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Spectrum is ‘King’ in Today’s Broadband World

Scarcity and Demand for Wireless Spectrum Increasing Value

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As AT&T’s bid to acquire T-Mobile demonstrated, cash is no longer king when it comes to mergers and acquisitions in the telecommunication world. The currency of choice in today’s broadband market is wireless spectrum – and lots of it. Although there was a considerable amount of capital involved - $39 billion to be precise, the far greater value of the deal to AT&T was the spectrum holdings of T-Mobile.

What is the Obama Administration's Plan to Find More Spectrum?

AT&T (NYSE:T) and Deutsche Telekom, T-Mobile’s parent company, surprised industry observers when both companies announced plans to acquire T-Mobile USA from Deutsche Telekom for $39 billion. The merger combined the second and fourth largest U.S. wireless carriers, and would have added almost 35 million subscribers to AT&T’s customer base. AT&T tried to persuade government regulators that the merger would benefit consumers because the networks of both companies would be collectively improved. Without the deal T-Mobile could not effectively achieve a competitive advantage offering LTE to almost all Americans.

Of particular importance to AT&T was the use of T-Mobile's AWS spectrum to add to AT&T's 700 MHz licenses - creating a huge LTE footprint in the U.S. In fact, the combined LTE footprint would include almost 97% of all Americans, more than 46 million more people than if AT&T did it alone. This would have placed the combined AT&T/T-Mobile company in a strategically beneficial position, as the national interoperable public safety network envisioned by the Obama administration is being implemented. With President Obama's recent support of allocating the D-Block to public safety, the merger would pay big dividends in terms of staking a claim to building the national public safety network.

What Really was at Stake in the Proposed AT&T/T-Mobile Merger?

The first major hurdle experienced by AT&T was the Department of Justice lawsuit filed in August, 2011. In November, the FCC dealt AT&T’s dealt the deal another major setback by releasing a highly critical 157-page report criticizing the deal, and things got worse from there. AT&T ultimately pulled out of the deal on December 19. Analysts theorize that the deal was probably undone by AT&T’s underestimation of the opposition it faced. Opposition came from consumer groups, Attorneys General of several states, and most importantly the FCC and Department of Justice. The Washington Post thought the real winners of the cancelled deal were consumers.

AT&T executives said they expected tough regulatory scrutiny, but ultimately they thought they could convince regulators to approve the deal. The deal was too much for the regulators and the industry to permit to happen.

With the deal now off the table, both companies will need to find other ways to compete for spectrum. AT&T has already received approval to acquire spectrum from Qualcomm. T-Mobile will have a much harder time with their spectrum acquisition plan in order to compete in the 4G/LTE marketplace. T-Mobile has been reportedly pursuing spectrum deals with Dish Network and Sprint-Nextel. In terms of the company coming out better positioned than before the deal, T-Mobile comes out the winner. The company will receive $3 billion in cash, and spectrum valued at approximately $1B.

What could be seen as even more evidence of the increasing value of spectrum holdings, is how other providers positioned themselves while the AT&T/T-Mobile was being considered by federal regulators. Verizon Wireless purchased AWS spectrum from Comcast for almost $4 billion, and Dish Network spent almost $3 billion to acquire 40 MHz of S-band spectrum. Dish Network also signaled its desire to partner with T-Mobile if the AT&T deal failed. Cox Communications, Time Warner Cable and Bright House Networks' also negotiated spectrum deals. As the FCC continues working on strategies to find and auction additional wireless spectrum - the acquisition of spectrum will continue to be more and more important.

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