December 9, 2011 2:20 PM

Merger Efficiencies and the Tech-Nobility

"Public Interest" merger "efficiencies" are in the eye of the beholder.  The term "efficiency" is hardly a precisely-defined, universally-understood concept.  For many, if a merger created more capacity to better serve the basic mobility communications (voice, text, and limited data) needs of those that would otherwise go without these benefits, the merger could be said to be "socially efficient."  

On the other hand, "efficiency" could be considered from an engineering perspective to use the latest technology to squeeze every last drop of bandwidth out of a given amount of spectrum in order to better satisfy the data demands of the most technologically advanced consumers.  The consumers that use these devices most intensively have a powerful voice in Washington, and might be called the "tech-nobility."

Throughout the analysis of the proposed AT&T/T-Mobile merger, the only "efficiency" benefits that have mattered are those that are important to the "tech-nobility."  And who represents the "tech-nobility"?  

Well, it's clear from last week's "Staff Report and Analysis" ("Staff Report"), by who it chose prominently to cite, that the FCC sides with the "tech-nobility"--a group whose views are most stridently expressed by the self-appointed "defenders" of advanced telecommunications consumers--Public Knowledge  and Free PressSee paras 165-245 of the Staff Report. The only potential efficiencies of concern to the Commission are those that can be demonstrated to further wireless broadband deployment.

The Parties' Argument and the Commission's Reaction

Unfortunately for the parties, a lot of their efficiency claims seem to depend on combining their 2G and 3G networks.  The Commission, while recognizing this possibility, seems openly contemptuous that AT&T and T-Mobile would be even operating these networks.  See, e.g., ("While it may be true that the spectrum gained from  control channel elimination could result in increased deployment of advanced technologies it could also prolong AT&T's reliance on outdated and inefficient GSM technology.) Report, para 203. (emphasis added)

Similarly, in paras 216-225, the Commission criticizes AT&T's claims of merger-specific efficiencies, because it believes that AT&T could and should be more aggressively moving GSM devices off its network--though the Commission acknowledges that AT&T has virtually eliminated the retail sale of 2G GSM devices.  For example, while the FCC doesn't dispute that the transaction could provide the parties more "head room" in gradually phasing out their GSM networks, while moving spectrum to "higher" uses, the Commission concludes, "prolonging the use of less efficient technology should not be deemed a benefit for purposes of assessing this transaction." Report, para 221.

Does Anyone Benefit from "Less Efficient" Technology?

Well, the answer is "yes", but the population benefited is only the poor and elderly, and they hardly count as constituents of Public Knowledge, Free Press, and the Commission's "Broadband Nation."  Who says the underserved, including the poor and elderly, benefit from lower priced, simpler offerings?  

The FCC, for one, took this point of view only six months ago in its Wireless Competition Report noting that, "MVNOs [Mobile Virtual Network Operators--companies which buy capacity from facilities-based carriers to create their own product/service offerings] often increase the range of services offered by the host facilities-based provider by targeting certain market segments, including segments not previously served by the hosting facilities-based providers." Wireless Report at para 33.

Unfortunately, in conducting its "efficiency" analysis in the Staff Report, the FCC seemed to neglect the increasingly important role of MVNOs, by ignoring the parties' claimed engineering benefits--which flowed from the bottom up.  The problem is one of bias--toward the "tech-nobility" as represented by Public Knowledge and Free Press.  

You see, neither the Commission nor the interest groups could put themselves in the place of a large carrier with a responsibility to serve all segments of the market--including those segments served indirectly through MVNOs.  AT&T has contractual responsibilities to its wholesale MVNO customers.  Let's consider their "social efficiencies" for a moment, since the Commission ignored this productive use of technologically-inferior networks.

The Poor

Tracfone is the country's fifth largest mobile wireless provider with approximately 20 million subscribers.  TracFone serves the value-oriented portion of the market, including customers poor enough to qualify for Lifeline subsidies.  TracFone offers a variety of affordable plans and phones from readily accessible general merchandisers and convenience stores.  

AT&T and T-Mobile are two of TracFone's largest underlying carriers.  Dislocating TracFone's GSM customers would impose costs on those least able to afford these costs and maintain cellular service.  Is it the best policy for the Commission to choose technological efficiency over social efficiency in order for the merger to be in the public interest?

The Elderly

America's seniors gain two major benefits from mobility--health and safety, and mitigation of loneliness, which often accompanies old age.  These consumers do not, for the most part, use advanced mobile broadband services.  One of my clients, Consumer Cellular, Inc. is the exclusive affinity provider of AARP and focuses on serving America's seniors.    

Recently, Consumer Reports announced that Consumer Cellular was rated highest in customer satisfaction among all mobile wireless service providers.  While Consumer Cellular was ranked highest in customer satisfaction, it should be noted that Consumer Cellular is an AT&T MVNO.  Paradoxically, Consumer Reports also ranked AT&T the lowest of the major carriers in terms of customer satisfaction.  Why?

The simple answer is that Consumer Cellular's customers use phones supported by the 2G and 3G networks for which the merging parties claim the greatest efficiency benefits from being able to combine.  It is also notable, in all the rhetoric surrounding adjacent markets in this merger, that Consumer Cellular offers its customers phones for which it has exclusive distribution arrangements.  These phones are made by Doro and have earned high reviews from consumers and tech experts alike for their performance tailored to the elderly and hard-of-hearing customer segments.

It goes without saying that, if AT&T were to quickly abandon its more "inefficient" networks as the FCC "tech-nobility" would demand, it would be punished for its own innovation targeted at an underserved market.  Thus, it's no surprise why Consumer Cellular CEO, John Marick, sees the efficiencies from the merger that the Commission chooses to ignore.

Who would you trust, an engineering model modified to generate the Commission's pre-determined views on "efficiency" or a wholesale customer, providing what a majority of its consumers believe to be the best mobile service in the country . . . using a network that it believes will become more efficient as the result of the merger?

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