WASHINGTON DC (WiMAX Day). The US Federal Communications Commission (FCC) postponed its approval on Friday of AT&T’s $79 billion purchase of BellSouth, until November 3. While the FCC will no doubt demand some concessions from AT&T, most analysts agree the merger will be approved, and moreover, that the merged company will become a major player in the US WiMAX market.

Earlier this week the US Department of Justice approved the merger with no conditions, surprising many observers that expected the DoJ to raise antitrust concerns regarding the 2.5 GHz spectrum holdings of the merged companies. The spectrum issue was raised last month by two prominent US Senators who argued that AT&T would “warehouse” its spectrum because its use might compete with other AT&T businesses. Both companies refuted this claim, and the Senators failed to see that AT&T has made a fortune carrying VoIP and wireless traffic from re-sellers and cable companies that competes directly with its traditional long-distance business.

Values of 2.5 GHz spectrum increases
In the last year, 2.5 GHz spectrum in America has gained significant importance, and value. Before Sprint’s merger with Nextel was approved last year, the FCC demanded that Sprint use its 2.5 GHz spectrum for broadband services, hence the announcement earlier this year that Sprint would invest billions in WiMAX.

While Sprint may have the largest holding of 2.5 GHz spectrum in America, it does not provide adequate national coverage. According to published reports, BellSouth is the second-largest owner of 2.5 GHz spectrum in the US, and controls spectrum in most of the 50 largest markets. BellSouth also has substantial holdings of 2.3 GHz spectrum that it acquired in 1997. AT&T also gained a large portfolio of 2.3 GHz spectrum last year when it was acquired by SBC.

WiMAX is the Key Enabler
BellSouth has been actively testing WiMAX for the last year and is now offering the service commercially in ten US markets. AT&T also has been testing WiMAX in numerous markets for the last two years.

Moreover, for AT&T WiMAX is not simply a new service offering, but rather it is a key component of the technical roadmap constructed for AT&T by Hossein Eslambolchi, the former CTO of AT&T who retired at the end of 2005. The future that Eslambolchi built for AT&T is IP-based, according to Eslambolchi, because “IP will consume everything.” Currently some 2 petabytes of data passes through the AT&T network every day, making it the largest IP network in the world.

The IP-based standards of WiMAX were not lost on Eslambolchi when he was planning the future of AT&T. At the Web 2.0 conference in 2005 he said “WiMAX is going to be very hot… because it will become a truly global wireless standard.”

Eslambolchi saw WiMAX not simply a new technology, but as a major cost saver for AT&T. It has been rumoured for more than one year that AT&T intends to replace the last mile local access that they lease from local carriers with their own WiMAX network. “We [AT&T] spent $8.5 billion on local access last year,” Eslambolchi said. “I’m going to find any way I can to bypass that as fast as we can.” AT&T is also the second largest operator of Wi-Fi hotspots in America, and using WiMAX to back-haul traffic for those hotspots would be a major cost savings as well.

The rationale for the AT&T and BellSouth merger is the convergence of fixed-line, mobile and wireless services. Although many GSM operators have taken an interest in WiMAX in the last year as a complement to or replacement of 3G services, companies such as AT&T and BellSouth need wireless broadband to increase their penetration in the residential last mile and VoIP markets, without incurring further investment in cable or DSL.