Well, ATT looks like it played its cards right. The government bodies that will review the $39-billion buy of T-Mobile by ATT opened the proceedings today and said the Federal Communications Commission and the Department of Justice will work together to evaluate this deal. The good news is that you will soon have a place at both agencies where you can file a complaint and the bad news is that it’s unclear if the FCC and DoJ will stand up for consumers on this deal. Here’s my takeaway based on the information shared today.
The approval of the deal revolves around competition — namely would this deal reduce competition to a point where it harms consumers? The DoJ has a fancy metric called the Herfindahl-Hirschman Index that it uses to measure this and by that metric this deal certainly raises an eyebrow. Chetan Sharma, a wireless analyst, provided this chart showing off the impact of the merger on nationwide competition compared with telecommunications competition in other parts of the world. He also emailed us the following analysis:
This chart looks at the market concentration by the top 3 players in the mobile market (mobile operators). I look at both the revenue and subscriber concentration which gives us a good picture of the total market concentration. Relative to other major markets, the U.S. is well placed competitively. Post merger, its position will shift upwards. Relative to other markets, it is still fairly competitive. Also, relative to other industries like OS, Search, Microprocessors, the mobile operator market will still more competitive so it is all relative. In the end, assessment has to be made on whether this harms consumers’ interests or not.
However, if you look at things historically in the U.S. market alone, this merger will represent the highest concentration of market share at any time in the history of the market since probably the early days of the industry. Over 90 percent of the market will be concentrated in 3 and over 75 percent in two. It is not uncommon but that’s what the regulators need to grapple with. Will it harm or benefit the consumer?
Given that raised eyebrow the DoJ and the FCC have a few choices, namely approve the deal unconditionally, block it, or to approve the deal but set all kinds of limitations around it known as conditions. Those limitations generally include things like selling off assets in some markets, opening up access to the network, maybe setting rules around how the new company can price or offer service. The key about the conditions is they are hammered out with a bunch of lawyers sharply focused on loopholes and they can expire. ATT is a master at setting conditions. ATT and the stock market are pretty confident ATT is going to get this deal through, so the deal’s harms to consumers may be mitigated by conditions. Will the FCC make sure those have teeth?
The FCC and FTC plan to do a market-by-market analysis (which is how it has looked at these and other wireline telecommunications deals in the past). These look at the spectrum holdings and subscribers in markets to determine if a market will become too uncompetitive. In uncompetitive markets ATT might be forced to sell off assets (subscribers and spectrum), which will not help consumers much at all. The hope is the FCC also looks at a true nationwide analysis given that few people buy a cell phone expecting to only use it in their backyard. Who cares if your hometown is has a smaller rural provider that offers competition, if that smaller provider doesn’t work when you travel for business. A review should also look at the affect the merger may have on Sprint (s s) and thus on the competitiveness of the market down the road.
In the last few years ATT (s t) and Verizon (s vz) have pulled ahead of both Sprint and T-Mobile in terms of subscribers despite generally having higher prices. The answer as to why is complicated, involving coverage areas, the quality of devices, contracts, marketing as well as business stumbles by the two smaller players — especially Sprint. However, in recent years Verizon and ATT have both spent big to cement an infrastructure advantage over the two players by buying up large swaths of spectrum for billions of dollars as well as through their access to wireline networks they operate. Those wireline networks provide ATT and Verizon with backhaul pipes to the Internet, pipes that T-Mobile and Sprint have to pay for in a largely unregulated market where prices can range up to $10 per megabyte.
Thus to support subscribers in certain parts of the country, T-Mobile and Sprint are effectively paying ATT and Verizon. The FCC is looking at this market, but there’s no indication of how long that will take or what the resolution might be. On the spectrum side, ATT and Verizon were the big winners at the recent 700 MHz auctions leaving other carriers in a poor competitive position for next generation wireless coverage. The FCC seems aware of this, and has even placed conditions on another spectrum deal with LightSquared to prohibit the nation’s two largest carriers from using more than 25 percent of the hopeful wholesale’s planned LTE network.
Given the nationwide nature of cell phone coverage, its awareness of the impact that spectrum consolidation and ATT and Verizon’s wireline assets can have on competitors, perhaps the FCC sees the traditional market-by-market analysis as a necessary hurdle that it must jump simply because it has done it that way in the past. But consumers should hope that the FCC is also setting up those additional hurdles to take into account the realities of the wireless business today.