Results tagged “antitrust”

September 26, 2017 10:15 AM

Section 230: Google's Shield and Its Sword

The irony of Google's riskless "net neutrality" campaign to impose competitive restrictions on other companies, we've noted here and here, is its claims that rules are necessary to prevent ISPs from engaging in the types of monopoly abuse that only it and a few other privileged platforms can profitably employ.  Google's current fight--against lawmakers' efforts to impose responsibility on websites that actively facilitate, promote, and profit from sex trafficking--contains a similar element of hypocrisy.  The principle that Google is fighting against--that websites should bear responsibility for the activities they promote/knowingly tolerate from 3rd parties--is a principle that Google itself has used to exclude competitors from its monopoly Android platform


Section 230 and SESTA

Section 230 of the Communications Decency Act ("Sect. 230") was passed to limit the potentially devastating effect on the Internet development resulting from potential liability of  Internet service providers held responsible for defamatory statements made by their users.  Sect. 230 states that no provider/user of an "interactive computer service" (i.e., a website that provides access to third party content) shall be "treated as the publisher or speaker of any information provided by [a third party]." 47 U.S.C. Sect. 230.  The scope of Sect. 230, as applied by the courts, is so vast as to be virtually unlimited; shielding websites, no matter how complicit they were in the content they distributed, from virtually any tort or state criminal law liability. See, e.g., criticisms here, here, and here.

The Stop Enabling Sex Traffickers Act of 2017 ("SESTA"), introduced by Sens. Rob Portman (R-OH) and Claire McCaskill this past summer, has nearly 30 bipartisan co-sponsors. Earlier this year, the two released a Staff Report of the Senate Permanent Subcommittee on Investigations describing the extent to which the website Backpage.com was actively involved in, and profiting from, the sexual exploitation of children throughout the world--all without any fear of legal consequences.  The proposed legislation would chip away--ever so slightly--at the broad immunity conferred on "information service providers" for the content of third party speakers under Section 230 of the Communications Decency Act.       

The prospect of losing any of its immunity has led Google to mobilize its academics and third parties to fight tooth-and-nail in its defense of Backpage.comYet, though it understands the importance of a website being able to distance itself from the speech of its users, Google recently removed another app, Gab.ai, ("Gab") from its Play Store because, Google claimed, the site did not display the ability to sufficiently control the speech of its users. 

Tolerance for Intolerance

Upstart social media site Gab.ai ("Gab") was founded in 2016 by a vocal Trump supporter and a Turkish Muslim who ardently opposed Trump's candidacy.  See, Complaint of Gab Ai Inc., v. Google, LLC, E.D. Pa. (filed Sept 14, 2017) ("Complaint") at paras. 7-17.  Concerned that Twitter seemed to be excluding speakers based on socially unpopular points of view, the two friends sought to create a more libertarian social media network.   

Gab's platform was made available to beta users on a private invitation basis in the second half of 2016, and was publicly released in May 2017.  Complaint para 10.  Gab "does not sell access to or otherwise 'monetize' its users' personal information."  Complaint 48.  Rather than selling advertising, Gab plans to support the service through paid "GabPro" premium memberships.

Gab is modeled off of Twitter, though it allows its users 300 characters, but Gab also includes some functions from Reddit, and unique features that "'provide people with the tools they need to create and shape their own experience.'" Complaint paras 19-29.  Thus, although Gab has developed a reputation as being more welcoming of "far right" and "conspiracy theory" types, its users can choose to exclude content that they do not wish to see.

Gab maintains community guidelines which prohibit "illegal pornography and terrorism; the posting of confidential information of others; communications calling for acts of violence; promotion of acts of self-harm or cruelty; the use of threatening language; and any other behavior that clearly infringes on the safety of another user or individual." Complaint at 31 (emphasis added).  Moreover, users must abide by its terms of service and privacy policy.  Gab's policies meet all formal requirements for distribution through the two leading app stores.

Gab's app was approved for distribution to Android users through Google's Play Store since its public launch in May. Gab quickly surpassed its founders' expectations and now has 268,000 users, including 3,000 paid accounts, and reached the $1.07 million SEC limit on "crowdfunded" offerings in only 38 days. Complaint 10, 53,and 55.

Intolerance for Tolerance

In the week following the recent Charlottesville tragedy, on August 17th, Google notified Gab that it had "'suspended and removed [Gab's app] from Google Play as a policy strike because it violates the hate speech policy.'" Complaint 138.  Gab contends that Google's purported justification was a cynical attempt to avoid press scrutiny at a time of national concern over extremist groups; and a mere pretext to eliminate a competitor with a business plan (no advertising, no sharing of user's personal information) that could only threaten, and never benefit, Google's advertising business.

Instead, Gab notes that Google well knew that Gab's app does not advocate "hate" (or any other) speech, but consists entirely of user-generated content ("UCG").  To the contrary Gab explains that it has always been compliant with Google's only formal policy for UCG-oriented apps: that such apps must "take additional precautions in order to provide a policy compliant app experience, requiring apps to define and prohibit objectionable content via terms of service, implement a system to report content, and block users." Complaint para 144.

Later, Google offered further justification (not provided to Gab) for its decision in an email to Ars Technica:

In order to be on the Play Store, social networking apps need to demonstrate a sufficient level of moderation, including for content that encourages violence and advocates hate against groups of people. This is a long-standing rule and clearly stated in our developer policies.

Complaint 140.  Gab notes, however, that this "moderation" requirement cannot be found anywhere in Google's developer policies. Gab also notes that Google would not, and does not, place any such requirement on other "social news" apps like Google+, YouTube, or its commercial partner, Twitter.  The only purpose of Google's arguing for such a requirement, Gab argues, is to raise the costs of entry, and to subject competitors to the risk of losing their Section 230 immunity.  

Policies Are Made for Exclusion Exceptions

Gab's contention that Google's policies are being unevenly applied is beyond dispute.  The most cursory search (via Bing) reveals that not only do other social news sites (e.g., Google's partner Twitter) not filter hate speech or pornography, but they actually sell access to the "hate speakers" to their advertisers.


Gab alleges that Google's "policies" exist only to be strategically applied to apps that compete with/offer little value to Google's other monopoly services.  Twitter's value to Google is obvious by virtue of the parties' relationship predicated on advertising-search "cooperation" (non-competition).  Gab, on the other hand, seems valuable only for features Google/Twitter want to copy--like the higher character limit (280) Twitter announced yesterday. Google--by virtue of its access to Twitter's "Firehose" of user data--knows that its partner either fails to moderate, or actively exploits, the hate speech of its own users. If this were really a concern for Google, Twitter would have been out of the Play Store long ago.

The most interesting thing is not that Google opportunistically applies its "social concerns" to exclude rivals.  Google is nothing if not brazen.  After all, this is the company that has its chief lobbyist blog about how much it cares about sex trafficking victims (in fairness, Google was recognized for a $3 million donation in 2013 to help NGO's better share information), while spending twice that much this summer fighting SESTA. 

Google Lobbying 2Q 17 v2.jpg


What is surprising, though (even for Google), is that Google would use the exact same justification to exclude a competitive app--moderation of speech--that it is telling Congress would ruin the Internet if it were applied to known bad actors.  The thing that hurt Gab the most may not have been so much the speech of its users, but the fact that that speech is unlikely to generate any profit for Google. After all, the Play Store is a business and curates its content accordingly.

google play v2.png

May 29, 2015 2:20 PM

The Historical Evidence Supporting the ISP Discrimination Theory

The primary justification for "strong" net neutrality rules is always that there is insufficient competition in the infrastructure services market.  The theory that insufficient competition in an Internet access market enhances the ISP's incentives/ability to discriminate against "off-net" traffic sources (content, applications, or interconnection facilities of smaller rivals) is a foundational premise of the Commission's recent Net Neutrality/Broadband Reclassification Order

Today, we're going to look at the origins of this theory--in competition law--and whether there is any historical evidence to validate this concern.  This may seem risky, because if historical evidence isn't conclusive, it can be claimed as "support" for a lot of different theories. 

giorgio-wheeler meme3.png         
For example, "ancient astronaut theorists" (as the History Channel calls the UFO crowd) point to surprisingly-advanced ancient wonders throughout the world (e.g., pyramids, or other very large inland structures) as "evidence" that aliens were responsible for these accomplishments.  While some [non-History-Channel-viewers] will be inclined to dismiss ancient astronaut theories, these theories cannot be disproved, either.  On the other hand, if the historical evidence is conclusive, it can rule out inconsistent theories.  Is "ISP market share=interconnection degradation" theory at least as viable as ancient astronaut theories?

WorldCom "Will . . . Become the Internet"

The quote above was from an antitrust complaint, filed by one of WorldCom's smaller rivals in the Internet backbone market, in 1998.  GTE Complaint at ¶2.a.  (emphasis in original)  The smaller rival was no beginner, it was GTE--the country's largest integrated local/long-distance telephone company (at a time when virtually all Internet traffic was carried on telephone company facilities). 

Moreover, GTE wasn't crazy to be concerned.  If you had a crystal ball, you could not have positioned yourself better than WorldCom did through a series of acquisitions from '94-'96, which--you may recall--was when the commercial Internet took shape.  By the end of 1997, WorldCom was the largest provider of Internet backbone capacity in the country. 

So, when WorldCom sought to acquire the second largest Internet backbone--MCI--in November 1997, the DoJ was concerned that the post-merger firm would control between 40-70% of the Internet backbone market.  In early 1998, the Economic Policy Institute estimated that 62% of the entire Internet's revenue would need to traverse the MCI WorldCom backbone, and 50% of all ISPs would be dependent on access to the firm's backbone network. 

A Flawed Theory Takes Root

GTE believed so strongly that the MCI-WorldCom merger threatened its ability to compete in both the Internet backbone, and long-distance, markets that it filed its own private antitrust suit to enjoin the MCI-WorldCom merger in May 1998.  In GTE's Complaint, the company explains its concerns:

all of the major backbones . . . are . . . dependent upon each other for interconnection. They thus find it in their independent interests to cooperate to maintain and upgrade the capacity of interconnection among their networks in order to offer their customers ubiquitous, high-quality access to the whole Internet. . . .  By concentrating . . . the two largest Internet backbone networks to create one dominant national network, the merger will give MCI-WorldCom a stranglehold over the burgeoning Internet and the incentive and ability to stifle competition from all other rival Internet backbone operators, including GTE.
GTE Complaint, at ¶2.a.  Interested readers should look at GTE's full Complaint, as (I promise) you'll find it all sounds very familiar. 

GTE's case never made it to trial, because the facts of the Complaint would soon become less clear.  In July of 1998, MCI agreed to spin off its own Internet backbone to Cable and Wireless; after which the DoJ cleared WorldCom's pending acquisition of MCI with a press release.  The FCC issued its Order clearing the transaction soon after the DoJ's Press Release. 

"So Much for Grand Efforts by Regulators to Dictate Outcomes"

MCI's divestiture of its Internet backbone didn't work out as the DoJ and FCC had hoped.  There were soon allegations that MCI had "pulled a fast one," and had not provided C&W much more than the physical assets of its Internet backbone business.  C&W sued MCI WorldCom in March of 1999. 

Undeterred, WorldCom announced it was buying Sprint for $115B in October of the same year.  In November of 1999, C&W aired its grievances at a Congressional Hearing on the Sprint/WCOM merger.  A little over a month later, Carleen Hawn wrote an incredibly insightful short piece for Forbes, entitled "Swimming with Sharks."   

In her article, Ms. Hawn recounts C&W's complaints, but notes significant industry disagreement about which side was to blame.  According to Jim Crowe, founder of Level 3, the divestiture would never have worked as expected by DoJ, because C&W lacked a domestic U.S. network with which to interconnect the MCI backbone network.  C&W would, therefore, have had to purchase domestic Internet transit capacity.  (Note: this would have been right before Internet transit prices began a swift, steep, and inexorable, period of decline.  See, Dr. Peering table of Internet transit prices.)  

Thus, post-merger MCI WorldCom's market position was unaffected by the divestiture, as its share of the backbone market continued to grow faster than rivals.  In January 2000, Hawn states, "MCI WorldCom is simply more dominant than ever," concluding, "so much for grand efforts by regulators to dictate outcomes."  

A Dominant Gatekeeper . . . Isn't Abusive?

But, if the MCI backbone divestiture did nothing to diminish MCI WorldCom's dominance in the Internet backbone market, what was the outcome?  If GTE's theory was correct, MCI WorldCom would now have "both the incentive and the ability to act opportunistically to degrade the quality of interconnection and increase costs for its rivals."  GTE Complaint ¶23. 

Apparently, though, even with 60% of the revenue-generating traffic on the Internet being dependent on its network, MCI WorldCom never found it profitable to act on its incentives/ability to degrade rivals' interconnection terms.  Indeed, there's no evidence they--or any other ISP (either with respect to access or backbone transit)--has ever acted on such an incentive.  But it would take more than a decade for a court to make this finding.  

The Theory Goes to Court

There are two lasting legacies of GTE's theory of dominant ISP discrimination: 1) the general justification for the FCC's current Net Neutrality/Broadband Reclassification Order, and 2) Cogent's peering strategy.  Beginning with its very first ISP peering dispute, with AOL in 2002, Cogent has been the torch-bearer for GTE's never-tested (at the time) theory.  In fact, Cogent has wheeled out this argument every time it's been de-peered (which is a lot--partial list here), and most of the time it files something new at the FCC, or speaks to the press.

So, it was only a matter of time before Cogent tried to really test the GTE theory in an adjudicatory proceeding.  In 2011, Cogent filed a complaint with the French competition authority, alleging, among other things, that France Telecom's peering ratio (of 2.5X) constituted anticompetitive discrimination, as was France Telecom's refusal to unilaterally add capacity in violation of the firm's prior peering agreement.  Customers of France Telecom experienced congestion when downloading content from Cogent client, Megaupload

In many ways the French competition authority was the most sympathetic forum for this claim.  European competition law--with respect to dominant firm behavior--gives much more weight to preserving opportunities for smaller, and mid-size, firms (U.S. antitrust laws tend to focus primarily on economic efficiency).  See here at pp. 5-6/16.  French competition law is more favorable (than E.U. law) to smaller firms versus dominant rivals, and includes the notion of "abuse of a situation of economic dependence."     

But, Cogent could not make the theory overcome its facts; real-life ISPs simply don't discriminate as predicted.  The French competition authority ruled against Cogent.  See summary here.  Cogent appealed the decision, and a French appellate court affirmed, noting that peering was not an "essential facility," and is in no way functionally different from, or inferior to, transit.  See summary here.    

It Costs More $$ to Believe a Theory than Our Own Lyin' Eyes

In May of 1998, the commercial Internet had only been around for a few years.  At the time, GTE's concern that a "dominant" firm would abuse its position to degrade access to, and raise prices of, interconnection facilities needed by its smaller rivals was not an unreasonable concern. 

However, GTE's concern was immediately put to the test in actual market conditions, and it proved inaccurate.  More recently, as noted, Cogent failed to convince a regulator, under the most lenient standards, that it was harmed by the dominant firm's observance of international peering standards.  A French appellate court agreed, and confirmed this finding.

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Yet the "dominant ISPs will harm consumers/competitors" theory--unlike the ancient astronaut theories--continues to pick up traction from sources that should be more skeptical.  But, unlike the ancient astronaut theories, continued belief in the GTE theory is not harmless.  Last week, in a policy memo, Hal Singer of the Progressive Policy Institute describes some of the many costs--in terms of services and innovations foreclosed, and investments forgone--of continuing to believe in the possibility of a theory that our "own lyin' eyes" have never seen happen.


April 10, 2014 2:19 PM

Comcast Wins When "Net Neutrality" Issues Take Center Stage

I guess everyone that watched yesterday's Senate Judiciary Committee hearing on the Comcast-Time Warner Cable merger had a different opinion on it.  I had prepped myself by reading all of those "Comcast owns Washington" and "David Cohen is The Man" articles, but I really wasn't prepared . . . for the awful truth.  See and believe (whole hearing here).


Maybe I'm reading this all wrong, but it looked like the Committee Chairman, Sen. Patrick Leahy (D-VT) pretty much indicated that he's cool with the deal--just, you know, as long as they include some net neutrality commitments, or something.  It was almost as if Senator Leahy was listening to Comcast's radio commercial as he spoke.  So, yeah, that pretty much set the tone.

The only Senators that represented my consumer interests, i.e., unchaining broadband Internet customers from the pay-TV business model, were Sen.'s Blumenthal (D-CT), Franken (D-MN), and Lee (R-UT).  I've already explained that the real problem here is the accretion of power that cable-affiliated RSNs have over pay-TV/broadband competitors.  In other words, this merger will harm the ability of consumers to ever use broadband Internet access--from any broadband provider--as a substitute for subscription TV service. 

The rest of the Committee members were distracted--like toddlers chasing soap bubbles--by the agenda of net neutrality "concerns" that we've seen hyped and re-hyped by the press for the last 3 months.  The reason that these "distractions" consumed the attention they did is, some believe, a sign of Comcast's power to intimidate the "real" witnesses away.  

And, according to this report, Comcast's "casting" of the issues covered in the hearing could not have worked out better for them.  Unfortunately, if the only people who are going to speak up about this merger can't pass up a public platform for their "net neutrality/broadband is a utility" shtick--then Comcast really is in great shape.  

3 Reasons Why "Net Neutrality" Is Comcast's Best Friend

1. The only "managed service" Comcast needs is the one they already have.  I can't say it any simpler than that.  When Prof. Susan Crawford went off the handle a couple weeks ago, at the rumor that Apple might have requested a "managed service" from Comcast, she failed to understand that this is precisely what is needed if the Internet is ever going to become a content delivery rival to TV.  If Comcast made "TV quality content delivery" available to some third party, then it would be available--and that's the point.

If a "managed" video delivery service is not available for wholesale purchase by Apple, then it's not available to any competitor to Comcast's cable service.  The fact is that Comcast will be happy to "swear off" offering managed services, because that's just like telling them to shut the door behind them for all those new markets where they'll be the dominant broadband and subscription TV company. 

2. Internet interconnection is not a merger issue (either).  Senator's Klobuchar (D-MN) and Franken (D-MN) wasted a fair amount of their time and attention on this little canard.  In fact, I'd say this line of questions, more than any other, made David Cohen look like the most reasonable person in the room. 

In the media, this issue is hyped a lot by Stacey Higginbotham from GigaOm.  She loves this issue--writes about it constantly (see), even when Comcast isn't buying its rivals.  Not surprisingly, a few days before the hearing, she writes, "expect more questions about paid peering and the Comcast merger."  

The reason this line of inquiry helps Comcast avoid harder issues is that buying transit is a long-established, industry-wide practice, and would exist even if Comcast was a "common carrier." Neither the FCC nor the DoJ, is going to do anything to change this practice in a merger review.

3. Data Caps.  The essence of this complaint is that the heaviest users don't like the ISP's pricing structure.  This complaint, like the previous issue, is a quixotic attempt to establish price regulation on ISPs. 

The "data caps" issue is only an issue for the highest use consumers--who want the lower use consumers to subsidize their consumption.  These people share the Reed Hastings view of net neutrality--averaging out the restaurant bill is fair, especially if you're the only guy drinking $100 champagne. 

At the hearing, TWC said they deal with this issue in an interesting way: they don't impose caps, but if a customer agrees to not exceed a certain amount of data downloads (and be subject to throttling, if they go over), the consumer gets $5 off their monthly bill.  My guess is that Comcast will have no problem offering this one up. 

Prognosis

Look, the net neutrality people aren't the "bad guys" here.  But, if a significant part of the merger opposition is ceded to the usual suspects--the same folks that seem intent on recycling their same net neutrality arguments, no matter the forum--then that's a shame. 

This merger squarely presents the DoJ and the FCC with a very fundamental "crossroads" choice--the future of competition for the broadband Internet versus the cable TV business model.  The public interest cannot settle for a bunch of buttercup-and-whipped-cream "commitments" to net neutrality.  The consequences are too high. 

I wanted to end on a cheerful note, so I'll leave it at this.  Remember, kids, while advocacy from 2005 ages poorly, this still-super fly Chamillionaire video never will.  Enjoy!
 

Maybe, I'll send some "Chamillitary" gear over to Prof.'s Crawford/Wu, and Free Press.  So, you know, at least the crew can be dressed in the "era-appropriate" pop fashion when they hit the NPR circuit.

March 20, 2014 11:02 AM

How the FCC Looks at Sports, Blackouts, and Broadband Consumers

The first day of March Madness is one of the greatest TV watching days in America, made even better by our special devotion to drinking and gambling.  Monday's article on Recode reminds us, though, that broadband-only consumers will be forced to spend this great national holiday watching TV in a bar.  

wheeler_zero_sign_2_caption.jpgThe value consumers place on sports content is as obvious as the rising prices of subscription TV.  But, sports content, and its regulation (or lack thereof) can also provide some insights into the FCC's priorities, and the relative value that the FCC places on the sports consumer (vs. the sports programming distributors).  It is also interesting to compare how the FCC views sports content distribution practices with how a court might view the same practices under the antitrust laws.

The FCC On Sports Blackouts

A good way to see just how the FCC views sports content consumers, relative to broadcasters and pay TV providers is to look at the FCC's NPRM to eliminate its sports blackout rules.  The proceeding began in November of 2011, when a group called the Sports Fan Coalition (Public Knowledge, Media Access Project, and some sports fan sounding groups) filed a petition to eliminate the rules.  

The petitioners were absolutely right and reasonable.  The FCC should have simply said, "we agree--and we're actually a little embarrassed that the rule was adopted at all, much less still on the books."

In reality, it took the FCC two more years to unanimously approve . . . a Notice of Proposed Rulemaking to ask questions about the effects of "repealing" the sports blackout rules (that it had no clear authority to adopt in the first place).  To reassure industry that the FCC hadn't found religion, Acting Chairwoman Clyburn was careful to explain that, "[e]limination of our sports blackout rules will not prevent the sports leagues, broadcasters, and cable and satellite providers from privately negotiating agreements to black out certain sports events."

Because, you know, what could go wrong with private blackout agreements between leagues, RSNs, and their MPVDs?  It's not like the agreements could be more anticompetitive than the rules themselves, right?

A Year Earlier, In a Court of Law . . .

In December 2012, a federal district court in New York issued an opinion refusing to dismiss antitrust complaints filed by TV and Internet consumers against Major League Baseball, the National Hockey League, Comcast, DirecTV, and other affiliated RSNs.  (Yes, the defendants are the same parties the FCC "will not prevent" from entering into private blackout agreements.)  The Southern District of New York ruled that the complaints presented a "plausible" claim that blackout agreements between the baseball and hockey leagues, and Comcast, DirecTV, and their RSNs were being used to eliminate Internet competition, require customers to purchase from MVPDs, and generally increase prices to consumers.

Here are some excerpts from the court's opinion describing how real consumers view the types of agreements the FCC "will not prevent" (internal quotes refer to the plaintiffs' complaints):

Plaintiffs challenge "defendants' . . . agreements to eliminate competition in the distribution of [baseball and hockey] games over the Internet and television [by] divid[ing] the live-game video presentation market into exclusive territories, which are protected by anticompetitive blackouts" and by "collud[ing] to sell the 'out-of-market' packages only through the League [which] exploit[s] [its] illegal monopoly by charging supra-competitive prices."  Opinion, at 2. Emphasis added.

The Complaints allege that the "regional blackout agreements," made "for the purpose of protecting the local television telecasters," are "[a]t the core of Defendants' restraint of competition." "But for these agreements," plaintiffs allege, "MVPDs would facilitate 'foreign' RSN entry and other forms of competition." Plaintiffs argue that the "MVPDs also directly benefit from the blackout of Internet streams of local games, which requires that fans obtain this programming exclusively from the MVPDs." Id. at 8.

Back at the Commission . . .

Public comments on the FCC's sports blackout NPRM were a filed a few weeks ago.  Major League Baseball does not typically blackout telecasts in response to gate sales.  But, realizing that its own private blackout agreements may soon be illegal, the MLB, predictably, argues the FCC rules are still needed--as an anticompetitive backstop to the anticompetitive agreements the FCC "will not prevent."  Of course, the MLB doesn't tell the FCC why it might not have as much access to private blackout agreements in the future.

In its comments, the Sports Fan Coalition devoted a several pages of its comments to explaining (as then Acting Chairwman Clyburn noted) that, even without the FCC's rules, anticompetitive private blackout agreements will still be available to the leagues, the RSNs, and the big cable and satellite companies.  But, the SFC is simply responding to the FCC's primary concern in the NPRM.

full fcc at meeting_caption2.jpgFCC Priorities: TV, TV, and TV

The contrast between the federal district court's skepticism and the FCC's comfort with private blackout agreements could not be clearer.  It is notable, but not terribly surprising, that there is no reference to the two year old consumer antitrust cases anywhere in the sports blackout docket; not in the original petition, the FCC's NPRM, or in any party's comments.  It's almost as if the FCC and sports consumers are in different worlds.    

If you just read the FCC's press releases, and the speeches from the Chairman and other Commissioners (and their tweets), you might think broadband Internet was a huge priority.  Yet, it's difficult to reconcile the FCC's statements with the fact that the Commission tolerates agreements by regulated TV distributors (broadcast, cable and satellite) that require sports leagues/teams to refuse to deal with broadband-only consumers on any terms for "in market" games.

The Chairman says that he will target legal restrictions on the ability of cities and towns to offer broadband service.  I'd be more impressed if he targeted restrictions in sports content distribution agreements that intentionally reduce the value of the broadband Internet to all consumers.




November 4, 2011 3:03 PM

The Walking Dead: Still Walking, and Still Dead

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

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?

C Spire

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.

What's Next?

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.

September 23, 2011 11:34 AM

Sprint's (Busted) Gambit: The Whale No Litigate

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.

Courtroom Caprice

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. 

But then Mr. Hesse went on to clarify, on behalf of the United States, that the government wasn't all that committed to the HHI thresholds listed in its complaint.  Said differently, the elimination of T-Mobile as a "maverick" competitor wouldn't be nearly as threatening to competition--in the view of the United States--if a nice firm like Sprint were the purchaser. 

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. 

Requiem

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.
 
September 7, 2011 1:21 PM

Sprint's Gambit: The Whale No Hesitate

A couple weeks ago, I explained how Sprint's "go for broke" gambit produces the most favorable outcome for Sprint, with regard to the AT&T/T-Mobile merger. I must be Sprint's good luck charm, because the day after I published that post, Sprint announced it would be getting the new version of the iPhone at the same time as AT&T and Verizon.  

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.


Continue reading Sprint's Gambit: The Whale No Hesitate
August 23, 2011 9:54 AM

Sprint's Gambit

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")? 

The Gambit

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, is the 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--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.
 
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.

May 10, 2011 7:53 PM

Handicapping "Uncle" T-Mo on the DoJ Merger Track

It's that time of year again--Triple Crown Season--with the first leg, the Kentucky Derby being won by "unthinkable" 20:1 longshot, Animal Kingdom.  Interestingly, the jockey aboard Animal Kingdom, John Velasquez, was supposed to ride one of the top favorites, Uncle Mo, before that horse was scratched the day before the Derby.

Ironically, Velasquez won his first Derby aboard a horse that most handicappers had dismissed as "unthinkable" with the most superficial of glances (Animal Kingdom had never raced on dirt), ignoring the fact that he had won his last two races on artificial surfaces (which closely resemble the dry track of Churchill Downs on the day of the Derby).  The lesson: sometimes it pays to resist the temptation to make a cursory judgment, based on the most obvious, and potentially irrelevant, information and do a little more analytical handicapping.  

With this recent lesson in mind, let's disregard (for a moment) that some have called the AT&T/T-Mo merger "unthinkable", based only on the casual observation that the number 2 national mobile wireless carrier is proposing to acquire the number 4 national mobile wireless carrier (notwithstanding whether "nationwide" is even a relevant market).  Instead, let's take a little deeper look at the Department of Justice's past performances with mergers similar to AT&T's pairing with "uncle" T-Mo.  Hopefully, this handicapping exercise might offer (at least) a thoughtful conjecture about the competitive effects of this merger.

If you're not familiar with horse handicapping, there are only a few basic principles.  The most important principle of handicapping is that mature horses generally run "true to form."  Another (somewhat obvious) aspect of handicapping is that you never get a perfect prior snapshot of the race you are looking at--the horses are always different, as are the tracks, the surface conditions, and distance.  Therefore, you have to analyze a race based on the past performances that seem most analogous to the race you are looking at.

So, let's give this a try, and try to see if we can get some insights into how "uncle" T-Mo might run on the DoJ Merger Guidelines course.  At first glance, it might be tempting to just go back and look at the last big wireless merger--Verizon/Alltel--and place bets based on that merger.  As superficially attractive as this merger might be, it's misleadingly obvious.  

Here's why I'm not going with VZ/Alltel,  First, the mergers might have different motivations, and, therefore, expected competitive effects.  In the present case, it seems clear that the T-Mo acquisition was entirely motivated by AT&T's spectrum starvation, and T-Mo's capital crunch.  As such, the merger may have output enhancing effects that were not part of the VZ/Alltel analysis.  Second, VZ/Alltel was analyzed by different Antitrust Division leadership (the deal was approved before the last presidential election).  Third, the last wireless deal was analyzed under the 1997 Horizontal Merger Guidelines (the 2010 Guidelines aren't a big change, but they do put "effects" front and center, and aren't as stringent on product market definition).  Finally, the VZ/Alltel Complaint relied on the fact that VZ and Alltel were each other's closest rival in every market subject to divestiture. Para. 17. This indicates heavy reliance on the "unilateral effects" theory.  Guidelines, Section 6.

The "unilateral effects" theory is based on the premise that in a differentiated market, market shares are a proxy for consumer preference.  Thus, if a firm is acquiring its next-closest substitute, it can profitably raise prices on the preferred service and capture most "lost" sales even holding prices constant for services of the next-best rival.  In the present merger, AT&T explains why the facts here do not support a "unilateral effects" theory. See Carlton Declaration

Since we don't have an "apples-to-apples" comparison of wireless mergers based on new and old Guidelines/Division leadership/similar facts, I'm going to go with the most recent "similar" past performance:  the Continental acquisition of United Airlines, consummated in September of 2010--after the new Guidelines were adopted, and analyzed by current Division leadership.  Why this merger?  

Well, for antitrust purposes, the airline industry is a good industry to compare to wireless in that the service being offered (the "product market") is very similar: the transportation of people (or information) from one point to another.  The "product market" is the same throughout the country, and the same between firms.  And, the geographic markets are all similarly local:  a traveler living in Charlotte is not going to drive 4 hours to Atlanta just to take advantage of a larger number of carriers flying to Los Angeles.  Wireless service is no different, and the Antitrust Division has always defined geographic markets by smaller local areas.  

So, given the similarities, let's apply the Continental/United analysis to AT&T/T-Mo.  According to a post-announcement study by GAO, the Continental/United combination would reduce the number of competitors from 5 to 4 on 387 city pair routes, from 4 to 3 on 454 routes, from 3 to 2 on 120 routes, and from 2 to 1 on 10 routes.  The outcome?  The merged firm got approval after agreeing to "fix it first" (fixing the problem prior to consummation) by leasing 36 slots at Newark.

AT&T, on the other hand, has only identified 29 markets (where the FCC spectrum screen has been reached) that would even go from 4 to 3 as a result of the merger.  See Appendix C.  Even looking back to the VZ/Alltel merger, the DoJ seemed to view 3 as the number of competitors that a market would need in order to be effectively competitive. See para. 13.  

This seems more than reasonable because, there is no evidence that "nationwide" carriers (like AT&T and T-Mobile) practice geographic price discrimination.  Thus, the post-merger firm will still have to set prices based on the average number of competitors in which most of their potential customers reside.  In other words, if 90% of the potential customers have 5 or more choices of providers, then prices are set based on these market conditions.  The other 10% of the post-merger firm's customers receive the benefits of the more competitive market prices.

So, if antitrust enforcers run true to form--and they should (which is the main reason for having "guidelines")--I would have AT&T/T-Mo as more of a favorite than Uncle Mo would have been had he run.  While there will certainly be some markets in which the post merger firm exceeds what the government may regard as tolerable spectrum/concentration thresholds, these will be a small minority of markets. 

Thus, through a little handicapping, we can see why AT&T's $3 billion "break up" bet makes sense. And, what makes more sense?  The public wins when AT&T's bet pays--in the form of increased wireless broadband capacity that otherwise would not be available to consumers anywhere near as quickly from either firm separately.