Report: AT&T prepping settlement to appease DOJ

AT&T may have been caught off guard by the U.S. Department of Justice’s move to block its acquisition of T-Mobile, but it regained its footing rather quickly. According to Reuters, AT&T already has a two-pronged plan in place to counter the DOJ’s lawsuit. The first prong is fighting the lawsuit in court, but the second involves a settlement with AT&T willing to put much more on the table to appease regulators, Reuters reported citing several unnamed sources to close to the deal.

The Justice Department filed its antitrust suit in federal court, claiming the “combination of AT&T and T-Mobile would result in tens of millions of consumers all across the United States facing higher prices, fewer choices and lower quality products for mobile wireless services.” (CP: DOJ lawsuit dashes AT&T’s hopes of an easy merger review). The aggressive tone taken by the administration implies its problems with the merger aren’t minor concerns solved with a few more market divestitures. If AT&T wants to settle with regulators it will have to make much bigger concessions than it has so far offered.

According to the Reuters report, AT&T may be willing to divest 25% of T-Mobile’s business, selling off networks and spectrum as well as its customer base. Otherwise, the sources quotes by Reuters offered no further details on AT&T’s plan.

The question is whether the DOJ and FCC would be happy with AT&T cherry picking markets for divestiture or if it’s looking for a much more drastic separation within the company. In its complaint, the DOJ repeatedly pointed to T-Mobile’s critical status as a low-cost voice and data operator to balance out the premium-rate operators Verizon Wireless and AT&T. The DOJ believes removing that low-cost provider from the market would cause overall consumer prices to rise, a view shared by many public interest groups, industry organizations and analyst firms (CP: Going deep on the AT&T-T-Mobile merger: How will it really affect wireless competition?).

The administration seems intent on preserving that low-cost option in the market. So either AT&T must guarantee to keep T-Mobile’s low-cost plans in place or spin off enough T-Mobile assets to allow another operator to take over its role. AT&T has already promised to grandfather T-Mobile’s rate plans for all existing customers at the time of the merger, but has made no commitments as to whether new future customers would have access to those rates. The answer is most certainly no. AT&T can’t offer two pricing structures—one distinctly cheaper than the other—under the same brand and through the same retail channels. The Yankee Group has calculated that more than half of T-Mobile’s customer base will have departed through natural churn by 2015, resulting in a gradual shift upward in average bill prices in most markets.

If AT&T does settle, flooding the market with former T-Mobile assets, there may be a lot of potential buyers (CP: Which operators emerged as winners and losers in the DOJ-AT&T fallout). Regional prepaid operators MetroPCS and Leap Wireless could use the divestiture as an opportunity to pick up cheap spectrum in their existing markets or even in new markets. If the DOJ were to require a nationwide divestiture of a particular spectrum band or network asset, the sale would prove more problematic. There would be no remaining national GSM and HSPA operators, and no regional GSM operators with has the scale to manage such an acquisition. Such a divestiture might need to be scavenged for its parts, the spectrum separated from the networks and sold as a whole or in pieces, while the networks would be either retuned for other bands or simply junked.