LENS ANALYSIS: What's Next for Wireless In Wake of AT&T Deal Collapse? 

For the record, I was supportive of the AT&T/T-Mobile deal and was surprised at the intensity with which the government opposed it. The DOJ and FCC blocked the merger because they believed the wireless market would no longer be sufficiently competitive and would lose an important source of innovation in T-Mobile.

Quick Review

What the government fails to realize is that the industry, and consumers, need "more network", as quickly as possible to accommodate the surging demand for data. Even if T-Mobile were removed as a standalone competitor, the majority of consumers would have a choice of four or more facilities-based providers, plus a growing number of MVNOs and flank brands, plus Clearwire and the national broadband networks being built by LightSquared and Dish. That's more choice and competition than just about any other country.

The FCC, which condemned the deal, is also largely responsible for its genesis. Since there is still little visibility as to when and how much additional spectrum will be available, the industry has been forced to take matters into its own hands. As evidence: Verizon did not oppose the deal, and smartly took advantage of the vacuum to acquire SpectrumCo and the Cox wireless assets.

Finally, the DOJ and FCC are looking at this industry from an awfully 1970s-era lens if they believe the operators are the prime sources of innovation. Not to diminish their accomplishments, but the balance of power has shifted toward Silicon Valley and the over-the-top players. The locus of innovation has also widened, with thousands of companies and hundreds of thousands of developers, contributing new features, services, and applications to what is among the most vibrant and fastest-changing industries on the planet. The regulators have also under-recognized how core operator revenue streams from voice and text messaging might erode from substitute uses and competitive over-the-top services.

What Now?

In the wake of this deal's collapse, expect a period of M&A activity and spectrum horse trading/sharing deals. Verizon kicked things off with the SpectrumCo and Cox deals, some aspects of which now might run into headwinds from regulators or opposition from incumbent operators - notably T-Mobile. Expect the following:

Sprint, though it opposed this AT&T/T-Mobile deal, is not necessarily better off. There is a potentially stronger T-Mobile back in the market, whose aggressive value-based pricing might impact Sprint's and its flank brands. Sprint will want to maximize the value of its spectrum assets, making a spectrum sharing deal with TMO a distinct possibility.

The story for AT&T in 2012 will be finding a source for more spectrum. It could sneak in a bid for SpectrumCo, which would turn AT&T-Verizon's traditionally civil boxing matches into Ultimate Fight Club. Acquiring Metro and/or Leap is also a possibility although that would only solve some of the problem in some of the markets. AT&T could also purchase DISH's spectrum, or sign a wholesale deal with Clearwire.

Metro and Leap will be in play in 2012. They could be acquired by AT&T or T-Mobile for their spectrum assets, or be part of a prepaid roll-up involving T-Mobile or perhaps Sprint. Or, Metro and Leap could combine, buy some spectrum from Clearwire, and become a viable facilities-based national 4G operator.

Three Fundamental Issues

This is an important time to step back and take a bigger picture look at the state of the industry. One important question is how many national 4G networks do we really need? The capital markets will not support AT&T, Verizon, Sprint and T-Mobile + Clearwire + LightSquared + Dish + some combo of Leap and Metro. We need a smaller number of really good 4G networks, not a larger number of not as good networks plus holders of valuable spectrum flaying in the uncertain winds of the capital markets. What we have is a large number of existing and would-be operators. What we lack is sufficient spectrum (or a roadmap for more) in the hands of the operators who are actually serving customers today.

A second key question we should be asking - and impressing upon the deal-blocking regulators - is why the overall wireless service business is so unhealthy in the midst of such device, data, and applications frothiness? Sprint remains fragile; T-Mobile's postpaid plunge has accelerated in the wake of the AT&T deal and lack of iPhone; AT&T is clearly at a crossroads; Leap and Metro bounce around; and the capital markets are not exactly embracing Clearwire and LightSquared. We need a real dialog on what is a healthy state structure for this industry going forward, what spectrum resources are required to meet projected demand, and how the U.S. can maintain what has become a global position of leadership in wireless innovation, data adoption, and 4G deployment.

A third issue is that we need to go on the offensive in Washington. Amidst all the pronouncements about spectrum, billions for a national broadband plan, and so on, there is still a lack of clarity on the spectrum picture. All this industry deal-making is a "private solution to a public problem", to quote the Journal's Dan Henninger. The FCC needs to provide an answer the following straightforward questions: whether new spectrum will be made available, when, how much, and what will be the rules for acquiring it? And for all the worry about the effects of consolidation on pricing, the FCC should recognize that spectrum is the scare resource: more spectrum will lead to better service, lower pricing, and a vibrant wholesale market; less spectrum will lead to higher pricing and curtailment of service.

Finally, regulators - DOJ, FCC, Congress, etc. need to start looking at this industry through a modified lens. Washington has missed how the mobile operator is no longer just the wireless version of the telecom business, but is increasingly the mobile broadband provider for portable computing devices (aka smartphones, connected laptops, and tablets). Washington has similarly missed how it is largely over-the-top services and applications that are driving consumer use of mobile data and substitution for traditional voice and text messaging usage. And we need to make regulators understand how in a 4G, all-IP world, operators' traditional voice and text messaging businesses are vulnerable to OTT players. Today's voice/text/data silos will eventually be replaced by an "access plan" of X number of GB, to be shared across myriad connected devices, and used for any combination of voice and data services the subscriber chooses. Which looks like...the mobile version of today's fixed broadband business.