April 8

Why did AT&T want to acquire T-Mobile?

The AT&T acquisition of T-Mobile has been all over the news recently.  Minneapolis web design firm, Rocket55 previously broke down the winners and losers of this merger.  The question of why AT&T bought T-Mobile for a whopping $39 billion was still floating around and we think that answering that question will not only shed light on what is to come but will also open more questions and dialogue about the future of mobile service carriers.

Why did AT&T want to acquire T-Mobile?

The obvious answer is increased profit and customer base.

The new combined entity of AT&T with T-Mobile, if it can receive regulatory approval, will be the largest carrier in the U.S. AT&T and T-Mobile USA combined have over 25% more subscribers now than Verizon (125+ million vs. 93+ million).

So to catch everyone up to speed, when AT&T acquired Deutsche Telekom for $39 billion, Deutsche Telekom acquired approximately 8% of AT&T and a seat on AT&T’s board of directors.

But there’s also another less obvious and more relevant reason why AT&T bought T-Mobile out and it isn’t about subscriber bases.  It’s about AT&T’s reliability (or lack thereof) and preparing for the 4G era of wireless communication.

Spectrum

AT&T has been criticized for its inability to keep up with a growing mobile data usage.  The acquisition of T-Mobile may be the solution to its concerns.  AT&T has a bad reputation.  The exclusive deal that Apple had with AT&T to carry the iPhone brought millions of new customers and billions in revenue but also increased data usage so much so that the network was left strained to unacceptable levels.  There wouldn’t have been so much hype surrounding Verizon’s iPhone if AT&T’s network didn’t drop so many calls and upset so many customers.

While AT&T is investing billions to upgrade its network, this process take years for approval to build new towers (especially in heavily populated areas).  The name of the game was time and urgency to improve a dire situation.

So the first problem is spectrum:  AT&T simply doesn’t have enough wireless spectrum to fuel the accelerating growth it has experienced over the last few years.  AT&T’s forecast is as follows: “…[A]ll of the mobile traffic volume AT&T carried during 2010 is estimated to be carried in just the first six to seven weeks of 2015.”

AT&T believes it will take years until more spectrum is opened up by the U.S. government for mobile broadband use. The simplest way to get its hands on precious broadband is through acquisition, and T-Mobile USA has the most GSM broadband spectrum after AT&T.  Problem solved?

Infrastructure

The second problem is infrastructure. In order to increase spectrum, more towers need to built.  AT&T can’t build towers fast enough, and the approval process to build the unsightly things acts as a major roadblock to the company’s efforts to boost its network reliability. So if you can’t build towers fast enough, what’s the next best way to get them? That’s right: You acquire them.

According to AT&T, “At closing, AT&T will immediately gain cell sites equivalent to what would have taken on average five years to build without the transaction, and double that in some markets.” This will increase AT&T’s network density by approximately 30 percent in some of the most heavily congested areas.

$39 billion is a lot of money to buy some towers, but because T-Mobile utilizes GSM technology (rather than the CDMA technology employed by Verizon), it can immediately use them to boost its network. If the deal is approved, expect AT&T to quickly offload some of its mobile data traffic onto T-Mobile’s infrastructure.

AT&T may be talking a lot about 4G in its press release, but T-Mobile has no LTE technology or infrastructure to offer. No, today’s acquisition is all about bolstering AT&T’s network and beginning the process of repairing its reputation.