Courts Approving Algorithmic Pricing Without Explicit Agreement Ignore Reality

Yet again, a federal court has embraced sponsored research and advocacy to legitimize an obvious case of implicit collusion that results in higher prices for consumers. See  https://business.cch.com/ald/GibsonvCendynGroupLLC8182025.pdf.  In the 9^th Circuit’s rationale, if any and all hotels in Las Vegas use the same software to determine profit maximizing rates, antitrust law is not violated, because each hotel owner voluntarily opted to use the software and made no commitment to comply with its pricing recommendation.

In the real world, ventures would rather not devote sleepless afternoons enhancing consumers’ value proposition, if an expedient and less profit risky alternative exists.  This used to be called “conscious parallelism,” a horizontal restraint of trade when competitors collude.

Collusion can occur outside of smoke-filled room occupied by competitors.  The algorithm makes the calculation, and the competitors buy into the premise that higher prices will not encourage market entry and greater supply, which typically would create downward pressure on prices.

All Las Vegas hotels, wireless carriers, airlines, et al cannot possibly have the same operating costs, so that they all are bound to accept the same market-driven price, so-called price taking.  Until algorithmic pricing became the go-to strategy, a wider range of prices typically arose. Now, it’s easier and more profitable for just about every hotel to tack on a resort, amenity, or destination fee, in addition to items like parking that used to be free or bundled in the base rate.

Why should Southwest Airlines offer free baggage, open seating and other components that can be separately priced by an algorithm?  For that matter, why have a publicly available rate for carriage when an algorithm can “size up” individual potential passengers and determine a customized rate based on calculated demand and price elasticity?

Why should TMobile offer anything cheaper and innovative when a higher price umbrella offers higher profits?

Where have all the marketplace mavericks gone?  It looks like shopping for algorithms and clever antitrust lawyers and economists.            

Life in the Antitrust Wonderland: Suspension of Disbelief and the TMobile-Sprint Merger

            Counsel for TMobile has filed a provocative and downright remarkable  Description of Transaction, Public Interest Statement, and Related Demonstrations with the FCC; available at: https://newtmobile.com/content/uploads/2018/06/T-Mobile-Sprint-Public-Interest-Statement.pdf.

The nearly 700 page document reads like an extended Wall Street Journal op-ed that distorts reality and encourages readers to embrace quite radical and questionable assumptions about the Internet ecosystem, the rule of antitrust law and what a New TMobile can and will do to make life better for wireless consumers and the nation.

            The authors of the document are banking on convincing a possibly all too easily persuaded federal government that it should ignore common sense, empirical evidence, the rule of law and basic economics.  TMobile and Sprint want to convince the world to ignore a basic smell test for a massive $26 billion horizontal merger of competitors that would further concentrate an already oligopolistic market.  Wising up from a failed attempt to merger in 2011, the companies’ strategists offer a false world view that things are different now, so much so that the future of U.S. competitiveness in next generation wireless technology is at stake and only a newly bolstered TMobile can save the day.

            The document insults the intelligence of both telecommunications professionals and everyday wireless subscribers.  Forget about AT&T and Verizon’s financial resources and industry leadership: New TMobile—and only New TMobile- can “leapfrog” technology and sustain U.S. global leadership.  The authors urge the FCC to “Keep America Great” by approving the merger even though the document fails to explain how TMobile will install and operate any new and innovative 6^th generation of wireless that only it can deploy.

It will be interesting to see whether AT&T and Verizon respond to the insult, or keep their power dry and say nothing, knowing that an even more concentrated industry will relieve competitive pressure.

            Robert Bork wrote a law review article and book that help support the view that antirust courts and regulators should use a consumer welfare template for assessing mergers, rather than consider market share.  In the Antitrust Paradox, he warned that government could harm consumers by protecting inefficient ventures from competition based on what he considered a misreading of congressional intent.  Seizing on the view that the government should ignore the market concentrating consequences of the merger, the document authors emphasize how consumers stand to benefit even as one existing competitor exits the market and contributes its market share to another.  Apparently TMobile can refute clear evidence of the merger’s anticompetitive consequences simply by making a series of unenforceable promises about how it will enhance its value proposition for consumers.

            In this alternative reality, merging the third and fourth players in a vastly concentrated market creates a new venture able to do consumer welfare enhancing things the two companies could not do individually.  Does that make sense to you?  The merged company will promote competition, save consumers money, employ more people than the two standalone companies, sustain national technological leadership, bolster TMobile’s innovative “uncarrier” credentials, leapfrog technology and provide salvation to long underserved rural residents. What an impressive list of promised and unenforceable deliverables!

            Let us consider each in sequence with an eye toward assessing whether and how  consumers will receive these gifts.      

The Enhanced Competition Gambit

            The TMobile advocacy document makes the assertion that combining two weaklings in a market will create one muscular competitor able to mix it up with the two dominant carriers AT&T Mobility and Verizon.  This has some plausibility until one asks exactly what could TMobile and Sprint not do as separate companies that they can collectively.  TMobile answers by claiming that Sprint is on the brink of becoming a failed venture notwithstanding massive investment by Softbank of Japan and historically low interest rates.  For its part, TMobile conveniently fails to acknowledge that Deutsche Telkom—reluctantly perhaps--surely has the financial wherewithal to underwrite any necessary investment in infrastructure, including competing in auctions for spectrum.

            The conventional antitrust economic literature, based on empirical evidence, warns that increases in market concentrate creates additional incentive for so-called competitors to engage in “consciously parallel” conduct.  In plain English, this means that ventures would rather not spend sleepless afternoons competing when they can implicitly agree on nearly identical terms, conditions and prices.  Haven’t we seen that outcome before?

            TMobile became the uncarrier after it realized a merger strategy was not viable.  The company innovated and singularly introduced most of the consumer welfare enhancements we like such as carry over of minutes into the next month of use, fair roaming charges even in foreign countries, lower rates for subscribers bringing their own devices, multi-line discounts, etc.  If it got merger authority in 2012, do you think TMobile would have the same zeal to avoid incentives to “go along” with an industry “consensus” on rates?  Bear in mind that for years, all four major wireless carriers had nearly identical price points and competed, if at all, on the availability of handsets and the subsidies offered for them.

            Perhaps airline concentration offers some insights on real world consequences of mergers.  We see nearly identical fares, a reduced value proposition for economy customers, unbundling of services into new profit centers, and an emphasis on attracting higher margin business customers.  Even Southwestern, the uncarrier in commercial aviation, has largely adopted consciously parallel terms and conditions.  It still offers free baggage carriage, but no longer regularly offers the lowest price, particularly when it has the highest market share in a specific airport.

Increased Investment in Infrastructure, Particularly in Rural Areas

            Even after all the lawyer and financial advisor fees, New TMobile promises it will have more funds available for capital expenditures.  So pre-merger, the company might have scrimped, despite having to convince consumers that its network offered the same coverage and reliability as the Big Two carriers.  Post-merger, the company will have two foreign benefactors apparently willing to “double-down” on their already sizeable wireless investment in the United States. It comes across as ironic that in this time of heightened scrutiny about trade and foreign ventures exploiting access to the U.S. market, the federal government will consider a merger that surely will accrue financial benefits that Softbank and Deutsche Telekom will expatriate to their foreign countries. 

            Not all mergers trigger a new burst in capital expenditures.  The acquiring company typically has to see a bargain, “diamond in the rough” that holds promise for future success. Otherwise mergers trigger aggressive cost cutting, ostensibly to accrue synergies and efficiency gains.

            On the matter of rural investment, TMobile conveniently ignores the reality that 5G will have two substantially different characteristics in urban versus rural areas.  One will require substantially more investment, operate on far higher frequencies, require vastly more antennas and will use cutting edge technology.  The other type will require much less investment, may not even meet baseline business case requirements for deployment in lots of areas, will operate on lower frequencies to improve signal coverage and will use less sophisticated technology providing comparatively slower bit transmission speeds while operating in locations having no spectrum scarcity.  So much for the much hyped “leapfrogging” technology.  By the way, which carrier do you think has more patents and a vastly higher research and development budget? It’s not TMobile, or Sprint.

Trickle Down Employment Stimulus

            Can you think of a horizontal merger where the acquiring venture does not declare redundant any existing employees, but instead hires more?  No., I can’t either.  Who knew?

Answer: a small set of the usual sponsored researchers.  Their studies would not pass muster using the traditional peer review process, for a number of potential procedural and ethical factors, the latter including the frequent failure to disclose financial sponsorship in the first place.

            Ignoring such a blatant conflict of interest, these studies attempt to refute common sense.  Horizontal mergers often include a premium above the current market capitalization of the acquired company.  The acquiring company justifies the higher offer based on the combination of physical assets, intellectual property and a catch all factor typically called goodwill reflecting the value of the brand and other positive factors about the acquired company.  Another irony in the document: TMobile devotes significant space telling the world what a not so great company Sprint is.  They’re going to make Sprint great again, or for the first time as New TMobile.

            Apparently, TMobile will unearth undetected value in the Sprint employee population.  Alternatively, TMobile will find many new ways to compensate for the reduction in employee numbers at various strip malls and kiosks throughout America.  Lots of pump priming according to the sponsored researchers.  Bear in mind that they can predict anything and the company can promise anything with impunity.  The federal government surely will not unwind an approved merger, because the acquiring company kinda, sorta overstated promises and under- delivered with performance.  Of course, its heart and that of its sponsored researchers was always well intentioned.

The Appeal to Patriotism and National Pride: Maintaining America’s Greatness in Next Generation, 5G Wireless and the Internet of Things

            One could admire the creativity in the document and its pretension in claiming that absent approval of the merger America is going to lose its technological superiority in wireless. Apparently Sprint will continue to be a failing concern and TMobile will have no way to help sustain American technological leadership unless it adds Sprint to its asset base. All those resellers of facilities-based carrier capacity can support the argument that a robustly competitive marketplace exists, but that will not sustain global best practices.

            I cannot help but ask what—if anything—prevented any of the four national carriers in the U.S. from sustaining global best practices?  Just how does the merger affect whether and how AT&T Mobility and Verizon can sustain global leadership?  Bear in mind that the Big Two already have test and demonstration projects for both 5G and the Internet of Things.  The merger would have no significant effect on their access to capital and their incentives to innovate.  Apparently even now (pre-merger) the Big Two see the need to continue acquiring more spectrum and to install new technology.  This would occur regardless whether TMobile and Sprint merge and it is foolhardy to think New TMobile can leapfrog the Big Two and threaten their technological leadership.

Competitive Necessity Either to Beat the 8-9 Major Players, or to Bolster the Uncarrier Strategy

            In addition to its promoting competition assertion, TMobile claims the merger will make it a more viable competitor in a crowded market.  The authors get to “8 or 9” competitors by counting so-called Mobile Virtual Network Operators (“MVNOs”) such as Tracfone and adding Dish Network that current faces a “use or lose” deadline for spectrum it acquired, but has not built any infrastructure to use.  Add Voodoo Math to the Voodoo Economics.

            MVNOs survive in the wireless marketplace if and only if facilities-based carriers allow them to do so.  MVNOs need an arbitrage margin between what they pay for capacity provided by a carrier with an operating network and what they can charge subscribers. TMobile and Sprint serve the vast majority of so-called pre-paid customers who subscribe to month-to-month service free of any longer term contractual commitment.  Will New TMobile retain the margin opportunity for resellers?

            Let me briefly raise the level of snark to this blog.  I try not to sink to the predominantly scummy level on many sites, but cannot help but pose this question: Will TMobile CEO John Legere maintain his “Bad Boy” posture, or get a haircut and develop a new affinity to Kansas City barbeque?  Economists pay close attention to incentives and even quasi-human corporations display predictable patterns.  The more concentrated a market, the greater the opportunity for so-called competitors to agree not to compete, or to do so in largely symbolic ways.  New TMobile promises a major consumer dividend by way of lower costs, higher data rates and better customer service.  I’ll be pleasantly surprised if they deliver on these promises and Mr. Legere keeps his long hair.

            In a prior blockbuster, vertical merger, Comcast did not even bother asserting that consumers would see lower subscription rates after the company acquires NBC-Universal.  Cable television rates kept right on rising well in excess of a general measure of consumer prices.  Recently, the Judge approving the AT&T acquisition of Time Warner assumed that consumers would gain $352 million in savings thanks to the removal of the markup flowing to Time Warner that it would no longer charge AT&T.  What are the odds that AT&T broadband rates will decline one dime thanks to the merger, and what are the odds that New TMobile will pass through any of its synergistic, efficiency gains by way of lower prices?  For that matter when was the last time any of us saw a wireless carrier offer a sale?

            What we will see is crafty use of tiering and pricing flexibility now that network neutrality rules do not apply.  As long as a wireless carrier kinda, sorta discloses a zero rating offer, then it can try to upsell subscribers with more service options, including “free” (unmetered) content.  Economists term that non-price competition and that is the best we can expect, even as it distorts the marketplace for content by forcing consumers to trade off higher preferences for less desirable, but subsidized content.  Of course New TMobile will have greater financial wherewithal to offer compelling alternative content to what the Big Two have available.

A Further Relaxation in Antitrust Enforcement in an Age of Technological and Marketplace Convergence

            TMobile and Sprint are banking on the FCC and Justice Department ignoring even more massive market concentration on the promise of great things only a merged company can offer consumers.  The Justice Department embraced the Herfindahl-Hirschman Index as a quantifiable measure of market concentration based on empirical evidence that concentrated industries typically operate less competitively.  Yes, of course, there are exceptions, but do you think the wireless industry will deviate from what we see in commercial aviation and other extremely concentrated industries?

            TMobile expects the FCC and Justice Department to cave out of exhaustion and repetitive “Mother May I” requests.  The company has increased its investment in sponsored researchers, lobbyists and other professionals able to make a plausible argument based on unenforceable promises and theoretical possibilities. 

            Why not stick with empirical data and a well-honed smell test?

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

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

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

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

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

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

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

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

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

Comcast-TWC: Why Compete and Innovate When You Can Buy Market Share?

            Expect a charm offensive as Comcast and scores of sponsored researchers explain how acquiring Time Warner Cable will promote competition and enhance consumer welfare.  You might not hear too much about two traditional concerns remedied by actual facilities-based competition: incentives to innovate and reduce prices.

            Comcast will frame its acquisition as necessary to achieve even greater scale to compete with other sources of video content and maybe to compete with the limited other sources of broadband access.  Granted cable television operators have to provide consumers with a compelling value proposition particularly given the pricing model they use that runs up the bill—often to three digits—with a large bundle of channels for which few consumers have any significant preference.

            But Comcast is not acquiring TWC as a defense strategy to shore up the viability of cable television.  Comcast is exploiting the apparent inability of government—even one with a Democratic President and Senate majority—to enforce viable competition policy.  A concentrated market used to trigger concern about whether one or more survivors would continue to compete, or simply agree not to devote sleepless hours innovating.

            Just what happens when markets concentrate?  How can one doubt that the incentive to innovate and compete recedes?  Consider commercial aviation: when a single airline controls an airport, rates to and from that market skyrocket.  Consider wireless service: when AT&T could not acquire TMobile, TMobile got serious about innovating and competing.  Reluctantly Verizon and AT&T have had to respond to TMobile’s initiatives like lower rates for subscribers using their own handsets, lower roaming charges abroad and refunds of early termination penalties.  Would AT&T, Verizon and even Sprint have introduced these enhancements if TMobile did not exist?

            The balance of power has shifted from consumers to providers in the telecommunications marketplace.  Companies like Comcast can invoke scale and efficiency arguments that obscure the fact that consumers will have to pay more for less. So-called competitors can “close ranks” and implicitly agree not to compete.   

            Consider access to Olympics content.  Comcast-NBC wants to make it certain that consumers access this content only via prescribed means, firewalled so that they control access via new technological options like the Internet.  If Comcast did not have the goal of maintaining the status quo, why would it care whether viewers watched commercials on a computer monitor, smartphone screen, or tablet in lieu of the television set?

            Reduced to its simplest terms Comcast’s acquisition of TWC enhances shareholder value at consumers’ expense.   The only silver lining might be FCC-imposed conditions that impose otherwise unlawful requirements,  Of course the Commission would have to enforce them in the face of relentless claims that the requirements are “job killing,” unnecessary and unconstitutional.  What politically savvy civil servant would want to take on a “too big to fail” venture like Comcast?