AT&T and T-Mobile USA: The Fat Lady Sang

The deal that began with a bang ended with a whimper yesterday evening as AT&T finally threw in the towel and gave up on its proposed takeover of T-Mobile USA. While T-Mobile parent Deutsche Telekom walks away with a $4 billion Christmas gift and a “mutually beneficial” roaming deal, what happens next with the Number Four U.S. wireless carrier is anyone’s guess right now.

“The days of four national mobile network competitors are numbered,” notes Mark Beccue, senior analyst at ABI Research. “T- Mobile USA will not survive for long on its own nor is there a viable suitor with enough firepower or a credible value proposition to make the fourth mobile network work. The U.S. market will be down to three national mobile players within the next two years whether the government likes it or not.”

(Editor’s note: There has been talk of a Sprint/T-Mobile alignment but those who wish such a deal only need look at what has happened with Sprint and Nextel.)

While AT&T’s press release was straightforward and to the point, DT’s was more informative: “Both companies are in agreement that the broad opposition by the U.S. Department of Justice (DoJ) and the U.S. telecommunications regulator (FCC) is making it increasingly unlikely that the transaction will close. Both companies are of the opinion that important arguments in support of the transaction have been ignored, such as the significant improvement in high-speed mobile network coverage for the U.S. market as well as the positive employment effects. In addition there was no indication that either authority would move away from its non-supportive stance in return for concessions from the parties in terms of the scope and structure of the transaction.”

What Happens Now?

As part of the break-up fee, T-Mobile USA gets more spectrum, specifically Advanced Wireless Spectrum in 128 Cellular Market Areas, including 12 of the Top 20 (Los Angeles, Dallas, Houston, Atlanta, Washington, Boston, San Francisco, Phoenix, San Diego, Denver, Baltimore and Seattle).

Details of the new roaming agreement includes U.S. coverage that will increase from 230 million POPs today to 280 million down the road, allowing T-Mobile USA access to parts of the country in which it had neither its own high-speed mobile communications network nor the associated roaming agreements.

“T-Mobile, especially with its newly found cash, will be able to shore up its HSPA+ network, but its Europe-esque ‘HSPA is adequate’ and low capex investment ratios won’t cut it in the face of U.S. market dynamics and the LTE commitments being made by AT&T, Verizon and Sprint,” says wireless industry analyst Mark Lowenstein of Mobile EcoSystem. “One could only imagine how T-Mobile’s postpaid subscriber defections will accelerate when the LTE iPhone is introduced in 2012. So T-Mobile needs a LTE strategy, and it needs sub-1 GHz spectrum. Options include a network sharing deal with AT&T (less likely), Sprint (more likely) or a wholesale deal with Dish, Clearwire or LightSquared.”

But what about AT&T, especially in light of the recent spectrum deals between major cable operators and rival Verizon Wireless (for more information, click here).

“AT&T will continue to be aggressive in leading the mobile Internet revolution,” says Randall Stephenson, AT&T’s chairman and CEO. “Over the past four years, we have invested more in our networks than any other U.S. company. As a result, today we deliver best-in-class mobile broadband speeds – connecting smartphones, tablets and emerging devices at a record pace – and we are well-underway with our nationwide 4G LTE deployment.”

But it’s going to cost the Number Two wireless carrier more money. In addition to the spectrum, AT&T was nearly as interested in the legacy tower sites it would have obtained via a T-Mobile USA buyout. According to ABI Research’s sources, AT&T had “less than 30 percent” of its cellsites co-located with T-Mobile. The added capacity, even if many markets were divested, would have boosted the quality of service AT&T could have offered its customers immediately, and it would have drastically reduced AT&T’s site-development processes.

“To meet the needs of our customers, we will continue to invest,” Stephenson adds. “However, adding capacity to meet these needs will require policymakers to do two things. First, in the near term, they should allow the free markets to work so that additional spectrum is available to meet the immediate needs of the U.S. wireless industry, including expeditiously approving our acquisition of unused Qualcomm spectrum currently pending before the FCC. Second, policymakers should enact legislation to meet our nation’s longer-term spectrum needs.”

Even though his agency was key to scuttling its T-Mobile marriage deal, FCC Chairman Julius Genachowski agrees in part with the AT&T chief, releasing a statement saying, ?“The U.S. mobile industry leads the world in mobile innovation, and we agree with AT&T that Congress should pass incentive auction legislation that will unleash new spectrum for mobile broadband.”

-Debra Baker