T-Mobile Sprints to the Finish Line: States Demand a Do-Over

Eric Fruits —  26 July 2019 — 1 Comment

The Department of Justice announced it has approved the $26 billion T-Mobile/Sprint merger. Once completed, the deal will create a mobile carrier with around 136 million customers in the U.S., putting it just behind Verizon (158 million) and AT&T (156 million).

While all the relevant federal government agencies have now approved the merger, it still faces a legal challenge from state attorneys general. At the very least, this challenge is likely to delay the merger; if successful, it could scupper it. In this blog post, we evaluate the state AG’s claims (and find them wanting).

Four firms good, three firms bad?

The state AG’s opposition to the T-Mobile/Sprint merger is based on a claim that a competitive mobile market requires four national providers, as articulated in their redacted complaint:

The Big Four MNOs [mobile network operators] compete on many dimensions, including price, network quality, network coverage, and features. The aggressive competition between them has resulted in falling prices and improved quality. The competition that currently takes place across those dimensions, and others, among the Big Four MNOs would be negatively impacted if the Merger were consummated. The effects of the harm to competition on consumers will be significant because the Big Four MNOs have wireless service revenues of more than $160 billion.

. . . 

Market consolidation from four to three MNOs would also serve to increase the possibility of tacit collusion in the markets for retail mobile wireless telecommunications services.

But there are no economic grounds for the assertion that a four firm industry is on a competitive tipping point. Four is an arbitrary number, offered up in order to squelch any further concentration in the industry.

A proper assessment of this transaction—as well as any other telecom merger—requires accounting for the specific characteristics of the markets affected by the merger. The accounting would include, most importantly, the dynamic, fast-moving nature of competition and the key role played by high fixed costs of production and economies of scale. This is especially important given the expectation that the merger will facilitate the launch of a competitive, national 5G network.

Opponents claim this merger takes us from four to three national carriers. But Sprint was never a serious participant in the launch of 5G. Thus, in terms of future investment in general, and the roll-out of 5G in particular, a better characterization is that it this deal takes the U.S. from two to three national carriers investing to build out next-generation networks.

In the past, the capital expenditures made by AT&T and Verizon have dwarfed those of T-Mobile and Sprint. But a combined T-Mobile/Sprint would be in a far better position to make the kinds of large-scale investments necessary to develop a nationwide 5G network. As a result, it is likely that both the urban-rural digital divide and the rich-poor digital divide will decline following the merger. And this investment will drive competition with AT&T and Verizon, leading to innovation, improving service and–over time–lowering the cost of access.

Is prepaid a separate market?

The state AGs complain that the merger would disproportionately affect consumers of prepaid plans, which they claim constitutes a separate product market:

There are differences between prepaid and postpaid service, the most notable being that individuals who cannot pass a credit check and/or who do not have a history of bill payment with a MNO may not be eligible for postpaid service. Accordingly, it is informative to look at prepaid mobile wireless telecommunications services as a separate segment of the market for mobile wireless telecommunications services.

Claims that prepaid services constitute a separate market are questionable, at best. While at one time there might have been a fairly distinct divide between pre and postpaid markets, today the line between them is at least blurry, and may not even be a meaningful divide at all.

To begin with, the arguments regarding any expected monopolization in the prepaid market appear to assume that the postpaid market imposes no competitive constraint on the prepaid market. 

But that can’t literally be true. At the very least, postpaid plans put a ceiling on prepaid prices for many prepaid users. To be sure, there are some prepaid consumers who don’t have the credit history required to participate in the postpaid market at all. But these are inframarginal consumers, and they will benefit from the extent of competition at the margins unless operators can effectively price discriminate in ways they have not in the past, and which has not been demonstrated is possible or likely.

One source of this competition will come from Dish, which has been a vocal critic of the T-Mobile/Sprint merger. Under the deal with DOJ, T-Mobile and Sprint must spin-off Sprint’s prepaid businesses to Dish. The divested products include Boost Mobile, Virgin Mobile, and Sprint prepaid. Moreover the deal requires Dish be allowed to use T-Mobile’s network during a seven-year transition period. 

Will the merger harm low-income consumers?

While the states’ complaint alleges that low-income consumers will suffer, it pays little attention to the so-called “digital divide” separating urban and rural consumers. This seems curious given the attention it was given in submissions to the federal agencies. For example, the Communication Workers of America opined:

the data in the Applicants’ Public Interest Statement demonstrates that even six years after a T-Mobile/Sprint merger, “most of New T-Mobile’s rural customers would be forced to settle for a service that has significantly lower performance than the urban and suburban parts of the network.” The “digital divide” is likely to worsen, not improve, post-merger.

This is merely an assertion, and a misleading assertion. To the extent the “digital divide” would grow following the merger, it would be because urban access will improve more rapidly than rural access would improve. 

Indeed, there is no real suggestion that the merger will impede rural access relative to a world in which T-Mobile and Sprint do not merge. 

And yet, in the absence of a merger, Sprint would be less able to utilize its own spectrum in rural areas than would the merged T-Mobile/Sprint, because utilization of that spectrum would require substantial investment in new infrastructure and additional, different spectrum. And much of that infrastructure and spectrum is already owned by T-Mobile. 

It likely that the combined T-Mobile/Sprint will make that investment, given the cost savings that are expected to be realized through the merger. So, while it might be true that urban customers will benefit more from the merger, rural customers will also benefit. It is impossible to know, of course, by exactly how much each group will benefit. But, prima facie, the prospect of improvement in rural access seems a strong argument in favor of the merger from a public interest standpoint.

The merger is also likely to reduce another digital divide: that between wealthier and poorer consumers in more urban areas. The proportion of U.S. households with access to the Internet has for several years been rising faster among those with lower incomes than those with higher incomes, thereby narrowing this divide. Since 2011, access by households earning $25,000 or less has risen from 52% to 62%, while access among the U.S. population as a whole has risen only from 72% to 78%. In part, this has likely resulted from increased mobile access (a greater proportion of Americans now access the Internet from mobile devices than from laptops), which in turn is the result of widely available, low-cost smartphones and the declining cost of mobile data.

Concluding remarks

By enabling the creation of a true, third national mobile (phone and data) network, the merger will almost certainly drive competition and innovation that will lead to better services at lower prices, thereby expanding access for all and, if current trends hold, especially those on lower incomes. Beyond its effect on the “digital divide” per se, the merger is likely to have broadly positive effects on access more generally.

Eric Fruits

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Eric Fruits, Ph.D. is Chief Economist at the International Center for Law & Economics and Economics International Corp. He is the Oregon Association of Realtors Faculty Fellow at Portland State University. He has written peer-reviewed articles on initial public offerings (IPOs), the municipal bond market, real estate markets, and the formation and operation of cartels. His economic analysis has been widely cited and has been published in The Economist and the Wall Street Journal. Dr. Fruits is an antitrust expert who has written articles on price fixing and cartels for the top-tier Journal of Law and Economics. He has assisted in the review of several mergers including Sysco-US Foods, Exxon-Mobil, BP-Arco, and Nestle-Ralston. He has worked on many antitrust lawsuits, including Weyerhaeuser v. Ross-Simmons, a predatory bidding case that was ultimately decided by the United States Supreme Court. As an expert in statistics, he has provided expert opinions and testimony regarding market manipulation, real estate transactions, profit projections, agricultural commodities, and war crimes allegations. His expert testimony has been submitted to state courts, federal courts, and an international court.

One response to T-Mobile Sprints to the Finish Line: States Demand a Do-Over

  1. 

    “By enabling the creation of a true, third national mobile (phone and data) network, the merger will almost certainly drive competition and innovation that will lead to better services at lower prices, (…)”

    If the merger is pro-competitive, how do you explain the increase in stock price yesterday for competitors Verizon and AT&T?

    Surely, a pro-competitive merger would reduce profit prospects of rivals, not increase it? Or are financial markets simply wrong here, and we should all short Verizon/AT&T in response to this news?

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