The Frequently Attempted, But Rarely Successful Identification of Causation

           First, thanks to anyone who sees a daunting title like this one and nevertheless reads on. I want to discuss whether and how researchers can correctly isolate variables and determine how impactful they are on consumers, competition, and the marketplace.

           For example, former FCC Chairman Ajit Pai and others claimed in that imposing network neutrality obligations on Internet access providers created a substantial, unassailable adverse effect on carrier investment in infrastructure:

           “So what happened after the Commission adopted Title II? Sure enough, infrastructure investment declined. Among our nation’s 12 largest Internet service providers, domestic broadband capital expenditures decreased by 5.6% percent, or $3.6 billion, between 2014 and 2016, the first two years of the Title II era. This decline is extremely unusual. It is the first time that such investment has declined outside of a recession in the Internet era.” Remarks of FCC Chairman Ajit Pai at the Newseum, “The Future Of Internet Freedom” (Washington, D.C, April 26, 2017); https://transition.fcc.gov/Daily_Releases/Daily_Business/2017/db0426/DOC-344590A1.pdf.

           After relentless repetition of this assertion, it became gospel truth and expanded to become a given that a single major regulatory initiative, by itself, can trigger multi-billion dollar reductions in carrier capital expenditures.

           Never mind that this isolation of a single causal (so-called dependent) variable simplifies a quite complex issue about the many factors directly impacting a carrier’s decision to invest in plant, that may take years to recover, if at all.  Politicians and sponsored researchers like to remove complexity and identify a single cause for all types of ills, particularly ones that possibly constrain profitability of important benefactors, requiring them to work harder. 

           Regulators were presented with “proof” that their work had harmed consumers and the public interest.  Publications, like the Wall Street Journal, showcase the research followed by a strongly worded editorial castigating the FCC for its poor work product.

           Currently, another variable isolation process is underway, this time to prove that mergers and acquisitions enhance consumer welfare and promote competition.  Dr. Tom Hazlett, Hugh H. Macaulay Endowed Professor of Economics, Clemson University, and Dr. Robert Crandall, Senior Fellow, Technology Policy Institute, have written a comprehensive paper concluding that TMobile’s $26 billion acquisition of Sprint in 2020 did not trigger a cascade of anticompetitive outcomes, but in fact achieved great things. See https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4736059 [hereinafter cited as Hazlett and Crandall 2024 Paper].

          The paper supports the premise that reducing the number of U.S. facilities-based wireless carriers from 4 to 3 did not result in a variety of terrible outcomes, predicted by the Justice Department, many state Attorneys General, and yours truly.

          In another blog entry, I may attempt to identify questionable assertions made in the paper which I suspect will get much promotion given the stature of the authors, the persuasive nature of the paper, and the ongoing campaign to shut down any initiative at the Federal Trade Commission and elsewhere to become more aggressive antitrust law enforcers.

          Right now, I would like to identify a curious and probably unanticipated result of the paper: two eminent researchers have provided ample evidence that U.S. wireless carriers always have made the necessary investments in plant to stay competitive, regardless of whether one or more regulatory initiatives might make cost recovery more difficult:

“Increases in total bandwidth and network investment accelerated in the post-merger period. These measured trends – each requiring costly actions by the competing mobile service carriers -- are the reverse of what would occur in the “cozy oligopoly” scenario predicted by opponents of the transaction.” Hazlett and Crandall 2024 Paper at p. 26.

           Simply put, wireless carriers capex invest decision are driven largely by technology cycles, whether a carrier has to invest in next generation network plant and bid billions of dollars for more spectrum to accommodate growing bandwidth demand, or not.  Wireless carrier capex has grown even after the election of President Biden and the resulting Democratic majority of FCC Commissioners starting in January 2021.

           Wireless carriers made extraordinarily high capital investments during the upcycle rollout of 5G technology, despite Covid 19 reductions in revenues and stock values, and temporary declines in average revenue per user. If Chairman Pai was correct, wouldn’t it follow that the carriers would have conserved capital during times when marketplace conditions were pointing to delayed or possibly nonrecoverable capital investment?

           Can we at least agree that there are many factors that determine marketplace outcomes? It appears quite unlikely that one event, no matter how profound, can singularly alter market-driven behavior.

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.

 

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.

Nipping in the Bud Any Reassessment of Merger Guidelines

             The Department of Justice and Federal Trade Commission have released for public comment proposed new guidelines designed to address "the many ways mergers can weaken competition, harming consumers, workers, and businesses." See https://www.ftc.gov/news-events/news/press-releases/2023/07/ftc-doj-seek-comment-draft-merger-guidelines. Rather than participate in a thorough debate on the merits of the new government guidelines, a variety of stakeholders have launched a preemptive strike to discredit the inquiry and individuals like FTC chairwoman Lina M. Khan. 

             Sponsored researchers, Chicago School antitrust doctrine advocates, and maybe some true believers in the virtues of maintaining the status quo have become apoplectic in their disapproval, some preemptively oppositional even before release of the proposal. See e.g., https://www.uschamber.com/finance/antitrust/a-shift-in-merger-enforcement-risks-damaging-our-economy; https://cei.org/studies/turning-back-the-clock-structural-presumptions-in-merger-analyses-and-revised-merger-guidelines/.

             Using a commonsense standard, I smell a rat.  Advocates for maintaining the status quo have much to lose if DOJ, FTC, and eventually, reviewing courts, respond to changing marketplace conditions such as the proliferation of "winner take all" platform intermediaries, like Facebook and Google.  Information Age markets do not always match the manner in which bricks and mortar markets operate.  See Rob Frieden, The Internet of Platforms and Two-Sided Markets: Implications for Competition and Consumers, 63 Vill. L. Rev. 269 (2018); https://digitalcommons.law.villanova.edu/vlr/vol63/iss2/3/; Two-Sided Internet Markets and the Need to Assess Both Upstream and Downstream Impacts, 68 Am. U. L. Rev. 713 (2019); https://digitalcommons.wcl.american.edu/cgi/viewcontent.cgi?article=2085&context=aulr. Nevertheless, stakeholders tenaciously adhere to doctrine, rules, laws, and assumptions that surely need reassessment in light of changed circumstances.

             Here are a few significant new challenges to the status quo.

1) Chicago School emphasis on consumer welfare and price ignores harmful secondary and tertiary impacts.

             It does not take a Ph. D in economics to see financial and reputational harms resulting from mergers and acquisitions that further concentrate markets. Even using monetary impact as the sole evaluative criterion, market dominance makes it possible for firms to extract monopoly rents.  Chicago School advocates note how firms like Facebook and Goggle and offer a valuable service "for free." Using their narrow focus, free represents a remarkable value proposition. However, a broader focus on economic impact readily identifies offsetting harms: identity theft, insufficient data protection resulting in stolen email addresses and passwords, disinformation leading to distrust in government, media, organized religion, and other bedrock institutions, threats to elections, national security, and individuals' overall sense of wellbeing, etc.

             Free does not mean without cost, particularly in an ecosystem where "surveillance capitalism" offers a "free" service as an inducement for the opportunity to mine, collate, market, and generate revenues from data.

2) Vertical and horizontal mergers are not necessarily separate transactions.

             Conventional antitrust theory, subsequently baked into case precedent and current DOJ-FTC merger guidelines, considers as gospel truth the mutual exclusivity of vertical and horizontal mergers.  The former qualifies for relaxed scrutiny based on the assumption that the acquiring firm did not compete in the markets served by the acquired firm.  The rationale concludes that no harm will beset consumers in a merger of firms that did not compete with each other in the first place.  Because horizontal mergers involve the elimination of a competitor and expanded market share for the acquiring firm, closer scrutiny should apply.

             There are several grave problems with this convenient and simplistic doctrinal model.  Many markets, especially information, communications, and entertainment ("ICE") ones, have dominant firms that operate throughout vertical and horizontal "food chains."  For example, Comcast creates content (NBC Universal), syndicates and licenses content for distribution by unaffiliated firms, and also delivers content to consumers (cable, broadcasting, streaming).  The company is vertically integrated and horizontally integrated.  It competes with companies that also have to pay it for access to "must see" content, e.g., NBC as a broadcast network still offering mass market programming such as network news and live sporting events.

             If courts did not assume vertical acquisitions lack any adverse impact on markets and consumers, a vertical acquisition might get the kind of close scrutiny it warrants.  Consider Comcast's acquisition of NBC.  The conventional wisdom framed the deal as vertical integration, because Comcast mostly distributes content as a cable television operator, with seemingly limited investment in content creation.  Even accepting the obvious that Comcast does create content, reviewing courts assumed the company would never withhold access, because it would reduce licensing and syndication revenues.

             News flash: Comcast might want to withhold content, or extract higher payments from competitors.  So-called retransmission consent requires Comcast, as the owner of NBC to negotiate in good faith with unaffiliated cable television companies.  Frequently, the parties cannot reach a renewal agreement on time and valuable content is blocked.  These "black outs" have become more numerous and last longer.  See, Rob Frieden, Krishna Jayakar, & Eun-A Park, There’s Probably a Blackout in Your Television Future: Tracking New Carriage Negotiation Strategies Between Video Content Programmers and Distributors, 43 Colum. J.L. & Arts 487 (2020);  https://academiccommons.columbia.edu/doi/10.7916/d8-aq85-2z51/download.

3) Mergers rarely enhance competition.

             Has anyone empirically proven that a merger or acquisition enhances consumer welfare rather than just the acquiring company's profitability?  Does reducing the number of competitors somehow make the survivors more vigorous competitors, keen on innovating, reducing prices, improving customer service, and otherwise making the marketplace more robust?

             Consider TMobile's acquisition of Sprint.  The conventional wisdom, dutifully articulated in the court's approval of the transaction (see https://law.justia.com/cases/federal/district-courts/new-york/nysdce/1:2019cv05434/517350/409/) assumed New TMobile would continue the tradition of being an innovator, lower cost competitor, and provocative pro-consumer warrior.  I see the wireless marketplace as an oligopoly of three offering roughly the same prices, happy to differentiate themselves on what "free" content like Netflix they will provide subscribers. Has New TMobile offered anything innovative and disruptive since acquiring Sprint?

             I readily acknowledge that Sprint had become a failing venture, perhaps on the brink of bankruptcy.  If an incumbent had not acquired the firm, I believe a new investor gladly would have paid pennies on the dollar for the opportunity to operate in a market with one of the highest average revenue per user in the world.  Yes, wireless rates have declined, but they are lower with better terms throughout most of the world.

4) Platform intermediaries, operating in two-sided markets, can adversely impact horizontal, vertical, secondary, and tertiary markets.

             Chicago School antirust doctrine provides simplistic, but easily understood and implemented rules. Judges and their law clerks, have become indoctrinated in "rules" that started as theory, but over time got baked into the jurisprudence.  I believe the Chicago School doctrine became unimpeachable gospel largely because stakeholders that would benefit from relaxed antitrust enforcement, invested heavily in making it a fundamental part of law and economics.

             How did this happen?  Millions of dollars spent over decades have made the doctrine appear legitimate and unimpeachable, despite regularly failing a simple smell test.  The combination of sponsored researchers, well-funded institutes, foundations, think tanks, and advocacy groups, all-expense paid seminars, endowed professorships, and the like have paid off.  Sponsored researchers create a plethora of work, framed as academic contributions, but designed to achieve support for a predetermined outcome. The process continues and builds on itself as sponsored researchers cite the prior work of sponsored researchers.  Over time, clearly results driven advocacy documents acquire the legitimacy and credibility of unsponsored work aiming to seek the truth.  In fact, sponsored research can crowd out work that does not have the public outreach and cheerleading provided by stakeholders.

             The whole process "stinks to high heaven."  Just now, sponsored researchers are noting that the proposed merger guidelines would harm the credibility of both DoJ and FTC, apparently before the court of public opinion and judges.  Of course, these very same pundits have the financial incentive to impeach the credibility of these government agencies and deem the proposed guidelines harmful, ill conceived, and bullying.

             It's a racket as my wife would say.  I am certain that so-called consumer stakeholders also have financial underwriters singing the praises of the proposed guidelines. However, these groups have substantially less funding available, because few stakeholders can see the direct monetary harm that would result from implementation of the guidelines.

             I understand that sponsored researchers often have the ongoing financial burden of having to generate annually enough "soft money" to keep graduate students employed. Sadly, that necessity has become yet another reason for the rats to proliferate.  

 

Market Forces Preempted by Rising Risk and Regulation?

             This might not be the best time for the U.S. Chamber of Commerce to make the case that rising risk and regulation are harming the marketplace and consumers.  See Public Policy Risks Soar Amid Growing Trend to Regulate Rather than Legislate and Partisan Approach to Lawmaking.  A content analysis of companies' 10-K filings with the Securities and Exchange Commission quantifies a rise in risk disclosures, with increases in key works such as data privacy, immigration issues, labor, and intellectual property.

             The Chamber appears intent on persuading the court of public opinion that life is getting riskier and harder for business. 

             It appears to me that Business America has largely foisted risk onto consumers, and counterintuitively their profit margins have increased despite frequent complaints that regulation raises the cost of doing business, squelches innovation, and reduces employment.

             I cannot find an airfare or hotel booking that permits cancellation without a risk premium doubling the non-refundable rate.  Similarly, if risk is so harmful, how can businesses, in a variety of market segments, find it possible to increase revenues and profit margins?  Even the Wall Street Journal notes this anomaly.  See Why Is Inflation So Sticky? It Could Be Corporate Profits

             I was indoctrinated by my UPenn and UVa training that market forces are largely unimpeachable.  In most cases yes, but just now, even some people at the "Diary of the American Dream" (a former marketing slogan for the Journal) see companies able to game the system.  Apparently, we consumers can become numbed by the constant drumbeat that inflation is unavoidable when markets become disrupted by supply chain and other extraordinary circumstances. The Chamber of Commerce wants to include in the emergency rationale upward price pressure created by added risk and government regulation.

             No one in the Chicago School seems able and willing to concede that sometimes market self-discipline fails.  How can these true believers explain the success achieved in keeping prices and margins extraordinarily high by blaming risk and the government even when the underlying emergency triggers have ended?  Now there are too many truck drivers at west coast ports chasing after declining loads.  No bottleneck in the supply chain anymore.

             Sticky, slimy, unclean, but surely not invisible hands at play.

What Do Juries, Prunes, and Antitrust Policy Have in Common?

Long ago, while a student at University of Virginia School of Law, my Criminal Procedure professor likened optimal jury size with the correct number of prunes to achieve proper effect.  Consistent with the Goldilocks story, juries should not be too large, or too small.

OK, I got that, but advocates for megamergers use the same logic.  They conjure the number at three.  A market—apparently, any market—only needs three competitors to remain robustly competitive.  If there are three, any incumbent should be free to acquire market share and extinguish the seemingly unnecessary competition generated by more than three ventures.

This does not pass my smell test, as corroborated by the U.S. mobile telecommunications and commercial aviation markets.  I cannot understand how market consolidation to three magically stimulates competitive juices making the market “more competitive” than when four or more ventures operated.

From my empirical perspective, I see the cellular carriers bundling video content and never fully disclosed handset subsidies, but never really going head-to-head on net, out of pocket costs.  There are plenty of obscure fees, sponsored advocates attempt to frame as taxes, scrimping on customer service, and lots of commercials that tout anything but lower costs.

Help me out, here: does TMobile offer, net out of pocket rates, significantly below what consumers can get for AT&T and Verizon?  Can consumers opt out of “free” video streaming and secure a lower price?  How much lower are rates, if you already have a smartphone?

Do the Big Three airlines aggressively compete on price, after you factor in all the now ala carte “amenities” that used to constitute part of the base fare? I see a preoccupation with Business Class seat enhancements and creation of a new Premium Economy option, because the margins are spectacular.

A now rarely used term, “conscious parallelism,” describes market behavior where so-called competitors do not seem to compete.  Remarkably the three major airlines offer an identical fare from A to B.  But what about the Low-Cost Carriers, who also want to merge and become better competitors?  Are they truly “functional equivalents” when they only offer a few flights from A to B and engage in “bait and switch” with teaser fares that come close to the legacy carrier rates after including all the ala carte amenities, such as the privilege of bringing a carryon bag aboard?

For a short time, my home airport had a fourth carrier available.  It offered one flight a week to a remote airport in Florida.  While the airport managers self-congratulated themselves, consumers faced a carrier offering no option when, predictably bad weather, flight irregularities, and “Air Traffic Control” issues scrubbed the flight.  Do these passengers have any options other than to cancel their vacations, often with non-refundable booking, or hope for “reaccommodation” (an airline non-word) a week later?  This option, akin to a weekly “charter flight” does not constitute a functional equivalent to the options available from legacy carriers.

Oh, but what a robustly competitive market we have in State College, PA!

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.

Misrepresentations in the Rat You Out Economy

            Most readers over the age of 30 probably know the meaning of “rat you out.”  In crime movies and elsewhere, someone discloses to law enforcement and other authorities the crimes and indiscretions committed by someone else. The rat saves himself from criminal prosecution, or something less hazardous, such as embarrassment.

            We live in a rat you out economy where just about every commercial and even presumed private transaction has an informant with a financial incentive to disclose any and all wants, needs, desires, interests, locations traversed, political affiliation and even crimes that law enforcement would never uncover.   Even trusted intermediaries reserve the option in their service agreements, for which consumers have no option other than “take it or leave it.”  In this world, cellphone carriers can leverage their need to track subscribers’ locations not just to maintain reliable service, but also to create new profit centers from the sale of locational information to willing buyers. 

            A curious example: a political party wanted to know the identities of frequent visitors to Roman Catholic churches.  Despite carriers claims that they anonymize subscriber location information, data analytics firms can use multiple sources to identify individuals, frequenting the churches.  With this amalgamated information, a political party opposed to abortion can target like-minded voters through locational data generated by cellphones, collected by wireless carriers and mined by other data analytics firms.

            Plenty more intrusive, risky and potentially deadly rat you out scenarios exist given the ease in which cellphone location data can identify travel patterns.  A bail bondsman might have an easier time finding someone who ignored a court appearance, but so too can a spurned spouse or lover track and potentially harm the rejecting former partner.

            Bear in mind that consumers have to accept such privacy intrusions and surveillance as part of the cost in participating wireless commerce.  Verizon and other carriers reserve the option of monetizing location data, without discounting service, or the cost of the smartphone.  Wireless carriers accrue real monetary benefits as do Internet firms that offer something “free,” provided subscribers agreed to one-sided terms and conditions. Clearly, the value proposition experienced by consumers contains both benefits and costs.

            If you agree to the last sentence above, perhaps you might see the problem in the relentless campaign by sponsored researchers and policy advocates to remind us about all the upside with nary an acknowledgement about the downside.  A recent consumer surplus love fest was expressed in a Wall Street Journal op-ed bemoaning antitrust scrutiny of large technology firms; see https://www.wsj.com/articles/the-misguided-antitrust-attack-on-big-tech-11600125182.  The authors tout the wondrous monetary savings and life enhancements generously offered by Big Tech firms.  Remarkably, the authors make no reference to offsetting financial benefits transferred from consumer to vendor.  They do not seem to comprehend how the rat you out economy works: consumers benefit from something offered freely, or at less cost, but only if they allow valuable commercial surveillance to occur. 

            I will readily acknowledge that consumers might still come out ahead in a final accounting that offsets benefits with costs, but the authors apparently do not want you to know that negative offsets exist.  Even if the authors had mentioned offsetting costs, they might have dismissed them as insignificant. 

            In the broader world of politics and global business such false accounting joins the rate you out economy.  Apparently the espionage in the surveillance by Huawei, ZTE and TikTok is a perilous threat to national security, but the enhanced value proposition from Big Tech deserves a major Thank You! with no need for antitrust scrutiny.

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.

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.

5 Guaranteed Future Outcomes from the Sprint-TMobile Lovefest—Part Two

            John Legere will serve as the new TMobile CEO, so the possibility exists that he’ll maintain the love of pink—make that magenta.   Of course, it will be harder for the new TMobile to frame itself as iconoclastic outlier.  Not much innovation in this tag line: “we’ve held the line on prices for THREE years.” Mr. Legere may continue to ride his TMobile motorcycle around town, but he’ll have lots of deposits to make at his bank.

            Over at Dish, the deal gives Charlie Ergen a 4-year extension to “fish or cut bait” with even more spectrum.  I’ll add to my prediction that he’ll devote an inordinate amount of that time raising a ruckus on the proper interpretation of his commitments as the fourth carrier replacement for Sprint.  Why spend time competing in the marketplace when you can complain about the plain meaning of the sweetheart deal he negotiated?  He’ll never be satisfied, particularly when he can blame everyone—including the other carriers—for any failure to meet the terms of the deal. 

Bear in mind that Dish’s quick entry into the marketplace will be through resale of the other carriers’ capacity. Mr. Ergen has a ready- made complaint that his competitors did not offer him generous enough terms for Dish to offer what Sprint previously did.

Bottom line: it’s money that matters, and the investment of millions by Sprint and TMobile will pay off handsomely at the expense of anyone who uses a cellphone.

5 Guaranteed Future Outcomes from the Sprint-TMobile Lovefest

Now that the U.S. Justice Department has planted a big kiss of approval on the combination of Sprint and TMobile, I predict 5 near term outcomes:

1) Charlie Ergen, CEO of Dish, gets yet another opportunity to find ways to evade regulator- imposed deadlines.  Facing a use or lose deadline for 5G spectrum, his company has received a lifeline from the Justice Department for further delay.  It does not take much to play the government and consumers for fools.

2)  John Legere, CEO of TMobile develops an aversion to pink and gets a haircut. You will never see him on a motorcycle again.

3)   The combined Sprint-TMobile finds ways to raise subscriber out of pocket rates, with new billing line items.

4) Somehow, some way, the robust 4th wireless carrier lacks most of the innovation, ambition and aggressive price cutting of Sprint or TMobile.  So much for re-creating a 4th carrier maverick.

5) Learning nothing about the consequences of airline, hospital, pharma and other industry consolidations, we are shocked at how U.S. wireless service rates exceed every country but Canada and Greece.

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.

D.C. Circuit Court of Appeals Affirms Lower Court Approval of AT&T-Time Warner Merger

            The D.C. Circuit Court of Appeals affirmed the lower court’s unconditional approval of AT&T’s acquisition of Time Warner. [1]  The appellate court opted not to second-guess the lower court’s findings that dismissed, ignored or misinterpreted the government’s evidence and the findings of its expert witnesses.  The D.C. Circuit Court of Appeals accepted the lower court’s near complete embrace of the findings by AT&T’s expert witnesses who purported to show that the vertical combination of AT&T and Time Warner would have no impact on content prices and create no increased ability for key content outlets, such as CNN and HBO, to demand higher compensation and weather longer blackout period of no compensation to extract better terms. 

            The appellate court also emphasized the offer by Time Warner to accept a seven year period of binding arbitration and to maintain current compensation arrangements instead of withholding content.  Additionally, the court appeared to agree that having alternative sources of “must see” video content, such as DirecTV and Uverse, did not create significantly greater incentives for AT&T to drive a hard bargain with video programming distributors, such as cable operators, knowing that during an extended black out period, disgruntled subscribers could migrate to AT&T-owned options.

            The D.C. Circuit accepted the lower court’s emphasis on “real world” empirical analysis whether a vertically integrated firm would have greater incentives to raise the cost of content to competitors.  Even though AT&T itself had made this assertion in pleadings before the FCC, [2] its expert witness attempted to show that the merger of Comcast with NBC Universal did not trigger increased content costs.  In a battle between conflicting expert witness testimony, the lower court’s preference for AT&T’s expert was not challenged perhaps based on the sense that it was based on real world circumstances while the government’s expert used economic bargaining theory. [3] 

            The D.C. Circuit credits the lower court for accepting the premise that vertically integrated firms could change bargaining tactics, but in this particular situation changed incentives and perception of leveraging power would not end up altering the outcome of content price negotiations. [4]  The appellate court did not question the lower court’s conclusion that even if the merged corporation would have greater resources to survive the loss of revenues during a blackout and even though it could offset losses from subscriber migration to AT&T content options, AT&T would have little more incentive to risk longer and more frequent black outs:

The district court’s statements identified by the government, then, do not indicate that the district court misunderstood or misapplied the Nash bargaining theory but rather, upon considering whether in the context of a dynamic market where a similar merger had not resulted in a “statistically significant increase in content costs,” the district court concluded that the theory inaccurately predicted the postmerger increase in content costs during affiliate negotiations. [5]

             The D.C. Circuit Court of Appeals concluded that in:

finding the government failed to ‘prov[e] that Turner [Broadcasting]’s post-merger negotiating position would materially increase based on its ownership by AT&T,’ . . .  the district court reached a fact-specific conclusion based on real-world evidence that, contrary to the Nash bargaining theory and government expert opinion on increased content costs, the post-merger cost of a long-term blackout would not sufficiently change to enable Turner Broadcasting to secure higher affiliate fees. [6]

            The appellate court also gave short thrift to the lower court’s assumption that AT&T would pass through all of the $352 million in program cost saving to its customers.  While the D.C. Circuit acknowledged that not all savings would flow through to consumers, as the lower court mistakenly assumed, the court returned to its point of emphasis: that the merger would not trigger content cost increases borne by other video program distributors that they would have passed through to consumers:

The district court accepted Professor Shapiro’s testimony about the $352 million cost savings from the merger. . . . [T]he district court found that the quantitative model as presented through Professor Shapiro’s opinion testimony did not provide an adequate basis to conclude that the merger will lead to “any” raised costs for distributors or consumers, “much less consumer harms that outweigh the conceded $350 million in annual cost savings to AT&T’s customers.”

Whatever errors the district court may have made in evaluating the inputs for Professor Shapiro’s quantitative model, the model did not take into account long-term contracts, which would constrain Turner Broadcasting’s ability to raise content prices for distributors. . . .[7]

            The appellate court notes that the district court did not conduct a costs benefit analysis balancing “increased prices for consumers against cost savings for consumers” [8] and instead found that the government had not shown the merger was likely to lead to any price increases, because Time Warner content negotiators would not have, or use increased leverage in affiliate negotiations after the merger.

---

[1]              U.S. v. AT&T Inc., No. 18-5214, slip op.  (D.C. Cir. Feb. 26, 2019); available at: https://www.cadc.uscourts.gov/internet/opinions.nsf/390E66D6D58F426B852583AD00546ED6/$file/18-5214.pdf.

[2]              The D.C. Circuit Court of Appeals accepted the lower court’s disinclination to consider such evidence as significant now: “Once the district court credited AT&T’s expert’s opinion based on an econometric analysis that the similar Comcast-NBCU merger had not had a ‘statistically significant effect on content costs,’ . . . the district court could understand that the defendants’ admissions at the time of the Comcast-NBCU merger offered little probative support for the government’s increased leverage theory.” Id. at 25.

[3]              “At this point, however, the issue is whether the district court clearly erred in

finding that the government failed to clear the first hurdle in meeting its burden of showing that the proposed merger is likely to increase Turner Broadcasting’s bargaining leverage.” Id. at 17-18.

[4]              “In other words, the record shows that the district court accepted the Nash bargaining theory as an economic principle generally but rejected its specific prediction in light of the

evidence that the district court credited.” Id. at 19.

[5]              Id. at 21.

[6]              Id. at 22.

[7]              Id. at 32.

[8]              Id. at 33.