Last week, the U.S. Department of Justice ("DOJ") filed suit to prevent AT&T (NYSE:T) from acquiring T-Mobile USA for $39 billion. T-Mobile is a subsidiary of Deutsche Telekom (OTCQX:DTEGY). The DOJ is concerned that the combination of the second and fourth largest U.S. mobile service providers will hurt competition and raise prices. This action will likely benefit the smaller competitors in this business. These antitrust actions usually do just that.
Communication services has been an arms race for quite some time. After spending billions on 3G networks, they are now building 4G networks. This advancement is likely to continue and the DOJ wants that process so that competitors feel the need to constantly improve. The costs involved in constantly updating and growing networks is a considerable barrier to entry by new competitors, but several capable competitors do already exist.
The first and third largest providers are Verizon (NYSE:VZ) and Sprint (NYSE:S), respectively. Sprint has opposed this merger since it was announced, arguing much along the line that the DOJ has now complained. The DOJ argues that T-Mobile USA is an important market competitor, whose absence would lessen pressure to keep profit margins low and/or improve service. For example, both AT&T and Verizon have been reluctant to offer as comprehensive of unlimited service packages, especially for data-hungry smart-phones.
The DOJ indicated that this deal could go through if certain concessions were made, but did not indicate what would be needed. If the merger does not go through, AT&T will be forced to benefit competition by providing Deutsche Telekom with about $3 billion in break-up fees, which it could then use to bolster T-mobile. Alternatively, AT&T could somehow provide a benefit to smaller competitors such as Sprint in an effort to please the DOJ and show it that competition shall not be stifled.
Other communication companies have also announced plans to compete in the wireless business. For example, satellite television provider Dish Network (NASDAQ:DISH) has applied for an FCC permit to build a 4G LTE network. Dish obtained spectrum licensing through the bankruptcy acquisition of TerreStar, a satellite phone provider. Other satellite providers could also theoretically enter this market, such as ViaSat (NASDAQ:VSAT), which already provides satellite voice over IP services, and Iridium Communications (NASDAQ:IRDM), which developed the first whole-earth satellite network.
Major competition may enter the wireless phone and data business in the coming years. Since the development of fiber optic networks, Verizon and AT&T have both offered home-based services that compete cable companies such as Comcast (NASDAQ:CMCSA), Cablevision (NYSE:CVC), Time Warner Cable (NYSE:TWC) and DirecTV (NASDAQ:DTV).
A common bundled service offered by cable and telephone companies is known as the triple play (phone, cable TV and high-speed internet). There appears little reason why AT&T and Verizon could not bundle quad-service, adding mobile device service into the package, and cable providers without satellite networks may find it essential to partner up with the independent mobile service providers in order to offer the same suite of services.
Disclaimer: This article is intended to be informative and should not be construed as personalized advice, as it does not take into account your specific situation or objectives.