The Odds for New TMobile to Morph into TMobile on Steroids?

            Reading the District Court decision approving the merger of TMobile and Sprint (see https://cdn.vox-cdn.com/uploads/chorus_asset/file/19712093/show_temp__6_.pdf), I am reminded of how much antitrust law relies on informed predictions of future market performance.  Judge Victor Marrero concluded that the plaintiff state Attorneys General failed to meet their burden of proving that the merger would materially harm consumers and competition.  In effect, the Judge bought the assertion that New TMobile will more aggressively compete and innovate than what the two stand-alone companies could muster, i.e., that the whole would be greater than the sum of the parts.

            This comes across as a leap of faith, substantially challenged by a hindsight review of market consolidation in other markets.  Let’s look at commercial aviation in the United States, with attention to how Southwest refined its business plan and strategy after several mergers involving both the company and other airlines.  Put more simply, is Southwest still the maverick in the same vein as TMobile?

            The answer to this question addresses how bulked-up companies, like Southwest and New TMobile, respond to a concentrated market.   Will they continue seeking to chisel additional market share from legacy carriers, possibly at the expense of profit margin, share price, average revenue per user and year-end bonuses, or will they “take the foot off the peddle”?

            In Southwest’s case, tweaks to their business plan show a reduced value proposition for consumers--what economists call consumer welfare.  Part of the reduction, results from a maturing company, but arguably a larger part results from adjustments that enhance the company’s bottom line with “nickle and dime fees.”  While Southwest has opted to continue offering checked baggage at no additional cost, the company has joined with other airlines in charging new fees that can significantly increase consumer’s total out of pocket costs. Southwest did not initiate these “enhancements,” but a concentrated market, where all other carriers charge these fees, makes it easy for the former maverick to join the group. See, e.g., https://www.forbes.com/sites/danielreed/2019/02/21/all-grown-up-as-it-approaches-50-southwest-is-dealing-with-mature-airlines-kinds-of-problems/#7031f97f7a7e; https://www.mcall.com/news/nation-world/mc-southwest-airlines-no-longer-cheapest-0505-20150505-story.html; https://www.fool.com/investing/2018/12/01/cost-creep-at-southwest-airlines-will-help-its-riv.aspx.

            I do not share Judge Marrero’s breathless optimism that the TMobile-Sprint merger benefits competition and consumers.  Can anyone come up with examples where industry consolidation has enhanced the value proposition for consumers?  Channeling Sarah Palin, how’s that concentrated airline industry working out for you?

TMobile-Sprint Merger Approved and 144 Million U.S. Subscribers Will Pay Dearly

            News of a reviewing District Court’s approval of the TMobile-Sprint merger has arrived today.  See. e.g., https://www.wsj.com/articles/u-s-district-judge-expected-to-rule-in-favor-of-sprint-t-mobile-merger-11581376688.  I’m sure the decision will conclude how much the combination will enhance competition, apparently more so than what the two companies individually could offer.

            This conclusion does not pass the smell test.  The court will note what a great competitor TMobile has been and how unviable Sprint will be in the middle to longer term.  OK, that observation makes sense and I’ll go one step further to note that Sprint recently has offered some of the best deals for consumers that the company probably could not continue to offer over time.

            I part company with the likely conclusion made by Judge Victor Marrero that the combined company will have every incentive to become even more competitive and innovative than what the two unaffiliated firms have generated and even what TMobile would generate even if Sprint were to falter and eventually exit the market.

            Let us step back and answer a fundamental question no one seems willing to pose and answer: why do companies seek to merge?  Answer: to make more money, enhance value for shareholders, possibly compete and innovate less because a more concentrated marketplace does not necessitate “sleepless afternoons.”

            The merged TMobile-Sprint has far greater incentives to accept its third among equals status than to work hard to chisel at the market dominance of AT&T and Verizon.  Why bother shaving margins when AT&T and Verizon offer rates generating some of the highest Average Revenue Per User (“ARPU”) and margins in the world.  None of the U.S. carriers want us to know this, but if you travel abroad, you can easily find month-to-month service for half the U.S. average rate.

            Why would TMobile want to upset the apple cart when, post-merger, it can generate higher revenues and profits using AT&T and Verizon’s margins as an umbrella under which it can offer slightly lower rates and call it a day?  In other words, TMobile has little incentives to start a price war.

            Lastly, I am quite leery of the logic in replacing Sprint with Dish entering a mature market solely as a reseller of Sprint and TMobile pre-paid, no-contract brands, coupled with a now extended deadline to have real skin (money) in the game.  Dish has an uncanny ability to acquire spectrum, do nothing with it, secure an extended deadline to buildout a network and then seek to sell it to another company more willing to invest in plant. 

            Will Dish provide salvation for consumers in the long run?  I doubt it.  In the short run, the 144 million plus subscribers in the U.S. can expect to pay more for less “unlimited” service.

More Overstatements About the Lovefest a Merged TMobile-Sprint will Deliver

            Having received FCC approval of its merger proposal, (see https://www.fcc.gov/transaction/t-mobile-sprint), TMobile and Sprint have turbocharged their array of less than meets the eye consumer welfare enhancing promises.  See https://www.finder.com/t-mobile-to-unveil-new-t-mobile-un-carrier-1-0

The companies have targeted states joining in an antitrust law suit to block the merger.  For example, the Attorney General of Colorado, a guy I used to admire, who should know better than to take the bait, agreed to withdraw from the law suit in exchange for significant Colorado-specific employment and facility commitments. See https://www.reuters.com/article/us-sprint-m-a-t-mobile/colorado-abandons-legal-effort-to-stop-sprint-t-mobile-merger-idUSKBN1X01QC

            Today’s New York Times contains the latest reiteration of why 3 national wireless competitors are better than four.  Before I “deconstruct” and refute the value of the Uncarrier’s commitments, I return to a basic question: If TMobile and Sprint can offer such a better value proposition than what AT&T and Verizon offer, would consumers fare even better if TMobile and Sprint also had to compete with each other?  In this age of historically low interest rates and the deep pockets of two foreign owners (Softbank and Deutsche Telekom), what prevents either company from offering what they now make contingent on their merger?

            In a nutshell, TMobile and Sprint treat the 5^th generation of wireless innovation as salvation for consumers, if and only if the companies merge.  If they cannot, then apparently AT&T and Verizon will capture the benefits of faster, better and more efficient technology all for themselves.  Only if Sprint and TMobile merge will the much overcharged and cheated consumer finally get a fare deal.  Again, what prevented either company from offering everything they make contingent on their merger?  At the very least, in light of far more concentrated market shouldn’t the Uncarrier explain why it can only become more competitive and innovative through consolidation, rather than competitive necessity?

            Today’s advertisement characterizes AT&T and Verizon as greedy, slow to innovate and unlikely to change.  Agreed, but doesn’t that make these two incumbents easy targets for lean and hungry competitors?  TMobile has increased its market share by offering consumers a better value proposition.  This company already has a 5G buildout plan and already offers lower prices.

            The ad offers 5G service to 99% of the U.S. population, a 50% discount for its lowest service tier, better rural 5G penetration in rural locales, fixed wireless broadband service and 11,000 more jobs by 2024. 

            I’d be wowed by these promises if I didn’t know the host of caveats, non-disclosures, misrepresentations and inability or unwillingness of the FCC to track and enforce pre-merger commitments.  In a nutshell, the Uncarrier promises far less than it could possibly deliver.

            The major BIG DECEPTION lies in the assumption the Uncarrier expects consumers to make about the nature of delivered 5G technology.  Rural locales will not now, or in the foreseeable future, have the tiny millimeter wave cell contours that will offer the promised vast improvements in transmission speed, capacity and latency.  TMobile has announced plans to use 600 MHz spectrum for rural 5G, far lower than the GigaHertz bands expected to be used in cities.  Every carrier, regardless of competitive necessity and the number of competitors will engage in the same prudent spectrum management process.  No carrier can execute a profitable 5G business plan that offers rural residents truly equivalent geographical market penetration, transmission speed, available capacity, etc.

            TMobile and Sprint will offer 5G networks that are no more or less “transformational” than what other carriers will deploy at the same time.  The Uncarrier may throw a bone to rural residents by installing more 600 MHz towers, but there is nothing I’ve seen from AT&T and Verizon indicating that these carriers will underinvest in the migration from rural 4G to rural 5G. Bear in mind that 5G is a wireless transmission, switching and routing technology, not a service.       The small print in the Uncarrier ad today underscores that 5G will not change the nearly identical technological nature of what any and all U.S. carriers will offer.  The merged company STILL will throttle video to DVD, standard definition 480 lines of resolution, despite the much touted higher capacity.

            TMobile and Sprint have expanded their charm offensive with targeted inducements now including first responders.  The companies imply that the remaining state Attorneys General need to be “educated” about the lovefest the Uncarrier will deliver.  If not, it’s curtains for the free world, American consumers and the country in general.

            Don’t buy it.

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.

Did the Justice Department Embrace Competition-Lite as a Merger Lifeline?

            Many press accounts report that the U.S. Justice Department will support the spin-off of Sprint’s wireless reseller, Boost Mobile, as a concession that will resolve staff concerns about the loss of a 4^th national competitor.  See, e.g., https://www.nytimes.com/2019/06/14/technology/t-mobile-sprint-merger.html; https://www.bloomberg.com/news/articles/2019-06-09/boost-mobile-founder-met-doj-friday-on-t-mobile-sprint-review.  Notice I did not say, 4^th national carrier, because Boost Mobile resells Sprint wireless network capacity and owns no towers and transmission facilities.

            Resellers of telecommunications network capacity survive if and only if they can exploit a margin between what they have to pay a facilities-based carrier and what they can charge consumers.  This arbitrage opportunity exists, only if 2 conditions are satisfied: 1) a facilities-based carrier will sell bulk minutes or Gigabytes of network capacity and 2) the rate offered by the facilities-based carrier is low enough to enable the reseller to earn a profit, i.e., the buy low, sell higher business model remains enact.

            Let us consider this Justice Department “solution.”  Merger advocates have emphasized how the deal would not raise prices, because it would generate “more competition” among three equally muscular, but hungry competitors.  Assuming this will take place, would the lower margins available to facilities-based carriers narrow the margin they will make available to resellers?  Might the 3 remaining facilities-based carriers abandon resellers based on the view that this sales option is no longer necessary and not worth the bother?

            The key flaw in the Justice Department’s rationale lies in the assumption that spinning-off Boost Mobile will retain a robust and viable 4^th competitor.  Is this a certainty when the resurrected 4^th venture does not control the key element and cost-center for service?  Bear in mind that while some resellers, like MCI, evolved into facilities-based carriers, as occurred in the long-distance voice telephone market in the 1970s, the prospects for Boost Mobile are questionable.  Can anyone identify a Virtual Mobile Network Operator (“VMNO”) who got rid of its virtual status?  See https://en.wikipedia.org/wiki/Mobile_virtual_network_operator.  Comcast sold it wireless spectrum, Dish has yet to activate any of its terrestrial spectrum assets even with a “use or lose” deadline and one can only speculate whether a deep pocketed newbie, like Amazon, will want to play white knight.

Wireless resellers are called VMNOs for good reasons. They offer the prospect of competition if and only if their virtual network can meet the 2 conditions identified above.  The possibility exists that the Justice Department might try to mandate compliance with these 2 conditions by the merged Sprint-TMobile company.  However, does anyone think Congress and or the courts would tolerate ongoing rate setting involvement by a government agency?  Ample case law shows appellate courts, including the Supreme Court, as at best skeptical and typically intolerant of such oversight, even by the FCC.

Assistant Attorney General Makan Delrahim has embraced structural, rather than behavior safeguards for mergers that have the potential to harm consumers and competition. See

https://www.kirkland.com/publications/kirkland-alert/2018/10/doj-antitrust-division-announces.  He is sadly mistaken if he thinks spinning off a VMNO offers anything more than window-dressing to salvage a raw deal.

What the Mergers by and of U.S. Airways Tell Us About the TMobile Sprint Merger

            You might join me in the contempt for the various sponsored (“coin-operated”) scholars who sing the praises of the TMobile and Sprint merger. These sponsored researcher/advocates never get around to explaining just what the separate companies cannot do now that they will be able to do as a combined company. There is ample empirical evidence that merged companies do not accrue the much-touted consumer and shareholder benefits.

            Let’s consider this issue in the context of commercial aviation and the airline I loved to hate for decades: The one in the same Allegheny Airlines, USAir and U.S. Airways.   Several decades ago, this airline acquired three, regional carriers: Piedmont; Pacific Southwest Airlines and America West. At least 2 of the 3 carriers had a better than average consumer ratings before their merger.  Of course, the rest is history: the merged company managed to leach out everything good coming from the acquired companies.

            Piedmont served mostly southern U.S. destinations with the same kind of pleasantness Southwest provides most of the time now. In addition, Piedmont innovated and offered price discounts.  They had a “Hopscotch Fare” that provided savings for passengers willing to take multiple flight segments instead of a non-stop flight.  I understand that passengers loved PSA and air traffic controllers used the name Cactus for America West, perhaps to commemorate the airline’s folksiness, but maybe to avoid confusion with American Airlines, the company that ended up acquiring U.S. Airways.

            In any event, American Airlines does not seem to offer much of anything cheaper or different than the other two major carriers United and Delta.  Consumers choose their poison and lock in for the occasional perk loyalty and frequently flier programs offer.

            Just now I wonder whether TMobile, Sprint and the vast array of funded merger advocates will convince the court of public opinion how much improved, cheaper, innovative and great the U.S. wireless marketplace will become.  The next time you board a domestic flight, think about how greater the user experience has become thanks to elimination of Continental, Northwest, and dozens of other competitors.