Thoughts on AT&T & T-Mobile

Random Walk for 1000 trials generated in R

So I am stuck for a while at SFO waiting for my flight to Vancouver tonight. I thought it’d be the perfect time to collate thoughts on my skyrocketing AT&T bill with the pending AT&T T-Mobile deal. Though there have always been traditional arguments for economies of scale, I strongly believe there needs to be more telecommunications competition in the United States.

Back home in New Zealand Vodafone’s prepaid service is just fine for my basic needs. The consumer in the US is faced with hidden tigers of fees waiting to pounce on one’s monthly telephone bill. Companies such as LightSquared which are introducing a wholesale approach to the leasing of spectrum is a positive step for the US telco industry, but not the greater consolidation of providers.

M&A in industries of such strategic importance has always been fraught with regulatory oversight, but a quick look at the Herfindahl-Hirschmann Index (HHI) for market atomization reveals in a deal involving the consolidation of such a large amount of market.

Below is a chart of pre-merger market share in the US:

The US Telco space is already considerably consolidated with 3 carriers accounting for 77.5% of market share. Let us now take a look at the post merger market share:

Post merger, AT&T will have approximately 43% of the US market share. This is an extremely large concentration in the hands of one company. To get a sense of the scale of this market share shift we must analyze this merger in the context of the HHI.

According to the US Dept. of Justice/Federal Trade Commission the spectrum of market concentration is organized by the HHI into the following three categories:

Unconcentrated: (HHI below 1,000). A merger resulting in an HHI below 1,000 is considered unlikely to have adverse competitive effects.

Moderately concentrated: (HHI between 1,000 and 1,800). Mergers which result in an increase in the HHI of less than 100 points in moderately concentrated markets post-merger are unlikely to have adverse competitive consequences; those resulting in an increase in the HHI of more than 100 points in moderately concentrated markets post-merger potentially raise significant competitive concerns.

Highly concentrated (HHI above 1,800): Mergers which result in an increase in the HHI of less than 50 points, even in highly concentrated markets post-merger, are unlikely to have adverse competitive effects. Mergers resulting in an increase in the HHI of more than 50 points in highly concentrated markets post-merger potentially raise significant competitive concerns. When the post-merger HHI exceeds 1,800, it is considered that mergers producing an increase in the HHI of more than 100 points are likely to create or enhance market power or facilitate its exercise.

Based on the DOJ’s definitions let us now analyze this merger in the context of the HHI.

Pre-Merger HHI

HHI = 32² + 11² + 34.5² + 22.5² = 2841.5

Clearly this HHI indicates that the market is already highly concentrated, but whats more startling is the change in the HHI.

Post-Merger HHI

HHI = 43² + 34.5² + 22.5² = 3523.25

Change in HHI = 681.75

Under those DOJ guidelines, This change in HHI not only far exceeds its terms on the level at which a merger becomes a concern, but it also demonstrates a marked increase in the market power for the remaining competitors.

Looking from the HHI standpoint alone, the numbers already make the deal hard to justify, but as with M&A multiple fronts must be considered. For the interests of the US consumer though, I would hope the market remains free and competitive.