For AT&T merger, Sprint dusts off its Christmas list

Sprint recently asked Congress to block the AT&T-T-Mobile merger because of its impact on competition for cellular backhaul. But the merger has nothing to do with backhaul--only on Sprint's bottom line.

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
6 min read

It's called "regulation by merger condition." And at the Federal Communications Commission, it's a problem that has become epidemic. As part of a drawn-out process the agency follows for approving proposed mergers in the communications industry (where it shares review authority with the Department of Justice), companies are persuaded to volunteer or are sometimes simply forced into accepting pages and pages of conditions that limit the merged entities' operating flexibility for years to come.

In part, the voluntary conditions are offered just to get the process moving. Though the FCC is required to complete its review in 180 days, it has the power to stop the clock at will--a power it exercises with abandon.

Many of the conditions have nothing to do with the merger itself. Instead, the FCC uses its leverage to impose sweeping new regulations it wants but doesn't have congressional authority or the political will to pass on its own. It's like Christmas all year at the FCC.

Among other fallout, "regulation by merger condition" has left behind a minefield of different rules and restrictions for different companies in the same business, some longer-lived than others. Recent examples of this embarrassment include the 2005 merger of SBC and AT&T, the 2008 XM-Sirius satellite radio deal (which took 16 months to "review"), and, most notoriously, last year's approval of Comcast's takeover of NBC Universal.

The nearly 200-page order (PDF) in the Comcast case included dozens of unrelated conditions, such as requirements for Comcast to add more children's programming on Telemundo, staying out of any decision making in its partly-owned Internet start-up Hulu, and living with the commission's Net neutrality rules even if Congress or the courts ultimately reject them. These were in addition to "voluntary" conditions Comcast offered during the course of the year-long review.

This regulatory feeding frenzy led the FCC's two Republican commissioners to call for a complete overhaul of the merger review process. "While many of these commitments may serve as laudable examples of good corporate citizenship," the two wrote in a joint concurrence to the Comcast order, "most are not even arguably related to the underlying transaction."

Competitors now getting in on the fun
But apparently we ain't seen nothing yet. In the early days of what will likely be an even longer and more coercive review of AT&T's proposed merger with T-Mobile USA, there are already signs that not only the FCC, but some of AT&T's competitors would like to use the merger to settle old scores and extract concessions for themselves.

In recent testimony before a Senate Judiciary Subcommittee, for example, Sprint CEO Dan Hesse dusted off his Christmas list and began reading it to Congress, hoping that the FCC will ultimately answer his letter to Santa.

Case in point: Hesse wants the merger blocked or at least crippled with regard to AT&T's cellular backhaul services. What is backhaul? Briefly, after cellular voice and data traffic travels from your mobile device to a cell tower, it must be offloaded to a high-speed network to reach its destination on the Internet or the telephone network. As cellular networks explode with data traffic, backhaul transport (or "special access" as it's known in industry jargon) is increasingly important to ensure overall performance.

Hesse complained that AT&T and Verizon together control most of the backhaul market(PDF). Today, Hesse says, Sprint pays $2 billion a year for backhaul, at prices that are "very very high." If the merger is approved, according to Hesse, "Two companies would control most of the nation's wire line infrastructure and the critical last mile that Sprint and the rest of the industry need to provide affordable rates and quality service."

Facts don't support Sprint's claims on backhaul non-competition
Sprint, it seems, wants to use merger review to get itself lower prices for backhaul. But Hesse is wrong on the facts and wrong in his conclusion. First, the backhaul market is competitive and growing quickly. Besides AT&T and Verizon, wireline backhaul services are offered by a variety of other companies including CenturyLink and cable providers Comcast, Cox, and Time Warner Cable. Comcast is projecting $1 billion in backhaul revenue.

And backhaul is provided by other technologies, including microwave and Ethernet. There are many providers here, including AboveNet, AirBand, Windstream, Level 3, and XO Communications. Indeed, in some markets Verizon is now buying microwave backhaul from Level 3.

Or consider Clearwire, a 4G WiMax pioneer that is majority-owned by Sprint. According to the company's CEO, Clearwire's network relies on microwave for 90 percent of its backhaul needs(PDF). And in many cases, Clearwire shares cell towers with Sprint. Neither AT&T nor Verizon offer microwave backhaul.

Of course no one is forcing Sprint to buy backhaul service from its competitors. While others in the communications industry have invested billions in new fiber, cable and copper upgrades, and other infrastructure, Sprint has stuck to wireless. Sprint made a strategic choice to lease rather than build backhaul capacity. If the company now regrets that decision, it's hardly the role of the FCC to bail them out.

Hesse claims that AT&T and Verizon earn "enormous profits" on backhaul, though the exact prices and costs are conveniently kept secret within the industry. But if huge profits are there to be made, why doesn't Sprint build its own infrastructure?

In part, the answer is that the company is doing just that. Late last year, Sprint announced a $5 billion initiative it calls Network Vision, which the company describes as "multimode technology to enhance service--coverage, quality and speed--create network flexibility, reduce operating costs and improve environmental sustainability." This innovative approach is likely to reduce Sprint's reliance on backhaul providers.

Backhaul won't be affected by merger in any case
But let's assume for the moment that Sprint is at the mercy of AT&T and Verizon for mobile backhaul. What does that have to do with the T-Mobile deal? T-Mobile does not sell backhaul service of any kind. For its own needs, the company relies almost exclusively on Ethernet. So T-Mobile is neither a customer of AT&T nor a competitor in the backhaul business.

The merger of AT&T and T-Mobile USA, in other words, would have absolutely no impact on the competitive landscape for backhaul, nor on current or future prices.

So why does Sprint think this is a relevant issue for Congress and the FCC to consider in its review of the merger?

The answer is clear, if depressing. Sprint is hoping the agency will force conditions on the merger that will improve its own bottom line. In this case, though the company didn't say so directly, it appears Sprint wants the FCC to return to its long-abandoned role as regulator of backhaul rates and conditions, at least as far as AT&T is concerned. (Verizon would continue to charge market prices--at least until its next merger review.)

What Sprint is suggesting goes beyond "regulation by merger condition." This is wholesale regulatory arbitrage based on unrelated and inaccurate facts.

And no doubt this is just one of what will surely be a record haul of red herrings by Sprint and others. The FCC's merger review process is already so befuddled, why not co-opt it for their own gain?

Merger review process is what needs correcting
In the end, the demands of AT&T's competitors, special interest groups, and perhaps suppliers and customers, will add up to nothing less than an attempt to restructure the communications industry and needle the FCC into acting beyond its authority.

Perhaps it is time for serious regulatory reform--the last major rewrite of U.S. communications law, after all, was passed in 1996. But that is a decision for Congress, not the FCC, to make. And certainly not in the course of reviewing a pending transaction.

If something urgently needs to be brought under control, it's the FCC's merger review process. Until then, competitors, interest groups, and everyone else who wants to take advantage of the merger review free-for-all will keep adding to their Christmas lists. Before looking in their stockings, though, these kids better hope the FCC doesn't ask if they've been naughty or nice.