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.
 

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