Analysis: AT&T's acquisition of T-Mobile could benefit iPhone users

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The news that AT&T would be acquiring its rival T-Mobile USA from its parent company Deutsche Telekom came as a surprise, even to those who keep close tabs on the wireless technology field. But, in the wake of the announcement, questions have already begun to arise about what the deal means for the future of the iPhone.

The deal, worth $39 billion, would make AT&T the nation’s biggest wireless carrier in terms of subscribers, adding 34 million T-Mobile customers to AT&T’s current 95.5 million. That number will dwarf the current market leader, Verizon, which boasts 101.1 million wireless phone customers.

Of course, before any major changes come to pass, the two companies will have to get regulatory approval from the U.S. government, which will attempt to ensure that the combining of two of the country’s big four cell carriers will not hamper competition in the wireless carrier market. But once the dust begins to settle, how will the impact be felt on existing iPhone customers, and on Apple itself?

Better service, more coverage

For existing AT&T iPhone users, the acquisition of T-Mobile will probably be a positive development—at least technologically. For one thing, AT&T stands to gain a plethora of existing cell towers in the U.S. This will allow the carrier to expand their network coverage in ways that wouldn’t have otherwise been feasible, since building new towers is often a costly and time-consuming proposition, especially in dense population areas where iPhone users have traditionally experienced heavy network congestion.

Charles Golvin, an analyst with Forrester Research in Boston, said existing AT&T iPhone users should see increased service quality and expanded coverage if the merger is approved. T-Mobile adds “tens of thousands” of towers to the AT&T network in the short-term, and other assets over the long haul.

According to AT&T, the company will increase its cell sites by 25 to 35 percent in San Francisco and New York, both noted trouble spots, and by 35 to 45 percent in Chicago. The expansion will hopefully increase coverage in buildings and allow the network to be more flexible in the case of events that might provide heavy clusters of usage. The carrier says that in most markets, these increases are equivalent to several years of building new cell sites.

“It’s pretty good news, assuming it actually goes through,” said Avi Greengart, research director for consumer devices at market research firm Current Analysis. “If you’re an existing AT&T iPhone customer, particularly in New York or San Francisco, there should be a lot of additional cell phone capacity that comes online because of this deal. It’s gotten better, but there are still a lot of devices in a small area. That may alleviate a lot of the problems people have in those two locales.”

However, certain adjustments will have to be made to existing cell sites. Currently, while T-Mobile and AT&T use the same 3G technology—High-Speed Packet Access (HSPA)—the two networks rely on different wireless frequencies, making their handsets incompatible. (They do, however, share a frequency for the older EDGE technology which allows for voice calls and slower data transfers).

AT&T has said that T-Mobile’s cell sites will be gradually updated to support AT&T’s frequencies as well. That has the added benefit of eventually freeing up the slice of wireless spectrum used by T-Mobile’s 3G service, a valuable asset as the radio frequencies available to wireless providers have become few and far between.

“This should translate eventually into a better user experience,” Forrester Research’s Golvin said. “T-Mobile has several spectrum assets, some of which will be used to help AT&T build out its next-generation LTE network.”

Fourth-generation LTE network

That forthcoming rollout of the Long-Term Evolution (LTE) technology was the other major potential benefit of the deal touted by AT&T. This 4G wireless network should allow for faster data speeds and improved capacity, though AT&T cautioned that full deployment is still some time off. In that race, the carrier is playing catch-up to Verizon, which began implementing its own LTE network in major markets last year. AT&T has said in the past that it plans to begin a migration to LTE this year. With the addition of T-Mobile’s cell sites, AT&T says its LTE network will be able to reach 95 percent of the U.S. population.

While the timeline for LTE adoption still makes it unlikely that Apple will produce a 4G iPhone this year, the T-Mobile/AT&T merge may, once approved, speed the technology’s rollout, making a 4G iPhone possible sooner rather than later.

The merger “should speed up the rollout of LTE, and [AT&T should] have much greater LTE coverage,” said Tim Bajarin, president of industry analysis firm Creative Strategies. “In theory, once you go to LTE networks, you should have better-quality calls and less dropped calls. But all that’s theoretical, since we don’t have those networks yet.”

T-Mobile iPhone?

Of course, T-Mobile customers potentially stand to see improvements as well. While the acquisition does not grant the carrier’s customers immediate access to Apple’s handset, it does at least provide a road map for those interested customers who didn’t want to abandon their network.

“I think there are still some T-Mobile loyalists who will be interested in the iPhone,” said Current Analys’s Avi Greengart.

Tim Bajarin of Creative Strategies said there has been “pent-up demand” among T-Mobile customers for access to the iPhone. “There’s no question this could be a win for T-Mobile customers who have been wanting an iPhone.”

“How much [demand], we don’t know,” Bajarin said. “We know that both Sprint and T-Mobile had been lobbying Apple to get the iPhone as well.”

Forrester Research’s Charles Golvin thinks that while Apple will benefit from a new customer base, it will only be to a limited extent. “We haven’t really surveyed those customers. I would guess [the potential number of new iPhone users] is in the low number of millions. The customers who were so enamored of the iPhone and would do anything to get it have probably already switched to AT&T or Verizon.”

Ross Rubin, directory of industry analysis at market research firm the NPD Group, agrees. “If you wanted an iPhone or other handsets in AT&T’s portfolio, you had that option today—you could’ve switched and paid more, potentially, for your data plan.” While Rubin thinks some may want an iPhone, he also suggests that other value carriers like Cricket and Virgin Mobile may be better positioned to grab T-Mobile customers.

Michael Gartenberg, an analyst with technology research company Gartner, said that AT&T and Apple can’t be assured that T-Mobile customers will follow their phone company, no matter the lure of the iPhone. “The big challenge,” said Gartenberg, ”is that people want T-Mobile for a reason, they were with T-Mobile for a reason. You probably want to be convinced that AT&T gives you the same value as before, and if not, that opens things up. The consumers are in play.”

Apple seems certain to pick up at least some gains from the expanded carrier and, between the new AT&T and Verizon, the company seems poised to make the iPhone available to the vast majority of American consumers.

Added Gartenberg, “If those T-Mobile customers flock to AT&T, that’s probably a good thing for Apple.”

The downside

While there are plenty of potential benefits to the deal between AT&T and T-Mobile, that doesn’t mean it doesn’t have its share of drawbacks. Despite the insistence by AT&T and T-Mobile leadership that the acquisition will not harm competition in the wireless carrier market, it does reduce the national field to three major players: AT&T, Verizon, and Sprint.

T-Mobile had long competed with the larger carriers by undercutting them on price and providing features that the others wouldn’t offer. NPD’s Rubin noted that the carrier was positioned as a “value network” that didn’t necessarily appeal to iPhone or gadget enthusiasts. With T-Mobile gone, that role will presumably be filled by smaller carriers and regional operators—though they won’t necessarily have the same clout.

Sprint Nextel, which will be the smallest of the major carriers if the deal goes through, may find itself with the short end of the stick, unable to compete with the larger carriers. A report in The Wall Street Journal on Monday (paid account required) cited concerns that Sprint would quickly find itself unable to compete with the behemoths of Verizon and AT&T. The merger is a particular blow to the country’s third-largest network, as a TechCrunch story reports that Sprint itself may have been eyeing an acquisition of T-Mobile. Ross Rubin of the NPD Group notes that, post merger, Sprint will also be the only major network not selling the iPhone.

Approval of the deal might also trigger a sort of arms race between Verizon and AT&T. That could make Sprint a tempting target for a Verizon acquisition since, just as AT&T and T-Mobile both have HSPA-based networks, Sprint and Verizon both use the same CDMA wireless technology. Such a move could reduce competition in the wireless carrier market even further.

And if competition in the wireless carrier market dwindles, it’s consumers that will find themselves on the losing end of the deal. To date, the battle between Verizon and AT&T for consumers has been fierce. For example, when Verizon announced the launch of the iPhone 4 on its network in January, it did so with an unlimited data plan; AT&T, meanwhile, had already discarded its own unlimited offering in favor of a tiered model last year. Verizon also boasted a $20 per month personal hotspot feature for the iPhone that one-upped AT&T’s limited tethering option. Undaunted, AT&T retaliated with its own similarly-priced personal hotspot feature within weeks.

AT&T, for its part, argues that the last decade, which has had its fair share of mergers—including AT&T Wireless’s own marriage with Cingular in 2004, the Sprint/Nextel merger in 2005, and Verizon’s acquisition of Alltel in 2008—has seen steadily lower costs for consumers. However, there are a variety of other reasons that could be responsible for those price drops, including wider adoption of cell phones, and increased competition among handset makers.

But with regulatory approval estimated at 12 months away, there are still a lot of obstacles to be overcome before AT&T’s acquisition of AT&T goes forward.

“This is by no means a done deal, and this is exactly the kind of deal the regulatory folks in Washington are going to take a close look at,” said Gartner’s Gartenberg. “While this may make good business sense, does this make good sense from a consumer standpoint? Does it make good sense from a consumer standpoint to go from four networks to three networks?”

[Joel Mathis contributed reporting for this story.]

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