Monday, April 4, 2011

Randall Stephenson was known as a finance whiz before 2007, when he became CEO of AT&T. But the telecommunications giant needs its Oklahoma City-born chief to display some country charm as he leads the most important sales campaign of his career.

Stephenson, 50, must persuade federal regulators — and the public they represent — to approve AT&T’s $39 billion agreement to buy T-Mobile.

That could be a tough sell.

Lots of consumers have soured on AT&T, particularly iPhone users who reported that they frequently couldn’t make or complete calls. AT&T placed last in Consumer Reports’ most recent survey measuring customer satisfaction with the big four wireless services, which also include Verizon, T-Mobile and Sprint.

The deal with T-Mobile also asks the Justice Department and Federal Communications Commission to let AT&T control 39% of all mobile customers — and allow just two companies, AT&T and Verizon, to capture about 70% of the market.

Sprint, with about 12% of wireless customers, warns the deal would create a “Ma Bell duopoly.”

To Stephenson, the naysayers don’t appreciate how many choices consumers have. What’s more, he says, AT&T needs T-Mobile’s spectrum so it can provide the speedy wireless connections that tomorrow’s smartphone and tablet computer owners will demand.

He seems confident in his power to persuade: AT&T has agreed to pay T-Mobile’s parent, Germany’s Deutsche Telekom, $3 billion if officials reject the deal.

Stephenson spoke with USA TODAY’s David Lieberman about how this deal will affect consumers, and the wireless future. Edited excerpts of that conversation follow.

Q: What exactly can you do with T-Mobile that you can’t do alone?

A: In the last four years, the volume of (traffic on) these (wireless broadband) networks is up 8,000%. We believe that we’re going to go up, in five years, eight to 10 times from where we are today. We don’t have the spectrum position to accomplish that.

T-Mobile’s spectrum is very compatible with ours. In cities like New York, we put the two companies together, and we get a very quick lift in capacity of about 30%. That means fewer dropped calls, better service quality, and it gives us a path to do something that neither one of us could do independently, and that is deploy fourth-generation mobile broadband to 95% of the U.S.

Q: Couldn’t you make your existing service more efficient? For example, you could deploy more cell sites.

A: Absolutely. In fact, that’s what we’re doing, building cell sites at a torrid pace, because these data networks require much greater cell-site density than traditional voice networks.

When we put T-Mobile with AT&T, we now have a cell-site infrastructure that is the equivalent of accelerating our cell-site build by five years. In markets like San Francisco, where they have a nice cell-site grid that complements ours very well, it accelerates the cell-site build by eight years.

Q: Is this deal a response to complaints about dropped calls with the iPhone?

A: No. It’s in anticipation of where this is going. That’s what T-Mobile is about. It gives us a chance to jump-start and get the capacity available for the new services that are coming.

Q: Sprint says the deal would turn the wireless industry into a duopoly.

A: Anybody who opens the newspaper or watches TV sees this as a fiercely competitive industry — maybe the most competitive in the United States.

The large majority of Americans, when they go to buy cellphone service, have a choice of at least five providers. In 18 of the top 20 markets, the customer has a choice of five different competitors. It’s a fiercely competitive market today. It will be a fiercely competitive market after this deal is done. We don’t see that changing.

Q: The FCC last year, for the first time, did not conclude that the market is competitive.

A: We would obviously take exception to that. I think the data would argue that that’s not the case. When the average customer has a choice of five different providers, that’s a very competitive market.

Q: There are small companies in the market, but one commentator said that they’re like grocery stores trying to compete with Walmart.

A: Everybody has their analysis. We can evaluate the numbers nine ways to Sunday. At the end of the day, the Justice Department will do the fact gathering and data gathering and will evaluate it market by market, then make those determinations. Based on our analyses, this is a deal that should be approved.

Q: If the market is so competitive, why might two companies have 70% of the business?

A: We all make technology decisions. We all put marketing plans into place. We all make decisions that drive how effective we are in the marketplace. I think we’ve done pretty well. I think Sprint has done a remarkable job over the last couple of years and will do very well tomorrow.

Q: Consumers only have two places where they can get an iPhone.

A: But there are RIM (BlackBerry) devices. There are Windows (Phone) 7 devices. Android devices tend to be doing very well throughout the market — in fact, we are having a lot of success with Android. Metro PCSand a lot of our competitors are having a lot of success there. So there are plenty of options for the customer.

Q: T-Mobile is known for its low prices. Would its prices go up if your deal goes through?

A: It would defy history. History tells you that prices in this industry have come down for 10 years. In the last 10 years, there’s been a significant number of business combinations in this industry, and prices have come down by 50%. And prices continue to come down.

Q: Would you be willing to make a commitment to T-Mobile customers that their prices would not go up following this deal?

A: We have a history, when we acquire one of these companies, we map their rate plans into AT&T. So if somebody chooses to stay on that rate plan, those rate plans are available.

Q: Would that continue in this case?

A: I don’t see why we would change it for this case. It’s just a customer-friendly thing to do.

Q: If we had three companies that controlled more than 80% of the market, would there still be an incentive for prices to come down?

A: We have a lot of new entrants coming to this market. LightSquared is building a nationwide footprint. Metro PCS has built 4G technology. Verizon’s building. Sprint has 4G technology. Everybody is innovating.

Q: Would this deal provide an incentive for others to combine?

A: I can’t comment on that. I have to look at the environment as it is today.

Q: The value of your deal depends on T-Mobile hanging onto its customers.Why would a consumer accept the uncertainty of going with T-Mobile at this point?

A: What uncertainty?

Q: You don’t know whether it’ll be part of AT&T.

A: T-Mobile will continue to operate their business exactly like they have. They’ve demonstrated that they’ve had a lot of success. They market directly against AT&T. I envision them to continue marketing against AT&T in the marketplace.

Q: If the deal goes through, would you offer all of the AT&T handsets to T-Mobile?

A: Of course. If you’re a T-Mobile customer, that’s one of the great advantages. The handset selection that AT&T offers would become available to T-Mobile customers.

Q: AT&T has had problems with its customer satisfaction ratings. Why shouldn’t consumers be concerned about you getting larger, given that track record?

A: What this transaction does is increase our capacity in virtually all metropolitan areas by 30%. That inherently means improved quality of the network.

Q: The concerns that people have had would be addressed by this?

A: This definitely enhances all of those facets. That’s what the transaction is all about — getting greater spectrum capacity and greater cell-site capacity.

Q: In the Comcast-NBC Universal deal, early on they came up with a list of things that they would commit to do to serve the public interest. Have you thought at all about doing something like that?

A: We’re going to build out LTE (4G broadband service) to 95% of the country.

Q: Nothing else?

A: It’s too early. We’ll do our filing with the Department of Justice. It will be a data- and fact-driven process. It’s not an emotional process. And based on the data and analysis that the DOJ performs, then we invariably enter into agreements into what kinds of concessions would be required to get the approval.

Q: In your view, are there any markets where there might be an antitrust problem?

A: It depends on what criteria are used. Do I believe that there will be markets that the DOJ would like to see us make some divestitures? I’m sure there are. But it’s too early. We need to do the analysis to see where that comes out.

Q: Should American consumers care whether T-Mobile is controlled by a German company or U.S. company?

A: AT&T is really focused on building out a world-class network in the U.S. Deutsche Telekom basically said, “We have limited capacity to invest in the U.S.” So they’re selling a large portion of their assets for cash, which they will redeploy in Germany and in Europe.

This is an indication as to where the industry is headed. The capital intensity, the spectrum requirements, are so significant that I think you're going to see more and more companies focus on what I’ll call intracountry activities rather than expansion outside in the mobile industry for a period.

Q: Part of the argument you made to Wall Street was that you would have lots of synergies with T-Mobile. That means you’ll cut back on duplication. That sounds like a net loss of jobs.

A: When you get to the support and staff functions, there will be duplication there. We’ll have to make some moves early on to work those force levels down. I think we have a very good track record of doing that gracefully.

As you begin to build out this LTE network, that is investment in our industry. Investment means people. It’s equipment, but it’s also people installing equipment. As you begin to build these LTE networks, you hire where you invest.

Q: Would it be a crisis for AT&T if this deal doesn’t go through?

A: I don’t think we would be in a crisis situation. But I don’t see that as a scenario. This deal ought to pass regulatory muster.

Q: But if it doesn’t — what would happen?

A: We’re operating this way today. We’re going to have to work with the FCC very aggressively to get new spectrum online fast. An industry constrained in capacity is an industry that cannot innovate at the same pace and where prices cannot continue to come down at the same pace.

Q: Constrained capacity just for a couple of years?

A: We do not have line of sight in the next three years to getting spectrum online to address the capacity situation we’re experiencing. This is an opportunity that gives us the ability to create the capacity in the next five years while we’re waiting for more spectrum to come on line.

Q: The FCC is trying to get spectrum from TV broadcasters. If you do this deal, will the need for that spectrum diminish?

A: No. It pushes it out for us, which is what we’re trying to accomplish here. If history proves out, it takes a decade from the time they begin to try to get this spectrum available to the time they put it into the hands of providers and start to build into it.

What would be a home run? Five years? In five years, we’ll have a spectrum crisis in this country.

Q: With this deal, are you saying implicitly that you’ll be focusing more on wireless broadband and less on something like U-verse, your TV service?

A: We’re continuing to move very aggressively with U-verse. None of that changes. It’s all about broadband. We’ll invest $19 billion this year to expand our bandwidth capability in wireless and fixed line.

Q: There had been some talk that AT&T would be interested in buying a satellite company such as Dish Network. Fair to say that you have your hands full, and that’s not on the agenda?

A: We don't comment on M&A speculation.

Q: How about your priorities?

A: My priority right now is getting the T-Mobile acquisition approved, getting the integration of these networks done, and getting this bandwidth in place. That’s my No. 1 priority.

Q: It would seem logical, then, that you would not want a distraction.

A: I’m not going to comment on M&A.

Q: Talk about prospects for video in wireless broadband. Are we about to see companies such as Netflix move the video business on to the Internet?

A: Not about to see — we’re experiencing that in a big way. Customers love these services. And I envision, as we move into fourth-generation networks, they will be consuming those services on mobile devices, whether it’s tablets or smartphones. Video will be an important driver of this. We feel very strongly about this.

Q: Are pay-TV customers starting to reduce or cancel their subscriptions?

A: Oh, yeah. These things, they tend to move faster than most of us expect. There’s a demographic today that says, ‘We don’t need a subscription pay-TV service.’

I think that market will grow over time.

Q: Cable operators say they’ve seen no evidence of this.

A: We used to say that wireless would never substitute for fixed-line telephones. This is the same thing. The technology will move fast. The models will evolve. And we do see it today.


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