The T-Mobile Merger Will Still Get Done

| About: AT&T Inc. (T)

A lot of readers here are probably waiting for an apology over my recent story predicting AT&T (T) would complete its purchase of T-Mobile.

See, they're saying. AT&T is already preparing to pay the $4 billion break-up fee on the deal and withdrew its request for approval before the FCC.

But everything I wrote last week still holds. Despite the headlines, AT&T is not walking away here. It is laying low.

As I noted last week, there are no other buyers for this asset. Deutsche Telekom (OTCQX:DTEGY), which owns T-Mobile, has thrown in its hand on the U.S. market. A Verizon (VZ) bid would face the same anti-trust problems. Sprint (S) has its own problems. Clearwire (CLWR)?

No one outside the telecom space is interested in telecom assets given the present business model. [This includes cable (CMCSA) by the way.] This is especially true given that past efforts to re-sell spectrum services, through Sprint, have been deemed a failure. With no other buyers available for T-Mobile, the government will have no alternative but to declare victory.

But that begs the key question. Is the telecom market broken, and what might replace it? How can it be that core Internet capacity has a thriving market, despite capacity growth, while edge capacity can't find a buyer, even with monopoly status guaranteed by the government?

Edge capacity must run out to the customer, and the number of consumers who can carry the costs of a line are limited. Meanwhile, the costs of equipment to service customers at the near-edge keeps declining, so that same edge capacity – whether we're talking radios or wires – can't be recouped.

Meanwhile it's consumers at the edge who are defining services, and the capacity to deliver those services in the form of bits is not a differentiator.

Advocates of the telcos and cable companies are pounding the table, here as elsewhere, insisting they are “essential” to the process, and thus must get their price. They are essential, in that you need some sort of connection, either wireless or wired, in order to reach the Internet and define the services you want.

But that's not the same thing as getting your price. What's happening in wireless is about to happen in TV. Forget those $150/month cable bills. A simple Internet broadband connection is sufficient for increasing numbers of consumers. What our Felix Salmon calls a bug is in fact a feature.

There is a growing, and continuing, bandwidth glut at the edge as consumers buy services a la carte from providers, with the telcos and cable operators cut out of the loop. If I want to watch today's Charleston vs. Huddersfield match in England's League One (to cite one outrageous example) I can. And if I want to watch The Daily Show, I can go directly to the source. Threats between program suppliers and cable operators, aimed mainly at increasing monthly charges to consumers, are increasingly empty and consumers no longer need to care.

That's what is happening in terms of TV, which is at the high end of the bandwidth spectrum. Think about how much digital capacity there is on any cable TV connection – the vast majority of which is currently defined as services called “channels” – and you start to see the size of the coming glut. In every other area of content – music, books, messaging, telephony – this direct-to-consumer model is already well established.

What will replace the current telco business model? If they can't sustain on monthly charges alone, I think the solution is to enable more resale, with the telcos accepting their role as mere utilities and backing away from the consumer. That can either happen with their consent or after they go bankrupt, but it is going to happen.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.