5 Questions the AT&T, T-Mobile Deal Raises

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It's mega-merger Monday as the business world mull's AT&T's decision to purchase wireless competitor T-mobile for $39 billion. The deal is a huge one that will shake the mobile service provider market. It raises a number of questions. Here are five big ones:

Will Regulators Balk?

The biggest obstacle to the completion of this merger is regulatory risk. It's a horizontal merger, which means that it's one direct competitor buying another. It will beef up the portion of the market that AT&T controls, possibly give it access to a few more devices, and provide it the ability to improve its network a little. But regulators might not be crazy about the fact that it will provide AT&T with 39% of the market share -- putting it ahead of Verizon. The two carriers will now vastly dominate the market. The oligopolies that exist will grow even stronger.

Will It Make AT&T #1?

Even though AT&T will have the biggest piece of the market if the deal succeeds, it may still be viewed by some consumers as inferior to Verizon. It has been plagued for years by complaints about its network. But this acquisition could help to solve this problem, since AT&T and T-Mobile have compatble networks. This is actually one of the chief benefits that AT&T is bragging about. From the Shayndi Raice and Anupreeta Das at the Wall Street Journal:

On Sunday, AT&T pitched the deal as a way to solve network congestion, by combining two operators using the same technology and alleviating a spectrum shortage that would keep T-Mobile from building a next-generation network.

This acquisition could be what AT&T needs to solve its biggest problem.

Who Are the Big Winners?

While the deal may help AT&T, big acquisitions like this tend to have a pretty poor track record of adding as much value as they cost, even if regulators do manage to let this one happen. But whether it works for AT&T or not, there will still be two clear winners. Here's Andrew Ross Sorkin, Michael J. de la Merced and Jenna Wortham from the New York Times explaining that T-Mobile parent Deutsche Telekom and Wall Street should be very, very pleased:

At $39 billion, AT&T would be paying a significant premium to most analysts' estimates for T-Mobile. Bank of America Merrill Lynch valued the subsidiary in December at about $23.2 billion, while a team from JPMorgan Cazenove valued it at about $25.5 billion.

The deal is expected to be a boon for Wall Street with more than half a dozen firms collecting hundreds of millions of dollars in fees.

This is probably the best thing that could have happened to T-Mobile from Deutsche Telekom's perspective. It held a weak fourth position in the marketplace, so its growth would have been difficult. But that 53% to 68% premium must make its shareholders quite happy.

Can Sprint Survive?

One clear loser in this deal is Sprint. It will be a distant third to the two dominant positions of AT&T and Verizon. Sprint has only around 11% of the market share, while almost the entire rest of the market will be held by two competitors. It's hard to see how Sprint progresses much with that kind of market dominance by its competitors in an industry like wireless, where network capacity and reach are what matter most.

Will Consumers Be Better Off?

Consumers will be another big loser -- probably. Most of the time when consolidation occurs in an industry with few participants and high entry costs, you see oligopolistic economics become even worse. Firms can set prices higher than if there were more competitors in the landscape. Technological progress also generally slows, because there's less incentive to compete.

But that assumes that AT&T and Verizon don't ramp up competition even more fiercely now that they'll be near equals. Could they start lowering mobile plan prices and providing bigger discounts on devices? It's possible, but unfortunately, oligopolies tend to move in the other direction, making consumers worse off.

Bonus Question: How long will it take for commercials like this to disappear?

Probably not very long!

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
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