In the wake of the announcement that AT&T and T-Mobile are walking away from their proposed merger, there will be ample time to discuss whether the deal would have passed muster in federal court, and to review the various strategic maneuvers by the parties, the DOJ, and the FCC.  But now is a good time to take a look at what the market is predicting — and what that has to say about the various theories offered concerning the merger.  In prior blog posts, we’ve examined the stock market reaction to various events surrounding the merger — and in particular, the announcement that the DOJ would challenge it in federal court.

For a brief review, there are two primary theories that the merger would reduce competition and harm consumers.  Horizontal theories predict that the post-merger firm would gain market power, raise market prices and reduce output.  On these theories, Sprint and other rivals’ stock prices should increase in response to the merger; thus, if the DOJ announcement to challenge the merger reduces the probability of the post-merger acquisition of market power, Sprint stock should fall in response.  We know that it didn’t.  It surged.   That is consistent with a procompetitive merger because the challenge increases the probability that the rival will not face more intense competition post-merger.  Thus, Sprint’s surge in reaction to the DOJ announcement is consistent with the simple explanation that the merger was procompetitive and the market anticipated more intense competition post-merger.

Of course, as AAI and others have pointed out, Sprint’s stock price surge in response to the merger challenge was also consistent with “exclusionary” theories of the merger that posit that the post-merger firm would be able to foreclose Sprint from access to critical inputs (in particular, handsets) required to compete.  Richard Brunell (AAI) made this point in the comments to our earlier blog post, relying upon the fact that Verizon’s stock fell 1.2% (compared to market drop of .7%) to emphasize the applicability of the exclusion theory.   The importance of Verizon’s stock price reaction, the argument goes, is that while Sprint has to fear exclusion by a combined ATT/TMo, Verizon does not.  Thus, proponents of the exclusion theories assert, the combined surge in Sprint stock with Verizon’s relative non-movement is consistent with that anticompetitive theory.

Not so fast.  As I’ve pointed out, this conclusion relies upon an incomplete exposition of the economics of exclusion and one that should be difficult to square with your intuition.  If Verizon has nothing to fear from the post-merger firm excluding Sprint, it should greatly benefit from the merger!   Consider that if the exclusion theories are correct, Verizon gets the benefit of free-riding upon AT&T’s $39 billion investment in eliminating or weakening one of its rivals.   Surely, the $39 billion investment to exclude Sprint and other smaller rivals — as the exclusion proponents argue is the motive for merger here — provides considerable benefits to Verizon who doesn’t pay a dime.  Thus, rather than holding constant, Verizon’s stock price should fall significantly in response to the lost opportunity to appropriate these exclusionary gains for free.  Verizon’s stock non-reaction to the announcement that DOJ would challenge the merger was, in my view, inconsistent with the exclusion theories.   In sum, the market did not appear to anticipate the acquisition of market power as a result of the merger.

We now have a new event to use to evaluate the market’s reaction: AT&T and T-Mobile abandoning the merger.   It appears that, once again, Sprint’s stock price surged in reaction to the news (and now up about 8% in the last 24 hours).  Again, Verizon doesn’t move much at all.

Stock market reactions and event studies — and I’m not claiming I’ve done a full blown event study here,  just a simple comparison of stock price reactions to the market trends — produce valuable information.  They are obviously not dispositive.  The market can be wrong.  But so can regulators.  And as my colleague Bruce Kobayashi said in an interview (which I cannot find online) in Fortune Magazine evaluating the market reaction to the Staples-Office Depot merger in light of the FTC’s challenge: “It boils down to whether you trust the agencies or the stock market. I’ll take the stock market any day.”

Markets provide information.  The information provided here gives no reason to celebrate the withdraw on the behalf of consumers, or even the ever-present “public interest.”  Celebratory announcements to the contrary should be read with at least a healthy dose of skepticism in light of information above (and see also Hal’s excellent post) that the market did not anticipate the merger to facilitate the acquisition of market power via the combination of AT&T and T-Mobile or through the exclusion of Sprint.   Media reports that the merger was a “slam-dunk” in terms of the economics or that this is a tale of dispassionate economic analysis defeating the monopolist lobbying machine are misleading at best.   More importantly for the future, abandoning this merger does not repeal the spectrum capacity constraints facing the wireless industry, the ever-increasing demand for data, or the dearth of alternative options (despite the FCC’s claims that non-merger alternatives abound) for acquiring spectrum efficiently.

This will be a very interesting space to watch as the agencies deal with what will undoubtedly be other attempts to consolidate spectrum assets — especially in light of the FCC Report and the framework it lays down for evaluating future mergers.

Filed under: antitrust, doj, economics, federal communications commission, wireless

Yesterday, AT&T announced it was halting its plan to acquire T-Mobile. Presumably AT&T did not think it could prevail in defending the merger in two places simultaneously—one before a federal district court judge (to defend against the DOJ’s case) and another before an administrative law judge (to defend against the FCC’s case). Staff at both agencies appeared intractable in their opposition. AT&T’s option of defending cases sequentially, first against the DOJ then against the FCC, was removed by the DOJ’s threat to withdraw its complaint unless AT&T re-submit its merger application to the FCC. The FCC rarely makes a major license-transfer decision without the green light from the DOJ on antitrust issues. Instead, the FCC typically piles on conditions to transfer value created by the merger to complaining parties after the DOJ has approved a merger. Prevailing first against the DOJ would have rendered the FCC’s opposition moot.

Read the full piece here.

By now everyone is probably aware of the “tracking” of certain cellphones (Sprint, iPhone, T-Mobile, AT&T perhaps others) by a company called Carrier IQ.  There are lots of discussions available; a good summary is on one of my favorite websites, Lifehacker;  also here from CNET. Apparently the program gathers lots of anonymous data mainly for the purpose of helping carriers improve their service. Nonetheless, there are lawsuits and calls for the FTC to investigate.

Aside from the fact that the data is used only to improve service, it is also useful to ask just what people are afraid of.  Clearly the phone companies already have access to SMS messages if they want it since these go through the phone system anyway.  Moreover, of course, no person would see the data even if it were somehow collected.  The fear is perhaps that “… marketers can use that data to sell you more stuff or send targeted ads…” (from the Lifehacker site) but even if so, so what?  If apps are using data to try to sell you stuff that they think that you want, what is the harm? If you do want it, then the app has done you a service.  If you don’t want it, then you don’t buy it.  Ads tailored to your behavior are likely to be more useful than ads randomly assigned.

The Lifehacker story does use phrases like “freak people out” and “scary” and “creepy.”  But except for the possibility of being sold stuff, the story never explains what is harmful about the behavior.  As I have said before, I think the basic problem is that people cannot understand the notion that something is known but no person knows it.  If some server somewhere knows where your phone has been, so what?

The end result of this episode will probably be somewhat worse phone service.

Filed under: advertising, consumer protection, privacy, regulation, technology, telecommunications, wireless

Geoff Manne’s blog on the FCC’s Staff Analysis and Findings (“Staff Report”) has inspired me to come up with a top ten list. The Staff Report relies heavily on concentration indices to make inferences about a carrier’s pricing power, even though direct evidence of pricing power is available (and points in the opposite direction). In this post, I have chosen ten lines from the Staff Report that reveal the weakness of the economic analysis and suggest a potential regulatory agenda. It is clear that the staff want T-Mobile’s spectrum to land in the hands of a suitor other than AT&T—the government apparently can allocate scare resources better than the market—and that the report’s authors define the public interest as locking AT&T’s spectrum holdings in place.

Read the full piece here.

As everyone knows by now, AT&T’s proposed merger with T-Mobile has hit a bureaucratic snag at the FCC.  The remarkable decision to refer the merger to the Commission’s Administrative Law Judge (in an effort to derail the deal) and the public release of the FCC staff’s internal, draft report are problematic and poorly considered.  But far worse is the content of the report on which the decision to attempt to kill the deal was based.

With this report the FCC staff joins the exalted company of AT&T’s complaining competitors (surely the least reliable judges of the desirability of the proposed merger if ever there were any) and the antitrust policy scolds and consumer “advocates” who, quite literally, have never met a merger of which they approved.

In this post I’m going to hit a few of the most glaring problems in the staff’s report, and I hope to return again soon with further analysis.

As it happens, AT&T’s own response to the report is actually very good and it effectively highlights many of the key problems with the staff’s report.  While it might make sense to take AT&T’s own reply with a grain of salt, in this case the reply is, if anything, too tame.  No doubt the company wants to keep in the Commission’s good graces (it is the very definition of a repeat player at the agency, after all).  But I am not so constrained.  Using the company’s reply as a jumping off point, let me discuss a few of the problems with the staff report.

First, as the blog post (written by Jim Cicconi, Senior Vice President of External & Legislative Affairs) notes,

We expected that the AT&T-T-Mobile transaction would receive careful, considered, and fair analysis.   Unfortunately, the preliminary FCC Staff Analysis offers none of that.  The document is so obviously one-sided that any fair-minded person reading it is left with the clear impression that it is an advocacy piece, and not a considered analysis.

In our view, the report raises questions as to whether its authors were predisposed.  The report cherry-picks facts to support its views, and ignores facts that don’t.  Where facts were lacking, the report speculates, with no basis, and then treats its own speculations as if they were fact.  This is clearly not the fair and objective analysis to which any party is entitled, and which we have every right to expect.

OK, maybe they aren’t pulling punches.  The fact that this reply was written with such scathing language despite AT&T’s expectation to have to go right back to the FCC to get approval for this deal in some form or another itself speaks volumes about the undeniable shoddiness of the report.

Cicconi goes on to detail five areas where AT&T thinks the report went seriously awry:  “Expanding LTE to 97% of the U.S. Population,” “Job Gains Versus Losses,” “Deutsche Telekom, T-Mobile’s Parent, Has Serious Investment Constraints,” “Spectrum” and “Competition.”  I have dealt with a few of these issues at some length elsewhere, including most notably here (noting how the FCC’s own wireless competition report “supports what everyone already knows: falling prices, improved quality, dynamic competition and unflagging innovation have led to a golden age of mobile services”), and here (“It is troubling that critics–particularly those with little if any business experience–are so certain that even with no obvious source of additional spectrum suitable for LTE coming from the government any time soon, and even with exponential growth in broadband (including mobile) data use, AT&T’s current spectrum holdings are sufficient to satisfy its business plans”).

What is really galling about the staff report—and, frankly, the basic posture of the agency—is that its criticisms really boil down to one thing:  “We believe there is another way to accomplish (something like) what AT&T wants to do here, and we’d just prefer they do it that way.”  This is central planning at its most repugnant.  What is both assumed and what is lacking in this basic posture is beyond the pale for an allegedly independent government agency—and as Larry Downes notes in the linked article, the agency’s hubris and its politics may have real, costly consequences for all of us.

Competition

But procedure must be followed, and the staff thus musters a technical defense to support its basic position, starting with the claim that the merger will result in too much concentration.  Blinded by its new-found love for HHIs, the staff commits a few blunders.  First, it claims that concentration levels like those in this case “trigger a presumption of harm” to competition, citing the DOJ/FTC Merger Guidelines.  Alas, as even the report’s own footnotes reveal, the Merger Guidelines actually say that highly concentrated markets with HHI increases of 200 or more trigger a presumption that the merger will “enhance market power.”  This is not, in fact, the same thing as harm to competition.  Elsewhere the staff calls this—a merger that increases concentration and gives one firm an “undue” share of the market—“presumptively illegal.”  Perhaps the staff could use an antitrust refresher course.  I’d be happy to come teach it.

Not only is there no actual evidence of consumer harm resulting from the sort of increases in concentration that might result from the merger, but the staff seems to derive its negative conclusions despite the damning fact that the data shows that wireless markets have seen considerable increases in concentration along with considerable decreases in prices, rather than harm to competition, over the last decade.  While high and increasing HHIs might indicate a need for further investigation, when actual evidence refutes the connection between concentration and price, they simply lose their relevance.  Someone should tell the FCC staff.

This is a different Wireless Bureau than the one that wrote so much sensible material in the 15^th Annual Wireless Competition Report.  That Bureau described a complex, dynamic, robust mobile “ecosystem” driven not by carrier market power and industrial structure, but by rapid evolution and technological disruptors.  The analysis here wishes away every important factor that every consumer knows to be the real drivers of price and innovation in the mobile marketplace, including, among other things:

1. Local markets, where there are five, six, or more carriers to choose from;
2. Non-contract/pre-paid providers, whose strength is rapidly growing;
3. Technology that is making more bands of available spectrum useful for competitive offerings;
4. The reality that LTE will make inter-modal competition a reality; and
5. The reality that churn is rampant and consumer decision-making is driven today by devices, operating systems, applications and content – not networks.

The resulting analysis is stilted and stale, and describes a wireless industry that exists only in the agency’s collective imagination.

There is considerably more to say about the report’s tortured unilateral effects analysis, but it will have to wait for my next post.  Here I want to quickly touch on a two of the other issues called out by Cicconi’s blog post.

Jobs

First, although it’s not really in my bailiwick to comment on the job claims that have been such an important aspect of the public conversations surrounding this merger, some things are simple logic, and the staff’s contrary claims here are inscrutable.  As Cicconi suggests, it is hard to understand how the $8 billion investment and build-out required to capitalize on AT&T’s T-Mobile purchase will fail to produce a host of jobs, how the creation of a more-robust, faster broadband network will fail to ignite even further growth in this growing sector of the economy, and, finally, how all this can fail to happen while the FCC’s own (relatively) paltry $4.5 billion broadband fund will somehow nevertheless create approximately 500,000 (!!!) jobs.  Even Paul Krugman knows that private investment is better than government investment in generating stimulus – the claim is that there’s not enough of it, not that it doesn’t work as well.  Here, however, the fiscal experts on the FCC’s staff have determined that massive private funding won’t create even 96,000 jobs, although the same agency claims that government funding only one half as large will create five times that many jobs.  Um, really?

Meanwhile the agency simply dismisses AT&T’s job preservation commitments.  Now, I would also normally disregard such unenforceable pronouncements as cheap talk – except given the frequency and the volume with which AT&T has made them, they would suffer pretty mightily for failing to follow through on them now.  Even more important perhaps, I have to believe (again, given the vehemence with which they have made the statements and the reality of de facto, reputational enforcement) they are willing to agree to whatever is in their control in a consent decree, thus making them, in fact, legally enforceable.  For the staff to so blithely disregard AT&T’s claims on jobs is unintelligible except as farce—or venality.

Spectrum

Although the report rarely misses an opportunity to fail to mention the spectrum crisis that has been at the center of the Administration’s telecom agenda and the focus of the National Broadband Plan, coincidentally authored by the FCC’s staff, the crux of the report seems to come down to a stark denial that such a spectrum crunch even exists.  As I noted, much of the staff report amounts to an extended meditation on why the parties can and should run their businesses as the staff say they can and should.  The report’s section assessing the parties’ claims regarding the transition to LTE (para 210, ff.) is remarkable.  It begins thus:

One of the Applicants’ primary justifications for the necessity of this transaction is that, as standalone firms, AT&T and T-Mobile are, and will continue to be, spectrum and capacity constrained. Due to these constraints, we find it more plausible that a spectrum constrained firm would maximize deployment of more spectrally efficient LTE, rather than limit it. Transitioning to LTE is primarily a function of only two factors: (1) the extent of LTE capable equipment deployed on the network and (2) the penetration of LTE compatible devices in the subscriber base. Although it may make it more economical, the transition does not require “spectrum headroom” as the Applicants claim. Increased deployment could be achieved by both of the Applicants on a standalone basis by adding the more spectrally efficient LTE-capable radios and equipment to the network and then providing customers with dual mode HSPAILTE devices. . . .

Forget the spectrum crunch!  It is the very absence of spectrum that will give firms the incentive and the ability to transition to more-efficient technology.  And all they have to do is run duplicate equipment on their networks and give all their customers new devices overnight.  And, well, the whole business model fits in a few paragraphs, entails no new spectrum, actually creates spectrum, and meets all foreseeable demand (as long as demand never increases which, of course, the report conveniently fails to assess).

Moreover, claims the report, AT&T’s transition to LTE flows inevitably from its competition with Verizon.  But, as Cicconi points out, the staff is unprincipled in its disparate treatment of the industry’s competitive conditions.  Somehow, without T-Mobile in the mix, prices will skyrocket and quality will be degraded—let’s say, just for example, by not upgrading to LTE (my interpretation, not the staff’s).  But 100 pages later, it turns out that AT&T doesn’t need to merge with T-Mobile to expand its LTE network because it will have to do so in response to competition from Verizon anyway.  It would appear, however, that Verizon’s power over AT&T operates only if T-Mobile exists separately and AT&T has a harder time competing.  Remove T-Mobile and expand AT&T’s ability to compete and, apparently, the market collapses.  Such is the logic of the report.

There is much more to criticize in the report, and I hope to have a chance to do so in the next few days.

Filed under: antitrust, business, law and economics, merger guidelines, regulation, technology, telecommunications Tagged: at&t, FCC, merger, t-mobile

Yesterday, the editorial page of the New York Times opined that wireless consumers needed “more protection” than that afforded by voluntary agreements by the carriers and existing regulation. The essay pointed to the “troublesome pricing practices that have flourished” in the industry, including Verizon’s alleged billing errors, as the basis for stepped up enforcement. As evidence of a lack of wireless competition, the editorial cites several indicia, none of which is persuasive.

Read the full piece here.

Economists have long warned against price regulation in the context of network industries, but until now our tools have been limited to complex theoretical models. Last week, the heavens sent down a natural experiment so powerful that the theoretical models are blushing: In response to a new regulation preventing banks from charging debit-card swipe fees to merchants, Bank of America announced that it would charge its customers $5 a month for debit card purchases. And Chase and Wells Fargo are testing $3 monthly debit-card fees in certain markets. In case you haven’t been following the action, the basic details are here. What in the world does this development have to do with an “open” Internet? A lot, actually.

Read the full piece here.

As I have posted before, I was disappointed that the DOJ filed against AT&T in its bid to acquire T-Mobile.  The efficacious provision of mobile broadband service is a complicated business, but it has become even more so by government’s meddling.  Responses like this merger are both inevitable and essential.  And Sprint and Cellular South piling on doesn’t help — and, as Josh has pointed out, further suggests that the merger is actually pro-competitive.

Read the full piece here.

Yale’s George Priest authored an op-ed in the WSJ on September 6th in which he raised a few of the arguments discussed here at TOTM over the past several weeks regarding the proposed AT&T / T-Mobile merger.  For example, we’ve focused upon the tension between the DOJ complaint’s theories of competitive harm (coordinated and unilateral effects) and the reaction of Sprint’s stock price.  Along these lines, Priest writes:

If the acquisition would lead to increased prices and lower quality products as the Justice Department has claimed, Sprint would be better off after the acquisition. Sprint would be able to add subscribers, not lose them, because of AT&T’s higher prices and lower quality. Sprint would oppose the acquisition—as it has—only if it thought that the merger would put it in a worse position by increasing the competitive pressures that it already faces.

The market—though not the Obama administration—understands this point. On the day that the Justice Department announced its opposition to the acquisition, Sprint’s share price rose 5.9%, reflecting investors’ belief that Sprint will be in a better competitive position without the acquisition.

As we’ve pointed out, Sprint’s stock price reaction is simply not consistent with the DOJ theories.  To find a theory of harm more consistent with the market reaction, critics of the merger have abandoned the DOJ’s theories in favor for a new one — that the merger will facilitate future exclusion of rivals from access to critical inputs like backhaul or handsets.

The AAI’s Rick Brunell makes this point in our comments.  The basic point is that under an exclusion theory Sprint benefits from the challenge to the merger because it prevents its future exclusion.   Brunell also argued in that comment that Verizon’s stock price movement supported exclusion theories of the merger, pointing out that its stock price fell 1.2% (with a .7% drop in the S&P 500) upon announcement of the challenge.

We challenged the economic logic of Brunell’s claim that Verizon’s non-reaction was consistent with exclusionary theories in a follow up post.  Put simply, assuming the merger will result in successful exclusion of rivals in the future, Verizon would be a gigantic winner from its successful completion:

The relevant economics here are not limited to the possibility that post-merger AT&T would successfully exclude Verizon.  Think about it: both Verizon and the post-merger firm would benefit from the exclusionary efforts and reduced competition.  However, Verizon would stand to gain even more!  After all, it isn’t paying the $39 billion purchase price for the acquisition (or any of the other costs of implementing an expensive exclusion campaign).  Thus, an announcement to block the would-be exclusionary merger — the one that would allow Verizon to outsource the exclusion of its rivals to AT&T on the cheap — wouldn’t happen.  Verizon stock should fall relative to the market in response to this lost opportunity.  The unilateral and coordinated effects theories in the DOJ complaint are at significant tension with the stock market reactions of firms like Sprint (and its affiliated venture, Clearwire).  The exclusion theory predicts a large decrease in stock price for Verizon with the announcement.  None of these comfortably fit the facts.  Verizon more or less tracks the S&P with a slight drop.  What about the smaller carriers?  Take a look at the chart.  MetroPCS barely moved relative to the market (in fact, may have increased relative to the market over the relevant time period); Leap is down a bit more than the market.  Here, with the smaller carriers there is not a lot of movement in any direction.  But, contra NB’s comment (“Verizon, a larger and far more significant competitor, had its stock drop sharply in that same period you show Sprint “surging”. MetroPCS’s stock also dropped.”), Verizon’s small fall relative to the market is nowhere near the magnitude of the positive effect on Sprint and Clearwire.

In other words, contra Brunell and other proponents of the exclusion theory, its not just that Verizon has “nothing to fear” from exclusion but that it has much to gain from it.  If the merger is likely to exclude Verizon’s rivals at a price tag of at least $39 billion paid with its chief competitor’s dollars, the announcement of a challenge should have resulted in a substantial loss for Verizon not one barely detectable beyond market trends. Excluding rivals and gaining market power with other people’s money is good work if you can get it.  If proponents of the exclusionary theory believe exclusion is worth $39 billion for AT&T and is the purpose of the merger, surely they also believe it is worth something quite significant to Verizon who would reap the benefits of exclusion and get it for free.

Unfortunately, AAI (through Brunell) ignores this point in a Letter to the Editor to the WSJ filed in response to Priest’s op-ed:

Mr. Priest ignores the fact that Sprint would be harmed if the merger enhanced AT&T’s (and Verizon’s) ability to exclude Sprint from the market (or raise its costs) through increased control over the best handsets, roaming and backhaul services that Sprint needs to compete effectively in the market, as Sprint alleges in its own lawsuit challenging the merger. Sprint also benefits, from the merger’s demise, as a potential acquirer of T-Mobile.

Mr. Priest also ignores the stock-price movement of Verizon, AT&T’s chief rival, which has no reason to fear exclusion from the market, and would be harmed the most if the merger made AT&T a more efficient competitor. In the two days following the merger announcement in March, Verizon’s stock price jumped 3.1% (compared to the S&P 500’s increase of only 1.1%), while in the two days after the Justice Department’s suit was announced, Verizon’s stock fell by 1.2% (compared to a .7% drop in the S&P 500). Verizon has not opposed the merger.

Event studies of stock-price movements are notoriously inconclusive. However, the data here are entirely consistent with investors’ expectation that the merger will result in less price and quality competition in the industry and higher costs for AT&T’s smaller rivals, all to the detriment of consumers.

If you are keeping score at home: Priest 1  –  AAI 0.  Once again, the exclusion theories don’t seem to hold up to these data.  On the other hand, the DOJ theories are embarrassingly confronted by the response of the rival’ stock price surging upon the announcement of a challenge.  For what its worth, I agree with Brunell that event studies are not dispositive of a merger’s likely effects — though query what data available to predict merger outcomes are?  But event studies and stock-price movements produce valuable information.  In this case, financial market responses cut against the the exclusionary theory favored by AAI and Sprint and the conventional DOJ theories.

Filed under: antitrust, doj, economics, exclusionary conduct, merger guidelines, mergers & acquisitions, telecommunications, wireless