Critics of AT&T's proposed acquisition of smaller wireless carrier T-Mobile have pointed to inadvertently revealed documents indicating that AT&T could build out its next generation network for a little less than $4 billion. Yet AT&T is willing to spend $39 billion buying out a rival. Does this prove that AT&T is simply trying to get rid of a competitor, and willing to pay a premium to do so?
Not necessarily. That's because the best way to understand the merger is as a play for scarce wireless spectrum; that's where the real premium is. Wireless spectrum is the raw material necessary for wireless, and there's not enough of it available to meet the massive rise in consumer demand. This isn't controversial. Even the current Federal Communications Commission has declared that "the amount of mobile data demanded by American consumers is likely to exceed capacity of our wireless networks in the near-term." As Jerry Brito of the Mercatus Center noted last year, "spectrum is barely traded in a market. Its uses are largely mandated by government fiat." So essentially the only way for AT&T to get access to large amounts of additional spectrum, spectrum it's clearly going to need at some point in the future in order to continue expanding its offerings, is to purchase a competitor. Given the lack of alternatives, then, the costly merger may be worth it.
And what happens to T-Mobile, and its spectrum, if the Department of Justice successfully blocks the merger? One possibility is that T-Mobile, which is already shedding its relatively small customer base, continues to lose subscribers, and lets its spectrum go unused. Via the wireless market geeks at CNET:
In contrast to AT&T, T-Mobile is nowhere near exhausting its current spectrum with its existing services. Its network has plenty of capacity to serve its shrinking subscribership.
Instead, the problem T-Mobile faces is that it needs additional bands of spectrum to migrate its customer base to the next generation of technology, 4G LTE. The Advanced Wireless Spectrum or AWS spectrum that T-Mobile bought in 2006 was used to build its 3G wireless network. If T-Mobile wants to build a 4G network, it will need additional spectrum to do it. And even though the government is talking about re-auctioning spectrum from TV broadcasters, it could be years before those auctions take place.
So T-Mobile would be left holding spectrum, but without a viable expansion strategy, and thus unable to improve service to its dwindling customer base. And at some point, AT&T and its customers would be stuck waiting for the federal government to free up additional spectrum for the market, and hoping that if it ever does, there aren't too many rules attached to how it can be used. And yet the DOJ is worried that if the merger goes through, consumers might suffer.