AT&T to Acquire T-Mobile for $39 BillionAT&T to Acquire T-Mobile for $39 Billion

A major issue to focus on is the impact on the handset business.

In one of the biggest developments in the mobile carrier market in recent memory, number 2 carrier AT&T has announced it will acquire number 4 carrier T-Mobile from Deutsche Telekom for $39 billion. Deutsche Telekom will also come away with an 8% stake in AT&T. The combined company's subscriber base will total roughly 130 million or 43% of the US market, vaulting it past current market leader Verizon's 33%. The deal is subject to regulatory approval, and that approval may require significant concessions on the part of AT&T. Given the scale of change in market composition, this combination may spur long-overdue changes in the regulatory environment that begin moving the mobile industry to its next phase.

Things have not been going well for T-Mobile. There had been rumors about a possible combination with number 3 carrier Sprint (17% market share), but combining T-Mobile’s GSM network with Sprint CDMA technology would have meant network integration costs on the order of Sprint's "painful" acquisition of Nextel in 2005. Further, Sprint's pursuit of WiMAX as their 4G strategy puts them out of synch with T-Mobile's plans for eventual adoption of LTE.

Deutsche Telekom acquired T-Mobile (then called VoiceStream Wireless) in 2000 for a princely $50.7 billion in stock and cash. T-Mobile has languished, and for their most recent quarter, they lost a whopping 318,000 customers, a 3.6% churn rate. That is in spite of low prices and a great reputation for customer service. AT&T’s $39 billion offer values each T-Mobile subscriber at $1,147; Merrill Lynch and JP Morgan had valued the company at $23.2 billion and $25.5 billion respectively. Deutsche Telekom's stock jumped 13% Monday on news of the deal.

This type of horizontal consolidation that takes competing players off the field does attract the attention of regulators. If the merger is allowed to go through, the top two mobile operators will control over 75% of the market, and there will be essentially one source for GSM services in the US. It will also mean that a combination of CDMA providers Verizon and Sprint would likely never materialize, as that would leave the top two providers with roughly 93% of the market.

Certainly some of T-Mobile's gambits like Unlicensed Mobile Access (UMA) will go by the wayside, but the bigger issue to focus on is the impact on the handset business. Unless they travel internationally, most users don’t really care whether they are GSM or CDMA (if they even know such a distinction exists). The fundamental truth of the mobile market is that despite the mobile operators’ claims and counter-claims regarding who has the "best", "most reliable", "fewest dropped calls", people are buying handsets.

From the customer's perspective, Apple's decision to sell its iconic iPhone through Verizon was a bigger development than the AT&T/T-Mobile merger. Now, if the AT&T/T-Mobile merger is approved, it will mean that iPhones are available to over 75% of mobile subscribers in the US--but where does that leave Sprint, Metro PCS, or US Cellular?

There are other market forces at work as well. The other two major ecosystems, RIM and Android, are ubiquitous; webOS, and the soon-to-be-extinct Symbian are essentially non-factors at the moment. Sprint did have a minor coup in being the first carrier to offer 4G smartphones, the Android-based HTC Evo and the Samsung Epic. Verizon recently announced its first LTE 4G smartphone, the HTC Thunderbolt. We've yet to see a 4G BlackBerry, but with BlackBerry World (formerly the Wireless Enterprise Symposium) coming up in early May, that may well change.

Given the importance of handsets in the equation, I think one of the major outcomes of the merger should it be allowed to go through would be a new policy regarding handsets and handset exclusivity. With the merger, the mobile carrier market will effectively become a duopoly. Given the importance of handsets in the buying decision, without access to the full range of popular devices, Sprint (and everyone further down the line) could effectively be squeezed into oblivion.

My general assessment is that the deal will go through, but the key to focus on will be the changes on the regulatory front that result. The nature of those regulatory changes will define how the mobile market evolves over the next decade.

Once that handset genie is out of the bottle, the mobile operators will actually have to start competing on the basis of being "carriers" as opposed to "handset distributors", and at that moment the whole complexion of the game will change. In the near term, things may look bleak, particularly for Sprint and the smaller providers, but this could be the dawning of a new day.