Stubborn facts: Nuisances to critics of the AT&T-T-Mobile merger

{mosads}The cellular service market is a “small numbers market.” Small numbers markets are characterized by high, upfront fixed costs and offer low marginal revenues — economic factors that naturally result in only a small number of competitors in the market. Having a small number of competitors in these markets is actually a socially efficient result and is not necessarily indicative of anti-competitive behavior.  

Even ignoring major regional players such as MetroPCS and Leap, so long as there is not a resulting monopoly, a merger will have little effect on competition. Therefore, going from four to three major carriers will not significantly affect the dynamics of competition in the cellular service market.  

The empirical evidence supports this proposition. Based on data reported by the nonpartisan, U.S. General Accounting Office, wireless prices declined 50% from 1999-2009, a period marked by significant consolidation in the U.S. cellular industry.  

Stubborn Fact #2: T-Mobile is a failing firm.

Critics of the merger hem and haw that the merger will eliminate a competitor in the U.S. cellular market. Those grumbles, however, belie the reality. The truth is that T-Mobile is exiting the market, one way or another, because it isn’t competitive.    

T-Mobile does not have a flagship device, like the Droid is for Verizon (and like the iPhone was for AT&T). T-Mobile deliberately declined to invest in the next generation of cellular network technology. And, regional players like MetroPCS and Leap have usurped T-Mobile’s strategic price leader position.  

Although still technically profitable, the writing is on the wall. As measured by “churn rate,” a benchmark that assesses the rate of subscribers joining a network versus the number leaving for a competitor, T-Mobile lags far behind its competitors. T-Mobile’s quarterly profits for the fourth quarter of 2010 were the lowest in four years. 

T-Mobile’s parent company, Germany-based Deutsche Telekom, has apparently had enough. Prior to striking a deal with AT&T, Deutsche Telekom was reportedly considering a sale price that would have been roughly 40% of the price paid for companies it acquired to enter the U.S. market. 

T-Mobile is exiting the U.S. cellular market one way or another. In this light, the real question should be who can make the best use of T-Mobile’s assets. The answer to that question is AT&T. 

Stubborn Fact #3: AT&T and T-Mobile are compatible.

The real issue should be determining who can make the most of T-Mobile’s holdings. I am not saying categorically that a failing firm’s assets should be sold to the highest valued user; there are situations where that would harm competition. However, as described above, the nature of the U.S. cellular market eliminates that concern. As such, the compatibility between AT&T’s and T-Mobile’s access technology makes AT&T the only real option for acquiring T-Mobile.

T-Mobile and AT&T both use the same access technology: Global System for Mobile communications (“GSM”). The prevalent alterative to GSM is Code Division Multiple Access (“CDMA”) which is used by Verizon and Sprint. Without getting overly technical — I am a lawyer, not an engineer — basically, this means that AT&T and T-Mobile would have fewer problems integrating their networks. This, in turn, will save T-Mobile’s customers from the hassle of getting new handsets and will allow AT&T to make more efficient use of the combined firm’s scarce spectrum. One need only look back to the Sprint-Nextel fiasco to see the problems of a merger between cell carriers using different access technologies.  

To conclude, these are the stubborn facts. Whether the critics of the AT&T – T-Mobile merger inadequately address, misrepresent, or flat-out ignore them, a careful consideration of these facts shows that the proposed merger will not have an adverse impact on competition in the cellular market and in fact will ultimately benefit consumers in the form of improved service, more access, and increased innovation.

David A. Balto is a nationally-known expert on competition policy. Mr. Balto has over 25 years experience as an antitrust attorney in a career spanning the private sector, the Antitrust Division of the Department of Justice, and the Federal Trade Commission.