More Misguided Derision from Critics of the Verizon-SpectrumCo Wireless Deal

Geoffrey Manne —  25 April 2012

The pending wireless spectrum deal between Verizon Wireless and a group of cable companies (the SpectrumCo deal, for short) continues to attract opprobrium from self-proclaimed consumer advocates and policy scolds.  In the latest salvo, Public Knowledge’s Harold Feld (and other critics of the deal) aren’t happy that Verizon seems to be working to appease the regulators by selling off some of its spectrum in an effort to secure approval for its deal.  Critics are surely correct that appeasement is what’s going on here—but why this merits their derision is unclear.

For starters, whatever the objections to the “divestiture,” the net effect is that Verizon will hold less spectrum than it would under the original terms of the deal and its competitors will hold more.  That this is precisely what Public Knowledge and other critics claim to want couldn’t be more clear—and thus neither is the hypocrisy of their criticism.

Note that “divestiture” is Feld’s term, and I think it’s apt, although he uses it derisively.  His derision seems to stem from his belief that it is a travesty that such a move could dare be undertaken by a party acting on its own instead of under direct diktat from the FCC (with Public Knowledge advising, of course).  Such a view—that condemns the private transfer of spectrum into the very hands Public Knowledge would most like to see holding it for the sake of securing approval for a deal that simultaneously improves Verizon’s spectrum position because it is better for the public to suffer (by Public Knowledge’s own standard) than for Verizon to benefit—seems to betray the organization’s decidedly non-public-interested motives.

But Feld amasses some more specific criticisms.  Each falls flat.

For starters, Feld claims that the spectrum licenses Verizon proposes to sell off (Lower (A and B block) 700 MHz band licenses) would just end up in AT&T’s hands—and that doesn’t further the scolds’ preferred vision of Utopia in which smaller providers end up with the spectrum (apparently “small” now includes T-Mobile and Sprint, presumably because they are fair-weather allies in this fight).  And why will the spectrum inevitably end up in AT&T’s hands?  Writes Feld:

AT&T just has too many advantages to reasonably expect someone else to get the licenses. For starters, AT&T has deeper pockets and can get more financing on better terms. But even more importantly, AT&T has a network plan based on the Lower 700 MHz A &B Block licenses it acquired in auction 2008 (and from Qualcomm more recently). It has towers, contracts for handsets, and everything else that would let it plug in Verizon’s licenses. Other providers would need to incur these expenses over and above the cost of winning the auction in the first place.

Allow me to summarize:  AT&T will win the licenses because it can make the most efficient, effective and timely use of the spectrum.  The horror!

Feld has in one paragraph seemingly undermined his whole case.  If approval of the deal turns on its effect on the public interest, stifling the deal in an explicit (and Quixotic) effort to ensure that the spectrum ends up in the hands of providers less capable of deploying it would seem manifestly to harm, not help, consumers.

And don’t forget that, whatever his preferred vision of the world, the most immediate effect of stopping the SpectrumCo deal will be that all of the spectrum that would have been transferred to—and deployed by—Verizon in the deal will instead remain in the hands of the cable companies where it now sits idly, helping no one relieve the spectrum crunch.

But let’s unpack the claims further.  First, a few factual matters.  AT&T holds no 700 MHz block A spectrum.  It bought block B spectrum in the 2008 auction and acquired spectrum in blocks D and E from Qualcomm.

Second, the claim that this spectrum is essentially worthless, especially  to any carrier except AT&T, is betrayed by reality.  First, despite the claimed interference problems from TV broadcasters for A block spectrum, carriers are in fact deploying on the A block and have obtained devices to facilitate doing so effectively.

Meanwhile, Verizon had already announced in November of last year that it planned to transfer 12 MHz of A block spectrum in Chicago to Leap (note for those keeping score at home: Leap is notAT&T) in exchange for other spectrum around the country, and Cox recently announced that it is selling its own A and B block 700 MHz licenses (yes, eight B block licenses would go to AT&T, but four A block licenses would go to US Cellular).

Pretty clearly these A and B block 700 MHz licenses have value, and not just to AT&T.

Feld does actually realize that his preferred course of action is harmful.  According to Feld, even though the transfer would increase spectrum holdings by companies that aren’t AT&T or Verizon, the fact that it might also facilitate the SpectrumCo deal and thus increase Verizon’s spectrum holdings is reason enough to object.  For Feld and other critics of the deal the concern is over concentrationin spectrum holdings, and thus Verizon’s proposed divestiture is insufficient because the net effect of the deal, even with the divestiture, would be to increase Verizon’s spectrum holdings.  Feld writes:

Verizon takes a giant leap forward in its spectrum holding and overall spectrum efficiency, whereas the competitors improve only marginally in absolute terms. Yes, compared to their current level of spectrum constraint, it would improve the ability of competitors [to compete] . . . [b]ut in absolute terms . . . the difference is so marginal it is not helpful.

Verizon has already said that they have no plans (assuming they get the AWS spectrum) to actually use the Lower MHz 700 A & B licenses, so selling those off does not reduce Verizon’s lead in the spectrum gap. So if we care about the spectrum gap, we need to take into account that this divestiture still does not alleviate the overall problem of spectrum concentration, even if it does improve spectrum efficiency.

But Feld is using a fantasy denominator to establish his concentration ratio.  The divestiture only increases concentration when compared to a hypothetical world in which self-proclaimed protectors of the public interest get to distribute spectrum according to their idealized notions of a preferred market structure.  But the relevant baseline for assessing the divestiture, even on Feld’s own concentration-centric terms, is the distribution of licenses under the deal without the divestiture—against which the divestiture manifestly reduces concentration, even if only “marginally.”

Moreover, critics commit the same inappropriate fantasizing when criticizing the SpectrumCo deal itself.  Again, even if Feld’s imaginary world would be preferable to the post-deal world (more on which below), that imaginary world simply isn’t on the table.  What is on the table if the deal falls through is the status quo—that is, the world in which Verizon is stuck with spectrum it is willing to sell and foreclosed from access to spectrum it wants to buy; US Cellular, AT&T and other carriers are left without access to Verizon’s lower-block 700 MHz spectrum; and the cable companies are saddled with spectrum they won’t use.

Perhaps, compared to this world, the deal does increase concentration.  More importantly, compared to this world the deal increases spectrum deployment.  Significantly.  But never mind:  The benefits of actual and immediate deployment of spectrum can never match up in the scolds’ minds to the speculative and theoretical harms from increased concentration, especially when judged against a hypothetical world that does not and will not ever exist.

But what is most appalling about critics’ efforts to withhold valuable spectrum from consumers for the sake of avoiding increased concentration is the reality that increased concentration doesn’t actually cause any harm.

In fact, it is simply inappropriate to assess the likely competitive effects of this or any other transaction in this industry by assessing concentration based on spectrum holdings.  Of key importance here is the reality that spectrum alone—though essential to effective competitiveness—is not enough to amass customers, let alone confer market power.  In this regard it is well worth noting that the very spectrum holdings at issue in the SpectrumCo deal, although significant in size, produce precisely zero market share for their current owners.

Even the FCC recognizes the weakness of reliance upon market structure as an indicator of market competitiveness in its most recent Wireless Competition Report, where the agency notes that highly concentrated markets may nevertheless be intensely competitive.

And the DOJ, in assessing “Economic Issues in Broadband Competition,” has likewise concluded both that these markets are likely to be concentrated and that such concentration does not raisecompetitive concerns.  In large-scale networks “with differentiated products subject to large economies of scale (relative to the size of the market), the Department does not expect to see a large number of suppliers.”  Rather, the DOJ cautions against “striving for broadband markets that look like textbook markets of perfect competition, with many price-taking firms.  That market structure is unsuitable for the provision of broadband services.”

Although commonly trotted out as a conclusion in support of monopolization, the fact that a market may be concentrated is simply not a reliable indicator of anticompetitive effect, and naked reliance on such conclusions is inconsistent with modern understandings of markets and competition.

As it happens, there is detailed evidence in the Fifteenth Wireless Competition Report on actual competitive dynamics; market share analysis is unlikely to provide any additional insight.  And the available evidence suggests that the tide toward concentration has resulted in considerable benefits and certainly doesn’t warrant a presumption of harm in the absence of compelling evidence to the contrary specific to this license transfer.  Instead, there is considerable evidence of rapidly falling prices, quality expansion, capital investment, and a host of other characteristics inconsistent with a monopoly assumption that might otherwise be erroneously inferred from a structural analysis like that employed by Feld and other critics.

In fact, as economists Gerald Faulhaber, Robert Hahn & Hal Singer point out, a simple plotting of cellular prices against market concentration shows a strong inverse relationship inconsistent with an inference of monopoly power from market shares:

Today’s wireless market is an arguably concentrated but remarkably competitive market.  Concentration of resources in the hands of the largest wireless providers has not slowed the growth of the market; rather the central problem is one of spectrum scarcity.  According to the Fifteenth Report, “mobile broadband growth is likely to outpace the ability of technology and network improvements to keep up by an estimated factor of three, leading to a spectrum deficit that is likely to approach 300 megahertz within the next five years.”

Feld and his friends can fret about the phantom problem of concentration all they like—it doesn’t change the reality that the real problem is the lack of available spectrum to meet consumer demand.  It’s bad enough that they are doing whatever they can to stop the SpectrumCo deal itself which would ensure that spectrum moves from the cable companies, where it sits unused, to Verizon, where it would be speedily deployed.  But when they contort themselves to criticize even the re-allocation of spectrum under the so-called divestiture, which would directly address the very issue they hold so dear, it is clear that these “protectors of consumer rights” are not really protecting consumers at all.

[Cross-posted at Forbes]

Geoffrey Manne

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3 responses to More Misguided Derision from Critics of the Verizon-SpectrumCo Wireless Deal

  1. 

    Harold: There are no doubt parts of your lengthy analysis that are correct and with which I agree. But the core point remains: Your concern for “competition” here is based on your assertion that concentration of spectrum holdings is a problem. But as I point out, there is no evidence to support this assertion, and the Conduct-Structure-Performance paradigm of which it is a piece is simply inconsistent with modern competition analysis. You are willing, quite explicitly, to trade solving the spectrum crunch for solving what you call the spectrum gap. But I don’t see that you’ve adequately defended that priority ordering.

    And I agree that you have clearly been more supportive of Verizon than of AT&T, but that isn’t saying much. At any rate, I wasn’t claiming that you derided Verizon per se, only that you derided this deal and the proposed “divestiture.” I don’t think that’s an unfair characterization. As I read your posts on this, you deride the divestiture as being purely political (and while Verizon hews to the claim that it is not about securing approval for the deal, that isn’t the issue — I don’t care what they say, and even if it is entirely about securing approval for the deal, they should still be applauded and not derided for doing what it takes to get the deal done), you deride Verizon’s claims that the to-be-divested spectrum is valuable, you deride their claims that the divestiture will address the concentration problems you are concerned about, and you deride the very idea that anything so “marginal” could possibly save us from the depredations of the underlying deal. This may add up to a veritable love-fest compared to your views on AT&T, but it still counts as derisive.

  2. 

    The invariable problem of writing long and complex analysis, such as my 5000+ word analysis of Verizon’s offer, is that it is rather easy for the hostile reader to miss the point, as appears to have happened here. My argument is fairly straightforward: do we care more about maintaining competition (which means competitors must have access to sufficient spectrum to stay in the game) or only about spectrum efficiency, in which case we don’t care if there are any competitors as long as overall spectrum efficiency improves in the deal. But without adequate competition, what forces AT&T and Verizon to pass on these efficiencies to customers? Especially in a market with serious concerns over coordinated effects, such as conscious parallelism?

    But i must take issue with your assertion that I am “derisive” about Verizon. To the contrary, as I have remarked before (including in my Insanely Long Field Guide to the Verizon/SpectrumCo merger), Verizon actually deploys stuff and has been pretty good about investing in their network. This is not, however, a morality tale. It is a defining moment in wireless telecom policy where we decide if we care about competition in the wireless industry or not. If we want to give up and go back to natural monopoly, we can do that as a matter of policy. But I prefer a more lightly regulated wireless industry, which means a structure that supports sufficient levels of competition.

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