Analysis: AT&T vision of wireless competition is tough sell

WASHINGTON Fri Mar 25, 2011 7:36pm EDT

The at&t logo is seen at their store in Times Sqaure in New York April 21, 2010. REUTERS/Shannon Stapleton

The at&t logo is seen at their store in Times Sqaure in New York April 21, 2010.

Credit: Reuters/Shannon Stapleton

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WASHINGTON (Reuters) - AT&T (T.N) faces a tough pitch convincing regulators that its $39 billion deal to buy Deutsche Telekom AG's (DTEGn.DE) T-Mobile will not create a duopoly in the cell phone market.

The massive telecom company was clearly honing its pitch even as it came out of the gate.

When announcing the deal on Sunday, it said that in 18 of the 20 top U.S. local markets there are five or more local carriers, not so subtly telling regulators they should take a market-by-market look when assessing competitiveness.

AT&T chose not to focus on the fact that the deal would concentrate 80 percent of U.S. wireless contract customers in just two companies -- itself and Verizon Wireless.

Susan Crawford, who teaches at Benjamin N. Cardozo School of Law at Yeshiva University, waved away the AT&T argument.

"It's a red herring to say there are five in major cities," she said. "People buy mobile service for nationwide coverage. ... It's already a duopoly."

AT&T also stressed that it was making the deal to acquire spectrum, which is in high demand as technology becomes more mobile.

Unlike most companies announcing mergers that regulators question, AT&T did not argue that the deal would mean lower prices but said that the cell phone market was competitive, and would remain rough and tumble despite the proposed deal.

This is the argument that AT&T's legal team is expected to take to the Justice Department for its antitrust review. The Federal Communications Commission also must sign off on the transaction for it to go forward.

One person who agrees with AT&T is Jeff Eisenach, who teaches at George Mason University School of Law.

"The wireless market is extremely competitive," he said, arguing that the cell phone industry lent itself to monopoly to take advantage of economies of scale.

"You see prices are declining really rapidly. I have not noticed Verizon and AT&T acting like cozy monopolists lately," he said, pointing in particular at the companies' vigorous advertising campaigns.

But most antitrust experts interviewed said it will be tough to convince regulators that the deal will allow a competitive wireless marketplace to thrive, without significant asset sales by AT&T.

This is especially true since the government itself recently raised doubts about competition in the wireless industry, before the deal was announced.

The FCC in May 2010 issued an annual report that for the first time since 2002 did not describe the wireless industry as having "effective competition."

The industry leader is Verizon Wireless with about 31.5 of the market and AT&T with 28.5, trailed by T-Mobile (12.1 percent) and struggling Sprint Nextel (S.N) (17.9 percent), according to an FCC report issued last May.

Verizon Wireless is owned by Verizon Communications (VZ.N) and Vodafone Group Plc (VOD.L).

While the four big companies have national reach, the smaller do not. These include MetroPCs (2 percent), US Cellular (2.3 percent) and Leap (1.4 percent), which owns Cricket, and some antitrust experts dismiss them as not truly competitive with the big companies.

"It's hobbled competition," said one veteran of the Justice Department's antitrust department.

Traditionally DOJ analyzes deals like this one by looking at local markets, said Bob Doyle, an antitrust expert with the law firm Doyle, Barlow and Mazard PLLC.

"However this deal, given the size and significance of both players, the government might be inclined to take a bigger picture and examine this deal on a national basis in which case you have a problematic four-to-three merger," he said.

"There could be several hundred localized markets where there could be divestitures in this case," he said.

(Additional reporting by Jasmin Melvin; Editing by Bernard Orr)

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