Tuesday, March 29, 2011

The AT&T and T-Mobile Merger: Thinking Things Through

Remember the 2008 merger of the satellite radio companies, XM and Sirius? The National Association of Broadcasters, advocating on behalf of its terrestrial broadcaster members, adopted a facile battle cry slogan. The NAB said the proposed combination was a "merger to monopoly."

The NAB's claim was specious because "satellite radio" was part of a much broader marketplace comprised of audio information and entertainment service providers using multiple platforms, including free 'over the air' AM and FM radio, iPods, mobile-phone streaming, HD radio, Internet radio and next-generation wireless technologies. The ferocity with which the NAB tried to defeat the merger refuted the notion that its terrestrial broadcaster members did not compete in the same market.

[Tip: When considering competitive and market impacts for purposes of merger reviews, observe the extent to which various competitors, often many competitors, mount vigorous campaigns designed to convince the antitrust authorities and the regulators that if the merger is approved there will be an absence of competition. Note the incongruity.]

I recall the NAB's silly "merger to monopoly" mantra now because, in the face of AT&T's proposed acquisition of T-Mobile, some of the usual "I've never seen a merger I would approve" suspects have been quick to claim that a merger from "four to three" in the wireless marketplace, or at least this particular "four to three" merger, necessarily would be anticompetitive.

But, please, not so quick!

While the "four to three" formulation, like the NAB's "merger to monopoly" mantra, may make a nice sound bite, it is in no way a substitute for the rigorous market analysis and weighing of the public benefits that will determine whether the proposed combination should be approved.

At the time AT&T's acquisition of T-Mobile was announced, I had no hesitancy in stating: "Like all mergers of this size, the proposed AT&T - T-Mobile combination will get close scrutiny, and it should." So I do not propose here to offer a final judgment on the merger – before the merging parties have even filed their supporting papers with the FCC, or provided documentation to the antitrust authorities.

But I do suggest that formulaic sloganeering, coupled with the predictable, tiresome references concerning "giant" corporations, ought to be ignored throughout the review process. This sloganeering does nothing but detract from the type of informed analysis which ought to be performed.

With that in mind, I don't want here to go into any in-depth market analysis, except to note, assuming the AT&T/T-Mobile merger is consummated, that there will still be three major nationwide providers – AT&T, Verizon, and Sprint – along with many smaller providers, such as MetroPCS, Leap Wireless, and U.S. Cellular, which serve many geographic areas. There are reportedly five or more competitors in the top 20 markets. There are other providers as well, such as TracFone, which serve niche product markets by differentiating their offerings on the basis of price or terms of service.

While Sprint asserts that, post-merger AT&T and Verizon, would "control" 72% of the subscribers, the 28% of the market that remains is not marginal. It seems sufficiently large that the remaining competitors would continue to exert competitive discipline on Verizon and AT&T. Of course, and more fundamentally, it is wrong to view the market shares as static, as if the competitors simply accede to characterization of "control" of subscribers and cease competing. If this were true, the Sunday newspapers would be an awful lot smaller than they already are.

As the inquiry into the merger begins, here are some thoughts to keep in mind. The government's role is not to judge the merits of the AT&T/T-Mobile combination against some other hypothesized – or wished for – combination that was never proposed and never might have been. Its job is to assess the merits of the proposal before it.

And it will be most important to keep in mind as well the rapidity with which the parameters of communications and information services market change, driven by the interplay and feedback loops of incessant technological change and evolving consumer demands. In light of such rapid changes and feedbacks, it is difficult for even the most sagacious and experienced business and technology gurus to predict the future course of communications markets, or of shifting market power within those shifting markets.

I mean no disrespect to government workers in suggesting they are even less likely than the business people or technologists to have the knowledge or expertise to succeed at making accurate predictions concerning the future of these dynamic markets. Indeed, given their dismal past track record, for example, conditioning mergers such as the AOL/Time Warner based on misplaced predictions concerning future market dominance and technological evolution, there is every reason to believe the antitrust authorities and the FCC commissioners and staff should approach the AT&T/T-Mobile merger with a healthy dose of humility concerning their own perspicacity.

Finally, the merger presents the FCC with yet another opportunity to demonstrate some much-needed regulatory modesty in the way the agency handles merger reviews. I first outlined the problems with the FCC's approach to merger review in a piece for Legal Times in March 2000 entitled "Any Volunteers?" As the title of the piece suggests, a significant recurring problem is the Commission's unseemly practice of extracting from the merger applicants, late in the review process, so-called "voluntary" commitments in exchange for the agency acting on the merger. Trouble is, these extracted conditions often have little or nothing to do with any specific competitive issues raised by the proposed merger. If the voluntary conditions are suitable at all for adoption as FCC-enforced mandates – and many are not – they should be considered in generic rulemaking proceedings.

For much more on this, see my recent blog, "FCC Merger Review Reform: The Case for Regulatory Modesty," and also FCC Commissioner Meredith Baker's excellent recent address on the subject. While the gist of my advocacy over the years, as well as the thrust of Commissioner Baker's speech, is that the Commission should adopt new generic policies and processes for handling merger reviews outside the context of any particular merger, there is no reason why the agency, in a display of self-restraint, cannot begin the long-overdue reform process right now.

Stranger things have happened.