October 3, 2013 4:32 PMPublic Knowledge, Consumer Action, and Writer's Guild of America, West filed a Petition to Deny AT&T's requested license transfers to facilitate their proposed acquisition of Leap Wireless. The Petition claimed that the proposed acquisition of Leap Wireless will reduce competition in the market for "prepaid wireless" services; a market which Public Knowledge contends is characterized by lower income consumers, who are more price-sensitive than "postpaid" customers.
The Public Knowledge, et al., Petition is interesting, not for the purpose for which it is offered (a last minute excuse to extract "concessions" from a merger whose review should have been long concluded), but for the flaws in the Commission's wireless competition framework that it exposes. First, let's dismiss the Petition on its own attenuated logic, because this will lead us to the more interesting problem highlighted by the Petition.
The "Need" for Conditions?
Let's go ahead and assume the Petition's premise--that the relevant product market is prepaid wireless services. Petitioners also allege some amount of increased concentration in this market, post-merger. But, what are the consumer harms?
The alleged harms from the merger's concentration, for which the FCC is urged to adopt conditions, kind of make you wonder how much of "prepaid" do the Petitioners really understand. For instance, the Petitioners take a bunch of AT&T statements out of context in order to come up with this crazy inference, "[i]n other words, far from allowing customers to retain their current wireless offering from Leap, AT&T has announced its intention to migrate Leap customers from their current low-cost, low-fee plans to AT&T's more costly pre-paid offerings as quickly as possible." (Petition p. 21/25)
Think about it. One of the distinguishing features of prepaid service is that it doesn't require a contract. So, if AT&T doesn't offer these customers terms that are attractive to the customer, the customer is free to move to one of the other service providers who serve over 80% of the prepaid market! In other words, if AT&T doesn't do right by the Leap customers, AT&T loses a whole lot of acquisition value, as customers migrate to more attractive offers of competitors.
Defining the Prepaid Market
The definition of the market is, in any case, the most interesting problem underscored by this Petition. The Petition starts with the overall size of the prepaid wireless market in terms of number of subscribers, as identified by the FCC in its most recent Wireless Competition Report (accurate as of the end of 2011), as being about 71 million. The Petitioners then count up the number of prepaid subscribers reported by the 4 national facilities-based carriers and Leap in their most recent financial reports (results in a slight overstatement vs. 2011) as the revised "market."
The Petitioners arrive at the "really relevant" relevant market of 48 million subscribers by using the FCC's convention of not assigning market shares to MVNO competitors when analyzing competition in the wireless market. However, while that approach may not result in a tremendous difference when looking at national figures for all wireless consumers, using this approach for the smaller, and more dynamic, prepaid wireless submarket simply does not work.
First, it should be obvious that failing to include firms which meet a third of the entire market's demand (71 million minus 48 million) cannot result in a sound analysis. Further compounding this problem is the fact that the single largest firm in that market--Tracfone, with over 21 million customers--escapes the analysis. If the single most successful firm in this market does not need network facilities, what can be the justification for excluding them?
This question, though, raises another question. How do you count the wholesale sales of the facilities-based carriers? Because, while the Petitioners infer that prepaid is a neglected market, what with its smaller EBITDA margins than postpaid retail sales, the only thing more attractive than low prepaid margins for some carriers is the prospect of even lower EBITDA margins moved in volume--a/k/a wholesale.
How else do you explain that, while AT&T has a little over 7 million prepaid customers, they supply more than twice as many customers through their wholesale channel? See here at 15/16. Of course, this has always been the problem with a myopic focus on margins--because margins are only half of the profitability equation, which is profit margin (such as EBITDA) multiplied by sales volume. Nonetheless, these heavily-discounted sales units are ending up somewhere, and--as a percentage of total market--wholesale sales disproportionately end up in the prepaid market.
Still, you can't necessarily fault the Petitioners for not addressing this issue in their market definition, because not all carriers even include wholesale sales--either as a revenue number or a number of customers number--as a separate item in their public financial disclosures. This is an issue that I have written about before here, but, if the Commission is really going to try to engage in meaningful submarket analyses, they will have to get a handle on these numbers.
The only subset of wireless revenue that is growing as fast as prepaid is wholesale--which is growing at a faster rate. Moreover, due to the fact that the Lifeline fund is expanding at something like twice the rate of the galaxy--and this growth is being driven by MVNOs providing prepaid service--the overall size of the prepaid market is, no doubt, substantially larger today than at the end of 2011. While this fact should substantially lessen concerns about the present merger, the larger problem is that unless or until the FCC wants to figure out wholesale, or count MVNO competition, the Commission will remain unable to say anything meaningful about competitive conditions in the important, and growing, prepaid wireless market.