Thursday, May 19, 2011

Rural Wireless Mobilizes Against the AT&T-Mobile Merger

Today, a group out outspoken opponents to the AT&T-T-Mobile merger hosted a webcast about consolidation in the wireless industry, which included a very insightful discussion about harms that the merger will impose on consumers and the industry as well as baseline antitrust arguments against the merger. The webcast was hosted by Carri Bennet of the Rural Telecommunications Group (RTG) and featured Ernesto Falcon from Public Knowledge, Ben Moncrief from Cellular South, and Trey Hanbury from Sprint. RTG and Public Knowledge are founding members of the newly formed No Takeover Project, a coalition of companies and consumer advocacy associations who are all vehemently against the merger. If you haven't yet checked out the No Takeover Project, I highly recommend you do so soon! The No Takeover Project is extremely dedicated to debunking the myths that the AT&T-Mobile merger will increase competition, provide consumer benefits, and not move the wireless industry back nearly 3 decades to a time when we knew of nothing besides wireless duopolies and telecom monopolies. Anyone who thinks we are not headed backwards in this direction would be wise to brush up on their telecom history and antitrust law before speaking out in favor of the merger. Hopefully I can help the No Takeover Project by providing my readers with commentary about the merger and its potentially devastating impact on small rural wireless carriers (although I suspect that most of my regular readers are anti-merger already). This is my 4th article on the merger, and I am definitely planning to summarize some of the petition to deny comments (due May 31 at the FCC-still time if you haven't done them yet!) as soon as I get through the USF Reform reply comments.

The webcast opened with some wireless and AT&T history lessons from Ms. Bennet- as a longtime lover of history, I always enjoy learning anything about telecom history, like how in 1999 AT&T introduced one-rate nationwide digital roaming which was soon copied throughout the industry, and ultimately became the lynchpin for consolidation as carriers frantically needed to expand their footprints to meet demand. I remember 1999; I had a Nokia phone with changeable face plates which (as a 17 year old) I though was about the coolest thing ever. Unfortunately, I wasn't allowed to use my phone because my service provider, AirTouch (which had just purchased my family's early wireless company), didn't have affordable roaming at my boarding school in Minnesota. So I happily changed my phone's faceplates every day to match my outfits and carried my phone everywhere, never daring to make a call unless it was an "emergency." Thankfully, by the time I moved to DC in 2000, I had service on the new Verizon nationwide network, allowing me to keep my Iowa number and make as many phone calls as I wanted (sort of) to my friends back home. Anyway, enough nostalgia about the early days of wireless, because we all need to focus on the challenge at hand. Ms. Bennet firmly stated that the merger will devastate small rural wireless carriers, and "if we don't win this one, we're gone."

Ernesto Falcon from Public Knowledge described the impact of the merger on consumers, and claimed that consumers will see higher prices. The 34 million T-Mobile consumers will be the real losers, as they typically have plans that are up to $50 cheaper than AT&T plans. In the Senate hearing last week, AT&T claimed that T-Mobile consumers will be able to keep their plans, but we all know that this will not be indefinite. As soon as a T-Mobile customer wants to renew his or her contract or buy a new handset, they will undoubtedly be forced to a more expensive AT&T plan, and AT&T consumers will certainly not be able to move to a lower-priced T-Mobile-style plan. One interesting point that Falcon mentioned, which I had not really considered yet, was the fact that there will be a duopoly for wireless service, but a monopoly for GSM service if the merger is complete. This means there will only be one choice for a nationwide GSM network, which could have devastating effects on GSM handset innovation in the U.S. Falcon argued that AT&T's claim that the market is currently competitive is "borderline ridiculous," and that smaller regional wireless carriers have virtually zero competitive impact on the AT&T machine. Furthermore, he added that "if the 5th largest wireless carrier merged with every single remaining regional and local wireless carrier, they would be smaller than T-Mobile." If this doesn't prove that competition in the wireless industry is an endangered species, I don't know what will!

Ben Moncrief from Cellular South, the nation's largest privately held wireless company with 875,000 customers, emphasized that the merger is purely horizontal and a case of "one competitor gobbling up another." He followed by discussing something I pointed out in my first article after the merger was announced: what will stop Verizon from going after Sprint next? Furthermore, what could be done to stop them? If the AT&T-T-Mobile merger is approved, Verizon could base its arguments on this approval, and the government would be in a really tough position to say "sorry, you can't merge even though we just allowed an equally monumental merger to happen." Now, this is definitely speculation, but it is still troublesome. Moncrief described how the two biggest consumer demands of a wireless carrier are nationwide coverage and "iconic" handsets, and the smaller carriers will not be able to offer affordable nationwide roaming or iconic handsets in a duopoly-controlled industry. He also addressed AT&T's assertion that the merged company will focus extensively on rural build-out, and he pointed out that AT&T will gain no additional rural spectrum from T-Mobile and AT&T already hoards spectrum without expanding into rural areas. Basically, AT&T will not expand its rural footprint by acquiring T-Mobile, and once again rural consumers will be the real losers in the end—especially if smaller wireless carriers are bled dry on roaming agreements or bullied out of exciting handsets through AT&T and Verizon exclusive contracts with manufacturers. Trey Hanbury from Sprint continued the discussion about AT&T's spectrum surplus, and provided some interesting maps to illustrate how much spectrum AT&T currently warehouses (as much as 50 MHz in some major markets, not including Qualcomm's spectrum, which brings that number up to 70 MHz in some markets). On the other hand, T-Mobile has virtually no unused spectrum. Why? Because AT&T underinvests; and despite claiming billions in network investment, AT&T's investment per subscriber is less than the industry average.

I thought the most interesting points in this webcast addressed antitrust law and the Herfindahl-Hirschman Index (HHI) for the wireless industry. Regarding antitrust law, the panelists argued that mergers have been blocked in the past; it is just particularly rare in the telecommunications industry. However, it is widely accepted that moving from 4 competitors to 3 is extremely harmful; and moving from 3 competitors to 2 is absolutely not desired. The bottom line is that the merger violates antitrust law, and the panelists provided a nice lesson on why this is true. Three thresholds that a company being acquired needs to meet in order for a merger to be acceptable are not valid with T-Mobile:

  1. The company being acquired cannot restructure to be successful on its own (FALSE, albeit T-Mobile has been hemorrhaging customers since the merger was announced),
  2. The company is facing imminent failure and has no other options (FALSE, T-Mobile is still relatively profitable),
  3. The company has conducted an exhaustive search to merge whereby antitrust laws are not violated (FALSE, there were rumors of T-Mobile merging with Sprint, but that is far from an "exhaustive search").
Finally—and here is the really kicker—the HHI argument. AT&T has been really dodgy on this topic, at least from what I have heard and read. HHI is a widely recognized method of determining how concentrated an industry is, and is calculated by adding the squares of the competitors' market share. 2,500 is considered highly concentrated, and the wireless market is currently at an HHI of around 2600. Furthermore, an increase in HHI of 200 points is considered dangerous, and the AT&T-T-Mobile merger will skyrocket the HHI up another 800 or so points to around 3400. If you don't believe me, here is a quick and dirty calculation if AT&T and Verizon each control roughly 40% of the market and the remaining 10% dispersed through smaller competitors: (0.4)^2 + (0.4)^2 + (0.1)^2 *10,000 = 3300. Math never lies, and this is a low-ball estimate.

The purpose of this webcast was clearly to mobilize consumers, the rural wireless industry, and anyone else who is likely to be harmed by the merger (including ancillary wireless communications inputs and industries) to jump into action and put a stop to this merger. This means submitting petitions to deny to the FCC, contacting members of Congress, and taking advantage of the many channels of communication (such as Twitter, Facebook, etc.) to inform others about the dangers of this merger. AT&T spends over $3,000 per hour on lobbying, but that is no reason to give up hope because the opponents of the merger are clearly attracting vast and powerful numbers.

I strongly urge my readers to check out the No Takeover Project. I will continue to write about the merger from the rural telecom perspective and I just donated $25 to the Public Knowledge "AT&T Lobbying Match Challenge," where they pledged to raise as much money in a week as AT&T spends on lobbying in an hour. Pretty creative! I think they met their goal, because they had $76 left to go before I gave them $25. Hopefully it was money well spent.

Have a great weekend everyone!

Cassandra Heyne

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