Winners and Losers in Yet Another Mega-Billion Dollar Acquisition—Verizon/Alltel

I’m going out on a very short and sturdy limb here to predict that the FCC will approve Verizon’s acquisition of Alltel with few conditions and with glowing endorsement of how the public benefits from the transaction. If I am correct then we have yet another instance where the FCC will have allowed partisanship, shoddy economic analysis and blind adherence to doctrine to ignore the obvious: a horizontal merger of this sort gives Verizon a few more market percentage points, concentrates the market further, and reduces the likelihood that the public will benefit from increased wireless competition.

Of course the FCC will see it another way and so probably would a reviewing court. In this time, horizontal mergers get rejected if and only if empirical evidence clearly demonstrates that consumers will face higher costs. In other words the burden of proof lies with opponents who have to show that significant harm will result as opposed to the proponents of the merger showing that significant benefits will accrue to the public.

Just who wins in a merger like this?

The venture capitalists who took Alltel private benefit with the infusion of cash to pay for their incredible “management fees” and for equity in the company. The VCs added absolutely no value to the company during the few months they owned it, but isn’t capitalism great? The VCs will get $28.1 billion, some of which will become available for new leveraged buyouts.

Verizon benefits big time. It can claim market leadership, reduce its rural roaming costs and raise the roaming costs of competitors, Sprint in particular. Verizon reduces competition now and in the future. The wireless market grows increasingly concentrated despite the bogus claim by the FCC that there are hundreds of megaHertz available for competitive services (see the FCC’s 12th Annual Report and Analysis of Competitive Market Conditions With Respect to Commercial Mobile Services; available at: http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-08-28A1.doc.

Here are a few inconvenient facts the FCC will have to ignore. Before the merger the top 4 wireless carriers (AT&T, Verizon, Sprint/Nextel and T-Mobile) controlled just shy of 90% of the market with the top 3 controlling 77%). The carriers’ advertisements emphasize service reliability (“Can you hear me now?) and rarely mention price. The carriers engage in consciously parallel pricing behavior and do not deviate significantly in terms of price and service terms. The carriers can tout lower per minute costs because they offer large baskets of minutes that well exceed what some consumers want. The United States prepaid wireless market has limited market penetration, as compared to Asia and Europe, with limited price competition. U.S. carriers enjoy comparatively rich profits as measured in Average Return per User.

Who loses in a merger like this?

The public once again suffers by having a less competitive wireless marketplace. The United States does not have a wireless industry demonstrating best practices. The FCC may offer effusive and undeserved praise to the wireless industry, but globally U.S. carriers lag in terms of next generation services. The next time you see a foreign film where wireless handsets play a role, notice how actors use the handsets. We in the U.S. continue to use our handsets for first and second generation services such as voice, messaging, ringtones and music downloads. Yesterday as I queued in line to secure conference registration materials and later waited four hours for a flight, I would have benefited by access to generation 2.5 services that offer bar codes on cellphone screens and flight information.

Alltel may not have had a national footprint, but it offered some degree of competition in many more markets than where it had facilities. Alltel’s absence will not necessarily raise consumer prices, but the Big Four carriers can rest a little bit easier that they won’t have to spend sleepless afternoons competing.