Magical Thinking Triumphs at the FCC

by on November 28, 2011 · 8 comments

[Cross-posted at www.reason.org]

While shoppers were hitting the malls Friday–a fair percentage of them no doubt evaluating the many choices of wireless smartphones and service plans available–AT&T said it was withdrawing its FCC application to merge with T-Mobile.

AT&T’s move was in response to FCC Chairman Julius Genachowski’s decision to refer the merger to an administrative law judge, coupled with a statement that he remains opposed to the $39 billion merger.

Many analysts see this as the beginning of the unraveling of the acquisition. Although AT&T said it plans to defend the deal in court against a Department of Justice antitrust suit, the company has taken accounting steps that signal it is prepared to pay Deutsche Telekom, T-Mobile’s current parent, the $4 billion it pledged if it could not close the purchase by September 2012.

“The fat lady hasn’t sung yet,” said Craig Moffett, an investment analyst for Sanford C. Bernstein, as quoted by the Washington Post’s Cecilia Kang. “But she has taken the stage. And the band has begun to play.”

By itself, Genachowski’s move is a tremendous exercise of executive power, as an ALJ hearing would only occur if AT&T wins its suit with the DoJ or settles it satisfactorily. In essence, the FCC is attempting to craft an ad hoc court of appeals in order to abrogate a separate judicial ruling.

Genachowski says he opposes the merger because it will lead to higher prices for consumers, less innovation, less investment and fewer U.S. jobs, assertions that are all questionable. What Genachowski really thinks, as spelled out when the merger was first announced, is that there should be four national wireless network services providers in the U.S. (Cue Monty Python: Four, not three, not five, but four!), as it were some golden number.

This is technocratic thinking at its worst. Although over the course of his term Genachowski has correctly identified the pressing problems of spectrum shortages and rural broadband build-out, he believes telecom policy begins with enforcing what he sees as a “correct” number of wireless carriers. And while the FCC likes to point to market concentration metrics, including the highly dubious HHI index, much of the commission’s anticompetitive analysis (as does the DoJ’s) relies on narrow definitions that exclude legitimate regional competitors and acrobatic number-crunching.  All of these can be answered with equally, if not more significant numbers, much of it from the FCC’s own research.

What Genachowski and other fans of central economic planning overlook is that no matter what happens with AT&T, T-Mobile is going away. Deutsche Telekom doesn’t want it. It is losing customers and lacks the capital to invest.

Business analysts say a cable company or non-U.S.-based service provider like America Movil might step up, but as I’ve argued before, many of the same FCC objections would still hold. Now that the FCC has pressed ahead with its opposition, approval of any future T-Mobile buyer will appear arbitrary.

In the short term, the real impact of the FCC’s intransigence will be felt by the millions of wireless customers who are beginning to experience service degradation because of the spectrum crunch. The AT&T-T-Mobile merger was a market-driven response to that problem, as it would have combined the spectrum owned by each company, opening more channels to customers of both companies. It’s curious as to why the FCC, which acknowledges the spectrum shortage as well as its own dilemmas in addressing it, would short circuit a workable path toward some relief.

But you can always count on the magical thinking of government central planning to trump basic mathematics. According to Peter Rysavy, a wireless engineering consultant who spoke at on a spectrum policy panel at the DCWeek conference earlier this month, there is 10 MHz available per cell in a wireless downlink. 1 MHz of bandwidth can support about 1.4 Mb/s, he said, which means each cell can support only about 10 to 15 YouTube video streams at one time. This is why wireless data service often times out even in the middle of a big city. It’s only going to get worse as wireless data use increases.

It is ironic that the FCC, along with the consumer groups who have lined up against the merger, generally frown on the idea of bandwidth caps or throttling (indeed, consumers don’t like the either). But if the regulators are bent on preventing the market from fashioning solutions, while they themselves drag their feet on spectrum availability, restrictive pricing models are inevitable.

The FCC, in forcing AT&T’s retreat, virtually guarantees to bring about that which it wants to prevent-higher prices, poor service and reduced investment.

 

  • http://stevencrowley.com Steve Crowley

    There are other ways to combat the capacity crunch besides
    mergers. I adapt a couple of paragraphs from a recent blog post:

    Today’s typical macrocell (large cell) wireless systems have
    always expended disproportional resources trying to overcome building
    attenuation and reach user devices indoors; it’s been an outside-in approach.
    Adding to the challenge, we’re inside 70% of the time, and will be inside even
    more as time goes on, according to Informa estimates. Building attenuation is
    not the only indoor problem; signals indoors weaken as the distance to base
    stations increases. Furthermore, capacity available to a user goes down as more
    users join the cell.

    At the same time, our indoors increasingly have fixed
    broadband service. This can be used in conjunction with small cells, such as
    Wi-Fi access points or femtocells, to offload data from the macrocell. When the
    user is close to small cells, a lot of good things happen, things beyond the
    ability of mergers to provide. Building attenuation goes down because we’re not
    punching through as many walls. Signal strength increases because of the
    shorter distance. Throughput to the user goes up because capacity is no longer
    shared with several dozen others. (Throughput to those still on macrocells goes
    up, too, because they’re no longer competing with the small cell users.) As an
    added benefit, since the user is close to the cell, not as much power is needed
    on the uplink; handset transmit power goes down, increasing battery life.
    Taking all these factors into account, data rates available to a user can go up
    80x or more using small cells depending on the deployment scenario.  (In contrast, doubling available spectrum
    increases throughput only 2x. Allocating the entire 300-3000 MHz band to mobile
    broadband would increase throughput only 7x, were that a practical option. This
    paints as dubious suggestions that spectrum is the only way to increase
    capacity.)

    The same improvements in electronics technology that enable
    smartphones, and their increased data requirements, likewise enable new
    small-cell technology that can address the demand. Wireless innovation is not
    only on the user-device side.

  • http://pulse.yahoo.com/_AWWIKW6MNPUHOC4OVSHWUDWAHM Fabio

    Right… The only thing I know, is that a DUOPOLY from AT&T and Verizon is something that NOBODY wants. Mr Steven Titch, you should research the MA BELL monopoly that HAD to be broken up in the 1980s.

  • http://pulse.yahoo.com/_AWWIKW6MNPUHOC4OVSHWUDWAHM Fabio

    Agreed 100%! Thank you! That’s innovation, we should have Wifi calling on all providers! T-Mobile already does this!

  • http://stevencrowley.com Steve Crowley

    Yes, it is innovation, and that is a paradox of U.S. spectrum policy. Policymakers say we need more spectrum so we can have more innovation, yet they ignore and even deprecate innovation in wireless infrastructure that reduces the need for new spectrum.

    Here is a link to my full blog post that adds context to my comment above:

    http://stevencrowley.com/2011/11/19/three-invalid-assumptions-that-make-the-fcc%E2%80%99s-spectrum-requirements-model-skew-high/

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  • Nobody

    What’s Sprint, chopped liver?

  • Steven Titch

    With all due respect, Fabio, I suggest you actually review the facts behind the AT&T antitrust case. Here are a few pointers:
    1, The case is rooted in the 1970s market environment , not the 1980s. It was initiated by the Nixon administration and settled January 1982 by Reagan’s DoJ. That settlement set up the divestiture, which became effective two years later in January 1984.
    2. The DoJ brought the case over AT&T’s complete vertical integration: AT&T was its own R&D lab and manufacturer. Ma Bell bought only from itself, all other manufacturers could not crack Ma Bell procurement. The suit sought to address this.
    3. The expectation at the time was that DoJ would demand the separation of Western Electric and Bell Labs from the Bell System phone companies. What happened was that just the local exchange companies were divested. These companies were allowed to retain their monopolies. Control of the local exchange bottleneck, or creating choice for local service, was not an aim to the antitrust case, nor was it covered in the MFJ. Viable local exchange competition–mostly geared for large enterprises, at that–would not emerge until later in the 1980s. And it was not addressed in legislation until the Telecom Act of 1996–14 years after the AT&T anti-trust case was settled.

    For more details on these points, and their significance to the AT&T/T-Mobile issue, please see my post from earlier this year: http://techliberation.com/2011/04/22/for-the-last-time-the-bell-system-monopoly-is-not-being-rebuilt/

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