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.

Wireless Carrier Ambivalence about Wi-Fi and What This Tells Us About Competition and Incentives

            Once upon a time, well over a decade ago, most wireless carriers saw Wi-Fi as a technological competitor.  The carriers always metered traffic then and wanted their subscribers to “use their minutes” rather than conserve them.  Subscribers could not “bring their own device, because the carriers managed a closed distribution link, selling most handsets and restricting the resale market.  Because the wireless carriers had a shared monopsony (buyers’ monopoly), they could dictate terms and conditions, including a prohibition on Wi-Fi access.  Nokia determined it could disable an installed Wi-Fi chip rather than redesign some handsets.

            Time passes and now wireless carriers adore Wi-Fi.  The carriers want subscribers to offload traffic onto Wi-Fi.  Better yet, U.S. carriers have lobbied the FCC to permit them to use unlicensed Wi-Fi spectrum for their commercial, licensed services.  Note what a sweet deal this would be as the carriers could avoid having to competitively bid and pay for some spectrum.

            Obviously the complete 360 degree reversal of position reflected changed circumstances.  But does the integration of a Wi-Fi option show how robustly competitive marketplaces operate, or are their other factors in play?  It gets murky, particularly in this partisan and contentious time.  A free marketer could use this reversal of position as evidence of how competition destroys business plans and forces ventures to enhance the value proposition for consumers. 

            I readily accept that marketplace competition imposes discipline and forces “sleepless afternoons.”  However, the free marketer overstates her case, because of other factors that either have nothing, or little to do with competition. 

            First, one should consider spectrum supply and demand.  As wireless service demand grew and bandwidth requirements expanded, e.g., streaming video, wireless carriers considered Wi-Fi a free and easy way to offload traffic.  Wi-Fi abated spectrum scarcity.  Additionally Wi-Fi provided network access where dead zones existed, because of zoning restrictions, particularly difficult terrain and perhaps the financial burden from having to install ever more cell tower sites.

            Competition does pay a major role in stimulating demand for service, but one has to look at the market structure of the industry.  You might not know that the FCC first created a wireless duopoly with a guaranteed license and market head start for incumbent wireline telephone companies.  Back then, Republican and Democratic FCC Commissioners had no problem collectively agreeing on this sweet deal. 

            Over time, two more facilities-based carriers entered the market.  As late entrants, often using spectrum at higher frequencies having less geographical coverage, these carriers had to offer a better deal to acquire market share.  But these late to market entrants had to think quite strategically about how much of a better deal to offer.  Carriers like Sprint used the prices of the two major incumbent wireless carriers, Verizon and AT&T, as a price ceiling.  Sprint was more likely to match or slightly discount the price of the incumbents, relying on features to stimulate churn and new subscriptions.  Sprint offered handset subsidies, offered not to start metering until the second minute of use and provided free automatic number identification, a feature that cost carriers virtually nothing to offer.   

            Remarkably the wireless marketplace did not show much price competition until quite recently.  I used to compile charts showing the near identical terms, conditions and prices of the four national carriers.  So much for robust price competition; the carriers have mostly competed on features.

            TMobile has aggressively used feature competition to acquire market share.  This “uncarrier” maverick has provided most of the consumer friendly feature innovations, including lower roaming fees, particularly abroad, the option to buy and use your own phone, zero rating, etc.

            Simply put, wireless carriers compete because they have to, not because they want to.  Their initial reaction to Wi-Fi was to block its use.  They embraced the technology, because they had to, not because they wanted to enhance the value position for subscribers.

            Wireless carriers are not charities, nor are they role models supporting an unregulated telecommunications marketplace.

             

Telecom Policy Lessons From Recent Aviation Mergers

         During this sabbatical year, I have had more opportunities for air travel. While I still marvel at the opportunity to be somewhere on the other side of the globe in a day, I cannot believe how even doubly diminished expectations are not achieved.

            Acquiring companies United, Delta and American swore how buying out a competitor would promote competition and help airlines become more financially stable so they could compete better.  Right, so they can spend up to $35,000 per business class seat and concentrate on the high margin customer even as they install cheaper, smaller and more numerous seats in economy.

            Rather than become more robust competitors it has become easier for the airlines to siphon consumer surplus by raising rates.  The survivors have less incentives to concentrate on consumer service, what with all the new opportunities to extract higher revenues, particularly from ancillary services like charging $300 for a change in an itinerary.

            Even former mavericks have come to realize that they have more to gain by joining the consensus than by offering a better value proposition.  Both Southwestern and Jet Blue have implemented some of the new fees the other carriers charge and neither typically offer the lowest fare anymore.  The smaller group of airlines can engage in consciously parallel pricing—some might call it price fixing—and get away with it, because no one wants to buck the trend of ever rising prices.

            If these mergers were supposed to make the airlines better competitors, why aren’t prices dropping, particularly in light of a 30-40% drop in fuel prices?  Most international flights from the U.S. have sizeable fuel surcharges, a term creating the impression that this billing item might drop, or evaporate if fuel prices decline.  This has not happened.  Why part with as much as $615 per trip if no other carrier reduces the surcharge?

            Fundamental economics suggests that if incumbent gouge and get too greedy, they create ever larger incentives for market entry.  Okay, where is the market entry?  It cannot happen when incumbents control all available takeoff and landing slots.  Even with low interest rates, what bank would loan millions to a startup airline boldly willing to jump high barriers to market entry?

 

            Of course the incumbents have every incentive to exploit their survivorship and to incur the lobbying and campaign investments necessary to sustain the status quo and their upper hand in the marketplace.  Congress is not about to force a reallocation of landing slots to market entrants any more than they would enact a law earmarking radio spectrum for competitive bidding only by non-incumbents. 

 

            It has become easier from incumbent airlines to pursue a strategy of reducing the value proposition of flight and to unbundle elements so that the sum of the line charges well exceeds the former single fare.  While much of this affects the economy class traveler United Airlines CEO Jeff Smisek even bragged how replacing whole cashews with pieces in business class would save the airline money without any fallout.  This miserly airline does not offer a free glass of wine in coach, even though US Airways does having previously tried to charge for water.

            Tweaks to frequent flier programs and a variety of line items, like that one sees on their cable television and wireless bills, make incumbents not much different than so-called low cost carriers.  These carriers do not look and act much different than carriers like Ryanair or Spirit. 

            So the thought has crossed my mind many times of late whether Comcast and AT&T have anything to offer other than higher stock prices from their proposed $100+ billion acquisitions.