AT&T/T-Mobile RIP

Yesterday, AT&T announced it was halting its plan to acquire T-Mobile. Presumably AT&T did not think it could prevail in defending the merger in two places simultaneously—one before a federal district court judge (to defend against the DOJ’s case) and another before an administrative law judge (to defend against the FCC’s case). Staff at both agencies appeared intractable in their opposition. AT&T’s option of defending cases sequentially, first against the DOJ then against the FCC, was removed by the DOJ’s threat to withdraw its complaint unless AT&T re-submit its merger application to the FCC. The FCC rarely makes a major license-transfer decision without the green light from the DOJ on antitrust issues. Instead, the FCC typically piles on conditions to transfer value created by the merger to complaining parties after the DOJ has approved a merger. Prevailing first against the DOJ would have rendered the FCC’s opposition moot.

The FCC’s case against the merger was weak. I have already blogged about the FCC’s Staff Report, but one point is worth revisiting as we digest the fate of T-Mobile’s spectrum: The FCC placed a huge bet on the cable companies’ breathing life into a floundering firm. In particular, the Staff Report cited a prospective wholesale arrangement between Cablevision and T-Mobile as evidence that some alternative suitor—whose name did not rhyme with “Amy and tea” or “her eyes on”—could preserve the number of actual competitors in the marketplace. However, within days of the FCC’s placing its bet on the cable industry, Verizon announced its intention to gobble up the spectrum of Comcast, Time Warner, and Bright House. Over the weekend, Verizon declared its purchase of spectrum from Cox.  To be fair, Verizon’s acquisition does not preclude T-Mobile and Cablevision from entering into some spectrum-sharing arrangement; let’s not hold our breath.

This episode highlights the danger of regulators’ industrial engineering: The wireless marketplace is so dynamic that a seemingly reasonable bet by an agency was revealed to be a stunning loser in just a matter of days. By virtue of AT&T’s “winning the auction” for T-Mobile’s assets—Deutsche Telekom, T-Mobile’s parent, is leaving the American wireless industry one way or another—the marketplace selected the most efficient suitor for T-Mobile. If the cable companies or some other suitor were interested in entering the wireless industry, then presumably they would have stepped forward when T-Mobile was still on the open market.

Can you blame the cable companies for their lack of interest in wireless? Who wants to enter an industry with declining prices that requires billions in network investment that cannot be re-deployed elsewhere in the event of a loss? When asked what Deutsche Telekom plans to do with its U.S. assets now that the AT&T deal has unraveled, a company spokesman said: “There’s no Plan B. We’re back at the starting point.” Such gloom is hard to reconcile with the FCC’s belief that a viable suitor is lurking in the background.

Short of Google’s or DISH Network’s or some non-communications giant’s swooping down in the coming days, the net costs of the FCC’s risky intervention will begin to mount. The ostensible benefits of intervention were to prevent a price increase and to preserve the cable companies’ play on T-Mobile’s spectrum. The second benefit has evaporated and the first benefit was never proven in the FCC’s Staff Report. On the cost side of the ledger, AT&T’s customers will soon experience increased congestion as their demand for wireless video and other bandwidth-intensive applications outstrip the capacity of AT&T’s network. And T-Mobile’s customers will never get to experience 4G in all its glory. (Deutsche Telekom has little incentive to upgrade a network it plans to sell.) The FCC has certainly capped AT&T’s spectrum holdings in place, but has the agency advanced the public interest?

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