Four weeks ago, we got the bad news: AT&T will acquire T-Mobile USA for $39B. An already bad carrier will get worse by gobbling a competitor, thus gaining more pricing power and reducing competitive pressure. Higher prices, lower service levels. The transaction leads us into a de facto oligopoly: AT&T and Verizon. (From the Wikipedia article just linked to: “Oligopolies are price setters rather than price takers.”)

Am I forgetting Sprint and other carriers such as Metro PCS and Leap?

Not at all. They’re merely too small to matter. They don’t have enough money for spectrum purchases and infrastructure build-up. Today, they don’t prosper, they merely survive. Tomorrow, with higher prices dictated by the two Big Guys, they’ll be thrilled to get a little bit of breathing room in exchange for their presence as token competitors on PowerPoint presentations to the Justice Department’s Antitrust Division.

Speaking of slides, feast your eyes on AT&T’s merger pitch at a special site, MobilizeEverything. You’ll see the “fiercely competitive landscape” and the gigantic increase in data volume: 8,000% since 2007.



No mention of the iPhone. Surely an innocent omission.

Coincidentally, “Mobilize Everything” is the title of an interview with AT&T CEO Randall Stephenson in the Brunswick Review, a PR mouthpiece. The interview, focused on “Strategy, Technology And Trust”, treats us to a collection of corpospeak platitudes such as:

“Leaders are people who get things done, and that takes courage…And above all, leaders never miss in terms of integrity.”


Very reassuring for this AT&T customer whose calls in the middle of the Palo Alto desert get disconnected several times a day.

Unsurprisingly, reactions to the projected acquisition have been negative. The overall sentiment is “everybody loses”. Well, not everybody: Wall Street sees the opportunity for more pricing power and cheerfully granted “T” (a single-letter stock symbol signals that you’re genuine Blue Blood) a 10% bump since the announcement.





Politicians, various government agencies, and the competition are jumping on the posturing opportunity. Sprint, with their expression of concern, is probably angling for concessions that will facilitate “regulatory approval.”

This is a farce. Compared to developed--and not-so-developed--nations, we have a terrible wireless infrastructure. Go to Europe, Japan, Korea, parts of China, and weep. With less competition, what incentive will AT&T have to improve coverage and service? Instead, AT&T will continue to milk its customers, parade its record $100 monthly ARPU for the iPhone...and continue to be the butt of jokes for its legendary bad service.

The regulatory review will unfold as an elaborate Kabuki script that will culminate in a pre-ordained approval. There will be congressional hearings, protests, and much handwringing but, in the end, we’ll hear sonorous but toothless concessions. AT&T is a company with deep knowledge of legislative and regulatory processes. In plain English: They know how to buy votes. Surely, they didn’t propose the acquisition without assurances it would go through, albeit at a (small) price, such as shedding assets or assuming new compliance obligations.

End of story? Not quite.

Let’s consider the 8,000% data volume increase and the unmentionable smartphone (which AT&T prudishly calls an “emerging device”, a moniker that reminds us of IBM’s cautious use of the Entry Systems label before lifting the fig-leaf and calling a PC a PC).

What has happened with the Jesus Phone and its ilk is disintermediation. For AT&T, the nightmare epiphany is this: Steve Jobs inaugurated the era of carriers as dumb pipes or, if you prefer, of OTT (Over The Top) services. An OTT example is a VOIP data link connection that “robs” billable minutes from the calling plan, or iTunes sales and delivery through the wireless data pipe (as opposed to Verizon’s own carrier-grade--a euphemism for ugly--V Cast content platform).

AT&T has seen its future as a disintermediated ISP that will have no dog in the services and content game...and it decided it had to act accordingly.

But how?

By becoming a regulated utility, like the old Ma Bell. The “obscene” acquisition proposal forces the issue: reduced competition triggers regulatory intervention, leading to a large utility with enough critical mass to provide everyone the now indispensable wireless Internet access. The political window dressers will use other phrases, but the result will be the same: back to the days of AT&T as a regulated public utility.

Am I going too far? Perhaps.

But consider Vodafone, the world’s largest wireless conglomerate. As you’ll see in this Seeking Alpha piece, Vodafone just announced the $11.4B sale of its 44% stake in SFR, a French cellular carrier. This follows its $5B divestiture of Softbank holdings in Japan, and a similar $7B sale of its China Mobile stake. Vodafone currently owns 45% of Verizon. It’s unhappy with that situation but, apparently, it’s unable to find a way out.

With the smartphone revolution just beginning, why would Vodafone run away from its stakes in promising markets in Asia and Western Europe? You know the answer: disintermediation, dumb pipes.

In the US, AT&T is its own majority owner. It can increase its footprint by acquiring T-Mobile and then negotiate its transformation back into a public utility by another name. Vodafone’s minority participation in multiple carriers around the world offers no such position of strength.

Same future, different levers.

JLG@mondaynote.com

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