Whack-a-Mole

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I feel like I'm playing Whack-a-Mole with AT&T's PR team when it comes to the company's rapidly disintegrating proposed merger with T-Mobile.

At every opportunity, AT&T's PR machine will find some journalist somewhere who is unfamiliar with the U.S. Department of Justice's antitrust guidelines, the DOJ's suit against AT&T, Deutsche Telekom and T-Mobile, or the FCC review process for mergers. Once they find such a writer, they spin the tale that some sort of settlement or divestiture can make the whole thing go away.

It's an appealing narrative for a financial writer. These folks love deals and their sources, Wall St. bankers who make millions off of mergers and acquisitions, love them even more.

But it's one that a journalist familiar with the workings of the DOJ or FCC would take with huge grain of salt. And in the case of AT&T's ill-fated proposed merger with T-Mobile, it will likely never happen.

Here's why:

Because the U.S. Department of Justice has joined with a bi-partisan group of 8 state attorneys general to sue in Federal Court to block the proposed transaction, any remedy or settlement proposed by AT&T and Deutsche Telekom has to comply with the Department’s antitrust guidelines, win the approval of both the DOJ and the state AGs and get another approval from a Federal Judge overseeing the trial against AT&T, et al.

Basically, those DOJ guidelines require that any settlement or remedy replace the market power T-Mobile currently brings to the marketplace. Let’s consider what that is:

  • The wireless business is a consumer product and service which is heavily marketed. Ad Age and other advertising trade publications estimate that T-Mobile spends several hundred milliondollars a year in advertising and marketing. (Nielsen pegs 2011 TV ad buys for T-Mobile at $412 million, per All Things D. Actual total marketing costs are estimated to be about $600 million.) That kind of annual spending has created a great deal of brand equity for T-Mobile over the 10 years since DT bought Voicestream. That would be have to be matched by any new entity or buyer of these assets.
  • Any new entity would have to create a nationwide network comparable to T-Mobile’s, which covers 97 percent of America. They would have to have spectrum licenses, cell towers and wireless switches in place to blanket America with coverage.
  • Any new entity or buyer of these assets would have to offer exclusive handsets, just as T-Mobile does each year.
  • Any new entity or buyer would have to have a national sales and distribution network in place. This means it would have to have thousands of company-owned retail stores, plus contracts with indirect dealers — not only the Best Buys and Wal-Marts of the world, but also those independent dealerships that are exclusive retailers for a wireless company.
  • AT&T would have to divest enough T-Mobile customers to ensure that any new entity or purchaser of the assets would have the same marketshare T-Mobile enjoys.

Currently, AT&T, Verizon, Sprint and T-Mobile control about 93 percent of the wireless market. The entire rest of the industry combined controls about 7 percent of the market. Media reports speculate the likely buyers would be Metro PCS or Leap. Metro currently controls 2.2 % of the market and Leap, which sells the Cricket service, has 1.5%. T-Mobile has 11.6 percent. If the reports are correct, AT&T is not prepared to divest anything close to what would create a new T-Mobile from either Metro or Leap.

Even if they were, and the DOJ agreed to it, and the 8 state AGs agreed to it and a Federal Judge agreed to it, such a proposal would likely require a brand new review by the FCC and several state Public Utilities Commissions. Also, AT&T would still have to deal with the antitrust lawsuits filed by C Spire and Sprint. Those suits just don't go away. (There's a scheduling conference for both suits slated for Dec. 9.)

Provided all of that could happen, all the reviews of AT&T/T-Mobile 2.0 would have to be completed by Sept. 20, 2012 in order for AT&T to avoid paying DT the hefty $4 billion break fee. When you understand all that AT&T and Deutsche Telekom are up against, you understand why Wall Street analysts are increasingly saying it’s time to move on.

The question remains, however, when will AT&T and Deutsche Telekom come to that conclusion? Until they do, I'm afraid, I'll have to continue to play whack-a-mole with AT&T's PR team.

p.s. Remember, this is my personal blog and doesn't necessarily reflect the views of my employer.