The Entire Telecom Fraternity is apprehensive about AT&T’s Buyout of T-Mobile. They say it will Benefit the buyer. It will. But the more Important debate is – will This Deal finally go through? B&E analyses why The US Justice Department does not really have a strong Anti-Competitive case against AT&T.
Fair enough. The only issue is – if we dig a little deeper, we discover that this decline in cellular rates do not add up. The CPI-U doesn’t measure the expenditure incurred on phone bills. With the increase in sales of tablets and smartphones, consumers are paying more for data services. Even AT&T’s revenue from post-paid connections per customer has increased by 3% over the past several years, revenues from data services was up by 47.57% in 2010 as compared to 2008. Something to ponder over.
A more rationale reason for this acquisition is to cover up the shortage of wireless capacity. According to a report released by PwC in 2010 titled, A range of possibilities in a changing wireless landscape, “Demand for new services such as video streaming (which consumes roughly 25 times the network capacity that a voice call does), the importance of service quality, and the migration toward 4G technologies has prompted carriers to continue investing in their infrastructure despite the challenging economy”. Since early 2007, AT&T’s data traffic has grown 80-fold. On the other hand, T-mobile doesn’t have much free spectrum left. There will therefore be some definite improvement in wireless capacity. But it’s hard to see as to how even this move can singlehandedly fulfil the exponential growth in demand. Therefore, to say that this deal will create a monopoly for AT&T is crime.
Many also argue that AT&T is doing what it is supposed to – protect and create shareholder value, in the light of increased competition and increased demand for greater investments in infrastructure. Says Stefan Zehle, CEO of Coleago Consulting, while speaking to B&E from Blackpool (UK), “In US, capital expenditure is increasing with the investment in new spectrum and infrastructure to cater for mobile broadband. Therefore, at this stage of the industry life cycle consolidation is likely to set in, at least at the network level. This is the only way in which an operator like AT&T can maintain shareholder returns.”
So, will the FCC & FTC give their nods? The Herfindahl-Hirschman Index (HHI) – used by antitrust bodies to find out the amount of competition in the market based on which an M&A deal is accepted or rejected – waves the green flag. According to data compiled by comScore in January 2011, AT&T, Verizon, T-mobile and Sprint had market shares of 26.6%, 31.3%, 12.2% and 11.9% respectively. In order to arrive at an HHI for this particular market, we took the squares of each player’s market share and added it up. This led to an HHI of 2249 basis points (bps). By rule, the FCC scrutinises deals in markets with an HHI of 2800 bps, while the FTC sets a standard of 2500 bps for the same. By any means, an HHI of 2249 bps falls way below the benchmarks. Therefore, despite apprehensions from many quarters, this deal will in all probability be passed by regulatory authorities.
But as we can argue forever – such deals are more subject to political prerogative than rational analysis, as New York-based telecom analyst Dan Frommer, tells B&E, “This is the time leading up to an election, and the current administration may be pushed to either reject the deal or insist on harsh terms. These terms may not be suitable to AT&T. I think the deal will ultimately be approved, but there could be some major conditions forced upon AT&T. It largely depends on how much of a political issue it becomes.”
Given the proximity that AT&T enjoys in political circles and also its historical track record of securing approvals for mega deals, it is just a matter of time that AT&T will become the largest telecom carrier in the US. Unless of course, Obama gets better fourth-generation ideas.
A more rationale reason for this acquisition is to cover up the shortage of wireless capacity. According to a report released by PwC in 2010 titled, A range of possibilities in a changing wireless landscape, “Demand for new services such as video streaming (which consumes roughly 25 times the network capacity that a voice call does), the importance of service quality, and the migration toward 4G technologies has prompted carriers to continue investing in their infrastructure despite the challenging economy”. Since early 2007, AT&T’s data traffic has grown 80-fold. On the other hand, T-mobile doesn’t have much free spectrum left. There will therefore be some definite improvement in wireless capacity. But it’s hard to see as to how even this move can singlehandedly fulfil the exponential growth in demand. Therefore, to say that this deal will create a monopoly for AT&T is crime.
Many also argue that AT&T is doing what it is supposed to – protect and create shareholder value, in the light of increased competition and increased demand for greater investments in infrastructure. Says Stefan Zehle, CEO of Coleago Consulting, while speaking to B&E from Blackpool (UK), “In US, capital expenditure is increasing with the investment in new spectrum and infrastructure to cater for mobile broadband. Therefore, at this stage of the industry life cycle consolidation is likely to set in, at least at the network level. This is the only way in which an operator like AT&T can maintain shareholder returns.”
So, will the FCC & FTC give their nods? The Herfindahl-Hirschman Index (HHI) – used by antitrust bodies to find out the amount of competition in the market based on which an M&A deal is accepted or rejected – waves the green flag. According to data compiled by comScore in January 2011, AT&T, Verizon, T-mobile and Sprint had market shares of 26.6%, 31.3%, 12.2% and 11.9% respectively. In order to arrive at an HHI for this particular market, we took the squares of each player’s market share and added it up. This led to an HHI of 2249 basis points (bps). By rule, the FCC scrutinises deals in markets with an HHI of 2800 bps, while the FTC sets a standard of 2500 bps for the same. By any means, an HHI of 2249 bps falls way below the benchmarks. Therefore, despite apprehensions from many quarters, this deal will in all probability be passed by regulatory authorities.
But as we can argue forever – such deals are more subject to political prerogative than rational analysis, as New York-based telecom analyst Dan Frommer, tells B&E, “This is the time leading up to an election, and the current administration may be pushed to either reject the deal or insist on harsh terms. These terms may not be suitable to AT&T. I think the deal will ultimately be approved, but there could be some major conditions forced upon AT&T. It largely depends on how much of a political issue it becomes.”
Given the proximity that AT&T enjoys in political circles and also its historical track record of securing approvals for mega deals, it is just a matter of time that AT&T will become the largest telecom carrier in the US. Unless of course, Obama gets better fourth-generation ideas.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
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