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Is It Time To Break Up AT&T Again?

Almost three decades later, AT&T is stronger than ever and reaches for an unprecedented opportunity to unleash its power on the U.S. wireless market. Is it time to tear AT&T up again? This time, for good?

When AT&T announced on Sunday that it would acquire T-Mobile USA from Deutsche Telekom for $39 billion, there was a subtle, but very noticeable tone in media reports and first analyst quotes that did not so much focus on the overall change this acquisition would bring to T-Mobile customers, but the fact of whether this merger could pass antitrust concerns of the U.S. government. Strangely enough, AT&T is very careful pitching the fact that it is about to create the largest U.S. wireless carrier with a subscriber base that eclipses Verizon Wireless' 100 million customers by about 30%.     

In 1982, it was widely believed that AT&T cut its own throat by agreeing to break itself up into several smaller firms and separate its long-distance and local telephone business. The 1984 break-up resulted in one long-distance provider (AT&T) and seven "Baby Bells" that provided local telephone service in different regions. The reason for the antitrust investigation back then was AT&T's vertical organization and dominance in long-distance and local phone service that allowed the company to stifle competition and offer unreasonable rates of high local and long distance rates, or poor local service to other long distance providers. The DOJ also had concerns of AT&T's cost shifting between its regulated and unregulated businesses.

Three decades have changed the telecommunications landscape dramatically. Technologies and economics have revolutionized the industry. What has remained the same, however, is the thrive of an AT&T to recreate what was broken up. Today's AT&T has been formed by a series of big mergers. In February 2005, SBC acquired the former parent company AT&T for about $16 billion and subsequently renamed itself to AT&T, arguing that the brand would have more market power than SBC. SBC itself was created by the purchase of the Regional Bell Operating Company (RBOC) Pacific Telesis in 1997, SNET in 1998 and the RBOC Ameritech in 1999. The combination of SBC and AT&T combined local and long distance service once again, and added several more assets, including wireless services and DSL broadband assets. The AT&T as we know it today has been in existence since November 2005 and is, in the view of history, a mega corp built by SBC. In March 2006, AT&T bought BellSouth for $86 billion and you had to wonder already back then why the government bothered to force a break up 24 years earlier.

Today, AT&T is the largest fixed telephony provider in the U.S., a leading broadband provider, one of the largest TV service providers and the acquisition of T-Mobile would make it the largest cellular provider with 130 million subscribers and a total subscriber base of about 250 million customers. Prior to the acquisition of AT&T, the company was considered to be the 7th largest U.S. company in terms of annual revenue ($124.3 billion in 2010). It employs 294,600 people and is listed by Forbes as the 13th largest company in terms of market cap. The company recently listed its total assets at a value of $269.3 billion, while the market cap is at $154.9 billion. In 2010 alone, the business operations created a positive cash flow of $35.0 billion, while the net income was about $19.9 billion. The most profitable segment is the wireless business, which brought in revenues of $58.5 billion and a profit of $15.3 billion. The wireline business is quickly deteriorating and delivered $7.8 billion on revenues of $61.2 billion. The DSL business already generates more profit than the voice business ($7.1 billion versus $6.6 billion). From every angle, AT&T has become a massive financial success with massive market reach. AT&T has no problems flaunting its market power, including price increases without an improvement of its service, which the company can sustain largely because of its market power. The acquisition of T-Mobile will give AT&T an entirely new opportunity in the wireless market by eliminating choice for consumers.

In this specific case, AT&T argues that the acquisition will improve network quality and deliver LTE to 294 million people. The transaction will deliver shareholder, shareholder and customer benefits, according to AT&T. AT&T even justifies the acquisition with president Obama's request to connect every part of America to the digital age. Of course, what AT&T did not mention is that its wireless price structure is prohibitive for reaching that goal, that limited data plans aren't exactly a desirable path into the digital age and it did not mention that eliminating the fourth largest player in the cellular market and adding it to the second largest to create a 130 million-subscriber carrier eliminates choice and can never be in the interest of the consumer. In fact, some of AT&T's statements in the acquisition announcement are questionable as far as AT&T's commitment to innovation is concerned - and, ins ome cases, plain false. "During the past few years, America’s high-tech industry has delivered innovation at unprecedented speed, and this combination will accelerate its continued growth,” he said. That may be the case, but this was not because of AT&T. This was despite of AT&T (Wireless), which has been more a roadblock to innovation rather than a company that invites innovation.

With the introduction of the first iPhone in 2007, the data network was far from being ready for such a device. In 2010, when the iPhone 4 was introduced, AT&T capped its data plans to 200 MB and 2GB at a time when there was a first device that showed the way into a data-centric mobile future. We recently heard that AT&T will cap its broadband data bandwidth to 150 GB. It own U-verse TV service would not be affected, while rival services such as Netflix are.       

With the T-Mobile acquisition, AT&T eliminates a wireless competitor that was established in the U.S. as a discount carrier that - while much smaller than AT&T - showed more innovative power than AT&T. T-Mobile's network is in its HSPA+ structure by far superior to AT&T and its pricing structure with data plans that expect users to take advantage of data plans, including text systems, is more beneficial to an innovative future in the U.S. than the piece-by-piece structure of AT&T's plans. T-Mobile said that it will honor all pricing plans that are agreed to before the company will go to AT&T, while T-Mobile also noted that it will remain an independent company and will not, as a result get the advantage of exclusive phones such as the iPhone. One can only speculate what the true benefit for T-Mobile owners will be, if AT&T, in fact will acquire T-Mobile U.S.A.

Analysts are already pointing out that there is extreme regulatory risk whether this acquisition will pass the antitrust hurdles in this country. Of course, there are several reason to believe why it will pass: AT&T has enough reason to pump even more money into its lobbying efforts as T-Mobile parent is entitled to a $3 billion fee from AT&T if the acquisition falls through. AT&T is listed as the second largest donor to political campaigns in the U.S. and has reportedly given $36 million - 56% to Republicans and 44% to Democrats. The company is known to have an extremely tight and influential lobbying structure. We would also expect that AT&T plays the same card that once almost prevented Deutsche Telekom from buying Voicestream, which eventually became T-Mobile U.S.A: Foreign ownership. Back in 2001, it was a concern of national security that a German company should not own a major telecommunications provider in the U.S. as critical information could, at least theoretically, be compromised by a foreign government.              

It is largely speculation what will happen in this case and whether there will be an antitrust concern or not. If it passes, it is clear that there will be doubts whether the antitrust system still works and it may require a corporation like Google to initiate a more serious antitrust effort that is supported by lobbying efforts that are on par with AT&T. That's the sad truth.

Is it time to break up AT&T again?