The Meaning Of AT&T's Deal For T-Mobile Collapsing

Dec.20.11 | About: AT&T Inc. (T)

I was wrong.

At the end of November, with storm clouds looming, I predicted here that AT&T's (NYSE:T) acquisition of T-Mobile would still get done, because AT&T had the lobbying clout necessary to get it done.

Yet that deal now seems well and truly dead. AT&T has agreed to pay T-Mobile's $4 billion break-up fee. It's walking away. Deutsche Telekom is now considering its other options. Supposedly it has a year to stabilize itself and find another partner.

This is a major turning point in our communications history, as big in its way as the 1984 Bell break-up or the 1996 Telecommunications Act. But while those previous events opened up value in the telecom market, this event seems to have discouraged value creation.

I've explained the reason. The business model of one company owning its entire network, amortizing those costs against the customer base, is broken. Whether you're talking about wired or wireless networks, the return on capital invested in network control is negative.

That obsolete business model is based on the 1908 deal between Theodore Vail (above, from Wikipedia) and Theodore Roosevelt (on behalf of the U.S.) In exchange for a monopoly, Vail would offer “universal service.” The idea would be to concentrate capital in stable hands, at stable prices, and provide one network serving everyone, regardless of the cost to serve anyone, rather than a welter of networks competing for prime customers and no connections for those in rural or poor areas.

Moore's Law has broken this model. Moore's Law has brought a new model to the market, the Internet model. Networking is based on negotiated standards, enforced through equipment, and carriers agree to interconnect or “peer” their networks, connecting first and collecting later.

But what of the last mile, you ask? What of the wires that connect your cable or DSL modem to the larger Internet? What of the wireless frequencies necessary to make your phone connect?

These are assets that can be rented in the Internet model, but they can be rented by anyone who maintains them. AT&T, or T-Mobile, or Comcast, should be free to re-sell this capacity to anyone who desires to use it, capturing that cost. And anyone who wishes to extend the market should be free to inter-connect with it, under negotiated peering agreements.

In the wireless world this can be done through LTE, a set of standards adopted in 2004 that evolve wireless broadband into a true Internet-like network. It's the cost of transforming their networks for LTE that have T-Mobile and AT&T (as well as Verizon (VZ) , Sprint (S) and Clearwire (CLWR) looking for partners or guarantees enabling the necessary expenditures.

It's this build-out that is impossible under Vail-era economics. It results in four duopolists, not a competitive market. But what if these companies only built-out parts of their networks they felt were profitable? What if they were willing to inter-connect and peer their networks? What if they were willing to let others use these frequencies, expand the footprint of the market, and peer as well?

What you would have then is a true marketplace. That's the future of telecommunications.

The point of the AT&T deal for T-Mobile collapsing is that of a teachable moment. All AT&T's vast lobbying and legal power has been thwarted. There are no other deals of similar size, and similar monopoly power, available to the company.

What if, instead of ramping up its political machine to gain the power to do what it wants under the Vail model, it fired the lawyers and hired engineers instead to pursue the Internet model?

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