The Great Wireless Merger: Two Years Later - Commentary by Bert Foer and Sandeep Vaheesan

AT&T’s proposed acquisition of T-Mobile in 2011 is one of the more highly publicized mergers in recent years. In August 2011, the Department of Justice (“DOJ”) challenged the deal in court, alleging that it violated the antitrust laws. The Federal Communications Commission (“FCC”) came out against the merger a few months later. This consolidation would have reduced the number of national wireless providers from four to three. According to the DOJ’s complaint in district court, this deal would have further cemented the power of the Big Two – AT&T and Verizon – in the national wireless market and led to higher prices and diminished service for consumers. In response to the DOJ and FCC opposition, AT&T and T-Mobile abandoned the deal in December 2011.

Given the passage of time and the DOJ's recent decision to settle its big merger challenge (American Airlines/US Airways),it seems an appropriate time to evaluate the wisdom of the government’s then-controversial decision. In their answer to the DOJ complaint, AT&T and T-Mobile asserted that stopping the merger would “severely set back growth and competition in the wireless industry.” The early evidence, however, suggests that the agencies were absolutely correct to oppose the merger in court. Despite struggling for many years, an independent T-Mobile has in the short term become a dynamic competitor in the concentrated wireless market and delivered significant benefits to American consumers.

Under new CEO John Legere, T-Mobile, always a maverick in the industry, has reinvented itself as the “uncarrier.” The company has ended a practice long reviled by consumers – the two-year contract. Under these contracts, subscribers pay a low upfront “down payment” for a phone and a fixed monthly amount for the entire two-year term, even once the phone has been paid off. Imagine if a homeowner had to continue making mortgage payments after the principal and interest have been paid. Furthermore, customers can escape the contract only by paying large early termination penalties.

Per T-Mobile’s plan announced in March 2013, subscribers pay separately for their phone and monthly service. Once subscribers pay off the cost of their phone, they have to pay only for service. And at that point, they are free to take their phone and sign up for a plan from a competitor. Along with the greater flexibility and transparency, customers are likely to save money over one or two years with T-Mobile.

T-Mobile has also announced rate reductions. Charges on overseas roaming have been reduced or eliminated. In 115 countries, calls are $0.20 per minute and data use and texts free on all T-Mobile plans. Furthermore, the company offers 200 MB of free data per month to iPad users.

T-Mobile has also improved its service. In April of this year, it began offering the iPhone – a long-standing hole in its smartphone menu. T-Mobile now allows subscribers to upgrade their phone every six months. It has, moreover, built 4G capabilities in a very short span of time. At the beginning of 2013, it did not offer 4G service anywhere in the country. As of August, T-Mobile’s 4G network covers 200 million Americans. By way of comparison, AT&T’s and Verizon’s 4G networks each cover or will soon cover over 300 million. (These rollouts contrast with the pessimistic outlook in AT&T and T-Mobile’s merger filings: they claimed that neither party would be able to expand 4G unless they combined.) Perhaps less significantly but still to the relief of many, T-Mobile has eliminated the 15-second introductory message to voicemail. All of this puts pressure on the industry leaders to improve their own offerings, which is exactly what we want from competition.

T-Mobile’s effect on the wireless marketplace is already apparent. After eight consecutive quarters of decline, T-Mobile’s base of contract subscribers increased by more than 600,000 in both the second and third quarters of 2013. In both periods, T-Mobile’s net subscriber growth exceeded that of AT&T. Soon after T-Mobile announced its semiannual phone upgrade plan, AT&T and Verizon gave their subscribers the option of upgrading every year. Perhaps most tellingly, Verizon, which has long been the largest and most profitable wireless carrier, is forecast to record lower profits in coming years, due in part to increased competition from T-Mobile. Verizon’s loss is consumers’ gain.

Thus far, it is hard to dispute the government’s decision to preserve four independent players in the national wireless market. A combined AT&T/T-Mobile would have likely had more pricing power and increased carrier profits at the expense of the consumer. In an over $160 billion annual industry, even a small price increase can have large effects. Subscribers would collectively spend billions more each year – in effect, a tax collected by corporate executives and shareholders. The DOJ and FCC appear to have not just preserved but unleashed competition. Recognizing it will be independent for the foreseeable future, T-Mobile has shaken up a cozy oligopoly and delivered tangible benefits to consumers. And, in the process, it has demonstrated the public value of strong antitrust enforcement.

Albert F. Foer is President of the American Antitrust Institute, www.antitrustinstitute.org, and Sandeep Vaheesan is its Special Counsel. The AAI is an independent non-profit research, education, and advocacy institution in Washington, DC.

Contact information:
Albert Foer, 202 276 6002
bfoer@antitrustinstitute.org