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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!

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 Press.  See 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?

Two Winners on Deck to Join FCC

Yesterday, the Senate held confirmation hearings on the nominations of Jessica Rosenworcel (testimony here), and Ajit Pai (testimony here) to fill two FCC seats--one of which is vacant, and another will become vacant upon the adjournment of the present Congress.  I have had the privilege to work with both nominees, and this is probably the last time I can respectfully refer to either by their first names (instead of "Commissioner").  I can't think of two better candidates, or more deserving people to serve on the Commission. Sometimes even Congress gets it right.

I worked with Ajit as a colleague at the Antitrust Division.  He's got a great sense of humor, and is a truly committed public servant.  Plus, he's a super-smart lawyer.  I like Ajit a lot, I've worked with him personally, and I'm very proud of him.  He'll do a wonderful job for the public and I really look forward to seeing him make a positive difference at the Commission.

As far as Jessica goes, I've known her for more than 10 years--though I've never "worked with" her in the sense that we both got paid by the same employer--I have worked with her in my capacity as an attorney representing competitive carriers.  Whether as a staff attorney, or a legal advisor to Commissioner Copps, Jessica was always fair, patient, and willing to hear you out.  

She made sure she understood your arguments, even if she didn't agree, and was never dismissive no matter how small the party or their issue of concern.  She is also a super-smart lawyer, and has exceptional political instincts, which will make her seem a lot more like a "veteran" commissioner than most people just stepping into the job.

Both candidates acquitted themselves well in the face of questioning by the Senate Commerce Committee.  Don't believe me?  Then watch it for yourself here.

Finally, Ajit--you did great, brother, and I mean that sincerely. But, on the "speaking truth to power", "keeping it real" front, there's no question that Jessica laid it down and picked it up. 

Check out the hearing at about the 1:08 point where both are asked the same question by Sen. Blunt (R-MO)--about whether the FCC staff or the Chairman released the "staff report and analysis" as part of the Wireless Telecommunication's Bureau order granting AT&T and DT's joint request to withdraw their license transfer applications. See previous blog for background.  Jessica could have hedged, but instead she laid down the stone cold truth.  I love that!

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.

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!"