Original URL: http://www.theregister.co.uk/2011/05/11/senate_hearing_on_att_tmobile_acuisition/

AT&T spars with rivals over T-Mobile merger

No love lost at US Senate hearing

By Rik Myslewski

Posted in Broadband, 11th May 2011 23:12 GMT

During the $39bn squabble in a US Senate hearing room about whether AT&T's proposed acqusition of T-Mobile should pass antitrust muster, it was no easy feat to sift fact from fiction – although it was easy to discern that the stakes were high and the arguments passionate.

"First and foremost, this transaction is about consumers," promised AT&T president and CEO Randall Stephenson in defense of the acquisition at the Wednesday hearing. Stephenson may have described the acquisition as a "transaction", but one of his opponents – Victor Meena, president and CEO of Cellular South – preferred the less-neutral term, "takeover".

Stephenson described the proposed deal as being "about keeping up with consumer demands, specifically. It's about having the capacity to drive innovation at competitive prices, and most important it's about giving consumers what they expect – and that's fewer dropped calls, faster speeds, and access to high-speed, fourth-generation mobile internet service, whether they live in a large city, a small town, or out in the country."

Philipp Humm, the president and CEO of T-Mobile USA, painted his company as being in need of AT&T's help. After first telling the committee that he has only been CEO since November 2010 and that the company is just beginning to right itself after two years of decline, he stated that the results of his team's rebuilding efforts have been "mixed," with revenues stabilizing but subscriber losses continuing.

"Returning the business to growth, however, will not be sufficient to secure T-Mobile's strategic future," he said. "As data usage continues to explode, spectrum is becoming a constraint to our business, with T-Mobile facing spectrum exhaust over the next couple of years in a number of significant markets.

"Moreover," he added, "our spectrum holdings will not allow us to launch LTE." He ended his woe-is-us remarks by saying: "T-Mobile's parent, Deutsche Telekom, is not in a position to finance the necessary large-scale investment in the US for T-Mobile to really remain competitive."

Hooking up with fellow GSM-centric provider AT&T, Humm said, will solve a number of T-Mobile's problems through "extensive synergies," and "will greatly benefit the American economy, consumers, and particularly T-Mobile customers."

Sprint Nextel's CEO Daniel Hesse saw the benfits of acquisition in quite a different light. "I respect Randall and Phillip," he told the assembled senators. "They are doing their jobs, maximizing value for their shareholders. Unfortunately there are only three beneficiaries of the proposed transaction: the shareholders of AT&T, Verizon, and the sole shareholder of T-Mobile USA, Deutsche Telekom."

Cellular South's Meena agreed. "Over the past several weeks, we have carefully reviewed this proposed takeover. We can find nothing good about it. It's bad for consumers, it's bad for jobs, it's bad for competition," he said. "If regulators approve this acquisition, all that remains is the end game, where the remaining non-Bell carriers patiently wait their turn to be acquired or bled dry by the biggest two carriers."

Gigi Sohn, president and cofounder of the digital-culture public-interest group Public Knowledge, was equally blunt. "This transaction is a pivotal moment in US antitrust law. If that law means anything, this classic merger of one company buying out a smaller competitor in the same business must be denied."

Meena provided the senators with his version of the history of the mobile phone industry. When he had first started in business, back in the late 1980s, he said, there was a local duopoly in every market. Because of this, consumers had only two choices of wireless service, and "carriers virtually had no market incentive to innovate, or improve service offerings."

"In a duopoly," Meena contended, "the market can quickly reach equilibrium, and if both providers are reasonably happy with their positions, that's how things will stay."

That static period ended in the late 1990s, according to Meena, when "the wireless industry began to awaken." The FCC auctioned PCS licenses to new competitors who "built networks, attracted customers, and just generally disrupted established markets."

That disruption, he said, shook the duopolists from their comfortable positions, and a new round of price cuts, feature growth, and coverage-area increases began. The reason for these consumer benefits, Meena argued, was the end of the local duopoly system of wireless coverage.

Now, however, he sees the duopoly coming back with a vengance, and on a national level. In the middle of the last decade, he said, "we began to see Humpty Dumpty being pieced together again. Through unfettered mergers and acquisitions, it was only a matter of time before the former Ma Bell reconstituted herself into two Bell sisters of the wireless industry: AT&T and Verizon," he said.

According to Meena, AT&T's new-found clout has allowed it to withold roaming agreements, "balkanize" spectrum in order to dominate the 700MHz band, and wrangle exclusivity agreements on new phones – a competition-stifling activity mentioned not only by Meena, but also by Hesse, Kohl, and Senator Amy Klobuchar (D-MN) as an advanatge that smaller, regional carriers don't have.

It's all about competition. Or innovation. Or rural coverage. Or...

"The wireless industry thrives on competition," Sprint's Hesse said, "which in turn drives investment, innovation, consumer choice, job creation, and US global leadership in communications. If AT&T is permitted to devour one of the two remaining independent national wireless carriers, while the rest of the world achieves advances in technology and innovation for the 21st century, the United States could go backwards to our last century's Ma Bell."

Senator John Cornyn (R-TX) asked the panel whether they thought that a compabined AT&T and T-Mobile would encourage or discourage innovation. As might be guessed, opinions differed.

Before giving a direct answer, AT&T's Stephenson said: "One thing that you cannot say about this industry is that it has lacked for innovation. The innovation in this industry is happening at every layer of service ... from 2G, to 3G, to 4G in a five-year period of time."

After extolling innovation as embodied by the development of the iPhone, the introduction of Android – crediting Hesse's Sprint as being the first to introduce an Android device on 4G network – contributions by RIM, and Tuesday's acquisition of Skype by Micrsoft, Stephenson finally got around to answering the question.

"By virtue of T-Mobile and AT&T combining," he said, "I suspect Mr. Jobs will nt delay one day the launch of his iPhone 5, or 6, or whatever number comes next. I don't think it will affect his launch by one day of the next iPad. I don't think it will slow Google down one iotain terms of developing the new OS capabilities coming. Or Microsoft.

"I don't think the infrastructure players are going to slow down. And Dan [Hesse] has done an incredible jobs of bringing the first true 4G networks to the United States. I don't see Dan slowing down as a result of T-Mobile and AT&T coming together," he emphasized.

Dan Hesse responded: "Thanks, Randall for the plug – on Android, anyway – but I actually have to give credit to this innovator over here," he said pointing to Humm. "T-Mobile USA launched the first Android device, and they would be, of course, removed from the market."

Hesse then offered to the Senators what he referred to as a short history of innovation in the wireless industry. "The US led the world in 1G – first-generation, which was analog. And that was the first cell-phone call – it was invented in Bell labs, we had US companies like Motorola, and we had this duopoly.

"And it was important for the US government to respond and create more competition because we fell behind Europe. Digital technology – GSM, that was European – so we fell behind because of the lack of innovation in the US wireless market. We really hadn't innovated very much at all becasue it was a duopoly," he said.

The government then got wise, though, in Hesse's estimation, echoing Meena's story. "They opened up the US market to more competitors – PCS providers." Due to the innovation sparked by that competition, "The US is now number one in the world in terms of wireless technology," he said, citing a long lead in total 3G and 4G customers and implementations.

He also turned Stephenson's arguments about Apple, Google, and the rest against him. "The companies that Randall talked about – Google, and Apple, and Microsoft, and all these innovative companies – they've developed on our shores for a reason: because this is a very vibrant market. My concern is that if we go back to the duopoly, we will go back to pre-mid-90s, and the US will, in fact fall behind the world again, as we once did.

"We will lose that edge that we've regained, if you will, over the rest of the world," Hesse concluded.

A raft of other topics were discussed during the two-plus hour hearing – rural coverage, access to national roaming services for local carriers, whether prices would rise or fall for consumer – but each topic was met with rather predictable statements.

AT&T, for example, claimed that the merger would allow for more coverage of rural areas, while opponents of the deal said that AT&T already has plenty of unused spectrum that it could use to extend its rural reach without the addition of T-Mobile, and Senator Patrick Leahy (D-VT) said "I hope you'll forgive me if I'm a bit sceptical" of AT&T's promises to improve rural coverage.

As the hearing wound down, Senator Cornyn spoke to both the merger's proponents and opponents about the investments needed to enhance country-wide wireless broadband. "My personal preference would be to see the private sector makes those investments," he said, "not the taxpayer have to make those investments. How does this merger effect – either positively or negatively – the ability of companies like yours to make that sort of investment?"

Stephenson responded first, citing President Obama's stated public-policy objective of 90 per cent of the US covered by mobile broadband. "The elegance of this [acquisition] is that this is a private-market solution for a major public policy objective."

Hesse – surprise – saw things differently. "We do not believe this meger facilitates this goal in any way. But even if you believed it were the case, at what cost? Is it worth eliminating a very robust, competitive, extremely important industry to the US economy in order to achieve that goal? And I think the answer is no." ®