March 26, 2011

AT&T merger with T-Mobile may cut competition

Investors cheered AT&T's proposal to buy rival T-Mobile USA for $39 billion, but wireless-phone users might not be so enthusiastic.

If the deal receives the blessing of regulators - probably no sooner than next year - the resulting company would be more able to meet the rising demands of mobile-phone growth, with coverage extended to more users in small towns and rural communities in Arizona and elsewhere, the companies said.

But consumers might not see improved call quality and could face higher prices, observers warned.

"My sense is that, in the end, this will not be good for consumers because it will reduce choice," said Dan Gillmor, director of the Knight Center for Digital Media Entrepreneurship at Arizona State University.

Casey Thormahlen, a senior analyst at researcher IBISWorld in Los Angeles, said, "It's hard to identify a distinct benefit for consumers unless they hold AT&T stock."

The proposed deal raises key questions regarding network coverage, pricing, service quality and the viability of competitors.

AT&T and T-Mobile, a unit of Germany's Deutsche Telekom, are two of the biggest four wireless providers in Arizona and most other markets, along with Verizon and Sprint.

A merger would leave the combined firm and Verizon with a "duopoly," said Gillmor, with Sprint and smaller players a step or more back.

Specifically, AT&T would have 40.1 percent of the U.S. wireless-market share, said Thormahlen, up from 28.6 percent now. Verizon has 33.2 percent; Sprint, 17.2 percent; T-Mobile, 11.5 percent; and smaller players the rest.

Gillmor said that would be like having two giant U.S. airlines, complemented with several small regional carriers.

Some observers already are speculating that Sprint might not survive.

"The proposed merger would leave Sprint a distant third in what would then be a Big Three wireless market, and some analysts predict that it, too, would need to seek a partner," Paul Reynolds of Consumer Reports wrote in a commentary.

Competition also could narrow, possibly putting upward pressure on the prices wireless users pay.

"T-Mobile is the only one that's now competing seriously on price," Gillmor said.

Consumer Reports research indicates that T-Mobile charges less than many competitors on various plan types, Reynolds said.

"It's possible, even likely, that after a merger, these lower rates will continue only until T-Mobile's contractual obligations are up, and then they'll rise to the levels of AT&T and other major carriers," he wrote.

However, Thormahlen doesn't see prices changing much because regulators almost certainly would insist on concessions before approving the deal.

For example, he predicts that AT&T would have to provide open access to smaller competitors, allowing them to use its network.

Still, AT&T probably would become more profitable after a merger, Thormahlen said, and he predicted layoffs involving duplicative sales, customer-service and management staffs at the two companies.

The merger also raises customer-service questions.

A recent report by J.D. Power and Associates showed AT&T and T-Mobile trailing Verizon in quality of use nationally and in a 16-state Western region that includes Arizona in quality among users.

In the West, Verizon had the fewest reported problems among the four big players. Sprint was next, T-Mobile third and AT&T last, with a problem rate nearly double that of Verizon's.

The full J.D. Power survey elicited responses from 26,000 wireless users nationally and focused on several problem areas, from dropped calls to delayed messages. Overall call quality had improved steadily since J.D. Power conducted its first study in 2003 but has halted recently.

This is largely a function of the changing ways wireless customers are communicating, such as more frequent texting and placing more calls from, or to, indoor locations, said Kirk Parsons, senior director of wireless services at J.D. Power.

"Clearly, the industry has improved since we started our coverage," he said. "But the way customers are using phones has changed, and they're using them more in places where coverage isn't the best all the time, such as inside buildings and at home."

Reynolds also raised service questions, citing Consumer Reports survey results that show "AT&T to be the clear worst wireless carrier in the country, with below-average scores in almost every attribute."

But Thormahlen said he expects service to improve, in terms of fewer dropped calls, higher and more consistent connection speed, and so on.

In their merger announcement, AT&T and T-Mobile predicted call quality will improve and cited a government report showing wireless pricing generally has declined over the past decade despite an industry-consolidation trend.

The companies also say the merger will expand coverage, especially in lightly populated areas, thanks to increased cell-tower density, broader network infrastructure and other factors.

"AT&T will immediately gain cell sites equivalent to what would have taken on average five years to build without the transaction," according to the joint announcement.

However, Thormahlen said he doesn't think rural coverage will expand much, because T-Mobile focuses on urban areas.

The proposal has been approved by the boards of both firms but awaits Federal Communications Commission approval.

Even if the deal is approved, the process could extend into 2012.

Gillmor of the Knight Center said he hasn't seen many indications that the Obama administration is focusing on enforcing antitrust laws.

"And no amount of (regulatory) tinkering would change the basic anti-competitive nature of this," he said.

Parsons said it's too early to tell whether the merger will be good for T-Mobile or AT&T customers.

But the delay, he said, offers an opportunity for users to "get educated, do your homework and look at other providers in your market."

by Russ Wiles The Arizona Republic Mar. 22, 2011 07:04 PM

AT&T merger with T-Mobile may cut competition

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