AT&T + T-Mobile Equals Verizon + Sprint

NEW YORK (TheStreet) -- Industry roll-ups tend to lumber toward an inevitable two-player duopoly, like Airbus and Boeing(BA), or Coke(KO) and Pepsi(PEP) -- at least until someone says whoa.

A big test of this premise is coming with the federal review of the $39 billion wireless hookup between AT&T(T) and Deutsche Telekom's(DT) T-Mobile.

The proposed transaction can take one of two directions: An end of the line for telco mergers, or a warm-up for one final mega deal.

Observers say that AT&T and T-Mobile might mark a takeover of a rival that goes too far for regulators to offer their blessings without demanding onerous concessions.

Or, if approved, the merger might set the stage for a big finale -- the combination of Verizon(VZ) and Sprint(S). This would create a mobile market dominated by two top competitors -- a duopoly.

Unfortunately, consumers and consumer interest groups won't be particularly supportive of the prospects for a two-player market, which would set the stage for higher prices.

"It's been a nasty environment," said Jacob Asset Management's Darren Chervitz. "You could certainly see some scale advantage to the existing players." Chervitz adds that duopolies can still be aggressive with prices, but overall it would still be "a negative for consumers."

Investors, on the other hand, see some upside to a consolidation of power in wireless. Since T-Mobile and Sprint are the two most aggressive carriers on prices, the profit margins of the whole group are held down.

Sprint has been opposed to the AT&T deal for T-Mobile on concerns of unfair competition. The company has reiterated it position as recently as Monday with suggestions for ways AT&T can expand its network without T-Mobile.

Verizon has been unusually mum on the proposed merger. However, when asked if Verizon would feel its own compulsion to merge, Verizon Wireless CEO Dan Mead dismissed the idea.

"We're not interested in Sprint. We don't need them," Mead told Reuters in March.

Market watchers argue the opposite, noting that market share is key and that anything beyond the strong top two picks is often a marginal position. This is especially true in national and international markets like the credit card duo Visa(V) and MasterCard(MA), or even in the corporate telecom market where AT&T and Verizon fight for business users.

Mobile service is a particularly costly business where already expensive networks are in constant need of expansion and upgrades.

"It would make sense for the industry to have fewer players because returns on capital in the sector have been weak relative to other adjacent sectors," said BayBridge Capital's Blake Bath.

One thing to keep in mind: it's a little premature to conjure up a Verizon/Sprint scenario when the Ma Bell/T-Mobile deal may not even get the thumbs up.

"There's been a lot of market concentration," says Monique Lewis of Mergermarkets, a deal research division of Pearson(PSO). "It's getting down to the point where there just aren't that many small guys left."

As illustrated in the chart above, the past three years have seen eight major wireless deals and the elimination of five independent mobile players.