Speaking to the Federal Communications Commission last week, T-Mobile execs blasted Verizon’s proposed acquisition of the unused Advanced Wireless Services (AWS) services airwaves held by Comcast, Time Warner Cable, Bright House Networks and Cox Communications, in order  to augment its LTE network. T-Mobile pointed out that Verizon already owned AWS spectrum, which it has been sitting on for nearly six years. Basically, T-Mobile accused Verizon of hoarding airwaves — keeping prime 4G airwaves out of its competitors’ hands — and told the FCC the deal should be stopped.

Now Verizon, Comcast, Time Warner and Bright House are crying foul. In a letter to the FCC, they accused T-Mobile of contradicting the very arguments it made last year to justify its failed $39 billion acquisition by AT&T. At the time, T-Mobile saw no problem with two nationwide operators consolidating spectrum, networks and customers, but now it’s criticizing the Verizon-cable deal on the same grounds, the companies said. Here are excerpts from the letter, which draws from past T-Mobile FCC filings:

T-Mobile now claims that there will be “serious harm to competition and to consumer welfare in the wireless market by permitting a dominant carrier to foreclose acquisition of spectrum by smaller rivals,” even though the transaction will not eliminate any competitors, will not combine businesses, and will not transfer any customers. In other words, despite its earlier claims that the combination of two top-four facilities-based providers would have no impact on competition in a fiercely competitive marketplace, T-Mobile now argues that the acquisition of a discrete block of spectrum – an only spectrum – by a carrier that needs to meet its customers’ escalating demand for mobile services will “serious[ly]” harm” competition.

… T-Mobile cannot continue to have it both ways, and its attempts to extract competitive advantages during the transaction review process should be disregarded.

We reached out to T-Mobile, and while it didn’t have a direct response to the letter the cable operators and Verizon filed Thursday morning, but T-Mobile did open up a new front on its assault against the deal. Last week, Verizon offered to sell off extra 700 MHz licenses if regulators approved the cable-AWS transaction. In a statement, T-Mobile SVP of government affairs Tom Sugrue said the concession was just a diversionary tactic:

“Verizon’s announced plan to sell lower 700 MHz spectrum contingent on approval of its spectrum transaction with the cable companies is a tactical ploy designed to divert attention from its attempt to foreclose competitors from being able to acquire AWS spectrum — the last swath of immediately usable mobile broadband spectrum likely to be available in the near term.  This proposed sale does not mitigate the competitive harms created by Verizon’s pending transaction with the cable companies that would add to its spectrum warehouse.”

Update. T-Mobile reached back out to us to respond directly to the charges of Verizon and the cable operators in Thursday’s letter. Here’s the statement:

[The cable operators have] not raised anything new that has not already been addressed by T-Mobile in this proceeding.  Their hodgepodge of complaints is simply a smokescreen to try to hide the serious anticompetitive impacts that would result from this highly problematic transaction.  The FCC’s focus must be on whether vigorous competition will continue following this spectrum transaction between Verizon and the cable companies.  T‑Mobile USA and many other parties have demonstrated that the long-term result would be less competition if Verizon is allowed to warehouse the last swath of spectrum likely to be available in the near term to provide meaningful nationwide competition in mobile broadband.

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The February study “turns the conventional view of wireless competition on its head,” according to its authors. It does so, however, by seemingly ignoring trends in mobile network architecture that intended to address the capacity crunch the author’s see, thus undermining the assumptions on which the theory is based.

The study raises questions.

The conventional view of more wireless providers as better for competition — and consumers– is based on the Cournot competition model, under which prices and profits intuitively decline as the number of firms increases. The authors start with this and make some tweaks for the wireless case.

First, they assume the amount of capacity is not linearly related to the amount of spectrum an operator has — capacity is assumed to increase at a greater rate than spectrum is added. This can be seen as an economy of scale.

Second, the authors look at what happens when all operators in a market have reached the point of so-called “spectrum exhaust” — when they’ve maxed-out spectrum use and are running at maximum capacity. Under spectrum exhaust, according to the theory, the operators with the largest spectrum assignments enjoy the largest economies of scale, which become even bigger if they can get more spectrum. These economies, ideally, make their way to the customer in the form of lower prices.

Split the exhausted spectrum up among more operators and economies of scale go down, prices go up. The authors give this example in an accompanying blog post:

Say you have 100 MHz of spectrum and you divide it among 4 firms so that each gets 25 MHz. Say this generates 100 units of capacity. If instead you divided 100 MHz among two firms, so that each gets 50 MHz, then the amount of total capacity would be something like 150.

Why 150 instead of, say, 105 or 200? We aren’t told. How few operators are optimal? We aren’t told that either:

We cannot and do not reach conclusions about how many competitors is the right number under existing market conditions. What we do demonstrate is this: if it is true that there is spectrum exhaust, then the argument that more competitors leads to lower prices is not true.

Again we’re left with a question: More than what? Though they don’t reach conclusions about the right number of competitors, they present a model that happens to show two as optimal, for what they say is an arbitrary set of input assumptions. Presumably a different set of assumptions, equally arbitrary, could indicate a higher or lower number than two.

What about the new wireless reality?

In light of their findings, the authors say the U.S. Department of Justice’s and the FCC’s reliance on traditional market concentration measures, such as Cournot model and the Herfindahl-Hirschman Index, is misplaced.

It’s encouraging to see some fresh, thought-provoking thinking on mobile competition analysis. One concern I have with the study, however, is the need for there to be a condition of “spectrum exhaust” for the model to work. Does an operator ever reach the point where it “runs out” or is exhausted of spectrum? I think not.

This is because capacity — what the operators are really selling, not spectrum — can be increased without using new licensed spectrum through a variety of techniques including Wi-Fi and small-cell offloading, or increased antenna sectorization at the base station. What happens to this, or any other, competition analysis when the customer can access an operator’s network using no licensed spectrum, or bypass that network completely for some services?

Some other concerns:

• In setting the background for the report, the study invokes a discredited FCC technical report that uses invalid assumptions and is reported to be disowned by the FCC staff that prepared it.
• After relying on the Cournot model, the authors caution that it has several practical defects.
• The authors say some analysts think there’s too much competition “today,” citing articles that are two or more years old.

I don’t doubt the authors’ belief that mobile-broadband competition analysis can be improved, but I don’t think this analysis, in its present form, is ripe for influencing policy. Perhaps the research could be extended to take into account the move toward heterogeneous networks, severing the notion of spectrum and capacity, and looking at the issue as an optimization problem in terms of size and location of licensed spectrum, number of operators, and use of unlicensed spectrum and other techniques to increase capacity. Then we may have a better handle on what is the optimal number of mobile broadband operators.

In one study of 40 international markets, 36 have three operators that control 85 percent of their market. That same study observes that this follows the Rule of Three, which states that there are three significant competitors for any mature market. Maybe two, as shown in the Phoenix Center model, isn’t that far off. In the face of disruption from offloading, heterogeneous networks, and over-the-top content, however, the mobile-broadband market is losing its mature status. The Rule of Three may become less applicable as traditional notions of a mobile-broadband industry fade.

Steven Crowley is a consulting network engineer, who blogs here. He can be found on Twitter @stevenjcrowley

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The FCC has found plenty to criticize in AT&T’s proposal, refuting Ma Bell’s claims about the supposed benefits of the merger from all sides in a press conference held Teusday. FCC lawyers found the merger would kill jobs, rather than create them, that the sum of the two operators’ 4G wouldn’t be greater than the parts, and that a merged AT&T-Mo would likely stifle wireless competition in 99 of the 100 largest markets – basically every major city but Omaha, Neb.

“The record clearly shows that — in no uncertain terms — this merger would result in a massive loss of U.S. jobs and investment,” a senior FCC official said.

Chairman Julius Genachowski is circulating a draft order recommending to commissioners that the FCC refer the case to an administrative law judge. That may sound like punting, but as FCC officials explained in a conference call the decision was the sharpest weapon the commission has at its disposal. The FCC can either approve the merger outright, approve it with conditions or refer it to a judge, if the FCC found fault with AT&T’s facts or felt the deal harmed the public good – which definitely seems to be the case.

FCC Chairman Julius Genachowski

The subtext here is that FCC staff don’t like the deal, they don’t want to negotiate or come to terms that would make the deal more palatable, so they’re taking the most definitive step they can take to kill it – passing it along to the courts. Chances are that’s where AT&T’s petition will stay because AT&T has several other regulators to deal with before it sees a hearing in that case.

AT&T is currently fighting off the U.S. Department of Justice’s lawsuit seeking to block the merger. The FCC said it plans to stand aside for those proceedings, scheduled to begin in Februrary. If the DOJ gets its injunction, then the FCC’s involvement is moot. If the courts back AT&T against the DOJ, then AT&T has to deal with multiple lawsuits from states attorneys general who have joined the DOJ’s filing as well as lawsuits from Sprint and other wireless operators. Update: Sprint also faces a review from the California Public Utilities Commission.

If AT&T overcomes all of those obstacles, than it gets its date with the FCC-referred law judge. The judge can rule for or against. If AT&T loses that round, too, it can petition the FCC for a reversal, but I doubt one would be forthcoming. If the FCC was in the mood to play ball, it would have gone into its usual ‘approval with conditions’ mode. There’s practically no chance that the deal could get that far. The last time the FCC referred such a case to a judge was in 2002, which effectively killed the merger between Echostar and Hughes (Dish and DirecTV). Still, no telecom deal that was challenged by the Justice Department every saw completion either. AT&T has tenacity, I’ll give it that.

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