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.

Shoot First with Snark and Maybe Check the Facts Later: Mistruths and Market Misperception by WSJ Columnist Holman W. Jenkins

            I was doing well on my self-imposed moratorium from correcting the frequent intentional and unintended mistakes in Wall Street Journal articles on telecommunications and the Internet.

Then along came Holman Jenkins’ whoppers in the Wed. July 31, 2019 edition: Faster Wireless vs. the Swamp; https://www.wsj.com/articles/faster-wireless-vs-the-swamp-11564527042

            Mr. Jenkins recently lambasted the government’s antitrust challenge to AT&T’s acquisition of Time Warner and today he mocks any benefit derived from having 4 instead of 3 facilities-based, wireless broadband carriers.  Anyone who thinks consumers and wireless competition benefit from 4 carriers has a number “fetish.” He seems pleased by a Sprint exit, particularly given the low odds he calculates for a Charlie Ergen-managed venture to provide facilities-based competition.

            Mr. Jenkins certainly offered a correct characterization of Mr. Ergen’s slipperiness and inclination to elevate negotiating/complaining/delaying strategies over building networks.  Mr.  Ergen likely will try finding ways to collect a hefty markup on spectrum he hoarded and was soon to lose, having never migrated to actually installing facilities to provide service.  The Justice Department just gave him a 4-year extension and ample time to remain a wireless reseller, beholden to the remaining 3 carriers who actually operate physical (not virtual) networks.

            Mr. Jenkins enters the land of half-truths (or less) by implying that fixed and mobile wireless are just about to the point of interchangeability. He bolsters his argument with the false implication that Comcast and Charter are facilities-based carriers in their own right.  Not exactly.  Both carriers offer Wi-Fi hotspots which only offer islands of broadband access with no hand off capabilities.  Comcast and Charter mobile service relies on resold capacity from the 4—make that 3—national carriers. 

Comcast and Charter both operate as “Mobile Virtual Network Operators.” MVNOs “are essentially wholesalers of wireless spectrum — they buy bandwidth from carriers and then resell it to customers under new branding.” https://www.businessinsider.com/charter-spectrum-mobile-mvno-service-2018-7  As resellers, MVNOs survive in the marketplace if and only if a facilities-based carrier agrees to sell them bulk transmission capacity at a low enough price to squeeze out a profit margin.

We may reach a point where fixed and mobile network become interchangeable, but we are not there now even as consumers do abandon wireline phone service.  One should not conflate abandoning the wireline phone networks for abandoning any and all fixed wireline services.  Consumers switch from metered, throttled and not unlimited wireless service to Wi-Fi, because the latter is unmetered, unthrottled and far less likely to have a data cap at all, or one that affects incentives to use the service.  Bear in mind that most Wi-Fi networks use wired broadband for access to the Internet cloud.  The last 50 feet is wireless.

Mr. Jenkins has a penchant for righteous indignation generated by an alternative reality about current marketplace conditions.  I still cannot wrap my head around his view that 3 carriers are better than 4.  I don’t have a predisposition for any minimum or maximum number of facilities-based competitors in the wireless marketplace.  I can state with almost the same certainty as Mr. Jenkins that allowing further concentration of the wireless marketplace with 3 carriers holding a 95% national market share guarantees less competition, innovation and employment with higher subscriber prices, carrier revenues and deteriorating global leadership in next generation networks and services.

Muddy facts, reporting and analysis.

The Lack of Competition in Cable Television Set Top Boxes

            Recently Comcast migrated from offering 2 free digital to analog converters to offering a rental at $1.99 per month.  It got me thinking why cable operators persist in this line of business when other ancillary markets, such as wireless routers and even cable modems have competitive options.  The authors of Wobbling Back to the Fire: Economic Efficiency and the Creation of a Retail Market for Set-Top Boxes offer plenty of answers and economic theories; see http://www.phoenix-center.org/papers/CommLawConspectusSection629.pdf.

            According to T. Randolph Beard, George S. Ford, Lawrence J. Spiwak, and Michael Stern there does not seem to be any financial upside for cable operators, or marketplace harm in sole sourcing and rentals.  So are cable operators simply providing a service that no one else wants to provide?  The authors correctly note that cable operators do not manufacture such devices, but instead contract for the manufacture by unaffiliated companies.  So what’s in it for the cable operators?

            I have a few empirical observations, again generated by personal experience.  First the possibility exists that the rentals of set top boxes, converters and modems represent a unrecognized profit center.  I suspect that the Pace converter that allows cable subscribers to continue using older analog televisions costs less than the devices used to convert off air digital signals into analog.  These more sophisticated devices retail for about $40—50.  So if Comcast can rent the simpler and cheaper mini-converters for $2 a month, the company breaks even in a matter of months even though subscribers might use the device for many years. 

            As to those more expensive set top boxes the time to break even will take longer, but again the length of rental without replacement may span many years.  How many generations of set top boxes have you run through in your years of cable television subscriptions?  Bear in mind that cable operators typically offer one set top box free and then charge $5 or more per month for additional units.

            Second the possibility exists that cable operators believe that their proprietary, non-compatible set top boxes provide greater opportunities to lock in consumers and limit them only to features the cable companies and content providers are willing to offer.  Once upon a time these stakeholders did not want companies like Tivo offering digital video recording opportunities, so interconnection and technical compatibility issues provided a means to thwart and stall competitive options.

             Third, cable operators, their trade associations and their sponsored researchers have expressed opposition to extending the Carterfone policy to television.  Carterfone supports the right of consumers to attach any device that does not cause technical harm.  If applied to cable television, it would enhance consumer freedom by preventing strategies to block or limit access by devices cable operators don’t control.  From my vantage point the lack of progress in cable efforts to promote “true two-way” access by televisions without a converter box means that cable operators see upsides in mandating access only via their soul sourced devices.  Additionally with digital transmissions, subscribers must have a set top box or converter for each and every television set thereby eliminating the previous free option of using a “cable ready” set.

            Also the fact that consumers have not embraced CableCards may reflect their lack of knowing that such an option exists, possibly the product of a strategy by cable operators not to promote such an option.

            My bottom line: the lack of a competitive market for set top boxes probably reflects market failure artificially induced by cable operators.

Wireless Market Concentration Leads to Lower Prices?

          A recent publication in the Federal Communications Law Journal offers the counterintuitive premise that under conditions where wireless carriers operate under scarce spectrum conditions, market concentration can offer consumers lower prices than when more carriers compete.  See T. Randolph Beard, George S. Ford, Lawrence J. Spiwak, and Michael Stern, Wireless Competition Under Spectrum Exhaust, 65 Federeal Communications Law Journal 80 (Jan. 2013); available at: http://www.phoenix-center.org/FCLJSpectrumExhaust.pdf.

         The authors state that they “demonstrate that under a binding spectrum constraint, a market characterized by few firms (rather than a large number of firms) is more likely to produce lower prices and possibly increase sector investment and employment.”  That conclusion does not seem right to me, particularly in light of my personal—call it empirical—experience.  When I vote with my dollars under conditions of resource scarcity, whether caused by government or marketplace conditions, I have to pay more, not less.

            Consider commercial aviation, a marketplace constrained by airport landing slots, required spacing in the air and now reduced air traffic controllers thanks to sequestration.  Many major airports have allocated all available landing slots, just as wireless carriers may near spectrum exhaustion.  So what happens in a market where one or two carriers dominate?  The Wall Street Journal, of all sources, provides an answer that makes sense to me:

 

Some big-city air routes have been hit with punishing price increases of 40% and 50%, and other well-traveled paths likely face big fare hikes in the future. It's the fallout from airline mergers, and the planned combination of American Airlines and US Airways could bring a new round of hefty fare increases. When two competitors combine to dominate prime routes, those markets tend to bear the brunt of higher prices. (Wall Street Journal, Where Airfares Are Taking Off (April 10, 2013); available at: http://online.wsj.com/article/SB10001424127887324010704578414813368268482.html.

            I’m sure my friends at the Phoenix Center could deftly explain why commercial aviation does not provide an appropriate comparison to wireless carriage.  They’d also refute any premise that the financial sponsors of the Phoenix Center, which may just include certain large wireless carriers, had anything to do with their motivation to come up with their premise and find an academic publisher to document it.  I’ll have to take them at their word, in part because I lack the math skills to understand their Cournot model.   But—and this is a big one—I’m not convinced that AT&T and Verizon would lack the motivation and ability to raise prices should they further bolster their market dominance.

 

 

What Charlie Ergen’s Rational Exuberance Means for Consumers

            In the latest of an unbroken chain of disinformation from the Wall Street Journal, columnist Holman W. Jenkins, Jr. today implies that a Dish Network acquisition of Sprint offers more proof that there’s nothing but sunshine in the broadband and wireless marketplace.  According to Mr. Jenkins, anyone having a “woe is us refrain” ignores the robustness of facilities-based competition and how the network neutrality issue is a solution seeking a problem.

            Not so fast Mr. Jenkins.  There is another meme to yours that your publisher won’t allow and you cannot fathom: Dish Network, like AT&T, Comcast and all actual or prospective acquiring companies have commercial objectives that mostly involve enhancing shareholder value, goosing stock options, locking up spectrum and buying out competitors than promoting competition or ensuring fairness and transparency.  There is nothing wrong, noble or charitable about Mr. Ergen’s gambit: just like Comcast, he sees the need to find a hedge and alternative to his core satellite services.  Just in case consumers lose their appetite for a forced bundle of content tiers, delivered via Mr. Ergen’s satellites or Comcast’s cables, incumbents like Dish need to identify new profit centers.  For both Comcast it involved bolstering control over content, not just its distribution.  For Dish it requires a return to earth-based content distribution technologies in addition to—hopefully not in lieu of—the satellite option.

            Dish sees Sprint primarily as a source of terrestrial spectrum, perhaps for the same content it now distributes via satellite.  There is nothing in a Dish acquisition that bolsters the “reality” of broadband competition, or refutes concerns about the incentive and ability of network operators to favor affiliates.  Dish may revitalize Sprint, but the deal does not create new competitors, new competition, or more spectrum. 

            Mr. Jenkins exuberantly sees a rosy future when competitors buy each other out and collaborate in ways that foreclose even the prospect for facilities-based competition.

Billing Line Items in Telecom and Other Industries

          In a previous blog entry, I questioned why wireless carriers allow sharing of voice minutes with no additional charge for multiple handsets, but new data sharing plans add surcharges for each additional device.  Subscribers incur no recurring fees for multiple device access to voice minutes even though carriers incur higher signaling costs when additional devices are on, even if they are not being used.  Carriers similarly incur such costs for smartphones, and I have seen no evidence that the costs are higher for data than voice.

            So why the difference?  As best I can determine the answer is that consumers have become inured to billing line item expansion.  We see it everywhere: airfares, mortgages, car purchases and even car repair.  I will not do business with auto repair facilities that tack on an additional 10% “shop fee” to the bill, but I seem to stand alone.

            What ever happened to companies having to absorb overhead?  Instead we get nickled and dimed by additional line items that make no sense: “adjusted dealer markup,” “shipping and handling,” “dealer prep,” “regulatory fee,” etc.

            Wireless carriers can charge for multiple device access, because they can praddle on about how multiple devices increase signaling and polling costs.  The carriers had to absorb such overhead for voice, perhaps because of a real or perceived need to enhance the value proposition of their service.  As the Internet diversifies and offers ever increasing options and utility, wireless carriers can capture greater profits simply by providing the essential first and last link.

            Bottom line: wireless carriers are in an increasingly better position to raise monthly subscription costs while reducing the amount of handset subsidies.

How Can U.S. Wireless Carriers Have the World’s Highest ARPUs and Some of the Lowest Rates?

          U.S. wireless carriers, their trade associations and sponsored researchers do not want widespread understanding that the U.S. market generates the highest average revenue per user (“ARPU”) returns in the world. “Verizon Wireless, NTT DOCOMO, AT&T, Softbank and KDDI reported highest wireless data revenues among other global top 10.”  B.P. Tawari, Beyond 4G Blog Site, New Report : Global Wireless Data Update Q1,2010 (Aug. 4, 2010); available at: http://www.beyond4g.org/new-report-global-wireless-data-update-q12010.  Leading ARPUs range in the 35-40%.

         U.S. carriers prefer to emphasize that they offer some of the lowest rates globally.  The carriers conclude that if market forces necessitate having to offer low rates, then the wireless marketplace must be fiercely competitive, notwithstanding best in class ARPUs.

       How these carriers generate massive ARPUs while also offering low rates?  Answer: All You Can Eat Pricing (“AYCE”) for extremely high volume customers with extremely high margin rates for low volume customers. It is easy for a wireless carrier to claim per minute voice and per text rates are extremely low, even if in fact most customers do not come close to using all of their allotted minutes of use and texts.  With all you can eat buffet pricing, wireless carriers can claim incredibly small margins for serving the households that, for example, generates several thousand text messages monthly.  For customers unwilling to pay the $20 monthly rate, wireless carriers can charge 20 cents a text for a service that costs less than one tenth of a cent to deliver.

          Wireless carriers want to eliminate AYCE pricing particularly for data service.  But in doing so they risk a clearer understanding of just how profitable and uncompetitive they are.

 

Comcast Violates an Unwritten Law

When a venture has petitioned the FCC to approve an acquisition, or to provide greater regulatory relief an unwritten law requires the petitioner to lay low. Comcast has violated this law by imposing, for the second time this year in Pennsylvania, a significant rate hike well in excess of the rate of inflation at the very same time it wants the FCC to approve the company’s acquition of NBC. Not smart.


Comcast surely must know that the optics of buying NBC do not look great no matter how much Comcast says such a transaction will promote competition. Raising both cable and Internet access rates reinforces the notion that the company has market power and faces limited competitive constraints. Of course this is the very company that does not want to pay anything for retransmission consent to carry broadcast television stations even as it charges subscribers $14.50 for the privilege. This company has fought a decade long battle to stymie alternatives to lucrative set top box rentals and now wants the FCC to abandon any efforts to promote CableCards and other alternatives.

It seems as though Comcast cannot lay low even during a time it wants a big gift from the FCC. The least the company could do is throw a gold-plated crumb to subscribers.