FCC Review of AT&T/T-Mobile to be Granular, May Take More Than Year, Official Says

The Department of Justice’s Antitrust Division will have the heaviest lifting in the early stages of review, analysts and the FCC official said. Months ago, FCC Chairman Julius Genachowski told his staff that he wanted them to work closely with Justice on divestiture questions in wireless mergers, the commission official said. An agency spokesman declined to comment on staffing.

AT&T CEO Randall Stephenson doesn’t think divestitures will be required to complete the deal, but things could change, he said Monday. He and AT&T General Counsel Wayne Watts each said they were confident that regulators would approve the T-Mobile purchase. AT&T gave “a head’s up” to the FCC and the Justice Department on the deal but hasn’t started formal conversations, Watts said. AT&T agreed to a $3 billion break-up fee if the deal doesn’t close, transferring to T-Mobile certain AWS spectrum that’s not needed by AT&T for its initial LTE rollout, and to provide a roaming agreement to T-Mobile on terms favorable to both parties.

Genachowski refused to be drawn out on what he thought about the deal, when speaking Monday at a National Telecommunications Cooperative Association meeting in Washington. “I encourage NTCA companies to work with the commission in an approach to reverse auctions that makes the most sense and look at the upsides of the reverse auction process,” he said later. Genachowski was responding to NTCA CEO Shirley Bloomfield’s concerns of reverse auctions not working well for the small carriers. The FCC will “insist on accountability in a rigorous way,” Genachowski said.

Whether or not the deal goes through, AT&T deserves credit for boldness, analysts at Stifel, Nicolaus wrote investors. “If the government ultimately blocks the deal … AT&T would still have accomplished significant strategic defensive objectives: blocking T-Mobile from acquiring additional spectrum to push out an LTE build and blocking a Sprint-T-Mobile deal, at least in the short term,” they said. “The main cost to AT&T would be the break-up fee and being sidelined on more aggressive lobbying on special access, wireless data roaming and possibly slowing the AT&T-Qualcomm spectrum deal review.”

The deal may have trouble because of its international implications, said Bingham telecom lawyer Axel Spies, who often represents German clients. “It certainly doesn’t help their approval process in the U.S. that Germany is listed on the U.S. Trade Representative’s blacklist for market obstacles in the telecoms sector.” T-Mobile’s parent company, Deutsch Telekom, is based in Germany. “CompTel filed another public complaint last December that doesn’t paint a rosy picture of competition in Germany,” Spies said. “A new USTR report is due in April. I am sure the other U.S. agencies will read it carefully."

The deal “is not a good development for competitive carriers,” said Rural Cellular Association President Steve Berry. “Rural America stands to be the most negatively impacted by approval of such a ‘mega-merger’ without significant conditions to ensure competitive forces are not eliminated as a result. The FCC must look to bring more of the competitive forces back into the wireless industry through data roaming, interoperability, success-based USF reform and a competitive spectrum allocation policy."

Groups like Public Knowledge and Consumers Union rushed to pan the proposed deal Monday. Public Knowledge Legal Director Harold Feld said AT&T likely didn’t agree to net neutrality rules just to win eventual support for such a merger. “I doubt it is anything as gross as a quid-pro-quo, but it is certainly the case that the goodwill AT&T generated with the chairman’s office will serve them well during review of this merger,” he said. “No matter how they may try to set that aside, public policy is made by human beings and these relationships are important. That said, I'm not sure there is enough good will in the world to push this through. Sprint-T-Mobile would have been a tough sell. This is significantly harder.” Feld predicted AT&T will focus on conditions tied to spurring broadband deployment in low-income communities: “Even so, I am not sure that AT&T can give enough to make this merger worth it for the Democrats."

The U.S. Distance Learning Association and the Institute for e-Health Policy weighed in on AT&T’s side. “By extending 4G technology to some 95 percent of Americans, combining the AT&T and T-Mobile networks will open up vast new opportunities for telemedicine services, especially in rural and other underserved communities,” the e-Health Institute said.

State-level authority over such mergers varies greatly, said Brian O'Hara, NARUC legislative director. “I suspect some of the about 18 states with jurisdiction over wireless would weigh in on some level.” He expects the states in which T-Mobile has an eligible telecom carrier designation would have more interest in reviewing the deal, and might seek specific commitments regarding the Universal Service Fund, which the FCC might require as well. T-Mobile is an ETC in Florida, Kentucky, Washington and Puerto Rico, according to data from the Universal Service Administrative Co.

The next step in T-Mobile USA’s technology evolution would be LTE, but the carrier, which has been rolling out an HSPA network, doesn’t have a clearcut path to broad deployment of LTE without obtaining access to more spectrum, or re-farming of existing spectrum, a Deutsche Telekom spokeswoman said. DT is confident that the deal will get regulatory approval due to the “significant” consumer benefits, she said. In addition to LTE expansion, the merger would accelerate the development of new and innovative services for consumers, she said. Both companies operate networks using the same technology GSM, and network integration will bring customers “almost immediate improvement in coverage and quality,” she said. Though the deal might come as a surprise, DT said since 2010 that it’s looking at a number of options for its U.S. business, she said. The deal, if approved, still secures DT’s access to the U.S. market -- DT would become AT&T’s biggest single shareholder -- and lets DT concentrate on the European market, she said. The transaction largely completes the “Fix” part of DT’s “Fix, Transform, Innovate” strategy, she said.

"Until the transaction closes, AT&T and T-Mobile will continue to independently operate as separate businesses, vigorously competing in all areas just as we do today,” an AT&T spokesman said, asked about what the deal means for D-Block debate. AT&T wanted reallocation, while T-Mobile advocated for auctioning.

A combined AT&T and T-Mobile would be almost three times the size of Sprint, a Sprint spokesman said. If approved, the merger would result in a wireless industry dominated “overwhelmingly by two vertically-integrated companies that control almost 80 percent of the U.S. wireless post-paid market” as well as control the availability and price of key inputs like backhaul and access needed by other wireless companies to compete, he said. The transaction would alter “dramatically the structure of the communications industry,” he said. Sprint shares fell 13.6 percent Monday. An option for Sprint is to acquire prepaid carriers MetroPCS or Leap Wireless, some analysts said. Sprint was reportedly in talks with DT about buying T-Mobile USA. The merger highlights the need for better spectrum policy, an industry official said. It offers a good opportunity to talk about spectrum issues, he said.

LightSquared, which plans to sell wireless and mobile satellite service wholesale, said the deal would likely increase demand for its coming network. The AT&T/T-Mobile deal “would occur in an already highly concentrated industry sector, and would not itself bring more spectrum to market to serve rapidly growing demand,” said LightSquared. Approval would “heighten the need” for LightSquared-like services, the company said. The FCC “must continue to take other steps to foster competition and innovation in the market for wireless services, and to avert the looming spectrum crisis that threatens to constrict the explosive growth of broadband services. Only by rapid and enlightened regulatory action will the American public get the full range of broadband services that it requires and deserves,” the company said. LightSquared said it is ready to “assist” in the regulatory review “as requested."

The Communications Workers of America supports the deal, a spokeswoman said. Potential layoffs aren’t a concern, she said. AT&T ownership would mean better employment security and a management record of full neutrality toward union membership and a bargaining voice, CWA President Larry Cohen said. The deal could provide a fresh start with T-Mobile management for T-Mobile USA workers, he said. Some 42,000 AT&T Mobility employees are union-represented. Since it entered the American market in 2001, T-Mobile has been repeatedly criticized by CWA for its employment relations.

Many analysts claimed that the proposal is a win for AT&T and DT, which will be able to easily integrate their networks, but a negative for Sprint and Clearwire. Standard & Poor’s estimated that AT&T would have some 130 million subscribers, “substantially more than its nearest competitor Verizon Wireless.” Integration risks would be partially mitigated because both companies use GSM, S&P said. This deal could also be positive for Verizon because it could result in a less aggressively competitive wireless market in the long term, some analysts said. Still, Verizon CEO Ivan Seidenberg has been “unconvincing in his attempt to convince investors that they are not in need of spectrum and AT&T just shined a bright light on this apparent bluff,” said BTIG analyst Walter Piecyk. Over time, Alcatel-Lucent, the dominant vendor at AT&T, would gain market share in the combined entity, Jefferies analysts said. Expansion of LTE networks would also benefit Ericsson, also an AT&T vendor. Near term, Alcatel-Lucent could be impacted by slowing infrastructure spending as the companies focus on merger approval and integration, they said.

Tower company Crown Castle said AT&T represented 21 percent of Crown Castle’s consolidated revenue, and T-Mobile 11 percent, and there are about 4,000 Crown Castle towers on which both carriers currently reside. Crown Castle’s revenue from T-Mobile on these 4,000 towers represents 6 percent of its revenue. There’s an average of about 12 years remaining on all lease agreements with AT&T and 7 years for T-Mobile, it said.

AT&T accounted for 20 percent of American Tower’s revenue, and T-Mobile 8 percent.