Thursday, April 28, 2011

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

On April 21, AT&T and T-Mobile filed the applications seeking the FCC's consent to their proposal for T-Mobile to be acquired by AT&T.

For those readers who may not be familiar with the FCC's merger review processes, and its historical timeline for ruling on merger applications, don't expect any decision from the FCC this calendar year. I'm not suggesting the government (the Department of Justice included – after all, it is one government we have!) shouldn't be able to reach a decision before next year, I am just predicting it won't.

As I said in a statement issued on March 20, the day the merger proposal was announced, "[l]ike all mergers of this size, the proposed AT&T – T-Mobile combination will get close scrutiny, and it should." I stand by that statement.

I went on to say that:

"My preliminary sense is that the benefits from the proposed merger, with the promise of enhanced 4G network capabilities implemented more quickly than otherwise would be the case, outweigh the costs. Even after the merger, the wireless market should remain effectively competitive with the companies that remain. Over the last several years consumers have benefited from a continuing downward-sloping price curve indicating a substantially competitive market. And it is important to remember that, with respect to many services, the wireless market increasingly is just part of a larger overall broadband market."

Nine days later, in a piece entitled, "The AT&T and T-Mobile Merger – Thinking Things Through," I offered some thoughts on ways to think about the merger as the review process commences. In re-reading the piece, they still seem apropos, so, if you're inclined, I commend them to you.

In the same vein of "thinking things through," I want to call your attention to a claim made by Sprint that strikes me as somewhat odd. Sprint, the third largest wireless provider after Verizon and AT&T, suggests that if the merger is consummated, consumers will pay higher prices for their wireless services. Sprint spokesman John Taylor said the merger would harm consumers and "raise prices."

This is an odd claim coming from Sprint because you would think that Sprint would benefit, as a competitor, if the result of the merger is that the combined AT&T and T-Mobile will charge higher prices than either would charge uncombined. After all, the higher the price charged by one marketplace competitor, the easier it is for other competitors to take away – compete away – the customers of the higher-priced provider.

So, I would take Sprint's crocodile tears alleging the likelihood of higher post-merger prices with a grain or two of salt. This is especially so in the face of the long-running steep declining price curve that, without interruption, has characterized wireless prices in the U.S. over the past 15 years. According to the FCC's 2010 Wireless Competition Report, only Hong Kong has lower rates. Consumers in Great Britain, Germany, and France, Japan and most other countries pay more. In reality, Sprint might well think, and be justified in thinking, the merger will lead to even lower prices and better service for AT&T's and T-Mobile's consumers as a result of the integration efficiencies achieved from combining spectrum resources and otherwise.

But if Sprint really thinks the proposed merger will lead to higher prices for AT&T's and T-Mobile's customers, it should welcome the opportunity to use this higher "price umbrella" to lure away those customers with its own lower prices. Indeed, as Scott Cleland pointed out in a post this week, Sprint features its low prices and "unlimited" calling plans in its advertising. (Scott's piece, "AT&T – T-Mobile in Competitive Perspective," contains a lot of pertinent data relevant to an antitrust-like market analysis.)

It may be that Sprint already is so focused on its role as "leading merger opponent" that its attention will be diverted away from what ought to be its primary job -- fighting for the customers presently served by AT&T and T-Mobile, and, for that matter, by Verizon, and by MetroPCS, Leap, Cox, and the myriad of other regional providers. Indeed, statements from Sprint's officials sound as if the company, in its "leading merger opponent" role, already has adopted a static mindset that will go a long way towards consigning it to back-seat status. Here is spokesman John Taylor: "America could say goodbye to competition in the wireless industry if two companies are allowed to control nearly 80% of wireless industry revenues." The notion that the wireless providers "control" their customers in a sense that renders these subscribers non-contestable is simply wrong. The providers battle fiercely not only to sign-up new customers but to get existing ones to switch. Witness their non-stop ad campaigns – and their marketing expenditures.

So, in thinking things through at this early stage of a long review process, one thought I have is that, as the months go by, I hope Sprint doesn't become so focused on opposing AT&T and T-Mobile in the regulatory and antitrust arenas that the company fails to avail itself of the opportunities to compete in the marketplace. I suspect that while AT&T and T-Mobile executives are heavily preoccupied with the merger themselves, opportunities for Sprint to devise marketplace responses will be plentiful.

Tuesday, April 26, 2011

"Bill Shock" Regulation Raises First Amendment Concerns

Over the last several months the FCC has been wading into what it calls wireless "bill shock." However, there is a real question whether bill shock constitutes a real problem – let alone a problem substantial enough to warrant a new slate of regulatory mandates. This question is particularly important considering that the proposed bill shock regulation presents constitutional problems under the First Amendment.

For starters, most consumers don't incur overage charges. The Nielsen Company analyzed 78,633 post-paid wireless bill accounts spanning from the third quarter of 2009 to the second quarter of 2010 (see here and here). According to Roger Entner's analysis of the Nielsen Study, "86.5% of accounts never have a voice overage and 82% never have a data overage." Of those that do incur such charges, they're usually much smaller than the extreme anecdotes that have been highlighted before the Commission, such as a report by an AT&T customer that he was charged over $9,000 when his teenage son watched YouTube for 45 minutes on his smartphone from Guatemala. The Nielsen Study numbers suggest the median charge for consumers going into voice overage once per year is $17.89 and twice per year is $29.90. And the median charges for going into data overage once per year is $2.00 and twice per year is $3.85.

Small overage charges imposed on consumers who exceed their usage plans are hardly shocking. Requiring consumers whose usage exceeds their plan allotment to pay for such extra use makes sense. What makes little sense is to automatically equate mere overage charges to bill shock. The FCC's bill shock survey – which contends that one in six wireless consumers or 30 million experience bill shock each year – appears to equate the two.

Consider also that in some instances, paying an extra charge for extra use of a service — beyond what is provided in a consumer's chosen service plan — is more efficient for a consumer than purchasing the next most expensive service plan. And in many instances, carriers will allow consumers who incur overage charges to retroactively upgrade to a higher-tiered service plan.

Last fall the FCC issued a proposed rulemaking to lay the groundwork for new "bill shock" regulation. The Commission proposes to require wireless carriers to clearly disclose any tools they offer consumers to set usage limits or review usage balances. Although many carriers already do this, the Commission would cement the practice into disclosure rules. Furthermore, the Commission proposes to require wireless carriers to provide some kind of warnings to consumers – perhaps voice alerts or text alerts – when consumers exceed their respective plan's monthly mobile use limits and begin to incur overage charges for voice, data, and text. (Carriers already provide consumers with a variety of alert options, too.)

The Commission also proposes to mandate warnings when customers "are approaching an allotted limit" on their monthly mobile use limits. Prepaid wireless services are swept up in the Commission's proposal, too, even though prepaid users don't pay recurring monthly bills and therefore are not even in the category of consumers who would face potential overage charges, let alone charges constituting bill shock. And the Commission proposes requiring warnings from wireless carriers when consumers are about to incur domestic roaming charges or international roaming charges that are not covered by their monthly plans.

Commenters in the bill shock rulemaking proceeding go further. Some even urge the FCC to require wireless carriers to provide multiple, individualized usage and overage alerts with specific information customized to particular consumers. Commenters insist that the Commission require carriers to offer a variety of choices regarding overage and usage alert delivery. Additional mandatory alerts are urged by commenters for informing consumers that they are no longer voice or data roaming and not subject to roaming fees. Commenters also argue the Commission should mandate wireless device screen notice and alert icons as part of the required slate of warnings.

Previously, I've raised concerns about the effect of imposing a slew of new regulatory controls on a thriving, competitive wireless market that is only in the beginning stages of delivering broadband services and upgrading network capabilities to 3G and 4G specs. (See the FSF Perspectives piece "Don't Let 'Bill Shock' Regulation End Light-Touch Treatment of Wireless.") But now I want to highlight a different concern. Because the regulation being considered isn't meant to address actual fraud or deception and because the scope of proposed regulatory controls appears so broad, many aspects of proposed bill shock regulation may infringe on First Amendment free speech rights.

The U.S. Supreme Court has repeatedly recognized that freedom of speech means not only a right to speak but also a right not to speak — or a right against being compelled by the government to speak. Although the Supreme Court's First Amendment jurisprudence typically accords a lesser degree of protection to what it categorizes as "commercial speech" and is generally more favorable to compelled disclosures of speech than to outright restrictions on speech, even government regulation requiring disclosures of factual information is subject to constitutional scrutiny. Commercial advertising that is inherently or implicitly misleading is not deserving of First Amendment protection. But where no fraud or deception is involved, commercial speech regulation is subject to set out by the Supreme Court in Central Hudson Gas & Electric Company v. Public Utilities Commission of California (1985).

Under Central Hudson, government regulation of non-misleading commercial speech is permissible where: (1) the regulation advances a substantial government interest; (2) the speech directly advances that interest; and (3) the regulation is not more extensive than necessary to achieve that interest. The government bears the burden in justifying its regulation as alleviating a real problem in a material way, as opposed to regulation having a vicarious connection to a merely conjectured problem. This also means the government must establish that less burdensome alternatives will not suffice to directly advance the substantial interest at stake.

When it comes to bill shock regulation, remember again that misleading information is not at issue. Instead, the Commission is proposing regulation for the purpose of "assist[ing] consumers in avoiding unexpected charges on their bills." Let's assume a court would find that the government proves there is an actual bill shock "problem" and that the Commission's stated purpose is "substantial" enough to warrant regulation. The government would still have to establish that the myriad regulations proposed by the Commission – and commenters, to the extent the Commission were to adopt their proposals – would materially address that problem beyond the extent is already addressed by available usage monitoring tools and alerts.

A question about diminishing returns immediately occurs when considering mandated usage monitoring tools and alerts when those tools and alerts are already widely available. But even if a court found that some or all of the requirements the Commission might ultimately adopt directly and materially advanced the government's purposes, questions would still remain about whether those same purposes could be achieved by more narrowly tailored approaches.

The Commission's proposal to require wireless carriers to clearly disclose their respective usage-monitoring tools to consumers certainly constitutes as a less burdensome alternative to achieving that purpose. If the problem, as stated by the Commission, is that consumers are often unaware of or unable to use them or gain access to the relevant information, then compelling disclosure could more likely satisfy First Amendment scrutiny. As the Supreme Court recently declared in Milavetz v. U.S. (2010): "Unjustified or unduly burdensome disclosure requirements offend the First Amendment by chilling protected speech, but 'an advertiser's rights are adequately protected as long as disclosure requirements are reasonably related to the State's interest in preventing deception of consumers.'" And a court would likely conclude that promoting consumer awareness through educational efforts provides an even less burdensome alternative that is even more directly focused on the perceived problem. The Commission has already undertaken such educational initiatives, including a bill shock "tip sheet" that it released to the public last year.

But recognition of the proposed disclosure requirement and educational efforts as less burdensome alternatives throws the broader array of Commission and commenter proposals for bill shock regulation into much greater uncertainty under the Supreme Court's First Amendment jurisprudence. The more bill shock requirements the Commission ultimately adopts and the broader their scope, the more likely it is that such requirements would be considered by a court to be unnecessary to achieving the Commission's purpose – and consequently contrary to the First Amendment.

At this point, the ultimate scope and particulars of any bill shock regulation that the Commission might adopt remains uncertain. Wireless has thrived in recent years thanks in part to light-touch regulatory treatment. But the broader regulatory approach to bill shock that the Commission and pro-regulatory voices have recently endorsed embodies a more heavy-handed approach – and one even at odds with the First Amendment in some respects.

Given questions about whether bill shock is a real, substantial problem, and a problem that multiple regulatory mandates are needed to fix, I hope the Commission will think again before imposing regulation so broad as to also raise First Amendment questions.

Monday, April 18, 2011

Expect Google's Privacy Problems to Threaten Bubble 2.0


As I have said several times before, there is no one, in my book, that writes more incisively about Google than Scott Cleland. Here’s another good piece by Scott.

While I don’t necessarily always agree with Scott’s conclusions, I always give them the thought they deserve.

So, here’s the latest food-for-thought:

Expect Google's Privacy Problems to Threaten Bubble 2.0 | The Precursor Blog by Scott Cleland

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