Award Winning Blog

Sunday, July 3, 2011

$1000 vs. $6.84 Million

     The California Public Utilities Commission has scheduled a series of workshops to explore the consequences of AT&T Wireless’ acquisition of T-Mobile.  I have received an invitation to participate, but my professorial travel budget cannot defray the $1000 or so it would cost.  Contrast that expense with reports that AT&T spent $ 6.48 million in the last three months on lobbying.  See
     Had I participated I would have made the following points.
     AT&T Wireless and T-Mobile want this deal, because they believe it will enhance shareholder value in their respective parent companies.  AT&T acquires more market share the easy way without much enhancement to its value proposition to consumers.  T-Mobile customers get the opportunity to make and receive “free” calls on the AT&T network, but on service plans offered in an even less competitive market.
     AT&T Wireless eliminates a competitor, and acquires T-Mobile’s spectrum, towers and other assets.  For its part T-Mobile gets to cash out of its U.S. investment having lost confidence that the company can compete with the AT&T and Verizon who over time have boosted their market share and consolidated control over the wireless market, including a strong negotiating posture with handset manufacturers.
     Like it or not the acquiring company bears a burden of proving that the venture serves the public interest, or more realistically causes little harm.  AT&T bears this obligation, because the company voluntarily has chosen to operate a business that uses spectrum—auctioned and freely granted—and provides service as a type of public utility known as a common carrier.  Rather than confiscate private assets, federal and state governments have lawful authority to require common carriers to operate in the public interest including duties to provide service on fair terms and conditions, not always set by an unfettered marketplace.
     AT&T has spent billions writing scripts for stakeholders and decision makers identifying all the anticipated public benefits accruing from the deal.  The company claims that the acquisition will expedite wireless broadband to rural areas, solve spectrum shortages caused by the failure of the FCC to reallocate more of this essential resource for commercial mobile services and overall enhance (or at least not harm) competition.  AT&T has experienced no difficulty in paying for the services of academics--some friends and colleagues of mine--to assert these benefits, albeit with very little science and empirical proof.
     Rather than join the queue and supplement a fund for my kids’ college educations I have undertaken the role of challenging the conventional wisdom among stakeholders and the FCC.  I want the FCC and state public utility commissions to collect empirical evidence about the consequences of this and other acquisitions.  Armed with that kind of material decision makers have a better chance at assessing what will change, or stay the same.  In a market already dominated by four  national carriers serving more than 90% of all subscribers in the U.S., regulators have to confirm that this deal will not trigger such consolidation as to accord AT&T Wireless and Verizon duopoly power.
     When two ventures share about 80% of the market there is great risk that they can affect the price, terms and conditions on which consumers access both wireless service and the devices that access service.  As the smart phone will become the third and dominant screen for information, communications and entertainment (“ICE”) regulators have to stand vigilant against allowing ventures to pursue transactions that make it easier for them to compete and innovate less.
     Already the U.S. wireless marketplace shows signs of lackluster competition and innovation.  A prospective customer would find little difference in the price points and service terms offered by the four national carriers.  These carriers have a reputation for imposing restrictions on service including what subscribers can do with their smartphones.  By locking consumers into a two year service contract, with significant early termination fees, wireless carriers reduce customer churn, but also stifle the flexibility and versatility of handsets.  Rather than becoming the equivalent of a wireless computer—as they are in most nations—handsets in the U.S. are locked by carriers who disable features installed by handset manufacturers and limit what subscribers can do with their handsets.
     Throughout my professional and academic career I have examined many out of the headline aspects of the telecommunications marketplace with an eye toward determining whether and how carriers compete.  Increasingly the terms and conditions by which carriers interconnect their networks affect the value consumers can accrue from access as well as the commercial viability of specific carriers.  AT&T Wireless and Verizon clearly understand that they can leverage market power to extract financial and operational concessions, or to bolster their dominance. 
     For example the FCC has stated that these two carriers have refrained from executing data roaming agreements with independent carriers largely because the absence of such an agreement creates a major and growing incentive for consumers to take service from a nationwide carrier.  So a common carrier providing both telecommunications and information services can leverage its unregulated, non-common carrier status to assert the right not to interconnect with other carriers.
     AT&T also has a strategy to disadvantage competitors who need wireline services to “backhaul” wireless voice and data traffic.  In light of the absence of robust competition for these so-called middle mile and special access services, companies such as AT&T and Verizon can price service at rates several multiples above other more competitive services.  For wireless carriers lacking a wireline corporate affiliate having an extensive national middle mile and backhaul network, incumbent carriers which combine both types of networks achieve a market boost in two ways: 1) the scale economies of having an integrated wireless and wireline network; and 2) the ability to demand extraordinarily profitable middle mile and backhaul rates.     
     Until quite recently the FCC summarily concluded that all telecommunications service markets were sufficiently competitive as to eliminate the need for regulatory scrutiny to prevent price squeezes and other anticompetitive practices where a carrier, such as AT&T can competitively disadvantage a competitor by offering retail rates below the wholesale or special access rate charged competing carriers.
     AT&T Wireless’ proposed acquisition comes at a time when incumbent carriers have launched an unprecedented campaign to convince legislators, judges and the public that regulation costs jobs, stifles innovation and handicaps competition.  I see this well funded initiative as causing just the opposition.  Has there ever been a merger or acquisition that did  not trigger a reduction in employment, at least in the short term, as one of the positive enhancements to efficiency?  What handset manufacturer will risk the displeasure of two customers representing 80% of market by offering handset innovations and features that these two carriers do not want subscribers to have.  Bear in mind that AT&T Wireless and Verizon initially disabled and later conditioned what subscribers could do with wi-fi access.  The carriers relented possibly because they realized that rather than adversely impact revenues, wi-fi access offloads traffic onto other networks, rather than tax the ability of their wireless network to handle growing demand.
      Lastly how competitive can a market be when four carriers have a 90% market share and the proposed acquisition would vest the top two carriers with an 80% share?  Consider this deal in the context of the commercial aviation business in the U.S.   How would consumers and the Justice Department respond if American Airlines, the number two air carrier, proposed to merge with Delta, the number four carrier having recently merged with Northwest?  Unlike aviation where all carriers have to negotiate runway access with an unaffiliated venture, in the wireless business a single carrier can control the runway, air craft, air traffic control and the commercial terms for transferring customers and their baggage.
     The AT&T acquisition of T-Mobile raises a variety of questions the companies simply do not want authorities to ask and answer.