AT&T Officials Saw 97 Percent LTE Coverage as Too Expensive, Prior to Proposed T-Mobile Buy

AT&T representatives met with FCC General Counsel Austin Schlick, Renata Hesse, senior counsel to Chairman Julius Genachowski for transactions, and other key officials evaluating the T-Mobile deal, the filing said. Some of the details were put online briefly in a filing posted by the FCC, though key financial details were redacted from a later version.

"AT&T noted that prior to January 2011, senior management had considered and rejected such proposals on numerous occasions, finding each time that there was no viable business case for the proposed expansion,” the filing said. “When, in early January 2011, senior management again revisited that decision, it came to the same conclusion. It found that expanding coverage from AT&T’s Plan of Record to 97 percent of the U.S. population would require AT&T to almost triple the land mass covered by its LTE network, from below 20 percent of the United States to approximately 55 percent.”

Since the carrier plans to offer HSPA+ service to 97 percent of the population by the end of 2012 anyway, “AT&T senior management concluded that it could not justify expanding its LTE footprint beyond the Plan of Record, despite the potential marketing and competitive benefits of doing so,” the filing said. Converting HSPA+ sites to LTE sites, absent the T-Mobile merger, would be too expensive, AT&T said.

"Because of the scale, additional spectrum and other benefits resulting from the [T-Mobile] transaction, AT&T senior management made a business judgment that the merger with T­-Mobile USA enables AT&T to expand its LTE build-out to 97 percent of the population,” the acquirer said. “These benefits include incremental reductions in cost due to the addition of T-Mobile USA resources; greater scale economies, such as higher volume discounts on handsets and equipment; a larger customer base; and the expectation of a higher take-rate for AT&T’s LTE service. In addition, the transaction will enable AT&T to re-purpose its existing capital budget allocated to spectrum acquisitions to be allocated for other uses."

AT&T said that as part of its current LTE deployment proposal, it already plans to upgrade some 44,000 nodes to LTE: 8,000 in 2011, 16,000 in 2012, and 20,000 in 2013.

"It looks like the staff wants to see how merger-specific the 97 percent LTE commitment is versus something AT&T would have done anyway in order to match Verizon’s LTE build,” said MF Global analyst Paul Gallant. “My sense is the FCC and Justice Department have been somewhat reluctant to date to accept at face value AT&T’s assertion of merger efficiencies and projected benefits of acquiring T-Mobile,” said Jeff Silva of Medley Global Advisors. “As such, it appears AT&T continues to be under steady pressure by policymakers to defend a proposed purchase that would give rise to a new No. 1 wireless carrier and the departure of the No. 4 wireless operator from a market with a dwindling supply of key sector input: Spectrum. AT&T may eventually win government clearance for the T-Mobile purchase, but it won’t be easy or pain-free."

"We are bound by the terms of the protective orders in this proceeding. But we are confident in saying that AT&T is misleading the FCC in the company’s characterization of what decisions were made and why they were made, and the FCC has the raw material that reveals the truth of this matter,” said Free Press Research Director Derek Turner. “The standard for which this supposed benefit must be judged is not whether AT&T made a business decision about rural deployment, but what they would likely do in a world without the merger."

The figure discussed by AT&T officials for a more aggressive LTE buildout, later redacted, is about 10 percent of the purchase price of T-Mobile, noted Public Knowledge spokesman Art Brodsky. “We wonder what the efficiencies are that a $39 billion transaction is more efficient than the marginal cost of $3.8 billion,” he said. “Second, as we have said before, the footprints of T-Mobile and AT&T overlap in urban areas, and that T-Mobile has very sparse coverage in more rural areas. We fail to see how the merger would allow AT&T to expand its coverage as it describes."

Nothing in the filing should come as a surprise, an AT&T spokesperson said. “The confidential information in the latest letter is fully consistent with AT&T’s prior filings,” the representative said. “It demonstrates the significance of our commitment to build out 4G LTE mobile broadband to 97 percent of the population following our merger with T-Mobile. Without this merger, AT&T could not make this expanded commitment."

Meanwhile, the Telecommunications Industry Association went on record for the first time on the potential benefits of AT&T/T-Mobile. President Grant Seiffert noted in a letter to the FCC that the group usually doesn’t comment on deals (http://xrl.us/bk8ctc). “Combining the infrastructure and resources of AT&T and T-Mobile would help create a reliable, high-speed mobile broadband network and encourage a virtuous cycle of investment and innovation in America’s business sector, meet growing consumer demand for these services, and address the looming spectrum crisis,” he said. “The potential benefits of the merger should be given substantial weight in the FCC’s review of the proposed transaction.”