Assuming the sale of Deutsche Telekom’s US T-Mobile unit to AT&T can be approved by the FCC and DOJ, we see several far-reaching consequences for the TMT landscape beyond the obvious scale and spectrum benefits for AT&T, and the competitive pressures on Verizon and Sprint.
4G build outs will accelerate. In its press release, AT&T referenced covering 95% of Americans with its LTE network. This is a substantial increase over previous plans and a seeming attempt to placate the FCC by appealing to its goal to get 4G to communities without choice in broadband. It would seem uncharacteristic of Verizon to sit on its one-year lead while its fierce rival rolls past it, so we believe this deal would accelerate and expand its deployments as well. In the short run, this will mean more demand for 4G equipment, devices and tower rentals. T-Mobile lacked the spectrum to build its own LTE network, so there is no near term offset. Given the history of Verizon/AT&T competition, we would expect rivalry to remain in the realm of network coverage/quality and device line ups, rather than service price. This could dampen the long term uptake of the technology and limit its threat to residential broadband, absent other regulatory or market developments.
The FCC will likely have a strong reaction. The FCC under Chairman Genachowski has been unequivocal in its support for increasing competition in wireless broadband. Reducing the number of national carriers by one and concentrating more than 45% of the commercial wireless spectrum assets below 2.0 Ghz in one carrier is directly contrary to the goals explicitly laid out in the commission’s National Broadband Plan. We would expect the FCC to demand that the combined entity divest spectrum to competitors on the cheap as part of any deal approval. Beyond that, we would also expect the FCC to disadvantage AT&T in proposed incentive spectrum auctions under Congressional consideration, through limits on total spectrum ownership. An obvious beneficiary of spectrum transfers would be Sprint, which has already aired strong objections to the combination and can be expected to lobby fiercely against deal approval. Metro PCS, which is already rolling out LTE in the AWS spectrum owned by T-Mobile in many geographies, would also likely benefit.
The US handset market may get more difficult for vendors. Combining AT&T and T-Mobile will mean handsets that accommodate at least 5 different spectrum bands (Exhibit 1). This is pressure on device makers, who will have to make uniquely complicated devices for the carrier, and an opportunity for RF component vendors who will help to address the complexity. Moreover, T-Mobile has been the most innovative of all US carriers in adopting new handsets, while, with the notable exception of the iPhone, AT&T and Verizon have been laggards. Expect the new AT&T to flex its muscles in device negotiations like never before (Exhibit 2).
Winners and Losers. The biggest winners may be LTE network equipment players, who will benefit from a bigger and faster network roll out – Alcatel Lucent, and Ericsson stand out with exposure to both AT&T and Verizon. Wireless chip makers will benefit from a faster developing market for 4G devices and from the increased complexity of radios that will need to deal with a wider range of spectrum bands – e.g. Qualcomm, Broadcomm, Nvidia, RFMD, Skyworks, Triquint, etc.. The availability of mobile broadband and the potential for increased residential broadband competition is positive for a wide range of internet centered business models, examples include Google, Apple, Amazon, Salesforce.com, etc.. While the initial reaction by investors puts Sprint in the losers column, we see the deal as a modest benefit for them, as the pricing umbrella set by AT&T and VZ will only get firmer and higher and the price competition from T-Mobile for the value segment subsides. All of the smaller carriers – Sprint, MetroPCS, Leap, etc. – may also benefit from forced market and spectrum divestitures by T, and from favorable terms that may be granted them in upcoming spectrum auctions.
The obvious losers are American consumers, who already pay the second highest mobile rates in the world and will now face less choice in networks and devices, along with an even more ossified duopoly setting the price umbrella. Although the market appears to be judging Verizon as a beneficiary of the AT&T deal, we are not so sure, as swallowing T-Mobile USA will allow T to close the network coverage/capacity gap on the cheap, gain huge advantages on scale and spectrum and likely force Verizon to step up its LTE investment plans. Device makers, like Motorola Mobility, Samsung, LG and HTC, will benefit from the bigger market for 4G capable devices, but will have less leverage in the US market up and down their product lines. Tower companies will see a short term benefit from a faster and broader roll out of LTE, but if spectrum auctions/transfers can’t enable a viable fourth national network, the concentration of the carrier industry would have very negative repercussions for American Tower, Crown Castle and SBAC.