Analysis: AT&T mega merger bad sign for spectrum reform

Reflections are seen in the window of an AT&T store in New York March 21, 2011.

WASHINGTON (Reuters) - AT&T Inc's $39 billion bid to buy Deutsche Telekom AG's T-Mobile casts doubt on the U.S. government's ability to swiftly deliver policy to meet the booming demand for wireless services.

Wireless companies have long lobbied for help to deal with what they see as a looming "spectrum crunch" as more consumers turn to mobile devices including Apple Inc's iPhone to surf the Web.

AT&T -- the No. 2 U.S. mobile carrier often criticized for dropped calls and slow connection speeds -- is not waiting for government remedies intended to free up airwaves for mobile broadband to help it meet ever-growing demands for video and data.

But the move could slow legislation needed to free up spectrum for auction to wireless carriers, a potential thorn in the Federal Communications Commission's agenda.

"The way things work in Congress, there's competition for what issues get the lawmakers' time and resources," Medley Global Advisors analyst Jeffrey Silva said.

Top lawmakers have already signaled an interest in scrutinizing the large-scale transaction.

The proposed merger would boost AT&T's spectrum holdings -- the airwaves used for wireless communication -- nearly 20 percent from 0.86 to 1.02 megahertz per million subscribers.

AT&T's Ralph de la Vega, chief executive of the company's wireless unit, said in television interviews this week that AT&T faced a spectrum shortage in the "short term."

A lack of spectrum would mean clogged networks, more dropped calls and slower connection speeds for subscribers.

The deal would "add capacity sooner than any alternative" and offers a quick solution "to the impending exhaustion of wireless spectrum," the company said in a release.

"AT&T is aware that there are regulatory initiatives to free up new spectrum but, in their world, they can't afford to wait," Silva said.

LEGISLATION MAY STALL

The U.S. government has been hunting for underused airwaves to make 500 megahertz of spectrum available over the next 10 years for wireless services.

But much of the plan hinges on TV broadcasters agreeing to part with portions of their highly sought after airwaves and Congress granting the FCC authority to hold incentive auctions that would compensate broadcasters for that spectrum.

Broadcasters have raised concerns about giving up their airwaves, and have considerable support among lawmakers because of their coverage of home-town politics.

Paul Gallant, an analyst with MF Global, said AT&T's bid for T-Mobile puts a dimmer outlook on the likelihood of lawmakers moving spectrum legislation this year.

"We would now put the odds of Congress passing major spectrum legislation in 2011 at 35 percent," he said in a research note.

Gallant said lawmakers could view the merger as giving AT&T what they need without controversial legislation.

The subcommittee has scheduled a hearing on spectrum for April 12.

The hearing could shed light on whether there's consensus on Capitol Hill that a wireless spectrum crisis exists. "That could be the biggest obstacle if there's not an acknowledgment that there is a looming spectrum crunch," Silva said.

Still, the "win-win-win outcomes" of incentive auctions freeing up airwaves, funding a public safety network and reducing the deficit will prompt lawmakers to act by 2013, Gallant said.

But the FCC has urged for swifter action.

A senior FCC official, who spoke on condition of not being named, said any potential shifting of existing spectrum among wireless companies does nothing to solve the fundamental problem of making more spectrum available to ease the crunch the wireless industry faces.

"If we do nothing in the face of the looming spectrum crunch, many consumers will face higher prices ... and frustrating service -- connections that drop, apps that run unreliably or too slowly," FCC Chairman Julius Genachowski said in a speech this week at a wireless industry event.

He declined to comment on the proposed merger.

(Reporting by Jasmin Melvin, editing by Maureen Bavdek)