Will AT&T, T-Mobile Merger Slow Wireless Innovation?

AT&T has done an incredible job of getting special interest group after group to endorse its merger with T-Mobile, saying it will provide better broadband access for minorities, rural subscribers and just about any group of people you can think of. The broader gay community too has endorsed the merger – apparently transgender-Americans have been hoping for the day when there was one less GSM provider to choose from.

Here is how the system works – AT&T has hundreds of thousands of workers and inevitably large numbers of them in myriad groups. This in turn coupled with large contributions to various organizations and associations is rewarded with the reciprocal endorsing of anything AT&T requests.

To help grease the wheels even further, AT&T has further upped its lobbying budget by 58% according to PC Magazine.

AT&T is doing the smart thing by getting rid of its sole GSM provider allowing it better negotiating leverage in its roaming agreements with foreign carriers and gaining the ability to raise rates with one less major competitor to depress market pricing. It will also gain more leverage when negotiating with hardware and software companies.

An anti-merger video by the Free Press Action Fund

If the US government blocks the deal it will be because the remaining major companies AT&T and Verizon will have so much share that they are effectively a duopoly at about 80% – allowing them to raise prices at will.

Again, if you are an AT&T or Verizon shareholder, you likely want this merger to happen and AT&T is serving its short-term  shareholders well by seeking this transaction.

But the challenge I see is that with one less major telecom carrier in the US it becomes that much more difficult for innovative start-ups to launch, get funding and hold their breath long enough for a carrier to buy from them. Sprint and T-Mobile have been fairly aggressive working with smaller companies that provide FMC solutions for example and because of this, funding has flowed into a bunch of companies serving the needs of the telcos. To make matters worse, Alcatel-Lucent has struggled for years to make money in this new landscape of shrinking carriers and NSN is really having problems making profit. Moreover, Nortel well bankrupt largely because of a single wireless contract it missed out on so obviously the challenge here is for the telecom hardware and software ecosystem as a whole.

So with less competition there will be less need to innovate and subsequently telecom equipment providers will have more trouble making money, getting funded and spending on R&D. This in-turn will cause a negative feedback loop where there are less companies innovating and Verizon, AT&T and a host of other carriers have less advanced services to offer. This in turn will eventually reduce revenues for carriers.

But this outcome will take a while to happen because investors aren’t thinking about these issues, they are still licking their lips trying to take part in a telecom deal like the one where Skype sold to Microsoft for $8.5B.

AT&T should know these dangers and they probably do – but it is possible they are giving up on services. After all, IMS was supposed to unleash a wave of new applications and the carriers were going to share in the profit. Well the the app store quickly brought an end to that hope.

But then again, Verizon CEO Lowell McAdam is set on bringing what he calls the innovation from wireless, into the wireline side of the business. But if Verizon really wants an environemnt where there is lots of innovation, one would imagine it would be very vocal in opposing the AT&T, T-Mobile deal. To date they haven’t said much.

So for AT&T, Verizon and a host of other larger carriers in the global market, this merger could make it more difficult for them to find the next killer service like SMS. But then again, if you own one of the two major wireless superhighways, you may not have to offer anything in exchange for increasing your toll prices.

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