In a slide deck (PDF) released this morning as part of a conference call for analysts and journalists, AT&T defended its $39 billion acquisition of T-Mobile USA by stressing five "opportunities" the deal will provide. Number one is boilerplate: "Further improve the customer experience." So is number five: "Seize new opportunities."

But it's the middle three "opportunities" that give us pause. Number two is "grow ARPU," or average revenue per user. Number three is "reduce churn." And number four is "expand margins." They could be recast as "you'll pay us more money each month, you won't leave, and we'll make more profit on each dollar you pay."

In a fully competitive marketplace, none of these are concerns. AT&T-Mobile might offer more compelling services for which users would gladly pay, while offering such great customer service that no one wants to leave. As for margins, who wants a company to be inefficient?

But there is serious reason to doubt that the wireless market is moving in this pro-consumer, pro-competition direction. The US has four major national carriers—AT&T, Verizon, Sprint, and T-Mobile—but if this deal goes through, that number falls to three, only one of which can handle GSM handsets. And let's face it: third-place Sprint is struggling, having lost customers over the last few years as Verizon and AT&T both added them.

Competition isn't what AT&T would have us believe

In its announcement of the T-Mobile deal, AT&T stressed its belief that the US wireless market is hugely competitive.

The US wireless industry is one of the most fiercely competitive markets in the world and will remain so after this deal. The US is one of the few countries in the world where a large majority of consumers can choose from five or more wireless providers in their local market. For example, in 18 of the top 20 US local markets, there are five or more providers The competitiveness of the market has directly benefited consumers. A 2010 report from the US General Accounting Office (GAO) states the overall average price (adjusted for inflation) for wireless services declined 50 percent from 1999 to 2009, during a period which saw five major wireless mergers.

In today's slide deck, AT&T said that "successful providers" included Verizon, Sprint, Metro PCS, Leap, US Cellular, and Cellular South. See? Massive competition!

This is all true, but it also misses the point. Regional players simply aren't competing with the big national carriers for the same market. As the GAO report (PDF) mentioned above makes clear, the small players can't keep up. "While these economies of scale [at national carriers] can facilitate the continued growth of the top carriers, they can also create challenges to the growth and competitiveness of small and regional carriers," said the GAO. "In particular, small and regional carriers, as well as other stakeholders, noted their difficulties in securing subscribers, network investments such as chipsets, and handsets."

In addition, regional carriers aren't making the investment in data services that AT&T, Verizon, T-Mobile and Sprint are. When it comes to 4G, only MetroPCS has joined the "big four" in deploying it, covering 13 markets as of today—and with serious restrictions.

Besides, their market share is tiny, even in most local markets (though some, like US Cellular in Chicago and the Midwest, can do decent business). The GAO produced a helpful chart of 2009 wireless market share that does a nice job of showing just how competitive the business really is.

We arrived at this point after a decade of mergers and buyouts. Again, turning to the GAO, one can see the astonishing number of mergers that have produced the major national carriers.

Such mergers produced plenty of good. People want national coverage, and economies of scale in capital-intensive businesses like wireless should allow the large players to offer lower prices so long as the market remains fully competitive.

As the GAO noted, inflation-adjusted wireless prices in 2009 were half of what they were in 1999, even with all the consolidation. Still, this doesn't tell us much—wouldn't you expect wireless service to cost far less after a decade of tower building, cheaper electronics, and the plummeting costs of data backhaul?

But a chart produced by AT&T based on government data can be read in less positive ways. For instance, almost all of the decline happened between 2000-2001 and between 2009-2010. Put another way, the eight years in the middle of the chart were front-loaded with mega-mergers between SBC/BellSouth, Cingular/AT&T Wireless, and Sprint/Nextel. After those huge mergers, prices hardly moved (note that the Y-axis on this chart only goes from 60-75). Indeed, from 2005 to 2009 prices had essentially flatlined, hardly robust evidence that the big mergers themselves had much to do with any dramatic price drops.





This is good for you



The results of the merger don't look pretty. According to the long-running American Consumer Satisfaction Index, T-Mobile is the national wireless carrier with the best customer satisfaction. AT&T is the worst (though the spread isn't that great). Neither company does as well as the regional players, suggesting that consolidation has failed to produce a better customer experience.

In addition to better customer service, T-Mobile has better pricing than AT&T. For instance, my wife's prepaid cellphone, used only for occasional calls and a bit of texting, is with T-Mobile because of the lower annual cost of operating a phone. Those plans are likely to go by the wayside.

AT&T is quite explicit about this. The average monthly payout for a T-Mobile data plan is $12.80, while AT&T pulls in an average of $17.50 for its data plans. One goal of the merger is to "increase T-Mobile smartphone penetration and data ARPUs," in part through adopting AT&T's own tiered data plans.

T-Mobile's margins also need to be improved, too, something associated more with being a "premium" provider and not a "value" provider. Right now, T-Mobile makes 29.2 percent profit margins, which sounds good until you realize that AT&T makes 40.7 percent.

On the other hand, AT&T claims that the deal will bring LTE 4G coverage to 95 percent of America, which neither it nor T-Mobile could do on their own. And AT&T will keep at least some of T-Mobile's cell towers in order to increase its own coverage ("equivalent to several years of cell-site build in most markets," AT&T said). Some markets will actually see their 3G coverage double, though the deal won't happen for at least a year.

Will these pro-consumer aspects trump the competition concerns? Battle lines are already being drawn before the Federal Communications Commission and Department of Justice both dig into the deal.

"Hello, Cellphone Soviet"



Free Press trashed the buyout, saying "A market this concentrated—where the top four companies already control 90 percent of the business, and two of them want to merge —means nothing but higher prices and fewer choices, as the newly engorged AT&T and Verizon exert even more control over the wireless Internet."

Defenders of the deal, like the Free State Foundation, found themselves in the odd position of arguing that less competition, in this case, might be better for Americans.

"In an 'idealized' marketplace, the more competitors the better," said president Randall May. "But the telecom marketplace is not an idealized market. It is one that requires huge ongoing capital investments to build broadband networks that deliver ever more bandwidth for the ever more bandwidth-intensive, innovative services consumers are demanding."

To which MarketWatch columnist Brent Arends had a colorful rebuttal. "The whole essence of our free market system lies in consumer choice," he wrote. "Take away that choice and the consumer is powerless. Goodbye, free market. Hello, Cellphone Soviet. And this is a for-profit Cellphone Soviet, too. The worst of all possible systems."