Results tagged “Deutsche Telecom”

September 19, 2011 12:50 PM

Should the Merger Guidelines Come With Guidelines?

I said before that the genius of Sprint's gambit was that--if they could successfully convince the Antitrust Division to accept and endorse a national market with four participants as the starting point for the Division's analysis--Sprint was (by those terms) guaranteed a three firm oligopoly for advanced broadband wireless services, no matter the outcome of the case.  The very act of the Department challenging the acquisition would have this effect.  Why?

The general answer is that the Department's Complaint is based on an application of the 2010 DoJ/FTC Merger Guidelines, which are a less-structured revision of the 1992/1997 Merger Guidelines.  While Guidelines can provide a useful way of learning competitive conditions in most (unregulated) industries, they cannot yield a comprehensive competitive analysis of an industry like mobile wireless telecommunications services.  The Guidelines simply do not take into account the degree of interdependence between regulation of critical, government-controlled inputs (like access to spectrum), differing network technologies and deployment cycles, the diversity of services and devices supported by any single network, and the massive capital intensity of the wireless industry.  

Even more specifically, though, the Guidelines don't instruct the enforcement agency to consider the effects of its decision--to challenge or approve the transaction--on future competition in an industry already heavily dependent on the decisions of another government agency.  But, let's back up before things get too confusing.

The Scarcity of Spectrum and the Need for a Spectrum Regulator

Ideally, the FCC, the NTIA, or some other government agency would act as the "central banker" of spectrum.  The spectrum "central banker" could forecast demand, try to free up supply in advance of anticipated demand, and hopefully have some success in at least mitigating situations of shortage or surplus.  

This role would balance the needs of government, and the various commercial users of spectrum so that resource scarcity could be somewhat removed from a competition analysis.  In the event a firm wanted to exit an industry, the "spectrum banker" could act as a purchaser of last resort.  This agency could purchase, hold or re-auction unused spectrum, and would have to be able to oversee the sale of an ongoing business in a manner designed to maximize spectrum utility, and the value created by the exiting firm.  One benefit of such an agency would be to allow competition agencies to make decisions based on competitive factors alone.

The Effect of Enforcement of the Guidelines on the Guidelines' Analysis

The Guidelines are supposed to explain what effect a combination of firms will have on consumers in the market for the good or service that is the subject of the transaction.  A proper Guidelines analysis is supposed to consider the effect that barriers to entry will have on the likelihood of future entry if prices were to increase.  When a market is characterized by high barriers to entry, the agency must give careful attention to a merger between firms in that market, because competition lost will not be quickly replaced by new entry.  So far, so good--in fact, if you search "barriers to entry" and "merger guidelines", you'll get tons of results.

The problem, though, is that barriers to exit have the effect of raising barriers to entry.  For our merger, this is the blind spot in the Guidelines' analysis.  If you search "merger guidelines" and "barriers to exit", you don't really get anything (at least not in the first five pages of results that I looked through).  

The result is what I would call the Guidelines' version of the "Heisenberg Principle."  Said differently, in cases where markets already have high barriers to entry, the failure to account for action pursuant to the Guidelines will, further raise barriers to exit, and thus future entry, than markets with otherwise low barriers to entry.

What Is the Significance of a "Barrier to Exit" in the DoJ v. AT&T/DT Suit?

Well, put yourself in the shoes of Deutsche Telecom.  You've invested billions of dollars in the U.S. mobile wireless market to develop spectrum, deploy infrastructure, innovate, create jobs, and add wireless capacity.  Now you would like to cash out. 

Continue reading Should the Merger Guidelines Come With Guidelines?