AT&T Inc. (NYSE:T)
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AT&T Inc.'s (T) surprising announcement that it would acquire T-Mobile USA raises one big question for consumers: What will happen to wireless pricing and service?
The planned $39 billion deal will mesh together the second- and fourth-largest U.S. mobile carriers, creating a behemoth that's likely to have nearly 130 million customers. The deal could help AT&T improve its network capabilities, which have long been criticized ever since the launch of Apple Inc.'s (AAPL) iPhone in 2007, but any potential service enhancements may come with the added burden of higher prices.
"It's no secret that AT&T has had issues with network quality over the last few years," said Brian Fino, managing director at Fino Consulting. "This is great news in terms of the network capacity that AT&T will be able to provide its customers. But people will probably have to pay a little bit more for better coverage."
The iPhone and other smartphones have created an exponential increase in data that have crimped AT&T's network. AT&T and T-Mobile say their customers will see service improvements, including better voice quality, based on additional spectrum and synergies related to network infrastructure.
The deal, which isn't expected to close until early next year, won't change much for consumers in the short term. T-Mobile doesn't currently carry the iPhone, and its customers won't likely have access to it until the deal closes and T-Mobile customers are folded into the AT&T universe.
But the deal raises many long-term pricing questions. Critics argue that eliminating T-Mobile, which has long undercut the industry average on data-plan pricing, will lead to higher prices for consumers amid wireless consolidation.
"T-Mobile was always a very good value provider," said Charlie Golvin, an analyst at Forrester Research. "We're going to see fewer options on the low end for contract customers."
T-Mobile has been known for its cheaper data offerings compared with AT&T and Verizon Wireless and has even run an advertising campaign that belittled other national carriers.
AT&T, in defending the legality of the deal, has argued that 18 of 20 major markets have at least five competitors each, suggesting that market forces will keep it price competitive.
Shares of smaller prepaid wireless companies such as MetroPCS Communications Inc. (PCS) and Leap Wireless International Inc. (LEAP) as well as rural cellphone providers like U.S. Cellular Corp. (USM) are up Monday based partly on how this deal could create a growing opportunity for them to take market share.
"There will always be a check and a balance when it comes to pricing dynamics," said Howard Loewenberg, managing director at Signal Hill Capital.
To be sure, some analysts suggest consolidation within the telecom industry won't necessarily be bad for consumers.
"It's not obvious that less competition will translate into higher consumer prices," said Craig Moffett, an analyst at Sanford C. Bernstein. "The knee-jerk reaction is that consolidation leads to pricing power. But in a scale-intensified business like telecom, consolidation also leads to lower costs."
He said the real question is whether or not the synergies inherent in a transaction on this grand scale get passed onto consumers.
"It's quite possible that you could get attractive economics for the carriers and higher margins as well as lower prices for consumers," he said.
-By Steven Russolillo, Dow Jones Newswires; 212-416-2180; email@example.com