As punishment for requesting their freedom, the Egyptian Pharaoh told the Israelite slaves that they had to maintain their quota of bricks, but with less of an essential input: straw. The burden of meeting demand with less resources applies as well in today's mobile services marketplace. Wireless carriers face demands for greater bandwidth to support growing mobile data services but, for the intermediate term, cannot expect additional spectrum capacity--it's essential input--on either a firm-specific or industry-wide basis.
It's unanimous: no matter who you talk to about wireless data, everyone agrees that "more bricks, less straw" is the unavoidable policy. Thus, as wireless data demand continues to show no sign of abating, wireless service providers will simply have to make do with less than optimal spectrum capacity. So if we're stuck in a "more bandwidth demand, less capacity supply" world, how do we solve the problem of how to ration capacity?
Who Needs Spectrum When You Can Upgrade Your Capacity?
So what's a wireless operator to do? Well, for starters, you upgrade existing capacity like crazy by constantly deploying the most efficient technology. But this isn't cheap. Since wireless data exploded in 2007 with the iPhone, AT&T alone has gone through a 3G upgrade, an HSPA upgrade, an HSPA+ upgrade, and, more recently, is in the midst of an upgrade to LTE.
Other companies have accelerated their own pace of upgrades as well. From December '06 (right before the iPhone launch) through December '11 (when most firms still have a long way to go to realize full LTE deployment) industry capex has increased by almost 50%, according to CTIA (the actual numbers are in a report that I can't afford, so take my word for it). But, even these improvements won't keep up with surging demand.
With No Spectrum Relief In Sight, Do You Play The Price Card?
Given the limited options for rationing capacity another, though unpopular, move is to raise prices. Over the last several months we've seen AT&T raise data prices, after realizing that the government was not--anytime soon--going to allow AT&T to efficiently augment its own capacity. Verizon quickly followed suit. For now, Sprint appears to be content to let its shareholders shoulder the costs of increased wireless data demand. But to be sure, increased demand without increased supply does create network strain--regardless of who pays.
Last week, at the CTIA Conference, Chairman Genachowski maintained/reasoned/disputed that the failure of the AT&T and T-Mobile merger last year had anything to do with AT&T's decision to raise prices. Yet, the Chairman knows better, as he has been a leading prophet of the spectrum shortage.
How to Recover Costs of Spectrum-less Capacity Expansion?
Given the costs of constantly upgrading capacity, how does a carrier manage excess data demand? As I indicated above, raising prices sounds like a simple solution, but must account for the fact that big data users are contract customers. That's how smartphones, and data plans become affordable, and predictable.
You see, the problem with raising prices for wireless data is that you can really only raise prices to the marginal customer (i.e., the person who's not your customer yet). Crazy, right? "Raising prices" is a statement of frustration and designed to curb consumption. Carriers are telling prospective customers that the network is nearing capacity and use of the remaining capacity will cost you. This is a horrible situation--who wants to be the (unpopular Redskins owner) Dan Snyder of wireless data?
If Sophisticated Buyers Want to Subsidize Consumers, Let Them!
Carriers know that raising prices for mobile data, or throttling data speeds to the largest users of mobile data, is no way to treat your biggest fans. But with the popularity of mobile device applications, which constantly stream information to and from the customer's phone, customers can unintentionally (and unnecessarily) stress capacity. Applications can distort data consumption in a way that even the most conscientious web surfers cannot offset.
So, earlier this year, at a conference in Barcelona, an AT&T executive suggested that maybe some applications providers would want to buy capacity in bulk in order to assure their customers that using the desired app wouldn't cause the customer to exceed their usage cap, or become subject to throttling. Not a bad idea, right? I mean the applications developer knows how much bandwidth their customers use, and they have a lot more buying power than the consumer.
Given the public's embrace of mobile data, and the cost of continually augmenting capacity, especially for firms with sub-optimal spectrum allocations, one would think the "public interest" would support options that allow customers to still enjoy wireless data, but at a lower cost/consumption threshold. One would think . . . .
But Don't Tell Public Knowledge!
The AT&T suggestion seemed harmless enough, but the reaction from the self-proclaimed public interest group Public Knowledge was alarmingly critical. Then again, this is the same group that published a paper arguing that all wireless carriers should provide flat-rated mobile data service. The irony, of course, is that flat-rated price structures cannot be profitable unless the majority of users pay for more data than they consume.
The notion of "more bricks, less straw" is, for regulators and service providers, an unfortunate and dystopic reality. Uniquely, Public Knowledge seems to relish the "more megabytes, less capacity" future with a fondness that can't help but be compared with how the ancient Egyptian brick consumers' lobby must have felt . . . right before the brick supply crashed.
Well, here it is: New Year's Eve 2011, and--in case you haven't been reading along--over the past several months, I kind of took to calling Sprint "the Whale" in one of my blog posts based on their disproportionate (to their size in the market) influence in Washington (everything they do is "crazy big"). So when it came time to recognize a regulatory "player of the year", I have to give props where they're due, and congratulate the Whale.
Whether you like it or not, and whether by skill or luck, you have to give the Whale credit . . . of all the big telecom players/issues considered this year, the Whale pulled a clear-cut victory on their priority issue when AT&T and DT announced they were abandoning their deal to allow AT&T to acquire T-Mobile. This doesn't happen much, and you have to recognize that this is no easy feat. For this alone, 2011 was the year of the Whale, and 2012 will, by virtue of the Whale's win in 2011, by no means be the year of the consumer.
Not taking anything away from Sprint's achievement, the coordinated actions of the DoJ and the FCC, did ensure that AT&T was never going to get an opportunity to defend itself on the merits in front of an impartial arbiter. This is because, once it becomes clear that the regulator (which has much broader authority to deny the merger than that conferred on federal judges under Section 7 of the Clayton Act) has made up its mind to deny a merger, a court has a lot less incentive to even try an antitrust case.
Consider that a U.S. District Court--under its Section 7 analysis--can only prevent the merger if it finds that it will lessen competition. The FCC, on the other hand, seems free to ignore the analytical framework the court is bound by, and the FCC does not have to approve a merger unless the parties convincingly demonstrate that the merger "promotes" the public interest. Thus, the FCC always holds the final cards.
In cases like the DoJ/AT&T case--where DoJ seeks a permanent injunction (equitable relief that requires a longer trial/discovery period than traditional "extraordinary" merger relief, such as preliminary injunctions and temporary restraining orders, courts might well be much more likely to include the regulator in the process early, so as to avoid "wasting time." Unfortunately, administrative/judicial efficiency can come at the cost of the merging parties' due process rights.
So, Congratulations! are in order for Sprint this New Year's Eve, and, looking forward, I would say that the way the "2 layer" merger review process (Justice/FTC + Regulatory Agency review) was exploited this year by the Agency, will possibly tee up this issue for legislative elimination in 2012.
Happy New Years! to all my readers. Thanks for taking the time to read my blog--I'm grateful for every "unique" view that I get--so tell all your friends! Best wishes to all for a safe and successful 2012!
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.
Here, I'm referring to the private antitrust cases filed by Sprint and C Spire (formerly Cellular South) seeking to enjoin the AT&T/T-Mobile merger. It's Halloween, the night on which the dead are said to be able to walk the earth. While the private antitrust cases are not officially "dead", they are (for now) some stuck between the world of the living and the realm of the dead.
A week ago, the court heard oral arguments on AT&T's Motion to Dismiss these private cases. Most news reports correctly noted the court's skepticism as to the viability of these cases--outside of the DoJ's own suit to enjoin the acquisition of T-Mobile by AT&T.
But, it doesn't take a psychic, a medium, or a Ouija board to understand that these cases are effectively among the many "dead" cases that still haunt the courts. Why?
Well, putting aside any of the court's skepticism and the many difficult legal standards these claims must survive, let's just consider whether the court, the public, or even the plaintiffs, stand to win by moving the cases forward. The answer is fairly simple.
If the government wins its case, the private cases become irrelevant because both the government and the private plaintiffs are seeking the same relief--judgment enjoining AT&T, DT, and T-Mobile from consummating the proposed transaction. On the other hand, if the government loses, both private cases will fall as well.
At the court's first hearing (on the U.S. v. AT&T case), Sprint told the court that if the government lost its case, Sprint would not proceed with its own case. While C Spire had not filed at that point, it is clear that C Spire's "injury" claims are simply too speculative to survive, or (even worse) rely on the court accepting a "regulatory evasion" theory (in other words, that even though the conduct feared by C Spire--e.g., the post-merger firm will raise roaming rates--can be addressed by the FCC, the post-merger firm will also be better able to evade such regulation).
So, if you're out tonight and run into these claims, fear not. Shifting metaphors, these are two turkeys that won't make it past Thanksgiving.
If anyone is interested, here are my notes on the court's questions regarding the "vertical" claims (i.e., those that the competitors, as opposed to the government, could bring) from last week's hearing.
We all have bad days, or even bad weeks; that's just the human condition. You know what I'm talking about, right Coco? As a late friend of mine best put it, "sometimes your horse is supposed to lose." But, let's say that you lost a whole lot . . . like, maybe close to all of your credibility . . . in just 6 or 7 weeks? You'd probably wonder whether it was bad luck, or something you were doing--perhaps even suffering the consequences of hubris (in the Greek tragedy sense of the word).
Well, this is exactly the problem encountered by our friend Sprint (a/k/a "the Whale"). On August 31st, Sprint's credibility was at its apex--when they convincingly "sold" their version of the AT&T/T-Mobile merger story to the Antitrust Division of the U.S. Department of Justice. About a week earlier, on August 23rd, your humble blogger outlined a coherent merger strategy for Sprint, giving Sprint's prior statements every benefit of the doubt and allowing it to keep its public voice consistent without being any worse off.
Did Sprint take my advice? Of course not! But let's look at what Sprint actually did in the subsequent several weeks (post 8/31) and you tell me whether they are victims of bad luck, or are suffering something akin to the proverbial tragedy that follows hubris?
Hubris or Bad Luck?
1.) September 6th. Sprint files its own Complaint seeking to enjoin the AT&T/T-Mobile merger. Sprint also sought to be included, for discovery purposes, as a party in the United States' case--a request the court denied.
Hubris? Yes. Given that the DoJ had already filed, Sprint had nothing more to gain by filing its own case. It was an unnecessary and reckless risk. The best they get is a few days of headlines, the worst is that Sprint's credibility comes under scrutiny, as their claims get dismissed.
Consequences. Filing a private merger suit alone is risky enough; no one has ever won this bet. But seeking joinder with the government, even for discovery purposes? As explained in an earlier post, this tactic was contradictory, absurd, and doomed Sprint's private standing. Moreover, even before Sprint's Complaint was filed, one of its allegations of harm (concerns over a failure to get access to popular handsets) had started to unravel by the announcement that Sprint would get the new iPhone at the same time as AT&T and Verizon.
2.) September 22nd. Sprint says only Sprint could buy T-Mobile. Sprint "clarified" that the government is less concerned with the loss of T-Mobile as an alleged fourth "national" competitor than it is with the identity of the "national carrier" acquiring T-Mobile. Sprint contends it is an acceptable acquirer, and AT&T is not. One wonders if the government ever thinks, "with a complainant like this, who needs defendants?"
Hubris? You bet. I'm guessing both the United States and Sprint's lawyers could have done without Sprint revealing its self-serving motives for opposing the merger. Moreover, there is no evidence that the government agrees with Sprint's "clarification."
Consequences. Obviously, this little "clarification" by Sprint, purporting to disclose the "true concerns" of the government is more than a little contradictory to Sprint's economic arguments opposing the proposed acquisition on "consumer protection" grounds. Worse still, it may have focused the attention of investors on whether Sprint really had the kind of money to buy T-Mo, causing a more general scrutiny of Sprint's financial health.
3.) September 29th. Three weeks earlier, according to its Complaint, the proposed acquisition posed an imminent threat to raise Sprint's costs for a critical input--wireless backhaul. Yet, according to early reports regarding the results of the first stage of a nationwide RFP for upgraded, high capacity backhaul, the most competitive carriers (by share of spend) were AT&T, Comcast, and Time Warner Cable. Curiously, AT&T wholesale was identified as the lowest cost provider. The same source noted Sprint's prediction that it "will end up with '25 to 30 significant backhaul providers."
Hubris? No, just bad timing. Sprint might reasonably view its intention to obtain a cheaper, higher capacity infrastructure for its network to be information that they should disclose to their shareholders.
Consequences. This was a publicly-announced "admission against interest." In its Complaint, Sprint alleges that a "unique" harm it will suffer as the result of AT&T's proposed acquisition of T-Mobile is that AT&T and Verizon will control a duopoly in the market for backhaul transmission, and have a greater incentive and ability to increase prices, pari passu. While Sprint never explained how this theory made sense, Sprint's actual recent experience directly contradicts this allegation.
4.) October 7th. Sprint hosts an "Analysts' Day" and explains its optimistic future, with no reference to the proposed acquisition, or (curiously) any real discussion of the iPhone (click here for presentation). Press reports suggest that analysts were a little upset (to put it lightly) by what they perceived as a lack of financial information regarding Sprint's future 4G plans. While a little harsh, the Journal probably best captured reaction to Sprint's big analyst call, "[i]t's not good when they laugh."
Hubris? Yes. The analysts and reporters, for whom the presentations were developed, would likely consider an underestimation of their questions to be a bit grating. Worse still would be if the guests thought that Sprint was being less than candid with them. If Sprint expected the analysts to accept a "faith-based" approach toward its strategy discussion, it was wrong.
Consequences. Aside from financial market consequences, the presentation will not help Sprint's plea for a permanent injunction in its antitrust case. Sprint makes no mention of the merger, and describes a generally optimistic view of its future--especially with regard to its recent performance versus both AT&T and T-Mobile--and its ability to reduce future roaming costs and cost per unit (the remaining allegations of harm in its antitrust complaint).
Tragedy: The Toll of Hubris?
Oral argument on AT&T's Motion to Dismiss Sprint's private antitrust case will be heard next Monday, the 24th. It is not at all unreasonable to expect a decision as early as the 31st. Given this likelihood, coupled with the outbreak of corporate hubris preceding Halloween, should Sprint's executives be considering costumes based on prominent figures in Greek tragedy?
In chess, a gambit is only a gambit (which implies a strategy with a chance of success) if it is not obvious to your opponent. Bluffs don't work unless you can convince the target: 1) that you believe you have the winning hand, and 2) the other players don't know you don't have the winning hand. The point here is that the Whale can have a great strategy, but even the Whale can blow it if he appears reckless, or insincere.
On Wednesday, everything the Whale did was "crazy big" (emphasis on crazy). On two separate occasions--once in the courtroom and once in the press room--Sprint betrayed its gambit, and essentially forfeited any chance of success.
In the courtroom, it would be too generous to say that the Whale took crazy risks. A "risk"--no matter how "risky"--contains the potential for reward. Lottery tickets are risky, yet real people win lotteries every day--you can win. Sprint's courtroom strategy was the equivalent of a legal "suicide bomb", damaging not only Sprint's claims, but its separate antitrust case, and that of Cellular South.
Let's set the stage. As everyone knows, on August 31st, the DoJ filed a complaint to enjoin AT&T from acquiring T-Mobile, because, the complaint alleged, the acquisition would tend to substantially lessen competition for mobile wireless services in violation of Section 7 of the Clayton Act.
Sprint filed an almost identical complaint a week later. Sprint also asked the court (both cases were assigned to the same judge) to allow it to participate in the trial planning/discovery procedures the with the government's case. If successful, this would be a big winner. It would give Sprint the ability to string case out over a much longer period of time, and give it a more controlling role in the case. Unfortunately, no court has ever joined a private plaintiff with the government in a merger injunction case(even for pre-trial purposes). This was a no win bet.
As noted in an earlier blog post, courts are very skeptical of antitrust complaints brought by competitors claiming to be seeking to protect "competition" and "consumers." Accordingly, the Supreme Court has held that private merger litigants must assert that they (vs. the general public) will suffer a specific injury resulting from the merger.
On the other hand, plaintiffs are not joined in litigation unless it is efficient for the courts to try their claims together because they are alleging common injuries as the result of the same event, or conduct (i.e., oil tanker negligently leaks oil, and multiple commercial fishermen lose business). In other words, to be joined with another plaintiff you have to be alleging substantially the same injury as a result of the same alleged illegal conduct of the defendants. Sprint did exactly that on Wednesday.
Does anyone see the problem here? For Sprint to maintain standing in its own antitrust case, they have to allege a unique, personal injury resulting from the merger. But, to be joined with the DoJ, even for discovery purposes, they have to be alleging the same injury as the result of the merger--otherwise they just bog down the government's case.
Obviously, Sprint can't satisfy both standards, which is why this tactic was so reckless. So, in the process of losing a meretricious motion, and effectively conceding its separate companion case, Sprint also destroyed whatever credibility it may have had as a witness for the government.
Why do I say this? After all, Sprint's lawyers aren't Sprint, so how could an ill-conceived legal strategy hurt Sprint's value as a witness? Well, it can't, really. This is the part where Sprint's CEO took over.
Investors Need to Know the Truth
At an "investors' conference" on Wednesday, Sprint's CEO notified investors (and, it would seem, the rest of the world) that Sprint was only kidding when it said mergers that exceed the "HHI" concentration numbers in the antitrust analysis contained in its complaint were illegal. it presented to the government and the FCC were illegal. Fair enough--it's his (and his shareholders') credibility to squander as he chooses.
Rather, Mr. Hesse explained, the government would only be concerned when the other two of the largest three firms attempted to acquire T-Mobile. You see, as Mr. Hesse clarified, the problem the government has with the AT&T merger, is unrelated to its allegations that the market is national and the number of participants would decline from 4 to 3. The government must be so excited to have a company that brags about not needing spectrum, to explain why they would be the perfect firm to take T-Mobile's capacity off the market.
I guess we have to conclude that Sprint's real concern was that if AT&T got any of the capacity it needed, AT&T might become more efficient and put downward pressure on prices. While I never drank Sprint's Kool-Aid on their opposition to the merger being motivated by concerns for the "public interest", I did drink the Kool-Aid on Sprint's Gambit.
The game was going as well as it could have for them, but they couldn't just help the "public interest" by being a witness--they had to be a "playa." Instead of waiting to see if Justice won, and then coming in as a savior for poor little T-Mo, they couldn't wait.
It's a proverb that you can get a lot done in Washington if you don't care who gets the credit. Unfortunately for Sprint, they could not abide this proverb. They had to be the Whale, the big boy in Washington, so they couldn't resist revealing themselves before the game was played out. In doing so, they busted what could have been a beautiful gambit.
I said before that the genius of Sprint's gambit was that--if they could successfully convince the Antitrust Division to accept and endorse a national market with four participants as the starting point for the Division's analysis--Sprint was (by those terms) guaranteed a three firm oligopoly for advanced broadband wireless services, no matter the outcome of the case. The very act of the Department challenging the acquisition would have this effect. Why?
The general answer is that the Department's Complaint is based on an application of the 2010 DoJ/FTC Merger Guidelines, which are a less-structured revision of the 1992/1997 Merger Guidelines. While Guidelines can provide a useful way of learning competitive conditions in most (unregulated) industries, they cannot yield a comprehensive competitive analysis of an industry like mobile wireless telecommunications services. The Guidelines simply do not take into account the degree of interdependence between regulation of critical, government-controlled inputs (like access to spectrum), differing network technologies and deployment cycles, the diversity of services and devices supported by any single network, and the massive capital intensity of the wireless industry.
Even more specifically, though, the Guidelines don't instruct the enforcement agency to consider the effects of its decision--to challenge or approve the transaction--on future competition in an industry already heavily dependent on the decisions of another government agency. But, let's back up before things get too confusing.
The Scarcity of Spectrum and the Need for a Spectrum Regulator
Ideally, the FCC, the NTIA, or some other government agency would act as the "central banker" of spectrum. The spectrum "central banker" could forecast demand, try to free up supply in advance of anticipated demand, and hopefully have some success in at least mitigating situations of shortage or surplus.
This role would balance the needs of government, and the various commercial users of spectrum so that resource scarcity could be somewhat removed from a competition analysis. In the event a firm wanted to exit an industry, the "spectrum banker" could act as a purchaser of last resort. This agency could purchase, hold or re-auction unused spectrum, and would have to be able to oversee the sale of an ongoing business in a manner designed to maximize spectrum utility, and the value created by the exiting firm. One benefit of such an agency would be to allow competition agencies to make decisions based on competitive factors alone. The Effect of Enforcement of the Guidelines on the Guidelines' Analysis
The Guidelines are supposed to explain what effect a combination of firms will have on consumers in the market for the good or service that is the subject of the transaction. A proper Guidelines analysis is supposed to consider the effect that barriers to entry will have on the likelihood of future entry if prices were to increase. When a market is characterized by high barriers to entry, the agency must give careful attention to a merger between firms in that market, because competition lost will not be quickly replaced by new entry. So far, so good--in fact, if you search "barriers to entry" and "merger guidelines", you'll get tons of results.
The problem, though, is that barriers to exit have the effect of raising barriers to entry. For our merger, this is the blind spot in the Guidelines' analysis. If you search "merger guidelines" and "barriers to exit", you don't really get anything (at least not in the first five pages of results that I looked through).
The result is what I would call the Guidelines' version of the "Heisenberg Principle." Said differently, in cases where markets already have high barriers to entry, the failure to account for action pursuant to the Guidelines will, further raise barriers to exit, and thus future entry, than markets with otherwise low barriers to entry.
What Is the Significance of a "Barrier to Exit" in the DoJ v. AT&T/DT Suit?
Well, put yourself in the shoes of Deutsche Telecom. You've invested billions of dollars in the U.S. mobile wireless market to develop spectrum, deploy infrastructure, innovate, create jobs, and add wireless capacity. Now you would like to cash out.
A week later, Sprint got half of what they were looking for when the DoJ filed suit to challenge the proposed AT&T/T-Mobile acquisition. Yesterday, if there were any doubters about Sprint's optimal outcome, Sprint announced its intention to keep those gains by filing their own private antitrust suit to enjoin the merger. Copy of Complaint here.
To hear Sprint's CEO talk, or read their pleadings, Sprint is very small in the marketplace. But around here, they call Sprint the "Whale", because they're a big boy in Washington. Everything they do is CRAZY BIG!! When they heard Justice was suing to enjoin the AT&T/T-Mobile merger, Sprint went all in. You know what I'm talking about, right Coco?
Let's take a look at what Sprint's "won" so far, and the risks that they still face before entering the capacity-constrained "promised land" of 4G with the largest cache of excess capacity.
The Beautiful Genius of Sprint's Gambit
The Guidelines are designed to limit "artificial" output restrictions by firms with market power, but Sprint has successfully convinced the government that the concentration figures in the Guidelines should be applied rigidly (in this instance) to prevent any of the largest 3 firms from quickly expanding capacity by purchasing it from the 4th largest firm (which is both capital and spectrum constrained).
In other words, Sprint understood AT&T's data capacity constraints in a much more real sense than any regulator could possibly understand. Consequently, by persuading the government to challenge the merger, Sprint can possibly compel an output restriction by one, if not two, of the remaining firms providing advanced wireless data services.
By persuading the government that "raw", undeveloped spectrum (which could hit the market in several years) is interchangeable with "working capacity", which can be easily diverted to address present excess consumer demand. Said differently, the beauty of Sprint's advocacy was that they have commandeered the tools of the Guidelines to defeat the purpose of the Guidelines.
How Justice Advanced Sprint's Gambit
First, the one big advantage Sprint gained was moving the merger decision out of the hands of the FCC, and into court with the Antitrust Division. This is important, because the only winner in Sprint's Gambit is Sprint. When other merger opponents realized this, they would have been arguing for merger conditions that allowed smaller, regional firms to become more powerful competitors to Sprint.
Approval of the proposed merger, subject to significant divestitures is a threat to Sprint. Not only is it possible that many markets would "de-concentrate" and become more competitive due to acquisitions by known participants, but large divestitures might open the door for another large telco (for example, a CenturyLink type company) to gain a toe-hold in wireless.
Second, Sprint wins by getting the DoJ to commit to its 2010 Guidelines concentration numbers for purposes of analyzing this, and perhaps future wireless transactions. This represents a potentially significant departure from past analyses, because it has the effect of making the smaller competitors acquisition targets (because they have limited growth ceilings), rather than marketplace threats. For Sprint, the oligopoly is the finish line--it doesn't matter who's left in the market, as long as existing firms will be leaving, and new firms won't be entering.
Third, Sprint--through the DoJ--has succeeded in reducing competition by creating artificial exit barriers. In other words, firms that invest, obtain a measure of success, and then seek to leave the market would now be required to "pay" a "penalty" (accept less than the fair value of their enterprise) in order to get their investment out. So, assuming there is a firm large enough to buy T-Mobile as an ongoing competitor (say China Mobile), and continue to invest in T-Mobile, the Department would minimize that risk for Sprint by declaring T-Mobile to be a "liquidity trap."
The Risks: The Whale No Hesitate--Sprint Goes All-In
Why did Sprint file its own, almost identical, antitrust case? We know that it won't be consolidated with the DoJ case, because--as noted in the 8/23 post--only the Government represents consumers and competition. Sprint, unlike the Government, needs to allege a Sprint-specific injury, which it makes only the vaguest attempt at asserting in a scant, vague 5 paragraphs at the end. Sprint's goal is not to win, but to have a voice in the settlement of the case.
First, Sprint needs this litigation to have a zero-sum outcome, and they've drawn a judge that is known for moving the litigation along. So, the worst case for Sprint is that Justice settles. Why? Because the likely result would be a stronger T-Mo/AT&T competitor plus amped up competition from U.S. Cellular, Metro PCS and Leap who would likely be the beneficiaries of significant divestitures. So even though Sprint's complaint will eventually be dismissed for lack of standing, the presence of the complaint is designed to put added pressure on DOJ not to settle.
Remember, if Justice wins the case, they only enjoin the deal as structured. AT&T can withdraw its existing merger application at any time and come back with a new deal with DT. Because of this omnipresent possibility, it may be the case that, paradoxically, the best outcome for Sprint would be to keep the litigation going if it looks like AT&T will "win." In that sense Sprint's filing is tactical, not substantive.
Second, Sprint's interest foreshadows that Sprint sees a significant role for itself in any Tunney Act proceedings to evaluate any settlement of the DoJ/AT&T litigation. (The Tunney Act requires the DoJ to put out all DoJ antitrust settlements for public comment and that a court review the settlement to ensure that it adequately addresses the concerns identified in the complaint.) This is the big risk that Sprint has overplayed its hand and will provoke a "fix it first" solution wherein the litigation is dismissed, the transaction is restructured so AT&T gets the capacity it needs, and DT gets a fair price for the assets that will go to strengthen smaller competitors.
Virtually from the announcement of the AT&T/T-Mobile merger, both Sprint's advocacy and Sprint's ultimate goal in its opposition to the merger (blocking the merger outright) have been a puzzle to me. Specifically, Sprint's categorical opposition to the merger makes me wonder: "why the opposition?" and "what are they really looking for here?"
Sprint's superficial, substantive arguments against the merger are a fairly generic, typical "Guidelines" style analysis from a consumer welfare (rather than Sprint-specific) perspective. Coming from a competitor, these arguments invite suspicion.
In fact, the Supreme Court has been extremely skeptical of competitors seeking to block mergers on the grounds that "competition" will suffer as a result of the merger. See, e.g., Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477 (1977)(rejecting antitrust standing of competitors seeking to block an acquisition on the basis that it would concentrate the market, and leave the post-merger firm with lower costs, creating a potential threat to plaintiff competitors).
Regardless, it makes little difference whether Sprint's opposition is motivated more by self-interest than the public interest. However, Sprint has been quite clear in its advocacy before the FCC and the Congress that the objective of its advocacy is to see the proposed transaction blocked.
The Puzzling Perplexity of Sprint's Advocacy Goals
If Sprint's preferred outcome is for the proposed transaction to be completely blocked, then we have to ask, how does this outcome maximize Sprint's self-interest? This is the question that is so vexing to me. After all, if a market becomes more concentrated, and leads to price increases and less innovation, one would expect that the last party to complain would be a competitor remaining in the post-merger market.
It seems obvious that Sprint will only benefit from higher retail prices. Less innovation, as well, would have its rewards in terms of reduced capex pressure, and reduced pressure to constantly roll out new bandwidth-gobbling devices. These are real benefits, so why does Sprint want the merger blocked (vs. "conditioned")?
A true "gambit" requires that a player sacrifice something of value to gain a greater strategic advantage. In this gambit, there are at least two very obvious sacrifices that Sprint is willing to accept from the outset.
The first sacrifice is that Sprint will not seek merger conditions, because (according to Sprint) there are no conditions that could mitigate the consumer harms created by this merger. This is a "real" sacrifice, because Sprint could have reasonably expected to extract some valuable concessions.
The other sacrifice is much more significant, but has gone completely ignored by the industry insiders and press. The fact is that Sprint, through its advocacy, has disqualified itself from acquiring T-Mobile. So Sprint is not seeking to disqualify AT&T from acquiring T-Mobile, so that it may subsequently acquire T-Mobile for a lower price.
This sacrifice is an unequivocal and inseparable part of its economic analysis of the merger. As Sprint explains, the current proposed merger allegedly increases the HHI by 700 points, based on market share numbers listed. On the other hand, a Sprint/T-Mobile merger would move the same "highly concentrated" baseline HHI up by 500 points. See Table 4 ("postpaid only" column) in the economics declaration in Sprint's Petition to Deny (p. 257 of 377).
It is, therefore, quite clear that Sprint's analysis--if accepted by the government as a basis to block the merger--would also disqualify Sprint and Verizon as subsequent bidders for T-Mobile, thus "cementing" the "national wireless market" (if you buy this definition) as a 3 firm market. Why do I say 3 carriers when we are left still with 4 "national" providers? Because in that world, T-Mobile is fundamentally crippled from a competitive standpoint and that, in essence, isthe big win.
The Gambit Payoff
Consider the advantages to Sprint of a capacity-constrained 3 firm oligopoly market structure.
1) Customer Share/Acquisition. Constructively, T-Mobile will be an island, cut off from ready access to capital from its parent, Deutsche Telecom. Without a "true" 4G network, T-Mobile will gradually lose customers to other carriers in the market. Many would argue that Sprint is the next best substitute for T-Mobile, so Sprint may gain disproportionately from T-Mobile customer defections.
2) Accelerated Growth in Data Services. Let's assume that Sprint (rationally) believes the fact that AT&T is very data capacity constrained. If the government successfully blocks AT&T's proposed acquisition of T-Mobile, the remaining three 4G carriers (remember, under the Sprint theory we virtually ignore other competitors like Metro PCS who may have 4G networks, too) have no real means to acquire additional spectrum capacity.
The number one provider of wireless data service--AT&T--will be supply inelastic in most cities for the foreseeable future (no capability to acquire sufficient spectrum). This puts AT&T in a "shortage" situation, where it must set prices not to maximize profits, vis-à-vis costs, but to increase prices, and reduce output, in an effort to ration service consumption.
Once AT&T is forced to implement "congestion pricing", it is logical to expect that Verizon, the number two wireless data provider, will adjust its own prices in order to preserve its network capacity in a spectrum-constrained market (it can't acquire spectrum either). The only party that "wins" in this scenario is the firm with the largest excess capacity--Sprint--which through its and Clearwire's holdings has more spectrum, and more capacity than anyone else in the market, including AT&T or Verizon. See FCC's 15th Wireless Competition Report, at Table 28 (Sprint/Clearwire has a weighted avg. of 184.4 MHz of spectrum vs. a combined weighted avg. of 173 MHz for AT&T and Verizon Wireless combined)
3) Peace of Mind. Can you ever really put a price on it? With a tight 3 firm oligopoly, characterized by high barriers to entry, Sprint no longer has to "watch its back" as the undisputed "national" value brand.
The Beautiful Genius of Sprint's Gambit
Sprint's analysis virtually ensures a 3 firm oligopoly going forward, because every potential bidder with the experience and financial capacity to acquire T-Mobile is eliminated. T-Mobile lacks the resources to build out a 4G network, and no other carriers have the kind of money they would need to buy T-Mobile, at their present size, and then upgrade T-Mobile's network to being 4G capable. Finally, if T-Mobile has to continue as an independent carrier, their only realistic alternative for offering "national" 4G services is through . . . Sprint's majority-owned wholesale carrier, Clearwire. This is a brilliant gambit.