Market Overview

Cellular Catastrophe: AT&T And T-Mobile (T)


It's Merger Monday again. If all goes as planned, tomorrow could be Terrible Tuesday, followed by Wacky Wednesday and Tenacious Thursday.

Now that AT&T (NYSE: T) has announced its plans for world domination, consumers are left to wonder about the future of cellular phones. Despite the advent of smaller firms like MetroPCS (NYSE: PCS) and Leap Wireless (NASDAQ: LEAP), many are beginning to call the industry a two-horse race. With AT&T and T-Mobile united as one, the two would have the power to compete more effectively with Verizon (NYSE: VZ) while eliminating the ongoing threat of a Sprint (NYSE: S) takeover.

Reportedly, Sprint had hoped to strike a deal with T-Mobile. As a result of AT&T's announcement, Sprint's shares dropped more than 13% today, recovering only a small percentage (0.63%) in after hours trading.

Meanwhile, Leap was up nearly 16% today. At close, MetroPCS was up 4.76%. Verizon jumped around 2.53%, while AT&T's shares rose by 1.32%.

All told, it's clear that the market is starting to move away from Sprint.

Hurdles First, Hangover Later

It hasn't even been a week since the merger was announced and already critics are talking about antitrust laws, duopoly concerns, and other legal issues that could prevent the mobile marriage from occurring.

Earlier today, former FCC chairman Reed Hundt told CNBC that he feels that the cellular union has created the “defining deal” of the antitrust policy of the Obama administration.

Will the merger pass? All signs point to yes. After all, why would AT&T go through the trouble (and spend billions of dollars) on a merger that it wasn't almost certain it could complete?

On the upside, T-Mobile users may very well appreciate the merger. By uniting the two telecommunication giants, T-Mobile users will gain access to something that was once a pipedream: the Apple (NASDAQ: AAPL) iPhone. This would leave Sprint as the only major carrier that doesn't carry the iPhone, thus making its mobile offerings less attractive to Apple-loving customers.

T-Mobile users would also gain access to the wide variety of monthly plans offered by AT&T. This could be good or bad, depending on how T-Mobile customers feel about their current service plans.

Existing AT&T customers aren't likely to notice much of a difference this year, so they may not care about the outcome of the merger.

Long-term, however, the whole industry could be forced into higher rates.

It's A Board Game To Them, A Game Of Greed To Us

While AT&T will surely claim that the merger is not about raising our rates, it's important to remember that this is the same company that just announced a data cap for U-Verse subscribers. As our data demands increases with new technology, AT&T is expected to raise its cap above the current limit of 250GB per month.

Unfortunately, “expected” decisions don't help us much in a market in which AT&T is a growing player. If the company gains even the slightest degree of monopoly power in the mobile market, who's to say how it would react? Up until recently, AT&T owned the iPad market for 3G coverage. Consequently, users were subject to growing fees and ridiculous data plans. Shortly after the original iPad launched, the company eliminated its unlimited offering. Sure, we know the excuses (read: data hogs are evil). But instead of punishing every user, why not come up with a more creative way to profit from the hogs?

With T-Mobile no longer presenting a danger in cellular coverage, AT&T would not have any reason to play nice with consumers. Slowly, its corporate execs would whip out a few “growing expense” reports, followed by a dozen statements explaining the company's struggling bottom line. Soon, AT&T would warn us of “impending” rate increases (or maybe it wouldn't; with little competition, who's to say how forthcoming AT&T would be?). Before we know it, we'd end up paying higher cell phone bills.

Verizon could combat this price increase by maintaining a lower rate. But that's not the result that critics expect. Rather, Verizon is expected to play a game of Duopoly and raise its rates along with AT&T, and vice versa.

Growing, Growing…Gone

Right now, Leap and MetroPCS offer decent alternatives to the larger cellular companies. But history has taught us that if one or both of them become too successful, they are likely to disappear.

It's not that growing companies have the tendency to die off suddenly – quite the contrary. Rather, as these small corporations begin to grow, large corporations ask themselves the following questions:

1. Is Company X a threat?

2. If acquired, would Company X increase our market share and/or improve our ability to compete?

In this case, the latter holds more weight. If AT&T has its way with T-Mobile, Sprint and Verizon might look to the remaining cellular entities for support. But rather than form an alliance, these carriers will likely attempt to purchase Leap or MetroPCS, effectively removing one of them from the market.

Solutions Or Hope?

At this point, it's too early to tell. Obviously if Comcast (NASDAQ: CMCSA) or Google (NASDAQ: GOOG) decided to launch a cellular service of its own – not likely but not impossible either – the duopoly concerns would ease and AT&T could complete its merger without worrying consumers.

Similarly, the merger could always be rejected, and T-Mobile would be forced to go on as the number-four player.

But in the recent history of major mergers, there haven't been too many failures. All things likely, unless AT&T or T-Mobile changes its mind, the merger will go through, as will our rates.

Through the roof, that is.


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