T-Mobile USA, or the value of pro-competition regulation

Author: Martyn Roetter
Published: 2017-11-19

Over the past few years, T-Mobile has become the third largest mobile operator in the U.S. after Verizon and AT&T, overtaking Sprint. As of September 2017, T-Mobile reported a customer base of 70.7 mn. It has enjoyed 18 straight quarters of growth of over 1 mn customers. In the first nine months of 2017 it generated gross revenues of €26.7 bn or almost 48% of its parent Deutsche Telekom’s (DT) global revenues, and contributed almost the same proportion (46.5%) of DT’s EBITDA (earnings before interest, taxes, depreciation, and amortization), a common measure of profitability.

In 2011 T-Mobile USA was a major problem for DT, not today’s poster child. Its market share was hovering around 10%, compared to the then third operator Sprint at 17%, and in that year it lost 1.65 mn contract subscribers. Hence DT welcomed AT&T’s bid to acquire its U.S. assets for $39 bn. AT&T abandoned this attempt after it became clear that arguments about the harm this acquisition would inflict upon competition in the U.S. mobile market would win the day at the Federal Communications Commission (FCC) and the Department of Justice (DOJ). AT&T argued that T-Mobile could not survive on its own, and the only course for its salvation lay with its acquisition by AT&T. Several economists, for whom cost savings and benefits for consumers are the inevitable outcomes of almost any merger, supported AT&T and produced paid studies agreeing with this forecast.

Opponents described a contrasting scenario in which T-Mobile could prosper independently by exploiting financial and spectrum resources to deliver superior and more customer-friendly services than the Big Two (Verizon and AT&T). Opponents also argued that the remaining major mobile operators would take advantage of T-Mobile’s removal as an independent competitor mainly for their own benefit and not that of consumers, given the incentives executives would face.

In 2011, the FCC’s Chairman was Tom Wheeler, a telecom industry veteran. Many expected he would tend to support the positions of major companies in the sector in which he had worked. Instead, Wheeler was intimately aware of the natural tendencies of companies with substantial market power to exercise it for their own benefit.

The post-2011 success of T-Mobile in the U.S. is a testimony to its own successful innovative services, marketing, and the deployment of new technologies in existing and newly acquired spectrum to match the coverage and capacity of its larger competitors. Although DT is an incumbent in Germany, it has allowed its U.S. entity to behave like a challenger. But it was the FCC that ensured T-Mobile would have the opportunity to compete, which is a lesson for regulators everywhere. While not all mergers are bad for competition and some make a lot of sense, blocking AT&T’s acquisition of T-Mobile is now proven to have been the right decision by the FCC.

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