Regulated duopoly vs. real competition

Last week, a Senate subcommittee held a hearing entitled “The AT&T/T-Mobile Merger: Is Humpty Dumpty Being Put Back Together Again?” The CEOs of three of the four major cellular companies got a chance to present their positions in between political grandstanding.

I was fortunate to catch the replay Sunday on C-SPAN (one of the few channels my monopolist cable company still provides on basic cable.) A low resolution version of the 2½ hour hearing is also available on the Senate website.

The expert (if self-interested) testimony confirmed what I already knew. As with any consolidation of four major firms down to three, the merger is about reducing rivalry, supplier power and buyer power — good for the surviving companies, bad for suppliers, customers and the smaller rivals.

The Case Against the Merger

The most enlightening testimony came from Victor Meena, CEO of small rural carrier (Cellular South) that (according to Wikipedia) is the 8th largest in the US (after Verizon, AT&T, Sprint, T-Mobile, MetroPCS, US Cellular and Cricket/Leap).

As someone who has spent 15 years studying the history of the US cellular industry — from the prehistory of the 60s and 70s to the boom era of the 90s — I believe Meena has it exactly right. Reducing competition back to a duopoly will bring us back to duopoly-style pricing and duoopoly-style non-competition.

Meena described the merger as a major step backwards for the industry and its customers:

When I began in this business in the late-1980s, there was a local duopoly in every market.… Carriers had virtually no market incentive to innovate or improve service offerings.… In a duopoly, the market can quickly reach equilibrium and, if both providers are reasonably happy with their position, innovation stagnates and prices rise.

The industry changed for the better in the late 1990s, when the FCC, pursuant to Congressional mandate, auctioned off PCS licenses and a substantial number of competitive carriers entered markets—launching a new, healthy competitive era of wireless in the U.S.
…
But this all began to change in the middle of the last decade. Through unfettered mergers and acquisitions, it has become clear that our industry is on a glide path toward Ma Bell reconstituting herself into the 2 Bell Sisters of the wireless industry: AT&T Wireless and Verizon Wireless.
…
Not surprisingly, this concentration of market power has led to less choice for consumers and the routine abuse of market power in an effort to prevent competition at every turn. Specifically, AT&T has used its enormous acquired scale to

1. restrict competitive carrier and consumer access to devices,
2. withhold roaming agreements, and
3. leverage its control over device and infrastructure vendors to Balkanize new spectrum and slow the deployment of 4G LTE technology in the U.S.

Meena and Sprint CEO Dan Hesse identified two other negative impacts of increased market power. As chairman of the CTIA, Hesse has been attempting to negotiate lower rates for wireline backhaul for cellular base stations — rates that AT&T and Verizon want to be high but the rest of the industry want to be low. And by consolidating carriers, Meena notes there will be fewer options for smaller carriers to find roaming agreements for 3G and 4G data, as mandated by the FCC last month.

Supporting Cast

As expected, AT&T CEO Randall Stephenson said little to convince me that the merger is good for anyone other than AT&T, while T-Mobile USA CEO Philipp Humm seemed intent on deferring to his new boss. Verizon’s CEO was strangely absent, either to avoid making arguments that would haunt him when he wants to buy Sprint, or to avoid reminding people that two companies will control 80% of the market if the merger goes through.

Among the leftist activists, the self-appointed “consumer” representative was far more persuasive and honest than the union president. At least she knows what a Herfindahl-Hirschman Index is. Tellingly, she also asked: “have you ever seen AT&T advertise against Metro PCS or Cricket?”

The quality of dialog from the top of the dais was also mixed. The two ranking members of the subcommittee — Sen. Kohl and Sen. Lee — asked intelligent questions that attempted to draw out the witnesses. Two other senators (Franken and Grassley) were dim bulbs acting like a prosecutor and defense attorney for the accused. (Sens. Klobuchar and Cornyn were only slightly better — but at least viewers were spared Chuckie Shumer).

If Not Competition, then What?

Meena offered a stark (and I believe accurate) contrast between the two paths forward:

The prospect of this transaction brings us to a critical decision point for policy-makers: are we are going to continue down the path toward an era of nationwide duopoly, or are we going to lay the foundation for a second competitive era in wireless. There is no third option – either AT&T will be allowed to acquire T-Mobile (paving the way for Verizon to acquire Sprint and cementing a national wireless duopoly); or it will not.

If AT&T’s takeover of T-Mobile is approved, all that will remain is the endgame, where the remaining non-Bell carriers wait their turn to be acquired or bled dry by the biggest two carriers.

And, Meena notes, the likely consequence of returning to duopoly is returning to FCC micromanagement:

[I]f the takeover goes forward, policymakers must begin preparations to regulate every aspect of the day-to-day business of the duopolists. Without effective competition as a check on market abuses, the government will have to interject itself to ensure that consumers – the true owners of wireless spectrum – are protected. This means subjecting a future wireless communications duopoly to the same type of regulatory oversight that wireline telephone and electrical power utilities have operated under for decades.

This idea was echoed by Sen. Klobuchar, who suggested that a more concentrated US market — like the rest of the world — would be a more tightly regulated market.

Of course we know that government (or any central command-and-control bureaucracy) usually does a bad job of assuring either innovation or efficiency. So if the choice for consumers — and app developers and handset makers and website owners — is real competition or regulated duopolists, the best option is obvious.

Saving T-Mobile

If the merger is killed, it still leaves the question of maintaining T-Mobile as an effective competitor. It will take more than just a cute spokesmodel and dishonest branding to have it maintain its market share.

In particular, both Stephenson and Humm pointed to T-Mobile’s looming quandary in the 4G era, given that it hasn’t bought new spectrum in the recent auctions. Actually, the solution for the #4 carrier is relatively simple: do what the #3 and #7 carriers are doing for a 4G network: rent one.

Clearly T-Mobile is not going to join Sprint using Clearwire’s WiMax network, but if Clearwire switches to LTE, it would be an attractive option.

If not, it can follow the lead of Leap Wireless (dba Cricket) in renting the LightSquared network. It’s LTE, it promises to be nationwide, and the T-Mobile/Cricket customer base would be enough to make an attractive business (at least until MetroPCS buys Leap).