As acting Department of Justice antitrust head, Sahris Pozen, said a couple of weeks ago, one of the DoJ’s main goals in working to block the AT&T / T-Mobile merger was to keep price competition alive.
But is it really?
I have a different theory.
By working to stop the AT&T merger, I think the DoJ is actually embarked on a stealth “tax hike” of sorts, one designed not to benefit consumers through lower prices, but one which would actually raise or “rationalize” rates, thus insulating competitors from increased competition instead.
Let me explain.
By most any measure, the wireless market is exceptionally vibrant and competitive. Service offerings and technological innovation abound, as prices remain at or below the CPI. In short, customers are getting a good deal for what they buy.
But companies are always on the lookout for “ruinous competition,” such that it forces prices downward, which in turn squeezes profits to uncomfortable levels.
AT&T rival, Sprint, seems particularly concerned about this. With their profit margins about half of the industry leaders’ (though still healthy), the company has got an apparent bugaboo about the deleterious effects of increased competition.
In Sprint’s recent 10K, the company warns shareholders:
…As competition among wireless communications providers has increased, we have created pricing plans that have resulted in declining average revenue per subscriber for voice and data services. Competition in pricing and service and product offerings may also adversely impact subscriber retention and our ability to attract new subscribers, with adverse effects on our results of operations. A decline in the average revenue per subscriber coupled with a decline in the number of subscribers would negatively impact our revenues, future cash flows, growth and overall profitability, which, in turn, could impact our ability to meet our financial obligations.
As to industry consolidation, Sprint’s filing cautions:
…Mergers or other business combinations involving our competitors and new entrants, including new wholesale relationships, beginning to offer wireless services may also continue to increase competition. These wireless operators may be able to offer subscribers network features or products and services not offered by us, coverage in areas not served by either of our wireless networks or pricing plans that are lower than those offered by us, all of which would negatively affect our average revenue per subscriber, subscriber churn, ability to attract new subscribers, and operating costs…
In Sprint’s view, increased competition means stiffer price competition. And this challenges their viability.
Now, if AT&T couldn’t merge by virtue of the DoJ (or the FCC, or both agencies, for that matter), increased competition via industry consolidation would be forestalled. And competitors like Sprint would rejoice.
Not surprisingly, Sprint has worked aggressively to block the merger, being at the forefront of the fight to stop the proposed union, and going so far as to file its own suit against the merger earlier this month
Avoiding increased competition sounds bad enough, but it gets even more anti-consumer than that.
AT&T needs the merger to gain access to much needed, yet severely government-limited spectrum and infrastructure. But, if the government successfully blocks AT&T’s proposed acquisition of T-Mobile, industry observer, Jonathan Lee, notes a disturbing “unintended” consequence that could occur as a result:
The number one provider of wireless data service–AT&T–will be supply inelastic in most cities for the foreseeable future (no capability to acquire sufficient spectrum). This puts AT&T in a “shortage” situation, where it must set prices not to maximize profits, vis-à-vis costs, but to increase prices, and reduce output, in an effort to ration service consumption.
Once AT&T is forced to implement “congestion pricing”, it is logical to expect that Verizon, the number two wireless data provider, will adjust its own prices in order to preserve its network capacity in a spectrum-constrained market (it can’t acquire spectrum either).
Strangely (or not), Lee adds:
The only party that “wins” in this scenario is the firm with the largest excess capacity–Sprint–which through its and Clearwire’s holdings has more spectrum, and more capacity than anyone else in the market, including AT&T or Verizon.
What an odd outcome, especially considering how the DoJ said that the agency wanted to “preserve price competition” – meaning lower prices – for consumers? Lee’s plausible surmise seems to point to the opposite effect, however.
Who knows if this is the DoJ’s end game? Maybe Justice’s suit is just a bargaining ploy, and the minute they “extort” other non-antitrust-related concessions out of AT&T and T-Mobile, they’ll throw Sprint and its special interest supporters under the bus.
Perhaps.
But if the DoJ blocks the merger, instead of increasing competition – which most think is good for consumers – it will likely lead to less. And consumers will pay.
States AT&T in a recent Washington Post piece:
“It will severely set back growth and competition in the wireless industry,” the company said. “Without this merger AT&T will continue to experience capacity constraints, millions of customers will be deprived of faster and higher quality service, and innovation and infrastructure will be stunted.”
At a time when U.S. companies aren’t investing in America, one – AT&T – says it’s ready to. Yet, with the DoJ suit aimed against the company, Washington appears embarked on another economy-killing blunder. Worse yet, it’s anti-consumer, amounting to a stealth “tax hike” that could just as easily have been included in the administration’s new “job stimulus” / tax increase plan instead of hidden by DoJ bureaucrats, wielding malleable antitrust theories that ostensibly protect “price competition.”
By working to stop the AT&T / T-Mobile merger, the DoJ seeks to insulate competitors from the rigors of competition. That hurts American consumers, and is contrary to the laws the agency was entrusted to serve.
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