Archive for category spectrum
Economists recognize that the source of sustainable, private-sector jobs is investment. Due to measurement problems with investment data, however, it is sometimes easier to link a byproduct of investment—namely, adoption of the technology made possible by the investment—to job creation. This is precisely what economists Rob Shapiro and Kevin Hassett have done in their new study on the employment effects of wireless investments.
Shapiro and Hassett credit the nation’s upgrade of wireless broadband infrastructure from second-generation (2G) to third-generation (3G) technology with generating over one million jobs between 2006 and 2011. To demonstrate that adoption of 3G handsets “caused” job creation in an econometric sense, the authors studied the relationship between the change in a state’s employment and the cumulative penetration of cell phone technologies. According to their econometric model, every 10 percentage point increase in the penetration of a new generation of cell phones in a given quarter causes between a 0.05 and 0.07 percentage point increase in employment growth in the following three quarters.
How reasonable are these results? In 2010, Bob Crandall and I estimated that investment in second-generation broadband infrastructure of roughly $30 billion per year, including wireless infrastructure, sustained roughly 500,000 jobs between 2006 and 2009. We further estimated that spillover effects in other industries that exploit broadband technology could sustain another 500,000, bringing the total job effect close to one million jobs per year. Although Shapiro’s and Hassett’s estimates (based on wireless deployment only) significantly exceed ours (based on all broadband deployment), their estimate is not outside the realm of the possibility.
Crandall, Lehr, and Litan (2007) also conducted a regression analysis using state-level broadband penetration data from 2003-2005 to estimate job effects. They projected that for every one percentage point increase in broadband penetration in a state, employment increases by 0.2 to 0.3 percent per year. On a national level, their results imply an increase of approximately 300,000 jobs per year per one-percentage-point increase in broadband penetration. Once again, Shapiro’s and Hassett’s estimates are consistent with this prior work.
Scholars may differ on the precise way to measure the employment effects, but that debate misses the more important policy point—namely, that broadband technologies generally and wireless broadband in particular have become a vital engine of job creation. The observed correlation between wireless adoption and employment is not accidental: To induce customers to adopt the coolest handset, firms must continuously invest in the next generation of network and device technologies. And these costly investments sustain jobs.
Moreover, contrary to the FCC’s opinion in its 15th annual wireless competition report, private industry’s sustained and widespread investment in new wireless broadband technologies is consistent with the sector being intensely competitive. Industry critics have decried such evidence, arguing instead that the industry is in the death grip of monopolists. Although a monopolist may have an incentive to innovate to protect against a future threat, firms in a competitive industry have incentives to invest and innovate as a way to protect against losing market share today.
Policymakers should ask themselves this question: Why would wireless carriers continually invest billions of dollars on next-generation technologies if they could sit back and exploit their alleged monopoly rents? Experience and common sense tell us that in fact, companies in this space are not behaving like monopolists. Rather, wireless providers of all stripes are desperately trying to distinguish themselves from their rivals. Wireless tablets and phones are driving demand for more and faster wireless broadband, while spectrum-devouring apps like Siri have captured the imagination of millions. The wireless arms race is on, and the U.S. economy stands to benefit directly as wireless companies try to outmaneuver one another with the fastest networks, coolest devices, and deepest array of killer apps.
Regulated firms and their Washington lawyers study agency reports and public statements carefully to figure out the rules of the road; the clearer the rules, the easier it is for regulated firms to understand how the rules affect their businesses and to plan accordingly. So long as the regulator and the regulated firm are on the same page, resources will be put to the most valuable use allowed under the regulations.
When a regulator’s signals get blurry, resources may be squandered. For starters, take the FCC’s annual wireless competition report and the Commission’s pronouncements on spectrum policy. For several years, the competition report cited a trend of falling prices and increasing entry as evidence of robust competition while at the same time noting that industry concentration was slowly rising.
In an abrupt turnaround, the FCC’s 2010 competition report cited the slow but steady increase in concentration as evidence of a lack of competition despite the continued decline in prices and increase in new-firm entry. In other words, in the face of the same industry trends, the agency’s conclusion on competition reversed. The increased weight placed on concentration also seemed at odds with the DOJ’s revised Merger Guidelines, which deemphasized concentration in favor of direct evidence of market power.
At last week’s Consumer Electronics tradeshow, the FCC chairman suggested that the competition report’s objective was not to provide guidance on Commission policy but instead “to lay out data around the degrees of competition in the different sectors.” So much for clearing up the ambiguity. Industry participants expect more than a Wikipedia entry on something so weighty as an annual report to Congress regarding one of the economy’s most critical sectors.
The agency’s signals on spectrum policy are even murkier. On one hand, during the last few years, the current FCC has been calling for more frequencies to be made available to support and grow wireless broadband networks. The FCC has also been publicly supporting voluntary incentive auctions—a market-based tool to compensate existing spectrum licensees for returning their licenses—as the best way to reallocate unused broadcast spectrum to wireless broadband. However, in a confusing set of remarks at the same tradeshow, the FCC now seems to be saying that it only wants to see more spectrum made available if the agency can dictate who gets the spectrum and how they can use it. The very discretion that the FCC now seeks will invite rent-seeking behavior among auction contestants, who will lobby the agency to slant the rules in a way that limits competition and advances their narrow interests; better to immunize the FCC from this lobbying barrage by limiting its discretion.
The agency’s inconsistent and confusing analysis and statements in these two critical policy arenas—wireless competition and spectrum policy—created the perfect storm last year when AT&T sought to acquire T-Mobile. AT&T argued that it wanted to purchase T-Mobile and use its spectrum to augment existing spectrum and infrastructure resources, consistent with the agency’s acknowledgement that wireless carriers needed more spectrum to support surging demand for bandwidth-intensive wireless services such as streaming video. Had AT&T understood the FCC’s intentions, it would not have offered a four-billion-dollar breakup fee to T-Mobile’s parent; these resources could have been put to better use.
The singular objective that should drive the Commission in all matters wireless is getting spectrum into the hands of firms that value it the most. The last 20 years of wireless-industry growth has proven that those who value spectrum the most put it to use most quickly. To commit to this course of action, the agency needs to more clearly and consistently signal its regulatory intentions. If the agency wants to spur competition, it should support Congressional efforts to authorize incentive auctions without restrictions. It also needs to let the evidence of lower prices, growing adoption, and increasing innovation inform its understanding of the state of competition.
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?
Geoff Manne’s blog on the FCC’s Staff Analysis and Findings (“Staff Report”) has inspired me to come up with a top ten list. The Staff Report relies heavily on concentration indices to make inferences about a carrier’s pricing power, even though direct evidence of pricing power is available (and points in the opposite direction). In this post, I have chosen ten lines from the Staff Report that reveal the weakness of the economic analysis and suggest a potential regulatory agenda. It is clear that the staff want T-Mobile’s spectrum to land in the hands of a suitor other than AT&T—the government apparently can allocate scare resources better than the market—and that the report’s authors define the public interest as locking AT&T’s spectrum holdings in place.
Top Ten Lines in the Staff Report
- “While there is more to establishing likely competitive harms than measuring market and spectrum concentration, these [concentration] metrics shed light on the scope and scale of the competition that would be eliminated by the proposed transaction.” Staff Report, para. 17. An important admission. The staff is signaling that the merger analysis cannot begin and end with a concentration analysis. The Staff Report fails to explain, however, what more is needed to establish anticompetitive effects. The answer is direct evidence that the merging firms significantly constrain each other’s ability to raise prices. And the Staff Report fails on this score.
- “Second, the proposed transaction would result in the elimination of a nationwide rival that has played the role of a disruptive competitive force in the marketplace.” Staff Report, para. 17. Setting aside the weakness of the claim that T-Mobile—the only major carrier to lose subscribers in 2010—is a disruptive force, the Staff Report fails to explain how T-Mobile’s supposed disruption has anything to do with the instant merger. Is the staff saying that T-Mobile is so disruptive and so irreplaceable that any merger eliminating T-Mobile would be anticompetitive? The Staff Report’s “disruptive” evidence, chronicled from paragraphs 21 through 28, could be regurgitated in a Sprint/T-Mobile merger review or in a Leap/T-Mobile review. Would those mergers be presumptively anticompetitive as well? Critically, the evidence of T-Mobile being a disruptive force does not speak to the issue of whether T-Mobile constrains the price of AT&T.
- “Market concentration statistics of the type generated by this transaction commonly indicate that buyers would have fewer viable choices, making both unilateral and coordinated competitive effects more likely.” Whether concentration statistics indicate anticompetitive effects in general or in a hypothetical U.S. market is beside the point. What matters here is whether concentration statistics are a good predictor of higher wireless prices. And the answer is a resounding no. As the former chief economist of the FCC has noted in a forthcoming paper, wireless concentration is negatively correlated with wireless prices. At a minimum, the FCC should note this finding—the abstract has been viewed nearly 1500 times and the full paper has been downloaded 250 times from SSRN—and provide the proper caveats to any concentration analysis they conduct regarding the wireless industry.
- “Although T-Mobile faces challenges as the industry develops and responds to the increasing data demands of consumers, the record does not support the bleak short-term outlook for T-Mobile that AT&T has portrayed in its submissions.” Staff Report, para. 22. To say that T-Mobile faces challenges is an understatement: T-Mobile is uniquely losing subscribers and its German owners want out of the U.S. market. How can the agency better predict the short-term outlook for T-Mobile? Is there a crystal ball in the FCC’s basement? If the short-term were as rosy as the agency suggests, then why would T-Mobile’s owners—who presumably have the best vantage on the firm’s future performance—seek a buyer right before a turnaround in performance?
- “These initiatives [announced by T-Mobile’s CEO before the transaction] might have strengthened T-Mobile’s disruptive role in the industry, for example by highlighting its unlimited data plans, and using them to define its brand and differentiate it from rival brands that have adopted tiered pricing.” Staff Report, para. 23. How can T-Mobile go from a disruptive force to an even stronger disruptive force? You can’t be half-pregnant, and you can’t be half-disruptive. It seems that the Staff Report is now saying that T-Mobile would have been disruptive but for the transaction, which caused T-Mobile to abandon these really stupendous plans. According to footnote 61, these initiatives were announced in a T-Mobile press release on January 20, 2011. But the agency doesn’t bother to see how the market reacted to these initiates. It is curious that the agency would stake its disruptive claims on something so speculative.
- “T-Mobile has also repeatedly acted as a pricing innovator over the past few years, introducing offers such as . . . T-Mobile introduced a simple online tool that allows a subscriber to manage all services on a multi-line family plan, for example, setting and changing the limits for minutes, messages and downloads (e.g., games, ring tones) on a child’s line.” Staff Report, para. 24. According to the Staff Report, this “innovation” is among the seven most disruptive offerings from T-Mobile since 2007. Seriously? Is this impressive to anyone out there? Even assuming T-Mobile was the first to allow wireless users to adjust their settings online, how in the world did that constrain AT&T’s ability to set prices? The other innovations cited in the Staff Report are equally unimpressive. How well did that Unlimited Hotspot Calling or T-Mobile Hotspot @Home work out? If none of the major carriers embrace an offering like those, can we safely infer that they weren’t so innovative? If you want to make free Wi-Fi calls on your phone, download Viber. Yawn.
- “[O]ur analysis of the record reflects that T-Mobile charges lower prices than the other nationwide firms.” Staff Report, para. 25. Apparently, the staff doesn’t want you to know that T-Mobile had its legs cut out by regional carriers such as Leap and MetroPCS. Indeed, T-Mobile’s executives have admitted as much publicly, explaining how it was caught between the high-end service of AT&T and Verizon and the low-end, no-frills service of Leap and MetroPCS. And no firm wants to be caught in the middle of the road. Speaking of being caught, the staff should not offer such misleading statistics. To make things concrete, in Washington D.C., T-Mobile offers a $39.99 per month plan that includes 500 minutes of voice and no text messages. In comparison, Leap offers a $35 per month plan that has unlimited voice minutes and includes text messages. But the Staff Report wouldn’t count Leap’s offering because Leap is not a “national” carrier, despite Leap’s offering wireless service in 35 states covering 100 million people.
- “T-Mobile expressed interest [in selling wholesale access to Cablevision], had previously exhibited a willingness to sell wholesale mobile wireless capacity, and, in Cablevision’s view, was likely to continue to have excess capacity it could use to serve Cablevision’s customers in the future. Although the outcome of any negotiation is uncertain, a deal between Cablevision and T-Mobile appeared to be beneficial to both parties.” Staff Report, para. 28. The staff here wants us to believe that in addition to the proposed merger undercutting T-Mobile’s initiatives to revamp the firm, the proposed transaction would undercut a prospective deal with Cablevision that would ostensibly bring benefits to Cablevision’s customers in parts of New York, New Jersey, and Connecticut. Well now this all makes sense: Stop a merger that could generate benefits to AT&T’s and T-Mobile’s nationwide customers to preserve Cablevision’s option to offer a quad-play to its customers in three states. Cudos to the cable lobbyists for getting their client’s concerns front and center in the FCC’s merger analysis. Setting aside the uncertainty surrounding the actual wholesale discussion that Cablevision and T-Mobile may or may not have entertained, the Staff Report suggests incorrectly that Cablevision depends uniquely on T-Mobile for spectrum, and that Cablevision’s customers would benefit significantly from having a sixth or seventh wireless option. As further evidence of how out of touch the Staff Report is from market realities, Verizon just announced that it was purchasing all of the AWS spectrum held by several cable companies, a market reality inconsistent with the staff’s views that T-Mobile’s innovative future lay in partnerships with cable companies.
- “Combined, these five regional providers accounted for approximately six percent of the industry’s total subscribers and revenues at the end of 2010. None of these providers’ networks cover more than 34 percent of the U.S. population, and for most their more advanced broadband networks are smaller.” Staff Report, para. 38. Because these regional providers do not have the potential to serve 100 percent of the U.S. population, it makes no sense to denominate their size in terms of nationwide subscribers. Doing so necessarily understates their importance in the local markets they serve. By way of analogy, Comcast’s in-region share of video subscribers or “video penetration” is roughly 44 percent, whereas its share of nationwide video subscribers is roughly 25 percent. Of course, the latter statistic bears no relation to Comcast’s pricing power. Moreover, while Leap or MetroPCS alone do not cover a majority of the nation, their roaming agreement (and complementary footprints) allows each firm to provide nationwide coverage. Again, the Staff Report appears to be playing fast and loose with the data.
- “AT&T’s unilateral incentive to raise price in this case arises because providers sell differentiated products, and many of AT&T’s customers view T-Mobile as their second choice at current prices. . . . Local number porting data (data on where customers go when they switch wireless providers while keeping their phone number) indicate that each of them [the major carriers] has customers who view T-Mobile products as their second choice.” Staff Report, para. 50. What does “many” mean in this context? And what does it mean to have at least some customers who switched to T-Mobile? Could “many” AT&T customers mean five percent? Any share less than T-Mobile’s probability-adjusted market share of roughly 16 percent (equal to T-Mobile’s share divided by 100 less AT&T’s share) would not be evidence of significant cross-price elasticity between AT&T and Sprint. The Staff Report later defines “many” as “a non-trivial fraction of AT&T’s customers.” But why is the standard so low? Later the Staff Report claims that “a substantial fraction” of AT&T customers switched to T-Mobile, and did so “in response to changes in the relative price of T-Mobile products and the introduction of new T-Mobile products.” Setting aside its loose standard (from “many” to “non-trivial” to “substantial”) of economic significance, porting data cannot tell you why a customer switched from one carrier to another. To assess cross-price elasticity, one must estimate an econometric model using customer-level wireless bills, which the Staff Report does not do. Finally, to bolster its evidence of cross-price elasticity, the Staff Report cites a T-Mobile “Losing Your Shirt” advertising campaign targeting AT&T’s customers. That T-Mobile aspired to attract AT&T customers does not constitute evidence that T-Mobile actually disciplines AT&T’s prices. Many computer companies aspire to topple Apple, but that doesn’t make it so.
As you digest these criticisms, think of how an economic expert could defend these statements upon cross examination. Although the authors of the report will never be subjected to such an exam, it is a bit surprising that such bald and unsupported statements could survive the cutting-room floor.