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Does blocking AT&T’s merger hurt the future of mobile broadband?

Until the FCC makes good on its promises of more spectrum, consolidation is the only means operators have of building the networks the Obama administration craves

The U.S. Department of Justice (DOJ) last week took a stand, moving to block the merger of AT&T and T-Mobile (CP: DOJ lawsuit dashes AT&T’s hopes of an easy merger review). The stand it took, however, rested purely on competitive grounds. Given the DOJ’s antitrust mission, that’s perfectly reasonable. But there’s another way to look at this highly controversial merger: from the perspective of mobile broadband.

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The Obama administration’s stated goal is to further mobile broadband services, extending them not only across the digital divide, but scaling them to meet the demand for high-bandwidth mobile data applications of the future. To accomplish those goals—particularly the latter one—operators are simply going to need more spectrum. And mergers and acquisitions are the primary tools operators have for getting that spectrum.

I know there’s a national broadband plan in place that’s supposed to help hundreds of new megahertz of frequencies on the wireless industry. But I don’t exactly see that spectrum falling from the sky right now. No operator is basing their future mobile broadband plans on spectrum that may or may not be available in the next three-to-five years. And they’d be crazy to try. As the controversy over LightSquared’s planned long-term evolution (LTE) launch shows (CP: Sorting out the LightSquared GPS interference mess), even spectrum that is already designated for mobile broadband can suddenly become clouded with problems.

LightSquared’s GPS problems may be a unique case, but interference and incumbency issues will affect every band reallocated from one industry or purpose to another. The GPS industry is putting up quite the fight in its battle to shut down LightSquared, but that’s nothing compared to the lobbying might the National Association of Broadcasters will bring to bear when the FCC starts going after further broadcast spectrum. Save some spectrum miracle, the operators have little choice but to grow their capacity through acquisition. And since the large pools of available spectrum tend to lie with the large operators, the large operators are the ones that will have to merge.

Despite AT&T’s claims, no new capacity will be created from its merger with T-Mobile. We’re talking about a redistribution of spectrum—concentrating it among a few large operators, rather than dividing it among multiple smaller ones. In fact, AT&T has misrepresented a lot about what the merger would accomplish. Buried among its talking points, however, is a key argument: By concentrating spectrum assets, operators can achieve economies of scale they simply wouldn’t be able to achieve given their current resources. Of course, every monopoly has economies of scale. The big danger is that a larger operator won’t pass its savings on to consumers, instead using its new market power to raise prices and double its profits. That result is entirely possible under a merged AT&T-T-Mobile.

Regardless of how AT&T would exercise those economies of scale, there’s no question they would exist. AT&T could build much more high-capacity networks by combining it and T-Mobiles’ advanced wireless services (AWS) spectrum. It could build that high-capacity network on a single infrastructure, rather than divide it among two separate network builds. That network could not only support greater connection speeds to the device, but it could support many more of those connections simultaneously—all at a lower cost per bit.

We’re so enamored of the bright shiny new networks being deployed today, we tend to ignore the fact they have half-lives. Verizon Wireless is sitting pretty atop a 20 MHZ LTE network today, but it realizes that it will use up that capacity sooner or later (given the enormous demand for mobile data, sooner is more likely). That’s why Verizon isn’t opposed to AT&T’s acquisition. VZW knows it will be back in the acquisition market soon enough, looking for the spectrum it needs to grow. Ironically the sole operator in a spectrum position to exercise outsized influence in the market is Sprint, the operator that supposedly would be hurt most if the merger were to pass. Through its control of Clearwire, Sprint has more than 100 MHz of spectrum in the major markets, making it the only operator prepared to take the mobile broadband revolution head on (CP: Which operators emerged as winners and losers in the DOJ-AT&T fallout).

I may sound like I’m preaching doom and gloom here, but I do realize that the networks of Verizon, AT&T, Sprint and T-Mobile will be perfectly adequate to meet the smartphone and tablet Web surfing and app download demands of today. It’s a question of what the mobile data services of the future will be. If your idea of a mobile broadband future involves streaming a Netflix movie to a tablet--without paying $30 a pop in data fees--then the networks being built today just won’t cut it. The mobile devices and applications being built and designed have voracious appetites. They’ll need to be fed by massive networks.

Regulators face a quandary. They can preserve choice and competition in the market by banning any future operator mergers, but then they risk saddling consumers with mediocre networks. Or they can allow consolidation, creating the massive networks the administration so craves. But then regulators would risk creating an elite cadre of mega-operators that could use their new economies of scale and pricing power to maximize profits instead of fueling the mobile broadband revolution they were supposed to birth. Opposing the AT&T-T-Mobile merger seems like a no-brainer to most, but the reality is much more complex.

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© 2014 Penton Media Inc.

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