Winners and Losers in the Sprint-TMobile Merger

            In this age of easily borrowed billions, outdated antitrust policy and largely libertarian regulatory oversight, the information, communications and entertainment (“ICE”) marketplace will get even more concentrated.  Despite President Trump’s occasional bluster opposing corporate gigantism, the Federal Communications Commission rarely sees a merger it cannot conditionally approve.  Pushback from the court of public opinion may arise, but the parties will have consummated the deal.

            Fait accompli?  I think yes for the wireless marketplace and let’s add Sinclair’s broadcast market grab.  AT&T’s merger with Time Warner poses some questions, primarily because of the President’s visible hatred of CNN.  Nevertheless, the results-driven FCC will find a way to rationalize how consumers benefit.

            All that remains is a prospective assessment of the winners and losers.

Winners

The Usual Suspects

            It does not take a brilliant buy-side Wall Street analyst to predict that Sprint, TMobile, involved financiers and lawyers and shareholders win.  A concentrated market makes it easier for the Big Three to eschew competition, innovation and enhanced value propositions for subscribers.

            Combining the two mavericks in the mix removes a clear motivation to compete aggressively.  Why not take the path of least resistance and allow the AT&T and Verizon to set a price and feature umbrella?  Why upset the apple cart and spend sleepless afternoons innovating and competing?

            Consider this commercial aviation thought exercise.  Southwest offers passengers the opportunity to check a bag for free.  The other major carriers have not matched this offer.  If Southwest merged with any other carrier with even a few percentage points of market share, do you think the free checked bag feature would remain?

            More broadly, how’s the concentration of the commercial aviation market working for you?

AT&T and Verizon

            Merger advocates typically resort to the bogus bromide that a financially stronger competitor enhances the public interest by ensuring that the company will survive and offer a compelling alternative to the major incumbents.  The FCC regularly embraces this rationale as occurred when it permitted the two satellite services Sirius and XM to merge.

             Maybe the combined Sprint/TMobile will retain their maverick proclivities despite major incentives to go along and get along.  In any event, AT&T and Verizon will have significantly less incentives to enhance the value position of their services.  Can you think of anything these two carriers introduced, rather than copied?

 

             BTW, both carriers got a significant bump in stock price on new of the prospective merger. 

Sponsored Researchers

             Yet another big—I mean HUGE—payday awaits the numerous academics and quasi-academics willing to generate advocacy documents masquerading as research.  I predict that one or more of these “scholars” will come up with a new economic and legal “Rule of Three.”  They will creatively generate all sorts of rationales supporting the simple premise that no market really needs more than three competitors to operate well.

            Gosh, it just so happens that the Sprint-TMobile merger will result in three national wireless competitors, so no harm, no foul.

            Perhaps some markets can operate competitively with three or even two ventures.  Commercial aviation manufacturing has a market comprised of two robust competitors: Boeing and Airbus.  But does the number three have some magical features applicable to all industries?

Losers

Anyone Reliant on a Robustly Competitive Internet Ecosystem

            A concentrated broadband wireless marketplace reduces the prospects for a robustly competitive and innovative one.  As just about everyone increasingly relies on a single broadband conduit to the Internet cloud, we should worry about vesting so much access control in three carriers.

            Recently, bipartisan concerns have arisen about the excessive market control by firms such as Google, Facebook and Amazon.  No such bipartisanship exists when the ICE marketplace becomes even more concentrated.  Positions continue to cleave on a political party fulcrum, even though people on both sides stand to suffer big time.

            Consumers capture limited surplus when a few players control access to an essential and irreplaceable conduit.  Increasingly, consumers will rely on a wireless conduit instead of a wired one.  Already sponsored researchers and the Republican FCC Commissioners preach the gospel of functional equivalence between the two transmission technologies.  Despite such assume competitiveness, incumbents like AT&T and Verizon have abandoned fiber optic and hybrid copper/fiber optic expansion.  Most Digital Subscriber Lines cannot handle two or more simultaneous video streams.  Even Goggle has abandoned major expansions of its fiber initiatives.

 

            You should not buy the party line that wired options can fully offset any collusion in the wireless market.  Why does wireless congestion exist, so much so, that carriers need to throttle subscribers of so-called unlimited service?

            Perhaps the aforementioned Rule of Three will claim that increases in profits and Average Revenue per User constitutes a win/win for carrier and subscriber.  Referring back to the commercial aviation in the U.S., domination by 3 or 4 carriers seems only to stimulate innovation in Business Class seat comfort with a race to unbundle and reduce the value position of Economy Class.

            Another day, another instance where consumers get screwed.

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.