Impressions from today’s Congressional hearing on the T-Mobile/Sprint merger – February 13, 2019

Going into today’s hearing, I thought T-Mobile/Sprint was in a no-win situation.  And, while it is clear that the New T-Mobile will have to make written commitments that support the lifeline program and deployment of 5G in rural communities at the very least, I believe that the CEOs of T-Mobile and Sprint, Legere and Claure, along with Douglas Brake from the Information Technology and Innovation Foundation, provided convincing arguments, on the record, that the merger has net benefits to competition and consumers.

The complementary combination of the Sprint and T-Mobile networks brings together the capacity and coverage to expand network capacity by 8 times.  The greater capacity on the market (increase in supply) will put downward (not upward) pressure on prices.

The cost synergies from scale will be significant.  Something the firms, particularly Sprint, cannot achieve on their own.  Even with its heavily discounted price, Sprint struggles to attract and retain subscribers.  It will need to take on a lot of debt to build out a 5G network.  The higher cost will put pressure on it to raise its prices.  Can a struggling Sprint survive on its own?  Getting to three carriers through a merger is a whole lot better than getting there by one of them failing.  (The gala apple exchange was interesting.)

The New-T-Mobile will be a “supercharged un-carrier” because of scale.  With that, I agree that it will have the incentive to compete aggressively.  Moreover, I agree with Brake’s comments that having more competitors is not always better.  In an industry, like wireless telecom, with high fixed costs and a minimum efficient scale at a high level of output relative to demand, cost efficiencies (lower unit costs) are achieved when more subscribers are on your network.  Too many duplicate networks are inefficient.

This merger is NOT the same as the one between AT&T and T-Mobile.  In that merger, AT&T’s share of the market would have jumped to more than 43% (31.7% + 11.6%).  With Verizon (34.3%), the duopoly share of the market would have been 77%, and Sprint would have been a very distant third with just 15.5% of the market.  Here, the combination of #3 and #4, creates three equally-sized firms duking it out on price and other product characteristics like speed, coverage, and quality of service (e.g. dropped calls).  Since 2011, Sprint’s share of the market has fallen from over 15% to about 11% today.  Meanwhile, T-Mobile’s share jumped from 11% to 18%.  Why?  The $4 billion breakup fee from the 2011 merger, consisting of cash and spectrum allocation, aided T-Mobile’s expansion and boldness in challenging the top dogs.  Finally, with 5G, the wireless carriers can challenge the cable guys.  This was not a possibility in 2011.  Disrupting this other market is huge.

T-Mobile/Sprint Deal: Let's see what Congress asks

On January 28^th, ranking members of the Judiciary and Energy and Commerce Committees of the House of Representatives announced that a joint hearing will be held on February 13^th to assess the potential impact of the T-Mobile and Sprint merger on “consumers, workers, and the wireless industry.”  T-Mobile CEO John Legere and Sprint Executive Chairman Marcelo Claure will testify at the hearing.  While Congress does not have a say in whether the deal goes through or not, that decision is in the hands of the Federal Communications Commission (FCC) and Antitrust Division of the Department of Justice, it provides an opportunity for House Democrats to go on record in opposition of the merger and in support of low-income consumers and communications workers, and to get the T-Mobile and Sprint executives to react to possible structural and behavioral conditions to a regulatory approval of the deal.  It’s a win-win for House Democrats.  It’s a win-win for the 4Competition Coalition that pressured Congress to have the hearing.  It’s probably a no-win for T-Mobile and Sprint.

It’s hard to argue that fewer competitors would be better than more in an already highly concentrated (HHI near 3,000) market characterized by high entry barriers.  Yet, in the domestic wireless market, the competition between Verizon, AT&T, T-Mobile, and Sprint is fierce on both price and product characteristics.  Post a hypothetical merger, it is highly likely that will continue as these firms are motivated by reducing post-paid churn, increasing average revenue per user (ARPU), investing in the latest technology, and gaining (not losing) customers in the wholesale and pre-paid markets. Without T-Mobile, Sprint will struggle to do all these things.

So, what will T-Mobile/Sprint have to agree to at the February 13^th hearing (possibly) and later with regulators to get this deal approve?  At a minimum, it will need to ensure that pre-paid services are “fairly” priced and available so that low-income households can afford access to wireless services.  It may need to detail its 5G deployment timetable and a coverage commitment in rural areas.   These would be behavioral remedies.  But, maybe, a structural remedy would provide the best outcome for shareholders and politicians and one that Legere and Claure should be prepared to talk about on the 13^th.  For example, would they be willing to sell their pre-paid services, MetroPCS, Boost, Virgin Mobile, to a new entrant or two?  Let’s see what they have to say.

https://www.4competition.org/about/

Update Note: The joint hearing has now been split into two.  The Energy and Commerce Committee will still meet on the 13th, but Judiciary Committee, because of a schedule conflict, will now convene on the 14th.

“Stay in Your Lane, Bro.”

In one of AT&T’s recent “it’s not okay to be okay” commercials, a tattoo artist tells his concerned and inquisitive client to “stay in his lane bro”.  Maybe, just maybe, this is advice that AT&T should take. 

As the second largest wireless telecom firm in the U.S., AT&T decided to branch out from its core business and acquire DirecTV in 2015 for $49 billion dollars.  At the time, despite annual declines in subscriptions, the deal made some sense as the satellite service would be a complementary business to wireless and provide traction to a strategic decision to enter the media space.  And, to stem the subscriber losses, in 2016, AT&T introduced DirecTV Now, its skinny bundle of 65 channels, to attract cord-shavers/cord-cutters who might see it as an attractive alternative to the full cable/satellite bundle (including DirecTV) priced two to three times higher. 

All looked good for a while.  But, then came the fourth quarter of 2018.  In addition to losing 403K DirecTV customers, AT&T reported losing 267K DirecTV Now subscribers.  What’s going on?  Is the DirecTV Now value-proposition not as attractive anymore to customers in an increasingly crowed streaming services market or is the one quarter of data an anomaly?  How should AT&T react if there are additional quarters of subscriber losses?  Would it be time to sell its “out-of-lane” business?  If so, would the right buyer be DirecTV’s closest competitor, Dish? Would regulators approve the deal when they were dead set against it 18-years ago?  (In a lot of ways this hypothetical tie-up would be like the T-Mobile/Sprint deal.)

In 2001, DirecTV and DISH (Echostar) announced their intentions to merge.  Regulators, however, struck down the deal as the horizontal merger would reduce the number of pay-TV providers per market by one. (The satellite providers competed in each local market with one other and with a cable operator and possibly a telecom firm).  At the time, FCC Chairman, Michael Powell, wrote “the combination of EchoStar and DirecTV would have us replace a vibrant competitive market with a regulated monopoly. This flies in the face of three decades of communications policy that has sought ways to eliminate the need for regulation by fostering greater competition.”  But, a lot has changed since.  The two satellite providers are struggling to be noticed in a crowded field of streaming services offered over multiple platforms.  Maybe, just maybe, its time to make satellite a stronger competitive force in the media space.  Two is not always better than one.

https://www.wsj.com/articles/at-t-wants-to-be-big-in-entertainment-first-it-has-a-49-billion-problem-to-fix-11548777413

It's in the Judge's hands

In its complaint for equitable relief filed over two years ago in the Northern California District Court, the FTC claims that Qualcomm engages in “exclusionary conduct that taxes its competitors’ baseband processor sales, reduces competitors’ ability and incentive to innovate, and raises prices paid by consumers for cell phones and tablets.”  Testimony wrapped up a few weeks ago and now the case is in the hands of Judge Lucy Koh, a 2010 Obama appointee to the District Court.  A decision is expected in a few weeks.  The question is what will that decision be?

Presenting this case as a violation of Section 5(a) of the FTC Act and not Section 2 of the Sherman Antitrust Act significantly lessens what the government must prove to win the case.  To prove monopolization or unreasonable restraints of trade under Section 2, there would need to be evidence that the defendant has possession of market power in the relevant market AND there is “willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.”  To prove unfair methods of competition under Section 5, the FTC, using its 2015 Enforcement Principles, would need to show that an act or practice is “likely to cause harm to competition or the competitive process, taking into account any associated cognizable efficiencies and business justifications.”

In this case, the FTC alleges that Qualcomm’s unfair methods of competition include 1) using its dominant market position in CDMA and premium LTE baseband processors to withhold its products unless the OEMs (e.g. Apple) accept a license to standard-essential patents, including paying royalties on separate patent licenses when using a competitor’s processor in their mobile devices (“no license-no chips”); and 2) consistently refusing to license its cellular standard-essential patents to its competitors, in violation of Qualcomm’s FRAND (fair, reasonable and non-discriminatory) commitments.[1]  The FTC claims that “by forcing OEMs to pay for the patent licenses regardless of whether they use the baseband processors supplied by Qualcomm or a Qualcomm competitor—enables Qualcomm to raise the all-in prices of processors without spurring substitution or attracting entry.”  Some of these higher costs are likely to be passed onto consumers in the form of higher prices or reduced handset features.

Based on what is necessary to meet the unfair business practices standard under Section 5(a) and the evidence presented in the case, it is highly likely that Qualcomm will be revising its business practices in 2019.

https://www.ftc.gov/system/files/documents/cases/170117qualcomm_redacted_complaint.pdf

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[1] Baseband processors (chips, modems) allow cell phones and other mobile devices to communicate with an operator’s cellular network.  Consequently, they must comply with the cellular communications standards (e.g. CDMA, LTE) that the network supports.  “By making a FRAND commitment, a patent holder accepts the benefits of participating in standards development and of seeking incorporation of its patented technologies into a standard, but agrees in exchange not to exercise any market power resulting from its patents’ incorporation into that standard.”