The quest for bandwidth
The rapidly increasing demand for smartphones and mobile bandwidth has prompted some analysts and regulators to warn of a looming wireless traffic jam — an irritant that some iPhone users in major cities have already experienced. Now, AT&T is proposing what it says is the fastest way to boost the capacity of its wireless network: buying T-Mobile. The $39-billion purchase would eliminate one of the four largest U.S. mobile phone networks and leave just two companies — AT&T and Verizon Wireless — in control of more than 70% of the market. That’s reason enough for regulators to take a skeptical view of the deal. Yet AT&T’s technical arguments raise the possibility that the acquisition could do more for the burgeoning ranks of smartphone users than the companies are likely to do separately.
Federal Communications Commission Chairman Julius Genachowski started sounding alarms about the need for more wireless bandwidth not long after he joined the FCC in 2009. The problem, as he told a wireless industry convention this month, is that the demand for mobile bandwidth is expanding far faster than the amount of airwaves (“spectrum”) that mobile phone companies have licensed.
Although telecommunications industry insiders made similarly dire predictions about wired networks only to be proved wrong, the concerns about wireless bandwidth seem well founded. Smartphones have made the leap from business users to the mass market, and consumers are embracing tablet computers at a phenomenal clip. Meanwhile, software developers are just beginning to exploit the capabilities of these powerful devices, creating applications such as Layar and Color that encourage people to upload and download data continuously.
AT&T executives argue that buying T-Mobile’s network, which uses the same mobile phone technology as AT&T’s but runs on a different frequency band, would expand the capacity of AT&T’s network much faster than the company could do by upgrading existing facilities. That’s because the purchase would bring AT&T more spectrum, providing extra bandwidth in crowded cities. Combining the two companies’ towers would allow AT&T to subdivide its network into smaller cells with fewer users per cell, which reduces traffic jams. And the elimination of T-Mobile would reduce the amount of bandwidth needed for directing traffic on the combined network, freeing up more for voice calls and Internet use.
Granted, the route AT&T has chosen isn’t exactly the fast lane. Regulators will hold up the acquisition for months while they review the pros and cons. And if it gets the green light, AT&T would have to make considerable upgrades to T-Mobile’s facilities to integrate them into its network. But even if Congress were to agree today to auction off more spectrum, it could take a decade to do all the work necessary to put those frequencies to use. And despite insistent calls for more spectrum from tech and telecommunications companies for years, Congress isn’t close to approving new auctions.
Nevertheless, the concerns about capacity shouldn’t lead the Justice Department, which will consider the effect on competition, or the FCC, which will decide whether the deal is in the public interest, to accept AT&T’s claims at face value. The steady consolidation of the wireless industry has left it with two dominant carriers. The proposed acquisition would eliminate one of the two leading low-cost rivals, reducing innovation in pricing and service offerings. The third-largest carrier, Sprint, is already taking a beating on Wall Street as investors take a dim view of its survival in an even more concentrated market. And the other mobile phone operators — most notably Leap Wireless and MetroPCS — are so much smaller, they typically find themselves on the losing end of bidding wars for spectrum and hot new phone models.
Some industry analysts contend that AT&T could more than meet its bandwidth needs without buying one of its competitors if it were willing to devote more money to network upgrades. For example, it could multiply the capacity of cell towers by connecting more of them to the phone grid with fiber-optic cables, and instead of buying T-Mobile’s towers, it could lease space on them. It could also seek to share spectrum with T-Mobile, as Sprint does with wireless broadband provider Clearwire.
Whether those steps would be practical and effective is a question for the regulators studying the deal. So too will antitrust officials have to judge the effect of giving AT&T nearly 40% of the wireless market (with Verizon controlling an additional 31%). We’ve seen how a duopoly behaves in residential broadband, where many markets offer consumers only the choice of DSL from one company or cable modem service from another: Monthly rates have held firm or inched up over the last three years, even as broadband prices around the globe have fallen. AT&T recently confirmed that it plans to stop offering DSL at a flat rate for unlimited use, effectively raising the price of broadband for the most active consumers.
There’s little question that the deal would be good for AT&T. Combining the two companies would cut costs and increase revenue so much, analyst Craig Moffett of Bernstein Research recently wrote, that AT&T would effectively be acquiring T-Mobile’s earnings for free. That’s true in part because AT&T charges more for service than T-Mobile and would be expected to try to move T-Mobile customers into more expensive plans.
Given the high stakes and complexity of the deal, regulators will probably spend more than a year poring over data and developing models for how the mobile phone market would behave if the takeover were approved. In the meantime, AT&T and Verizon will be rolling out higher-bandwidth 4G networks and phones in more markets, which could ease the capacity crunch — or exacerbate it, just as adding lanes on a highway inevitably draws more traffic. Regulators should watch what happens closely for signs that the ballyhooed spectrum crunch is or isn’t near at hand. And lawmakers should get to work on the long-term challenge of freeing up more spectrum.
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