TeleComSense

U.S. Mobile Data: More Bricks, Less Straw

Thu, 17 May 2012 15:23:40 -0500

As punishment for requesting their freedom, the Egyptian Pharaoh told the Israelite slaves that they had to maintain their quota of bricks, but with less of an essential input: straw. The burden of meeting demand with less resources applies as well in today's mobile services marketplace. Wireless carriers face demands for greater bandwidth to support growing mobile data services but, for the intermediate term, cannot expect additional spectrum capacity--it's essential input--on either a firm-specific or industry-wide basis.

It's unanimous: no matter who you talk to about wireless data, everyone agrees that "more bricks, less straw" is the unavoidable policy. Thus, as wireless data demand continues to show no sign of abating, wireless service providers will simply have to make do with less than optimal spectrum capacity. So if we're stuck in a "more bandwidth demand, less capacity supply" world, how do we solve the problem of how to ration capacity?

Who Needs Spectrum When You Can Upgrade Your Capacity?

So what's a wireless operator to do? Well, for starters, you upgrade existing capacity like crazy by constantly deploying the most efficient technology. But this isn't cheap. Since wireless data exploded in 2007 with the iPhone, AT&T alone has gone through a 3G upgrade, an HSPA upgrade, an HSPA+ upgrade, and, more recently, is in the midst of an upgrade to LTE.

Other companies have accelerated their own pace of upgrades as well. From December '06 (right before the iPhone launch) through December '11 (when most firms still have a long way to go to realize full LTE deployment) industry capex has increased by almost 50%, according to CTIA (the actual numbers are in a report that I can't afford, so take my word for it). But, even these improvements won't keep up with surging demand.

With No Spectrum Relief In Sight, Do You Play The Price Card?

Given the limited options for rationing capacity another, though unpopular, move is to raise prices. Over the last several months we've seen AT&T raise data prices, after realizing that the government was not--anytime soon--going to allow AT&T to efficiently augment its own capacity. Verizon quickly followed suit. For now, Sprint appears to be content to let its shareholders shoulder the costs of increased wireless data demand. But to be sure, increased demand without increased supply does create network strain--regardless of who pays.

Last week, at the CTIA Conference, Chairman Genachowski maintained/reasoned/disputed that the failure of the AT&T and T-Mobile merger last year had anything to do with AT&T's decision to raise prices. Yet, the Chairman knows better, as he has been a leading prophet of the spectrum shortage.

How to Recover Costs of Spectrum-less Capacity Expansion?

Given the costs of constantly upgrading capacity, how does a carrier manage excess data demand? As I indicated above, raising prices sounds like a simple solution, but must account for the fact that big data users are contract customers. That's how smartphones, and data plans become affordable, and predictable.

You see, the problem with raising prices for wireless data is that you can really only raise prices to the marginal customer (i.e., the person who's not your customer yet). Crazy, right? "Raising prices" is a statement of frustration and designed to curb consumption. Carriers are telling prospective customers that the network is nearing capacity and use of the remaining capacity will cost you. This is a horrible situation--who wants to be the (unpopular Redskins owner) Dan Snyder of wireless data?

If Sophisticated Buyers Want to Subsidize Consumers, Let Them!

Carriers know that raising prices for mobile data, or throttling data speeds to the largest users of mobile data, is no way to treat your biggest fans. But with the popularity of mobile device applications, which constantly stream information to and from the customer's phone, customers can unintentionally (and unnecessarily) stress capacity. Applications can distort data consumption in a way that even the most conscientious web surfers cannot offset.

So, earlier this year, at a conference in Barcelona, an AT&T executive suggested that maybe some applications providers would want to buy capacity in bulk in order to assure their customers that using the desired app wouldn't cause the customer to exceed their usage cap, or become subject to throttling. Not a bad idea, right? I mean the applications developer knows how much bandwidth their customers use, and they have a lot more buying power than the consumer.

Given the public's embrace of mobile data, and the cost of continually augmenting capacity, especially for firms with sub-optimal spectrum allocations, one would think the "public interest" would support options that allow customers to still enjoy wireless data, but at a lower cost/consumption threshold. One would think . . . .

But Don't Tell Public Knowledge!

The AT&T suggestion seemed harmless enough, but the reaction from the self-proclaimed public interest group Public Knowledge was alarmingly critical. Then again, this is the same group that published a paper arguing that all wireless carriers should provide flat-rated mobile data service. The irony, of course, is that flat-rated price structures cannot be profitable unless the majority of users pay for more data than they consume.

The notion of "more bricks, less straw" is, for regulators and service providers, an unfortunate and dystopic reality. Uniquely, Public Knowledge seems to relish the "more megabytes, less capacity" future with a fondness that can't help but be compared with how the ancient Egyptian brick consumers' lobby must have felt . . . right before the brick supply crashed.

At CTIA: Dropped Opportunites Exceed Dropped Calls

Wed, 09 May 2012 18:42:14 -0500

[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?

The Year of "The Whale"

Sat, 31 Dec 2011 15:54:45 -0500

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

Fri, 09 Dec 2011 14:20:01 -0500

"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

Thu, 01 Dec 2011 23:53:03 -0500

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!

FCC Dismisses Applications, But Can't Let Go

Wed, 30 Nov 2011 10:47:55 -0500

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?

The FCC's Thanksgiving Week Charade

Mon, 28 Nov 2011 16:33:47 -0500

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.

H&R Block, AT&T, and the Error of Recency

Wed, 16 Nov 2011 15:13:47 -0500

Last week, the U.S. District Court for the District of Columbia, released its opinion granting the Antitrust Division of the U.S. Department of Justice a preliminary injunction preventing H&R Block ("HRB") from acquiring the stock of "2SS Holdings, Inc.", the maker of TaxACT, a digital "do it yourself" ("DDIY") tax preparation software.

Since this news was released on November 2nd, many have speculated, opined and hypothesized--without basis--that this decision does not bode well for AT&T's acquisition of T-Mobile USA from Deutsche Telecom. According to just about everyone, the impact was decidedly positive for the DoJ's chances to win its case against AT&T/T-Mobile if it goes to trial next February in Judge Huvelle's courtroom.

The simplified reasoning was that because the government had just prevailed on its most recent horizontal merger challenge, it will likely prevail on its next horizontal merger challenge in the same district. These stories were the predictable result of a well-known human behavioral bias, known as the "error of recency"--the notion that humans tend to overweight the value of recent actions. While the "hot hand fallacy" and the "gambler's fallacy" were identified with respect to how humans approach "random" (i.e., "unrelated") events over 300 years ago, these biases continue to persist.

What is interesting, though, is that the "hot hand fallacy" infected all major stories reporting, or commenting on, the event. The result was that the "legitimate" news stories (e.g., Bloomberg and Reuters) were remarkably similar to the interest group blogs. But, since no one has yet attempted to offer any perspective on the HRB case (unaffected by the error of recency), let's look at how the two cases might be perceived differently by a different court, with a different set of facts.

Market Definition

HRB

This is perhaps the most obvious difference between the two cases. The HRB case was, strategically, much more of a traditional horizontal merger case. The basic strategy in a horizontal merger case is for the plaintiff to seek to define the markets (product and/or geographic) very narrowly, and for the defendants to seek the broadest possible market definition. For example, if the alleged market was soft drinks, defendants would want to argue that all non-alcoholic beverages, including tap water, should be included in the product market.

It would not be going too far to say that HRB was all about product market definition. In fact, the court devoted more than half of its opinion to evaluating each party's claims regarding the properly-defined product market. Only if the court agreed with the DoJ's contention that DDIY software was a discreet product market, would the government have been able to show sufficiently high concentration numbers to make its case that this merger would lessen competition.

Defendants, on the other hand, were arguing that the market also included professionally-assisted tax preparation, and (fatally) consumers that file their tax returns without any assistance. The court found this definition impermissably broad, because the inclusion of "pen and paper" filers distorts the market because these filers were not purchasing any product or service, but merely performing a legally-compelled "chore."

Ultimately, the court found the DoJ most persuasively defined the relevant product market. After adopting "DDIY" as the product market, the concentration numbers were substantial. The market leader, Intuit, had around a 62% market share, with HRB and 2SS coming in second and third with approximately 15.5% and 13% shares, respectively. Now, let's compare the market definition facts of the AT&T case.

AT&T/T-Mobile

Unlike the HRB merger, there are unlikely to be many, if any, novel proposed market definitions presented by this proposed wireless acquisition versus any of the many others for which the DoJ has alleged the same product and geographic markets it is alleging in the present complaint.

Competitive Effects--HRB vs. AT&T/T-Mobile

Contrary to the assumptions of some commenters, however, mergers are not evaluated solely on concentration numbers. The HRB court, relying on U.S. v. Baker Hughes, explained that "[t]he Herfindahl-Hirschman Index cannot guarantee litigation victories." Opinion at 53 of 86 (internal citations omitted). So let's compare the alleged anticompetitive effects of both proposed mergers.

First, we have to recognize that under the worst case for AT&T/T-Mobile, almost every geographic market starts with much lower concentration numbers--and smaller increases in concentration due to the merger--than in HRB. The higher initial concentration numbers, and the greater changes in concentration in HRB, make it easier to understand how the simple removal of one vigorous competitor (the court eschewed the term "maverick") could have an anticompetitive effect.

Second, consider also that the DDIY tax preparation market was a differentiated product market, in which the proposed acquiring/acquired firms were each other's closest substitutes. Thus, it was fairly easy to understand the DoJ's unilateral effects theory--that HRB could raise the price on its "high end" DDIY services and still capture lost sales through its ownership of the "low end" acquired brand.

On the other hand, it is unclear whether any true "differentiation" exists in the wireless mobile telecommunications service market. Unlike in HRB, the government has not alleged that retail consumers perceive AT&T and T-Mobile to be each other's closest substitutes. Thus, it seems unlikely that this merger will provide the post-merger firm with the opportunity to execute a unilateral price increase.

The Effects of H&R Block on the AT&T/T-Mobile Merger

Did you really think I'd try to answer that question? I have no idea. It's obvious that the facts of the HRB merger made it into a more traditional battle over a narrow vs. broad product market. On the other hand, from the beginning the AT&T/T-Mobile merger has been about competitive effects. All we really know is that, while it's a gamble to try to predict the outcome of a case based on oral arguments, it's an odds-against bet to try to predict the outcome of one case based on the near-term results of an unrelated case.

Even My Boring Blogs Are Worth Reading

Thu, 10 Nov 2011 14:14:53 -0500

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!"

The Walking Dead: Still Walking, and Still Dead

Fri, 04 Nov 2011 15:03:02 -0500

I kind of feel like I'm the guy that made it all happen. All I have to do is to call the Sprint/C Spire antitrust cases against AT&T/DT/T-Mobile "The Walking Dead" on Halloween, and what happens? Two days later, the court issues an order that really turns these cases into the legal equivalent of zombies, by dismissing all but a fraction of one of Sprint's claims, and preserving C Spire's equally-weak claims. Doh!

To be fair, though, after applying the law evenly and giving plaintiffs every benefit of the doubt--the court allowed all adequately-pled claims to move forward; notwithstanding the poor prognosis for these surviving claims. Now, just what "move forward" means is anybody's guess, but I'll again make some intrepid predictions.

Sure, some of you might say that because the court did not dismiss the private cases in their entirety as I predicted at the beginning of the week, I should be eating at least a little crow--maybe the feathers of the claims that are still left--and that's fair. So, if you want to make fun of me, please do. I'm not so important that I can't take a little abuse. But, since I never get comments, please do me a favor and submit them in the "comments" section--it'll be fun.

Now that we've seen the court's order, let's look at what's left of the private case claims, and try to guess what happens next.

Sprint

Sprint still maintains a small portion of its argument that the merger will injure them in the input market for handsets. Sprint contends that AT&T's acquisition of T-Mobile will increase AT&T's incentive and ability to use its post-merger buying power to coerce handset/operating systems vendors to disadvantage Sprint by foreclosing access to the most desirable handset models. Sprint is allowed to try to prove its theory that AT&T's incremental increase in its buying power (as a result of the merger) will cause AT&T to not just get lower prices for itself, but to disadvantage Sprint.

Outcome: Ouch! Almost the worst imaginable, because if you were at the oral argument on October 24th, you would have heard the court incredulously ask Sprint, "are you saying AT&T and Verizon control Apple and Google?" By allowing only this claim to survive, the court pits Sprint not against AT&T, but against the handset vendors. Why do I say this?

Because in order for this claim to succeed, Sprint needs to get a handset vendor to agree with it in court. After committing over $20 billion in handset spend over the next 3 years to one vendor (Apple), do you really think Sprint is going to get a vendor to alienate AT&T and Verizon by making such a statement?

But let's just consider the facts as they stand. Handsets are a worldwide market. T-Mobile is a wholly owned subsidiary of Deutsche Telecom: a company with 128 million mobile subscribers today (more than either AT&T or VZ). Hasn't Sprint already seen the "horror" of a competitor with superior buying power?

Moreover, assuming T-Mobile stays a wholly-owned subsidiary of Deutsche Telecom (which recently combined procurement operations with France's Orange), T-Mobile becomes an even bigger threat (under Sprint's theory) as it will have more handset buying power than AT&T, Verizon, and Sprint combined (the joint DT/Orange procurement group will represent 286 million mobile customers). Sprint is thus in the difficult position of asserting that AT&T--with an estimated post-merger customer base of around 130 million mobile customers--is a more dangerous buyer with T-Mobile, than T-Mobile is with DT and Orange. Are you buying?

C Spire

The court clearly viewed C Spire's complaint as the better-pled complaint, in that it allowed more of C Spire's handset-related claims to stand, and the court allowed C Spire's roaming injury allegation to stand (that a portion of C Spire's customers are GSM-based and buy roaming from AT&T and T-Mobile now, but will be left with only AT&T post-merger).

Prognosis: On the handset claims, C Spire has essentially the same problems as Sprint, but made worse by the fact that C Spire only has 875,000 customers. U.S. Cellular, Leap, and MetroPCS all have multiples of this number--making these firms (as well as the larger firms) much more attractive to handset vendors. After all, is it really unnatural, or anticompetitive, that a Sears or WalMart might be able to carry a larger inventory selection (for any product) than a small town general merchandiser? For an AT&T, with or without T-Mobile, the defense is as simple as "don't hate me 'cuz you ain't me."

C Spire's surviving roaming claims are even less attractive than Sprint's "monopsony" claim. Instead of pitting C Spire against its own vendors (as the surviving Sprint claim does), this claim pits C Spire against its regulator. You see, in order to prove that the proposed acquisition could harm C Spire's access to a regulated service, C Spire will have to produce some evidence that the regulator can't effectively regulate AT&T's obligation to offer roaming.

What's Next?

Well, considering that the DoJ was well aware of all of these vertical claims, and chose to include none in its complaint, we have to believe the private cases are on the slow burner. Why?

First, the court didn't schedule a status conference on discovery and case management until 5 weeks after its order came out--December 9th. Coincidentally, this status conference occurs two days after the parties to the DoJ case have identified all of their witnesses (by December 7th). (see scheduling order, para 11).

It's highly unlikely that the court will require AT&T to defend on two fronts--and indulge discovery on these unique (from the DoJ complaint) claims--until after the February 13th trial ends. Before these claims will go to trial, we'll know the outcome of the DoJ case--most likely rendering these claims moot, either way.

It seems like a good time for Sprint to consider that, if it really wanted to help DoJ, how effective a witness it will be as an interested party in a related case vs. simply folding a losing hand.

The Walking Dead

Mon, 31 Oct 2011 18:16:31 -0500

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" »

Who Knew? Hu Knew!

Fri, 21 Oct 2011 11:22:13 -0500

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]

Even Whales Get the Blues . . .

Wed, 19 Oct 2011 12:06:35 -0500

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?

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

Fri, 23 Sep 2011 11:34:37 -0500

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.

Should the Merger Guidelines Come With Guidelines?

Mon, 19 Sep 2011 12:50:58 -0500

I said before that the genius of Sprint's gambit was that--if they could successfully convince the Antitrust Division to accept and endorse a national market with four participants as the starting point for the Division's analysis--Sprint was (by those terms) guaranteed a three firm oligopoly for advanced broadband wireless services, no matter the outcome of the case. The very act of the Department challenging the acquisition would have this effect. Why?

The general answer is that the Department's Complaint is based on an application of the 2010 DoJ/FTC Merger Guidelines, which are a less-structured revision of the 1992/1997 Merger Guidelines. While Guidelines can provide a useful way of learning competitive conditions in most (unregulated) industries, they cannot yield a comprehensive competitive analysis of an industry like mobile wireless telecommunications services. The Guidelines simply do not take into account the degree of interdependence between regulation of critical, government-controlled inputs (like access to spectrum), differing network technologies and deployment cycles, the diversity of services and devices supported by any single network, and the massive capital intensity of the wireless industry.

Even more specifically, though, the Guidelines don't instruct the enforcement agency to consider the effects of its decision--to challenge or approve the transaction--on future competition in an industry already heavily dependent on the decisions of another government agency. But, let's back up before things get too confusing.

The Scarcity of Spectrum and the Need for a Spectrum Regulator

Ideally, the FCC, the NTIA, or some other government agency would act as the "central banker" of spectrum. The spectrum "central banker" could forecast demand, try to free up supply in advance of anticipated demand, and hopefully have some success in at least mitigating situations of shortage or surplus.

This role would balance the needs of government, and the various commercial users of spectrum so that resource scarcity could be somewhat removed from a competition analysis. In the event a firm wanted to exit an industry, the "spectrum banker" could act as a purchaser of last resort. This agency could purchase, hold or re-auction unused spectrum, and would have to be able to oversee the sale of an ongoing business in a manner designed to maximize spectrum utility, and the value created by the exiting firm. One benefit of such an agency would be to allow competition agencies to make decisions based on competitive factors alone.

The Effect of Enforcement of the Guidelines on the Guidelines' Analysis

The Guidelines are supposed to explain what effect a combination of firms will have on consumers in the market for the good or service that is the subject of the transaction. A proper Guidelines analysis is supposed to consider the effect that barriers to entry will have on the likelihood of future entry if prices were to increase. When a market is characterized by high barriers to entry, the agency must give careful attention to a merger between firms in that market, because competition lost will not be quickly replaced by new entry. So far, so good--in fact, if you search "barriers to entry" and "merger guidelines", you'll get tons of results.

The problem, though, is that barriers to exit have the effect of raising barriers to entry. For our merger, this is the blind spot in the Guidelines' analysis. If you search "merger guidelines" and "barriers to exit", you don't really get anything (at least not in the first five pages of results that I looked through).

The result is what I would call the Guidelines' version of the "Heisenberg Principle." Said differently, in cases where markets already have high barriers to entry, the failure to account for action pursuant to the Guidelines will, further raise barriers to exit, and thus future entry, than markets with otherwise low barriers to entry.

What Is the Significance of a "Barrier to Exit" in the DoJ v. AT&T/DT Suit?

Well, put yourself in the shoes of Deutsche Telecom. You've invested billions of dollars in the U.S. mobile wireless market to develop spectrum, deploy infrastructure, innovate, create jobs, and add wireless capacity. Now you would like to cash out.
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