Should the proposed merger between AT&T and T-Mobile be approved

Merger

The first step in analyzing a merger's affect on an industry is to define the industry. The proposed merger between AT&T and T-Mobile takes place largely in the "Commercial Mobile Radio Services" industry, as defined by the Federal Communications Commission (FCC, 2010). In this instance, the industry has already been defined by a regulatory body, but there may also be industry bodies that can help to define the industry for merger purposes. If there are no such pre-set definitions, the industry can be defined on the basis of the fundamental service offered and the firms within the industry defined as those that are offering a roughly similar product or service. The firms compete against each other, so there is often a rough definition within the industry players as to who, precisely, is in the industry. But in the case of AT&T and T-Mobile, the FCC has already set out a definition of the industry that can be used for merger analysis purposes.

The boundaries of the industry are set as telecommunications providers operating mobile phone and data provision. The main competitors in the industry are AT&T, Verizon, T-Mobile, Sprint Nextel, and a number of smaller players. The top two players control 60% of the industry. The industry is becoming increasingly concentrated, with the top two players gaining in market share and the next two losing market share. The remaining market remains heavily fragmented, and with little market power.

The Herfindahl-Herschman Index is often used as a measure of industry concentration. The index is calculated on the basis of the following formula:

HHI = s1^2 + s2^2 + s3^2 + ... + sn^2

A score greater than 1800 will indicate a highly concentrated marketplace. A merger that increases the HHI by more than 100 points in a concentrated marketplace raises antitrust concerns (Investopedia, 2011). The HHI for the mobile industry is 2848 as of 2008, up 700 since 2003 (FCC, 2010). This defines the industry as concentrated. Thus, any merger that increase the HHI by even 100 points would be ruled invalid by the antitrust authorities.

The use of HHI is impacted by other factors, however. For example, market entry and exit conditions are taken into account. There are a number of smaller firms in the industry, however the top firms in the industry have been able to win greater market share over the years. Only the top firms in the industry have been able to make critical infrastructure investments, even during periods of economic downturn. The smaller firms therefore may be able to gain entry into the market but are generally unable to compete on quality with the top firms, and this is allowing the market leaders to grow as a result.

Another factor that is taken into consideration is the regulatory entry and exit conditions. In the mobile industry, there is a significant barrier in spectrum. Given that there is a finite amount of broadband wireless spectra available, and potential limits on where wireless towers can be sited, there are limits to the number of players in the market (FCC, 2010) This means that consolidation at the top of the industry could create limitations on the amount of competitors that can enter a given market. The DoJ will take this into account as well.

There are pros and cons associated with this merger. The pros are that the industry will take a more natural shape and the demise of T-Mobile will be avoided. The company is a distant #4 in an industry where prevailing conditions favor only the major players. T-Mobile, therefore, is unlikely to survive anyway. Over time, its market share will be portioned off among the major competitors, so this merger simply allows for the natural competitive process to be accelerated. There are still three major firms in the industry and a number of smaller players as well, some of whom may eventually emerge as strong players. The three main players will all keep each other engaged in intense competition. Moreover, the FCC can still play a role in the governance of this industry, something that cannot be said of many other industries.