Faced with regulatory hurdles too tall for it to leap, AT&T has announced that it has pulled the plug on its proposed plan to purchase T-Mobile USA from Deutsche Telekom for $39 billion.

The merger, which would have made AT&T the largest wireless provider in the nation, was widely criticized by opponents who believed that by removing T-Mobile from the marketplace, it would have taken away a lower-cost option for consumers. It would also, along with Verizon Wireless, have effectively created a duopoly in the U.S. wireless market, meaning less competition and innovation.

Parul P. Desai, policy counsel for Consumers Union called today’s announcement, “an early holiday present” for consumers.

“From the first day that this deal was announced, we have warned regulators, lawmakers, and consumers of the dangerous consequences of this merger,” says Desai. “Regulators clearly saw through AT&T’s claims of better service and saw what we saw – a combined AT&T/T-Mobile would mean higher prices and fewer choices for consumers. It would mean a wireless market dominated by a powerful duopoly with little incentive to compete with other carriers.

“We applaud the Justice Department and the FCC for their actions. We urge them to apply this same strict level of scrutiny to future spectrum transactions as Verizon attempts to consolidate more spectrum.”

In August, the Justice Dept. filed a lawsuit to block the merger. That trial was set to begin in early 2012.

In late November, the FCC announced it would hold an administrative hearing — essentially a trial in which the merging businesses would need to prove that the deal is in the best interest of the public — after the completion of the DOJ trial. On Thanksgiving, AT&T withdrew its merger request with the FCC, claiming it wanted to focus on the Justice Dept. trial.

Here is the statement from the Death Star:

AT&T Inc. said today that after a thorough review of options it has agreed with Deutsche Telekom AG to end its bid to acquire T-Mobile USA, which began in March of this year.

The actions by the Federal Communications Commission and the Department of Justice to block this transaction do not change the realities of the U.S. wireless industry. It is one of the most fiercely competitive industries in the world, with a mounting need for more spectrum that has not diminished and must be addressed immediately. The AT&T and T-Mobile USA combination would have offered an interim solution to this spectrum shortage. In the absence of such steps, customers will be harmed and needed investment will be stifled.

“AT&T will continue to be aggressive in leading the mobile Internet revolution,” said Randall Stephenson, AT&T chairman and CEO. “Over the past four years we have invested more in our networks than any other U.S. company. As a result, today we deliver best-in-class mobile broadband speeds – connecting smartphones, tablets and emerging devices at a record pace – and we are well under way with our nationwide 4G LTE deployment.

“To meet the needs of our customers, we will continue to invest,” Stephenson said. “However, adding capacity to meet these needs will require policymakers to do two things. First, in the near term, they should allow the free markets to work so that additional spectrum is available to meet the immediate needs of the U.S. wireless industry, including expeditiously approving our acquisition of unused Qualcomm spectrum currently pending before the FCC. Second, policymakers should enact legislation to meet our nation’s longer-term spectrum needs.

“The mobile Internet is a dynamic industry that can be a critical driver in restoring American economic growth and job creation, but only if companies are allowed to react quickly to customer needs and market forces,” Stephenson said.

To reflect the break-up considerations due Deutsche Telekom, AT&T will recognize a pretax accounting charge of $4 billion in the 4th quarter of 2011. Additionally, AT&T will enter a mutually beneficial roaming agreement with Deutsche Telekom.

What remains to be seen is what will happen to T-Mobile now that the deal is done. The company had been the target of takeover rumors by just about every other wireless provider in the months leading up to last March’s announcement. But as AT&T was unable to purchase T-Mobile, there is no chance that Verizon (currently the largest cell phone carrier in the U.S.) could make such a deal work. A more reasonable partner would be the similarly sized Sprint.

T-Mobile USA could be also spun off into its own company, though it’s been reported that the amount of cash that would generate in the short term would be significantly less than what a sale would earn.

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