Show Me One Merger or Acquisition That Promotes Competition or Enhances Consumer Welfare

            I marvel how sponsored researchers have perpetuated the myth that mergers and acquisitions are great events. Can anyone provide an example how consumers benefits?  How did removing Sprint from the marketplace make the wireless ecosystem more rewarding to consumers?  TMobile improved their quality of service, but no longer offers lower prices, or innovations.  Anyone care to assert that the company remains an iconoclastic champion of competition and enhanced consumer welfare?

            Why companies merge reminds me of the question why robbers target banks.  There’s money in banks and higher revenues, less competition, better stock prices, more annual bonuses, and less senior management wear and tear when markets concentrate.  Why spend sleepless afternoons competing when you can reduce the number of competitors making it more likely that the cartel can fix prices.  That’s what has occurred in meat packing, healthcare, commercial aviation, insurance companies, car rentals, and every other concentrated marketplace

            There’s an inconvenient fact that U.S. wireless subscribers pay some of the highest rates globally. See, e.g., https://communitytechnetwork.org/blog/why-is-the-internet-more-expensive-in-the-usa-than-in-other-countries/; https://kushnickbruce.medium.com/at-ts-wireless-profits-are-outrageous-at-t-s-5g-wireless-prepaid-prices-are-obscene-compared-dc15c57926f; https://themarkup.org/2020/09/03/cost-speed-of-mobile-data-by-country; https://www.quora.com/Why-are-phone-plans-in-the-US-so-expensive-compared-to-other-countries-not-hate/.

Statistics do show a long-term reduction in cost based on increasing minutes of use and data consumption, i.e., the per voice minute or per megabyte of data price has dropped precipitously.  As markets evolve and carriers accrue greater economies of scale, prices should decline.  However, the rate of decline in the U.S. pales in comparison to that occurring just about everywhere else.  Recently, U.S. carriers have raised, not further reduced rates.  See, e.g., https://www.cnn.com/2023/03/06/tech/verizon-plan-price-increase/index.html. Also, the three national carriers remarkably have the same prices for service, with differentiation a matter of which “free” content subscription is offered.

I also cannot wrap my mind around the persistent view that markets can be viewed from a static and fixed vertical and horizontal template.  The conventional wisdom views market “food chains” in a discrete, mutually exclusive frame where ventures compete, or not.  Horizontally, companies must compete, because they operate in the same market.  Vertically, they target separate markets and accordingly do not compete.

            This is a simplistic and ill-conceived conceptualization of how markets operate.  Of course, ABC, CBS, Fox, and NBC compete on a horizontal plane for advertising revenues and viewers’ attention.  If two of these companies sought to merge, a court might interpret the Sherman Act as a bar, based on the sense that market concentration would harm consumers.  But if any one these multinational giants wanted to acquire a wireless carrier, a reviewing court would have no concerns, based on the false notion that a content creator and distributor has no interest in, or impact on the wireless telecommunications marketplace.  If a venture does not directly compete with a merger or acquisition target, then where is the actual or potential harm to consumers?

            There’s plenty, because markets do not conveniently operate in mutually exclusive ecosystems. Vendors of video content have an interest in distributing their content in wireless markets.  They might consider a wireless carrier acquisition as a way to reduce their carriage costs, or a way to raise consumers’ total out of pocket costs, because a complete service requires both content and delivery of the content to screens.

            Consider the recent approval of Microsoft’s $69+ billion acquisition of Activision. https://www.nytimes.com/2023/10/13/technology/microsoft-activision-blizzard-deal-closes.html.

Reviewing courts and oversight bodies dismissed antitrust concerns, based on the simple notion that Microsoft, a software vendor, was acquiring a computer game content vendor.  As the two ventures presumably did not compete, no harm no foul.

            Yes foul, if you free your mind of this ridiculous locked in frame of mutual exclusivity.  Microsoft surely operates in gaming markets.  The company sells a gaming computer, Xbox.  It has created an operating system for gaming and surely wants that software to become dominant in the wireless gaming marketplace.  Did anyone think that Microsoft would use the compelling content available from Activision as a lure for consumers to migrate to devices, operating systems, and platforms controlled by Microsoft? Where is the enhanced consumer welfare in a more concentrated marketplace for games, gaming devices, gaming platforms, and gaming operating systems?

            I understand that in capitalism, companies do not operate as charities. They generate revenues to reward shareholders and to earn more money.  It’s their money, but our marketplace.

Hipster and Geriatric Antitrust Doctrine

Relentless concentration in broadband and other industries, coupled with ever increasing market power, has triggered more interest in antitrust law and policy.  Predictably, this increased scrutiny generates questions about the viability of case precedent and the empirical “proof” supporting policy.  It also encourages advocates—with a political agenda—to argue for maintenance of the status quo, or substantial change.

The “stay the course” camp sees no need to change doctrine, despite the Internet’s ascendency and the significant difference between “bricks and mortar” commerce and e-commerce.  These mandarins disparage advocates for change and dismiss anything new as “hipster,” undisciplined and wrong.  They have received millions of dollars to spread their gospel, early and often.

The insurgent group plays into the hands of status quo thinkers when their progressive goals subverts, subordinates, or ignores the core mission of antitrust law: to remedy market failures generated by single companies or cartels who use market dominance, conspiracies and other bad actions to harm competition and consumers.  Insurgents also muddy their message when they combine normative goals, inherent in antitrust enforcement, with public policy objectives well outside the antitrust enforcement mission.

A pox on both houses!  The mandarins act as though Chicago School doctrine operates as unimpeachable law.  They see no need to recalibrate and modify based on changed circumstances.  They make no distinction between downward price trends in bricks and mortar markets and the perception of “free” and enhanced value proposition from broadband-mediated services that require no cash payment, but extract great and sellable value from data mining.
The insurgents play into the hands of the mandarins when they lack the discipline and intellectual rigor needed to show the wisdom in incremental adjustments based on changed circumstances.  They become easy targets by pushing normative goals, baked into the antitrust regime, into a progressive, social policy agenda.

I seethe when reading arrogant, inflexible, hubristic and condescending hipster antitrust critiques.  I dismiss as naive, undisciplined and ineffectual the insurgents’ wish list for antirust enforcement.  The incumbents may not win on points, but they appear to have won in courts, legislatures and classrooms.  They have powerful and rich incumbents underwriting their academic work.  That investment has paid handsome dividends.

For example, the FCC and Justice Department continue to approve mergers and acquisitions that trigger “Defcon4” alerts about extreme market concentration.  Somehow, basic economics about market power and concentration do not matter if sponsored researchers can show how consumers theoretically benefit.

One can easily declare a winner when judges and their clerks, well versed in Chicago School doctrine, cannot understand that “free” does not mean without significantly high  individual and social costs.

Empirical Tests for Assessing the Consumer and Marketplace Consequences of the Sprint-TMobile Merger

            You probably have seen one or more versions of the advertisements touting the consumer benefits in the Sprint-TMobile merger.  While never explaining why they could not achieve pro-social goals individually, the companies claim that collectively they can bridge the digital divide, generate more competition and make us all proud of our 5G supremacy.  The companies offer not one speck of empirical proof that anything good actually will occur other than make it easier for them to satisfy Wall Street and Main Street investor expectations.

            I can accept that Sprint and TMobile want to make lemonade out of their sorry performance in the marketplace.  On the other hand, I cannot accept the unquestioning boosterism of FCC Chairman Ajit Pai and others who ought to know better.  These government officials also offer not one piece of empirical evidence of the “win-win” value proposition where the companies and consumers benefit without any harm to the marketplace.  I will question their motivations, because I know these people are smart and fully able to pose uncomfortable questions if their had incentives to do so.  Sadly, the public interest falls far down the list when there are doctrinal, political and personal stakes involved.

            Yet again “tilting at windmills,” I offer some forward looking, but evidenced based tests for assessing the marketplace and consumer impact of the Sprint-TMobile merger.

Status Quo Extrapolation of Tower Sites, Available Bandwidth and Capex Versus Merged Company Performance.

            Chairman Pai has emphasized the need to inject ostensibly non-partisan economics and empirical data in the FCC’s ongoing oversight.  Great idea, but somehow, I do not see the swamp drained with clear-headed analysis.  On the other hand, we can do a back of the envelop analysis that shows how empiricism works if you care to use it. All one has to do is compile a list of current performance factors for the two companies.  How many tower sites do the companies have individually?  How much bandwidth do they use now and how much do they have in reserve? How much did the companies individually invest in previous years?

            Surely Chairman Pai understands the veracity and importance of these variables, even though they too can be politicized and misrepresented.  The Chairman has touted a party line that network neutrality regulation, or at least the prospect of it in the future after completion of judicial review, creates all sorts of investment disincentives for incumbents and market entrants alike. 

So, what exactly would industry consolidation do? It does not take any leap of faith to conclude that measurable statistics will show a reduction relative to what two standalone, competitors would generate.  For example, when Sirius and XM merged, over time they could reduce the total number of satellites needed to provide service, i.e., less total bandwidth.  Their operational efficiency gains generally accrued by reducing the number of employees.  The merged company did not need two groups of lawyers, accountants, network engineers, salespeople, etc.

Average Revenue Per User

            Even as senior management at Sprint and TMobile would never admit it, the merger will make it easier for the combined company to generate greater returns for shareholders and the stock options and profit sharing for employees.  The merged company will have less need to devote sleepless afternoons innovating, solving digital divides and enhancing the value proposition of their service.  Can anyone show me how the combined Sirius-XM offers so much more than what either of the two prior companies was able to offer?  Bear in mind that while one could make the argument that one or both of the digital satellite operators might face bankruptcy, neither wireless carrier lacks sufficient access to debt and equity financing.

            Wireless carriers in the U.S. generate some of the highest ARPUs in the world.  They have declined of late, but one should expect this outcome in a maturing industry nearing saturation and commodification.  The carriers have responded by upselling with bundles of video, audio and other content as well as zero rating.

            What is the likely impact on industry ARPU from the merger?  One can generate a quite likely scenario by examining revenue and profit statistics in the broad information, communications and entertainment marketplace as well as other industries, such as commercial aviation.  Generally, industry consolidation enhances the prospect for both revenue and profit growth.  Surely the current performance of airlines, pharmaceuticals and hospital groups offer empirical evidence of growth, arguably at the expense of consumer welfare.

Health of MVNOs

            Mobile Virtual Network Operators provide consumers with a pre-paid, often cheaper competitive alternative to post-paid service.  As noted in the prior blog entry, the Justice Department considers the MVNO option as important, so much so that merger approval may be contingent on the ongoing viability of Boost Mobile.

            When markets concentrate, facilities-based incumbents may have less incentives to “off load” product to resellers.  In the wireless marketplace, AT&T and Verizon are less than aggressive resellers, because they do not want to cannibalize their service.  What percentage of wireless consumers even know that AT&T owns Cricket?

            Will 3 national wireless competitors have any interest in offloading bulk minutes of use and bandwidth to unaffiliated vendors?  Why should they support lower priced competitors?

Out of Pocket Consumer Costs

            Anyone blessed with the opportunity to travel abroad quickly notices 2 major differences in the wireless experience. Consumers outside the U.S. typically pay far less for more data and voice minutes, plus they have far more opportunities to use multiple SIM cards options.

            U.S. carriers still manage to play cute with questions about unlocking phone even for ones that the consumer owns and has fully paid all installments.  While the number porting process has become routine, you might find it quite difficult to simply pull out your existing SIM card and replace it with one you purchased from a reseller.  The U.S. carriers want to make switching carriers as difficult as possible and I do not see the FCC doing anything to sanction such behavior.

            If competition on price is rather meek in the U.S. right now, exactly what good will result when two separate companies join forces?  It does not augur well when the best that the merged company will offer is not to raise prices for three years.  Curiously, that is exactly what Sirius and XM offered followed by sizeable rate increases and proliferating fees.

            This deal does not pass empirical tests, or one’s common sense of smell.

Grievous Defects in the AT&T-Time Warner Court Decision

            A preliminary reading of the District Court decision (available at: http://www.dcd.uscourts.gov/sites/dcd/files/17-2511opinion.pdf leaves me with despair and several unanswered questions.  I am not an antitrust law expert, nor do I have a Ph.D. in antitrust economics.  On the other hand, I offer unsponsored, non-doctrinal common sense.

            The Judge places great emphasis on the pro-consumer benefits of a vertical merger.  On several occasions, he states that the merger will accrue $352 million in cost savings to the combined company (p. 67) now able to eliminate one of two content price markups: 1) Time Warner’s profit margin in licensing content to AT&T as content distributor and 2) AT&T’s profit margin in delivering content to subscribers.  Economists term this benefit the Elimination of Double Marginalization (“EDM”).

            This makes sense intuitively, but specifically as to the video entertainment market, how much—if any-- of this $352 million flows downstream to cable/DBS subscribers?  This is a question for which empirical data does exist.  The Judge excoriates the Justice Department and its expert witnesses for failing to provide conclusive and persuasive evidence of consumer harm, largely because it has to be predictive.  But insofar as the flow through of vertical integration’s efficiency gains and EDM, empirical evidence provides a clear answer.

            Year after year, the FCC’s reports that video content prices rise, well in excess of a broader measure of consumer prices. See Implementation of Section 3 of the Cable Television Consumer Protection and Competition Act of 1992, Statistical Report on Average Rates for Basic Service, Cable Programming Service, and Equipment, MM Docket No. 92-266, Report On Cable Industry Prices (rel. Feb. 8, 2018),; available at https://apps.fcc.gov/edocs_public/attachmatch/DA-18-128A1.docx.  Over the five years ending January 1, 2016, the price of expanded basic service rose, on average, by 4.4% percent annually with the average price per channel (price divided by the number of channels offered with expanded basic service) increasing 2.1% percent to 47 cents per channel, even with the proliferation of unwanted channels in an enhanced basic programming tier.  The FCC again reported the anomalous statistic that monthly rates in communities, deemed not to have effective competition, had service rates below those charged in locales meeting an effective competition test.  The Commission reported that cable operators have substantially increased charges to recoup broadcast signal retransmission costs with a 33.9% percent rise from 2014 to 2015.  So much for robust competition.

            Let’s consider a previous blockbuster vertical merger: Comcast’s acquisition of NBC-Universal.  Did Comcast reduce its rates to reflect EDM and operational synergies?  More broadly, why hasn’t Comcast reduced its rates in response to cord shaving, cord cutting and significantly greater churn?

            The Judge mistakenly assumes that the combined AT&T-Time Warner will pass through at some—if not all (see p. 69)-- of the EDM savings, but Comcast did not do so after it acquired access to a large inventory of cable networks.  Simply put, the Judge erred in thinking that the AT&T-Time Warner acquisition financially benefits consumers in a speedy and measurable way.  When pressed to identify consumer benefits of NBC-Universal acquisition, Comcast senior managers admitted that cost savings and rate reductions for subscribers were not likely.

            The Judge also did not accept any element of the Government’s assertion that a combined AT&T-Time Warner would have heightened negotiation leverage with competing content aggregators and distributors.  Again, common sense and empirical evidence challenge his confident—bordering on arrogant—conclusions.

            Just look historically at the content licensing process and identify who blinks first in the negotiation process, particularly when a blackout has occurred.  Time after time, content distributors cave, largely as “must see” television appears on the horizon.  No DBS or cable operator will hang tough once the NFL regular season starts.  Content providers have the upper hand in negotiations and who among us will pay $50 a month for a package of channels lacking CNN, TBS, TNT and other Time Warner networks?

            There are several instances where vertically integrated ventures evidence self-serving, anticompetitive behavior.  Consider this example: Comcast inserted its wholly owned Golf Channel in the enhanced basic programming tier, but relegated the unaffiliated Tennis Channel to a most expensive sport tier.   The FCC’s Administrative Law Judge determined that Comcast’s tiering decision was motivated in part by a strategy to harm a competitor.  On appeal to the FCC Commissioners, the decision was reversed.  One can readily smell a rat here, but even without politics and partisanship, the FCC staff would have been hard pressed to prove anticompetitive intent.  There always plausible deniability—that Comcast determined its subscribers like golf more than tennis, or any of a number of plausibly legitimate business motivations.

            Let us also consider a scenario where AT&T does not use its leverage, or does not have the upper hand.   Content carriage fees will increase, probably well in excess of a general measure of consumer prices.  Some non-AT&T video content subscribers will consider reducing or eliminating their cable/DBS monthly rates.  They will seek the alternatives including AT&T’s U-verse and DirecTV as well as the options the company offers via its broadband wireless, cellular radio service and “over the top” options available to broadband wired subscribers.  A significant percentage of churning video subscribers will migrate to an AT&T option, so in at least some scenarios AT&T enjoys a “win-win” proposition: 1) it can maintain or raise profit margins for still loyal subscribers and 2) it can capture new market share with churning subscribers of competitors who do not want to pay higher rates, even if they do not reflect greater AT&T leverage, post-merger.

            I’ll stop for the time being with a prediction: consumer video content costs will rise well in excess of general inflation measures and this decision will lead to an even more concentrated industry having less incentives to enhance consumer welfare and compete on price.