The Wireless Duopoly?

   The July 9, 2012 edition of the Wall Street Journal (Winners' Circle R6) identifies some of the most successful money managers for the year so far.  Included is James Wong of Payden Value Leaders.  Mr. Wong is long on Verizon and AT&T and offers this insight:

    "The beauty of the business [of AT&T and Verizon] is that it's an oligopoly."  But a robustly competitive one for sure.

Swinging for the Fence or Hitting Singles?—How AT&T and Verizon Further Consolidated the Wireless Marketplace While Most Weren’t Looking

       Before anyone claims victory for the consumer in AT&T’s abandonment of its “swinging for the fence” gambit to buy T-Mobile’s market share and spectrum, consider what did not make many headlines this week.  Both AT&T and Verizon substantially shored up their spectrum stocks with major deals with Qualcomm and several cable companies respectively.

       Solid hits for both carriers: not homeruns, but very strategic singles and doubles. 

      What results from these deals?  Well on the positive side the two major carriers have more spectrum to satisfy consumer demand.  On the negative side this spectrum initially was acquired by companies that offered the prospect for more competition.  The competition will not occur, so the incumbents have even less downward rate pressure and the incentive to innovate.

      No one has convinced me that the wireless marketplace in the United States has too many carriers and too much competition.  Quite the contrary.  But no carrier wants to compete with two “too big to fail” giants who have the customer base and spectrum to make quite costly competitive market entry, or even competition by existing carriers.  These barriers to entry solidify incumbent market dominance, something the FCC could have prevented if it had reserved spectrum for new carriers and nondominant existing carriers. 

      This would not “promote competition for competition’s sake.”  Instead it would enable sustainable competition to flourish in much the same way that airport authorities do not allow one or two airlines to capture all the landing slots.  Airport authorities have learned the hard way that allowing one carrier to dominate results in higher prices.  While price sensitive customers can vote with their dollars and take alternative transport, or drive to another airport, wireless subscribers have limited options. 

      Might a further consolidation of spectrum—the functional equivalent of landing slots—result in higher prices in the “robustly competitive” U.S. wireless marketplace?

A Wireless Duopoly?

Recently Cox Communications announced its departure from the wireless telecommunications.  Similarly some speculate whether T-Mobile can survive if its merger with AT&T does not happen.  What does it mean when an incumbent carrier exits a market, with doubts about the ongoing viability of one of the Big Four national carriers? There are too many carriers and a market shake out must reduce competition?  The Big Two carriers (AT&T and Verizon) have engaged in lawful and questionable tactics to “corner the market.”?  Something else?

If a hyper-competitive market migrates to a less competitive balance of two carriers, two things appear clear: 1) a duopoly has evolved making ludicrous to claim self-regulation will foreclose anticompetitive conduct; and 2) market failure has occurred, unless consumers somehow do not suffer from haivng a choice of two facilities-based carriers and a few resellers.

If the Big Two have captured the market, then it becomes necessary to identify what lawful, questionable and unlawful tactics they have pursued.  In the lawful department, the Big Two have invested the money to build superior networks.  They have captured the competitive benefits of positive network externalities: offering not to debit minutes of use for intranetwork use.  Additionally they have exploited economies of scale.

             In the questionable department the Big Two have exploited exclusive handset deals and the first mover advantage of having received free spectrum from the FCC while other carriers had to compete in a comparative hearing, or hope for success in a ping pong ball selection.  While they appear not to have colluded in a “smoke-filled room,” these carriers offer nearly identical rate plans, what antitrust law considers conscious parallelism.

At the very least the FCC should aggressively work to promote market entry so that the facilities-based wireless market does not end up being more concentrated than commercial aviation.