May 2011 Archives

May 26, 2011 11:57 PM

House Merger Hearing: Regulatory Complaints Dominated Merger Concerns

Yesterday, the Subcommittee on Intellectual Property, Competition, and the Internet of the House Judiciary Committee held a hearing on the effects of the proposed AT&T/T-Mobile merger.  The CEOs of AT&T and Deutsche Telecom both testified, as did several other parties who either opposed or supported the proposed merger.  

"Vertical" issues (how the post-merger firm could limit access to inputs needed by competitors) dominated the questioning.  However, this being a "horizontal" merger, the witnesses for the merging parties had to keep referring the questioners to FCC proceedings.

Earlier this week, I published a post that referred to most arguments opposing the merger as being essentially frustrations over regulatory complaints that are best resolved by the FCC--as opposed to merger-specific concerns that would not be exist, absent the merger.  The Rural Cellular Association ("RCA") witness, for the most part, made me look like a psychic.


Continue reading House Merger Hearing: Regulatory Complaints Dominated Merger Concerns
May 25, 2011 12:37 PM

The Commission's Wireless Competition Conundrum: "Neutral" Is Not an Option

Since 1997, Congress has required the Federal Communications Commission to file annual reports that measure whether certain industries, such as mobile wireless services, are "effectively competitive."  Every report the FCC has issued since 1997 has found the wireless market "effectively competitive," until 2010, when the Commission failed to make any finding at all for calendar year 2009. See 2010 Report.

While it is not difficult to understand a bureaucracy's fear of commitment--making no judgment on one matter in the present seems to preserve all options for future matters.  There are now news reports, though, that the FCC might take the same "neutral" stance with respect to wireless competition that it took last year.  This time, though, that course destroys, rather than preserves, options, and the Commission must reconsider its fear of commitment.

The article notes that the Commission may be afraid of finding the wireless market to be "effectively competitive" for fear of limiting its options in reviewing the proposed AT&T/T-Mobile merger.  If this report is correct, the Commission's reasoning is both specious, and dangerous to its present agenda regarding spectrum policy and incentive auctions--an issue that Chairman Genachowski has been aggressively, and correctly, pursuing since the beginning of the year.  

 
Continue reading The Commission's Wireless Competition Conundrum: "Neutral" Is Not an Option
May 24, 2011 7:39 PM

A "Leap" in the Wrong Direction: Regulatory Problems Disguised as Merger Concerns

Yesterday, Leap Wireless ("Leap") added its voice to those opposed to the AT&T/T-Mobile merger.  What is interesting about Leap's opposition, are Leap's claimed concerns about the acquisition.  According to Leap's Chairman, Doug Hutcheson, the proposed AT&T/T-Mobile merger:

raises problems of spectrum concentration and impaired access to spectrum by competitive carriers; undercuts access to wholesale voice and data roaming services; and threatens to foster reduced device availability and reduced interoperability of wireless networks and devices, among many other issues.

See Leap Press Release. (emphasis added)

Mr. Hutcheson expresses some important concerns about the future of the wireless industry, although it's unclear how any of these concerns are necessarily exacerbated by the merger, or would be mitigated by cryogenically preserving T-Mobile in its present state.  However, I do sympathize with Mr. Hutcheson's concern over whether smaller carriers have been getting a fair shot at spectrum, and whether things will change for them in the future--though I disagree that the merger is the appropriate target of this frustration.  In other words, there is no immediate solution that could mitigate Leap's concerns, or solve AT&T's capacity crunch.


Continue reading A "Leap" in the Wrong Direction: Regulatory Problems Disguised as Merger Concerns
May 19, 2011 3:41 AM

Microsoft-Skype: The End of the "Free Lunch"?

When Microsoft's acquisition of Skype for $8.5 billion was announced last week, a lot of members of the financial press were quick to criticize the amount of money Microsoft paid for Skype.  But, I'm not a Microsoft shareholder, so I couldn't care less how they spend their money.

Still, there were a number of stories that intrigued me--all of which suggested that Microsoft's purchase of Skype may strain its relationship with the large phone companies, because Microsoft will further cut into the phone companies' revenues by expanding the Skype revenue base.  Here is a representative article, but there are lots more that say the same thing.

The "Conventional Wisdom"

All articles echoing this theme assume that Microsoft will be able to continue to offer the same Skype service at the same Skype rates (around 2.3ยข/min for calls to the PSTN/mobile networks) from all of Microsoft's operating systems and devices?  The concern the writers express is whether Microsoft's inevitable erosion of phone company revenues will strain Microsoft's relationships with the telephone companies, insinuating that Microsoft may have a difficult time getting its Windows Mobile O/S placed with the major carriers, while "eating their lunches" with Skype's super cheap rates.

Based on a few facts, and some incorrect assumptions, this conclusion has some superficial appeal, and it's understandable that the financial press would mistake appearance for analysis.   On this one, though, I'm taking the opposite side of the financial writers.



Continue reading Microsoft-Skype: The End of the "Free Lunch"?
May 18, 2011 2:02 AM

Free Press's Antitrust Letter Makes Sense . . . If You Don't Think About It

Last week, opponents of the AT&T/T-Mobile Merger published a short-lived political advertisement (that unfortunately, and shamefully, caught the reader's eye at the expense of transgendered Americans), using the catchy T-Mobile slogan in their ads against AT&T.  Around the same time, one of their affiliated interest groups--"Free Press"--sent a letter to the Senate Subcommittee on Antitrust, Competition Policy, and Consumer Rights, purporting to analyze the transaction from an antitrust perspective.   

The foundation of any relevant merger opposition rests on the correct definition of a relevant product and geographic market, and then attempting to rationally predict the expected consequences of any undue concentration in these markets.  To this end, Free Press's proposed definition of a "nationwide smartphone cellular service market" deserves some scrutiny.  

The Free Press Product Market Definition

In order to prove a merger violates the relevant antitrust laws, an opposing party must demonstrate that the effect of the merger would be "substantially" to lessen competition "in any line of commerce" (product market) in "any section of the country" (geographic market). Clayton Act, Section 7.  For a merger opponent to be successful, they must show that the merger will lessen competition in some discrete product and geographic market.

As an opposing party, Free Press begins its criticism of the merger in an analytically correct manner--by attempting to narrowly define a "market" in which it contends competition will be lessened.  Nonetheless, in defining a product or geographic market, an opponent must look at the consumer's options--not just what might work for their case.  

Frequently, antitrust plaintiffs make the mistake of defining product markets too narrowly (e.g., "stuff that only I like", or "Bob Marley Songs") in order to produce high concentration numbers.  Product markets are often defined too narrowly because plaintiffs mistake product differentiation within a market for different product markets.  

Free Press makes this same mistake, concluding that "nationwide", post-paid, smartphone cellular service constitutes a separate product simply because some carriers offering these services can command higher prices than functionally-equivalent service plans offered by smaller competitors.  Rather than proving a separate product market, Free Press has simply identified an example of differentiated competition within a product market (mobile wireless service).  Courts have consistently, and correctly, rejected product differentiation as a basis for defining a "product market"--from "premium" ice cream, to "premium" beer, to "expensive" suits. See The Significance of Variety in Antitrust Analysis, Section II. B., generally.  

Among its many other omissions, Free Press fails to define the unique characteristics of providing "nationwide" smartphone cellular service, as opposed to cellular service supporting all mobile devices, such as a "feature phone", a "tablet", or the dreaded "somewhat-smart-phone" that Free Press criticized Metro PCS for offering just 4 months ago. Given the unique diversity of products each carrier supports, it is difficult to imagine how a "hypothetical" smartphone cellular service monopolist would behave differently from a carrier supporting all mobile wireless services for purposes of satisfying the market definition tests under the DoJ's Merger Guidelines.

Even if the proposed product market could be defined with precision, it would still not necessarily indicate that consumer welfare would be harmed, due to the principle of "supply substitution."  You see, a "hypothetical monopolist" in the product/service market must be able to profitably be able to raise prices without attracting entry by other firms in the market.  See Guidelines, Section  9.0, et seq.  

This is why the FCC (from its earliest Wireless Competition Reports) wisely declined to analyze competition on a service-specific basis, finding instead, that the "evidence "support[ed] a product market that was much broader, including all CMRS services.  See 2nd Annual CMRS Report at 8. The Commission presciently made this finding when 36% of all CMRS customers were using paging, and that market was growing at 22% year over year. Id. at 5.

Geographic Market Definition

Free Press provides even less evidentiary support for why the relevant geographic market, from a consumer's perspective, is nationwide.  While all wireless consumers want to be able to contact anyone in the country, and they want to be able to use their phones anywhere in the country, this is an element of product market definition, and one that the FCC has recently addressed through its "Data Roaming Order." 

The geographic market for wireless services (including "smartphone cellular services") is the area in which a consumer could reasonably be expected to purchase such service--even if a "hypothetical monopolist" raised prices by a small but significant amount within that area.  In other words, for most people, this market is local (as the Commission has always concluded).  While it is natural for every economic agent to want to provide service to the largest possible market, the only reason Free Press argues for a "nationwide" market is to enhance concentration numbers in an "artificial" geographic market.  

For Free Press, this argument is understandable (to increase merger-related concentration), but it is also intellectually dishonest.  After all, how can Free Press scream up and down about a Metro PCS smartphone cellular service offering, and then argue that Metro PCS is not "in the market" for a significant number of customers?  Regional carriers, like Metro PCS, are either relevant or they're not.  Free Press can't get a free pass.

Just Don't Think About It . . .

Without its uniquely distorted market definition (and maybe even with it), Free Press cannot show any consumer harm from the merger.  Allegations of harm through "coordinated conduct" usually work best in homogeneous product markets that are geographically concentrated (think milk or cement).  If the only thing to compete on is price, then competition is best "managed" through coordination.  

On the other hand, a "unilateral effects" theory (also argued by Free Press) works better in highly concentrated markets, with differentiated products, and where each firm is each other's closest substitute.  The big question here is, does AT&T price its services differently in markets where T-Mobile is a competitor than in markets where T-Mobile is not present?  This seems highly unlikely--given Free Press's "nationwide" geographic market argument.

Successfully opposing a merger is no easy matter, but, at a minimum, the merger opponent has to arguably promote something more than social engineering.  In the present case--based on all known facts--consumer welfare (represented by output stimulation) has been most persuasively argued by the merging parties.  Fortunately for consumers, any localized competitive concerns can be easily cured by discrete divestitures, which will only strengthen "renegade", "irrelevant" carriers like Metro PCS.