AT&T and T-Mobile Call Off Their Merger

AT&T and T-Mobile, which announced a prospective merger in March 2011, withdrew their merger application in December. AT&T blamed the merger’s demise on the opposition of the U.S. Department of Justice (DOJ), which filed a lawsuit in August to block the merger, and the Federal Communications Commission (FCC). AT&T claimed that blocking the merger would harm consumers, investment and innovation.

The top four wireless carriers, AT&T, T-Mobile, Verizon and Sprint, provide 90 percent of mobile wireless telecommunications service in the United States. DOJ argued that the high post-merger concentration, both nationally and in almost all local markets, suggests that the loss of one competitor would result in a substantial increase in market power. DOJ also stated that the merger’s anticompetitive effects would be worse because T-Mobile was a particularly aggressive competitor both in pricing and innovation. Moreover, entry would be difficult as it would require nationwide spectrum, a national network, a large number of customers to produce scale economies, and a strong brand. Thus, DOJ alleged that the merger would result in consumers facing “higher prices, less product variety and innovation, and poorer quality service.”

The FCC’s staff report on the merger makes arguments similar to DOJ’s. It states that “the unprecedented increase in market concentration” due to the merger would raise prices and lessen innovation and investment in the mobile wireless market. The FCC found no evidence to support AT&T and T-Mobile’s claim that the merger would create jobs. In fact, it found that AT&T’s internal documents contradicted this claim. The FCC staff found it more likely that the merger would lead to massive job losses as the two firms eliminated overlapping services and operations. According to the report, internal AT&T documents also contradicted the claim that the merger was necessary for AT&T to expand its 4G LTE network to more users. The FCC staff concluded that while AT&T needs more spectrum to increase its capacity, it could meet that need by buying spectrum licenses from companies not using them, as it has been doing.

Because the merger has fallen through, AT&T must now pay Deutsche Telekom, the parent company of T-Mobile, $3 billion cash and also give it $1 billion in wireless assets. In addition, AT&T and T-Mobile subsequently entered into a seven-year roaming agreement for the United States. This agreement will allow T-Mobile to extend its coverage into sections of the country where it previously had no high-speed mobile network.

EI Senior Economist Allison I. Holt, an empirical microeconomist, specializes in quantitative analysis and assessment of damages in antitrust and class action matters.