May 4, 2011

May 4, 2011 | Commentary on Regulation

AT&T’s Play for T-Mobile Needs Only One Blessing: Commentary

AT&T Inc.’s acquisition of struggling wireless carrier T-Mobile USA Inc. recently took a major step forward: AT&T formally requested that the Federal Communications Commission approve the deal, arguing that it would unlock significant efficiencies without harming competition.

The deal makes perfect sense. Not so sensible is the process regulators will use to review the deal.

To say that the wireless industry is dynamic is like saying Tibet has a few hills. Barely two decades ago, cell phones were a novelty used by fewer than 10 million Americans. Today, they are ubiquitous. Prices have declined precipitously, with the consumer price index for wireless declining every year since 2001, according to the U.S. Bureau of Labor Statistics.

But the biggest change has been in the devices themselves. Wireless is no longer simply -- or even primarily -- used to talk. Increasingly, devices are used for data, with today’s smart phones providing everything from Internet access to GPS positioning.

The growth in such services has been phenomenal. AT&T reports its mobile data traffic has grown 8,000 percent from 2007 to 2010. And the growth is continuing. In the first six to seven weeks of 2015, AT&T expects to carry as much mobile traffic as it did in all of 2010.

Bandwidth Needed

All of this innovation takes resources to achieve. It isn’t just dollars that are needed -- although AT&T alone has invested $21 billion in its network since 2008 -- but megahertz.

Finding the spectrum to fuel this growth isn’t easy. That’s why AT&T set its sights on T-Mobile. The Deutsche Telekom AG subsidiary has long been struggling to keep up in the über- competitive wireless marketplace. Overall, it serves only about a tenth of the market, but more importantly, it has found it difficult to keep up with the most advanced services being developed.

Making things worse, in January, Deutsche Telekom announced it would no longer be able to provide financial support for its struggling unit.

The acquisition seems a no-brainer, providing T-Mobile customers with financial and technical resources they need, while supplying AT&T’s subscribers with access to spectrum and other assets.

Sign of Health

Of course, there are no guarantees. The business landscape -- especially that of the tech sector -- is littered with phantom synergies from mergers past that never materialized. (Can you say “AOL”?) But this lack of certainty provides no excuse for regulators to block the deal. Unpredictability is a sign of a healthy, innovative industry, not a flaw to be rooted out.

Rather than demand guarantees of marketplace success, the job of regulators should be simply to make sure that the marketplace itself is working. And in wireless, it’s working remarkably well; there’s every reason to believe it will continue to do so after the acquisition is completed.

Combined, the two firms serve about 43 percent of wireless subscribers, more than the 30 percent or so served by Verizon Communications Inc. The remainder is served by a variety of smaller players, led by Sprint Nextel Corp. It’s no surprise these market shares are higher than many other industries. This isn’t the dry-cleaning industry -- given the economies of scale, no one should expect, or want, atomistic competition with Mom- and-Pop providers on every corner. Still, many industries with two dominant players are famously competitive: think Coke vs. Pepsi and Boeing vs. Airbus.

Two Regulatory Reviews

More worrisome than the market structure resulting from this deal is the regulatory structure in place to review it. The acquisition, like others involving a transfer of FCC licenses, must undergo not one, but two separate reviews, one by antitrust authorities (in this case the Department of Justice), and a second by the FCC.

The difference? While Justice will evaluate the competitive implications of the deal, the FCC has a far broader and nebulous task: to determine whether the transaction is in the “public interest.”

This leaves the FCC virtually untethered in its review. Unlike the antitrust authorities, who follow well-established rules in evaluating the competitive effects of a merger, the FCC has no such constraints.

At best, the FCC’s review is redundant -- re-examining the competition issues examined by the competition authorities themselves. At worst, it allows the FCC to use the approval process as a lever to achieve other, often unrelated goals. Already there is talk of the agency conditioning its approval on a commitment by AT&T to abide by its net-neutrality rules, even if those rules are overturned in court.

Such dual, and unconstrained, review makes no economic sense, and it contradicts basic rule of law principles. In the regulatory marketplace, two is simply too many.

James Gattuso is senior research fellow in regulatory policy at The Heritage Foundation.

About the Author

James L. Gattuso Senior Research Fellow in Regulatory Policy
Thomas A. Roe Institute for Economic Policy Studies

First appeared in Bloomberg