August 2011 Archives

August 23, 2011 9:54 AM

Sprint's Gambit

Virtually from the announcement of the AT&T/T-Mobile merger, both Sprint's advocacy and Sprint's ultimate goal in its opposition to the merger (blocking the merger outright) have been a puzzle to me.  Specifically, Sprint's categorical opposition to the merger makes me wonder: "why the opposition?" and "what are they really looking for here?"
 
Sprint's superficial, substantive arguments against the merger are a fairly generic, typical "Guidelines" style analysis from a consumer welfare (rather than Sprint-specific) perspective.  Coming from a competitor, these arguments invite suspicion. 
 
In fact, the Supreme Court has been extremely skeptical of competitors seeking to block mergers on the grounds that "competition" will suffer as a result of the merger.  See, e.g., Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477 (1977)(rejecting antitrust standing of competitors seeking to block an acquisition on the basis that it would concentrate the market, and leave the post-merger firm with lower costs, creating a potential threat to plaintiff competitors).  

Regardless, it makes little difference whether Sprint's opposition is motivated more by self-interest than the public interest.  However, Sprint has been quite clear in its advocacy before the FCC and the Congress that the objective of its advocacy is to see the proposed transaction blocked.

The Puzzling Perplexity of Sprint's Advocacy Goals

If Sprint's preferred outcome is for the proposed transaction to be completely blocked, then we have to ask, how does this outcome maximize Sprint's self-interest?  This is the question that is so vexing to me.  After all, if a market becomes more concentrated, and leads to price increases and less innovation, one would expect that the last party to complain would be a competitor remaining in the post-merger market.

It seems obvious that Sprint will only benefit from higher retail prices.  Less innovation, as well, would have its rewards in terms of reduced capex pressure, and reduced pressure to constantly roll out new bandwidth-gobbling devices. These are real benefits, so why does Sprint want the merger blocked (vs. "conditioned")? 

The Gambit

A true "gambit" requires that a player sacrifice something of value to gain a greater strategic advantage.  In this gambit, there are at least two very obvious sacrifices that Sprint is willing to accept from the outset.

The first sacrifice is that Sprint will not seek merger conditions, because (according to Sprint) there are no conditions that could mitigate the consumer harms created by this merger.  This is a "real" sacrifice, because Sprint could have reasonably expected to extract some valuable concessions.

The other sacrifice is much more significant, but has gone completely ignored by the industry insiders and press.  The fact is that Sprint, through its advocacy, has disqualified itself from acquiring T-Mobile.  So Sprint is not seeking to disqualify AT&T from acquiring T-Mobile, so that it may subsequently acquire T-Mobile for a lower price.

This sacrifice is an unequivocal and inseparable part of its economic analysis of the merger.  As Sprint explains, the current proposed merger allegedly increases the HHI by 700 points, based on market share numbers listed.  On the other hand, a Sprint/T-Mobile merger would move the same "highly concentrated" baseline HHI up by 500 points.  See Table 4 ("postpaid only" column) in the economics declaration in Sprint's Petition to Deny (p. 257 of 377).

It is, therefore, quite clear that Sprint's analysis--if accepted by the government  as a basis to block the merger--would also disqualify Sprint and Verizon as subsequent bidders for T-Mobile, thus "cementing" the "national wireless market" (if you buy this definition) as a 3 firm market. Why do I say 3 carriers when we are left still with 4 "national" providers?  Because in that world, T-Mobile is fundamentally crippled from a competitive standpoint and that, in essence, is the big win.

The Gambit Payoff

Consider the advantages to Sprint of a capacity-constrained 3 firm oligopoly market structure.

1)  Customer Share/Acquisition. Constructively, T-Mobile will be an island, cut off from ready access to capital from its parent, Deutsche Telecom.  Without a "true" 4G network, T-Mobile will gradually lose customers to other carriers in the market.  Many would argue that Sprint is the next best substitute for T-Mobile, so Sprint may gain disproportionately from T-Mobile customer defections. 

2)  Accelerated Growth in Data Services.  Let's assume that Sprint (rationally) believes the fact that AT&T is very data capacity constrained.  If the government successfully blocks AT&T's proposed acquisition of T-Mobile, the remaining three 4G carriers (remember, under the Sprint theory we virtually ignore other competitors like Metro PCS who may have 4G networks, too) have no real means to acquire additional spectrum capacity. 

The number one provider of wireless data service--AT&T--will be supply inelastic in most cities for the foreseeable future (no capability to acquire sufficient spectrum). This puts AT&T in a "shortage" situation, where it must set prices not to maximize profits, vis-à-vis costs, but to increase prices, and reduce output, in an effort to ration service consumption.
 
Once AT&T is forced to implement "congestion pricing", it is logical to expect that Verizon, the number two wireless data provider, will adjust its own prices in order to preserve its network capacity in a spectrum-constrained market (it can't acquire spectrum either).  The only party that "wins" in this scenario is the firm with the largest excess capacity--Sprint--which through its and Clearwire's holdings has more spectrum, and more capacity than anyone else in the market, including AT&T or Verizon. See FCC's 15th Wireless Competition Report, at Table 28 (Sprint/Clearwire has a weighted avg. of 184.4 MHz of spectrum vs. a combined weighted avg. of 173 MHz for AT&T and Verizon Wireless combined)
 
3)  Peace of Mind.  Can you ever really put a price on it?  With a tight 3 firm oligopoly, characterized by high barriers to entry, Sprint no longer has to "watch its back" as the undisputed "national" value brand.

The Beautiful Genius of Sprint's Gambit

Sprint's analysis virtually ensures a 3 firm oligopoly going forward, because every potential bidder with the experience and financial capacity to acquire T-Mobile is eliminated.  T-Mobile lacks the resources to build out a 4G network, and no other carriers have the kind of money they would need to buy T-Mobile, at their present size, and then upgrade T-Mobile's network to being 4G capable.  Finally, if T-Mobile has to continue as an independent carrier, their only realistic alternative for offering "national" 4G services is through . . . Sprint's majority-owned wholesale carrier, Clearwire.  This is a brilliant gambit.
 
August 4, 2011 7:28 PM

What the Price Cap LECs Saw, and What They Need to See

Last Friday--after months of intense negotiation, compromise, and an exhaustive re-calculation of the Mayan Calendar--the six largest "price cap" LECs submitted a comprehensive USF/Intercarrier Compensation reform plan to the FCC ("the Plan").  [Note: you really only need to read "Attachment 1"--the rest just provides legal and economic support for the FCC to adopt the Plan.]  

Under the Plan, the only economic incentive to keep the PSTN alive will disappear on July 1, 2017.  On that date, the Plan--and the Prophecy--require that Price Cap LECs shall be required to make money just like any other business: by efficiently selling services to customers who voluntarily decide to purchase these services.  

This Plan, if adopted by the Commission, will serve to streamline intercarrier compensation, while more efficiently promoting the goal of universal access to broadband, as well as voice, services.  At first, all of this will sound kind of scary to many of you.  

Therefore, let me assure some of you that arbitrage will still be around for 6 more years, and the Plan only requires the end of subsidies as they currently exist.  The Plan is by no means a "Doomsday Prophecy", but merely a gateway to the implementation of simpler, more efficient, and more transparent, subsidy recovery mechanisms.  

Let's look at how the Plan would affect two large, PSTN-dependent industries, if adopted today:

VoIP Providers:

    1) Positive:  allows for recovery of all VoIP-originated or terminated "toll" calls at interstate access rates for the next two years!  That's a crazy incentive to upgrade to more efficient technology ASAP.  As a LEC, you don't have to maintain "big iron" to get big bucks.  There will also be a strong short term benefit to interconnected VoIP providers.  No more haggling with big LECs who only want to pay you $.0007/min, and there's a big difference between $.05 and $.0007.  For the next 6 years--albeit at descending rates--carriers serving end-users of VoIP service will be able to collect larger revenue streams than they are generally being paid today.

    2) Negative:  costs to over-the-top VoIP providers will increase, as may wholesale costs of transmission to interconnected VoIP providers (if purchased from a third party backbone operator--because as the costs collected from other carriers goes down, customer costs will increase; even in the wholesale world).

Wireless Carriers:  Stone cold positive.  No negatives here at all.  Wireless providers get a quick transition from intrastate access rates (which are usually much higher than interstate) to the much lower interstate rates, and decreasing rates over time.  It is notable that most of the Price Cap LECs in the Plan, DO NOT have wireless affiliates.

Regulatory "Underbrush" Grows on Both Sides of the Fence

All of the price cap LEC's supporting the Plan have waxed eloquent at one time or another about the need for the FCC to eliminate its outdated regulations a/k/a "regulatory underbrush."  The Price Cap LEC's Plan accomplishes a lot of these goals, but keep in mind, "regulatory underbrush" grew on both sides of the fence. 

The same byzantine, opaque, universal service system also resulted in cost recovery mechanisms in the form of "services" that are no where to be found in the modern, competitive services offered by cable companies, and wireless carriers.  For example, in a competitive market that didn't start as a regulated monopoly with the goal of keeping "basic" service rates low, would any of these things really emerge as "services" that customers would buy?    

    --"unlisted" phone numbers;

    --"foreign exchange" service (in wireless, you can port a NY number to a TX carrier, but LEC voice providers still make you pay to "port" your landline number a mile away);

    --"hunt groups" (say a customer has one number for its business, but the customer actually buys 10 lines to make sure calls are always answered--the automatic process of "hunting" (finding an open line attached to the main number)--is sold as a separate service);

    --phone handset "rentals":  there have got to be some people still renting that bakelite phone for 3 bucks a month;

    --inside wiring "protection";

    --selling common PSTN "vertical" switch features, like caller ID, a la carte;

    --charging extra for "touch tone" dialing (still happens).

Bottom Line:  The Price Cap LECs have a good plan to streamline regulations for "cost recovery."  But, allowing carriers to to recover costs by receiving explicit subsidies and charging a fair price for service may cause the FCC to wonder how much in costs is still recovered via distorted "services" that emerged from the antiquated regulatory regime in need of reform.  If you can think of any "cool" old, tariffed "services" that seem to have originated as a form of "cost recovery"--and are still being "sold"--please post in the comment section. 


August 2, 2011 11:38 AM

Bored with Stale Rhetoric? Take the AT&T/T-Mobile Cynicism Quiz

I haven't posted anything in a while, and that's because the only thing anyone seems to be focusing on is the AT&T/T-Mobile Merger.  In fact, at this point--during the dog days of Summer--I am genuinely bored to death with the banality of the banter between merger opponents.  If it seems like the same arguments are being made, it's because they are.  
 
Don't believe me?  Then see if you can correctly guess who said what, and when, starting with the proposed 2004 acquisition of AT&T Wireless by Cingular Wireless for $41 billion, which would have made Cingular the largest wireless carrier with a market share of over 40%.  Sounds familiar, no?  So, we'll start there.

Every assertion listed below is (substantively) part of an argument being made by the merging parties or their opponents at the FCC.  All you have to do is guess whether the statement was made previously or now, and whether it was made by a merger opponent or proponent.  We'll score you up at the end to rate your DC telecom cynicism.  

1)  "T-Mobile does not provide a meaningful competitive alternative [to AT&T] as a roaming partner to many cellular carriers and subscribers."

2)  "[T-Mobile] is not a significant competitive constraint on AT&T."

3)  "In many cases, T-Mobile has been unwilling to even enter into roaming agreements with rural wireless carriers."

4)  "At a minimum, the elimination of T-Mobile as a 'benchmark' firm for these purposes [offering roaming agreements to smaller carriers] frustrates the FCC's ability to monitor the emerging marketplace and ensure compliance with the pro-competitive rules adopted by the Commission."

5)  "In fact, the statements made by wireless incumbents [including T-Mobile] . . . make clear they have no intention of offering broadband with the freedom to attach any device and run any application."  [in other words, "maverick" behavior]

6)  "T-Mobile is not merely a direct competitor, but a 'maverick' whose behavior forces pro-consumer responses from larger firms despite T-Mobiles [sic] relatively modest market share."
 
7)  "Consumers make their wireless purchasing decisions at the local level--where they can see the devices, speak with sales representatives about the products and services, and comparison shop among competitors."

8) "The FCC should reject a national market definition.  Wireless is sold as a local product. National coverage and calling plans are one characteristic of the service, but it is bought and sold at the local level."

9)  "[T]here is clearly substantial competition among the national carriers in those portions of the country where most Americans reside, and in many cases additional competition in areas served by regional carriers . . . ."

 
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