Results tagged “wireless competition”

January 18, 2017 10:01 AM

Wheeler's Last "Because-I-Said-So"

Last Wednesday, January 11th, we were treated to what is hopefully the last instance of Chairman Tom Wheeler's "because-I-said-so" policy-making, when the FCC released a "Report" from the Wireless Telecommunications Bureau ("WTB Report") regarding the WTB's "Policy Review" of the sponsored data and zero-rated offerings of major wireless broadband ISPs.  The WTB Report asserts that it is applying the Commission's "General Conduct Rule" in its 2015 Open Internet Order ("Order")  to 4 offerings from 3 carriers (AT&T, T-Mobile, and Verizon Wireless).  The WTB Report concludes that AT&T's "Sponsored Data" offering, and Verizon's "FreeBee 360" plan "present significant risks to consumers and competition in downstream industry sectors because of network operators' potentially unreasonable discrimination in favor of their own affiliates."  WTB Report at p.1.

 

Commissioner Ajit Pai, in a separate statement,  decried the FCC's "midnight regulation of free data."  Commissioner Pai also succinctly identifies one of the major errors in the WTB Report's application of the Commission's Rules, noting that the plans "are popular among consumers precisely because they allow more access to online music, videos, and other content free of charge."  Pai statement (emphasis added).

 

As Commissioner Pai implicitly notes, the Commission's "General Conduct Rule" is, on its face, consumer focused.  Yet, the WTB's analysis ignores the market targeted by the plans, and their corresponding consumer benefits. 

 

The WTB Report Analysis Ignores the Open Internet Order

 

The WTB Report notes that it "expresses no concern with retail zero rating per se." Report at 1. Rather, the report notes that FCC acknowledged the potential benefits of zero rating in its Open Internet Order.  Specifically, the FCC noted that,

 

evidence in the record suggests that these business models may in some instances provide benefits to consumers, with particular reference to their use in the provision of mobile services. Service providers contend that these business models increase choice and lower costs for consumers.

 

Order at para 151 (emphasis added and internal citations omitted).  While not explicitly mentioned by the Commission in its Open Internet Order, the WTB Report argues that "[t]hese benefits may include increased video competition by facilitating the availability of over-the-top (OTT) offerings." WTB Report at p.1.

 

Thus, the Commission recognized that a potential benefit of zero-rating, in the provision of mobile broadband Internet access services, would be greater competition in the broadband Internet access market.  On the other hand, the specific potential benefit mentioned in the WTB Report is in the increased availability of OTT video offerings.  This difference is important, because, as noted by Commissioner Pai, the WTB Report does indeed ignore the benefit of enhanced competition in the primary market: the market for mobile broadband Internet access. 

 

The WTB Report Misapplied the Commission's General Conduct Rule

 

With respect to carrier-specific zero-rated data promotions, the WTB Report focuses its criticism primarily on AT&T's "Sponsored Data" program.  This program allows AT&T Wireless subscribers, who also purchase AT&T's "DirecTV" or "DirecTV Now" subscription television services, to watch that video content without accruing data usage charges. 

 

The Commission's General Conduct Rule, provides that a broadband ISP "shall not unreasonably interfere with or unreasonably disadvantage" either, 1) a consumer's ability to access Internet applications/content/services, or 2) an edge provider's ability to provide any application/content/service to consumers.  See Order at para 136 (emphasis added and internal citations omitted). The WTB Report notes that among the "guiding factors" identified by the FCC in the application of this Rule, the WTB chose to focus primarily on "competitive effects." See Report at 10, and Order at para 140.

 

Given the emphasis on the word "unreasonable" in the FCC's General Conduct Rule, one would expect that any "competitive effects" analysis under the rule would look a lot like the "Rule of Reason" in antitrust analysis under Section 2 of the Sherman Act.  This analysis looks at the intent of the conduct in question, as well as its effects, in terms of whether the conduct increases or restricts consumer welfare (output) in the relevant market.   

 

The WTB Report notes that its concern is "that AT&T offers Sponsored Data to third party content providers at terms and conditions that are effectively less favorable than those it offers to its affiliate, DIRECTV."  WTB Report at 13. This, the WTB argues, will "likely obstruct competition for video programming services delivered over mobile Internet platforms and harm consumers by inhibiting unaffiliated edge providers' ability to provide such service to AT&T's wireless subscribers." Id.

 

There are several problems with the WTB Report's "competitive effects" analysis.  First, the WTB Report never defines a market, much less attempts to assess AT&T's intent in offering the service, or to determine the actual consequences of AT&T's Sponsored Data program in that market.  Instead, the WTB Report seems to regard its analysis as more of an exercise in imagination, asking, "Could there ever be a situation in which future output could be limited as a result of this plan?"    


Mobile Broadband Competition Expands--Rather than Restricts--OTT Video Availability

 

The WTB Report's own description of all carriers' zero rated data plans makes it clear that the purpose of each plan is to entice mobile broadband Internet consumers to use their service instead of that of a competitor.   This point could not have been made more clearly by T-Mobile's prompt response to AT&T's Sponsored Data program--in which it offered AT&T Wireless customers a free year of DirecTV Now.  

 

In fact, the original provider of AT&T's Sponsored Data with DirecTV was competitor Sprint, which offered new DirectTV customers a free year of wireless service in "celebration" of AT&T's purchase of DirectTV--well over a year before AT&T came out with its DirecTV/mobile broadband offer.  The purpose of sponsored data is obvious in the competitive effect that each new offer sparks in the marketplace--more access to Internet content at a lower price--and this is what makes mobile broadband Internet access the relevant market.

 

But, what about that hypothetical future OTT service?  As every mobile broadband provider has more video content available--without charge--to its subscribers than ever before, what is clear is that mobile Internet video content has grown as a result of sponsored data, and not in spite of it.   

October 3, 2013 4:32 PM

Public Knowledge's Analytical Leap

On Monday, Public Knowledge, Consumer Action, and Writer's Guild of America, West filed a Petition to Deny AT&T's requested license transfers to facilitate their proposed acquisition of Leap Wireless.  The Petition claimed that the proposed acquisition of Leap Wireless will reduce competition in the market for "prepaid wireless" services; a market which Public Knowledge contends is characterized by lower income consumers, who are more price-sensitive than "postpaid" customers.

The Public Knowledge, et al., Petition is interesting, not for the purpose for which it is offered (a last minute excuse to extract "concessions" from a merger whose review should have been long concluded), but for the flaws in the Commission's wireless competition framework that it exposes.  First, let's dismiss the Petition on its own attenuated logic, because this will lead us to the more interesting problem highlighted by the Petition.

The "Need" for Conditions?

Let's go ahead and assume the Petition's premise--that the relevant product market is prepaid wireless services.  Petitioners also allege some amount of increased concentration in this market, post-merger.  But, what are the consumer harms?

 The alleged harms from the merger's concentration, for which the FCC is urged to adopt conditions, kind of make you wonder how much of "prepaid" do the Petitioners really understand.  For instance, the Petitioners take a bunch of AT&T statements out of context in order to come up with this crazy inference, "[i]n other words, far from allowing customers to retain their current wireless offering from Leap, AT&T has announced its intention to migrate Leap customers from their current low-cost, low-fee plans to AT&T's more costly pre-paid offerings as quickly as possible." (Petition p. 21/25)

Think about it.  One of the distinguishing features of prepaid service is that it doesn't require a contract.  So, if AT&T doesn't offer these customers terms that are attractive to the customer, the customer is free to move to one of the other service providers who serve over 80% of the prepaid market!  In other words, if AT&T doesn't do right by the Leap customers, AT&T loses a whole lot of acquisition value, as customers migrate to more attractive offers of competitors.

Defining the Prepaid Market

The definition of the market is, in any case, the most interesting problem underscored by this Petition.  The Petition starts with the overall size of the prepaid wireless market in terms of number of subscribers, as identified by the FCC in its most recent Wireless Competition Report (accurate as of the end of 2011), as being about 71 million.  The Petitioners then count up the number of prepaid subscribers reported by the 4 national facilities-based carriers and Leap in their most recent financial reports (results in a slight overstatement vs. 2011) as the revised "market."

The Petitioners arrive at the "really relevant" relevant market of 48 million subscribers by using the FCC's convention of not assigning market shares to MVNO competitors when analyzing competition in the wireless market.  However, while that approach may not result in a tremendous difference when looking at national figures for all wireless consumers, using this approach for the smaller, and more dynamic, prepaid wireless submarket simply does not work.

First, it should be obvious that failing to include firms which meet a third of the entire market's demand (71 million minus 48 million) cannot result in a sound analysis.  Further compounding this problem is the fact that the single largest firm in that market--Tracfone, with over 21 million customers--escapes the analysis.  If the single most successful firm in this market does not need network facilities, what can be the justification for excluding them?

This question, though, raises another question.  How do you count the wholesale sales of the facilities-based carriers?  Because, while the Petitioners infer that prepaid is a neglected market, what with its smaller EBITDA margins than postpaid retail sales, the only thing more attractive than low prepaid margins for some carriers is the prospect of even lower EBITDA margins moved in volume--a/k/a wholesale.

How else do you explain that, while AT&T has a little over 7 million prepaid customers, they supply more than twice as many customers through their wholesale channel?  See here at 15/16. Of course, this has always been the problem with a myopic focus on margins--because margins are only half of the profitability equation, which is profit margin (such as EBITDA) multiplied by sales volume.  Nonetheless, these heavily-discounted sales units are ending up somewhere, and--as a percentage of total market--wholesale sales disproportionately end up in the prepaid market.

Still, you can't necessarily fault the Petitioners for not addressing this issue in their market definition, because not all carriers even include wholesale sales--either as a revenue number or a number of customers number--as a separate item in their public financial disclosures.  This is an issue that I have written about before here, but, if the Commission is really going to try to engage in meaningful submarket analyses, they will have to get a handle on these numbers.  

The only subset of wireless revenue that is growing as fast as prepaid is wholesale--which is growing at a faster rate.  Moreover, due to the fact that the Lifeline fund is expanding at something like twice the rate of the galaxy--and this growth is being driven by MVNOs providing prepaid service--the overall size of the prepaid market is, no doubt, substantially larger today than at the end of 2011.  While this fact should substantially lessen concerns about the present merger, the larger problem is that unless or until the FCC wants to figure out wholesale, or count MVNO competition, the Commission will remain unable to say anything meaningful about competitive conditions in the important, and growing, prepaid wireless market.

May 1, 2013 11:12 AM

What's the [Low] Frequency, Kenneth? The Government's Uniquely "Consumerless" Concept of Competition

Has anyone else noticed how nutty the news stories have become about the FCC and DoJ fight to promote wireless competition?  Here are some examples: this and this, but I'll summarize for you.  First we have the DoJ "letter" to the FCC; a letter which I think the FCC probably sent the DoJ along with a self-addressed, stamped envelope a few months ago.

I mean, seriously, how could two separate agencies--both independently, and within six months of each other--come up with the same notion that the next available spectrum to be auctioned would be put to its best use by Sprint and T-Mobile (who had not even bid on spectrum the last time it was available) because of its radio frequency characteristics?  That last part was highlighted because it's like the peanuts on top of the walnuts on top of the almonds in this all-nut sundae of a theory.

Like most tin foil hat theories, this one has a small kernel of logic.  For a smaller carrier, especially a new entrant, low-frequency spectrum provides a lot more value per cell site--and requires a lot less cell sites--for a carrier to achieve adequate coverage. But do the FCC and DoJ want to promote smaller carriers or new entrants?  Of course not; that might provide consumers with some value.  And since the FCC/DOJ believe that only national firms count toward improving competition in the marketplace - new entrants as envisioned by these agencies would fail to meet that goal.

The DoJ and the FCC didn't have this theory of theirs until they also seemed to arrive at the conclusion--as near as I can tell, sometime during their analysis of the proposed AT&T/T-Mobile merger--that mobile wireless competition is best measured by market share on a national level.  And, with a market artificially defined as "national", despite the fact that consumers make choices locally, a "market" could only be truly competitive if each firm's share (of customers, of spectrum, of cool new handsets, and crunchy nut confections) is roughly equal.

Does anybody recognize the problem with this raison d'etre?  Does the conclusion at the end of the last paragraph sound a little like the description of a commodity market?  Yeah, it kind've does, doesn't it?  Are wireless services a commodity market?  Well, the AT&T iPhone crowd from 2007 didn't seem to think so; nor did the Verizon Droid evangelizers from 2009.  So, let's just say no; wireless is not a commodity market.  Like with cars, people seem to take a certain personal pride in their selected combination of network and handset.  

Why would anyone expect that differentiated product markets would result in competitors having a roughly equal share of sales?  After all, some people like (and can afford) fancy overpriced compact cars, while others need pimped-out, baller SUVs because . . . that's just how they roll.  So isn't it nice that we have BMWs and Escalades?  Do they have the same market share?  Yeah, probably, but that's beside the point.

The problem with the government's idea of what competition should look like is that it starts from a lot of flawed premises--all of which come from the same flawed premise: consumer preferences don't count.  The relevant geographic market is national, not because this is the way consumers actually purchase wireless service, but because this is the way the government likes to look at it.

To the government, market shares are only unequal because firms have unequal amounts of low frequency spectrum, and not the other way around.  They don't seem to understand that AT&T and Verizon have customers that, for the most part, have chosen not to buy service from at least 3 other firms.  Now that's competition.  

Why doesn't the government just reconcile itself to the reality of consumer driven competition and "wreckanize" that the consequences of choice can produce distinct winners and losers?  Yogi Berra told us a long time ago:  "If the people don't want to come out to the ballpark, nobody's going to stop them."  Why do the DoJ and the FCC keep trying?

April 17, 2013 5:13 PM

The DoJ's FCC Alley-Oop

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

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

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

If You're Not Low, You Must Be High

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

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

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

A Low-Down Dirty Shame

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

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

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

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

The FCC Lobs . . . And DoJ Dunks!

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

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

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

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

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

So, do you think any Senators called out William Baer on this at the oversight hearing yesterday?  According to the trade press, the ranking member of the Antitrust Subcommittee, Senator Mike Lee (R-UT), expressed concern that the Department was suggesting to the FCC that AT&T and Verizon were warehousing spectrum.  You bet he did--because us Lees just happen to know a f@$k-ton of stuff about telecom and antitrust.
April 1, 2013 12:04 PM

Wholesale Wireless Competition Is Important: The FCC Should Care More

About a week and a half ago, the FCC released its 16th Wireless Competition Report.  Among the significant data collected and presented in this Report, there is one important, and growing, indicator of wireless competition that the FCC desperately needs to better understand: wholesale wireless competition.  

Based on my experience at COMPTEL, I know that a healthy wholesale market is one big indicator of effective retail competition.  Because, hey, anytime a retail competitor doesn't have to rely on regulatory compulsion to obtain wholesale access, that's a pretty good indicator that the facilities-based carrier doesn't think it has a whole lot of market power to protect.

The good news is in this Report is that the wholesale wireless segment is getting "healthier" at a faster rate than any market segment.  While still a relatively small number of total wireless connections, wholesale connections grew at the fastest rate of any service type measured by the Commission--almost tripling in the 2 year period 4Q 2009-4 Q 2011. Rpt. para. 250.

The FCC's numbers are telling us that wholesale competition is on fire.  But when you try to figure out what this really means, well . . . the Commission doesn't seem too sure.   

Understanding Wholesale Wireless Competition

The FCC introduces us to the wholesale market in paras. 29-36, and it explains how it uses wholesale data for purposes of calculating market concentration in paras. 53, and 57.   The largest use of wholesale wireless service is by mobile virtual network operators (MVNOs).  These service providers rely on the facilities of other carriers for their mobile service, but handle every other aspect of the customer's account themselves.  

Because wholesale wireless relationships are voluntary, we have to presume that both the buyer and the seller expect the relationship to be beneficial.  That presumption alone, though, does not tell us too much about how wholesale sales affect retail competition. According to carriers, such as Verizon, a carrier's relationship with its MVNOs is fundamentally "arm's length." Report n. 102.  And, why wouldn't it be?  Wholesaling at arm's length has long been a routine part of the wired telecommunications world.

Wholesale Confusion--Some Say . . .

Well, the FCC's not so sure.  Take a good look at the FCC's explanation of the wholesale industry (paras. 29-36), read all the footnotes, and it becomes clear that no less than two academic articles (cited in n. 109), and one report by an "industry analyst" (providing his "predictions" for 2011) (n. 110) characterize MVNO "competition" as something less than the real thing.  The only one of these sources freely available on the Internet is the report by the analyst for the Yankee Group, available here.

The Yankee Group report is a relatively short article with some of the analyst's "4G" predictions for 2011, and a brief summary of the analyst's thinking in making the prediction.  Although, the "predictions" don't seem to be much more than the author's personal opinions, the FCC cites the explanation behind a single prediction in order to characterize the nature of MVNO/network operator competition.  

For example, in n. 110, the FCC cites this document as the basis for this insightful gem, "Like a small bird on an elephant's back, if an MVNO can establish a symbiotic relationship with its host and provide some direct commercial benefits, it can flourish." Yankee Group at 7.   See also, n.123 "[I]t's critical the MVNO does not compete to any meaningful degree with the host."  Id.  MVNOs are also cautioned to never look the host carrier directly in the eyes, as this is seen as a sign of aggression by network operators.

With insights like these, I'm sure readers would like to know how this analyst's "predictions" for 2011 worked out.  Well, the prediction backed up by the insights quoted above was this: "MVNO Hype Will Build, But Most of It Will Lead to Nothing."  

In reality?  MVNOs were able to increase connections by 182% between Q 4, 2010 (when the Yankee Group predictions were released) and Q 4, 2011.  FCC Rpt, Chart 13, p. 159.  This was the fastest one year growth in wholesale connections to date.  Suck it, Yankee Group.

But, Maybe Not?  

The FCC seems to regard MVNO competition as somewhere between the "franchisee" characterization of the non-industry sources, and the "real thing" characterization of some carriers. See, e.g., n. 125 where AT&T's assertion that competition between carriers for a portion of TracFone's 19 million customers has led to lower wholesale and retail prices is balanced against this quote from a 3 year old academic paper:

It is found that MNOs host MVNOs if and only if the latter do not exert a competitive constraint on MNOs' retail businesses. Thus, absent access regulation, MVNO entry may happen but is unlikely to reduce consumer prices.     

Report, para. 35, n. 125.  The problem here is not that the carrier disagrees with the theoreticians, or even that the theoreticians' point doesn't make a whole lot of sense for any wholesaler with less than a 50% retail share.  No, the problem is that the FCC does not seem to have an opinion as to which is more credible.

*     *     *     *     *

If you type the term "industry analyst reports" as a search term in the Report, it turns up four results.  Each and every instance is the Commission relying on "industry analyst reports" as an excuse for why it is unable to account for MVNO competition.  There is no excuse for the Commission not to try to understand and account for the competition provided by MVNOs in its next Wireless Competition Report.  The public needs for the Commission to be the "expert agency" on all things wireless--but especially on the fastest growing customer segment in the wireless industry.

May 9, 2012 6:42 PM

At CTIA: Dropped Opportunites Exceed Dropped Calls

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

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

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

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

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

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

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

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

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

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

December 31, 2011 3:54 PM

The Year of "The Whale"

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!

December 9, 2011 2:20 PM

Merger Efficiencies and the Tech-Nobility

"Public Interest" merger "efficiencies" are in the eye of the beholder.  The term "efficiency" is hardly a precisely-defined, universally-understood concept.  For many, if a merger created more capacity to better serve the basic mobility communications (voice, text, and limited data) needs of those that would otherwise go without these benefits, the merger could be said to be "socially efficient."  

On the other hand, "efficiency" could be considered from an engineering perspective to use the latest technology to squeeze every last drop of bandwidth out of a given amount of spectrum in order to better satisfy the data demands of the most technologically advanced consumers.  The consumers that use these devices most intensively have a powerful voice in Washington, and might be called the "tech-nobility."

Throughout the analysis of the proposed AT&T/T-Mobile merger, the only "efficiency" benefits that have mattered are those that are important to the "tech-nobility."  And who represents the "tech-nobility"?  

Well, it's clear from last week's "Staff Report and Analysis" ("Staff Report"), by who it chose prominently to cite, that the FCC sides with the "tech-nobility"--a group whose views are most stridently expressed by the self-appointed "defenders" of advanced telecommunications consumers--Public Knowledge  and Free PressSee paras 165-245 of the Staff Report. The only potential efficiencies of concern to the Commission are those that can be demonstrated to further wireless broadband deployment.

The Parties' Argument and the Commission's Reaction

Unfortunately for the parties, a lot of their efficiency claims seem to depend on combining their 2G and 3G networks.  The Commission, while recognizing this possibility, seems openly contemptuous that AT&T and T-Mobile would be even operating these networks.  See, e.g., ("While it may be true that the spectrum gained from  control channel elimination could result in increased deployment of advanced technologies it could also prolong AT&T's reliance on outdated and inefficient GSM technology.) Report, para 203. (emphasis added)

Similarly, in paras 216-225, the Commission criticizes AT&T's claims of merger-specific efficiencies, because it believes that AT&T could and should be more aggressively moving GSM devices off its network--though the Commission acknowledges that AT&T has virtually eliminated the retail sale of 2G GSM devices.  For example, while the FCC doesn't dispute that the transaction could provide the parties more "head room" in gradually phasing out their GSM networks, while moving spectrum to "higher" uses, the Commission concludes, "prolonging the use of less efficient technology should not be deemed a benefit for purposes of assessing this transaction." Report, para 221.

Does Anyone Benefit from "Less Efficient" Technology?

Well, the answer is "yes", but the population benefited is only the poor and elderly, and they hardly count as constituents of Public Knowledge, Free Press, and the Commission's "Broadband Nation."  Who says the underserved, including the poor and elderly, benefit from lower priced, simpler offerings?  

The FCC, for one, took this point of view only six months ago in its Wireless Competition Report noting that, "MVNOs [Mobile Virtual Network Operators--companies which buy capacity from facilities-based carriers to create their own product/service offerings] often increase the range of services offered by the host facilities-based provider by targeting certain market segments, including segments not previously served by the hosting facilities-based providers." Wireless Report at para 33.

Unfortunately, in conducting its "efficiency" analysis in the Staff Report, the FCC seemed to neglect the increasingly important role of MVNOs, by ignoring the parties' claimed engineering benefits--which flowed from the bottom up.  The problem is one of bias--toward the "tech-nobility" as represented by Public Knowledge and Free Press.  

You see, neither the Commission nor the interest groups could put themselves in the place of a large carrier with a responsibility to serve all segments of the market--including those segments served indirectly through MVNOs.  AT&T has contractual responsibilities to its wholesale MVNO customers.  Let's consider their "social efficiencies" for a moment, since the Commission ignored this productive use of technologically-inferior networks.

The Poor

Tracfone is the country's fifth largest mobile wireless provider with approximately 20 million subscribers.  TracFone serves the value-oriented portion of the market, including customers poor enough to qualify for Lifeline subsidies.  TracFone offers a variety of affordable plans and phones from readily accessible general merchandisers and convenience stores.  

AT&T and T-Mobile are two of TracFone's largest underlying carriers.  Dislocating TracFone's GSM customers would impose costs on those least able to afford these costs and maintain cellular service.  Is it the best policy for the Commission to choose technological efficiency over social efficiency in order for the merger to be in the public interest?

The Elderly

America's seniors gain two major benefits from mobility--health and safety, and mitigation of loneliness, which often accompanies old age.  These consumers do not, for the most part, use advanced mobile broadband services.  One of my clients, Consumer Cellular, Inc. is the exclusive affinity provider of AARP and focuses on serving America's seniors.    

Recently, Consumer Reports announced that Consumer Cellular was rated highest in customer satisfaction among all mobile wireless service providers.  While Consumer Cellular was ranked highest in customer satisfaction, it should be noted that Consumer Cellular is an AT&T MVNO.  Paradoxically, Consumer Reports also ranked AT&T the lowest of the major carriers in terms of customer satisfaction.  Why?

The simple answer is that Consumer Cellular's customers use phones supported by the 2G and 3G networks for which the merging parties claim the greatest efficiency benefits from being able to combine.  It is also notable, in all the rhetoric surrounding adjacent markets in this merger, that Consumer Cellular offers its customers phones for which it has exclusive distribution arrangements.  These phones are made by Doro and have earned high reviews from consumers and tech experts alike for their performance tailored to the elderly and hard-of-hearing customer segments.

It goes without saying that, if AT&T were to quickly abandon its more "inefficient" networks as the FCC "tech-nobility" would demand, it would be punished for its own innovation targeted at an underserved market.  Thus, it's no surprise why Consumer Cellular CEO, John Marick, sees the efficiencies from the merger that the Commission chooses to ignore.

Who would you trust, an engineering model modified to generate the Commission's pre-determined views on "efficiency" or a wholesale customer, providing what a majority of its consumers believe to be the best mobile service in the country . . . using a network that it believes will become more efficient as the result of the merger?

November 30, 2011 10:47 AM

FCC Dismisses Applications, But Can't Let Go

Yesterday, the FCC issued an Order Dismissing the Applications of AT&T and Deutsche Telecom for license transfers.  This was not unusual.  The way the Commission did it, and the drama leading up to yesterday's events was.

As AT&T's Jim Cicconi succinctly and thoroughly notes in a blog post yesterday, the Commission's action was the only legally correct response to AT&T and DT's request to withdraw their license transfer applications.  So far, so good, but then the FCC decided to include a 109 page document entitled "Staff Analysis and Findings", which is primarily FCC staff's attempt to analyze the merger under Section 7 of the Clayton Act (the subject of pending litigation by the agency charged with enforcing Section 7 of the Clayton Act in a venue authorized to decide challenges brought under that statute)  This is where it gets interesting.

Yesterday's action--the appending of the "Staff Analysis and Findings" to the Dismissal Order--was interesting, not only because it was unusual and unnecessary to accompany an order terminating an FCC matter, but because the Commission seemed so intent on releasing its own primarily antitrust analysis, when the parties are already engaged in active antitrust litigation in a court with the jurisdiction to decide antitrust claims.  

While the Commission attempts to offer some superficially unpersuasive justifications in paragraph 8 of its order, these justifications are laughable. For example, they note that "a lot of people spent a lot of time on this"--in what large matter do they not?  The Commission also argues that releasing the document "furthers transparency"--this is the one that is laughable.  The Commission never releases pre-decisional, deliberative documents.  In fact, there is a Freedom of Information Act exception that allows agencies to withhold exactly this information.

Finally, the FCC notes that "the parties could still re-file."  But, doesn't this argue for just holding on to the original draft order?  Far from persuading, the order's empty reasoning leaves the reader with the question of "why did the Commission really bother?"  

Comm-temptible?

Personally, when I heard the Commission planned to release a report containing the "Commission staff's" opinions (that were allegedly the basis of the draft designation order) along with an order approving the parties' withdrawal of their applications, my reaction was that the agency was engaging in a distasteful, rude, and uncivil disregard for the legal process. After all, the proper authorities were already well engaged in antitrust litigation with the parties before a U.S. District Court.

You would hope that the FCC would show some respect for the rule of law, and the responsibilities of the judiciary, and simply take the action they were legally bound to take--dismissing the license transfers.  But instead, the FCC displayed a relative contempt for the law.

The Commission certainly understood that it was extinguishing its own jurisdiction over the applications it was dismissing. So, what purpose did the Commission have that was so important that would cause it to include--in a dismissal order--its own, non-expert, antitrust analysis that was admittedly not based on solid evidence (which is why the FCC wanted to refer the matter to an ALJ)?  

It's hard to believe that the Commission wasn't aware that it would at least create the perception that it was attempting to exert some extra-legal influence over the pending antitrust litigation.  Thus, my initial reaction--when I heard what the Commission planned to do--was one of disappointment at the agency's disregard (if not contempt) for the integrity of the court proceeding.  

Or Comm-edic?

I spoke to a reporter last night who had talked to a lot of other attorneys.  The reporter wanted to get my "take" on the Commission's action--which I just described.  The reporter told me that I was the only person that had expressed this opinion.  It turns out that most people were focused on the substance of the staff report, and what (generally negative) effect this report would have on AT&T's prospects for its antitrust litigation.

Many people opining on the matter claimed to be under the impression that the FCC was asked to release its report at the request of the Antitrust Division. Personally, I don't believe this to be true, because it just sounds silly on its face.  The basis of this report was a draft order, prepared by Commission staff for the Commission's own internal purposes.  The "draft order" was clearly converted to a "staff report and analysis" in an awfully short period of time, and this is what makes the "Antitrust Division request" theory all the more incredible.

First, what Antitrust Division attorney, working on their own case, would want to be stuck with a report, analysis, and support prepared by FCC staff, and released under a cloud of bias?  It makes no sense.  FCC staff did not write the Division's complaint, FCC staff have not reviewed the same evidence as the Division staff, so it is more likely that the FCC staff report would lock the Division into a weaker case than the Division should be able to make for itself.

Second, why would the Antitrust Division want its case, including supporting materials, laid out for AT&T's inspection for a full two and a half months prior to trial?  What attorney would be comfortable with this arrangement?

Third, whether the DoJ asked for it or not, they now have to deal with the prospect of bias in the eyes of the court.  Even though the defendant is a big company, courts are mindful of fairness.  Any contradictory inconsistency between the Division's actual case and the staff report will be the government's burden to reconcile and justify.

To What End?

There is no good answer for why the FCC included its report in its dismissal order.  By showing bias at this point, can the FCC really re-claim the mantle of the "public interest?"  If the case settles, or the parties win the litigation, can the FCC do anything more than process and approve a new application?  

November 28, 2011 4:33 PM

The FCC's Thanksgiving Week Charade

Last week was a short week for most Americans . . . a time to relax, and enjoy time with friends and family.  While most Americans were doing just that, political types in Washington--like our friends at the FCC--had nothing to do but play politics . . . and play politics they did.  However, what was no doubt intended to be a political game of "chicken", turned out to be just another "turkey" in a week devoted to the turkey.

Here's what happened.  Last Tuesday, on the 22nd, the Commission apparently decided that they had seen enough of the proposed AT&T/T-Mobile acquisition, and circulated a draft order expressing conclusions of "Commission staff" that the proposed acquisition was just bad juju and needed to be rejected by the FCC on "public interest" grounds (assuming the Antitrust Division failed to prove the merger would lessen competition).  The alleged draft order would have required an Administrative Law Judge to hold a hearing in order to validate the harms the "FCC staff" had already identified.  

Stealthy Regulation

Aside from the Commission's pre-holiday timing, the FCC also surprised the merging parties themselves--calling to notify them only hours before going "public" with its announcement.  Perhaps, "going public" is not quite the best characterization of the decision, as the FCC's web page fails to mention this development.  Apparently, only those reporters that could be trusted to keep a secret were privy to the press briefing.  Every seemingly-firsthand report announcing this "news" also includes "boilerplate" similar to this language from the Infoworld article, "FCC officials said in a press briefing in which they spoke under the condition they not be named." 

This Commission has made "open and transparent decision-making" a point of distinction.  While the meaning of this term is open to debate, what is clear, however, is that access to "open and transparent decision-making" is an earned privilege, and not a right.

Jobs Creation: Identity of Investor vs. Amount of Investment

Along with the self-evident statement that would be true of every previous wireless merger the FCC found to be in the "public interest" (that the merger would result in an "unprecedented concentration" in the wireless industry), the anonymous FCC officials explained further that AT&T had failed to prove that the merger was necessary to increase rural broadband coverage, or that the merger would create jobs, and/or prevent job losses. 

The "unnamed" FCC officials, appeared to base their reasoning on a variation of the established principle that "[i]f you have five dollars and Chuck Norris has five dollars, Chuck has more money than you." See generally, Chuck Norris Facts.  But, an FCC that isn't even comfortable "publicly" disclosing their own names at a press briefing cannot be expected to be candid, or cavalier, enough to disclose that they relied on reasoning derived from a "Chuck Norris fact" to further the agency's political interest. 

If this assessment seems a little harsh, let me explain.  Only four days prior to the secret commissioner's other briefing, the FCC issued a very public self-congratulatory statement on their recently-adopted Connect America Fund Order ("CAF Order"), explaining that a broadband development fund not to exceed $4.5 billion dollars/year (comprised of rate-payer "contributions") would generate approximately 500,000 jobs over the next 6 years.  So, the FCC plans to "invest" (through direct subsidies) between $24-$27 billion over the next 6 years to create 500,000 jobs.

On the other hand, AT&T has publicly stated--and the Commission could require--that it will invest an additional $8 billion (above their normal cap-ex budget) over about the same period of time.  It's puzzling that, even by the Commission's self-serving "recovery math", it can't give AT&T credit for its claim that its investment (1/3 of the Commission's total) will produce a comparatively modest 100,000 jobs. After all, if the FCC converted that $8 billion investment into an additional $8 billion subsidy, the same amount would produce about 167,000 jobs over the next 6 years. 

Even if the Commission believes that private investment is significantly less efficient than FCC-directed subsidies, it's hard to believe that AT&T's investment couldn't potentially create at least 60% of the jobs the Commission could produce using an equivalent CAF subsidy. On its face, it would seem as if the FCC is using one set of assumptions for CAF subsidies, and another for AT&T wireless infrastructure investments, but yet this explanation would suggest inconsistent treatment of similar issues--the opposite of open and transparent decision-making.

Why the FCC would use one investment-to-jobs multiplier for its CAF Order, and then--only 4 days later--tell the public that AT&T's substantial incremental merger-related investment would not create jobs is unclear. The only consistent rationale that would allow both claims to stand would be something along the lines of "if the FCC invests $5 in rate-payer funded subsidies, and AT&T invests $5 in private capital, the FCC will create more jobs."  

Not only is this logic tortured, but it borders on Chuck Norris pop culture heresy.  The Commission's fundamental error is in using a Chuck-specific mathematical principle to justify a transparently specious political agenda.  With this information in hand, it is easier to understand why the FCC officials insisted on anonymity at the press briefing.  Unfortunately for the FCC officials, any student of Chuck Norris facts can tell you that, if Chuck knows where Carmen Sandiego is (and, according to the Internet, he does), Chuck will certainly find the FCC officials . . . and the results will not be pretty. 

Even worse . . .

Not only is it bad enough that the FCC wouldn't even publicly disclose who was (indirectly) briefing the "public" in a press briefing, and failed to apply its own investment-to-jobs creation formula consistently, but the Commission compounded these problems by reverting to its  all-too-common "modus operandi" of obtaining its objective through an act of omission. By designating its "concerns" to an indefinite administrative hearing process, the Commission signaled its intent to effectively derail this proposed transaction by outright delaying consummation past the September 20th "drop dead" date.  

Pathetic?  You bet; but this is precisely why there are a number of Chuck Norris facts web sites, and exactly no "FCC facts" web sites . . . .  The Commission should be giving thanks that AT&T and DT saved some piece of the agency's dignity by seeking to withdraw their license transfer request on Thanksgiving Day.  The FCC should hope Chuck will be that gracious.

November 10, 2011 2:14 PM

Even My Boring Blogs Are Worth Reading

I'll be the first to admit that not everything I write is some kind of jewel that's just going to draw everybody in and make salient, compelling points in a hilariously entertaining fashion.  Truth be told, sometimes I don't even try.  While I always write about subjects that hold some interest for me (and try to make points that other people aren't talking about), sometimes I write about things that seem to only interest me.

One of those times was about 6 weeks ago, in a post entitled "Should the Merger Guidelines Come with Guidelines?  The point of the post was that the Guidelines don't really account for barriers to exit (which increase barriers to prospective entry), especially when merger enforcement could exacerbate already-high entry barriers by adding "barriers to exit", which would not otherwise exist.  Does anyone even follow the reasoning that the agency--by undertaking an enforcement action--can change the original characteristics of the market on which its action is focused?  I didn't think so.

BUT, if you did read the whole post, you would have seen this quote "Perhaps China Telecom, Carlos Slim, SingTel, or some other prolific foreign telecom investor, will, at some point, come to DT's rescue?" (emphasis added)   If you read this far, then you wouldn't have been at all surprised to see this story from Bloomberg a couple days ago, announcing that China Telecom plans to enter the U.S. market sometime in 2012.  Interestingly, the President of China Telecom Americas does not rule out entering on an own-facilities basis, noting that "money is not a problem."

So, on the off chance that the government and AT&T are unable to work out a satisfactory compromise that allows AT&T to expand output, protects consumers and rewards DT's substantial investment, it looks like all hope might not be lost for DT.  I write this for you 4 readers that did read that post.  Rest assured, I'm doing my best to provide a thorough analysis of all potential consequences of government actions--even unintended consequences.

If you're one of my few readers . . .  thank you . . . and please give your friends this message: "Telecomsense: Just Shut Up and Read It!"

October 31, 2011 6:16 PM

The Walking Dead

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. 

Happy Halloween--Boo!

*******

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.


Continue reading The Walking Dead
October 21, 2011 11:22 AM

Who Knew? Hu Knew!

Who knew what Hu knew, and when did he know it?  The "who"/"Hu" is, of course (for you merger mavens), Victor "Hu" Meena, CEO of C Spire Wireless--the company formerly known as Cellular South, Inc. (Digression: I'm not sure adding "spire" to a letter is ever really a good sign.  When I was at CompTel, we had a member named ACSI (American Communication Services, Inc.), which changed its name to "e.spire Communications."  You know what happened?  It ex-pired--declared bankruptcy just 3 years later.  According to the pleadings, "c spire" was looking to con-spire with AT&T not to engage in facilities-based service competition; not good, but name-appropriate. See, AT&T Motion to Dismiss, at 1 (p.7 of 18)  Lesson:  if you want a new name, stay away from "spire"--it's just bad juju.) 

The "what", of course, was that Hu knew that C Spire was going to get the Apple iPhone 4S in the coming weeks.  So, why is the "when" so important?  Why is it any of my business, or yours?  Well, if C Spire was just "some company", we wouldn't care--and even if we did--it would be none of our business.

But C Spire is our business . . . for several reasons.  First, we support C Spire.  In fact, in 2010, we gave C Spire over $161 million in "high cost" subsidies--subsidies that the FCC has decided to no longer make available to wireless companies under the "equal support" rule (which provides wireless carriers with the same support as wireline carriers operating in rural areas even though they don't have equal costs). [For total sum of high cost support for 2010, by company, see Tables 3.22, 3.23, 3.25, 3.27, 3.28, 3.29, 3.30].

Second, Mr. Meena used the time of our Congress to explain why the AT&T/T-Mobile merger would have the effect of "foreclosing" access to desirable handsets from smaller regional carriers.  And, finally, about a month ago--on September 19th--C Spire decided to use our judicial resources to press a merger concern (that it cannot get timely, affordable access to popular devices) that it certainly knew to be specious at the time of filing.  See, e.g., para. 26.

So, here's our question, "when did Hu know he was getting the newest iPhone at around the same time as AT&T, Sprint, and Verizon?  I'm guessing it was probably for several months--given C Spire's description of how difficult it is for smaller carriers to get the attention of device manufacturers.  Was it 5 months ago?  Around the time Hu implored the Senate that--if the merger is approved--no one would ever make desirable devices available to small, regional carriers?  

C Spire has about 900,000 customers.  Let's say their average cost for the iPhone 4S is around $300 (in between the $200 and $400 versions).  Let's further assume that C Spire would have to commit to purchasing a not-unreasonable 250,000 units.  That's a lot of phones, and a pretty big investment by C Spire--at around $75 million.  

I have no experience in the wireless service business, or the device manufacturing business, but I'm guessing that a deal like that would take a few months to work out.  After all, the device manufacturer and the service provider have to work out an acceptable price, and unit commitment, that would make a C Spire-specific production run profitable for both parties.  Moreover, this was no small commitment by C Spire--probably half, or more, of its USF subsidies for a year.  A deal like this does not get done overnight.  So what's the point?

Well, C Spire has to convincingly support their theory of merger-specific harm in front of the court on Monday afternoon.  By then, I'm guessing C Spire or AT&T will have provided the court with supplemental information pursuant to Rule 15(d) of the Federal Rules of Civil Procedure.  Come Monday afternoon, C Spire should expect to be asked when Hu knew about the iPhone, and why are they continuing to press what they have already demonstrated to be an unconvincing theory of harm?  

[Since this is my last post before the oral arguments on AT&T's Motions to Dismiss, let me "keep it real"--because no one (not even AT&T) is going to tell you--but the private cases can only be dismissed. Why do I say this?

Because when a business has legitimate concerns about concentration (and possible anticompetitive consequences) resulting from a merger among its input providers, then getting the government to challenge the merger is the name of the game--period.  Seriously; that's the best you can do as a potential "victim".   

Let's think about it.  Imagine you own a car company, and all the tire manufacturers want to merge to monopoly.  Well, you can't sell a car without tires, and a tire monopoly could probably eat an additional $500 to $1000 more out of each vehicle sold.  So you are really invested in getting the government to stop that merger.  

But, here's the deal--and we all know it: if the government doesn't win, then you aren't going to win, either. So why would any rational interested party ever sue on a merger, after the government has already filed to enjoin the transaction?  I've never even heard of such a thing . . .  until now.  Why waste the cash?  

Each plaintiff would be working with the same set of facts and the same legal precedent.  The trials are always before a judge, and never before a jury.  On the same set of facts, you'd get the same judge as every other plaintiff, and you'll get the same verdict when the judge applies the same law to the same facts.  Duuh?!!  

I'm sorry if this is a "spoiler" for you, but I hope you've enjoyed the "Whale" series as well as this post.  Thank you for reading at all.   -Jonathan
]

October 19, 2011 12:06 PM

Even Whales Get the Blues . . .

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?

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.
 
August 2, 2011 11:38 AM

Bored with Stale Rhetoric? Take the AT&T/T-Mobile Cynicism Quiz

I haven't posted anything in a while, and that's because the only thing anyone seems to be focusing on is the AT&T/T-Mobile Merger.  In fact, at this point--during the dog days of Summer--I am genuinely bored to death with the banality of the banter between merger opponents.  If it seems like the same arguments are being made, it's because they are.  
 
Don't believe me?  Then see if you can correctly guess who said what, and when, starting with the proposed 2004 acquisition of AT&T Wireless by Cingular Wireless for $41 billion, which would have made Cingular the largest wireless carrier with a market share of over 40%.  Sounds familiar, no?  So, we'll start there.

Every assertion listed below is (substantively) part of an argument being made by the merging parties or their opponents at the FCC.  All you have to do is guess whether the statement was made previously or now, and whether it was made by a merger opponent or proponent.  We'll score you up at the end to rate your DC telecom cynicism.  

1)  "T-Mobile does not provide a meaningful competitive alternative [to AT&T] as a roaming partner to many cellular carriers and subscribers."

2)  "[T-Mobile] is not a significant competitive constraint on AT&T."

3)  "In many cases, T-Mobile has been unwilling to even enter into roaming agreements with rural wireless carriers."

4)  "At a minimum, the elimination of T-Mobile as a 'benchmark' firm for these purposes [offering roaming agreements to smaller carriers] frustrates the FCC's ability to monitor the emerging marketplace and ensure compliance with the pro-competitive rules adopted by the Commission."

5)  "In fact, the statements made by wireless incumbents [including T-Mobile] . . . make clear they have no intention of offering broadband with the freedom to attach any device and run any application."  [in other words, "maverick" behavior]

6)  "T-Mobile is not merely a direct competitor, but a 'maverick' whose behavior forces pro-consumer responses from larger firms despite T-Mobiles [sic] relatively modest market share."
 
7)  "Consumers make their wireless purchasing decisions at the local level--where they can see the devices, speak with sales representatives about the products and services, and comparison shop among competitors."

8) "The FCC should reject a national market definition.  Wireless is sold as a local product. National coverage and calling plans are one characteristic of the service, but it is bought and sold at the local level."

9)  "[T]here is clearly substantial competition among the national carriers in those portions of the country where most Americans reside, and in many cases additional competition in areas served by regional carriers . . . ."

 
Continue reading Bored with Stale Rhetoric? Take the AT&T/T-Mobile Cynicism Quiz
June 29, 2011 2:01 PM

How I Learned to Stop Worrying and [Like?] the Wireless Competition Report

Earlier this week, the FCC released its annual Wireless Competition Report to Congress. Like last year, the Commission noted the overall complexity of the mobile wireless market, and the adjacent markets in the supply chain for wireless services.  Based on this complexity, the Commission again decided not to make any conclusions as to whether the mobile wireless market was effectively competitive.  Commissioner McDowell fairly expressed criticism that the Commission shouldn't shy away from its directive simply because it is difficult.

I couldn't agree more with Commissioner McDowell.  The FCC's failure to sift through all that complex data and reach a well-supported conclusion means that I had to read the report.  This was, to say the least, tedious--yet informative.  Regardless of what one might think about the Commission's indecision, the Report was obviously the result of a lot of hard work, and the Commission staff certainly deserved the compliments included in the Commissioners' separate statements.

Once you accept that the Commission wasn't going to reach any conclusions regarding the state of wireless competition in its Wireless Competition Report, you cannot help but be impressed by both the (perhaps unnecessary?) ambitiousness of the report, and the conclusion that--by just about any relevant measure--the mobile services market became more competitive over the time period measured.  

Network capacity increased (in terms of network deployment and upgrades), output (as measured by consumer demand/subscribership) increased for both voice and data services, as did consumer choice for rural and urban consumers in terms of number of service providers and services/devices from which consumers could choose.  The number of wireless Internet data subscribers more than doubled between 2008 and 2009.  Through this time period, prices remained low (as measured by the Cellular CPI-Table 19), or declined (for most data users--see discussion at para. 90).


Continue reading How I Learned to Stop Worrying and [Like?] the Wireless Competition Report
May 26, 2011 11:57 PM

House Merger Hearing: Regulatory Complaints Dominated Merger Concerns

Yesterday, the Subcommittee on Intellectual Property, Competition, and the Internet of the House Judiciary Committee held a hearing on the effects of the proposed AT&T/T-Mobile merger.  The CEOs of AT&T and Deutsche Telecom both testified, as did several other parties who either opposed or supported the proposed merger.  

"Vertical" issues (how the post-merger firm could limit access to inputs needed by competitors) dominated the questioning.  However, this being a "horizontal" merger, the witnesses for the merging parties had to keep referring the questioners to FCC proceedings.

Earlier this week, I published a post that referred to most arguments opposing the merger as being essentially frustrations over regulatory complaints that are best resolved by the FCC--as opposed to merger-specific concerns that would not be exist, absent the merger.  The Rural Cellular Association ("RCA") witness, for the most part, made me look like a psychic.


Continue reading House Merger Hearing: Regulatory Complaints Dominated Merger Concerns