Lies, Damn Lies, and Selective Statistics About Our Great Wireless Marketplace Thanks to the TMobile Acquisition of Sprint

             In the February 13^th edition of the Wall Street Journal, Professor Thomas W. Hazlett offers a breathless endorsement of market concentration with the TMobile acquisition of Sprint his go to example.  See https://www.wsj.com/articles/t-mobile-proves-that-mergers-can-benefit-consumers-8fab2890.  Apparently, mergers and acquisitions benefit consumers, because they enhance competition and generate all sorts of positive outcomes that could not possibly have occurred, but for the reduction in the number of industry players.

            Professor Hazlett has cherry picked statistics to create the false impression that mergers are the primary trigger for all events enhancing consumer welfare.  Conveniently, he ignores the benefits accruing from technological innovation, maturing markets, and the likelihood that just about all of his evidence would have occurred even if TMobile had not acquired Sprint.

             Do not be fooled into suspending disbelief and ignoring common sense.  Companies merge, because senior management believes industrial consolidation will enhance shareholder value, generate bonuses, and make it less essential to work sleepless afternoons, reduce operating margins, and enhance the value proposition of the goods and service offered.

            Here’s a reality check: consider whether and how TMobile continues to serve as the wireless marketplace maverick keen on innovating and distinguishing itself from the clueless market leaders AT&T and Verizon.  The judge approving the $26.5 billion acquisition of Sprint shared Professor Hazlett’s enthusiasm that a bolstered TMobile would have even greater capabilities and incentives to acquire market share and trounce the bigger incumbents:

 

[I]t is highly unlikely that New TMobile executives, upon the company being reinforced  nearer in size and resources to AT&T and Verizon, would do a commercial about-face and instead pursue anticompetitive strategies. State of New York et al v. Deutsche Telekom AG et al, No. 1:2019cv05434 - Document 409 at 160-61 (S.D.N.Y. 2020). available at: https://cases.justia.com/federal/district-courts/new-york/nysdce/1:2019cv05434/517350/409/0.pdf?ts=1581513636 … [T]estimony and documentary evidence revealed . . . a company reinforced with a massive infusion of spectrum, capacity, capital, and other resources, and chomping to take on its new market peers and rivals in head-on competition. Id. at 161

             Do you consider TMobile as operating with the competitive zeal anticipated by an approving court and attributed by Professor Hazlett?  Put another way, post-merger, what has TMobile offered to distinguish itself as the better of three options?

             TMobile has relaxed its maverick, competitive muscles making it possible for all three gigantic carriers to raise rates, well above the general inflation level.  TMobile matches, and in some instances, exceeds comparable options from AT&T and Verizon. https://www.lightreading.com/5g/t-mobile-s-premium-pricing-passes-at-t-verizon; https://ktla.com/news/money-smart/t-mobile-planning-to-move-customers-on-older-phone-plans-to-newer-ones/; https://www.cnn.com/2023/03/06/tech/verizon-plan-price-increase/index.html. The three carriers have nearly identical rates and differentiate primarily on what “free” video streaming service they bundle and how clever they can confuse consumers into assuming “on us” means a free handset.

             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, all three U.S. wireless carriers have raised, not further reduced rates.  See, e.g., https://www.cnn.com/2023/03/06/tech/verizon-plan-price-increase/index.html. TMobile triggered major pushback when it sought to eliminate service tiers and force an “upgrade” to something significantly more expensive. https://www.fiercewireless.com/wireless/t-mobile-will-migrate-customers-higher-cost-plans.

             I can find nothing about the T-Mobile acquisition of Sprint proving how mergers can benefit consumers.

 

Antitrust Judicial Review That Gets It Right

             Just when one reasonably could assume that no federal appellate court could possibly do the right thing in a merger review, pigs fly!  Judge William G. Young of the District Court in Massachusetts did not buy the conventional wisdom that all mergers “promote competition.” He rejected the proposed JetBlue’s $3.8 billion acquisition of Spirit Airlines. https://www.nytimes.com/2024/01/16/business/jetblue-spirit-airlines-ruling-merger.html; https://www.law360.com/articles/1786317/attachments/0.

             Millions of dollars in sponsored research and litigation expert witnesses have persuaded jurists and their law clerks that even though a merger reduces the number flights and airlines operating on the same city pairs, consumer welfare somehow increases. The conventional rationale explains that the combined carrier will have greater resources and no less incentives to compete aggressively with larger incumbents.

             How could it ever make sense that a profit maximizing business venture would prefer to devote sleepless afternoons reducing consumers’ out of pocket costs and enhancing their value proposition?  Why would any merged venture take the harder glide path of aggressive pricing and innovation rather than “go along and get along” by matching the dominant carriers’ rates?    

            I remember the unshakable confidence expressed by Judge Victor Marrero of the Southern District of New York, that $37 billion merger between T-Mobile and Sprint would benefit consumers by promoting more competition in the wireless marketplace. See https://casetext.com/case/united-states-v-deutsche-telekom-ag.  

             It did not happen!  

            Since acquiring Sprint TMobile evidences nothing of its former iconoclastic nature.  It has become a happy camper more than willing to engage in “consciously parallel” conduct, quite willing to follow the lead of AT&T and Verizon on price, performance, handset deals, freebie streaming subscriptions, etc.  

            The combination of Sprint and TMobile tower sites has improved TMobile’s reliability, especially in rural locales. But what evidence can anyone show that TMobile now is a deep cost cutter and conscientious innovator?  

            The Big Three now compete on what “free” video streaming service they offer and how much they can deceive consumers about “free” access to the latest and greatest smartphone.  AT&T advertisements first touted free Iphone 15s “on us” https://about.att.com/story/2023/iphone-15.html.  Soon thereafter both TMobile and Verizon quickly used the same “on us” deception.  https://www.t-mobile.com/news/devices/get-iphone-15-pro-on-us-and-be-upgrade-ready-every-year-only-at-t-mobile; https://www.verizon.com/smartphones/apple-iphone-15-pro/.  

            You call this maverick innovation?  The three national carriers deliberately use the same slogan to imply that consumers can get a free handset on them. This is evidence of robust competition?  

            The con job usually works, but maybe someday more consumers will understand that a marketplace with Alaska Airlines, JetBlue, Hawaiian Airlines, and Spirit Airlines works better than if two evaporate.  

            It does not take a rocket scientist to conclude that consumers suffer when four national wireless carriers dissolved into three.

When a Confirmed Reservation Means Nothing of the Sort

A few hours before the time for delivery of a rental car, a local rep called to renege: no apology, no explanation, no offer to mitigate damages; nothing but nastiness.

I'm confused about the email Enterprise previously sent me about a "confirmed" reservation.  What would a reasonable person understand confirmed reservation to mean?  Perhaps a better question: what prevented Enterprise from blocking rentals it knew (or should have known) that no vehicle would be available?

This shameful episode has absolutely nothing to do with force majeure that absolves a contracting party from liability for abrogating a contract.  How could Enterprise not consider the impact of Covid recovery and chip shortages?

Enterprise can fail to perform duties in a contract it created with impunity, but in most transactions, "no show" consumers have to incur 100% of the financial loss. You miss the flight, you lose.  You cannot make it to the concert, tough.  How can Enterprise not suffer any consequences for its negligence . . .dare I say fraud?

Libertarian economists typically would answer by suggesting the company would suffer revenue declines and an even worse reputation.  Maybe not, particularly when lax antitrust law enforcement allows markets to concentrate.

Enterprise can have a cavalier attitude toward misrepresenting rental car availability, because the company suffers no significant penalty for its contemptable behavior.

For what it's worth: shame, shame, shame on Enterprise Rent-A-Car.

I do not feel better, and I will be without transportation of any sort for 4 days as my wife uses our single vehicle to care for an ailing parent.  So much for cutting my CO2 load.

Hidden in Plain Sight: FCC Chairman Pai’s Strategy to Further Concentrate the U.S. Wireless Marketplace

          While couched in noble terms of promoting competition, innovation and freedom, the FCC soon will combine two initiatives that will enhance the likelihood that Sprint and TMobile will stop operating as separate companies within 18 months.  In the same manner at the regulatory approval of airline mergers, the FCC will make all sorts of conclusions sorely lacking empirical evidence and common sense. 

            FCC Chairman Pai’s game plan starts with a report to Congress that the wireless marketplace is robustly competitive.  The Commission can then leverage its marketplace assessment to conclude that even a further concentration in an already massively concentrated industry will not matter. Virtually overnight, the remaining firms will have far less incentives to enhance the value proposition for subscribers as TMobile and Sprint have done much to the chagrin of their larger, innovation-free competitors AT&T and Verizon who control over 67% of the market and serve about 275 million of the nation’s 405 million subscribers.

            Like so many predecessors of both political parties, Chairman Pai will overplay his hand and distort markets by reducing competition and innovation much to the detriment of consumers.  He can get away with this strategy if reviewing courts fail to apply the rule of law and reject results-driven decision making that lacks unimpeachable evidence supporting the harm free consolidation of the wireless marketplace.  Adding to the likely of successful overreach, is the possibility of a muted response in the court of public opinion.

            So how will the Pai strategy play out?  First, the FCC soon will invite interested parties to provide evidence supporting or opposing a stated intent to deem the wireless marketplace sufficiently accessible and affordable throughout the nation.  The FCC has lots of evidence to support its conclusion, but plenty of countervailing and inconvenient facts warrant a conditional conclusion, particularly in light of future market consolidation.  Wireless carriers have invested billions in network infrastructure and spectrum.  Rates have significantly declined as the industry has acquired scale and near full market penetration.  Bear in mind that all of this success has occurred despite, or possibly because of a federal law requiring the FCC to treat wireless carriers as public utility telephone companies.  Congress opted to treat wireless telephone service as common carriage, not because of market dominance, but because it wanted to maintain regulatory parity with wireline telephone service as well as apply essential consumer safeguards. 

            How ironic—perhaps hypocritical—of Chairman Pai and others who surely know better  to characterize this responsibility as the product of overzealous FCC regulation that has severely disrupted and harmed ventures providing wireless services.  Just how has common carrier regulation created investment disincentives for wireless carriers when operating as telephone companies?  Put another way, how would removal of the consumer safeguards built into congressionally-mandated regulatory safeguards unleash more capital investment, innovation and competitive juices?

            U.S. wireless carriers regularly report robust earning and average revenue per user that rival any carrier worldwide.  Of course industry consolidation would further improve margins while relaxation of network neutrality and privacy protection safeguards would create new profit centers.  TMobile shareholders get a big payout, while the remaining carriers breath a sigh of relief that their exhaustively competitive days are over.

            Will the court of public opinion detect and reject the FCC’s bogus conclusion that common carrier regulation has thwarted wireless investment and innovation?  That requires a lot of vigilance and memories of the bad old days when no carrier opted to play the role of maverick innovator and marketplace disrupter.  With TMobile or Sprint merged or acquired, the remaining ventures have ever more incentives not to spend sleepless afternoons competing and devising new ways to stimulate customer interest in changing carriers.  TMobile and Sprint have offered just about every value enhancement in recent years such as carry forward minutes, reduced roaming charges, unlimited service, new bundles and use your own device at much lower monthly rates.  Would these options exist if only three carriers served 95% of the market?

            If you think the recent spate of airline mergers has enhanced competition and the air travel experience, then a wireless marketplace with 3 national carriers will work out just peachy.

Make Versus Buy in Information, Communications and Entertainment –Comparing the Strategy of AT&T with Facebook, Google and Other Unicorns

            With ample lines of credit and a relaxed global monetary policy, AT&T can easily move up and down the ICE food chain with massive acquisitions.  Sensing opportunities presented by changing marketplace conditions and threats to legacy business lines, the company has opted to buy market share and expertise. Other major ICE ventures have opted to make new products and services, or to blend make and buy as appropriate. 

            I believe differences in strategy largely depends on the confidence a venture has in its ability to integrate acquisitions into the family by exploiting the skills, expertise and market share the acquired venture offers.  We hear how merged companies will exploit synergies and efficiencies, but doing this requires great finesse.  Can AT&T embrace people, plans and skills not invented from within?

            Consider what Amazon, Facebook, Google, Microsoft and other major firms have done on the make versus buy dichotomy for telecommunications transmission capacity.  These firms have opted to build undersea fiber optic transmission capacity rather than lease it from incumbent carriers on a cost plus, plus basis.

            Making content carriage instead of renting it makes absolute sense, because content companies can achieve savings in a major cost center, but one that is fungible. In other words, transmission capacity has substantial costs that content companies must incur, but transmission capacity does not significantly differ between carriers, or between a self-provisioning venture and one that leases capacity.

            Content does not have such fungible characteristics, because of a far wider range of good versus bad quality. Fiber optic transmission capacity matches, best practice, global standards, while content can be nation specific, idiosyncratic and quite risky to produce.  Perhaps Netflix has found ways to reduce risk of failure through data mining and a business plan where even large investments in single series will not threaten the ongoing viability of the company.  Generally speaking, even today, generating a winning content formula involves gut instinct, a long learning curve and many failures.  That explains why producers stick and copy with winning formulas resulting in countless sequels, prequels and duplicates.

            AT&T has ample funds to experiment, but with such a deep pocket the company risks buying at the top of a market and paying too great a premium over the stock price.  Consider its $48.5 billion DirecTV acquisition.  AT&T has bought a venture that has substantial recurring investment costs including the satellites with ten year useable lives and launch technology that historically has a one third probability of failure or live reducing anomaly.  Worse yet, AT&T did not get any internally generated content for its investment, at a time when consumers appear increasingly disinclined to pay for large and costly bundles of content, only a small portion of which they want to view.

            On the other hand, AT&T has grown and become a major powerhouse through successful acquisitions.  Only AT&T and Verizon remain from the seven divested Bell Companies.  Additionally AT&T knows how to bundle services and bill for it.

            Maybe AT&T can keep its acquisition success streak intact.  If it succeeds, it will have beaten stiff odds and proven its superior management skills, forecasting talent and business acumen.

AOL-Time Warner ($160 Billion in 2000) vs. AT&T-Time Warner ($85 Billion in 2017): Is It Different This Time?

            A little over 16 years ago, the merger of Time Warner and America Online resulted in an unprecedented loss in market capitalization.  Visions of synergy, efficiency and enhanced share valuation evaporated as reality kicked in quickly.  By 2002, the merged company already had to write off $99 billion in goodwill, an implicit recognition that a lucrative transformation did not occur.  See http://fortune.com/2015/01/10/15-years-later-lessons-from-the-failed-aol-time-warner-merger/.

            A significantly changed Time Warner, in a substantially changed marketplace, welcomes another mega-merger.  Proponents invoke the common refrain: This Time It’s Different.

So is it?  The answer lies in the changes in the company, AT&T and the information, communications and entertainment (“ICE”) marketplace.

            Time Warner has largely spun off non-core ventures, ironically an elimination of the vertical integration AT&T now seeks to achieve.  Time Warner now concentrates on content creation and distribution.  AT&T has invested heavily in migrating from wired and wireless telephony into a fully integrated and ubiquitous ICE venture.  Like Time Warner, AT&T recognizes the absolute need to change its market targets, or risk loss market share and declining prospects.  AT&T sees content ownership as key to its survival as the content carriage business declines.

            So far so good: AT&T vertically integrates and move up the ICE food chain into content creation.  It can better manage its transformation (there’s that word again) into a one stop shop for content access via any medium, including satellite, fiber, copper and terrestrial radio spectrum.

            AOL and a more diversified Time Warner had similar goals and expectations.  To put it mildly, it did not work out as planned. AOL’s stock capitalization dropped from about $226 billion to $20 billion.  The merged company could not come up with a successful strategy for managing the transition from a narrowband, dial up Internet access environment to one with easy and low cost market access by content and app makers using the broadband networks of unaffiliated carriers.

            Even if “necessity is the mother of invention” and adaptation, AOL-Time Warner could not make it work.  Maybe AT&T-Time Warner can with new synergies and enhanced consumer value propositions.  For example, AT&T offers its wireless subscribers a nearly unlimited data plan if they add DirecTV.  Such upselling and bundling positively exploits synergies and the merits in one stop shopping.

            We shall see in 2017 onward, because I expect the deal to achieve grudging, conditional, but not harmful regulatory approval.