Thursday, March 24, 2011

Explaining Wireless Spectrum Woes

     Yet again The Wall Street Journal, in an editorial and op-ed piece, uses snarkiness and mischaracterizations to refute legitimate concerns about AT&T’s acquisition of T-Mobile.  See Wall Street Journal, Review & Outlook, More Spectrum, Please--AT&T bids $39 billion to get around FCC bottlenecks, A14  (March 23, 2011); Holman W. Jenkins, Jr. AT&T’s Big Bet on Spectrum Folly, A13 (March 23, 2011).  These pieces reframe the issue from a question about market concentration into an endorsement of AT&T’s valiant “self-help” efforts to find adequate spectrum for consumers.  They glibly ignore or dismiss the proper focus on how the deal would affect consumers, competition, innovation, employment and service prices. 
     The Journal dismisses as hackneyed Gigi Sohn’s conclusion that allowing two or three ventures to control over 92% of the market reduces competition and choice, raises prices, reduces innovation and results in fewer jobs. See PBS News Hour, How Will Consumers Fare in T-Mobile, AT&T Merger? (March 22, 2011); available at:
     Once upon a time even the Republican Party of Teddy Roosevelt acted to prevent marketplace distortion caused by monopoly “trusts.” When a market lacks robust competition few operators do not have to spend sleepless afternoons innovating and striving to operate more efficiently.  Wireless carriers in the U.S. generate some of the world’s higher Average Revenue Per User.  These carriers do this by offering users large baskets of minutes to use making it possible to operate with vast profits and for the Journal to tout how consumers enjoy some of the lowest rates.  One can chisel down the per minute cost of service and the per text rate with high volume usage.  But such usage triggers spectrum and other infrastructure problems for which the carriers and the Journal blame the FCC.
     The truth is far more complex than simply demeaning the FCC and claiming this agency “micromanages” the marketplace.  Spectrum scarcity exists largely because other agencies of the U.S. government—primarily the defense, intelligence and homeland security agencies—hoard over 50 percent.  The second most important factor results from who makes spectrum decisions and how they do it.  Because spectrum crosses national borders, nations have to share and coordinate use.  The International Telecommunication Union, a specialized agency of the United Nations, allocates blocks of spectrum and specifies what uses are appropriate.  National regulatory authorities, like the FCC, in turn allocate spectrum largely consistent with the ITU-forged consensus. 
     Spectrum management decisions can rely on outdated assumptions about the ability of users not to interfere with each other.  For example, the ITU still has spectrum allocations that specify primary uses exclusively for land, sea or airborne use.  Technological innovations now make it possible to use a handheld device in all three locations.  But for the time being all involved government agencies, including the Departments of Commerce, Defense and State, accept the consensus even as they try to persuade nations to accept more flexible spectrum use.
     Spectrum scarcity is a real and constraining factor for wireless carriers.  But AT&T and its cheerleaders, simply use this factor, to prevent the close scrutiny needed to ensure robust competition.

Monday, March 21, 2011

The Likely AT&T Wireless Playbook for Securing Authority to Acquire T-Mobile

     There are several tried and true tactics that AT&T Wireless can use to convince the FCC and Department of Justice to approve the company’s merger with T-Mobile notwithstanding the obvious harmful and anticompetitive consequences.  Regardless of which party controls the White House these tactics work as evidenced by the rare instance where a market concentrating telecommunications mega-merger is not approved.  AT&T will reframe the merger away from market concentration and into the realm of better serving the consumer and responding to delays in FCC regulatory reform.
1)         This merger will benefit consumers! 
            Let me get this straight: a horizontal merger buying out one of 4 major players, which control over 90% of the wireless marketplace, is good for me?  Would a merger of the 2d and 4th airlines in the U.S. (Delta Airlines and American Airlines) benefit the consumer with lower rates, more choices, better rural options, etc.?  AT&T’s acquisition of T-Mobile’s market share and spectrum will make AT&T a better service provider.  Perhaps, but at what harm to the traditional benefits in a robustly competitive market?  Might an oligopolistic wireless market have carriers implicitly agreeing not to compete on price?  It looks like that already occurs: is it market equilibrium, or price fixing for the 4 major carriers already to offer the same price points for the same number of minutes?  Why won’t a carrier offer discounted service rates to subscribers who do not want a new subsidized handset? 
            Market consolidation typically harms consumers with fewer choices, less competitive necessity to lower prices and greater carrier inflexibility.  Yes carriers need scale and ever more spectrum, but a merger is more about buying out competition than becoming a more effective and efficient competitor.  With fewer carriers it becomes easier for the survivors—collectively, collusively or independently—to reach the same conclusions about network neutrality, service tiering and disabling features available from subscribers’ handsets.  Once AT&T fires the thousands of redundant T-Mobile employees, it can claim how precompetitive FCC regulation “kills jobs.”  Just when the FCC has to show a backbone on matters of consumer protection, the remaining 2 or 3 national wireless carriers will have the clout to persuade fringe and mainstream political factions how carriers can self-regulate.
2)         The FCC made us do it! 
            This tactic shows that the best defense is an outrageous offense.  AT&T frames the need to buyout a competitor as the product of FCC regulatory decisions that deprived the company of enough spectrum to satisfy consumer demand.  So AT&T’s well deserved record of poor service is the FCC’s fault and not the product of selling too many subscriptions and failing to match switching and other infrastructure elements with the onslaught of Iphone subscribers.
            AT&T like wireless subscribers could use more spectrum, but the FCC has accommodated incumbent carriers from the onset of cellular service to present.  AT&T’s local carriers got free spectrum and a first mover advantage when the FCC “set aside” spectrum for wireline incumbent and required newcomers to compete in a comparative hearing.  The FCC abandoned a cap on spectrum controlled by any single carrier and will not designate any new spectrum for market entrants instead of incumbents.
            AT&T does not want the FCC or us to remember that the company first disabled the Wi-Fi features in its handsets, thereby preventing use of additional spectrum that might have made the AT&T network less congested.  AT&T later permitted conditional Wi-Fi use even as the company wanted subscribers to buy a femtocell device that would offload some of its traffic onto the Internet services of other carriers.  AT&T and Verizon recently acquired the lion’s share of newly available spectrum and with fewer competitors bidding for future spectrum the federal government will generate less from spectrum auctions.  Of course with less competition, AT&T might not have to pass through its savings with lower rates for service.  On the contrary AT&T and the surviving wireless carriers soon will abandon unmetered service plans.  Even as the company hypes smartphones as handheld computers, wireless carriers will make metered data services a profit center able to raise average revenue per subscriber (“ARPU”) already at levels few carriers in other nations come close to generating.
3)         Prominent scholars and consultants endorse the merger!
            I could have self-financed my kids’ college educations if only I had joined the ranks of “scholars for dollars.”  An impressive array of academics will write white papers, scholarly law review articles, affidavits, expert statements and other products endorsing the merger. Few will acknowledge their financial sponsor and all will claim that they came up with the ideas in the paper independently of their sponsor’s regulatory agenda.
            The murky world of rarely disclosed sponsored research will provide fire power to AT&T’s arguments how the merger makes operational and economic sense without harming the national interest, or the subscribers of AT&T and T-Mobile.  Sponsored researchers will make outlandish assertions that would not pass muster under rigorous peer review.  Nevertheless these sorts of documents will find a home in filings at the FCC and in prominent law and economic journals.  Rarely do these journals even require notification about AT&T’s sponsorship, or that of countless other Washington think tanks funded by AT&T.

4)         Our merger will achieve the same type benefits as other mega-mergers.         
        The FCC rarely receives a merger application it cannot conditionally approve.  AT&T surely will have to share the wealth to make the merger happen, but a company that come up with $25 billion in cash to acquire T-Mobile, surely can spend an extra few hundred million dollars to persuade Congress that the merger will serve the national interest.  I mention Congress, because the FCC and DOJ surely do not want to make the legislature unhappy, especially the individuals who chair oversight and funding hearings.
      Of course AT&T will come up with a bunch of “voluntary concessions” that will secure votes from ambivalent Commissioners.  These concessions typically add a minor cost to the acquisition and sound wonderful.  But AT&T in particular has a skill in offering something that is both limited in time and actual benefit.  We can expect to see AT&T offering all sorts of rural buildout commitments, as well as support for open and neutral access to its network.  The commitment will have conditions and exceptions that mitigate the benefit.  For example, when AT&T acquired BellSouth the FCC received a voluntary network neutrality commitment, but one limited to a few years and applicable only the DSL service line linking retail subscribers and the first AT&T switching facility.  
            A year or so from now AT&T probably will get conditional merger authority.  The future dominant means for accessing the Internet will become an unregulated conduit controlled by companies free to leverage employment and infrastructure buildouts for a free reign.

Sunday, March 20, 2011

AT&T-T Mobile One Merger Too Many?

So AT&T wants to acquire T-Mobile's market share concentrating the wireless marketplace so that 3 carriers control over 90% of the market.  Would anyone buy the bogus argument that No. 2 Delta Airline's acqusition of No. 4 American would "promote competition"?  Does anyone notice that mergers are job killing?  Does the FCC and the Justice Department have the courage to say no? 

Bear in mind the FCC rarely refuses to approve with conditions market concentrating mergers.  For wireless the FCC has abandoned spectrum caps and making new spectrum available only to new market bidders.

I predict that months from now the FCC will find a way to frame this merger as something really great for consumers.  Bogus!