Category Archives: Antitrust

Why U.S. v AT&T Should Worry Silicon Valley

On Forbes this morning, I argue that the Department of Justice’s effort to block the AT&T/T-Mobile merger signals a dangerous turn in antitrust enforcement.

While President Obama promised during his campaign to “reinvigorate” antitrust, few expected the agency would turn its attention with such laser-like precision on the technology sector, one of the few bright spots in the economy. But as Comcast, Google, Intel, Oracle and now AT&T can testify, the agency seems determined to make its mark on the digital economy. If only it had the slightest idea how that economy actually worked, and why it works so well. Continue reading →

FCC Mobile Competition Report Is One Green Light for AT&T/T-Mobile Deal

BY LARRY DOWNES AND GEOFFREY A. MANNE

The FCC published in June its annual report on the state of competition in the mobile services marketplace. Under ordinary circumstances, this 300-plus page tome would sit quietly on the shelf, since, like last year’s report, it ‘‘makes no formal finding as to whether there is, or is not, effective competition in the industry.’’

But these are not ordinary circumstances. Thanks to innovations including new smartphones and tablet computers, application (app) stores and the mania for games such as ‘‘Angry Birds,’’ the mobile industry is perhaps the only sector of the economy where consumer demand is growing explosively.

Meanwhile, the pending merger between AT&T and T-Mobile USA, valued at more than $39 billion, has the potential to accelerate development of the mobile ecosystem. All eyes, including many in Congress, are on the FCC and the Department of Justice.  Their review of the deal could take the rest of the year. So the FCC’s refusal to make a definitive finding on the competitive state of the industry has left analysts poring through the report, reading the tea leaves for clues as to how the FCC will evaluate the proposed merger.

Make no mistake: this is some seriously expensive tea. If the deal is rejected, AT&T is reported to have agreed to pay T-Mobile $3 billion in cash for its troubles. Some competitors, notably Sprint, have declared
full-scale war, marshaling an army of interest groups and friendly journalists.

But the deal makes good economic sense for consumers. Most important, T-Mobile’s spectrum assets will allow AT&T to roll out a second national 4G LTE (longterm evolution) network to compete with Verizon’s, and expand service to rural customers. (Currently, only 38 percent of rural customers have three or more choices for mobile broadband.)

More to the point, the government has no legal basis for turning down the deal based on its antitrust review. Under the law, the FCC must approve AT&T’s bid to buy T-Mobile USA unless the agency can prove the transaction is not ‘‘in the public interest.’’ While the FCC’s public interest standard is famously undefined, the agency typically balances the benefits of the deal against potential harm to consumers. If the benefits outweigh the harms, the Commission must approve.

The benefits are there, and the harms are few. Though the FCC refuses to acknowledge it explicitly, the report’s impressive detail amply supports what everyone already knows: falling prices, improved quality, dynamic competition and unflagging innovation have led to a golden age of mobile services. Indeed, the three main themes of the report all support AT&T’s contention that competition will thrive and the public’s interests will be well served by combining with T-Mobile.

1.  Mobile Service: Rare Bright Spot in Recession

Demand for mobile services is soaring. The FCC reports 274 million mobile subscribers in 2009, up almost 5 percent from the previous year. The number of mobile internet subscribers, the fastest-growing category, doubled between 2008 and 2009. By late 2010, 41 percent of new mobile phone purchases were for smartphones. More than 9 billion apps had been downloaded by the end of 2010.

Despite poor economic conditions elsewhere, new infrastructure investment continues at a frenzied clip. Between 1999 and 2009, industrywide investment exceeded $213 billion. In 2009 alone, investments topped $20 billion—almost 15 percent of total industry revenue. Of the leading providers, only Sprint decreased
its investments in recent years.

Yet unlike virtually every other commodity, prices for mobile services continue to decline across the board, hardly a sign of flagging competition. The price of mobile voice services, the FCC reports, has ‘‘declined dramatically over the past 17 years,’’ falling 9 percent from 2008-2009 alone. (The average price for a voice minute is now 4 cents in the U.S., compared with 16 cents in Western Europe.) Text prices fell 25 percent in 2009. The price per megabyte of data traffic fell sevenfold from 2008-2010, from $1.21 to 17 cents.

2.  Mobile Competition Is Robust and Dynamic

The FCC, recognizing the dynamism of the mobile services industry, is moving away from simplistic tools the agency once used to evaluate industry competitiveness. The report repeatedly de-emphasizes the Herfindahl-Hirschman Index, or HHI concentration index, which tends to understate competition. The report also downplays the value of ‘‘spectrum screens’’ that once limited a single provider to one-third of the total spectrum in a given market.

Now, the commission says, its evaluation is based on real-world conditions, and looks at competition mostly at the local level. That makes sense. ‘‘Consumers generally search for service providers in the local areas where they live, work, and travel,’’ according to the report, ‘‘and are unlikely to search for providers that do not serve their local areas.’’

Looking at all 172 local markets individually, the FCC found ample evidence of vibrant competition. For mobile voice services, for example, nearly 90 percent of consumers have a choice of five or more providers. In 2010, almost 68 percent of U.S. consumers had four or more mobile broadband providers to choose from, a significant increase over 2009.

Competition between different kinds of wireless service (cellular, PCS, WiFi, and WiMax) is also increasing, and a wider range of the radio spectrum is now being included in the FCC’s analysis. Competition between mobile and traditional wireline service is growing in significance. More and more consumers are even ‘‘cutting the cord:’’ By the beginning of 2010, 25 percent of all households had no wireline service, up from 2 percent in 2003.

And competition within the mobile services marketplace, the Commission recognizes, is increasingly being driven not by the carriers but by new devices, applications and services. From 2008-2009, the FCC found that 38 percent of those who had switched carriers did so because it was the only way to obtain the particular handset that they wanted.

There are dozens of handsets to choose from, and no dominant provider among smartphone operating systems or device manufacturers. New entrants can and do thrive: handsets running Google’s Android operating system rose from 5 percent of the total market at the end of 2009 to almost 20 percent by mid-2010.

3.  If There Is a Problem, It Is Government

As consumers continue to embrace new mobile technologies and services, pressure is building on existing networks and the limited radio spectrum available to them. The risk of future network overload is serious—the one dark cloud hanging over the mobile industry’s abundant sunshine. According to the report, ‘‘mobile broadband growth is likely to outpace the ability of technology and network improvements to keep up by an estimated factor of three.’’

The FCC sees a ‘‘spectrum deficit’’ of 300 megahertz within five years. But the FCC and Congress have made little progress over the last two years to free up underutilized spectrum in both public and private hands. Auctions for available spectrum in the valuable 700 Mhz. band are tied up in political fights over a public safety network. Spectrum held by over-the-air television broadcasters is idling as Congress debates ‘‘incentive’’ auctions that would share proceeds between the broadcasters and the government.

Improving coverage by modifying or adding cell towers, the commission finds, is subject to considerable delay at the local level. Of 3,300 zoning applications for wireless facilities pending in 2009, nearly 25 percent had been idling for more than a year. Some had been languishing for more than three years, despite an FCC requirement that applications be decided within 150 days at the most.

Combining the spectrum assets of AT&T and T-Mobile would go a long  way toward limiting the potentially catastrophic effect of ‘‘spectrum deficit.’’ AT&T plans to move T-Mobile 3G customers to its existing network and integrate T-Mobile’s existing physical infrastructure, improving 3G service and freeing up valuable spectrum to launch a new nationwide 4G LTE network. As the report notes, T-Mobile had no plans to ever launch true 4G service and, given its limited spectrum
holdings, probably never could.

As part of its public interest analysis, the FCC will have to take these and other regulatory constraints to heart.

To Reality . . . and Beyond!

Reading the entire report, it’s clear that the FCC recognizes, as it must, that, even with the exit of T-Mobile from the U.S. market, mobile services would be anything but a ‘‘duopoly’’—either at the national level or at the local level, which is where it counts.

Competition is being driven by multiple local competitors, competing technologies, and handset and software providers. Federal, state and local governments all play an active role in overseeing the industry, which even the FCC now sees as the only serious constraint on future growth.

In Silicon Valley, if not inside the Beltway, consumers are understood to be the real drivers of the mobile services ecosystem—the true market-makers. Maybe that’s why the report found that the vast majority of U.S. consumers report being ‘‘very satisfied’’ with their mobile service.

It is a relief to see the FCC looking carefully at real data and coming to realistic conclusions, as it does throughout the report. Let’s hope reality continues its reign during the long AT&T/T-Mobile review and beyond, as this dynamic industry continues to evolve.

Reproduced with permission from Daily Report for Executives, July 11, 2011. Copyright 2011 The Bureau of National Affairs, Inc. (800-372-1033) www.bna.com.

Updates to the Media Page

We’ve added about a dozen new posts to the Media Page on my website, reflecting a sampling of articles, media quotes, and radio appearances from the last few months. These include several pieces for CNET News.com and Forbes, as well as links to appearances on NPR’s “Science Friday” (debating Sen. Al Franken on privacy law) and “Marketplace.”

I continue to be called on to help business leaders understand the confusing and dangerous new interest that national, state and local governments are taking in the “management” of the digital economy. I’ve been speaking most recently about Apple’s iPhone privacy flap (which turned out to have nothing to do with privacy), the AT&T/T-Mobile merger, and pending legislation in Congress aimed at curbing online piracy of movies and trademarked goods, the so-called “Protect IP” Act.

Next week, I’ll be making my tenth visit this year to Washington to meet with Congressional staffers and other policy makers to discuss these and other worrisome developments. Increasingly, my role seems to be as an unofficial representative of Silicon Valley helping regulators see the potential damage to innovation from ill-considered laws.

Of course I continue my long-standing work with companies working to introduce new products and services that exploit digital technology. The introduction of “killer apps” only gets faster with time, and more than ten years since the publication of my first book, I’m deeply flattered to hear from entrepreneurs who tell me the book still works as a manual for success in the digital age.

For AT&T/T-Mobile merger, Sprint throws in regulatory kitchen sink

For CNET this morning, I write about the latest tempest in the AT&T/T-Mobile USA merger teapot: cellular backhaul or “special access” as its known in the industry.

Like a child sitting on Santa’s lap at the mall, Sprint CEO Dan Hesse included backhaul in his wish list of conditions he’d like to see attached to the deal. Yesterday, Public Knowledge duly confirmed that yes, backhaul is a “multiplier” problem for the deal.

(Sprint says they would like the deal blocked, but that is mere posturing. What they really want is to use the FCC’s bloated and unprincipled merger review process to sneak in as many private concessions for themselves as they can get. And who can blame them for trying? More on that in a moment.)

For those who don’t know, backhaul is the process of moving cellular traffic (voice and data) to other high-speed networks (traditionally landline copper but now including cable, fiber, microwave and local Ethernet) to transport them to their ultimate destination. As mobile use increases, of course, the necessity of reliable, high-speed backhaul to keep overall performance up becomes more critical than ever.

Let’s work backwards:

1. The merger has no impact whatsoever on backhaul. PK’s Harold Feld told The Hill that “One measure of just and reasonable is comparing similarly situated customers. So AT&T has to at least be reasonably consistent in pricing. That means T-Mobile benefits to some degree from any pricing concessions that Sprint can negotiate, and vice versa. And if AT&T is too unreasonable to either one, or both, having two similarly situated companies complain to the FCC and produce evidence that AT&T is being unreasonable makes a stronger case than having just one company.”

Except that T-Mobile is not a customer. T-Mobile, like Sprint’s own subsidiary Clearwire, does not buy backhaul from AT&T or Verizon or any other landline infrastructure provider, relying instead on alternate backhaul technologies including microwave and Ethernet. T-Mobile doesn’t sell backhaul, and it doesn’t buy it from landline providers. So whatever part of the backhaul market AT&T holds today will be exactly the same the day after the merger. All Sprint loses is another company who could theoretically join it in complaining about AT&T’s rates to the FCC–except that T-Mobile doesn’t care about AT&T’s rates, because T-Mobile doesn’t buy from AT&T.

2. Sprint has only itself to blame if it’s too reliant on others for backhaul – The backhaul market, like many aspects of the communications industry (e.g., peering arrangements), is notoriously secret. No one really knows who is paying how much to whom for what–and those that do know are prohibited from disclosing.

But we do know that landline and cable companies have been investing billions over the last decade to upgrade, update, and extent their infrastructure. And we know that Sprint has not made a similar investment in landline infrastructure, putting its money in its wireless network. Which means that Sprint has known all along that it would remain reliant on its competitors for backhaul. The company made a strategic choice to lease rather than to build, knowing that while the FCC no longer regulates backhaul rates, the agency is there to keep prices in check. The merger doesn’t change that reality one iota.

Sprint says it pays “very very high” prices for backhaul from AT&T and Verizon, and that the backhaul business is exceptionally profitable. That sounds like a great opportunity, if it’s true, for someone else to enter the market. And indeed, dozens of companies large (Comcast) and small (local Ethernet) have entered the market. (Comcast projects $1 billion in its backhaul revenue in the near future.) Just not Sprint. Why should the FCC bail them out of what may have been a series of bad business decisions?

3. The real problem is merger review – As the two Republican FCC Commissioners said at the time of the Comcast-NBC Universal merger and its 200 pages of largely unrelated conditions, the FCC’s “regulation by merger” habit has grown life-threatening for the industries it regulates. Despite having nothing to do with the merger, and despite pure rent-seeking by Sprint to cut its backhaul costs in the name of antitrust, it seems possible that–sure, why not?–backhaul rate regulation concessions will be added to what will surely be the mother of all condition lists. (For AT&T, not Verizon or anyone else–at least not until their next merger review)

That is, when the FCC finally gets around to approving the deal. (The agency maintains a 180-day review deadline, but also grants itself the power to stop the clock anytime it likes. That’s how XM-Sirius took sixteen months, for example.)

The dangers of regulation by merger condition are obvious and getting worse. The merged entity is often crippled in its ability to operate for years after the merger, with each condition overseen by the FCC (and/or DOJ and/or FTC). Different companies offering similar products and services live by different sets of regulations, some of which exceed what the agencies could have legally done had they simply regulated everyone under their Congressional powers. The net result does nothing to improve competition in the relevant market. Quite the opposite.

Inviting competitors like Sprint to add to the list of unrelated conditions its Christmas list of kickbacks, sweetheart deals, tribute and plenary indulgences only makes a bad problem worse. Looking beyond the AT&T/T-Mobile merger, Sprint of all companies should know that…and know better.

FCC's Data Roaming Order: Trouble, Right here…

For Forbes.com this morning, I take a close look at last month’s controversial FCC order requiring facilities-based wireless carriers to negotiate data roaming agreements with other carriers.

There are business, technical, and legal reasons why the order stands on unsteady ground, which the article looks at in detail.

The order, by encouraging artificial competition in nationwide mobile broadband, could also undermine arguments against AT&T’s merger with T-Mobile USA.

How so?  If every regional, local, or rural carrier can offer their customers access to the nationwide coverage of Verizon, AT&T, or Sprint, on terms overseen for “commercial reasonableness” by the FCC, what’s the risk of combining AT&T and T-Mobile’s infrastructure.  Indeed, doing so would create stronger nationwide 3G and 4G networks for other carriers to use.  It’s actually pro-competitive, and a pragmatic solution to spectrum exhaustion.

The bigger question is why the FCC seems so determined to get into the business of regulating the Internet economy, when Congress has so clearly and consistently told them to stay out of it.

(The results of that wise foresight speak for themselves:  compare the health of digital life to the health of, say, wireline telephone and over-the-air TV broadcasters, which the FCC has long-regulated to within an inch of their lives, or less.)

With its historic client base rapidly disappearing, the FCC, like any good business, is looking for new markets and new clients.  But like Harold Hill, the flim-flam artist featured in Meredith Wilson’s classic “The Music Man,” it doesn’t know the territory.

Shut out of market for digital regulation by Congress (underscored repeatedly by the courts), the agency has no expertise in dealing with the business or technical dynamics of the Internet.  To paraphrase Wilson, the market is looking for mandolin picks, but the FCC keeps selling big trombones.

The result is trouble, my friends.  Right here.

The AT&T – T-Mobile Merger: Beyond the Arithmetic

Following AT&T’s announcement last month of its planned acquisition of T-Mobile USA, pundits and other oddsmakers have settled in for a long tour of duty. Speculation, much of it uninformed, is already clogging the media about the chances the $39 billion deal—larger even than last year’s merger of Comcast and NBC Universal—will be approved.

Both the size of the deal and previous consolidation in the communications industry lead some analysts and advocates to doubt the transaction will or ought to survive the regulatory process.

Though the complex review process could take a year or perhaps even longer, I’m confident that the deal will go through—as it should. To see why, one need only look to previous merger reviews by the Department of Justice and the Federal Communications Commission, both of which must approve the AT&T deal.

Critics of the deal argue principally that a reduction from four national wireless carriers to three will create grave risks to competition. But Justice and the FCC have consistently rejected such simple-minded analysis. Instead, as consent decrees for several wireless mergers over the last decade–under Democratic and Republican administrations—make clear, both agencies approach the unique economic features of mobile communications with more subtle tools.

For example, both Justice and the FCC have consistently concluded that wireless markets are essentially local. Their competitive analysis—the key in reviewing horizontal mergers of this type—therefore focuses on the choices available to consumers where they buy wireless service; typically where they live, work or shop.

In today’s dynamic mobile industry, some national wireless carriers are strong in some cities or rural areas and weak or absent from others. Beyond the national carriers, lower-priced providers including MetroPCS and Cricket, as well as established regional companies including US Cellular, are strong in local markets. The Justice-FCC market analysis will consider market structure at the local level, counting all providers who are genuinely competitive.

The discussion so far about market concentration levels—measured by the Herfindahl-Hirschman Index, or HHI—ignores the more detailed analysis that the DOJ and the FCC have performed for past mergers including Sprint-Clearwire and Verizon-Alltel (both in 2008).

HHIs are commonly used as starting screens to identify markets where anti-competitive effects might result. But the two agencies have historically concluded that anti-competitive effects will occur only where concentration is especially high–at levels of the HHI well above the published estimates for the AT&T-T-Mobile deal in most markets. In particular, the focus has historically been on local markets where the merger would result in too few remaining competitors. In those markets, local divestitures have been required.

On that analysis, AT&T probably will be required to divest some consumers in some local markets, but fewer than would result from strict application of the high-level HHI screens.

The FCC must also consider potential benefits of the deal that improve the ‘‘public interest.”  Here, the agency will take into account serious capacity constraints both AT&T and T-Mobile are already experiencing on their networks. AT&T argues the merger will allow it to optimize scarce spectrum, improve network performance and quality, and accelerate deployment of nationwide mobile broadband using LTE technology, including expansion into rural areas.

The FCC and DOJ will require evidence to support these claims, of course. But assuming AT&T can back them up, they constitute strong public interest benefits.  After all, these are all goals the FCC itself established as part of last year’s National Broadband Plan. Likewise, as part of its evaluation, the DOJ will consider these and other claimed synergies as pro-competitive efficiencies produced by the merger.

Finally, that the deal is being vigorously opposed by some competitors—notably Sprint—actually helps AT&T’s case. Antitrust enforcers are understandably skeptical of claims by competitors that a merger will hurt them. Why? If a merger leads to higher prices for consumers, competitors such as Sprint would actually benefit. So when a competitor complains a merger is anticompetitive, the agencies take that as evidence the deal will in fact produce a stronger rival. And a stronger rival is good for consumers.

In the end, Justice and the FCC will have to weigh the competitive risks of further consolidation against the benefits for American consumers of improved service and accelerated deployment of nationwide mobile broadband. If history is any guide, the merger will ultimately be approved with specific conditions, including divestitures, to ensure that local competition is preserved even as national benefits are achieved.

That, of course, assumes the agencies follow their own best practices and not naysayers who can only count down from four to three. Let’s hope they do.

Reproduced with permission from Daily Report for Executives, 69 DER B-1 (Apr. 11, 2011). Copyright 2011 by The Bureau of National Affairs, Inc. (800-372-1033)