AT&T's surprise $39-billion acquisition of T-Mobile USA Inc. could lead to more consolidation in the U.S wireless industry, leaving the market with just two dominant providers — and the prospect of higher rates and fewer choices for consumers.
If approved by regulators, the newly expanded AT&T Inc. would have 130 million subscribers, allowing it to leapfrog arch-rival Verizon Wireless and its 94 million customers to become by far the nation's largest wireless carrier. Sprint Nextel Corp. would be a distant third.
The potential market shift could force Verizon to consider making a large acquisition itself, analysts said, possibly including Sprint. But Sprint itself may snap up one or more of the many smaller providers, such as U.S. Cellular and MetroPCS.
"This move by AT&T is likely to start a chain reaction of consolidations in the U.S. market," said Dan Hays, who tracks the telecommunications industry for PRTM, an international consulting firm.
Such a trend probably would drive up mobile service rates and reduce the number of phones and tablet computers available to wireless subscribers, he said.
AT&T asserted that the deal would increase competition and lower prices, citing a government study that said the average cellphone bill had dropped over the last decade, a period in which there were several large telecom mergers.
"The U.S. wireless industry is one of the most fiercely competitive markets in the world and will remain so after this deal," AT&T spokeswoman Lauren Harris said.
AT&T also said that the merger would allow it to accelerate the spread of faster, next-generation wireless service — often called 4G — to more of the country. Because AT&T and T-Mobile already use similar technology for their existing cellular networks, the two would be able to more efficiently deploy the new technology, they said.
But critics of the deal warned that cheaper options could dry up if there were just three or fewer players left in the market.
"When you have two companies control almost the entire market, you're almost back to reassembling the Ma Bell monopoly" when the old AT&T dominated local and long-distance service before it was broken up by federal regulators, said S. Derek Turner, research director for Free Press, a Northampton, Mass., nonprofit public interest group that focuses on media policy.
Washington lawmakers quickly jumped on news of the deal, with Democratic senators urging close scrutiny of the acquisition by federal regulators.
"It is absolutely essential that both the Department of Justice and the FCC leave no stone unturned in determining what the impact of this combination is on the American people," Sen. John D. Rockefeller IV (D-W.Va.) said.
In looking at the proposal, federal antitrust and telecommunications regulators such as the Federal Communications Commission and the Justice Department are likely to weigh the benefits of market and technical efficiencies achieved by the merger against the potential loss of competition. Regulators are also likely to scrutinize the combined market share for both Internet broadband services and wireless telephone services.
AT&T said it was confident that the deal would be approved within 12 months.
Besides the potential for huge savings from closing overlapping retail stores and call centers, AT&T is hoping that absorbing T-Mobile's national cellular network will give it a more robust ability to route calls and data traffic around the nation.
Nearly a third of U.S. cellphone users have the newer breed of Internet-connected smart phones such as Apple's iPhone and Motorola's Droid. Consumers on those phones have a greater appetite for video, music and Web surfing — data-intensive activities that are putting a strain on cellular networks.
AT&T said data traffic on its wireless network had grown 8,000% over the last four years — the same four years for which it has offered the iPhone. The heavy load on AT&T's networks has earned it a reputation as slower and less reliable than its competitors, which the company has worked hard to shed over the last year.
The acquisition could be appealing for some T-Mobile customers, who may be able to buy the popular Apple iPhone. AT&T would not say whether it would make the iPhone available to T-Mobile customers.
T-Mobile, owned by German communications conglomerate Deutsche Telekom, has long painted itself as the low-cost alternative to its competitors, offering cheaper, less advanced phones and lower monthly rate plans.
But the low-cost image probably won't fit with AT&T's pitch to consumers that it has the highest-quality service, said Christopher M. Larsen, a telecommunications analyst at Piper Jaffray & Co.
"I think you'll probably see that positioning fade," he said. "The last things they'll want to do is say they have a superior network and then price it cheap."