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The Proposed AT&T and T-Mobile Monopoly… What You Need to Know

When AT&T (NYSE: T) offered $39 billion to buy T-Mobile last week, there was only one word that dominated the headlines: Monopoly.

That’s the major hurdle that the deal has to clear before it’s approved. Both the FCC and Department of Justice have to sign off – and that’s far from a sure thing.

In fact, given that the deal would give AT&T 130 million subscribers and vault it to the head of the mobile pack, the process could take 12 to 18 months.

While it’s impossible to predict the outcome, it looks more likely than not. AT&T is willing to pay a $3 billion merger fee… strong competitors on the national stage remain in place… and AT&T is using rural 4G coverage as a lure for the government.

The Obama administration has said that getting broadband speeds to rural areas is a priority and AT&T has pledged to extend LTE service to 95% of all Americans. That’s no small matter.

Let’s look at what this merger would mean for the telecom industry…

AT&T’s Mobile Market Domination

AT&T was already a huge company – second only to Verizon in the mobile space. With the T-Mobile merger, AT&T becomes the dominant player in the market. But that’s far from the most important part of this merger.

AT&T has long bumped up against the ceiling of its network’s capacity. But by purchasing T-Mobile, AT&T will increase towers and cell sites by over 50% – and take over a large portion of coveted spectrum space.

That means there will be more bandwidth for existing customers – and more bandwidth to expand into with 4G.

AT&T and T-Mobile Merger Winners

The deal certainly helps T-Mobile. The company was losing subscribers, had no plans for a 4G expansion and had no exciting device like the iPhone. In previous columns, we’ve said that T-Mobile will end up as the loser in the cellphone wars – so it would be wise to take the money.

Even Verizon (NYSE: VZ) could benefit from this deal. Not only will Verizon have less competition to worry about – and hence, a greater say in pricing – but it also has a good opportunity to poach current AT&T customers while Big Blue deals with the complex merger approval process.

Customers might benefit, too. Even though competition will decline, the cost of providing cell coverage is very much dependent on economies of scale. Larger companies can afford to charge less – even if they increase their own margins.

Smaller companies have something to smile about, too. AT&T, in completing any merger, will likely have to sell off some of its assets to other companies. That means regional companies can beef up their own networks at what should be discounted, fire-sale prices.

The Losers in the AT&T/T-Mobile Merger

Not everyone is happy about this deal, however.

Sprint (NYSE: S) goes from a strong third to a distant last place, with only 16% of the mobile market. At about half the size of Verizon, it will have problems keeping up on price and coverage with the Big Two.

Cellphone makers could suffer, too. With less competition between companies, there’s less incentive to differentiate between handsets – and fewer distribution channels. A big hit like the iPhone probably won’t suffer, but the next tier down could see sales drop.

Apple (Nasdaq: AAPL) might also encounter trouble. Carriers will be less inclined to accept Apple’s demands when they already have such large customer bases and there aren’t many scenarios in which they’re likely to lose customers.

In the end, choices will likely be more limited if this merger goes through. In the long term, an AT&T that controls 43% of the market – compared with Verizon’s 31% – could be a problem.

But in the short- to medium-term, prices may actually drop. And by the time they start to rise, we’ll probably be on to the next generation of technology – with a new slate of competitors.

Good investing,

Ryan Cole

*The views and opinions expressed in this article are those of the author and do not necessarily reflect the official position of Wall Street analysts.

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