Results tagged “AT&T”

November 13, 2017 11:22 AM

The Strange Case of the Inverted Vertical Merger

After a year of not really hearing anything about AT&T's proposed acquisition of Time Warner Entertainment ("TWX"), we learned last week that the deal could be in serious jeopardy from the Antitrust Division of the U.S. Department of Justice ("DoJ" or "Department").  Many of the stories earlier in the week, citing "DoJ sources," suggested that the Department wanted AT&T to sell CNN, in order to gain approval.  In an extensive interview at the New York Times DealBook Conference, AT&T's Chairman, Randall Stephenson put the rumor to rest that CNN was a divestiture the DoJ was seeking, or that AT&T had offered. (See video of the full interview).  
 
Stephenson also noted his "surprise" that the Department would have concerns serious enough to litigate; noting that a vertical merger had not been successfully challenged in court in over 40 years, and that Comcast's acquisition of NBCU had presented much more difficult content problems than AT&T's proposed TWX acquisition.  Stephenson is understandably surprised, because he's absolutely correct on the law.  Nonetheless, the DoJ must have some concern about the deal, so what's going on here?
 
What an Anticompetitive Vertical Merger Looks Like
 
The words "vertical" and "horizontal" are used in antitrust to refer to firms' positions in the supply chain, from creating a product through to its delivery to consumers.  Firms at the same position in the supply chain are, of course, direct competitors, and a merger between them would be called a "horizontal" merger. On the other hand, the merger of a bakery with a grocery store would be an example of a vertical merger--the bakery produces products that are distributed to the public through grocery stores.
 
A vertical merger will rarely present an antitrust problem, unless one or both of the two merging partners has "market power." For example, if the distribution of a service is a monopoly (think local telecommunications services prior to the late 1990's) and a provider of a "competitive" service using this distribution network (like a long distance voice company) wanted to acquire the local telephone exchange, the antitrust agencies would likely be concerned that the acquiring firm may be able to foreclose other long distance companies from being able to continue to access the local distribution network to sell their services to end users, resulting in higher prices to consumers of long distance service.
 
AT&T and TWX

AT&T provides consumer fixed line voice, internet, and multi-channel television service throughout the service territories of its former incumbent local exchange providers. AT&T also provides nationwide mobile voice and internet service through AT&T Wireless, and nationwide multi-channel television service through its satellite (DirecTV) and streaming (DirecTV Now) services. All of the consumer services provided by AT&T are "competitive" services, available from multiple providers.
 
TWX is a worldwide entertainment conglomerate.  Its 3 major divisions are HBO (premium television/streaming entertainment), Turner Broadcasting (includes a number of popular cable channels, including CNN, TBS, and TNT), and Warner Bros. (primarily film and television production/distribution).  The Turner Broadcasting division, it should be noted, owns the rights to broadcast a number of basketball (NBA and NCAA Tournament) and MLB games, as well as assorted sports that no one watches, like golf and women's Irish curling [probably].
 
Nominal Overlap: While generally AT&T distributes the programming of others, it does own some regional sports networks under the "AT&T SportsNet" name. Although AT&T owns the exclusive rights to distribute the games of certain local teams (NBA/NHL/MLB/some NCAA) in Houston, Pittsburgh, Portland, OR, Seattle, and Utah, these regional sports properties do not "compete" with the games that Turner Broadcasting distributes nationally.
 
What Is Going On?
 
Adding to the confusion surrounding the Department's concerns, the reactions from even well-informed commenters have diverged greatly. Because this merger presents nothing exceptional from an antitrust perspective, some, like economist Hal Singer, have concluded that the only reason the DoJ is holding up the deal is to further prosecute President Trump's ongoing personal feud with CNN (owned by TWX).  However, others, like Harold Feld, argue that the DoJ is on the right track and that only large scale divestitures (like all of Turner Broadcasting, or DirecTV) could remedy the competitive problems with this merger.  
 
While Feld makes a compelling case to question the "spite" theory, and he offers the DoJ an ostensible case theory, it's not a convincing argument; as it ignores current market conditions, and relies on a lot of the same, now obsolete, market "assumptions" that the 1992 Cable Act is based on. Of course, this should come as no surprise, since Public Knowledge's current president--Gene Kimmelman--was one of the principle forces behind the Cable Act (on the side of broadcasters).  See, e.g., this NY Times article from 1992.  Note that the 1992 Cable Act continues to richly reward the broadcasters that these ("natural monopoly") arguments favored.  Consumer Reports notes that cable company "price hikes are mainly driven by the rising costs they face for carrying both traditional broadcast networks, such as CBS and Fox, and regional sports channels."
 
The Blind Men and the Elephant
 
Sometimes, as the old fable illustrates, you can't get an accurate picture by focusing on the smallest possible market that could (conceivably) be defined; and this is what I think is going on here.  In Feld's analysis, the post-merger firm is either a distribution colossus (why else would it need to divest DirecTV?), or a "must have" programming hoarder who may well put competitive video distributors (like Comcast?) out of business.  However, to have this opinion one has to explicitly disregard AT&T's stated reason for the deal--to build an advertising platform of the scale to offer competition to the Google/Facebook duopoly on mobile and desktop screens.
 
Public Knowledge, and the other opponents of AT&T's acquisition of DirecTV, ignored the company's stated purpose for that deal--that AT&T needed scale to be a more effective video distribution competitor. Instead, opponents preferred to focus only on the limited number of TV markets that would "lose" a multichannel competitor (those in which AT&T already provided U-verse TV).
 
Three years later, where are we?  Well, customers are continuing to "cut the cord" of traditional pay TV services, like the service offered over AT&T's U-verse.  However, by creating an entirely new video product--DirecTV Now--AT&T has, in less than a year, obtained 800,000 additional customers (a number that represents about 15% of AT&T's entire base of U-Verse TV customers at the time of its DirecTV merger announcement) and 60% of these customers are entirely new customers to AT&T

Said differently, in less than a year of marketing DirecTV Now, AT&T acquired 15% of the customers that took U-Verse TV 10 years to acquire. Rather than losing a choice in a few markets, consumers nationwide gained a choice and acted on it. Thus, consistent with its stated reasoning for acquiring DirecTV, the acquisition allowed it to stimulate output of multichannel video services. Opponents failed to realize the implications of AT&T's DirecTV purchase, in which a new nationwide competitor was created to challenge not only the traditional DirecTV satellite & U-Verse TV services, but also cable companies, other OTT providers, and may have even spurred the entry into the market of newer "large screen" players like Google, Hulu, others.
 
The Opportunity and the Danger
 
The AT&T/TWX merger, as noted by Mark Cuban at a Senate Judiciary Committee Hearing almost a year ago, gives AT&T a chance--and not a very good one, at that (according to Cuban)--to compete against the dominant new media ad giants.  To do this successfully, AT&T will have to, again, expand output of the firm it is acquiring; there simply are not any credible hypotheticals where AT&T "wins" anything by restricting TWX output. 
 
But, if the Department insists on defining the elephant as a snake, based on the shape of its trunk, there is a danger that it leaves existing markets worse off than when it found them.  If, for some crazy reason, AT&T actually agreed to sell off Turner Broadcasting, the only buyer would be another media conglomerate--further concentrating an already highly concentrated market (which is trending toward even greater concentration with Fox-Disney merger rumors) .  Similarly, if AT&T were required to sell off DirecTV, its entire ability to market to a nationwide base of potential video customers would be eliminated--practically guaranteeing that its only profitable strategy would be to restrict output to local market multichannel competitors!
 
May 22, 2015 3:23 PM

The FCC Should Not Use the AT&T-DirecTV Merger to Weaken Internet Interconnection

Over a year ago, I explained why the Comcast-TWC merger may present regulators with concerns.  On the other hand, I also explained that the AT&T-DirecTV merger presented consumers with nothing but opportunities.  As noted earlier this week, those opportunities have only expanded with ISP/MVPD competition and increased pressure on the programming bundle.  The post-merger AT&T-DirecTV would be a tempting target that may well give some programmers an incentive to "cheat" the industry-standard distribution agreements, and finally let go of the Bundle.

But, recently, news reports have said the FCC may require AT&T to accept "interconnection conditions" as a prerequisite to granting its approval to AT&T's acquisition of DirecTV.  This would be a mistake, because it would also undermine the careful restraint the Commission showed in its (still overly-broad-for-the-purpose) Open Internet Order

In a general sense, all regulations distort economic incentives; and overly broad regulations create more profoundly-distorted incentives.  Still, the FCC did show some restraint--with respect to Internet interconnection--in its ultimate Order.  The Commission should decline invitations to undo its previous well-considered reservations, as it will only promote moral hazard and careless network practices by those it has been asked to "help." 

Regulations Shouldn't Distort Market Discipline--Lessons from the Mortgage Crisis

Overly-broad regulations--designed to minimize one market risk--can easily distort incentives in adjacent markets (or market participants) in ways that create worse problems than the one the regulation was supposed to address.  This was the message of Charles Plosser, the President and CEO of the Federal Reserve Bank of Philadelphia, as he reflected on the role of prior government regulations in contributing to the mortgage crisis.   

In a speech entitled, "Responding to Economic Crises:  Good Intentions, Bad Incentives, and Ugly Results," Plosser considers why we continue to see financial crises, despite the fact that each crisis inevitably brings its own new regulations.  He concludes that, it's "[b]ecause the public and our lawmakers seldom recognize that attempts to insure against bad economic outcomes can sometimes be counterproductive."

Plosser (quoting economist Allan Meltzer) says, "Capitalism without failure is like religion without sin. It doesn't work."  He explains that regulations cannot insure "all manner" of market participants against bad outcomes (or limit the ability of firms to take risks); because while such rules might reduce market volatility, they would also limit innovation and economic growth. 

Plosser offers a number of examples where regulations undermined market discipline, making the overall system more vulnerable.  For example, in the decades preceding the crisis, the government provided numerous implicit and explicit subsidies to financial firms (Fannie/Freddie) and others that became "too big to fail."  By limiting these firm's risk, the subsidies gave lenders the impression that the government would always bail these firms out.  Thus, those lending the money to these firms had little incentive to limit the amount of debt they allowed the firms to accept.   

Plosser concludes that better regulations, and not simply more regulations, are the proper response to market failures.  He cautions,

If regulation distorts incentives, it can create moral hazard problems whereby firms don't bear the costs they impose on others. Such regulations can have unintended consequences that interfere with achieving the regulations' goals. 

The Commission's Invitation to Create Moral Hazard

Of course, there aren't perfect parallels between the financial system and the Internet, but there are enough similarities to draw some useful lessons.  The financial markets function best when they keep money flowing to efficient uses from efficient sources.  Similarly, the Internet, especially the market for Internet interconnection, has become the world's most efficient system for the routing and delivery of data traffic. 

As we have explained previously (see, here and here), the market for Internet interconnection works well, and has its own market discipline, which serves consumers well.  Where the financial markets efficiently reward accurate risk evaluation, the market for Internet interconnection rewards those firms that invest in the most efficient networks to provide valuable traffic routing to prospective interconnection partners. 

Thus, the FCC wisely decided not to regulate Internet interconnection as a separate "service," despite being heavily lobbied to do so by a tiny minority of firms."  In its recent Open Internet Order, the Commission, also wisely, declined to impose any specific interconnection obligations on ISPs, choosing to "rely on the regulatory backstop prohibiting common carriers from engaging in unjust and unreasonable practices." Order ¬∂ 203.

Recent events have vindicated the Commission's restraint.  Some of the same firms requesting regulation have, indeed, been able to reach fair terms with large ISPs.  Level 3 and Comcast, as well as Cogent and Verizon, have recently been able to reach mutually-beneficial, long-term agreements. 

Unfortunately, though, a few parties, including one (Cogent) that has had found itself on the "disciplined" end of  Interconnection market discipline more than any other (see, e.g., problems with Level 3, Sprint, generally, going back to AOL as a dial-up ISP), and another best known for recently gaming the Commission's own competitive bidding system, have asked the FCC to supplant competitive market discipline with extraordinary relief in the form of conditions to an otherwise pro-competitive merger.  These parties have nothing to lose by asking for relief

However, if the FCC accedes to these demands, AT&T's broadband Internet consumers can only lose.  Because, notwithstanding any evidence that AT&T is acting unjustly or unreasonably with respect to Cogent or Dish, these firms are asking the Commission to impose different terms on AT&T than other ISPs.  It is, therefore, more than likely that the FCC--if it agreed to do so--would be imposing a weaker link (through non-competitive interconnection terms) into some retail customers' supply chain.  This is no way to ensure consumers have the best end-to-end broadband Internet access.  It will, however, ensure that the FCC gets more requests to regulate outcomes best decided by a more efficient market. 


May 23, 2014 11:24 AM

The Difference between AT&T/DirecTV and Comcast/TWC

After Sunday's announcement that AT&T had entered into an agreement to purchase DirecTV, many parties have rushed to talk about the "media consolidation trend."  The usual suspects have expressed their opposition or express their "skepticism."   Others have applied an equally superficial analysis to come to the opposite conclusion.   

In order to appreciate how the Comcast/TWC merger is different from AT&T/DTV, you have to understand what the two mergers have in common.  One, not-so-obvious thing the two transactions have in common is that one party in each transaction--Comcast and DirecTV--is a co-defendant in major consumer antitrust litigation over the foreclosure of sports programming over the Internet to broadband-only consumers.

These cases are significant, because they should have a direct effect on the outcome of the Comcast-TWC merger, but will, most likely, not affect the AT&T/DTV merger.  It should be noted that these cases have survived a motion to dismiss (opinion), under the heightened Twombly scrutiny requiring antitrust complaints to demonstrate a "plausible" (vs. merely "possible") claim that would establish an antitrust violation, before allowing antitrust plaintiffs to proceed to discovery.  So, we know these cases have some merit.  

Equally noteworthy, these cases are being brought by real consumers (not DC interest groups) in reaction to real behavior in the marketplace; behavior that the DoJ and FCC claimed to be fixed by the Comcast-NBCU merger conditions.  The D.C. interest groups, on the other hand, supported the feckless merger conditions imposed by DoJ and the FCC.  

The Antitrust Litigation

The cases are captioned, Garber v. Office of the Commissioner of Baseball, et al.,  and Laumann v. National Hockey League, et al.  I've mentioned these cases before, here and here.

The plaintiffs are classes of consumers that buy the MLB.TV (or NHL GameCenter Live) online service either by itself or in addition to a subscription TV service.  The defendants in the cases (other than the two named sports leagues) are certain individual teams and some regional sports networks owned by Comcast and DirecTV, and the TV providers themselves.  

The crux of the complaints is that the sports leagues, and integrated RSN/subscription TV companies, allocate markets through what are, essentially, agreements not to compete with one another.  Unlike a typical horizontal territorial allocation scheme, though, these are the result of a series of industry-wide "vertical" distribution agreements with sports leagues and the TV companies' RSNs--the success of the scheme being contingent on identical terms in all agreements.

How the Agreements Work

When the RSN pays all that money for the rights to broadcast all of a team's games, what do they get for their money?

First, the RSN gets the rights to show the games of that team on TV for the home team's "market area".  This means the RSN can set the prices that other subscription TV companies in the home market area have to pay in order to give their viewers access to the games.  This right is exclusive to the RSN for the market area.  Thus, even though when the home team plays away games, the away team also has rights to the game, the contracts are written so that the away team will not sell its broadcasts back into another RSN's "home market."

Second, and most importantly, while the vertically-integrated RSN is technically only buying TV rights, it effectively also gets a promise that the league's online streaming provider (i.e., MLB.TV or NHL GameCenter Live) will refuse to deal--at any price--with broadband-only customers within any teams' home market areas.  (If you want to check for yourself, here's the link to the MLB.TV blackout section.)  Thus, there is some foreclosure value being offered in exchange for the ridiculously high fees being paid by cable RSNs for regional sports rights.

How Does the Antitrust Litigation Affect Analysis of the Two Mergers?

Knowing this important commonality, we can try to understand how the big media mergers will change things.  The Comcast/TWC merger is likely to make things worse for customers and competitors of Time Warner Cable.

According to a study, published last year by Navigant Economics Principals, the "vertical integration premium [the relatively higher fees charged by a vertically-integrated RSN] increases significantly with the local downstream market share of the RSN's affiliated distributor."  The paper isn't available for free, but you can access the presentation to the FCC staff here.  

So, in all likelihood, Comcast's increased share of certain markets (e.g., New York and L.A.) could be expected to lead to increased prices for TV consumers (of any provider) in those former TWC markets. (Comcast will also increase its L.A. market share through its Charter deal.)  Nor would Comcast's accretion of TV market power be likely to change its opposition to the sports leagues making "in market" games available over the Internet.

On the other hand, AT&T's incentives would be expected to change markedly for the better, relative to a standalone DirecTV.  DirecTV, only a few weeks ago, questioned why it would even bother creating and promoting an online video package.  AT&T, though, just last month, AT&T announced its intentions to get behind over the top content in a big way. 

AT&T has different incentives than Comcast with respect to online video, because--according to the Leichtman Research 1st quarter report on broadband additions--AT&T has a much lower share of the market in terms of video-speed broadband than the cable companies.  If you massage the information available from Leichtman (which groups T and VZ together), an overly optimistic approximation (which only includes Comcast and TWC in the denominator) gives AT&T and VZ less than a 40% share of video-speed broadband subscribers.  

AT&T has already announced plans to dramatically expand its very high speed broadband footprint.  AT&T's successful deployment of higher broadband speeds is dependent on consumers having a reason to purchase higher capacity service.  This is why AT&T will want to push--more content online--especially linear content that consumers want.  

By understanding what has kept linear content--specifically, the sports programming that is so important to consumers--off the Internet, it is easy to see why broadband consumers will be better off with AT&T owning DirecTV than they are now.

May 8, 2014 2:48 PM

Is Restricting Deployable Spectrum Really the Best Way to Prevent Potential Market Power?

On Monday, 16 Republicans on the House Energy and Commerce Committee sent a letter to FCC Chairman Wheeler, complaining that the Chairman's proposal (described in his blog) to restrict bidding on at least 30MHz of the available spectrum in the upcoming incentive auction "is not how a market-based auction should function; it is how a cartel controls price."  The House Republicans hit closer to the mark than you might.

Ironically, the purported reason for the restrictions is to prevent "one or two firms from running away with the auction."  Such a result would be only be bad if it led to these "one or two firms" controlling enough spectrum to be able, at a later point in time, to exploit consumers through cartel behavior.  

We know that cartels restrict output.  If bidding restrictions, likewise, reduce output, then whose cartel tactics are likely to cost the consumer more?  

The FCC's Theory on the Competitive Significance of Low-Band Spectrum

In his blog, the Chairman states that spectrum below 1Ghz is really important for commercial success in wireless.  He believes this, presumably, because AT&T and Verizon (the two wireless companies with the most customers) also have more low-band spectrum than anyone else.  However, correlation is not the same as causation. 

Presently, here is how much total "low band" spectrum is available for commercial service:

Low Band Spectrum.jpgNote that the chart above does not account for the broadcast spectrum to be auctioned in the upcoming incentive auctions.  The FCC had originally speculated that the amount of 600MHz broadcast spectrum tendered for auction could be anywhere from 80MHz to 120MHz.  The House Republicans speculated that only 60MHz would be tendered, due to the Chairman's decision to limit auction participation, and the value to broadcasters of surrendering spectrum.

If you want to see how the Chairman's plan will affect specific companies, the table below will give you an idea.  This information is based on Table 18 from the FCC's 16th Wireless Competition Report (adjusted to reflect mergers), and it assumes that broadcasters will tender 84MHz to be auctioned.  We also assume that the FCC wants to limit the amount of spectrum below 1GHz that any carrier can acquire; here, we use 1/3 of the post-auction total (73 MHz) as the limit.
 
Low Band Spectrum 3.jpgNote, also, that in the above chart, neither AT&T nor Verizon's low-band spectrum comprises a majority of either company's total spectrum. 

How Does the Chairman's Plan to Redistribute Low-Band Spectrum Effect Consumers?

The Chairman's plan is not just to limit the amount of low-band spectrum held by AT&T and Verizon.  No, the plan also is designed to promote a more "equitable" distribution of low-band spectrum--at the lowest possible price to competitors of AT&T and Verizon. 

These distortions are the primary reason no one expects the auction to recruit 120MHz of new low-band.  The result of Chairman's bidding restrictions will be a 50% reduction in spectrum capacity available in this auction, and a total post-auction capacity restriction of almost 20% less total low-band spectrum available for U.S. consumers.   

This last point is incredibly important.  Restricting output is what monopolies do when they want to increase prices.  Because consumer demand is fairly steady in the short term, the only way producers can move prices quickly is to restrict supply, which changes the equilibrium price to a point higher up the demand curve.

The Chairman of the FCC is unmistakably urging the Commission to adopt a plan that he knows will restrict output.  The justification for this output restriction is ostensibly to prevent the top two firms from restricting output in some future time period. 

What's the Worst That Could Happen?

If we assume the auction takes place with no bidding restrictions, reasonable spectrum screens, and we get active (but not maximum) broadcaster participation, then it seems possible that somewhere around 100MHz-110MHz in broadcast spectrum gets tendered.  Moreover, let's assume AT&T and Verizon are allowed to buy as much as 60MHz-70MHz of the 100MHz. 

Now, at some point in the future, the concern is that AT&T and Verizon will realize that demand is strong, every other competitor is capacity-constrained, and their opportunity to restrict output has finally arrived.  If this day comes, and AT&T and Verizon decide, notwithstanding antitrust laws, that they want to maximize their opportunity, then they might look to the early 1970's OPEC.

As cartels go, early 1970's OPEC wrote the book on cartel coordination meeting exactly the right opportunity.  As the world was already producing at maximum capacity, OPEC's 25% output reduction in November of 1973 changed the world

So, for a worst case, let's assume that AT&T/Verizon will want to cut output by 25%.  A 25% output restriction translates into somewhere between 40.5MHz and 43MHz, depending on whether you assume the two companies bought 60MHz or 70MHz of spectrum in this auction (25% of their combined new low-band total of 162MHz-172MHz). 

What Does It Cost to Prevent?

This "worst case" outcome is, obviously, more than a little improbable.  For the worst to happen, we have to assume: 1) AT&T/VZ would capture most of the profits from an output restriction, 2) both firms would/could disregard/circumvent the antitrust laws, 3) that such a steep restriction makes sense (25% is a lot), and 4) that the firms could effectively monitor and police their levels of capacity in service.  Moreover, output "quotas" do not tend to work for very long (even OPEC members cheat on output quotas).

Nonetheless, the "worst case" does serve a purpose.  In this case, it gives us some way of valuing the worst harm the Chairman's proposed bidding restrictions are supposed to protect us from. 

If we know the economic costs of the worst case, we can assess the probabilities of that worst case, and get an idea of what preventing it is worth.  So, here, the worst case is that consumers will face the higher prices that would result from an output restriction of about 40MHz of premium-grade, low-band spectrum. 

But this is only a "risk"--it's not a certainty.  But, even if you think there's as high as a 30% chance of the worst case happening, then we can assign a value on the worst case.  In rough terms, it would be rational to engage in rules/regulations that "cost" up to 12MHz (in spectrum that will never reach the market) in order to prevent the worst outcome (i.e., a 30% chance of the economy losing the benefit of 40MHz of spectrum capacity).

Worth the Cost?

On the other hand, there seems to be a consensus among observers (both for and against the bidding restrictions) that the Chairman's proposed bidding restrictions will result in broadcasters bringing up to 40MHz less spectrum to the auction.  But, even if the Chairman's restrictions "only" cause broadcasters to offer 20MHz less spectrum for auction, the loss is real and it is 100% certain.

Insurance is what the Chairman is selling with his proposed bidding restrictions.  But, even at a Vegas blackjack table, insurance pays 2:1.  At a guaranteed cost to the public of up to 40MHz, the Chairman owes taxpayers an explanation of why his bidding restrictions aren't the bad bet they look like.








October 3, 2013 4:32 PM

Public Knowledge's Analytical Leap

On Monday, Public 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.

April 17, 2013 5:13 PM

The DoJ's FCC Alley-Oop

At the end of last week and in advance of Assistant Attorney General for Antitrust William Baer's appearance before the Senate Judiciary Committee yesterday, the DoJ's Antitrust Division filed an ex parte submission with the FCC offering some serious advice on how to conduct (read: limit participation in) a spectrum auction--specifically, the next spectrum auction.  

The Department's "advice" contained all the acuity, but none of the profanity (and occasional hilarity), of a drunken sports heckler (like Bud Light's Mr. Pro Sports Heckler Guy).  Until I read the DoJ ex parte, I had no idea as to what might be the regulatory equivalent of "catch the ball", "make the basket", or "play defense, you idiots."  Now I know.

The Department's "advice," while generally a meandering discussion of points not in contention, such as the DoJ's horizontal merger analysis and the many benefits of competition, also included such "game changing" spectrum auction tips as "protect competition", "don't award spectrum to buyers that won't use it efficiently", and "spectrum below 1 GHz is cheaper for smaller competitors to use."  

If You're Not Low, You Must Be High

The one "point" the Department puts on its relatively general discourse is its belief that to be successful on a nationwide basis a carrier needs some low frequency spectrum in order to efficiently serve rural areas and to provide service that works inside of buildings.  The DoJ notes that the two "leading" wireless carriers (AT&T and Verizon) have a large amount of low frequency spectrum, but Sprint and T-Mobile have little to none of this spectrum.  

By making this assertion (I would guess?), the DoJ wants us to conclude that "low frequency spectrum" is the only thing distinguishing the leaders from the laggards in wireless market share.  The only reason AT&T and Verizon have the most low frequency spectrum is because, the DoJ explains, they pay a lot more for low frequency spectrum in order to prevent Sprint and T-Mobile from using it.  

The DoJ warns that this trend should be expected to continue into the next spectrum auction as well.  Why the next auction?  Because the next auction is for LOW frequency spectrum, and this is the kind that AT&T and Verizon only buy in order to keep away from Sprint and T-Mobile.   

A Low-Down Dirty Shame

If Sprint and T-Mobile did have some low frequency spectrum, they would totally be able to build it out and offer better service to rural areas and inside of buildings, and thereby steal share from AT&T and Verizon.  But, even if they didn't actually use the spectrum, Sprint and T-Mobile should still be able to gain share because AT&T and Verizon would provide worse service without this spectrum, right?  Either way . . . it's cool, says DoJ.   

You see what they're doing here?  First, you establish that a firm's "success" in terms of market share, or whatever other benchmark you like, is critically dependent on one specific input.  Next, you pick an industry characterized by a shortage of this key input that affects all firms--like wireless--and you're almost home.

Then, postulate that some companies have greater access to the scarce input than their rivals, and the conclusion falls into place.  You see?  The input-favored companies can benefit even if they don't use all of their superior access to inputs to increase output.  This is because they know that their competitors cannot increase output to steal customers from the input-favored firms.  Stick to the basic format, and this argument always works. Cool, huh?  

If the FCC adopts rules that exclude AT&T and Verizon from the next auction, you can bet that they'll be using an iteration of this same argument on their appeal.  But, if DoJ's argument is that transparent, and that malleable, why are they using it now?  

The FCC Lobs . . . And DoJ Dunks!

First, let's dispel any lingering suspicion you may have that the DoJ is offering its theories based on any observable facts.  If AT&T and Verizon were merely warehousing low frequency spectrum to keep their rivals down, the simple way to check would be to see if they're using it.

Let's just assume that both AT&T and Verizon have been using the 850-900 MHz spectrum since the FCC first handed it out to their predecessor companies in the 1980's.  After all, they didn't get to be the two largest companies by not using their "first mover" spectrum.  So, what about all the other low frequency spectrum?

"All the other" low frequency spectrum would be the 700 MHz spectrum that AT&T and Verizon purchased in 2008.  The companies claim to have needed the spectrum to accommodate the very predictable surge in demand for wireless data services.  And, according to no less venerable a source than Wikipedia, AT&T and Verizon are, in fact, using their 700 MHz spectrum to roll out their fancy LTE service, for their fancy data-loving, bandwidth-hogging LTE customers.  So, why is the DoJ insinuating otherwise?

Well, as near as I can tell, low frequency spectrum just became a "thing" in the FCC's NPRM from 6 months ago, where they solicited comments on whether the Commission should change its spectrum screen to account for the perceived greater value of low frequency spectrum.  So, if I had to guess, I would say that the FCC's been waiting for 6 months for some big player to take the low frequency "lob" they put up with the NPRM and slam-dunk it home--and the DoJ is that big playa'.

Lebron dunk.jpgDoJ . . . with no regard for human life!

So, do you think any Senators called out William Baer on this at the oversight hearing yesterday?  According to the trade press, the ranking member of the Antitrust Subcommittee, Senator Mike Lee (R-UT), expressed concern that the Department was suggesting to the FCC that AT&T and Verizon were warehousing spectrum.  You bet he did--because us Lees just happen to know a f@$k-ton of stuff about telecom and antitrust.
February 21, 2013 1:51 PM

Don't Conflate the Mission of Free Press with Free Speech

One week ago, S. Derek Turner of Free Press was doing like he do--criticizing other parties for speech with which he disagrees, and presumably advocating the moral purity of single letters as first names--except that this time, he couldn't wait the 5 minutes or so that Free Press normally waits before doing something completely inconsistent.  No, this time Free Press tied it up in one neat little package for us.

Not wanting to waste such extreme courtesy (or poetic irony), the task of reporting this feat has fallen to moi.  Specifically, Mr. Turner released a statement calling AT&T out for a "missive" against the FCC that, Turner believes, was emblematic of AT&T's "penchant for bullying" which, he continues, is as "boundless as its hubris."

From what "bullying" by AT&T was Mr. Turner defending the FCC?  It turns out to be this blog post by Bob Quinn, speculating that if the FCC has a difficult time saying goodbye to "old-timey" regulations designed to protect the then-nascent telephone market from the depredations of the telegraph industry, then hopes were dim for the FCC to progressively regulate the unique issues that will arise as part of the transition from TDM-based networks to IP networks.   

I'm not surprised by AT&T's comment any more than I am by Free Press's disagreement with this comment.  But "bullying?"  Correct me if I'm getting the whole "bullying" thing backwards, but isn't the goal of bullying to intimidate someone to act differently than they would otherwise act?  I'm pretty sure that AT&T's blog post more accurately qualifies as "criticism."

"ToMAYtoe"/"toMAHtoe", right?  I mean how's a phone company to act if they don't like what the FCC is doing/failing to do you? Interestingly for AT&T, Free Press's guidance is linked at the bottom of the post. 

In its comments opposing AT&T's Petition for the FCC to start a proceeding to deal with issues involving the IP transition, Free Press points to the "right way" for AT&T to pursue a deregulatory goal, 

"it is perfectly appropriate for any incumbent carrier to assert its rights under Section 10 of the Act to seek forbearance from specific regulations, as has been done for the specific regulations AT&T names in its petition." At p.2

See, if AT&T had just supported forbearance, that's the way Congress told them the FCC would deregulate, then it would be OK.  Oh, wait, AT&T's blog post sounded like it was expressing support for the US Telecom Forbearance Petition that it believed the FCC could have granted in less than a year.  Message to AT&T from Free Press:  you suck!  With a capital S.!

May 9, 2012 6:42 PM

At CTIA: Dropped Opportunites Exceed Dropped Calls

[In case no one noticed, I've been on a "Vision Quest" for the last few months; but, in the words of the great John Riggins, "I'm bored, I'm broke, and I'm back."]

One thing I've noticed during my self-imposed absence is that there really isn't much of a dialogue in the public discourse on telecom policy these days.  That's not a particularly astute observation for some areas of public discourse, like politics.  After all, anyone can tell you that the big political parties mischaracterize each other and talk past one another all the time.  But telecom issues aren't especially political, so what's the harm in listening to what someone is saying and--if you want to respond--providing a thoughtful response?  

No where was the unfortunate temptation to characterize, rather than accept and address, an opponent's arguments more on display as it was in Chairman Genachowski's remarks at the CTIA show yesterday.  Rather than respond to AT&T's CEO Randall Stephenson's contention that the Commission's decision to oppose AT&T's purchase of T-Mobile had caused AT&T to increase its retail prices for wireless data, the Chairman chose to mischaracterize and dismiss Stephenson's observation.  This was unfortunate, and a missed opportunity by the Chairman to validate a different view of the same spectrum shortage the Chairman has sought to publicize.

While Stephenson's statement made headlines last week in advance of the CTIA show, AT&T's Stephenson has made this same observation consistently, in both December, and over 3 months ago in a conference call with shareholders and analysts.
 
Chairman Genachowski, to his credit, has been one of the most vocal advocates for the need for more spectrum for the wireless industry.  The Chairman has, for most of his tenure as FCC Chairman, understood that demand for wireless data services is outstripping the supply of spectrum and the ability of wireless operators to use different techniques to most efficiently use the spectrum that they have.  The Chairman made all of these points in his remarks yesterday at CTIA.

Randall Stephenson, AT&T's CEO, has said nothing inconsistent with the facts the Chairman has used to argue for the need for more wireless spectrum to be brought to market.  It only stands to reason that if there is insufficient spectrum (on an industry-wide basis) to satisfy the growth in aggregate demand for wireless data, then spectrum shortages will affect some firms earlier than others.  The first firms to feel the spectrum crunch will necessarily be the first firms to react by managing demand (because input supplies are static).  And, the only way to manage demand is through price increases. Indeed, avoiding this inevitable result of spectrum scarcity was AT&T's justification for its proposed merger with T-Mobile.

But, rather than accept the perspective of one of the industry's first firms to feel the spectrum crunch, the FCC Chairman chose to conflate the observations of AT&T's Stephenson into two arguments that Stephenson never makes.  The first is that wireless competition is bad for consumers, and the second is that competition is bad for spectrum efficiency.

After reading Stephenson's observations, it makes more sense to interpret his statements as being that the "new" wireless industry is characterized by many firms lacking minimum efficient scale to meet the projected demand of their consumers.  This is hardly a radical statement.  Many industries demand significant scale in order to satisfy consumer demand--one reason we don't see "mom and pop" microchip manufacturers.  A permanent increase in demand, which the Chairman perceives as a good thing, may well require a higher, firm-specific level of access to the vital input of spectrum.

The solution, which would best benefit consumers, would be for the Chairman to recognize that--if he is confident that more spectrum will come on the market soon--there cannot be any one static notion of how many firms should be in the market.  In a world where spectrum can be expanded, so can the number of competitors.  Any backward-looking concept of how competition should look reflects nothing more than an irrational time bias.  In other words, if adequate spectrum (to support more firms in the market) is coming, then near term consolidation--if it maximizes industry output--will not lead to a less beneficial result for consumers in the long run.

Singapore is actively considering just such an approach, by reserving specific future spectrum for a new competitor.  Such an approach introduces the concept of "contestability" in a very real and certain way.  Firms in the market are allowed to maximize current efficiency by using optimal blocks of spectrum.  Yet these same firms understand that they will be facing certain competition by a potentially lower cost competitor in the foreseeable future.  

Wireless broadband consumers benefit from solutions, not rhetoric.  The FCC should stop viewing market participants as obstacles to consumer satisfaction, but rather as indispensable vehicles to satisfying consumer demand.  In a world where a vital input like spectrum can be expanded, albeit slowly, does it really make sense to freeze firms' spectrum reserves at a pre-wireless-broadband level?  

August 4, 2011 7:28 PM

What the Price Cap LECs Saw, and What They Need to See

Last Friday--after months of intense negotiation, compromise, and an exhaustive re-calculation of the Mayan Calendar--the six largest "price cap" LECs submitted a comprehensive USF/Intercarrier Compensation reform plan to the FCC ("the Plan").  [Note: you really only need to read "Attachment 1"--the rest just provides legal and economic support for the FCC to adopt the Plan.]  

Under the Plan, the only economic incentive to keep the PSTN alive will disappear on July 1, 2017.  On that date, the Plan--and the Prophecy--require that Price Cap LECs shall be required to make money just like any other business: by efficiently selling services to customers who voluntarily decide to purchase these services.  

This Plan, if adopted by the Commission, will serve to streamline intercarrier compensation, while more efficiently promoting the goal of universal access to broadband, as well as voice, services.  At first, all of this will sound kind of scary to many of you.  

Therefore, let me assure some of you that arbitrage will still be around for 6 more years, and the Plan only requires the end of subsidies as they currently exist.  The Plan is by no means a "Doomsday Prophecy", but merely a gateway to the implementation of simpler, more efficient, and more transparent, subsidy recovery mechanisms.  

Let's look at how the Plan would affect two large, PSTN-dependent industries, if adopted today:

VoIP Providers:

    1) Positive:  allows for recovery of all VoIP-originated or terminated "toll" calls at interstate access rates for the next two years!  That's a crazy incentive to upgrade to more efficient technology ASAP.  As a LEC, you don't have to maintain "big iron" to get big bucks.  There will also be a strong short term benefit to interconnected VoIP providers.  No more haggling with big LECs who only want to pay you $.0007/min, and there's a big difference between $.05 and $.0007.  For the next 6 years--albeit at descending rates--carriers serving end-users of VoIP service will be able to collect larger revenue streams than they are generally being paid today.

    2) Negative:  costs to over-the-top VoIP providers will increase, as may wholesale costs of transmission to interconnected VoIP providers (if purchased from a third party backbone operator--because as the costs collected from other carriers goes down, customer costs will increase; even in the wholesale world).

Wireless Carriers:  Stone cold positive.  No negatives here at all.  Wireless providers get a quick transition from intrastate access rates (which are usually much higher than interstate) to the much lower interstate rates, and decreasing rates over time.  It is notable that most of the Price Cap LECs in the Plan, DO NOT have wireless affiliates.

Regulatory "Underbrush" Grows on Both Sides of the Fence

All of the price cap LEC's supporting the Plan have waxed eloquent at one time or another about the need for the FCC to eliminate its outdated regulations a/k/a "regulatory underbrush."  The Price Cap LEC's Plan accomplishes a lot of these goals, but keep in mind, "regulatory underbrush" grew on both sides of the fence. 

The same byzantine, opaque, universal service system also resulted in cost recovery mechanisms in the form of "services" that are no where to be found in the modern, competitive services offered by cable companies, and wireless carriers.  For example, in a competitive market that didn't start as a regulated monopoly with the goal of keeping "basic" service rates low, would any of these things really emerge as "services" that customers would buy?    

    --"unlisted" phone numbers;

    --"foreign exchange" service (in wireless, you can port a NY number to a TX carrier, but LEC voice providers still make you pay to "port" your landline number a mile away);

    --"hunt groups" (say a customer has one number for its business, but the customer actually buys 10 lines to make sure calls are always answered--the automatic process of "hunting" (finding an open line attached to the main number)--is sold as a separate service);

    --phone handset "rentals":  there have got to be some people still renting that bakelite phone for 3 bucks a month;

    --inside wiring "protection";

    --selling common PSTN "vertical" switch features, like caller ID, a la carte;

    --charging extra for "touch tone" dialing (still happens).

Bottom Line:  The Price Cap LECs have a good plan to streamline regulations for "cost recovery."  But, allowing carriers to to recover costs by receiving explicit subsidies and charging a fair price for service may cause the FCC to wonder how much in costs is still recovered via distorted "services" that emerged from the antiquated regulatory regime in need of reform.  If you can think of any "cool" old, tariffed "services" that seem to have originated as a form of "cost recovery"--and are still being "sold"--please post in the comment section. 


May 18, 2011 2:02 AM

Free Press's Antitrust Letter Makes Sense . . . If You Don't Think About It

Last week, opponents of the AT&T/T-Mobile Merger published a short-lived political advertisement (that unfortunately, and shamefully, caught the reader's eye at the expense of transgendered Americans), using the catchy T-Mobile slogan in their ads against AT&T.  Around the same time, one of their affiliated interest groups--"Free Press"--sent a letter to the Senate Subcommittee on Antitrust, Competition Policy, and Consumer Rights, purporting to analyze the transaction from an antitrust perspective.   

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 differentiation within 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. See The 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.  See Guidelines, 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.  See 2nd 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.

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.



March 11, 2011 12:32 PM

Time to Quit Whipping a Dead Horse?

What we've got here is...failure to communicate. Some men you just can't reach. So you get what we had here last week, which is the way he wants it... well, he gets it. I don't like it any more than you men.  -Rep. Henry Waxman (D-CA) (referring to Communications Subcommittee Chairman Greg Walden's (R-OR) inability to get a major ISP to testify in favor of an anti-net neutrality resolution at Wednesday's hearing).

The quote above is, of course, not the words of Rep. Waxman.  That quote (you may recognize) was spoken by "Captain, Road Prison 36" in the classic movie "Cool Hand Luke."  Although, it sounds like something Rep. Waxman could have said after Wednesday's hearing (if he was a redneck chain gang prison guard from the '60s), what he actually said was this, "[r]epublicans couldn't get a single major broadband provider to testify in support of their resolution."  For the record, the Republicans won the battle, by successfully voting their "net neutrality repeal" resolution out of the Subcommittee on a 15-8 vote, along party lines.

The significance of Wednesday's hearing might be a little deeper than what meets the eye.  Why did Rep. Waxman say that there wasn't a single major broadband provider supporting the Republican repeal resolution?  Well, Jim Cicconi of AT&T said it best in his prepared testimony wherein he explained, including a quote from a previous statement by AT&T's CEO, Randall Stephenson, that the FCC's compromise rules weren't everything that AT&T had hoped for, but the rules provided certainty, and AT&T could live with them.  Reasonable enough, right?  

On the other side of the coin, for Republicans the "theatre" of the hearing has to lose a little more luster when the biggest proponent of net neutrality uses your own tag line against you.  And, that's just what happened Wednesday when S. Derrick Turner of Free Press referred to the Republicans' effort to legislatively overturn the Commission's rules as a "solution in search of a problem."  This is the exact same language with which Republicans criticized the FCC for spending so much time and resources to adopt the unnecessary, and counterproductive, net neutrality rules.

But, changing ownership of a clich√©, or catchphrase--while considered clever by the folks at Free Press--essentially means nothing.  After all, it didn't help the opponents of net neutrality rules, so why should this "used and losed" phrase fare any better in the hands of the proponents of net neutrality?  But the real reason why the Republicans should have heeded the "no more hearings" warning in my post after the last set of hearings?
 
The only payoff is for your opponents.  They simply get more undeserved press to rehash stale arguments.  Unfortunately, for Republicans, the juice just isn't worth the squeeze.  Even if Republicans succeed in getting the resolution out of the House, the resolution then has to get past the Senate and garner 60 votes to get past a Presidential veto.  This is a bad bet, no matter how well-intentioned, because it has long odds and a win won't pay big.  What do you win when your natural supporters don't even want you to place the bet?  But, given the greater odds against, the more relevant question for Republicans might be what can you lose?  

As the Republicans are learning, it takes precious time to demagogue this big bowl of nothing.  Perhaps, the Democrats last term might have been better served by focusing attention on more important issues.  Now there are less Democrats.  Do the Republican legislators really want to repeat this mistake?  

February 24, 2011 1:27 PM

Network Transparency: Disclose No Evil?

Who's to say, what's not to say, and what's fair to say
Let's ask Dr. Dre
Dr. Dre? . . .

"Rain Man", Eminem (with Dr. Dre), 2004

The truth is that, when it comes to the "transparency" disclosure rules in the FCC's Open Internet Order (see Section 8.3, App. A, p. 88), the good Doctor could probably provide as much useful information to consumers as any network provider will be able to offer--especially with respect to mobile wireless broadband performance.  Hard to believe . . . but true.

At first glance, the "transparency" disclosure requirement seems like the most reasonable "net neutrality" rule . . . and the one most likely to actually help consumers.  In fact, the rule seemed so rational that it was the only net neutrality rule that the FCC deemed reasonable to apply to both mobile wireless and wireline broadband ISPs in equal measure.  And, who could blame the Commission?  After all, they were only following the requests of the largest manufacturers of smartphones, smartphone operating systems, and infrastructure equipment.

The Information Technology Industry Council ("ITIC"), which represents (among others) Apple, Nokia Siemens, Google, Microsoft, and RIM, even told the FCC that,

mobile wireless BBIA [broadband Internet access] service providers should be required to  comply with robust disclosure requirements similar to those that should apply to wireline BBIA service providers.  These rules should require the disclosure of sufficient information to enable consumers . . . to make informed choices regarding use of the BBIA service offered by the mobile wireless provider.

ITIC PN Comments at 8 (emphasis added).  The FCC listened, and required all broadband Internet access service providers to "disclose accurate information [regarding service performance, terms, and characteristics] sufficient for consumers to make informed choices regarding the use of such services . . . ."  Open Internet Order, App. A, p.88 (new Section 8.3 of FCC rules).

But, who's to say, what's fair to say, and what not to say?  Personally, I would've thought that information was self-evident . . . until I read a very interesting article at Ars Technica ("Ars"), comparing iPhone service performance in Chicago on the AT&T and Verizon wireless networks.

Before, I explain the significance of this article, let me explain that I am NOT taking sides for either carrier.  I know that there are tech reviews that argue for the merits of Verizon in some places, and AT&T in others--even nationwide.

The Ars test, though, got "behind the bars" and was able to discern that certain "bellweather" indicators--like number of bars, and speed tests were not always indicative of actual performance.  The results of the Ars test were that, on average--for the criteria tested (speed, large file app download, and Youtube video download)--AT&T's network out-performed Verizon's for the iPhone device.  However, if you look at the individual data sets, there is a lot of variability even on the same network within the city of Chicago.  So, depending on which areas you spend most of your time, your experience might be different than the results of the article suggest.  

Interestingly, the article observes that,

the Speedtest results may say one thing, but they don't always translate to real-world network performance. Even in the cases where the Verizon iPhone got a faster download speed than the AT&T iPhone, the AT&T app download took noticeably less time than the same app download on Verizon--in one case, where AT&T was measured via Speedtest as slower (UIC test), the download time on AT&T was almost half that of Verizon.
What can wireless consumers learn from this "real world" performance test regarding information sufficient to allow them to make informed choices about their mobile wireless broadband service?  Most importantly, that wireless networks will never have uniform performance, so--as Ars also notes, "when it comes to cell signal and quality . . . where you live and work and how the network is in your area trumps anything you'll read in any review."

This is why it's probably unreasonable for the FCC to require carriers to provide consumers with information that is likely to be misleading.  Even if the carrier believes its performance information to be generally correct, it will never be accurate for any given customer, because accurate performance information is outside of the network provider's control.

But, does this fact render the "transparency" rule completely worthless?  Well . . . maybe  . . . at least for wireless carriers.  Although it's certainly in consumers' interest to have accurate information about every aspect of their service within the network provider's control, most wireless carriers already disclose this information as part of their voluntary compliance with the CTIA Consumer Code

So, for the most valuable "disclosure" information--accurate network performance--who's to say what's fair to say, and what not to say?  For now, you might as well ask Dr. Dre . . .

August 6, 2009 5:40 PM

The FCC's Inscrutable "Screwtape" Letters

Last Friday, it was reported that the FCC sent a series of letters to Apple, AT&T, and Google reacting to an item reported in the New York Times that Apple, through its iPhone Apps Store, had refused to carry "Google Voice" (a call management application).  "Google Voice" (GV) is still available to iPhone customers by using the Google search engine on their iPhones, so I'm not completely sure what the disadvantage is to Google by not being allowed to "retail/give away" this application in the Apple "Apps Store" (but we'll assume there is some disadvantage because Google asked for "retail" placement, and was denied).  Nonetheless, as TeleComSense noted only a few weeks ago, in the unregulated world, the Supreme Court has only reluctantly found a duty to deal, even by dominant firms

Each letter asked different questions, depending on the firm being asked, about the episode in question--Apple's refusal to carry the GV application, AT&T's relationship to Apple and the decision to not carry the application, and Google's efforts to get its GV application placed in the iPhone Apps Store.  Now for the context that makes me "complexed" (so completely perplexed that I have an inferiority complex) about the FCC's letters--the explanation of why they are so inscrutable (we'll get to the Screwtape reference later).


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