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AT&T T-Mobile Deal: No, Not a Reaction to the Verizon iPhone

Word that AT&T (T) would buy T-Mobile for $39 billion seems to have caught most everyone by surprise. Maybe that's because Sprint (S) and T-Mobile had been working on a merger deal.

Some market watchers assume that a main reason for the deal is so AT&T can offset migration of iPhone customers to Verizon (BNET's Damon Brown thinks that Google's (GOOG) Android will be a big loser), but if you look at the subscription numbers for both companies, there's a different story. It's not about any one specific smartphone. It's about the fact that AT&T has been lagging behind Verizon in growth, even before the iPhone.

How the iPhone didn't make AT&T
There's a widely held belief that the iPhone made AT&T's customer growth since its introduction, but the numbers suggest that isn't the case at all. Look at the number of AT&T's wireless subscribers at the end of 2007: 70 million. By the end of 2010, the company's wireless subscribers numbered 95.5 million. That's a compound annual growth rate of 8.08 percent.

What did Verizon do in the same period? The company had 65.7 wireless subscribers at the end of 2007. By the end of 2010, it had 94.1 million, for a compound annual growth rate of 9.4 percent.

In other words, even without the almighty iPhone, Verizon growth outpaced that of AT&T. Clearly it was possibly to grow significantly a large wireless carrier business without Apple. Much of what people attribute to the iPhone specifically is actually just the growth of the smartphone market that came about with the introduction of touch screens, better user interfaces, and the availability of applications that consumers didn't have to buy through carriers.

In wireless, size is good
In the wireless industry, as in many others, size means you can throw your weight around to demand better conditions for making profit. At the end of 2010, T-Mobile reported 33.73 million customers. The acquisition would leave AT&T with a little more than 129 million customers, keeping it well ahead of Verizon for the foreseeable future. Combined revenue for the two would be $79 billion. That's a lot of heft.

Furthermore, only 8.2 million of T-Mobile's users had smartphones, meaning that there is a lot of room to grow that profitable part of the business. That's important to AT&T, given that its average revenue per user for voice services declined 8.6 percent in 2010. Service ARPU, however, was up 14.7 percent. And as T-Mobile was a discount carrier, AT&T would probably move customers up in price plans over time, making them more profitable. The customers might think of leaving, but where would they go? Verizon? Sprint?

Compatibility is bliss
Both companies use the same underlying wireless carrier technologies, and so are compatible from that view. AT&T would suddenly get a lot more spectrum and, as a result, bandwidth. That would mean improved better network capacity and a chance to lose the reputation for dropping calls. T-Mobile also has a jump on 4G service, so you could expect AT&T to ride that coattail as a way to position itself as being further along than Verizon.

But this is going to be a tricky deal to get past regulators. Right now, T-Mobile has been the GSM alternative to AT&T, meaning that customers who had unlocked GSM phones would no longer be able to change carriers and preserve their investment. That's not even addressing the fact that the market would become a virtual duopoly. But if regulators did OK the deal, that would outfox Verizon, which then might not be able to buy Sprint as a counter move, because that really would leave only two national carriers.


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