AT&T buys T-Mobile

Ovum analyst Steven Hartley, Principal Analyst

AUSTRALIA: The deal is symptomatic of growing market maturity in the US, but is better for AT&T than Deutsche Telekom. AT&T gains spectrum for the forthcoming 4G battle and synergies. Deutsche Telekom gets a short-term cash boost way below the price it paid to enter the US and loses its global presence.

Nevertheless, Sprint is the biggest loser in this deal. It had 16 percent connection market share in Q4 2010 and was the third largest player of four nationwide carriers. It will remain third, but will have half the connection share of Verizon Wireless. Just as it was beginning to recover from its disastrous previous few years, so it is being further cut adrift from the leaders.

The key benefit for AT&T is T-Mobile’s spectrum. This enables AT&T to boost its own LTE plans, while also leveraging T-Mobile’s recent aggressive HSPA+ roll-out. The technology fit makes this so much more appealing than an oft-rumored, but illogical T-Mobile / Sprint tie up.

AT&T also gains scale in operational terms - an estimated $3 billion in synergies are expected per year after three years. The resultingorganisationwill have 129 million connections and 43% market share, although this assumes the deal receives complete regulatory approval without concessions. This is highly unlikely given the scale of the deal and following the asset swaps resulting from Verizon Wireless’ purchase of Alltel in 2008. Nonetheless, AT&T’s press release unashamedly panders to US government concerns:emphasisingcustomer benefits, US ownership, aunionisedworkforce and bridging the digital divide.

Despite all these benefits, integration will not be entirely straightforward. While certainly simpler than a Sprint / T-Mobile integration would have been, AT&T and T-Mobile still have technical hurdles to overcome, not least the fact that they operate today in different GSM spectrum bands. So even after the companies come together it will be some time before devices from the two operators are able to operate on each others’ networks.

Even after that, devices will likely have to be provisioned with more spectrum bands than previously to take advantage of the combined network. And this is on top of all the usual challenges associated with any integration effort. But AT&T certainly has the recent integration experience to make it work, following the BellSouth, SBC and Cingular mergers.