A Wireless Duopoly?

Recently Cox Communications announced its departure from the wireless telecommunications.  Similarly some speculate whether T-Mobile can survive if its merger with AT&T does not happen.  What does it mean when an incumbent carrier exits a market, with doubts about the ongoing viability of one of the Big Four national carriers? There are too many carriers and a market shake out must reduce competition?  The Big Two carriers (AT&T and Verizon) have engaged in lawful and questionable tactics to “corner the market.”?  Something else?

If a hyper-competitive market migrates to a less competitive balance of two carriers, two things appear clear: 1) a duopoly has evolved making ludicrous to claim self-regulation will foreclose anticompetitive conduct; and 2) market failure has occurred, unless consumers somehow do not suffer from haivng a choice of two facilities-based carriers and a few resellers.

If the Big Two have captured the market, then it becomes necessary to identify what lawful, questionable and unlawful tactics they have pursued.  In the lawful department, the Big Two have invested the money to build superior networks.  They have captured the competitive benefits of positive network externalities: offering not to debit minutes of use for intranetwork use.  Additionally they have exploited economies of scale.

             In the questionable department the Big Two have exploited exclusive handset deals and the first mover advantage of having received free spectrum from the FCC while other carriers had to compete in a comparative hearing, or hope for success in a ping pong ball selection.  While they appear not to have colluded in a “smoke-filled room,” these carriers offer nearly identical rate plans, what antitrust law considers conscious parallelism.

At the very least the FCC should aggressively work to promote market entry so that the facilities-based wireless market does not end up being more concentrated than commercial aviation.

           

Academic Entrepreneurism and Rent Seeking

            While perhaps few in number, professors like me execute on their capitalist beliefs.  I am glad to augment my sparse teaching salary with consulting work.  Just as corporations seek to enhance shareholder value I will maximize my rents, particularly for distasteful work such as serving as an expert witness for a case that should never reach a court room.

            But unlike many ventures in the telecom sector, like AT&T Wireless, I am upfront about my work: I can be rented, but not bought.  Similarly I may not maximize my earnings, because non-quantifiable matters like reputation in the community matters to me.  I have passed up on work that I simply cannot support.  I am upfront with prospective and actual clients.

            The same cannot be said for a client like AT&T which uses dollars to subvert scholars into shills.  AT&T has invested millions of dollars on academics and consultants who will help legitimize the acquisition of T-Mobile as a wise, noble and cheaper effort to expedite wireless market penetration in rural locales.

            In truth AT&T has come to realize two basic realities:

1)         It is cheaper to buy out competition than to compete with a larger set of competitors; and

2)         It is cheaper to support mergers and other deregulatory campaigns with lawyers, lobbyists and consultants than to work harder in the marketplace.

            AT&T can enhance shareholder value and improve the odds than stock options remain “above water” by buying market share.  If a venture has to compete less it logically follows that a greater return on investment may result.  Why devote sleepless afternoon competing when readily available and comparatively cheap advocates can help frame a merger in terms of promoting competition and narrowing the digital divide?

            What’s remarkable is the reality that this sham would not possibly pass the smell test of fair minded people, but for a relentless campaign to legitimize outrageous propositions.

$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 http://www.fiercewireless.com/story/ctia-att-boost-lobbying-spending-q1/2011-07-01.

     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.

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 4^th 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.