AT&T and T-Mobile: 3 Reasons Why it's a Bad Deal

AT&T shares fell nearly 8 percent Wednesday after the U.S. Department of Justice filed to block the company's takeover of T-Mobile USA, a move that would have united the No. 2 and No. 4 largest carriers.

The $39 billion deal was first proposed in March and would have left Dallas-based AT&T the biggest carrier in the U.S. It would have left Deutsche Telekom, T-Mobile's owner, with an 8 percent stake in AT&T. Now AT&T might have to shell out a $6 billion break-up fee.

The antitrust division of the Justice Department filed a civil case against the deal, claiming it would substantially lessen competition for mobile wireless telecommunications services ... resulting in higher prices, poorer quality services, fewer choices and fewer innovative products.

Clearly, AT&T and T-Mobile's army of well-paid lawyers will file objections and seek a dismissal in federal court. But the drama is just starting.

Here are three reasons why this deal should never have been proposed.

It demonstrates an ignorance of history. This is AT&T, after all, a company the Truman Administration first sought to break up and finally was busted up in 1984 after the tenacious efforts of the Justice Department and a crusading federal judge, the late Harold Greene.

Few now remember the near-monopolistic stranglehold the old AT&T had on rates, policies, equipment and usage. Virtually every home had a Western Electric telephone set. Early developers of cordless phones only were permitted to sell their products after lawsuits and complaints to the Federal Communications Commission.

The old AT&T, as well, stifled any competition to its landline stranglehold. While Scandinavia led the world in creating wireless services in the Nordic Mobile Telephone System, the first U.S. cell service came only in 1985, when a now-rolled-up spinoff, Ameritech, offered it in Chicago.

Only around the time of the 1984 breakup did entrepreneurs like Craig McCaw and others start spending on today's mobile system. Need we mention which company ultimately acquired McCaw Cellular Communications, the No. 1 U.S. mobile operator?

The deal displays an ignorance of Washington's view of technology. It's not just breaking up old AT&T. How about some of the long-running cases such as the Justice Department's review of IBM, also dating back more than 50 years, and Microsoft, whose break-up was first sought in the last days of the administration of the first President Bush, but where the Clinton-Gore Administration pushed and won a consent decree?

IBM had to agree to unbundle services, under terms of a 1969 agreement and then was scrutinized for years while the mainframe sector ruled the technology sector. For many years, its chief counsel was a former U.S. Attorney General, Nicholas Katzenbach.

Microsoft's problems were later but stemmed from the ways founding CEO Bill Gates wielded the Windows OS as a tool with just about all the major PC players. Then came bundles that include browsers around the time of the start of search engines.

Microsoft ultimately signed a consent decree in 2000. Judicial oversight expired in May. The software giant also faced scrutiny from the European Commission.

Other technology leaders with predominant roles, including Google, could be subject to antitrust suits. Google is already under probe by both the U.S. Federal Trade Commission and the European Commission.

It comes as telephony is merging with content. One reason why AT&T and T-Mobile want to merge is to provide better coverage nationwide. AT&T, which first rolled out the Apple iPhone, has had many complaints about service. Fleshing out its network with T-Mobile's infrastructure would help consumers.

But how about competition? The bigger AT&T would dethrone Verizon Communications, but after the new Big 3 (now including Sprint-Nextel) there would only be a handful of smaller, regional carriers to offer a choice. But CenturyLink, U.S. Cellular and USA Mobility, for example, don't have the national reach, advertising and pull of the big ones.

One of the insights Steve Jobs had as Apple CEO is that consumers will pay for solid content. That's why iTunes and the iPod were such successes, followed by the iPhone and iPad.

Now as smartphone shipments are predicted to exceed 478 million in 2011, market researcher IHS estimates, the carriers are about to reap a content bonanza. Consumers will want movies and TV along with all the other services to which they've grown accustomed.

If there are only three principal gatekeepers, what will happen to price? Sure, the initial services will be priced low, but imagine what would happen by 2017 if there were only three major carriers?

Clearly, the Obama Administration, Attorney General Eric Holder and acting antitrust chief Sharis Pozen had these points in mind. It will be crucial to see how the court responds and how the administration handles this civil case.