I guess everyone that watched yesterday's Senate Judiciary Committee hearing on the Comcast-Time Warner Cable merger had a different opinion on it. I had prepped myself by reading all of those "Comcast owns Washington" and "David Cohen is The Man" articles, but I really wasn't prepared . . . for the awful truth. See and believe (whole hearing here).
Maybe I'm reading this all wrong, but it looked like the Committee Chairman, Sen. Patrick Leahy (D-VT) pretty much indicated that he's cool with the deal--just, you know, as long as they include some net neutrality commitments, or something. It was almost as if Senator Leahy was listening to Comcast's radio commercial as he spoke. So, yeah, that pretty much set the tone.
The only Senators that represented my consumer interests, i.e., unchaining broadband Internet customers from the pay-TV business model, were Sen.'s Blumenthal (D-CT), Franken (D-MN), and Lee (R-UT). I've already explained that the real problem here is the accretion of power that cable-affiliated RSNs have over pay-TV/broadband competitors. In other words, this merger will harm the ability of consumers to ever use broadband Internet access--from any broadband provider--as a substitute for subscription TV service.
The rest of the Committee members were distracted--like toddlers chasing soap bubbles--by the agenda of net neutrality "concerns" that we've seen hyped and re-hyped by the press for the last 3 months. The reason that these "distractions" consumed the attention they did is, some believe, a sign of Comcast's power to intimidate the "real" witnesses away.
And, according to this report, Comcast's "casting" of the issues covered in the hearing could not have worked out better for them. Unfortunately, if the only people who are going to speak up about this merger can't pass up a public platform for their "net neutrality/broadband is a utility" shtick--then Comcast really is in great shape.
3 Reasons Why "Net Neutrality" Is Comcast's Best Friend
1. The only "managed service" Comcast needs is the one they already have. I can't say it any simpler than that. When Prof. Susan Crawford went off the handle a couple weeks ago, at the rumor that Apple might have requested a "managed service" from Comcast, she failed to understand that this is precisely what is needed if the Internet is ever going to become a content delivery rival to TV. If Comcast made "TV quality content delivery" available to some third party, then it would be available--and that's the point.
If a "managed" video delivery service is not available for wholesale purchase by Apple, then it's not available to any competitor to Comcast's cable service. The fact is that Comcast will be happy to "swear off" offering managed services, because that's just like telling them to shut the door behind them for all those new markets where they'll be the dominant broadband and subscription TV company.
2. Internet interconnection is not a merger issue (either). Senator's Klobuchar (D-MN) and Franken (D-MN) wasted a fair amount of their time and attention on this little canard. In fact, I'd say this line of questions, more than any other, made David Cohen look like the most reasonable person in the room.
In the media, this issue is hyped a lot by Stacey Higginbotham from GigaOm. She loves this issue--writes about it constantly (see), even when Comcast isn't buying its rivals. Not surprisingly, a few days before the hearing, she writes, "expect more questions about paid peering and the Comcast merger."
The reason this line of inquiry helps Comcast avoid harder issues is that buying transit is a long-established, industry-wide practice, and would exist even if Comcast was a "common carrier." Neither the FCC nor the DoJ, is going to do anything to change this practice in a merger review.
3. Data Caps. The essence of this complaint is that the heaviest users don't like the ISP's pricing structure. This complaint, like the previous issue, is a quixotic attempt to establish price regulation on ISPs.
The "data caps" issue is only an issue for the highest use consumers--who want the lower use consumers to subsidize their consumption. These people share the Reed Hastings view of net neutrality--averaging out the restaurant bill is fair, especially if you're the only guy drinking $100 champagne.
At the hearing, TWC said they deal with this issue in an interesting way: they don't impose caps, but if a customer agrees to not exceed a certain amount of data downloads (and be subject to throttling, if they go over), the consumer gets $5 off their monthly bill. My guess is that Comcast will have no problem offering this one up.
Look, the net neutrality people aren't the "bad guys" here. But, if a significant part of the merger opposition is ceded to the usual suspects--the same folks that seem intent on recycling their same net neutrality arguments, no matter the forum--then that's a shame.
This merger squarely presents the DoJ and the FCC with a very fundamental "crossroads" choice--the future of competition for the broadband Internet versus the cable TV business model. The public interest cannot settle for a bunch of buttercup-and-whipped-cream "commitments" to net neutrality. The consequences are too high.
I wanted to end on a cheerful note, so I'll leave it at this. Remember, kids, while advocacy from 2005 ages poorly, this still-super fly Chamillionaire video never will. Enjoy!
Maybe, I'll send some "Chamillitary" gear over to Prof.'s Crawford/Wu, and Free Press. So, you know, at least the crew can be dressed in the "era-appropriate" pop fashion when they hit the NPR circuit.
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.
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.
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.
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 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?
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.
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.
Still, there were a number of stories that intrigued me--all of which suggested that Microsoft's purchase of Skype may strain its relationship with the large phone companies, because Microsoft will further cut into the phone companies' revenues by expanding the Skype revenue base. Here is a representative article, but there are lots more that say the same thing.
The "Conventional Wisdom"
All articles echoing this theme assume that Microsoft will be able to continue to offer the same Skype service at the same Skype rates (around 2.3¢/min for calls to the PSTN/mobile networks) from all of Microsoft's operating systems and devices? The concern the writers express is whether Microsoft's inevitable erosion of phone company revenues will strain Microsoft's relationships with the telephone companies, insinuating that Microsoft may have a difficult time getting its Windows Mobile O/S placed with the major carriers, while "eating their lunches" with Skype's super cheap rates.
Based on a few facts, and some incorrect assumptions, this conclusion has some superficial appeal, and it's understandable that the financial press would mistake appearance for analysis. On this one, though, I'm taking the opposite side of the financial writers.
The foundation of any relevant merger opposition rests on the correct definition of a relevant product and geographic market, and then attempting to rationally predict the expected consequences of any undue concentration in these markets. To this end, Free Press's proposed definition of a "nationwide smartphone cellular service market" deserves some scrutiny.
The Free Press Product Market Definition
In order to prove a merger violates the relevant antitrust laws, an opposing party must demonstrate that the effect of the merger would be "substantially" to lessen competition "in any line of commerce" (product market) in "any section of the country" (geographic market). Clayton Act, Section 7. For a merger opponent to be successful, they must show that the merger will lessen competition in some discrete product and geographic market.
As an opposing party, Free Press begins its criticism of the merger in an analytically correct manner--by attempting to narrowly define a "market" in which it contends competition will be lessened. Nonetheless, in defining a product or geographic market, an opponent must look at the consumer's options--not just what might work for their case.
Frequently, antitrust plaintiffs make the mistake of defining product markets too narrowly (e.g., "stuff that only I like", or "Bob Marley Songs") in order to produce high concentration numbers. Product markets are often defined too narrowly because plaintiffs mistake product differentiationwithin a market for different product markets.
Free Press makes this same mistake, concluding that "nationwide", post-paid, smartphone cellular service constitutes a separate product simply because some carriers offering these services can command higher prices than functionally-equivalent service plans offered by smaller competitors. Rather than proving a separate product market, Free Press has simply identified an example of differentiated competition within a product market (mobile wireless service). Courts have consistently, and correctly, rejected product differentiation as a basis for defining a "product market"--from "premium" ice cream, to "premium" beer, to "expensive" suits. SeeThe Significance of Variety in Antitrust Analysis, Section II. B., generally.
Among its many other omissions, Free Press fails to define the unique characteristics of providing "nationwide" smartphone cellular service, as opposed to cellular service supporting all mobile devices, such as a "feature phone", a "tablet", or the dreaded "somewhat-smart-phone" that Free Press criticized Metro PCS for offering just 4 months ago. Given the unique diversity of products each carrier supports, it is difficult to imagine how a "hypothetical" smartphone cellular service monopolist would behave differently from a carrier supporting all mobile wireless services for purposes of satisfying the market definition tests under the DoJ's Merger Guidelines.
Even if the proposed product market could be defined with precision, it would still not necessarily indicate that consumer welfare would be harmed, due to the principle of "supply substitution." You see, a "hypothetical monopolist" in the product/service market must be able to profitably be able to raise prices without attracting entry by other firms in the market. SeeGuidelines, Section 9.0, et seq.
This is why the FCC (from its earliest Wireless Competition Reports) wisely declined to analyze competition on a service-specific basis, finding instead, that the "evidence "support[ed] a product market that was much broader, including all CMRS services. See2nd Annual CMRS Report at 8. The Commission presciently made this finding when 36% of all CMRS customers were using paging, and that market was growing at 22% year over year. Id. at 5.
Geographic Market Definition
Free Press provides even less evidentiary support for why the relevant geographic market, from a consumer's perspective, is nationwide. While all wireless consumers want to be able to contact anyone in the country, and they want to be able to use their phones anywhere in the country, this is an element of product market definition, and one that the FCC has recently addressed through its "Data Roaming Order."
The geographic market for wireless services (including "smartphone cellular services") is the area in which a consumer could reasonably be expected to purchase such service--even if a "hypothetical monopolist" raised prices by a small but significant amount within that area. In other words, for most people, this market is local (as the Commission has always concluded). While it is natural for every economic agent to want to provide service to the largest possible market, the only reason Free Press argues for a "nationwide" market is to enhance concentration numbers in an "artificial" geographic market.
For Free Press, this argument is understandable (to increase merger-related concentration), but it is also intellectually dishonest. After all, how can Free Press scream up and down about a Metro PCS smartphone cellular service offering, and then argue that Metro PCS is not "in the market" for a significant number of customers? Regional carriers, like Metro PCS, are either relevant or they're not. Free Press can't get a free pass.
Just Don't Think About It . . .
Without its uniquely distorted market definition (and maybe even with it), Free Press cannot show any consumer harm from the merger. Allegations of harm through "coordinated conduct" usually work best in homogeneous product markets that are geographically concentrated (think milk or cement). If the only thing to compete on is price, then competition is best "managed" through coordination.
On the other hand, a "unilateral effects" theory (also argued by Free Press) works better in highly concentrated markets, with differentiated products, and where each firm is each other's closest substitute. The big question here is, does AT&T price its services differently in markets where T-Mobile is a competitor than in markets where T-Mobile is not present? This seems highly unlikely--given Free Press's "nationwide" geographic market argument.
Successfully opposing a merger is no easy matter, but, at a minimum, the merger opponent has to arguably promote something more than social engineering. In the present case--based on all known facts--consumer welfare (represented by output stimulation) has been most persuasively argued by the merging parties. Fortunately for consumers, any localized competitive concerns can be easily cured by discrete divestitures, which will only strengthen "renegade", "irrelevant" carriers like Metro PCS.
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.
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.