Big Government Piece: DoJ Suit to Block AT&T Merger Blocks Consumers, Workers and Competition Instead

by Mike Wendy on September 16, 2011

Here’s a piece I wrote for Big Government, which appeared earlier this week in the publication:

DoJ Suit to Block AT&T Merger Blocks Consumers, Workers & Competition Instead

by Mike Wendy

As acting Department of Justice antitrust head, Sharis Pozen, said a couple of weeks ago, one of the DoJ’s main goals in working to block the AT&T / T-Mobile merger was to promote competition, not competitors.

But would its suit really accomplish that?

I wonder.

By attempting to stop the AT&T merger, the DoJ may actually work to impose a “tax hike” of sorts, one designed not to benefit consumers and workers through lower prices and more innovation, but one which would tamp down market dynamics, thus insulating competitors from increased competition instead.

Let me explain.

By most any measure, the wireless market is exceptionally vibrant and competitive.  Service offerings and technological innovation abound, as prices remain at or below the CPI.  In short, customers are getting a good deal for what they buy.

But companies are always on the lookout for “ruinous competition,” such that it forces prices downward, which in turn squeezes profits to uncomfortable levels.

AT&T rival, Sprint, seems particularly concerned about this.  With its profit margins about half of the industry leaders’ (though still healthy), the company has got an apparent bugaboo about the deleterious effects of increased competition.

In Sprint’s recent 10K filed with the SEC, the company warns shareholders:

…As competition among wireless communications providers has increased, we have created pricing plans that have resulted in declining average revenue per subscriber for voice and data services. Competition in pricing and service and product offerings may also adversely impact subscriber retention and our ability to attract new subscribers, with adverse effects on our results of operations. A decline in the average revenue per subscriber coupled with a decline in the number of subscribers would negatively impact our revenues, future cash flows, growth and overall profitability, which, in turn, could impact our ability to meet our financial obligations.

As to industry consolidation, Sprint’s filing cautions:

…Mergers or other business combinations involving our competitors and new entrants, including new wholesale relationships, beginning to offer wireless services may also continue to increase competition. These wireless operators may be able to offer subscribers network features or products and services not offered by us, coverage in areas not served by either of our wireless networks or pricing plans that are lower than those offered by us, all of which would negatively affect our average revenue per subscriber, subscriber churn, ability to attract new subscribers, and operating costs…

In Sprint’s view, increased competition means stiffer price competition.  And this challenges its viability.

Now, if AT&T couldn’t merge by virtue of the DoJ (or the FCC, or both agencies, for that matter), increased competition via industry consolidation would be forestalled.  And competitors like Sprint would rejoice.

Not surprisingly, Sprint has worked aggressively to block the merger, being at the forefront of the fight to stop the proposed union, and going so far as to file its own suit against the merger earlier this month

Avoiding increased competition sounds bad enough, but it gets even worse.

AT&T needs the merger to gain access to much needed, yet severely government-limited spectrum and infrastructure.  But, if the government blocks AT&T’s proposed acquisition of T-Mobile, industry observer, Jonathan Lee, notes a disturbing “unintended” consequence that could occur as a result:

The number one provider of wireless data service–AT&T–will be supply inelastic in most cities for the foreseeable future (no capability to acquire sufficient spectrum). This puts AT&T in a “shortage” situation, where it must set prices not to maximize profits, vis-à-vis costs, but to increase prices, and reduce output, in an effort to ration service consumption.

Once AT&T is forced to implement “congestion pricing”, it is logical to expect that Verizon, the number two wireless data provider, will adjust its own prices in order to preserve its network capacity in a spectrum-constrained market (it can’t acquire spectrum either).

Strangely (or not), Lee adds:

The only party that “wins” in this scenario is the firm with the largest excess capacity–Sprint–which through its and Clearwire’s holdings has more spectrum, and more capacity than anyone else in the market, including AT&T or Verizon.

What an odd outcome, especially considering how the DoJ said that the agency wanted to “preserve price competition” – meaning lower prices – for consumers.   Lee’s plausible surmise seems to point to the opposite effect, however.

This paradoxical result has been made more possible by the DoJ’s new shift in its antitrust analysis.

Instead of examining the dynamics of markets where consumers buy their goods and services, the agency now seems concerned only with a “national market,” virtually ignoring its past practice of looking at the effects of “[c]ompetitive conditions [that] vary considerably for consumers in different geographic locales.”

The DoJ’s new and “improved” analysis means throwing out all of the other providers in any given market – the majority of which have five or more wireless competitors.  Consequently, as the competitive focus gets narrower, any change to a smaller grouping of competitors looks more significant.

Translation: Though we purchase our services locally, which has vibrant “national,” “regional” and “local” competition, the DoJ’s new math prevents virtually any change in “national” players, thus protecting companies like Sprint from “increased competition” brought on by big “national” rivals.

Sadly, it would “protect” consumers and workers from increased competition, too.

What a time to change horses in mid-stream, however.  Unemployment hovers stubbornly at or above 9%.  Poverty levels, driven in large part by the lack of jobs, sit at a 17-year high.   And GDP “grows” at an anemic 1.5%.

Yet if the DoJ successfully blocks the merger, instead of increasing competition – which most think is a good thing for Americans – it will likely lead to less.

States AT&T in a recent Washington Post piece, stopping the merger will:

…[S]everely set back growth and competition in the wireless industry…Without this merger AT&T will continue to experience capacity constraints, millions of customers will be deprived of faster and higher quality service, and innovation and infrastructure will be stunted.

At a time when U.S. companies aren’t investing in America, AT&T says it’s ready to.  And then some.  It wants to repatriate 5,000 workers, and help foster more than 50,000 other new American jobs, spurred on by the merger’s new infrastructure investment.  But, with the DoJ suit aimed against the company, Washington appears embarked on another economy-killing blunder.

As one industry insider puts it:

This decision by the DOJ is an ill-conceived assault on innovation and progress in what may be the one shining segment of our bedraggled economy.

Insulating competitors from the rigors of competition is wrong.   American consumers and workers deserve more than this stealth “tax hike” on growth and innovation.

The DoJ should pull back on its suit against the merger.

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