Obama Should Not Allow AT&T to Buy T-Mobile

By Nicholas Economides, Professor of Economics

It does not make economic sense to buy a whole nationwide company just to use some local assets that can be bought much more cheaply.

August 20, 2011 -- It has been 30 years since the 100-year monopoly of AT&T in US telecommunications was broken into 14 pieces for rampant violations of antitrust laws. Almost immediately, the Baby Bells started merging. By now, AT&T has reassembled 12 out of the 14 pieces.

In wireless telecommunications, after absorbing Cingular, AT&T Wireless faces Verizon, Sprint, and T-Mobile as its main rivals. Now AT&T proposes to buy T-Mobile, reducing the number of nationwide competitors from four to three.

Almost every economic model shows, and almost every economist (except the consultants of AT&T) confirms, that such a merger will decrease competition and increase prices for cellular calls and cellular Internet services.

President Obama campaigned on a platform of tough antitrust intervention, but so far the toughness has not materialized. Now push has come to shove, and the Obama administration faces a major dilemma: should it allow AT&T to merge or not?

At first glance, the answer should be “no.” Mergers in concentrated industries that are likely to increase prices should not be allowed. Antitrust law was written to protect consumers from monopolies and artificially high prices.

AT&T and its consultants argue that AT&T wants to absorb T-Mobile not to raise prices but to use T-Mobile’s electromagnetic spectrum. In the last few years, AT&T added millions of accounts of iPhone users who demanded significant data services that AT&T was unable to provide in some key areas, including New York City and San Francisco. The inadequacy of the AT&T network resulted in dropped calls and snail-speed data connections in these areas. As a consequence, AT&T stopped selling the iPhone in NYC and San Francisco (although Apple still sells it at these locations).

How valid is AT&T’s argument that absorbing T-Mobile will make it more efficient and able to handle the calls of the irate iPhone customers?

That argument is flawed. AT&T has insufficient capacity in only a few parts of the country, essentially New York and San Francisco. For a small fraction of the $39 billion T-Mobile acquisition cost, AT&T can lease or buy bandwidth in these two areas from T-Mobile or a number of smaller regional competitors.

It does not make economic sense to buy a whole nationwide company just to use some local assets that can be bought much more cheaply. Additionally, there is some evidence that A&T has not been investing enough in its existing network to ensure that it is used optimally.

It’s clear that the real reason behind AT&T’s proposed acquisition is not the access to additional electromagnetic spectrum in a couple of locations, but AT&T’s desire to eliminate a competitor and increase wireless service prices.

Ma Bell was dismantled in 1981 to put an end to just this kind of non-competitive behavior. It’s bad for consumers, and it’s bad for innovation—precisely the kind of innovation that brought us all the amazing telecom technology we’ve so enjoyed these past three decades. President Obama should not allow AT&T to create Ma Bell Version 2.0 for the 21st century.