A Threat of GSM Monopoly in the Mobile Market
Intermediate Microeconomics
The University of Akron
Eric Tannehill
May 4, 2011
On March 20th, 2011 AT&T Incorporated and Deutsche Telekom announced
that they had entered into an agreement in which AT&T will purchase competing
mobile network T-Mobile USA from Deutsche Telekom. The acquisition will proceed
with the trading of roughly thirty-nine billion U.S. Dollars worth of cash and stocks
from AT&T to Deutsche Telekom. This merger, which is among the largest
worldwide acquisitions in the past year, is under severe scrutiny from the United
States government. This paper will go discuss the terms and conditions of this
agreement while assessing the potential economic effects that it will have on the
mobile phone industry in the United States.
The acquisition of T-Mobile USA will provide AT&T with many desirable
assets. With the recent boom in mobile data subscribers there has been an
increasing strain on network providers to supply enough bandwidth in which their
customers can operate. The purchasing of T-Mobile by AT&T will provide the latter
with an optimal combination of network assets to add capacity to their dataproviding infrastructure. This appears to be an easier method of growth for AT&T
than by expanding upon their own towers and network. AT&T has experienced a
growth in their mobile traffic of 8,000% (or eighty times) over the past four years.
By 2015 they are projected to experience continued growth in data consumption of
up to an additional ten times that of the 2010 mark (White, 2011). AT&T is claiming
that it will require additional data spectrum before any new spectrums become
available, hence their eagerness in the purchasing of T-Mobile USA.
AT&T and T-Mobile are capable of merging due to the common data
transmission that they share. In the United States there are two primary networks
in which data is transmitted wirelessly (excluding the recent introduction of fourthgeneration technologies): Code Division Multiple Access (CDMA), which is utilized
by Verizon Wireless and Sprint Nextel, and Global Systems for Mobile
Communications (GSM) which both AT&T and T-Mobile operate on (GSMA, 2011).
Although both of the vested companies use different GSM frequencies, they use
same base technology, which would allow for the simple integration of similar
products.
This acquisition will push AT&T into the first place for the largest mobilephone provider in the United States, resulting the swapping of positions with
Verizon Wireless who would fall to the second largest provider. That will leave
Sprint Nextel, who was already in third place nationally, as the smallest of all major
U.S. carriers by a wide margin.
The case of a single-carrier GSM market has been a cause for concern for
many people, which has resulted in what will likely be a lengthy investigation by the
United States Federal Communications Commission. This committee is concerned
that the deal will reduce the market competitiveness. If this were the case,
consumers searching for a GSM network provider will most certainly end up facing
increased prices along with more limited options. Gigi Sohn, president of the
Washington-based consumer advocacy group Public Knowledge vehemently
opposes the buyout. “We know the results of arrangements like this – higher prices,
fewer choices, and less innovation.” (Thomson, 2011). As the GSM technology is the
most popular type of data network used worldwide, Americans who need phones
capable of use in other countries will be forced to either join the ranks of the merged
AT&T- T-Mobile corporation or to buy an unlocked separately.
Unlike competitive firms, organizations functioning as a monopoly operate at
a point along the industry demand curve that yields economic inefficiency. The
monopolist firm will produce at the point where their marginal cost of production is
equal to the marginal revenue from selling the last unit. Generally this functional
point is different from the average total cost curve and can yield indefinite above
normal profits. By producing at this level there will be a certain guaranteed level of
deadweight loss, which is the summation of potential gains that go neither to the
consumers or the producers. This deadweight loss arises from a pricing point that is
not at the equilibrium level of demand and supply (in this case the pricing point will
be above the equilibrium level) and buyers lose out on some of their consumer
surplus at the extent of the producers.
The Federal Communications Commission annually complies a Mobile
Wireless Report in which they present the findings regarding the state of
competition in the mobile services industry. Their primary goal of function is to
promote competition in the market. For the year 2009 they suggested that key
inputs in the mobile marketplace, including data spectrum, must evolve in order to
ensure a superior level of competition in the future. On the subject of firm exits in
this industry, the Federal Communications Commission states that the exit of firms,
through mergers, acquisitions, or discontinuance, has both positive and negative
effects on competitive performance and consumer welfare. “The main potential
negative effect of the exit of a competitor is that with fewer competitors remaining
in the marker, there is an increased possibility of higher prices, reduced quality of
services, or slower rate of innovation” (Federal Communications Commission,
2010). In continuance, the FCC states that if there is firm consolidation that results
in the substantial increase of firm size, there could be reduced competitive pressure
placed on the firm. This is clearly stated to have the potential of higher prices for
consumers and lower incentive to improve consumer services. In previous years
there have been cases of mobile firm acquisitions, many of which have resulted in
the divestiture of wireless assets to other firms in order to maintain reasonable
competition (Federal Communications Commission, 2010).
In the case of the AT&T and T-Mobile acquisition there will be only one GSM
network provider in the United States. However, if one were to look at the entire
mobile phone industry there would only be two major players. AT&T and T-Mobile
combined account for 39% of the market, while Verizon operates on 31.1%. Sprint,
who would now be in a far-reaching third place, holds 12% of the U.S. mobile
market (Bode, 2010). With two goliaths dominating the market and a handful of
other small providers it is likely that the mobile industry could begin to stagnate due
to decreased competition and low innovation. Some smaller network providers
such as Boost Mobile and Virgin Mobile, who do not offer coverage across all of the
United States, would not be able to keep up with the nation-wide leviathans that will
now be setting more stringent price points and production levels to maximize
profits.
There is a general belief that this acquisition will not be passed as is; there
will likely be a slew of concessions imposed upon AT&T in order for this deal to go
through. It is expected that government officials would require the combined
corporation to sell off assets such as cell towers, wireless spectrum, and possibly
even customers in some markets that may be deemed too concentrated to smaller
network providers to increase competition. Other practices that are already
considered to be anti-competitive may have to go. Some include imposing large fees
on customers that terminate their contracts before they expire and the blocking of
certain online applications. This is similar to the laws of net-neutrality (which
deems it unlawful to ban certain internet content), however these are not imposed
upon mobile network providers (Tessler, 2011).
The federal government is also expected to set implications that support
smaller wireless providers who may not be able to compete with a merged AT&T –
T-mobile corporation. These could involve data-roaming obligations that require
AT&T to allow regional wireless companies to use its network in areas that are not
supported by the latter. This would be an important aspect of the merger, as
smaller rival wireless providers would likely not be able to compete with nation
wide coverage, therefore preventing them from being immediately forced out of the
market.
With the ever-rising dominance of data-hungry phones such as the iPhone
and phones operating on the powerful Android operating system, carriers have
been struggling to meet data demands. AT&T sees opportunity to appease their
customers’ demand for data by acquiring T-Mobile’s spectrum. However, AT&T is
using this as an alternative to the option of systematically building up their own
network. This natural growth could be a strong source of job growth in a technical
industry, which could give the U.S. economy a much-needed boost. AT&T sees fit to
take the easy route, the path yielding far less job creation and production.
Going past the effects on the average consumer, the merging of AT&T and TMobile will likely produce negative externalities for the corporations supplying
inputs to the industry. Phone handset makers, such as the likes of HTC, Motorola,
and Samsung, are likely to take a hit, as they will see the carriers who purchase their
GSM-based phones shrink from two to one. They will have less ability to control the
prices of their handsets, as there will now only be a single buyer that dictates which
GSM phones enter the market. Similarly, network equipment suppliers such as
Alcatel-Lucent and Nokia Siemens, who supply gears and other equipment to both
T-Mobile and AT&T, will lose nearly all of their bargaining power with a single
customer and their profit margins could take a major hit (Malik, 2011).
Sprint, who is currently the third largest North American wireless provider,
has expressed its dissent over the proposed acquisition. They believe that this deal
will alter the industry dramatically by having two carriers holding nearly eighty
percent of the total customers. Consumers may quickly see their most cost-effective
wireless option disappear as soon as the integration of AT&T and T-Mobile
networks goes live, as T-Mobile currently has some of the cheapest wireless rates.
For comparison, in 2010 both T-Mobile and Sprint offered unlimited voice, text, and
data services for $99.99 per month while Verizon and AT&T offered the same
services for $119.99 per month (Federal Communications Committee, 2011). Sprint
and T-Mobile’s more aggressive pricing structures has been able to keep the larger
companies’ pricing plans in check. With the removal of T-Mobile from the market
Sprint will likely experience severe pressure from existing companies, and with a
small percentage of the market share impeding on their profit margins they may be
forced to raise prices closer to that of AT&T and Verizon. This is probably a worstcase scenario, however it would leave American consumers without any competitive
options.
The Federal Communications Commission (2010) has provided a map of
coverage density in the United States. The darkest region depicts areas covered by
four or more wireless providers.
The merger of AT&T and T-Mobile will bring nationwide coverage to a maximum of
three service providers, therefore resulting in fewer options per area, which in turn
yields less competition.
As we learned in our microeconomic theory, among the negative implications
of a monopoly such as economic inefficiency (deadweight loss), there is another
possible harmful outcome that is harder to describe; this is known as x-inefficiency
or laziness. With a merger resulting in a GSM monopoly (or perhaps oligopoly from
an industry-wide perspective) these operating firms will have less incentive to be
‘good’ producers. Price making monopolies operate at a point where prices are
greater than their long-run average costs. This x-inefficiency consists of behaviors
such as empire building or a lack of innovation that end up increasing the firm’s
average total cost. Because a non-competitive firm can set their price above the
equilibrium supply and demand level they need not worry about minimizing costs.
This x-inefficiency is a detriment to the economy in the sense that a firm’s laziness
due to low competition causes them to operate in a way that increases total costs,
causing further divergence from the economically efficient level.
This acquisition proposed by AT&T Incorporated involves many moving
pieces that will have serious implications for the overall health of the American
mobile market. The rapid growth of the wireless data industry has resulted in the
desperate need for increased bandwidth for service providers. The merger of AT&T
with T-Mobile will offer greater network capabilities for AT&T’s data-hungry
consumers, however there is strong reason to expect decreased competition and
negative effects for consumers and competing firms alike. In summation, if
approved by the Federal Communications Commission it can be expected that this
acquisition will drastically change the landscape of the United State’s wireless
industry.
Works Cited
White, Gregory. "AT&T Buys T-Mobile." Business Insider.
<http://www.businessinsider.com/att-buys-t-mobile-2011-3>. March 210,
2011.
GSMA. "GSM World." GSM World : Home of the GSM Association.
<http://www.gsmworld.com/technology/gsm/index.htm>, 2011.
Thomson, Amy. "AT&T Deal May Get a Year of Regulatory Scrutiny Even With
Disposal Pledges." Bloomberg - Business & Financial News.
<http://www.bloomberg.com/news/2011-03-21/at-t-has-to-fend-offscrutiny-to-win-nod-for-unthinkable-t-mobile-bid.html>, Mar 4, 2011.
Bode, Karl. "Wireless Market Share By Device And ISP." DSLReports.
<http://www.dslreports.com/shownews/Wireless-Market-Share-By-DeviceAnd-ISP-108292>, May 7, 2010.
Tessler, Joelle. "Monopoly Worries Plague AT&T's Purchase of T-Mobile."
TheSunNews.com.
<http://www.thesunnews.com/2011/03/22/2053664/monopoly-worriesplague-purchase.html>, March 22, 2011.
Malik, Om. "In AT&T & T-Mobile Merger, Everybody Loses." GigaOM · Tech News,
Analysis and Trends. <http://gigaom.com/2011/03/20/in-att-t-mobilemerger-everybody-loses/>, March 20, 2011.