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Top Ten Flaws in FCC's AT&T/T-Mobile Competition Analysis

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The unprecedented release of a FCC draft staff analysis opposing the proposed AT&T/T-Mobile transaction could backfire legally, undermining its intent to backstop the DOJ’s pending lawsuit against the merger. The FCC’s staff analysis could backfire because it: is not credible or fair; is replete with arbitrariness, bias and illogic; and suffers from glaring omissions of relevant exculpatory evidence.

If the FCC’s staff’s duplicative antitrust competition analysis is any indication of the strength of the DOJ’s Clayton Act case against the transaction, the Government’s case is much weaker than most appreciate. When one reviews the many serious flaws in the FCC’s competition analysis it is clear why AT&T and T-Mobile eagerly await their day in court. Legally, the FCC staff analysis has hurt, not helped, the DOJ’s antitrust case and it makes the FCC’s signalled negative public interest determination much more vulnerable upon appeal.

I.   Summary of Top Ten Flaws in FCC’s AT&T/T-Mobile Competition Analysis

  1. Totally ignored the Internet’s impact on wireless competition.
  2. Totally ignored international competitive comparisons that repudiate its conclusion.
  3. Assumed away all existing wireless competition that does not support its conclusion.
  4. Totally ignored the financial/investment facts of Deutsch Telecom, T-Mobile’s parent.
  5. Totally ignored the competitive impact of the FCC-described “looming spectrum crisis.”
  6. Overplayed the maverick impact of T-Mobile by ignoring Sprint’s maverick incentives.
  7. Turned a blind eye to the fundamental high-capital intensity of wireless competition.
  8. Silent about Open Internet presumption that competition can’t protect consumers.
  9. Totally misunderstood where the real market power resides in wireless devices.
  10. The proposed Verizon-Cable spectrum sale and cross-marketing arrangement blows up the staff analysis’ central assumption that Verizon and AT&T will not compete fiercely going forward.

II. Top Ten Flaws in FCC’s AT&T/T-Mobile Competition Analysis

1.  FCC staff totally ignored the Internet’s impact on wireless competition.

The most glaring omission of evidence, fact and context is the staff’s total blind eye to the huge competitive substitution effect and downward price pressure of free Internet voice, texting, and video on all wireless providers. Incredibly, if one does an Adobe Acrobat word search of the FCC’s 157-page staff analysis PDF, there is no mention of the following words: “Internet,” “bandwidth,” “wireless broadband,” “WiFi,” “WiMax,” “Android,” “Netflix,” “iChat,” “Facetime,” “Google,” “Apple,” “Facebook,”  “Microsoft,” or “Skype.” (In stark contrast for example, the FCC’s July Wireless Competition Report mentioned the “Internet” 186 times, “wireless broadband” 47 times, “Wimax” 67 times, “Android” 65 times, etc.)

How can FCC staff ignore the exculpatory blue whale in the room? Many tens of millions of American wireless consumers use free communications apps like Microsoft-Skype, Google-Voice, Apple iChat/Facetime, Facebook messages or Vonage Mobile?  How can the FCC, whose top “competition” institutional priorities of the last three years supposedly were the National Broadband Plan and Open Internet regulations, claim their analysis here is credible, fair, fact-based, expert, or thorough without any competitive analysis of the Internet or wireless broadband phenomena that most everyone else recognizes are revolutionizing wireless communications?

2.  FCC staff totally ignored international competitive comparisons that repudiate its conclusion.

Incredibly again, FCC staff totally ignored exculpatory international comparisons of competitive concentration of national wireless markets among industrialized nations, despite the FCC’s intense competitive interest in such international comparisons when the FCC sought to prove the U.S. was falling behind the world in broadband deployment in order to discredit competition policy and advance its National Broadband Plan. International comparisons from Merrill Lynch, that are well-known to FCC staff, indicate the U.S. currently has the least concentrated wireless market. Moreover, the post-merger, HHI market-concentration scores of AT&T/T-Mobile, still would not make the U.S. wireless market as concentrated as most all other major industrialized markets. Excluding this critically relevant international comparison data is exceptionally prejudicial, misleading and arbitrary, because the international comparison data devastates the central premise of the DOJ/FCC case -- that the U.S. wireless market must have four major competitors to be competitive when most all other nations have only three major competitors. If the FCC somehow believes the international comparison data is somehow wrong or irrelevant, a fair process dictates that the FCC must prove why that is so.

3.  FCC staff assumed away all existing wireless competition that does not support its conclusion.

Incredibly yet again, FCC staff assumed away exculpatory evidence of actual and potential competitors that did not fit the DOJ’s new gerrymandered national market definition. First, the FCC used circular illogic to assert that regional competitors, like Metro PCS, Leap Wireless, and U.S. Cellular are not significant competitors to AT&T or T-Mobile. After the FCC’s latest wireless competition report stated that ~90% of American consumers have a choice of five or more wireless choices in their local market, the FCC now claims wireless is a national market. This means that the regional competitors that the FCC long considered as wireless competitors are no longer competitors for the purposes of this transaction because they do not have national scale and scope necessary to fit into the new gerrymandered market definition. This circular illogic conveniently excludes about ~8% or 20+m American wireless consumers as irrelevant because they did not choose one of the national wireless providers that the Government thinks they should have chosen.

Second, FCC staff summarily excluded Clearwire as a competitor or disruptive maverick force, despite mentioning “Clearwire” 142 times and “WiMax” 67 times in the FCC’s fifteenth wireless competition report just five months ago, and despite the fact that Clearwire has built a fifth national wireless broadband network that already covers 82 million Americans. Third, FCC staff summarily excluded a potential sixth facilities based wireless competitor, LightSquared, whose pending 4G LTE wireless broadband network is not considered by the FCC to be potential competition, despite an innovative effort proposing a wholesale only model utilizing a combination of mobile and satellite technologies, and despite the extraordinary exemption and support the FCC staff provided LightSquared to get it’s effort off the ground.

Fourth, it is ironic that FCC staff’s summarily excludes all MVNO resellers like Tracfone as relevant competitors that buy wholesale and compete in retail offerings, when the FCC pushes wholesale-resale as key to competition in giving LightSquared special help and in considering reclassification of broadband as a Title II service to promote wholesale resale as a way to increase competition to benefit consumers. It appears FCC staff only view Government-driven wholesale resale as “real” competition and not the sixty odd actual market-driven resellers as ‘real” competition. The FCC’s national market definition appears arbitrary and unfair given how much competition that the FCC previously-recognized and advanced is excluded from the competitive analysis of this transaction.

4.  FCC staff totally ignored the financial/investment facts of Deutsch Telecom, T-Mobile’s parent.

The FCC staff omitted any discussion of the critical factual context that T-Mobile must exit the U.S market because T-Mobile’s parent, Deutsch Telecom which is partly owned by the German Government, is financially unable and unwilling to fund a fourth 4G wireless broadband competitor in the U.S. when the German Government’s financial resources must be allocated to propping up the sovereign debt of Euro partners in financial crisis: Greece, Italy, Portugal and Spain. If the FCC staff contacted the U.S. Departments of Treasury or State, the German Embassy, the IMF, or the Federal Reserve, they could easily have learned that their expectation that the German Government would and should fund a fourth 4G infrastructure in the U.S. (when Germany has not fully built out one), is not a credible, responsible or accurate competitive policy assumption for this transaction.

5.  FCC staff totally ignored the competitive impact of the FCC-described “looming spectrum crisis.”

Spectrum is the essential resource and foundation of wireless competition. While the FCC is fully-aware of the seriousness of the “looming spectrum crisis,” and fully-aware that AT&T is justifying its acquisition of T-Mobile in large part to gain scarce spectrum, it is inexplicable that the 157-page FCC staff analysis never mentions or discusses the competitive context and implications of the looming “spectrum crisis,” “spectrum shortage,” or “spectrum scarcity.” Without question a very material competitive legal fact here is that in a spectrum-constrained market, it is necessary, logical, and beneficial for there to be market consolidation and/or spectrum sharing in order to optimize the efficient utilization of this scarce resource. Omitting these material economic facts and critical investment context from this FCC competitive analysis is not fair, objective or accurate.

6.  FCC staff overplayed the maverick impact of T-Mobile by ignoring Sprint’s maverick incentives.

The FCC asserts without evidence that #3 competitor Sprint is not a disruptive maverick force when Sprint competes aggressively on price, unlimited usage, bundles, and network innovation. FCC staff don’t explain why if neither Sprint and T-Mobile have the scale and scope of Verizon and AT&T, why only T-Mobile and not Sprint would have the competitive incentive to be a market maverick?

7.  FCC staff turned a blind eye to the fundamental high-capital intensity of wireless competition.

The FCC and DOJ, in attempting to unilaterally move the acceptable antitrust boundary back from three competitors to four-plus, are turning a blind eye to how a market’s competitive intensity can be very different in capital-intensive markets than in non-capital intensive markets. Verizon and AT&T each individually invest more capital annually than any other American corporation and must spend more on advertising to maintain and grow their businesses than most any other corporation in the U.S.  This is because of wireless market’s capital intensity, competitive intensity and because of cannibalization from Internet substitution of free apps. Excluding the fundamentally important capital intensity dimension of wireless economics in its competitive analysis is not expert, fair or accurate.

8.  FCC staff is silent about their Open Internet presumption that competition can’t protect consumers.

The FCC staff analysis makes no mention of the very material FCC bias here that the FCC does not believe that market competition can protect consumers’ economic interests without FCC economic regulation. The premise of the FCC’s Open Internet Order, which just went into force, is that competition and market forces were insufficient to protect consumers from potential discrimination unless the FCC preemptively economically regulated broadband and banned Internet discrimination by broadband providers.  This was the FCC’s view before the proposed AT&T/T-Mobile transaction while the U.S. had the most facilities-based wireless competition in the world. To be fair and open, the FCC should caveat its staff analysis with a transparent disclosure that the FCC has ruled implicitly in its Open Internet Order that competition can no longer work to generate lower prices, more choice, and innovation without the intervention and oversight of the FCC.

9.  FCC staff totally misunderstood where the real market power resides in wireless devices.

The FCC asserts without evidence or understanding of the device market that a combined AT&T/T-Mobile could have monopsony buying power in devices when the market reality is that Apple with its wildly popular, iconic, high-end iPhone/iPad, and Google-Android with its dominant 53% share of the mobile operating system market, have the real market power over wireless devices. Failure to analyze the effect of the whole ecosystem on device competition is not fair or accurate analysis.

10.  The proposed Verizon-Cable spectrum sale and cross-marketing arrangement blows up the staff analysis’ central assumption that Verizon and AT&T will not compete fiercely going forward.

Fundamental to the FCC’s conclusion that they must avoid a wireless “duopoly” is that the two biggest wireless players, Verizon and AT&T, will not compete fiercely going forward. It appears that Verizon is serving as a maverick competitor in a highly-competitive wireless marketplace. The Verizon-Comcast/Time Warner Cable/Bright House deal greatly accelerates wholesale and retail wireless competition as their cable/broadband/phone bundles will enable cable to offer retail wireless service at a retail price closer to the wholesale rate than most any competitor – benefiting competition and saving consumers money. This new outside-the-box thinking and cross-marketing arrangement will increase wireless competition, put further downward pressure on prices, and sustain fierce competitive rivalry between Verizon and AT&T/T-Mobile.

III. Conclusion

In sum, FCC staff has deemed this merger to not be in the public interest with one-sided analysis and without due process. Like everyone in America, AT&T and T-Mobile are due their day in court. Despite what the DOJ and FCC have asserted publicly, AT&T and T-Mobile have much precedent, evidence, and merit on their side.

Looking ahead, If AT&T prevails in court against the DOJ, much of the FCC’s duplicative antitrust staff analysis becomes legally moot. Then if the FCC still tries to block the merger at the FCC under its public interest standard, and AT&T ultimately appeals that public interest ruling to Federal Court, the FCC’s prospects upon appeal will be much weaker as a result of the unprecedented release of this obviously flawed, fact-challenged,  and arbitrary FCC staff analysis.

Scott Cleland is President of Precursor LLC a consultancy serving Fortune 500 clients, and is Chairman of Netcompetition.org, a pro-competition e-forum supported by broadband interests.