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.

The RCA expressed concern that the merger would: 1) make it more difficult for smaller carriers to obtain spectrum, 2) increase the difficulty of obtaining satisfactory roaming on the post-merger firm's network, 3) increase their members' vulnerability to price increases for backhaul, and, 4) make it more difficult for their members to obtain access to popular handsets, such as smartphones.

The problems with these "vertical" issues are that 1) most complaints focus on AT&T and Verizon being the two largest firms in the market (however defined), though these two firms are not merging, 2) no one explains how the post-merger firm would have a greater incentive/ability to engage in anticompetitive tactics than AT&T/Verizon would have absent the merger, and 3) all of these "raising rivals' costs" theories are coming from firms whose retail prices are alleged to be significantly lower than those of either AT&T or Verizon.

I actually "like" the handset issue.  It's an interesting topic, and merits more discussion in its own separate post.  Nonetheless, the handset-related concerns of the smaller carriers will not be exacerbated by any outcome of this proposed merger.  Accordingly, neither will the other "vertical" merger-related concerns raised by opponents at today's hearing, so let's quickly consider each--crediting the opponents with every assumption in their favor.  

Access to Spectrum.  Opponents claim that it is hard for them to compete with the larger carriers for spectrum capacity when it comes up for auction.  This is, no doubt, true for the smaller carriers, but whether there are 7, 6, 5, 4, or 3 carriers that are larger and better funded, the smaller carriers won't be put on equal footing with the larger firms unless, or until, the FCC designs its future auctions by creating smaller spectrum blocks.  To be sure, this is a legitimate concern of fairness, but it is an auction design problem that can only be resolved by the FCC.

Access to Roaming.  Every carrier in every market--regardless of size--must be able to offer their customers a service that can be used nationally.   Aside from the facts that large carriers have entered into many voluntary roaming agreements, and that there are two nationwide wholesale 4G networks under construction, this remains a regulatory issue.  Because it is an issue of general regulation, the Commission has adopted voice roaming obligations, and--most recently--imposed data roaming obligations, on all wireless carriers.

Access to Backhaul.  Resolving every contested fact in favor of the opponents, it is still unclear how this merger makes matters worse for other wireless competitors.  Let's assume that every incumbent LEC--particularly AT&T and Verizon--has an absolute monopoly (unconstrained by regulation or competition) throughout their incumbent wireline regions.  

If the incumbent LECs are currently charging the monopoly profit-maximizing price, it is unclear how the proposed AT&T/T-Mobile merger would create an incentive for not only AT&T, but every other incumbent LEC, to inefficiently increase their rates above the optimal monopoly price.  On the other hand, if AT&T is not charging the highest efficient price to its wireless competitors, no one has explained why this merger will suddenly trigger exclusionary behavior by AT&T--in which it could have engaged pre-merger.  Again, though, the FCC already has an ongoing proceeding to examine special access pricing behavior by incumbent LECs.

I'm not trivializing any specific concerns raised by competitor-opponents of the AT&T/T-Mobile merger, but let's be clear--these are not merger-related concerns--they are general regulatory issues.  The merger opponents may be frustrated with the Commission's pace of action in resolving their concerns, but this frustration should not be an excuse for further FCC delay by taking the parties for a walk down "Shakedown Street."

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