Results tagged “AT&T/T-Mobile merger”

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elimination could result in increased deployment of advanced technologies it could also prolong AT&T's reliance on outdated and inefficient GSM technology.)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?

November 28, 2011 4:33 PM

The FCC's Thanksgiving Week Charade

Last week was a short week for most Americans . . . a time to relax, and enjoy time with friends and family.  While most Americans were doing just that, political types in Washington--like our friends at the FCC--had nothing to do but play politics . . . and play politics they did.  However, what was no doubt intended to be a political game of "chicken", turned out to be just another "turkey" in a week devoted to the turkey.

Here's what happened.  Last Tuesday, on the 22nd, the Commission apparently decided that they had seen enough of the proposed AT&T/T-Mobile acquisition, and circulated a draft order expressing conclusions of "Commission staff" that the proposed acquisition was just bad juju and needed to be rejected by the FCC on "public interest" grounds (assuming the Antitrust Division failed to prove the merger would lessen competition).  The alleged draft order would have required an Administrative Law Judge to hold a hearing in order to validate the harms the "FCC staff" had already identified.  

Stealthy Regulation

Aside from the Commission's pre-holiday timing, the FCC also surprised the merging parties themselves--calling to notify them only hours before going "public" with its announcement.  Perhaps, "going public" is not quite the best characterization of the decision, as the FCC's web page fails to mention this development.  Apparently, only those reporters that could be trusted to keep a secret were privy to the press briefing.  Every seemingly-firsthand report announcing this "news" also includes "boilerplate" similar to this language from the Infoworld article, "FCC officials said in a press briefing in which they spoke under the condition they not be named." 

This Commission has made "open and transparent decision-making" a point of distinction.  While the meaning of this term is open to debate, what is clear, however, is that access to "open and transparent decision-making" is an earned privilege, and not a right.

Jobs Creation: Identity of Investor vs. Amount of Investment

Along with the self-evident statement that would be true of every previous wireless merger the FCC found to be in the "public interest" (that the merger would result in an "unprecedented concentration" in the wireless industry), the anonymous FCC officials explained further that AT&T had failed to prove that the merger was necessary to increase rural broadband coverage, or that the merger would create jobs, and/or prevent job losses. 

The "unnamed" FCC officials, appeared to base their reasoning on a variation of the established principle that "[i]f you have five dollars and Chuck Norris has five dollars, Chuck has more money than you." See generally, Chuck Norris Facts.  But, an FCC that isn't even comfortable "publicly" disclosing their own names at a press briefing cannot be expected to be candid, or cavalier, enough to disclose that they relied on reasoning derived from a "Chuck Norris fact" to further the agency's political interest. 

If this assessment seems a little harsh, let me explain.  Only four days prior to the secret commissioner's other briefing, the FCC issued a very public self-congratulatory statement on their recently-adopted Connect America Fund Order ("CAF Order"), explaining that a broadband development fund not to exceed $4.5 billion dollars/year (comprised of rate-payer "contributions") would generate approximately 500,000 jobs over the next 6 years.  So, the FCC plans to "invest" (through direct subsidies) between $24-$27 billion over the next 6 years to create 500,000 jobs.

On the other hand, AT&T has publicly stated--and the Commission could require--that it will invest an additional $8 billion (above their normal cap-ex budget) over about the same period of time.  It's puzzling that, even by the Commission's self-serving "recovery math", it can't give AT&T credit for its claim that its investment (1/3 of the Commission's total) will produce a comparatively modest 100,000 jobs. After all, if the FCC converted that $8 billion investment into an additional $8 billion subsidy, the same amount would produce about 167,000 jobs over the next 6 years. 

Even if the Commission believes that private investment is significantly less efficient than FCC-directed subsidies, it's hard to believe that AT&T's investment couldn't potentially create at least 60% of the jobs the Commission could produce using an equivalent CAF subsidy. On its face, it would seem as if the FCC is using one set of assumptions for CAF subsidies, and another for AT&T wireless infrastructure investments, but yet this explanation would suggest inconsistent treatment of similar issues--the opposite of open and transparent decision-making.

Why the FCC would use one investment-to-jobs multiplier for its CAF Order, and then--only 4 days later--tell the public that AT&T's substantial incremental merger-related investment would not create jobs is unclear. The only consistent rationale that would allow both claims to stand would be something along the lines of "if the FCC invests $5 in rate-payer funded subsidies, and AT&T invests $5 in private capital, the FCC will create more jobs."  

Not only is this logic tortured, but it borders on Chuck Norris pop culture heresy.  The Commission's fundamental error is in using a Chuck-specific mathematical principle to justify a transparently specious political agenda.  With this information in hand, it is easier to understand why the FCC officials insisted on anonymity at the press briefing.  Unfortunately for the FCC officials, any student of Chuck Norris facts can tell you that, if Chuck knows where Carmen Sandiego is (and, according to the Internet, he does), Chuck will certainly find the FCC officials . . . and the results will not be pretty. 

Even worse . . .

Not only is it bad enough that the FCC wouldn't even publicly disclose who was (indirectly) briefing the "public" in a press briefing, and failed to apply its own investment-to-jobs creation formula consistently, but the Commission compounded these problems by reverting to its  all-too-common "modus operandi" of obtaining its objective through an act of omission. By designating its "concerns" to an indefinite administrative hearing process, the Commission signaled its intent to effectively derail this proposed transaction by outright delaying consummation past the September 20th "drop dead" date.  

Pathetic?  You bet; but this is precisely why there are a number of Chuck Norris facts web sites, and exactly no "FCC facts" web sites . . . .  The Commission should be giving thanks that AT&T and DT saved some piece of the agency's dignity by seeking to withdraw their license transfer request on Thanksgiving Day.  The FCC should hope Chuck will be that gracious.

November 16, 2011 3:13 PM

H&R Block, AT&T, and the Error of Recency

Last week, the U.S. District Court for the District of Columbia, released its opinion granting the Antitrust Division of the U.S. Department of Justice a preliminary injunction preventing H&R Block ("HRB") from acquiring the stock of "2SS Holdings, Inc.", the maker of TaxACT, a digital "do it yourself" ("DDIY") tax preparation software.  

Since this news was released on November 2nd, many have speculated, opined and hypothesized--without basis--that this decision does not bode well for AT&T's acquisition of T-Mobile USA from Deutsche Telecom.  According to just about everyone, the impact was decidedly positive for the DoJ's chances to win its case against AT&T/T-Mobile if it goes to trial next February in Judge Huvelle's courtroom.

The simplified reasoning was that because the government had just prevailed on its most recent horizontal merger challenge, it will likely prevail on its next horizontal merger challenge in the same district.  These stories were the predictable result of a well-known human behavioral bias, known as the "error of recency"--the notion that humans tend to overweight the value of recent actions. While the "hot hand fallacy" and the "gambler's fallacy" were identified with respect to how humans approach "random" (i.e., "unrelated") events over 300 years ago, these biases continue to persist.

What is interesting, though, is that the "hot hand fallacy" infected all major stories reporting, or commenting on, the event.  The result was that the "legitimate" news stories (e.g., Bloomberg and Reuters) were remarkably similar to the interest group blogs.  But, since no one has yet attempted to offer any perspective on the HRB case (unaffected by the error of recency), let's look at how the two cases might be perceived differently by a different court, with a different set of facts.

Market Definition

HRB

This is perhaps the most obvious difference between the two cases.  The HRB case was, strategically, much more of a traditional horizontal merger case.  The basic strategy in a horizontal merger case is for the plaintiff to seek to define the markets (product and/or geographic) very narrowly, and for the defendants to seek the broadest possible market definition.  For example, if the alleged market was soft drinks, defendants would want to argue that all non-alcoholic beverages, including tap water, should be included in the product market.  

It would not be going too far to say that HRB was all about product market definition.  In fact, the court devoted more than half of its opinion to evaluating each party's claims regarding the properly-defined product market.  Only if the court agreed with the DoJ's  contention that DDIY software was a discreet product market, would the government have been able to show sufficiently high concentration numbers to make its case that this merger would lessen competition.

Defendants, on the other hand, were arguing that the market also included professionally-assisted tax preparation, and (fatally) consumers that file their tax returns without any assistance.  The court found this definition impermissably broad, because the inclusion of "pen and paper" filers distorts the market because these filers were not purchasing any product or service, but merely performing a legally-compelled "chore."

Ultimately, the court found the DoJ most persuasively defined the relevant product market.  After adopting "DDIY" as the product market, the concentration numbers were substantial.  The market leader, Intuit, had around a 62% market share, with HRB and 2SS coming in second and third with approximately 15.5% and 13% shares, respectively. Now, let's compare the market definition facts of the AT&T case.

AT&T/T-Mobile

Unlike the HRB merger, there are unlikely to be many, if any, novel proposed market definitions presented by this proposed wireless acquisition versus any of the many others for which the DoJ has alleged the same product and geographic markets it is alleging in the present complaint.
 
Competitive Effects--HRB vs. AT&T/T-Mobile

Contrary to the assumptions of some commenters, however, mergers are not evaluated solely on concentration numbers.  The HRB court, relying on U.S. v. Baker Hughes, explained that "[t]he Herfindahl-Hirschman Index cannot guarantee litigation victories." Opinion at 53 of 86 (internal citations omitted).  So let's compare the alleged anticompetitive effects of both proposed mergers.

First, we have to recognize that under the worst case for AT&T/T-Mobile, almost every geographic market starts with much lower concentration numbers--and smaller increases in concentration due to the merger--than in HRB.  The higher initial concentration numbers, and the greater changes in concentration in HRB, make it easier to understand how the simple removal of one vigorous competitor (the court eschewed the term "maverick") could have an anticompetitive effect.

Second, consider also that the DDIY tax preparation market was a differentiated product market, in which the proposed acquiring/acquired firms were each other's closest substitutes.  Thus, it was fairly easy to understand the DoJ's unilateral effects theory--that HRB could raise the price on its "high end" DDIY services and still capture lost sales through its ownership of the "low end" acquired brand. 

On the other hand, it is unclear whether any true "differentiation" exists in the wireless mobile telecommunications service market.  Unlike in HRB, the government has not alleged that retail consumers perceive AT&T and T-Mobile to be each other's closest substitutes.  Thus, it seems unlikely that this merger will provide the post-merger firm with the opportunity to execute a unilateral price increase.

The Effects of H&R Block on the AT&T/T-Mobile Merger

Did you really think I'd try to answer that question?  I have no idea.  It's obvious that the facts of the HRB merger made it into a more traditional battle over a narrow vs. broad product market.  On the other hand, from the beginning the AT&T/T-Mobile merger has been about competitive effects.  All we really know is that, while it's a gamble to try to predict the outcome of a case based on oral arguments, it's an odds-against bet to try to predict the outcome of one case based on the near-term results of an unrelated case. 
 
November 4, 2011 3:03 PM

The Walking Dead: Still Walking, and Still Dead

I kind of feel like I'm the guy that made it all happen.  All I have to do is to call the Sprint/C Spire antitrust cases against AT&T/DT/T-Mobile "The Walking Dead" on Halloween, and what happens?  Two days later, the court issues an order that really turns these cases into the legal equivalent of zombies, by dismissing all but a fraction of one of Sprint's claims, and preserving C Spire's equally-weak claims.  Doh!  

To be fair, though, after applying the law evenly and giving plaintiffs every benefit of the doubt--the court allowed all adequately-pled claims to move forward; notwithstanding the poor prognosis for these surviving claims.  Now, just what "move forward" means is anybody's guess, but I'll again make some intrepid predictions.

Sure, some of you might say that because the court did not dismiss the private cases in their entirety as I predicted at the beginning of the week, I should be eating at least a little crow--maybe the feathers of the claims that are still left--and that's fair.  So, if you want to make fun of me, please do.  I'm not so important that I can't take a little abuse.  But, since I never get comments, please do me a favor and submit them in the "comments" section--it'll be fun.

Now that we've seen the court's order, let's look at what's left of the private case claims, and try to guess what happens next.

Sprint

Sprint still maintains a small portion of its argument that the merger will injure them in the input market for handsets.  Sprint contends that AT&T's acquisition of T-Mobile will increase AT&T's incentive and ability to use its post-merger buying power to coerce handset/operating systems vendors to disadvantage Sprint by foreclosing access to the most desirable handset models.  Sprint is allowed to try to prove its theory that AT&T's incremental increase in its buying power (as a result of the merger) will cause AT&T to not just get lower prices for itself, but to disadvantage Sprint.

Outcome:  Ouch!  Almost the worst imaginable, because if you were at the oral argument on October 24th, you would have heard the court incredulously ask Sprint, "are you saying AT&T and Verizon control Apple and Google?"  By allowing only this claim to survive, the court pits Sprint not against AT&T, but against the handset vendors.  Why do I say this?

Because in order for this claim to succeed, Sprint needs to get a handset vendor to agree with it in court.  After committing over $20 billion in handset spend over the next 3 years to one vendor (Apple), do you really think Sprint is going to get a vendor to alienate AT&T and Verizon by making such a statement?

But let's just consider the facts as they stand.  Handsets are a worldwide market.  T-Mobile is a wholly owned subsidiary of Deutsche Telecom: a company with 128 million mobile subscribers today (more than either AT&T or VZ).  Hasn't Sprint already seen the "horror" of a competitor with superior buying power?

Moreover, assuming T-Mobile stays a wholly-owned subsidiary of Deutsche Telecom (which recently combined procurement operations with France's Orange), T-Mobile becomes an even bigger threat (under Sprint's theory) as it will have more handset buying power than AT&T, Verizon, and Sprint combined (the joint DT/Orange procurement group will represent 286 million mobile customers).  Sprint is thus in the difficult position of asserting that AT&T--with an estimated post-merger customer base of around 130 million mobile customers--is a more dangerous buyer with T-Mobile, than T-Mobile is with DT and Orange.  Are you buying?

C Spire

The court clearly viewed C Spire's complaint as the better-pled complaint, in that it allowed more of C Spire's handset-related claims to stand, and the court allowed C Spire's roaming injury allegation to stand (that a portion of C Spire's customers are GSM-based and buy roaming from AT&T and T-Mobile now, but will be left with only AT&T post-merger).  

Prognosis:  On the handset claims, C Spire has essentially the same problems as Sprint, but made worse by the fact that C Spire only has 875,000 customers.  U.S. Cellular, Leap, and MetroPCS all have multiples of this number--making these firms (as well as the larger firms) much more attractive to handset vendors.  After all, is it really unnatural, or anticompetitive, that a Sears or WalMart might be able to carry a larger inventory selection (for any product) than a small town general merchandiser?  For an AT&T, with or without T-Mobile, the defense is as simple as "don't hate me 'cuz you ain't me."

C Spire's surviving roaming claims are even less attractive than Sprint's "monopsony" claim.  Instead of pitting C Spire against its own vendors (as the surviving Sprint claim does), this claim pits C Spire against its regulator. You see, in order to prove that the proposed acquisition could harm C Spire's access to a regulated service, C Spire will have to produce some evidence that the regulator can't effectively regulate AT&T's obligation to offer roaming.

What's Next?

Well, considering that the DoJ was well aware of all of these vertical claims, and chose to include none in its complaint, we have to believe the private cases are on the slow burner.  Why? 

First, the court didn't schedule a status conference on discovery and case management until 5 weeks after its order came out--December 9th.  Coincidentally, this status conference occurs two days after the parties to the DoJ case have identified all of their witnesses (by December 7th).  (see scheduling order, para 11).

It's highly unlikely that the court will require AT&T to defend on two fronts--and indulge discovery on these unique (from the DoJ complaint) claims--until after the February 13th trial ends.  Before these claims will go to trial, we'll know the outcome of the DoJ case--most likely rendering these claims moot, either way.  

It seems like a good time for Sprint to consider that, if it really wanted to help DoJ, how effective a witness it will be as an interested party in a related case vs. simply folding a losing hand.

May 10, 2011 7:53 PM

Handicapping "Uncle" T-Mo on the DoJ Merger Track

It's that time of year again--Triple Crown Season--with the first leg, the Kentucky Derby being won by "unthinkable" 20:1 longshot, Animal Kingdom.  Interestingly, the jockey aboard Animal Kingdom, John Velasquez, was supposed to ride one of the top favorites, Uncle Mo, before that horse was scratched the day before the Derby.

Ironically, Velasquez won his first Derby aboard a horse that most handicappers had dismissed as "unthinkable" with the most superficial of glances (Animal Kingdom had never raced on dirt), ignoring the fact that he had won his last two races on artificial surfaces (which closely resemble the dry track of Churchill Downs on the day of the Derby).  The lesson: sometimes it pays to resist the temptation to make a cursory judgment, based on the most obvious, and potentially irrelevant, information and do a little more analytical handicapping.  

With this recent lesson in mind, let's disregard (for a moment) that some have called the AT&T/T-Mo merger "unthinkable", based only on the casual observation that the number 2 national mobile wireless carrier is proposing to acquire the number 4 national mobile wireless carrier (notwithstanding whether "nationwide" is even a relevant market).  Instead, let's take a little deeper look at the Department of Justice's past performances with mergers similar to AT&T's pairing with "uncle" T-Mo.  Hopefully, this handicapping exercise might offer (at least) a thoughtful conjecture about the competitive effects of this merger.

If you're not familiar with horse handicapping, there are only a few basic principles.  The most important principle of handicapping is that mature horses generally run "true to form."  Another (somewhat obvious) aspect of handicapping is that you never get a perfect prior snapshot of the race you are looking at--the horses are always different, as are the tracks, the surface conditions, and distance.  Therefore, you have to analyze a race based on the past performances that seem most analogous to the race you are looking at.

So, let's give this a try, and try to see if we can get some insights into how "uncle" T-Mo might run on the DoJ Merger Guidelines course.  At first glance, it might be tempting to just go back and look at the last big wireless merger--Verizon/Alltel--and place bets based on that merger.  As superficially attractive as this merger might be, it's misleadingly obvious.  

Here's why I'm not going with VZ/Alltel,  First, the mergers might have different motivations, and, therefore, expected competitive effects.  In the present case, it seems clear that the T-Mo acquisition was entirely motivated by AT&T's spectrum starvation, and T-Mo's capital crunch.  As such, the merger may have output enhancing effects that were not part of the VZ/Alltel analysis.  Second, VZ/Alltel was analyzed by different Antitrust Division leadership (the deal was approved before the last presidential election).  Third, the last wireless deal was analyzed under the 1997 Horizontal Merger Guidelines (the 2010 Guidelines aren't a big change, but they do put "effects" front and center, and aren't as stringent on product market definition).  Finally, the VZ/Alltel Complaint relied on the fact that VZ and Alltel were each other's closest rival in every market subject to divestiture. Para. 17. This indicates heavy reliance on the "unilateral effects" theory.  Guidelines, Section 6.

The "unilateral effects" theory is based on the premise that in a differentiated market, market shares are a proxy for consumer preference.  Thus, if a firm is acquiring its next-closest substitute, it can profitably raise prices on the preferred service and capture most "lost" sales even holding prices constant for services of the next-best rival.  In the present merger, AT&T explains why the facts here do not support a "unilateral effects" theory. See Carlton Declaration

Since we don't have an "apples-to-apples" comparison of wireless mergers based on new and old Guidelines/Division leadership/similar facts, I'm going to go with the most recent "similar" past performance:  the Continental acquisition of United Airlines, consummated in September of 2010--after the new Guidelines were adopted, and analyzed by current Division leadership.  Why this merger?  

Well, for antitrust purposes, the airline industry is a good industry to compare to wireless in that the service being offered (the "product market") is very similar: the transportation of people (or information) from one point to another.  The "product market" is the same throughout the country, and the same between firms.  And, the geographic markets are all similarly local:  a traveler living in Charlotte is not going to drive 4 hours to Atlanta just to take advantage of a larger number of carriers flying to Los Angeles.  Wireless service is no different, and the Antitrust Division has always defined geographic markets by smaller local areas.  

So, given the similarities, let's apply the Continental/United analysis to AT&T/T-Mo.  According to a post-announcement study by GAO, the Continental/United combination would reduce the number of competitors from 5 to 4 on 387 city pair routes, from 4 to 3 on 454 routes, from 3 to 2 on 120 routes, and from 2 to 1 on 10 routes.  The outcome?  The merged firm got approval after agreeing to "fix it first" (fixing the problem prior to consummation) by leasing 36 slots at Newark.

AT&T, on the other hand, has only identified 29 markets (where the FCC spectrum screen has been reached) that would even go from 4 to 3 as a result of the merger.  See Appendix C.  Even looking back to the VZ/Alltel merger, the DoJ seemed to view 3 as the number of competitors that a market would need in order to be effectively competitive. See para. 13.  

This seems more than reasonable because, there is no evidence that "nationwide" carriers (like AT&T and T-Mobile) practice geographic price discrimination.  Thus, the post-merger firm will still have to set prices based on the average number of competitors in which most of their potential customers reside.  In other words, if 90% of the potential customers have 5 or more choices of providers, then prices are set based on these market conditions.  The other 10% of the post-merger firm's customers receive the benefits of the more competitive market prices.

So, if antitrust enforcers run true to form--and they should (which is the main reason for having "guidelines")--I would have AT&T/T-Mo as more of a favorite than Uncle Mo would have been had he run.  While there will certainly be some markets in which the post merger firm exceeds what the government may regard as tolerable spectrum/concentration thresholds, these will be a small minority of markets. 

Thus, through a little handicapping, we can see why AT&T's $3 billion "break up" bet makes sense. And, what makes more sense?  The public wins when AT&T's bet pays--in the form of increased wireless broadband capacity that otherwise would not be available to consumers anywhere near as quickly from either firm separately.

April 14, 2011 7:57 PM

Boardwalk, Park Place, and Spectrum: NAB's Mistaken Understanding of Monopoly Auctions

Yesterday, NAB President Gordon Smith speculated that the proposed AT&T/T-Mobile merger could reduce the amount of money the Treasury might have previously expected to receive from voluntary auctions of unused broadcast spectrum.  Mr. Smith, a former U.S. Senator from Oregon, theorized that if he were still in the Congress (which must authorize any re-purposing of spectrum from broadcast to mobile wireless) he would have second thoughts about the proposed voluntary auction, based on the amount of money it would produce with one potential bidder removed. 

Mr. Smith reasoned that an auction with one fewer bidder would, necessarily, yield lower prices for the auctioned commodity--in this case, spectrum. But, here's where it helps to better understand that spectrum is unique, scarce, and owned by a monopoly--the United States Government.

Chairman Genachowski, to his credit, has been earnestly and convincingly explaining at every opportunity--from the White House Spectrum Summit to the NAB Show--the importance of voluntary auctions to relieve the impending spectrum shortages facing the country.  The facts are stark. Wireless broadband demand is quickly out-stripping spectrum capacity in the aggregate. 

For some firms, the crisis is even more urgent. Just this week, the CEO of U.S. Cellular, voted best mobile carrier by Consumer Reports for 2011, made the same point to Congress.  AT&T cites an 8,000 percent increase in mobile data demand over the last four years as the motivating factor in its proposed acquisition of T-Mobile.  Indeed, even without the AT&T acquisition, T-Mobile also lacked the spectrum capacity to migrate to LTE.  

So, what about Mr. Smith's observation? In an auction for goods that have substitutes, Mr. Smith's auction theory has some merit.  In an auction for antique furniture, for example, the removal of one bidder (who might uniquely value one item over another) might well affect the total auction value.  However, that's not the situation here.

The spectrum market, as Chairman Genachowski has effectively explained, is characterized by a type of market failure known as "shortage", or a situation where demand for the available quantity of a product exceeds the available supply.  Those of you old enough to remember can recall the Arab Oil Embargo

In this situation, a cartel controlling a significant portion of the world's available oil decided to refuse to supply oil to the United States.  Demand for oil could not be quickly displaced to another substitute.  As a result, the price of oil quadrupled and gas prices increased daily, resulting in long lines at the pump and gasoline rationing.

Now, imagine you were a trucking firm at that time.  Supply of an indispensible input has been constricted for all firms.  Let's say some trucking companies merged, so that there were fewer colors of trucks waiting in the gas lines.  But, there wouldn't be fewer trucks, because consumers still demand transportation for all the same products.  Will the price of gas really change just because there are fewer colors on the trucks in the gas line?

Of course not; and this is the fallacy of Mr. Smith's argument, which--if taken to its rational conclusion--contradicts itself.   Anyone that has ever played the game Monopoly understands that the hypothetical monopolist is willing to pay the highest price for scarce property.  Like Boardwalk and Park Place, a spectrum monopoly is very valuable--and would garner the highest revenue for the government.

In the case of additional spectrum, the government is the monopoly supplier in a shortage environment.  If it simply wanted to capture the greatest amount of money, it would sell the spectrum in one big block to the highest single bidder--in effect auctioning off market power.

Fortunately, the Communications Act requires the FCC to structure its auction rules in a way that allows the most participation by the most firms.  Do the provisions of the Act, which requires small firms to be able to compete for spectrum with large firms, reduce the government's returns from an auction?  Probably, but the public benefits from the vibrant competition produced by these auction rules.  As a former Senator, Mr. Smith should understand this.

March 20, 2011 8:59 PM

AT&T/T-Mobile: Good for Broadband Deployment

Earlier today, AT&T announced it was acquiring T-Mobile for $39 billion.  Among the compelling reasons/benefits AT&T cited for the merger (from the AT&T news release):

With this transaction, AT&T commits to a significant expansion of robust 4G LTE (Long Term Evolution) deployment to 95 percent of the U.S. population to reach an additional 46.5 million Americans beyond current plans - including rural communities and small towns.  This helps achieve the Federal Communications Commission (FCC) and President Obama's goals to connect "every part of America to the digital age." T-Mobile USA does not have a clear path to delivering LTE.
As I noted yesterday, I'm out at COMPTEL PLUS, one of the most important trade shows for providers of fiber capacity of the year.  Fiber guys (and gals) like COMPTEL because carriers come ready to write checks.

With this in mind, I have to say that AT&T's statement is not hard to believe.  The show floor opened about an hour and a half ago, and a lot of carriers hadn't yet heard about the deal, but--after taking the temperature based on a quick lap around the floor--the reactions were generally optimistic. 

Here's why: a lot of fiber backhaul providers do business with AT&T, not so many do business with T-Mobile.  Many believe that, if this acquisition turns the CapEx spigots up higher for AT&T, then more capacity will trickle through the supply chain.  The great thing about the wireless supply chain is that for LTE, it will have to be even more dense with high capacity bandwidth.  Bandwidth that then becomes available for other carrier customers, and large enterprise users.  Hopefully, regulators will understand that while spectrum starvation motivated this acquisition, the deal has benefits that can potentially cascade throughout the competitive telecom ecosystem.