Why the AT&T/T-Mobile deal may mean less than it seems

Earlier today, AT&T announced an agreement with Deutsche Telekom to acquire its U.S. T-Mobile operation for $39 billion in cash and stock. The timing of the announcement was very interesting: AT&T and T-Mobile chose to announce the deal on a Sunday, while Western forces are attacking Libya, the Japanese disaster continues and the U.S. college basketball championships are underway--in other words, when very few people are likely to pay attention to it.

Part of the companies' caution is due to the fact that the deal will undergo intensive investigation by the Federal Communications Commission, Federal Trade Commission and U.S. Department of Justice. There's an excellent chance that the deal will be challenged in court; it will add T-Mobile's 33.7 million subscribers to AT&T's 95.5 million, making the merged company the largest mobile operator in the U.S.

On the other hand, there's also a good chance that the deal will go through, at least in some form. T-Mobile is the Number 4 mobile operator in the U.S., the smallest of the four nationwide operators. It's struggling to come up with the capital to upgrade its network to the worldwide LTE standard, and despite its ads portraying its existing network as 4G, most consumers realize that it's not true. Both AT&T and T-Mobile use the same GSM transmission system (albeit at different frequencies), so integration of the two companies' networks will be much easier than if the rumored Sprint/T-Mobile merger had occurred.

AT&T is likely to argue that it's the most natural partner for T-Mobile, and that T-Mobile is unlikely to survive as a national operator in the long term if it stays independent, is acquired by a company with an incompatible infrastructure, or is acquired by a private equity investor that doesn't have extensive telecom experience.

The obvious concern is that an AT&T/T-Mobile merger will result in higher prices and poorer service for consumers, and given AT&T's prior track record with acquisitions, that's likely to be the case. Regulators may require the two brands to maintain separate identities, even if the infrastructure of the two companies is merged. My belief is that AT&T will continue to use T-Mobile as a "value" brand to compete with prepaid and lower-priced postpaid services from operators such as MetroPCS and Leap Wireless, but will migrate T-Mobile's most profitable customers to AT&T.

T-Mobile may not have much of a future in the U.S., whether or not the AT&T acquisition goes through. It's up to AT&T can convince regulators that the most likely outcome for an independent T-Mobile is, at best, to become a regional carrier without the scale to compete with AT&T, Verizon and Sprint.

You may not be able to see Clear(ly) for much longer

Clearwire, the U.S. wireless broadband provider, is fighting for its life. Operating under the Clear name, Clear offers WiMAX services itself and through Sprint. Even as the company was announcing record subscriber growth last week, it also announced a 15% layoff, delays in opening up the Denver and Miami markets, dramatic slowdowns in the number of new retail stores to be opened, and a virtual shutdown of its advertising and promotion efforts. In addition, executives from Sprint, Clearwire's largest investor, resigned from the company's board of directors.

Now comes news that Sprint has initiated arbitration proceedings with Clearwire over the amount of money that Sprint has to pay Clearwire for use of that company's 4G mobile phones. According to FierceTelecom, Clearwire claims that several hundred thousand 4G phones are being used in areas with no 4G coverage, and that Sprint is supposed to make monthly payments to Clearwire for every 4G phone it sells, whether or not it's used in an area that supports 4G. Sprint disagrees and has initiated arbitration. Sprint charges its subscribers $10/month extra for the 4G phones it sells, whether or not the 4G service is used, and Clearwire is apparently claiming some or all of that $10 fee.

This comes on the heels of yet another story suggesting that Sprint might invest additional money in Clearwire. However, it's difficult to see how motivated Sprint is to invest more money in Clearwire if it can't be bothered to make monthly payments of no more than a few million dollars for the right to use all its 4G phones on Clearwire's network.

In more normal economic times, the most likely outcome for Clearwire is that Sprint would purchase 100% of the company and fold it into Sprint's operations. However, Sprint doesn't appear to want to do that. What may actually be happening is that Sprint is looking for a strategy for transitioning to LTE, which is being adopted by all major U.S. carriers and is widely assumed to be the replacement for WiMAX, even for Clearwire. Sprint needs a 4G solution as a differentiating advantage until it gets LTE up and running, and for that it needs Clearwire. However, that advantage isn't worth acquiring all of Clearwire.

Therefore, even with the arbitration, the most likely outcome is that Sprint will invest enough in Clearwire to keep it afloat with no new markets or major capital investments until Sprint gets LTE running nationwide. After that, Clearwire will be on its own.

If you're thinking about buying a Sprint 4G phone or Clear's service and equipment, you may want to wait. Verizon will launch its LTE service later this year, AT&T will follow soon after in 2011, and by this time next year, WiMAX may be a footnote in wireless history.

AT&T to deploy HSPA+ as high-speed wireless stopgap

It appears that the combination of Verizon's advertising and customer complaints have taken their toll on AT&T. The company had planned to move from its existing wireless architecture, which uses HSPA 7.2 (capable of theoretical download speeds up to 7.2Mbps) but without sufficient backhaul capacity in all locations to support that speed, to LTE, which offers theoretical speeds of 100Mbps down and 50Mbps up, starting in late 2011. (There's a huge difference between theoretical and actual; Verizon achieved LTE download speeds of from 5Mbps to 12Mbps and uploads from 2Mbps to 5Mbps in tests in Boston earlier this year.)

Last week, however, AT&T announced that it will implement HSPA+ in most locations, which has a maximum theoretical download speed of 14.4Mbps, by the end of this year. Customers in areas with limited backhaul capacity will see little or no improvement. What's likely is that AT&T will increase its backhaul capacity during the rest of this year and 2011, and then start implementing LTE late next year. Meanwhile, Verizon will have LTE live in 25 to 30 markets by the end of this year, and will have as many as five LTE phones available for customers by mid-2011. Once again, AT&T's strategy of minimizing its plant and equipment investments with "good enough" technology will keep it at a competitive disadvantage for at least another year.