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The debates over mobile spectrum aggregation and the auction rules for the FCC’s upcoming incentive auction — like all regulatory rent-seeking — can be farcical. One aspect of the debate in particular is worth highlighting, as it puts into stark relief the tendentiousness of self-interested companies making claims about the public interestedness of their preferred policies: The debate over how and whether to limit the buying and aggregating of lower frequency (in this case 600 MHz) spectrum.

A little technical background is in order. At its most basic, a signal carried in higher frequency spectrum doesn’t travel as well as a signal carried in lower frequency spectrum. The higher the frequency, the closer together cell towers need to be to maintain a good signal.

600MHz is relatively low frequency for wireless communications. In rural areas it is helpful in reducing infrastructure costs for wide area coverage because cell towers can be placed further apart and thus fewer towers must be built. But in cities, population density trumps frequency, and propagation range is essentially irrelevant for infrastructure costs. In other words, it doesn’t matter how far your signal will travel if congestion alleviation demands you build cell towers closer together than even the highest frequency spectrum requires anyway. The optimal — nay, the largest usable — cell radius in urban and suburban areas is considerably smaller than the sort of cell radius that low frequency spectrum allows for.

It is important to note, of course, that signal distance isn’t the only propagation characteristic imparting value to lower frequency spectrum; in particular, it is also valuable even in densely populated settings for its ability to travel through building walls. That said, however, the primary arguments made in favor of spreading the 600 MHz wealth — of effectively subsidizing its purchase by smaller carriers — are rooted in its value in offering more efficient coverage in less-populated areas. Thus the FCC has noted that while there may be significant infrastructure cost savings associated with deploying lower frequency networks in rural areas, this lower frequency spectrum provides little cost advantage in urban or suburban areas (even though, as noted, it has building-penetrating value there).

It is primarily because of these possible rural network cost advantages that certain entities (the Department of Justice, Free Press, the Competitive Carriers Association, e.g.) have proposed that AT&T and Verizon (both of whom have significant lower frequency spectrum holdings) should be restricted from winning “too much” spectrum in the FCC’s upcoming 600 MHz incentive auctions. The argument goes that, in order to ensure national competition — that is, to give other companies financial incentive to build out their networks into rural areas — the auction should be structured to favor Sprint and T-Mobile (both of whose spectrum holdings are mostly in the upper frequency bands) as awardees of this low-frequency spectrum, at commensurately lower cost.

Shockingly, T-Mobile and Sprint are on board with this plan.

So, to recap: 600MHz spectrum confers cost savings when used in rural areas. It has much less effect on infrastructure costs in urban and suburban areas. T-Mobile and Sprint don’t have much of it; AT&T and Verizon have lots. If we want T-Mobile and Sprint to create the competing national networks that the government seems dead set on engineering, we need to put a thumb on the scale in the 600MHz auctions. So they can compete in rural areas. Because that’s where 600MHz spectrum offers cost advantages. In rural areas.

So what does T-Mobile plan to do if it wins the spectrum lottery? Certainly not build in rural areas. As Craig Moffett notes, currently “T-Mobile’s U.S. network is fast…but coverage is not its strong suit, particularly outside of metro areas.” And for the future? T-mobile’s breakneck LTE coverage ramp up since the failed merger with AT&T is expected to top out at 225 million people, or the 71% of consumers living in the most-populated areas (it’s currently somewhere over 200 million). “Although sticking to a smaller network, T-Mobile plans to keep increasing the depth of its LTE coverage” (emphasis added). Depth. That means more bandwidth in high-density areas. It does not mean broader coverage. Obviously.

Sprint, meanwhile, is devoting all of its resources to playing LTE catch-up in the most-populated areas; it isn’t going to waste valuable spectrum resources on expanded rural build out anytime soon.

The kicker is that T-Mobile relies on AT&T’s network to provide its urban and suburban customers with coverage (3G) when they do roam into rural areas, taking advantage of a merger break-up provision that gives it roaming access to AT&T’s 3G network. In other words, T-Mobile’s national network is truly “national” only insofar as it piggybacks on AT&T’s broader coverage. And because AT&T will get the blame for congestion when T-Mobile’s customers roam onto its network, the cost to T-Mobile of hamstringing AT&T’s network is low.

The upshot is that T-Mobile seems not to need, nor does it intend to deploy, lower frequency spectrum to build out its network in less-populated areas. Defenders say that rigging the auction rules to benefit T-Mobile and Sprint will allow them to build out in rural areas to compete with AT&T’s and Verizon’s broader networks. But this is a red herring. They may get the spectrum, but they won’t use it to extend their coverage in rural areas; they’ll use it to add “depth” to their overloaded urban and suburban networks.

But for AT&T the need for additional spectrum is made more acute by the roaming deal, which requires it to serve its own customers and those of T-Mobile.

This makes clear the reason underlying T‑Mobile’s advocacy for rigging the 600 MHz auction – it is simply so that T‑Mobile can acquire this spectrum on the cheap to use in urban and suburban areas, not so that it can deploy a wide rural network. And the beauty of it is that by hamstringing AT&T’s ability to acquire this spectrum, it becomes more expensive for AT&T to serve T‑Mobile’s own customers!

Two birds, one stone: lower your costs, raise your competitor’s costs.

The lesson is this: If we want 600 MHz spectrum to be used efficiently to provide rural LTE service, we should assume that the highest bidder will make the most valuable use of the spectrum. The experience of the relatively unrestricted 700 MHz auction in 2008 confirms this. The purchase of 700 MHz spectrum by AT&T and Verizon led to the US becoming the world leader in LTE. Why mess with success?

[Cross-posted at RedState]

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]

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 15th 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. Continue Reading…

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.

Tomorrow, along with a great group of antitrust attorneys, I am going to pick up where I left off in that post during a roundtable discussion hosted by the American Bar Association.  If you are in the DC area you should attend in person, or you can call in to listen to the discussion–but either way, you will need to register here.  There should be a couple of people live tweeting the event, so keep up with the conversation by following #ABASAL.

Panelists:
Richard Brunell, Director of Legal Advocacy, American Antitrust Institute, Boston
Allen Grunes, Partner, Brownstein Hyatt Farber Schreck, Washington
Glenn Manishin, Partner, Duane Morris LLP, Washington
Geoffrey Manne, Lecturer in Law, Lewis & Clark Law School, Portland
Patrick Pascarella, Partner, Tucker Ellis & West, Cleveland

Location: 
Wilson Sonsini Goodrich & Rosati, P.C. 1700 K St. N.W. Fifth Floor Washington, D.C. 20006

For more information, check out the flyer here.

[Cross-posted at Tech Liberation Front]

Milton Mueller responded to my post Wednesday on the DOJ’s decision to halt the AT&T/T-Mobile merger by asserting that there was no evidence the merger would lead to “anything innovative and progressive” and claiming “[t]he spectrum argument fell apart months ago, as factual inquiries revealed that AT&T had more spectrum than Verizon and the mistakenly posted lawyer’s letter revealed that it would be much less expensive to expand its capacity than to acquire T-Mobile.”  With respect to Milton, I think he’s been suckered by the “big is bad” crowd at Public Knowledge and Free Press.  But he’s hardly alone and these claims — claims that may well have under-girded the DOJ’s decision to step in to some extent — merit thorough refutation.

To begin with, LTE is “progress” and “innovation” over 3G and other quasi-4G technologies.  AT&T is attempting to make an enormous (and risky) investment in deploying LTE technology reliably and to almost everyone in the US–something T-Mobile certainly couldn’t do on its own and something AT&T would have been able to do only partially and over a longer time horizon and, presumably, at greater expense.  Such investments are exactly the things that spur innovation across the ecosystem in the first place.  No doubt AT&T’s success here would help drive the next big thing–just as quashing it will make the next big thing merely the next medium-sized thing.

The “Spectrum Argument”

The spectrum argument that Milton claims “fell apart months ago” is the real story here, the real driver of this merger, and the reason why the DOJ’s action yesterday is, indeed, a blow to progress.  That argument, unfortunately, still stands firm.  Even more, the irony is that to a significant extent the spectrum shortfall is a product of the government’s own making–through mismanagement of spectrum by the FCC, political dithering by Congress, and local government intransigence on tower siting and co-location–and the notion of the government now intervening here to “fix” one of the most significant private efforts to make progress despite these government impediments is really troubling.

Anyway, here’s what we know about spectrum:  There isn’t enough of it in large enough blocks and in bands suitable for broadband deployment using available technology to fully satisfy current–let alone future–demand.

Two incredibly detailed government sources for this conclusion are the FCC’s 15th Annual Wireless Competition Report and the National Broadband Plan.  Here’s FCC Chairman Julius Genachowski summarizing the current state of affairs (pdf):

The point deserves emphasis:  the clock is ticking on our mobile future. The FCC is an expert agency staffed with first-rate employees who have been working on spectrum allocation for decades – and let me tell you what the career engineers are telling me. Demand for spectrum is rapidly outstripping supply. The networks we have today won’t be able to handle consumer and business needs.

* * *

To avoid this crisis, the National Broadband Plan recommended reallocating 500 megahertz of spectrum for broadband, nearly double the amount that is currently available.

* * *

First, there are some who say that the spectrum crunch is greatly exaggerated – indeed, that there is no crunch coming. They also suggest that there are large blocks of spectrum just lying around – and that some licensees, such as cable and wireless companies, are just sitting on top of, or “hoarding,” unused spectrum that could readily solve that problem. That’s just not true.

* * *

The looming spectrum shortage is real – and it is the alleged hoarding that is illusory.

It is not hoarding if a company paid millions or billions of dollars for spectrum at auction and is complying with the FCC’s build-out rules. There is no evidence of non-compliance. . . . [T]he spectrum crunch will not be solved by the build-out of already allocated spectrum.

All of the evidence suggests that spectrum suitable for mobile broadband is scarce and growing scarcer.  Full stop.

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 (and its investors and stockholders).  You’d think AT&T would be delighted to hear this news–what we really need is a shareholder resolution to put Gigi Sohn on the board!

But seriously, put yourself in AT&T’s shoes for a moment.  Its long-term plans require the company to deploy significantly more spectrum than it currently holds in a reasonable time horizon (evengranting Milton’s dubious premise that the company is squatting on scads of unused spectrum–remember that even if AT&T had all the spectrum sitting in its proverbial bank vault it would still be just about a third of the total amount of spectrum we’re predicted to need in just a few years).  Considering the various impediments of net neutrality regulation, congressional politics, presidential politics (think this had anything to do with claims about job losses from the merger, by chance?), reluctant broadcasters, the FCC, state PUCs, environmental groups and probably 10-12 others . . . the chances of being able to obtain the necessary spectrum and cell tower sitings in any other reasonable fashion were perhaps appropriately deemed . . . slim.

With the T-Mobile deal, on the other hand, “AT&T will gain cell sites equivalent to what would have taken on average five years to build without the transaction, and double that in some markets. AT&T’s network density will increase by approximately 30 percent in some of its most populated areas.” (Source).  I just don’t see how this jibes with the claim that the spectrum argument has fallen apart.

But there is a larger, “meta” point to make here, and it’s one that policy scolds and government regulators too often forget.  Even if none of that were true, as long as we don’t know for sure what is optimal and do know the DOJ is both a political organization made up of human beings operating not only under said ignorance but with incentives that don’t necessarily translate into “maximize social welfare” and also devoid of any actual “skin in the game,” I think the basic, simple, time-tested, logical and self-evident error cost principle counsels pretty firmly against intervention.  Humility, not hubris should rule the roost.

And that’s especially true since you know what will happen if the DOJ (or the FCC) succeeds in preventing AT&T from buying T-Mobile?  T-Mobile will still disappear and we’ll still be left with (according to the DOJ’s analysis) the terrifying prospect of only 3 national wireless telecom providers.  Only, in that case, everyone’s going to think a lot harder about investing in future developments that might warrant integration or cooperation or . . . well, the DOJ will challenge anything, so add to the list patent pools, too much success, not enough sharing, etc., etc.  And you wonder why I think this might constitute an assault on innovation?

Now, as for Milton’s specific claims, reminiscent of Public Knowledge’s and Free Press’ talking points, let me quote AT&T’s Public Interest Statement discussing its own particular spectrum holdings:

Because of the high demand for broadband service, AT&T already has had to deploy four carriers (for a total of 40 MHz of spectrum) for UMTS [3G] in some areas—and it will need to deploy more in the near future, even if doing so squeezes its GSM spectrum allocation and compromises GSM service quality . . . .  AT&T expects that, given the relative infancy of the LTE ecosystem and the time needed to migrate subscribers, it will need to continue to allocate spectrum to UMTS services for a substantial number of years—indeed, even longer than AT&T needs to continue allocating spectrum for GSM services.

* * *

AT&T has begun deployment of LTE services using its AWS and 700 MHz spectrum and currently plans to cover more than 250 million people by the end of 2013

* * *

AT&T projects it will need to use its 850 MHz and 1900 MHz spectrum holdings to support GSM and UMTS services for a number of years and, in the meantime, will not be able to re-deploy them for more spectrally efficient LTE services.

* * *

AT&T’s existing WCS spectrum holdings cannot be used for this purpose either, because the technical rules for the WCS band, such as limits on the power spectral density limits, make it infeasible to use that band for broadband service.

In other words, I don’t think AT&T has been (nor could it be, given the FCC’s detailed knowledge on the subject) hiding its spectrum holdings.  Instead, the company has been making quite clear that the spectrum it has is simply insufficient to meet anticipated demand.  And, well, duh!  Anyone who uses AT&T knows its network is overloaded.  Some of that’s because of tower-siting issues, some because it simply didn’t anticipate the extent of demand it would face.  I heard somewhere that no matter how hard they try to account for their perpetual under-accounting, every estimate by every mobile provider of anticipated spectrum needs in the past two decades or so has fallen short.  I’m quite sure that AT&T didn’t anticipate in 2007 that spectrum usage would increase by 8000% (yes, that’s thousand) by 2010.

Moreover, there will always (in any sensible system) be excess capacity at times–as it happens, at (conveniently) the times when spectrum usage is often counted–in order to deal with peak loads.  It is no more sensible to deploy capacity sufficient to handle the maximum load 100% of the time than it is to deploy capacity to handle only the minimum load 100% of the time.  Does that mean the often-unused spectrum is “excess”?  Clearly not.

Moreover (again), not all spectrum is in contiguous blocks sufficient to deploy LTE.  AT&T (at least) claims that is the case with much of its existing spectrum.  Spectrum isn’t simply fungible, and un-nuanced claims that “AT&T has X megahertz of spectrum and it is plenty” are just meaningless.  Again, just because Free Press says otherwise does not make it so.  You can simply discount AT&T’s claims if you like–I’m sure it’s possible they’re just lying; but you should probably be careful whose “information” you believe instead.

But, no, Milton, the spectrum argument did not “fall apart months ago.”  Gigi Sohn, Harold Feld and Sprint just said it did.  There’s a difference.

“Letter-Gate”

As for the infamous letter alleged to show that AT&T could expand LTE service from its previously-planned 80% of the country to the 97% it promises if the merger goes through for significantly less than it would cost to buy T-Mobile:  I don’t know exactly what its import is—but no one outside AT&T and, maybe, the FCC really does, either.  But I think a little sensible skepticism is in order.

First, for those who haven’t read it, the letter says, in relevant part:

The purpose of the meeting was to discuss AT&T’s current LTE deployment plans to reach 80 percent of the U.S. population by the end of 2013…; the estimated [Begin Confidential Information] $3.8 billion [End Confidential Information] in additional capital expenditures to expand LTE coverage from 80 to 97 percent of the U.S. population; and AT&T’s commitment to expand LTE to over 97 percent of the U.S. population as a result of this transaction.

That part, “$3.8 billion,” between the words “Begin Confidential Information” and “End Confidential Information” was supposed to be redacted, but apparently wasn’t when the letter was first posted to the FCC’s website.

While Public Knowledge and other critics of the deal would have you believe that this proves AT&T could roll-out nationwide LTE service for 1/10 of the cost of the T-Mobile deal, it’s basically impossible to tell what this number really means–except it certainly doesn’t mean that.

Claims about its meaning are actually largely content-less; nothing I’ve seen asks (or can possibly answer) whether the number in the letter was full cost, partial cost, annualized cost, based off of what baseline, etc., etc.  Moreover, unless I’m mistaken, nothing in the letter said anything at all about $3.8 billion being used to relieve congestion, meet future demand, increase speeds, reduce latency, expand coverage in urban areas, etc.  It seems to me that it’s referring to “additional” (additional to what?) capital expense to build infrastructure to make it even possible to offer LTE coverage to 97% of the U.S. population following the merger.  AT&T has from the outset said (bragged, more like it, because it’s supposed to bring lots of jobs and that’s what the politicians care about) that it planned to spend an “additional” $8 billion–additional to the $39 billion required to buy T-Mobile, that is–to build out its infrastructure as part of the deal.  But neither this letter nor any of AT&T’s statements (nor anyone with any familiarity with the relevant facts) has ever said it could or would have full-speed, LTE service available and up and running to 97% of the country for $3.8 billion or even $8 billion–or even merely $39 billion.  In fact, AT&T seemed to be saying that it was going to cost at least $47 billion to make that happen (and I can assure you that doesn’t begin to account for all the costs associated with integrating T-Mobile with AT&T once the $39 billion is out the door).

As I’ve alluded to above, deploying LTE service to rural areas is probably not as important for AT&T as increasing its network’s capacity in urban areas. The T-Mobile deal allows AT&T to alleviate the congestion problems experienced by its existing customers in urban areas more quickly than any other option–and because T-Mobile’s network is already up and running, that’s still true even if the federal government was somehow able to make tons of spectrum immediately available.  Moreover, with respect to the $3.8 billion, as I’ve discussed at length above, without T-Mobile’s–or someone’s!–additional spectrum and the miraculous removal of local government impediments to tower construction, pretty much no amount of money would enable AT&T to actually deliver LTE service to 97% of the country.  Is that what it would cost to build the extra pieces of hardware necessary to support such an offering?  That sounds plausible.  But actually deliver it? Hardly.

And just to play this out, let’s say the letter did mean just that — that AT&T could deliver real, fine LTE service to 97% of the country for a mere $3.8 billion direct, marginal outlay, even without T-Mobile.  It is still the case that none of us outsiders knows what such a claim would assume about where the necessary spectrum would come from and what, absent the merger, the effect would be on existing 3G coverage, congestion, pricing, etc., and what the expected ROI for such a project would be.  Elsewhere in the letter its author states that AT&T considered whether making this investment (without the T-Mobile merger) was prudent, and repeatedly rejected it.  In other words, all those armchair CEOs are organizing AT&T’s business and spending its money without the foggiest clue as to what the real consequences would be of doing so–and then claiming that, although, unlike them, actually in possession of the data relevant to such an assessment, AT&T must be lying, and could only justify spending $39 billion to buy T-Mobile as a means of securing its monopoly power.

And I think it’s important to gut check that claim, as well, as it’s what critics claim to fear (The Ma Bell from the Black Lagoon).  Unpacked, it goes something like this:

Given that:

  1.  AT&T is going to spend $39 billion to buy T-Mobile;
  2. It is going to spend $8 billion to build additional infrastructure;
  3. Having bought T-Mobile, it is going to incur some ungodly amount of expense integrating T-Mobile’s assets and employees with its own;
  4. It is going to incur huge, ongoing additional costs to govern a now-larger, more-complex organization;
  5. It is going to continue to be regulated by the FCC and watched carefully by the DOJ and its unofficial consumer watchdog minions;
  6. It will continue to face competition from its current largest and second-largest competitor;
  7. It will continue to face entry threats from the likes of Dish and Lightsquared;
  8. It will continue to face competition from fixed broadband offered by the likes of Comcast and Time Warner;
  9. It will do all this quite publicly, under the watchful eyes of Congress and its union to whom it has made all manner of politically-expedient promises;

 Then it follows that:

  1. Although it can’t muster the gumption to risk $3.8 billion to legitimately (it is claimed) extend full LTE coverage to 97% of the U.S. population, it nevertheless thinks it’s a sure bet that it will be able to recoup all of these expenditures, in this competitive and regulatory environment, by virtue of having thus taken out not its largest, not even its second-largest, but its smallest “national” competitor, and thereby having converted itself into an unfettered monopolist. QED.

The mind boggles.

So.  Back to Milton and his suggestion that I was wrong to claim that the DOJ’s action here is a threat to innovation and progress and his assertion that AT&T’s claims surrounding the benefits of the transaction fail to stand up to scrutiny:  C’mon, Miltons of the world!  Where’s your normally healthy skepticism?  I know you don’t like big infrastructure providers.  I know you’re angry your iPhone isn’t as functional as it is beautiful.  I know capitalists are only slightly more trustworthy than regulators (or is it the other way around?).  But why give in so credulously to the claims of the professional critics?  Isn’t it more likely that the deal’s critics are just blowing smoke here because they don’t like any consolidation?  It doesn’t take much research to understand (to the extent anyone can understand something so complex) the current state of the U.S. broadband market and its discontents–and why something like this merger is a plausible response.  And you don’t have to like, trust, or even stand the sight of any business executive to know that, however stupid or evil, he is still constrained by powerful market forces beyond his ken.  And “Letter-Gate” is just another pseudo-scandal contrived to suit an agenda of aggressive government meddling.

We all ought to be more wary of such claims, less quick to join anyone in condemning big as bad, and far less quick to, implicitly or explicitly, substitute the known depredations of the government for the possible ones of the market without a hell of a lot better evidence to do so.

As Josh noted, the DOJ filed a complaint today to block the merger.  I’m sure we’ll have much, much more to say on the topic, but here are a few things that jump out at me from perusing the complaint:

  • The DOJ distinguishes between the business (“Enterprise”) market and the consumer market.  This is actually a good play on their part, on the one hand, because it is more sensible to claim a national market for business customers who may be purchasing plans for widely-geographically-dispersed employees.  I would question how common this actually is, however, given that, I’m sure, most businesses that buy group cell plans are not IBM but are instead pretty small and pretty local, but still, it’s a good ploy.
  • But it has one significant problem:  The DOJ also seems to be stressing a coordinated effects story, making T-Mobile out to be a disruptive maverick disciplining the bigger carriers.  But–and this is, of course an empirical matter I will have to look in to–I highly doubt that T-Mobile plays anything like this role in the Enterprise market, at least for those enterprises that fit the DOJ’s overly-broad description.  In fact, the DOJ admits as much in para. 43 of its Complaint.  Of course, the DOJ claims this was all about to change, but that’s not a very convincing story coupled with the fact that DT, T-Mobile’s parent, was reducing its investment in the company anyway.  The reality is that Enterprise was not a key part of T-Mobile’s business model–if it occupied any cognizable part of it at all– and it can hardly be considered a maverick in a market in which it doesn’t actually operate.
  • On coordinated effects, I think the claim that T-Mobile is a maverick is pretty easily refuted, and not only in the Enterprise realm.  As Josh has pointed out in his Congressional testimony, a maverick is a term of art in antitrust, and it’s just not enough that a firm may be offering products at a lower price–there is nothing “maverick-y” about a firm that offers a different, less valuable product at a lower price.  I have seen no evidence to suggest that T-Mobile offered the kind of pricing constraint on AT&T that would be required to make it out to be a maverick.
  • Meanwhile, I know this is just a complaint and even post-Twombly pleading standards are lower than standards of proof, but the DOJ does seem t make a lot out of its HHI numbers.  In part this is a function of its adoption of a national relevant geographic market.  But (as noted above even for most Enterprise customers) this is just absurd.  As the FCC itself has noted, consumers buy cell service where they “live, work and travel.”  For most everyone, this is local.
  • Meanwhile, even on a national level, the blithe dismissal of a whole range of competitors is untenable.  MetroPCS, Cell South and many other companies have broad regional coverage (MetroPCS even has next-gen LTE service in something like 17 cities) and roaming agreements with each other and with the larger carriers that give them national coverage.  Why they should be excluded from consideration is baffling.  Moreover, Dish has just announced plans to build a national 4G network (take that, DOJ claim that entry is just impossible here!).  And perhaps most important the real competition here is not for mobile telephone service.  The merger is about broadband.  Mobile is one way of getting broadband.  So is cable and DSL and WiMax, etc.  That market includes such insignificant competitors as Time Warner, Comcast and Cox.  Calling this a 4 to 3 merger strains credulity, particularly under the new merger guidelines.
  • Moreover, the DOJ already said as much!  In its letter to the FCC on the FCC’s National Broadband Plan the DOJ says:

Ultimately what matters for any given consumer is the set of broadband offerings available to that consumer, including their technical characteristics and the commercial terms and conditions on which they are offered.  Competitive conditions vary considerably for consumers in different geographic locales.

  • The DOJ also said this, in the same letter:

[W]ith 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 the FCC agains] 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.

Quite the different tune, now that it’s the DOJ’s turn to spring into action rather than simply admonish the antitrust activities of a sister agency!

I’m sure there is lots more, but I must say I’m really surprised and disappointed by this filing.  Effective, efficient provision of mobile broadband service is a complicated business.  It is severely hampered by constraints of the government’s own doing — both in terms of the government’s failure to make available spectrum to enable companies to build out large-scale broadband networks, and in local governments’ continued intransigence in permitting new cell towers and even co-location of cell sites on existing towers that would relieve some of the infuriating congestion we now experience.

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.

BY LARRY DOWNES AND GEOFFREY A. MANNE

The FCC published in June its annual report on the state of competition in the mobile services marketplace. Under ordinary circumstances, this 300-plus page tome would sit quietly on the shelf, since, like last year’s report, it ‘‘makes no formal finding as to whether there is, or is not, effective competition in the industry.’’

But these are not ordinary circumstances. Thanks to innovations including new smartphones and tablet computers, application (app) stores and the mania for games such as ‘‘Angry Birds,’’ the mobile industry is perhaps the only sector of the economy where consumer demand is growing explosively.

Meanwhile, the pending merger between AT&T and T-Mobile USA, valued at more than $39 billion, has the potential to accelerate development of the mobile ecosystem. All eyes, including many in Congress, are on the FCC and the Department of Justice. Their review of the deal could take the rest of the year. So the FCC’s refusal to make a definitive finding on the competitive state of the industry has left analysts poring through the report, reading the tea leaves for clues as to how the FCC will evaluate the proposed merger.

Make no mistake: this is some seriously expensive tea. If the deal is rejected, AT&T is reported to have agreed to pay T-Mobile $3 billion in cash for its troubles. Some competitors, notably Sprint, have declared full-scale war, marshaling an army of interest groups and friendly journalists.

But the deal makes good economic sense for consumers. Most important, T-Mobile’s spectrum assets will allow AT&T to roll out a second national 4G LTE (longterm evolution) network to compete with Verizon’s, and expand service to rural customers. (Currently, only 38 percent of rural customers have three or more choices for mobile broadband.)

More to the point, the government has no legal basis for turning down the deal based on its antitrust review. Under the law, the FCC must approve AT&T’s bid to buy T-Mobile USA unless the agency can prove the transaction is not ‘‘in the public interest.’’ While the FCC’s public interest standard is famously undefined, the agency typically balances the benefits of the deal against potential harm to consumers. If the benefits outweigh the harms, the Commission must approve.

The benefits are there, and the harms are few. Though the FCC refuses to acknowledge it explicitly, the report’s impressive detail amply supports what everyone already knows: falling prices, improved quality, dynamic competition and unflagging innovation have led to a golden age of mobile services. Indeed, the three main themes of the report all support AT&T’s contention that competition will thrive and the public’s interests will be well served by combining with T-Mobile.

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