Posts Tagged Verizon
The net neutrality debate reached a fever pitch last week when the D.C. Circuit heard oral arguments in Verizon v. FCC. Although many pundits have predicted what the appeals court will do, let’s search instead for an instructive lesson for reforming the FCC, something that policy wonks on all sides of the debate agree is necessary.
For years, I have been peddling a “compromise” on net neutrality between the folks who want to level the playing field for websites (or “edge providers”) and the folks who want to turn down the lights at the FCC.
Before explaining the idea, a quick backgrounder is in order: In December 2010, the FCC issued its Open Internet Order, which effectively proscribed certain practices by Internet service providers (ISPs), including selectively blocking traffic and contracting for priority delivery with websites. Rather than imposing an outright ban on “pay for priority” contracts, the FCC sternly warned ISPs that “as a general matter, it is unlikely that pay for priority would satisfy the ‘no unreasonable discrimination’ standard.” Put differently, such arrangements would presumptively violate the FCC’s new “non-discrimination” rule, and the burden would be on the ISP to reverse that presumption if it was ever foolish enough to try such a thing.
Of course, these rules have nothing to do with discrimination in the classic sense—that is, treating someone or something differently on the basis of some exogenous attribute (such as age, race, or lack of affiliation). For example, under the FCC’s Open Internet Order, if Time Warner TWX +0.57% (an ISP) entered into a pay-for-priority arrangement with Sony SNE +0.89% (a website) to support a Sony online-gaming application, that contract would presumptively violate the FCC’s “non-discrimination” rules even if Time Warner stood ready to extend the same economic terms to all comers. Calling these rules the “zero-price rule” or the “no-economic-relation” rule would have been more accurate, but less politically appealing.
Flash forward three years to last week’s hearing, and the FCC’s attorneys were arguing that pay for priority was tolerated under the order. Huh? Competition Law 360 ran an article appropriately titled “FCC Switches Gears In D.C. Circuit Net Neutrality Fight.” In response to the FCC’s surprise claim that ISPs were free to strike pay-for-priority deals, Judge Tatel exclaimed: “I thought the whole purpose of the rule was so edge providers would have free and unfettered access.” And Judge Silberman asked how an ISP could charge websites for priority but have no recourse if the website refused to pay.
Setting aside the legal niceties raised by Verizon’s challenge, the best outcome for consumers would be a rule that permits ISPs to contract for priority delivery but polices such arrangements for discriminatory conduct (say in favor of an affiliated website) on a case-by-case basis. Under this ex post approach, priority arrangements would be presumptively legal, and the burden of overturning that presumption would fall on the complaining website. It bears noting that the FCC uses the exact framework to adjudicate discrimination complaints in the cable video space.
Like any compromise, this solution would entail some sacrifice on both sides: Nascent websites would be forced to pay up if they wanted the same quality of service as their (paying) competitors, and ISPs would be prevented from playing favorites. It is hard to identify any “losers” in an economic sense, except perhaps those websites that preferred a free ride.
The consumer benefits of this ex post approach would be enormous: Investments would likely pour into real-time applications such as telemedicine, distance learning, and interactive games, which could exploit the priority services. Users could enjoy these apps as they were originally intended. And ISPs could use the new revenues to extend or enhance their networks.
Another benefit of this approach is that it appears to solve at least one of the FCC’s legal predicaments. Judge Tatel warned during his questions last week that the Open Internet Order’s “non-discrimination” rule did not afford “any room for negotiation” between ISPs and websites. And Judge Silberman said, “As a matter of law, this [non-discrimination] rule requires some level of access, which runs afoul of common carriage.” By permitting pay for priority contracts, the ex post approach would provide ISPs the very flexibility that is needed to get them out of this mess.
So how can this grand compromise come about? The D.C. Circuit will likely vacate the “non-discrimination” portion of the order and send it back to the FCC. At that point, the FCC will have an opportunity to revise its rules along the lines of what I’ve described here. With any luck, the agency will recognize that the ex post approach is a template for much more than fixing its overreach in the Open Internet Order. Forsaking broad proscriptions in favor of regulatory tolerance toward new business relations combined with case-by-case review is the path forward in the new digital era.
Today the Senate will convene a distinguished panel of experts to discuss the state of wireless competition in America. Although it is trendy among the cognoscenti to complain about the wireless industry, the reality is that wireless competition is vibrant here, and U.S. carriers are leaving their European counterparts in the dust.
A common refrain among those calling for regulators to “level the playing field” is that two carriers—AT&T T +1.8% and Verizon—are running away from the pack, due to their allegedly superior spectrum holdings. The resulting imbalance in competition can be remedied, they claim, by capping the spectrum holdings of the larger carriers and steering newly available spectrum to smaller carriers. Any relative improvement in the smaller carriers’ networks would attract more customers, which would reduce wireless concentration.
One problem with this story is that wireless concentration—a very fuzzy indicator of competition when it comes to wireless services—is not climbing as predicted. In fact, U.S. wireless concentration as measured by the FCC has held steady since 2008, indicating that Sprint and T-Mobile are not losing ground. Indeed, 2012 was a particularly good year for these carriers, as both enjoyed significant subscriber gains. T-Mobile recently completed its merger with MetroPCS, giving the combined company access to more subscribers and more spectrum.
Perhaps the best indicator of the smaller carriers’ prospects is the bidding war for Sprint that has erupted between Softbank and Dish Network. If Sprint stood no chance to compete with AT&T and Verizon due to its allegedly inferior spectrum, then these savvy investors would not be so bullish about Sprint’s future. Put differently, Sprint’s spectrum holdings are valued dearly in the marketplace despite their “high-frequency” nature.
The same voices calling for intervention will likely cite lower wireless prices in Europe as proof that reducing concentration will bring lower prices. But a new study by GSMA, a trade association representing 800 of the world’s mobile operators, concludes that “Europe now lags far behind the United States in the deployment of next-generation mobile technologies and the advanced services made possible through mobile,” rendering any straight-up price comparison unreliable. The study found that U.S. mobile customers consume five times more voice minutes and nearly twice as much data as their European counterparts, and average mobile data connection speeds in the United States are now 75 percent faster than those in Europe.
By convening a panel on the state of wireless competition, the Senate must be careful not to miss the forest for the trees. The phrase “wireless competition” implies incorrectly that wireless carriers compete exclusively among themselves. New data suggests that wireless competes increasingly with wireline connections such as cable modem and DSL for broadband customers. According to a consumer survey by Leichtman Research Group, hundreds of thousands of Americans canceled their home Internet service in 2012, taking advantage of the proliferation of Wi-Fi hot spots and fast new wireless networks accessible to smartphones and tablets. Indeed, more U.S. households stopped paying for home Internet subscriptions (and relied on wireless access instead) than cancelled their pay-television subscriptions (and relied on video over Internet services).
How quickly will wireless overtake wireline broadband connections? Dish’s chairman is projecting that as many as a third of all Americans one day could find it more efficient to get their home Internet service wirelessly; Cisco IBSG recently projected that up to 15 percent of U.S. consumers could “cut their cord” in favor of a mobile data connection by 2016; and Samsung recently predicted that mobile networks could supplant wireline broadband by 2020.
The oncoming battle between wireless and wireline Internet providers suggests a more permissive attitude toward wireless concentration. For those who can’t (or won’t) recognize this “inter-modal competition,” any increase in wireless concentration is mistakenly perceived as bad news for consumers. The quest to promote wireless competition via spectrum policy could result in less competition where it matters most.
The New York Times just ran a provocative story titled “Americans Paying More for LTE Service,” suggesting that prices charged by U.S. wireless operators for access to their new 4G networks are triple what they would be were our wireless markets more competitive. In support of this claim, they compare the price per gigabyte charged by Verizon Wireless for its bundled voice-data plan ($7.50) to the “European average” LTE price for data-only plans ($2.50), as calculated by the consultancy Wireless Intelligence. Time to call in the trust busters? Hardly.
As any first-year economic student understands, prices are determined by supply and demand conditions. When performing international price comparisons, one should account for these differences before proclaiming that U.S. consumers spend “too much” on a particular service. Of course, it is much easier to generate readership (and hence advertising dollars) with fantastic claims that our wireless markets are not competitive.
Let’s start with differences in demand that could affect the value of wireless data services and thus relative prices. While it makes sense for The Economist to compute a Big Mac Index for a product that is basically the same wherever it is sold, price comparisons of services that are highly differentiated across countries are less revealing. And the quality of wireless LTE networks varies significantly. Verizon’s LTE network covered two-thirds of the U.S. population in April 2012. In contrast, the geographic coverage of European carriers’ LTE networks is anemic, prompting the European Commissioner Neelie Kroes to proclaim this month that the absence of LTE across the continent was proving to be a major problem in Europe. No wonder it is hard to get Europeans to pay dearly for LTE services!
Turning to the supply-side of the equation, while the surface area of the U.S. LTE “coverage blanket” is relatively larger, the European coverage blanket is thicker than ours. U.S. wireless carriers don’t have as much spectrum, the key ingredient in delivering wireless service, as their European counterparts. As pointed out by wireless analyst Roger Entner, U.S. carriers have only one-third of the spectrum available in Italy (on a MHz-per-million-subscribers basis), and one-fifth of the spectrum as France, Germany, and the UK. Given this relative scarcity of spectrum, U.S. carriers must prevent overuse of their LTE networks through the price mechanism—else their data networks would be worthless. As more spectrum comes online, basic economic theory predicts that U.S. data prices will fall.
The staggered LTE offerings by U.S. carriers are another factor affecting the supply-side of the equation. As the New York Times article notes, Verizon was the first to market LTE in the United States in December 2010. AT&T, Sprint, and T-Mobile unveiled LTE offerings at a later date and are playing catch up. To compete for LTE customers, these latecomers are undercutting Verizon, which in turn, will lead to lower prices. By offering unlimited LTE data plans, Sprint charges $0 on a per-gigabyte basis at the margin. T-Mobile also offers an “Unlimited Nationwide 4G” plan at $90 per month (including unlimited voice minutes) that sets the marginal price on a per-gigabyte basis to zero. Although AT&T does not offer unlimited data plans, one can compute the “imputed” price per gigabyte for its bundled voice-data plans by subtracting the price of a comparable unlimited voice plan and then dividing by the gigabytes permitted. The result? A lower price per gigabyte than the European average. (Interested readers can email me for the math.)
Thus, even if you think U.S. wireless data prices are “too high” today, the competitive process should be given more than one year to work its magic. Consider the competition for wireless voice services, which has played out over a decade. According to Merrill Lynch, the United States enjoyed a lower price for voice services on a per-minute-of-use basis ($0.03) than France ($0.10), Germany ($0.08), or the UK ($0.08) in the fourth quarter of 2011. How can the New York Times say, on the one hand, that these European countries serve as a competitive benchmark for wireless data services in the United States, but that the prices for voice services in these same countries should be ignored? Are we to mimic European policies with respect to data services and shun their policies with respect to voice services?
The lesson here is that what’s happening to European prices for wireless voice, wireless data, healthcare, or any differentiated product for that matter depends on several things, none of which is controlled for when making these simplistic international price comparisons. I know, I know. We need to sell Internet advertising. Can you imagine the headline: “Difference-in-difference regression shows that U.S. data prices are just right?”
Last week, the FCC decided not to extend certain provisions of the “program access” protections of the 1992 Cable Act. Reading the popular press gives one the false impression that the entire program-access regime was taken apart. In reality, the ban on exclusive distribution arrangements between cable operators and cable networks will be lifted, while other protections for rival distributors will remain in force.
Although the FCC’s Sunset Order suggests that lifting the ban will mostly affect cable-affiliated networks, those networks are generally distributed by their affiliated cable owner without a contract. There is no reason to add an exclusivity provision to a contract that does not exist.
Accordingly, permitting exclusive contracts likely will have a greater impact on independent networks (such as Disney Channel), which are distributed pursuant to a contract. Under the old rules, a cable operator could not tell an independent network: “I will carry you only if you agree not to deal with DISH Network, DirecTV, Verizon, and AT&T.” With the ban on exclusive agreements lifted, a cable operator may make such a take-it-or-leave-it offer.
To ensure access to newly exclusive programming, the FCC will rely on a case-by-case review of any complaints brought by distribution rivals. This ex post approach to adjudicating access disputes is similar to the one used by the Commission for “program carriage” complaints, in which an independent cable network must persuade the agency to permit a complaint to be heard by an administrative law judge. In contrast, the case-by-case approach embraced in the Sunset Order is not consistent with the ex ante prohibition against discriminatory contracting by broadband network owners in the Commission’s Open Internet Order of 2010. When it comes to handling discrimination, the Commission is anything but consistent.
In the Sunset Order, the FCC gave special treatment to cable-affiliated sports programming, often carried on regional sports networks (RSNs). In particular, the FCC established a “rebuttable presumption” that an exclusive contract involving a cable-affiliated RSN violates the Cable Act. Because sports programming is one of the few types of “must-have” programming, this exemption implies that the competitive balance among cable operators and their competitors may not be altered significantly. This is not to say that non-sports programming is meaningless—as the FCC recognized in its Comcast-NBCU Order, the refusal to supply a collection of non-sports programming could impair a rival distributor. But exempting sports programming takes much of the bite out of the rule change.
In addition to effectively exempting the most likely basis for a program access dispute, the Sunset Order makes clear that a distribution rival still can bring a complaint under other sections of the Cable Act. For example, a rival can allege “undue influence” under Section 628(c)(2)(A); discrimination under Section 628(c)(2)(B); or a “selective refusal to deal” under Section 628(c)(2)(B). In other words, the FCC removed one of several ways a cable operator can violate the Cable Act. The agency is still watching.
The FCC also pointed out that approximately 30 cable-affiliated, national networks and 14 cable-affiliated RSNs are subject to program-access merger conditions adopted in the Comcast-NBCU Order until January 2018. These conditions require Comcast to make these affiliated networks available to competitors, even after the expiration of the exclusive contract prohibition. Because these networks account for a significant share (about one third) of all cable-affiliated programming, the effect of removing the exclusivity ban will be further diminished.
The choice between an ex ante prohibition of certain conduct and an ex post, case-by-case review of complaints turns on the potential for efficiency justifications. In reaching its decision, the Commission noted one potential procompetitive benefit of permitting exclusive deals—ostensibly, to promote investment in new programming. While promoting investment in new programming is important (notwithstanding the fact that there are literally hundreds of cable networks, many of which sprouted up during the exclusivity ban), so too is promoting investment in rival distribution networks. With 55 percent of all U.S. households beholden to a single, fixed-line provider of broadband access (mostly cable modem service), the Commission should consider how each of its rules affects broadband investment. Alas, the agency disposed of this consideration in a single paragraph in the Sunset Order, arguing that the case-by-case approach was sufficient to protect the investment incentives of broadband operators.
It is no accident that the relaxation of the exclusivity ban was opposed by Google, Verizon, and AT&T—each of whom is deploying broadband networks (of both the fixed and mobile variety) in competition with incumbent cable operators. If these rival networks cannot secure access to cable programming, then convincing a cable customer to “cut the cord” will be that much harder. And if rivals cannot reach a certain level of penetration, then their investments will not generate positive returns; if that happens, we won’t see as much broadband investment as we hoped for.
To the extent that the Sunset Order is a harbinger of the FCC’s newfound embrace of case-by-case adjudication of discriminatory conduct, then it is a good thing. To ensure that 4G network operators or Google do not lose their appetite to invest in broadband networks, however, the FCC must be vigilant in enforcing the new rules.
Today the commissioners of the Federal Communications Commission (FCC) are meeting to vote on two issues that will be pivotal to the future of the wireless industry: (1) whether to impose a “spectrum cap” on wireless providers, and (2) how to design the “incentive auction” of the broadcasters’ spectrum. There is a lot at stake for the U.S. economy in getting these policies right: A new analysis by Deloitte estimates that mobile broadband network investments over the period 2012–2016 could expand U.S. GDP between $73 and $151 billion, and account for up to 771,000 jobs.
A spectrum cap would prevent a single provider (say, Verizon) from acquiring more than a certain amount of the airwaves or “spectrum rights” in a given geographic area (say, Washington, D.C.). Spectrum is the most important input in the supply of wireless services—without it, a provider literally can’t compete. The objective of a spectrum cap is to prevent any single carrier from monopolizing a key input in the production process; more wireless entry means greater competition, which means lower wireless prices. So why is this idea so controversial?
The reason is that even carriers with significant spectrum holdings need more of it to survive. To make things concrete, compare the spectrum holdings of Verizon with those of Sprint and T-Mobile. According to Deutsche Bank, Verizon has about 18 percent of all available spectrum on a population-weighted basis (including the spectrum recently obtained from SpectrumCo), compared to about nine percent each for Sprint and T-Mobile. Yet Verizon is desperate for more spectrum because its subscriber base is larger than that of its rivals, and because today’s wireless customers are finding cool (and bandwidth-intensive) things to do with their new 4G phones, straining the capacity of its wireless network. According to one noted wireless analyst, the demand for mobile broadband will surpass the spectrum available to meet it in mid-2013. Even the Chairman of the FCC recognizes that “biggest threat to the future of mobile in America is the looming spectrum crisis.”
Reinserting the spectrum cap—it was sent to the regulatory dustbin several years ago—and setting it at say one-fifth of all available spectrum would effectively bar Verizon from acquiring any more spectrum, whether in an auction or through the secondary markets. And that means that Verizon’s customers would suffer a serious degradation in their wireless connections relative to a world in which Verizon could augment its spectrum capacity. As one Nobel laureate economist famously said, “there’s no such thing as a free lunch.” Taking away from Verizon to give to smaller carriers entails serious tradeoffs.
And to understand those tradeoffs, the FCC must think hard about what the ideal market structure of the wireless industry should look like. A spectrum cap equal to one-fifth of all spectrum implies that the ideal market structure is five national carriers. But even five might be too many given the evolving wireless technology: With the enhanced download speeds made available by 4G networks—Verizon’s 4G network is seven times as fast as its 3G network according to PC World—wireless consumers will be streaming high-definition movies and FaceTiming with their friends, placing even greater pressure for more spectrum. The FCC needs to come to grips with the fact that its policies are in conflict with these technological trends and the associated economies of scale in the supply of wireless services.
Five carriers might also be the wrong number when one considers the role of mobile broadband in the larger broadband market. According to the FCC’s Wireline Competition Bureau, as of mid-2011, 55 percent of all U.S. households relied on a single wireline broadband provider capable of meeting the FCC’s definition of broadband. This means that wireless 4G connections could serve as the second broadband pipeline in over half of U.S. homes. Given the competitive implications of moving from one to two broadband providers—cable modem prices have been shown to fall significantly in the face of competitive entry—the right number of wireless carriers might be closer to three.
But who really knows? The market should decide whether the optimal number of wireless carriers is three or four or five, not the regulators. If the FCC is worried about a single carrier buying up the entirety of the spectrum in the forthcoming broadcast spectrum auction, then a simple rule forbidding such an outcome in that auction is more efficacious than a clumsy spectrum cap. By micro-managing the structure of the wireless industry, the commission tasked with overseeing the communications industry risks making the wrong call.
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.