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Suit to stop AT&T, T-Mobile merger: a boon for consumers?

The Justice Department's suit to block the merger could boost mobile-phone competition. If successful, the suit could preserve low-price plans that T-Mobile has been pushing.

By Business editor / August 31, 2011

This file combination photo displays logos for AT&T (left) and Deutsche Telekom AG. The Justice Department filed suit Aug. 31, 2011, to block AT&T's $39 billion deal to buy T-Mobile USA on the grounds that it would raise prices for consumers.

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If the Department of Justice succeeds in deep-sixing the proposed merger between AT&T and T-Mobile USA, consumers could come out ahead.

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That’s partly because, as consumer groups have argued all along, the more competitors there are in the marketplace, the less mobile-phone service is likely to cost. If one of those competitors is feisty T-Mobile, which consistently has offered lower-cost and more innovative plans than its competitors, the marketplace will be especially well served.

There are at least two other reasons a broken merger could help:

First, T-Mobile’s merger agreement with AT&T stipulates that AT&T pay it a $3 billion breakup fee in case the merger doesn’t go through, says Parul Desai, policy counsel for Consumers Union, a consumer information group in Yonkers, N.Y., and publisher of Consumer Reports. That money could help the small mobile carrier enhance its services even more.

Second, not merging with giant AT&T could pave the way for a merger with smaller Sprint, creating a joint entity that could provide more competition for AT&T and Verizon.

The Justice Department’s suit Wednesday to block the merger is a win for consumers, Ms. Desai says. “In this case, consumers can put a W next to their name.”

Not so, says AT&T. The telecom giant says it plans to contest the suit “vigorously,” because the merger will bring “enormous benefits.”

For example, by going it alone, AT&T calculated that it did not make business sense to expand its mobile broadband network from 80 percent to 97 percent of the US population, even though it would add an extra 55 million Americans, mostly in the rural US, to its potential customer base. But in an Aug. 8 letter AT&T's counsel sent to the Justice Department regarding the merger, the company argued that with the merger, spending an extra $3.8 billion on the expansion made sense because of T-Mobile's extra spectrum capacity, economies of scale, a larger customer base, and other advantages of the merger.

Thus, with the merger, millions of Americans would get mobile broadband and the nation would benefit from increased investment.

But outside observers are skeptical that AT&T's motives are that pure.

“Sometimes, it’s better to knock out a low-cost competitor because it lessens competition,” speculates Desai of Consumers Union.

The Justice Department argues that the negatives of the deal outweighed any positives: “We believe the combination of AT&T and T-Mobile would result in tens of millions of consumers all across the United States facing higher prices, fewer choices and lower quality products for their mobile wireless services,” James Cole, the department’s Deputy Attorney General, said at a press conference Wednesday announcing the lawsuit.

For its part, T-Mobile also expressed its great disappointment with the federal suit.

T-Mobile wireless plans typically cost $15 to $50 less per month than comparable plans from AT&T, Consumers Union found in a recent price analysis. The consumer group's most recent cellphone satisfaction survey also showed that the carrier ranked higher than AT&T on almost every measure.

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