AT&T formally kicked off the T-Mobile merger process today by filing its first supporting documents with the FCC. At 381 pages, it's a monster -- it lays out AT&T's groundwork for the merger, argues that it will actually help competitiveness in the wireless industry, and promises that rural customers will ultimately be better served. In other words, everything AT&T's said all along.
We've broken down the document with some light analysis after the break, so you should definitely grab the PDF and follow along -- one way or another, this transaction is going to fundamentally change the US mobile market, and it's critical to understand all the angles.
Introduction, or how America is addicted to data
The gist of the entire merger is AT&T's claim that this is the quickest path to relief of the country's explosive growth in data consumption over the past several years -- growth that is expected to continue unabated for years to come. Unfortunately, they weren't shy redacting the public version of the filing, so a lot of the juiciest info is missing, but there's still some revealing data to be found:
- AT&T opens by saying it "faces network spectrum and capacity constraints more severe than those of any other wireless provider, and this merger provides by far the surest, fastest, and most efficient solution to that challenge."
- It expects to generate $39 billion in "cost savings and other synergies" from the merger over time, starting with $3 billion in year three post-merger. Those savings are expected to come from a few sources, including a reduction in interconnect costs on the T-Mobile side (by switching to AT&T backhaul where possible), "optimized" retail and distribution, and a greater economy of scale for handset and infrastructure contracts.
- There's no question that LTE is a major focus of AT&T's arguments in favor of the merger -- the company continues to promise that the merger will allow it to hit 97 percent of Americans with LTE, or about 55 million more people than it had been previously planning for. That focus on connecting everyone comes up a lot -- AT&T clearly thinks that playing to the Obama Administration's broadband initiatives will help it win approval.
- AT&T's data volumes went up 8000 percent from 2007 to 2010, and they don't expect the curve to level off -- in fact, AT&T says it projects to do all of 2010's mobile data traffic in just the first five to seven weeks of 2015.
- WiFi hotspots (and "Hotzones" like Times Square) have been a key part of AT&T's plan to alleviate network congestion -- particularly in ultra-dense areas -- but they say their "experience is that Wi-Fi provides less meaningful capacity relief than a cell site."
How AT&T thinks T-Mobile can help
AT&T says that it expects to have insufficient capacity to handle traffic or build out LTE in a variety of cities at some point in the future, but -- as before -- all of the details are redacted. Thanks a lot, AT&T. (We'd also point out that AT&T is already sitting on massive caches of 700MHz and AWS spectrum and will be getting more through its Qualcomm deal, so this is a pretty tricky part of the case to build.)
AT&T's main argument is relatively simple: although a merger with T-Mobile won't create any more spectrum -- rather, combining the two company's spectrum holdings will enable all of it to be used more efficiently and ultimately serve more people. This is broken up into a number of sub-arguments:
- Efficiencies from combining T-Mobile's cell sites into AT&T's network, a process that will begin "immediately" after the deal is approved, yield results in nine months, and be completed in two years.
- The combined company will "eliminate redundant control channels and promptly free up 4.8 to 10 MHz of extra spectrum, depending on the market."
- The company talks up the potential for "channel pooling efficiencies," which is a fancy way of saying that users of both networks will have access to each others' resources instead of being arbitrarily split into two buckets that can't spill over into the other during busy periods. AT&T uses ticket agent lines at an airport to illustrate the point: one line with four agents can serve people more efficiently than two lines with two agents at opposite ends of the airport, since the lines will almost certainly be different lengths.
- Utilization efficiencies from making better use of "spare" capacity in places where the networks are underutilized.
- Broader deployment of LTE, using T-Mobile's AWS spectrum (AT&T is already using both AWS and 700MHz bands to build out its LTE services). This basically means that T-Mobile's "4G" HSPA network will be shut down and replaced by LTE over time, which we were all mostly expecting anyway. Oh, and T-Mobile has spectrum licenses across the country, which makes it easier for AT&T to build out their network.
- In talking about LTE coverage, Rick Moore, AT&T's SVP of Corporate Development, notes that the company's "senior management concluded that an 80% build was the limit [their] company could justify to [their] shareholders" -- in other words, the merger is the only way the suits were going to give the thumbs-up to the 97 percent figure they're talking about now.
- Worried that the integration might not go smoothly? "Cingular’s acquisition of AT&T Wireless in 2004 is a prime example of our ability to execute on synergy plans. Within two years of the AT&T Wireless acquisition, most of the integration work was complete and merger synergies were being realized."
"In short, this transaction is the most pro-consumer solution to the critical capacity challenges facing these two companies. It is also the most pro-innovation and pro-investment solution for America." It is not clear whether hard copies of the filings come with miniature American flags, but they should.
In the "sum is greater than the parts" department, AT&T also talks up its COWs -- mobile cell sites that can be deployed to disaster areas or to temporary crowds where service is suffering -- as an example of its emergency preparedness, specifically citing its response to Hurricane Ike in 2008. Likewise, it praises T-Mobile's response to Katrina in 2005, saying the pair's "combined emergency-preparedness initiatives will provide customers with more robust disaster recovery capabilities than they would receive in the absence of this transaction."
AT&T assesses the 'competition'
- Verizon is AT&T's "closest competitor," and "occupies an exceptionally strong position in all market segments, and it claims unequaled network advantages in the provision of high-end LTE services over its nationwide 22 MHz block of 700 MHz spectrum." AT&T also says Verizon has outspent it on advertising in three of the last four years.
- Sprint is described as a "tough, significant, and resurgent competitor," AT&T notes, has "reversed its earlier setbacks" and is in the midst of a multi-billion dollar network upgrade -- and AT&T concludes that "Sprint appears to have delivered on its network performance promises to customers." This is probably just about the only time you're going to hear AT&T laud Sprint's "substantial 4G success," praise the Evo 4G as "highly successful," and call Sprint's spectrum position "exceptional" and "far stronger than AT&T's."
- Here's where the list starts to get a little silly: MetroPCS and Leap are described as "the industry's leading mavericks," which might be the best line in the entire filing. They're grouped under the same bullet, "all you can eat" providers that focus on the value market. AT&T also points out that MetroPCS is outpacing T-Mobile in some markets -- quite an accomplishment for a regional carrier -- and both have LTE plans in place, allowing them to "quickly fill any market gap T-Mobile USA leaves upon the completion of this transaction."
- US Cellular, with presence in 26 states, "has strong double-digit shares in many markets."
- Relatively tiny players Cellular South, Cincinnati Bell, and Cox are all mentioned as offering "nationwide wireless service plans with marked success." They can't seriously be using these guys to make the point that competition is still fierce post-merger... but hey, it's possible that Cincinnati Bell's status as a "significant competitor in southwestern Ohio" is keeping the AT&T brain trust up at night.
- Clearwire "is also conducting LTE trials, which, according to CTO John Saw, have yielding 'mind blowing' results."
- LightSquared won't even have a live network until later this year, but AT&T's already noting them as a competitor. They expect to cover about 100 million people with LTE by the end of 2012, and they have a deal in place with Leap.
The company also points to Android as both a cause and effect of "intense competition" within the industry, saying that the operating system is innovative and offers many apps, but that its "extraordinarily rapid growth is also due to the fierce rivalry among wireless service providers."
AT&T CTO John Donovan says that the merger will give the company "sufficient" spectrum to support its new LTE network prior to the next round of spectrum auctions, "which will further enhance innovators’ confidence in deploying new devices and services on AT&T’s LTE network," which -- in turn -- would "increase pressure on AT&T’s facilities-based wireless broadband competitors, including Verizon, Sprint, Clearwire, MetroPCS, Leap, and LightSquared, among others, to press for increased innovation on their own networks."
Only AT&T can rescue T-Mobile from itself
- The craziest bits in the entire filing may be AT&T's repeated putdowns of T-Mobile, saying that the carrier's "absence from the marketplace will not have a significant competitive impact, particularly vis-à-vis AT&T." Burn! The company says that it's too busy worrying about Verizon, Sprint, and "rapidly growing mavericks like MetroPCS and Leap and other providers," which have already started to "replace the diminished market role T-Mobile plays today." In general, building the case for the merger puts AT&T in an extremely awkward position, because it needs to explain both why it'll be in a bad spot if it can't make jam the deal through -- something corporate spin doctors never like to do -- and downplay the competitive relevance of the company it's trying to buy.
AT&T repeatedly drives home the point that T-Mobile has no "clear path" to LTE deployment, noting that current parent Deutsche Telekom has refused to shake loose additional capital for the company to buy the spectrum it'd need; of course, the argument here is that AT&T gives T-Mobile that clear path.
- "T-Mobile is now struggling for relevance in this increasingly competitive market."
- "While Sprint has turned itself around within the past two years, and while industry upstarts MetroPCS and Leap have grown with astonishing rapidity, T-Mobile USA’s percentage of subscribers nationwide has declined since 2009."
- AT&T is also insistent that T-Mobile is not a real competitor -- after all, if T-Mo isn't real competition, than the merger won't affect the market. It's a little funny to think AT&T views Cincinnati Bell as bigger regional competition than T-Mobile, but according to AT&T Chief Marketing Office David Christopher, "T-Mobile USA does not exert strong competitive pressure on AT&T," and "AT&T views T-Mobile USA as a competitor of limited and declining significance."
- The hits don't stop there, though -- AT&T says that T-Mobile doesn't have a "particularly compelling portfolio of smartphone offerings."
- AT&T's also lying about HSPA+ being equivalent to 4G, so it doesn't slam T-Mobile too hard, but it does say "T-Mobile USA’s HSPA+ launch appears to have been lost among other carriers’ 4G messaging."
- According to AT&T, T-Mobile's "business-oriented offerings are limited compared to those of AT&T, Verizon and Sprint."
- It's not all dire, though -- and it's not often you hear a carrier admit that one of its competitors has better customer service: "...because AT&T will adopt the best practices of each company, AT&T expects that its customers will benefit from T-Mobile USA’s industry-leading customer care practices."
- "T-Mobile USA customers will also gain access to a broader range of current devices such as the iPhone, the iPad, and the ATRIX 4G, as well as faster access to the next generation of devices." So there you have it, folks: the T-Mobile iPhone. Sort of.
- AT&T says that existing T-Mobile customers "who are happy" with their current rate plans can keep them and they'll "enjoy the benefits of improved service quality and thus a lower quality- adjusted price," but naturally, they'll be able to choose an AT&T plan as well. The undertone seems to be that T-Mobile's plans would be sunsetted for new subscribers, which is no surprise.
We'd wrap this up with a conclusion, but AT&T's already handled it for us. "Simply put, AT&T does not generally focus its competitive energies on T-Mobile USA because in our view: 1) T-Mobile USA does not have a strong differentiating network claim; 2) it does not have a marquee device portfolio; and 3) its emphasis on lower, but not the lowest, prices has not resulted in T-Mobile USA winning customers away from AT&T on a net basis." T-Mobile: it sucks so bad, AT&T wants to spend $39 billion on it.
AT&T's other major acquisition: the FLO TV spectrum
What about that 700MHz space that AT&T's buying from Qualcomm -- the spectrum formerly used for FLO TV?
Turns out the FLO spectrum is unpaired, which is kind of like the data equivalent of a half-duplex speakerphone. "Although technological advances will allow unpaired spectrum to be integrated into two-way wireless technologies to supplement downlink capacity, the technical specifications for doing so in LTE will not be developed until 2012, and equipment manufacturers will then need substantial time to design, test, and build the relevant equipment. As a result, this spectrum likely will not be available until 2014 at the earliest."
Meeting the government's nationwide broadband goals
One hot button AT&T's definitely pressing in this filing is the government's push for ubiquitous broadband, a goal the company says this merger will help meet.
- As it mentions many, many times throughout the filing, the merger would take AT&T's total LTE footprint from roughly 80 percent of the US population to 97 percent, marking "a quantum leap towards meeting the Administration’s rural broadband deployment objectives — without any expenditure of public funds."
- Regarding the fraction of the country that AT&T's pre-merger LTE plan doesn't cover: "The remaining 20 percent of the population generally lives in less populated areas, including rural and smaller communities, where economies of scale and density are very low and per-customer costs are very high. And in some of these areas, AT&T simply lacks the spectrum necessary to deploy LTE."
- AT&T says these rural deployments will help spur the creation of "thousands of jobs," though it glosses over the fact that the $39 billion in "synergies" it hopes to create through the merger will probably lead to quite a few job cuts, too -- so it's unclear how the net will look.
- Still playing the rural deployment card: "LTE will bring especially significant benefits to residents of rural areas and smaller communities, where the benefits of real-time video and similar capabilities are most urgently needed to fill gaps in physical infrastructure for healthcare, education, and other social needs."
Additional reporting by Nilay Patel