THE BLOG
04/25/2011 02:44 pm ET Updated Jun 25, 2011

AT&T Takeover Plan Is Really Beyond the Fringe

One of the better shows on TV is a program called Fringe, a show built around the old sci-fi staple of the parallel, alternate universe. There is a Walter in this world, who is a brilliant eccentric given to absent-mindedness, old sweaters and buttoned-up shirts. There is a look-alike Walter on "the other side" who is a hard-ass, power-hungry bureaucrat in fancy suits. You get the idea.

The only feasible explanation for AT&T's filing at the Federal Communications Commission (FCC) on April 21 to take over T-Mobile is that somehow the AT&T from the "other side" leaked through to this world, with the resultant confusion.

This world's AT&T is a colossus. It spends about $2 billion a year on ads to persuade everyone to "rethink possible" with its fabulous 4G network on which "sparks fly faster." The company's commercials boast that it covers 97 percent of all Americans.

Its financials are as solid as a company's financials can get. Look at their first quarter numbers. The company made 57 cents per share, contrasted with 41 cents a year earlier. It collected $31.2 billion in revenues, up $700 million from the first quarter a year ago. There were "best ever" increases in wireless customers, smartphone sales, device adds, while the revenue per subscriber keeps going up and up for the ninth straight quarter. Wireless revenue was up almost 24 percent, which translates into about $1 billion. Broadband connections are up, business revenue is up. Dividends are getting paid.

Yet the AT&T depicted in the FCC filing seems to be another company entirely. It faces "a growing capacity crunch." AT&T continued: "Absent a solution to this problem, AT&T's customers would face a greater number of blocked and dropped calls as well as less reliable and slower data connections. And in some markets, AT&T's customers would be left without access to more advanced technologies."

This dire state of affairs is made more mysterious because AT&T declined to make public where it is having the most difficulty. Note: UMTS is the official definition for 3G service, while CMA stands for Cellular Market Area.

"First, AT&T anticipates that it would lack the spectrum it needs to serve the demand for UMTS service in approximately [Begin Confidential Information] [End Confidential Information] CMAs covering nearly [Begin Confidential Information] [End Confidential Information] people by the end of [Begin Confidential Information] [End Confidential Information] (and in additional markets thereafter). Hogg Decl. ¶ 37. In particular, AT&T expects [Begin Confidential Information] [End Confidential Information] CMAs to reach UMTS spectrum exhaust between now and the end of [Begin Confidential Information] [End Confidential Information], and [Begin Confidential Information] [End Confidential Information] more CMAs by the end of [Begin Confidential Information] [End Confidential Information]. Id. These markets include large cities such as [Begin Confidential Information]"

That sounds bad, but it's only the start. Not only that, but in some cases, at the same time that AT&T is bragging in commercials about its 4G network, it can't even offer service of two generations previous: "In [Begin Confidential Information] [End Confidential Information] additional markets, AT&T does not have enough spectrum today even to launch and support UMTS service, and thus it can offer only 2G GSM service to the more than [Begin Confidential Information]." In other markets, customers won't be able to upgrade even from basic service at all.

It's sad, this alternate AT&T, that such a company was shocked, shocked, to be the exclusive distributor of the iPhone and yet still be overwhelmed by the demands on its data network. They were overwhelmed by the data usage: "As a result, in many urban, suburban, and rural markets, AT&T faces a growing capacity crunch. Absent a solution to this problem, AT&T's customers would face a greater number of blocked and dropped calls as well as less reliable and slower data connections. And in some markets, AT&T's customers would be left without access to more advanced technologies." Oh, the shame.

Unfortunately, T-Mobile, AT&T's takeover target, is having issues of its own. It faces "spectrum exhaust in a number of markets," AT&T told the FCC. T-Mobile is being cut off from its parent company, the German Deutsche Telekom, which won't fund it any more and it has "no clear path" to the faster services. (Which is too bad, because then we won't see commercials like this which tout its fast network while chiding AT&T for being way too slow.)

The solution is to combine these two starving companies into a great big healthy one. Genius. On one hand, AT&T posits taking over T-Mobile cell towers to increase capacity. On another, it can "decommission" thousands of others, resulting in big savings. It can tuck and trim around the edges, fooling with control channels and channel pooling -- as if those efforts could save two companies on the verge of spectrum dehydration. (And don't forget the efficiencies of "underutilized" spectrum -- although that may be hard to find in such constrained times as well.)

It's not that AT&T hasn't tried to relieve its spectrum shortage. In December last year, it paid $1.93 billion to Qualcomm for some of that nice 700 MHz spectrum. The commentary at the time was that the new spectrum would help AT&T alleviate congestion on its network, particularly in urban areas. Now, AT&T tells the FCC it will be "several years" before that spectrum will be of any help. The filing doesn't mention the 12 MHZ in the 700 MHz band AT&T bought for $2.5 billion in 2007.

Once, AT&T would look down from its mountain and scoff at the competition. But in the alternate universe, we see an AT&T tied down, Gulliver-like, at the mercy of Lilliputian competitors. It's not only Verizon and Sprint that AT&T is worried about. It's also MetroPCS, Leap, U.S. Cellular, Cellular South and Cincinnati Bell, companies that the Government Accountability Office found have a market share equivalent to an AT&T rounding error.

Without a doubt, AT&T needs some regulatory help. It needs to combine with T-Mobile to alleviate the spectrum shortages and make up for its poor planning. T-Mobile needs to be rescued from the parents that will abandon it to be clutched to the bosom of Ma Bell. All of that needs to happen. Just not in this universe.