AT&T and T-Mobile--listen before you judge

Consumer advocates have already condemned the AT&T and T-Mobile USA as "unthinkable." But Larry Downes argues jumping to conclusions doesn't help anyone, especially consumers.

Larry Downes
Larry Downes is an author and project director at the Georgetown Center for Business and Public Policy. His new book, with Paul Nunes, is “Big Bang Disruption: Strategy in the Age of Devastating Innovation.” Previous books include the best-selling “Unleashing the Killer App: Digital Strategies for Market Dominance.”
Larry Downes
8 min read

The usual suspects are already sharpening their knives against AT&T's announced acquisition of T-Mobile's U.S. business.

Within hours, the Media Access Project announced that "if approved, this deal would further increase costs and decrease choices for the public." Media reform group Free Press headlined its press release, "Consumers lose when there's less competition." And Public Knowledge condemned the deal as "unthinkable."

That sort of rhetoric is par for the course inside-the-beltway where, for some reason, every combination of business assets is presumed to be hostile to consumers. These groups are so convinced of the evils of mergers that they no longer feel the need for bothersome facts and time-wasting analysis.

But out here in the real world, thinking things through is actually still considered a rational way to analyze a problem.

So let's think about the "unthinkable."

Of course, the details of the planned merger haven't been made public yet, so it's hard to say specifically how the combination will affect consumers, influence market dynamics, or change the landscape for communications services--mobile and otherwise.

But at the same time, I don't understand the line of non-reasoning that opposes any combination of two companies in the same industry on the theory that any loss of competition, no matter how theoretical, translates to higher prices and reduced service to consumers.

For starters, it assumes that the sole purpose of any merger is to gain economic leverage over one's customers and to translate that leverage into consumer harm. That, in any case, isn't what managers tell investors, who like the rest of us don't see what a company would have to gain from intentionally fouling its own nest.

From the standpoint of investors, the whole point of mergers of this kind is to give the merged entity economies of scale and other efficiencies that allow it to operate at a lower unit cost. That is, to make it more competitive.

That's especially important in the wide-open and fast-evolving mobile industry. Assuming the deal is ultimately approved, there will still be significant competitors to AT&T in every U.S. market--competitors who will be eager to take advantage of inevitable distractions for AT&T in both pursuing and implementing the merger.

Companies regularly underestimate the costs and time it takes to complete a merger, by the way, which can also be helpful to competitors. And mergers of this scale may fail to ever deliver the benefits to investors that inspire them, perhaps because technological advances in the interim undermine the assumptions that made the merger seem attractive. Witness America Online and Time-Warner, which similarly and incorrectly terrorized consumer advocates in 2000.

(Adam Thierer, now with The Mercatus Center, wrote a brilliant paper in 2009 (PDF) analyzing both the fear-mongering and sober realities of media and communications mergers over the last decade that is well worth rereading.)

More, not less, competition
In opposing mergers without any analysis (which requires thinking, after all), facts pose little obstacle for the true disbelievers. But for those who care about such details, it simply isn't true, as the Media Access Project says in its press release, that "The FCC's National Broadband Plan, issued last year, warned about the absence of sufficient competition in the wireless market."

Actually reading the FCC's plan, I find just the opposite. There is no hint of a warning about insufficient wireless competition. According to the FCC, rather, as of last year over 77 percent of U.S. homes had access to three or more providers for 3G mobile services.

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In fact, the FCC believes that expanding and accelerating the deployment of next-generation 4G services has the potential to increase competition, not just in mobile but in the broader category of all communications services. As higher-speed and more efficient 4G services are implemented, the FCC notes, LTE services have the "potential to be a closer competitor to wireline broadband" than existing 3G services.

Making 4G available to more U.S. consumers, in other words, is not only good for mobile competition but also makes mobile a viable alternative to wired service, where some consumers currently have fewer options.

And the U.S. Department of Justice, who along with the FCC will need to give approval for the merger, agrees. In its submission to the FCC as part of the development of the FCC plan, the Department of Justice said nothing about a lack of competition in wireless service.

Quite the contrary, it found that robust competition was spurring the kind of innovation that was making wireless a viable competitor to wireline. "Emerging fourth generation ('4G') services," the Department wrote, "may well provide an alternative sufficient to lead a significant set of customers to elect a wireless rather than wireline broadband service."

Which is precisely the point of the proposed merger. According to AT&T, "Because of the scale, spectrum and resources resulting from this transaction, AT&T can expand 4G LTE to 95 percent of U.S. population or 294 million people."

By bringing together complementary spectrum from AT&T and T-Mobile, the combined entity will be able to compete more effectively with Verizon in the 4G space, improve overall network performance, and speed up what the Justice Department described as "encouraging signs" that mobile is beginning to compete effectively with wireline service. (Already, significant numbers of U.S. consumers have abandoned wireline telephone service, for example.)

How else can wireless providers improve service?

That, of course, brings up another myth about mergers, which is that they inevitably lead to declines in service quality. Again, let's do the "unthinkable" and hash that through for a moment. Quality of service even in the 3G market is a principal issue on which the competitors compete today--witness the funny (or not-so-funny) commercials all the wireless companies run denouncing the performance of everyone else.

If AT&T or any other provider genuinely wanted to improve their coverage, speed, fidelity or any other quality measure consumers value, how else besides a merger can they do it? Adding or upgrading existing infrastructure--cell towers, for example--is entirely constrained by federal, state, and local regulatory approval. And most of these regulators have proven themselves to be too slow, incompetent, and/or corrupt to allow the infrastructure investments the carriers want to make.

Another alternative is to expand coverage by using more of the radio spectrum. But spectrum is a limited resource, and the FCC has not held a significant auction since 2008. (At that auction, AT&T spent billions to acquire key blocks of the 700MHz frequency, presumably for use in deploying its future 4G service.)

As everyone knows, there are vast tracks of spectrum which are inefficiently allocated today. The National Broadband Plan, in fact, called for the FCC to identify and reallocate some 500MHz of spectrum in the next 10 years--300 MHz of it for mobile services in the next five years.

So far, however, that effort has gone nowhere. On the first anniversary of the its plan, the FCC is still splitting hairs over whether it has even gotten around to preparing an inventory of the existing allocations, as mandated last summer by President Obama.

In the absence of meaningful spectrum reform or cell tower siting rules, what else can a service provider do but acquire more frequency through merger? While the FCC dithers, industry is taking action. Mergers may not be the best way to reallocate the mess of current spectrum allocations. But waiting for the FCC will mean a slower roll-out of 4G services, and decline in overall quality as spectrum demand continues to outpace supply.

The reality of merger review is complicated
Without mergers, in other words, costs are likely to increase and consumer choice is likely to decline--not the other way around.

Again, this is also the view of the Department of Justice. In evaluating the proposed transaction, the department will continue to recognize that putting available spectrum to its best use is essential to promote, not damage, competition. In its letter to the FCC on the National Broadband Plan, the Department wrote:

Reallocating spectrum that is being underutilized would encourage the deployment of wireless services and could help to make such services more competitive with wireline offerings. First, an increase in the amount of spectrum that firms could devote to broadband would lower the cost of providing wireless broadband services and encourage entry. Second, more spectrum would allow providers to increase the capacity and reliability of their offerings, thereby bringing them closer to cable modem and fiber-based broadband. Third, the increased capacity in the systems would help support new applications. We urge the Commission to give priority to making more spectrum available to wireless broadband providers so as to maximize their potential to compete against the established wireline ones.

As these quotes suggest, the unthinking, knee-jerk rejection of any proposed combination as an antitrust violation has little to do with the reality of how the FCC and Department of Justice should--and usually does--review proposed mergers. There is no magic formula for deciding what percentage of a relevant market an individual competitor is permitted to control. Defining the market itself is complicated, especially given different conditions in different parts of the U.S. and the potential for mobile service to compete with wireline alternatives. The influence a company has over price is affected by other factors besides direct competition, including potential substitutes and regulatory constraints.

And in a market with high fixed and sunk costs, such as mobile services, even the most aggressive antitrust review does not mean, to quote the Department of Justice once again, "striving for broadband markets that look like textbook markets of perfect competition, with many price-taking firms." Rather, the department says, "promoting competition is likely to take the form of enabling additional entry and expansion by wireless broadband providers, applying other appropriate policy levers, and spurring competition among broadband providers by improving the information available to consumers..."

The real risk here is that between the FCC and the Department of Justice (it isn't clear yet which agency will take the lead in reviewing the proposed merger), the deal won't be closed quickly, slowing the combined company's ability to deploy new 4G service to nearly everyone.

The FCC's review of the Comcast-NBC merger, for example, took more than a year, despite the fact that the agency has a self-imposed (but unenforced) 180-day shot clock. After fits and starts, the approval resulted in a nearly 300-page document rife with irrelevant hand-wringing and unrelated conditions on the merged entity, including a promise to abide by the FCC's notorious net neutrality rules even if Congress or the courts ultimately overturn them.

Indeed, reviewing the sorry history of the Comcast review, FCC Commissioner Meredith Baker recently noted with characteristic understatement, "the current FCC merger review process is ripe for overhaul."

This is just a start to what will be, in the best of circumstances, a long and complicated conversation about the AT&T-T-Mobile deal. But when opponents line up to preemptively reject the deal before the details are even announced, you can count on a longer and largely pointless slog.

Thinking--and actual economic analysis-- about proposed mergers is certainly harder than blustering about the "unthinkable." But if the Washington advocacy groups actually want to do something to improve the consumer experience in mobile, they might give it a try.