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Divestiture: When your carrier leaves you (FAQ)

Coverage changes and higher prices aren't the only possible consequences of T-Mobile-AT&T merger. Some customers may find that the combined carrier no longer offers service in their area.

It's been almost a month since AT&T dropped the $39 billion bomb that it was intending to acquire T-Mobile. And since that time, the wireless world had talked about little else. Indeed, the news of the potential merger dominated the CTIA show last month, and my CNET colleagues and I have fielded many reader questions over the marriage.

Your concerns about a merger are understandable. If approved by the feds, the deal would not only lump 130 million subscribers under one provider, but also it would result in just one GSM national carrier. Higher prices, customer service changes, and degraded coverage are top of mind for many consumers, but divestiture is another consequence to consider. We'll get into the details below, but the short story is that the combined carrier may have to stop service to your area. And if that happens, you can wind up with a different provider that you didn't choose. It's nothing to panic over, but it is something to keep in mind. So for more on divestiture and what it could mean to you, read on.

So what is divestiture?
By its dictionary definition, divestiture is the total or partial disposal of a company's assets through sale, exchange, closure, or bankruptcy. Assets can consist of pretty much anything, but in wireless carrier terms we're talking about the spectrum that it owns and uses to operate a voice and data network. If the merger is approved, a divestiture process may force AT&T to offload spectrum in various markets around the country.

What happens to customers in a divested markets?
Without the necessary spectrum, the carrier would no longer be able to offer wireless service in your area. So instead of you leaving AT&T, AT&T effectively would leave you. And when another carrier buys the spectrum licenses, they buy you as a customer as well.

Why would a merger result in divestiture?
Like in any other merger, there will be some overlap or redundant services when two wireless carriers get hitched. Some of that overlap will be internal departments like accounting or marketing, but there also will be redundancies in the carrier's physical presence. In addition to spectrum, these things could include towers and network infrastructure, retail stores, and customer call centers.

Eliminating overlap with the goal of saving money always happens after a corporate acquisition, whether it's an airline, a bank, or a department store. If the merger is approved, you can bet that AT&T will close stores, lay off staff, and turn off cell towers. And with those assets, it can pretty much integrate however it wants. Spectrum, however, is another matter.

Why is spectrum unique?
It's unique because it's a finite resource. There's only so much of it, which is why the Federal Communications Commission has always regulated how it's allocated to broadcasters and wireless carriers. Licenses for available spectrum are auctioned off and the FCC tries to keep the market competitive. But if AT&T and T-Mobile merge, AT&T also will acquire any spectrum licenses that T-Mobile owns (in fact, that's the main reasonwhy AT&T is willing to pay $39 billion). And when one player owns too much spectrum in a market, the feds can step in and force divestiture to ensure competition.

How does divestiture happen?
Jeffrey Eisenach, a former Federal Trade Commission official and now a managing director and principal at the consulting firm Navigant Economics, told CNET that the U.S. Department of Justice initially drives the divestiture process. Once AT&T and T-Mobile file their merger papers with the FCC, the DOJ will review the application and evaluate the markets where divestiture may have to occur. Then, after negotiations with the carriers, the DOJ will list these markets in a consent decree that the FCC will incorporate into its own review. By signing the consent decree, the two carriers pledge to divest the required spectrum if the FCC gives final approval to the merger.

When does divestiture happen?
The process would happen soon after the merger is finalized. Eisenbach said the deadline for divestiture can vary, but the DOJ will oversee the process. If the carriers delay divestiture, it can be penalized.

How the markets decided?
According to Eisenach, because technology and economic factors change so rapidly over time, the DOJ does not use a strict formula (like an ownership percentage) for determining the problem areas. Instead, the exercise becomes more of an antitrust analysis where each market is considered on a granular basis. Generally, though, rural areas and smaller towns are more likely to be affected because they have fewer carriers than big cities.

Two questions that the DOJ will consider are: if enough customers would be able to switch carriers and if the merger would result in a small but significant and nontransitory increase in price (SSNIP). If either question raises problems, the DOJ will add that market to its list.

How are the market boundaries determined?
The DOJ considers both metropolitan statistical areas (geographical and economic regions used by the U.S. Census Bureau) and direct marketing areas (media markets defined by Neilsen media Research) in its analysis. It also will consider factors like the number of retail outlets a carrier operates in an area and the jurisdictional boundaries of city and county governments.

Eisenach said that lawyers from the DOJ and the carriers can spend a lot of time debating the boundaries. The carrier, of course, wants to divest as few markets as possible while the DOJ aims to ensure competition. Things can get tricky, for example, if there are a lot of customers living on the very edge of a market. If they switch carriers by going across a county line, then the carrier may try to strike that market from the list.

Who can buy the assets in a divested market?
As Eisenach put it, this is the most interesting part of the process. After divestiture, it's up to the carrier to find a buyer and strike a deal for whatever it can get. Though the transaction also needs government approval, the buyer could be just about anyone with the cash.

Just consider that when Verizon had to divest assets after its 2008 acquisition of Alltel, AT&T ended up paying $2.35 billion for spectrum in 18 states that covered 1.5 million people. As part of the transaction, Verizon and Alltel customers in those areas suddenly found themselves under the care of AT&T even though AT&T's GSM network was incompatible with Alltel's CDMA technology. As a result, network migration had to follow and the new AT&T customers had to get new phones.

If I'm affected by divestiture, what can I do?
For now, we advise a wait-and-see approach. The FCC won't consider the merger for months, and any integration process wouldn't begin until next year at the earliest. But if the merger is approved, and AT&T is forced to divest your market, it's not as if all wireless service will suddenly disappear. A buyer will come through and until that point, the combined carrier will continue to serve your area. Alternatively, some former T-Mobile customers could continue to get service under the T-Mobile banner. For the 26 Alltel markets that AT&T didn't acquire, Atlantic Tele-Network stepped in as buyer. That company now offers service to about 800,000 subscribers in six states under the Alltel name.

When you do get a new carrier, the buyer should honor your contract until its end date. Unfortunately, though, you will have to buy a new phone eventually if the new provider uses CDMA. And considering that Sprint and Verizon will likely bid on any divested assets, you may find yourself in that position.

If you aren't happy with your new provider, then we suggest shopping around for a new one. There are plenty of small regional carriers in the United States that offer new phones, extensive services, and affordable plans. They may fit your needs nicely, so shop around and find the best deal for you.