrum. Nobody can lose from this, except, almost certainly, the punter. ®