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.  

 

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.

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?

Legacy Antitrust Models Have Legs in the Internet Ecosystem: AT&T’s Acquisition of Time Warner

            A day after the FCC’s termination of network neutrality rules, District Court Judge Richard J. Leon will announce the verdict in the Justice Department’s suit against AT&T’s acquisition of Time Warner.  See https://www.nytimes.com/2018/06/10/technology/att-time-warner-ruling.html.  I’m betting the Judge will apply “old school” competition policy analysis finding no significant harm in this $85 billion deal that he will frame as vertical integration among non-competitors.  This ruling will lead to even more industry consolidation always framed as necessary to achieve scale, efficient operations and effective competition. We have not heard much about how these acquisitions offer consumer benefits, apparently because advocates do not have to bother telling us.

            Using the perspective of Chicago School economists, vertical mergers and acquisitions trigger limited concern about harm to competition and consumers while horizontal deals eliminate a competitor and further concentrate a market.  The prevailing wisdom assumes vertical integration can achieve benefits for the merging parties without offsetting harms to consumers largely because judges assume the two merger-aspiring ventures do not compete in the same market segments.

            In the Information, Communications and Entertainment (“ICE”) markets, deep-pocketed ventures operate throughout the marketplace with extensive vertical and horizontal integration.  It makes no sense to assume any ICE venture involving major incumbents, such as AT&T and Time Warner, operate in mutually exclusive market segments.  Decision makers do not seem willing, or able to understand that the Internet ecosystem seamlessly combines conduit and content and the ICE marketplace has fully integrated converging markets and technologies.

            Consider the conditionally approved acquisition of NBC-Universal by Comcast in 2011.  Even then, Comcast operated extensively in both content creation and content delivery.  It made no sense to consider the deal as solely occurring in a vertical “food chain” with Comcast a downstream distributor of content created mostly by unaffiliated ventures such as NBC.  In 2011, Comcast had 100% ownership interests in content networks including E!, Golf Channel Versus, G4, and dozens of regional sports networks, with minority interests in dozens of other networks.  See https://apps.fcc.gov/edocs_public/attachmatch/FCC-11-4A1.pdf at p. 177.

            It seems that competition policy models do not easily lose traction after having made the transition from academic theory, to preferred model by stakeholders, to conventional wisdom. For example, the Chicago School and now case precedent hold that no venture would ever deliberately underprice a good or service for any period of time beyond a blockbuster sale, e.g., the day after Thanksgiving (“Black Friday”).  The prevailing wisdom concludes that the underpricing company would have no good likelihood for recouping its losses, particularly in competitive markets that would foreclose gouging.  How then can judges and academics—including Chicago School economists—make sense of the ongoing business plan of Amazon and other Internet “unicorns” to forgo profits for years in the pursuit of market share and expanding “shelf-space” for products and services?

            Day by day consumer safeguards evaporate in the ICE marketplace.  I am not endorsing ex ante remedies that anticipate problems, but may well create their own through inflexibility.  But in this current environment, even ex post responses to legitimate complaints do not appear necessary. Who needs a largely impartial and qualified referee when economic doctrine assumes the market can solve or prevent all ills?