When the federal government torpedoed the AT&T/T-Mobile USA merger in December pursuant to the current administration’s commitment to “reinvigorate antitrust enforcement,” it created a new client in search of official protection and favors.
It was clear there is no way T-Mobile – which lost 802,000 contract customers in the fourth quarter – is capable of becoming a significant competitor in the near future. T-Mobile doesn’t have the capital or rights to the necessary electromagnetic spectrum to build an advanced fourth-generation wireless broadband network of its own.
T-Mobile’s parent, Deutsche Telekom AG, has been losing money in Europe and expected its American affiliate to become self-reliant. In 2008, T-Mobile sat out the last major auction for spectrum the company needs.
The company received cash and spectrum worth $4 billion from AT&T when the merger fell apart, from which T-Mobile plans to spend only $1.4 billion this year and next on the construction of a limited 4G network in the U.S. But it must acquire additional capital and spectrum to become a viable competitor.
Unfortunately, every wireless service provider requires additional spectrum. “[P]rojected growth in data traffic can be achieved only by making more spectrum available for wireless use,” according to the President’s Council of Economic Advisers. Congress recently gave the FCC new authority to auction more spectrum, but it failed – in the words of FCC Chairman Julius Genachowski – to “eliminate traditional FCC tools for setting terms for participation in auctions.”
Everyone fears it will take the FCC years to successfully conduct the next round of auctions while it fiddles “in the public interest.” That’s why Verizon Wireless is seeking to acquire airwaves from a consortium of cable companies, and why T-Mobile will do anything to stop it.
T-Mobile previously looked into buying the spectrum for itself, but it didn’t happen. If regulators can be persuaded to block the Verizon Wireless from acquiring it, that would reduce the market value of the spectrum and create an opening for T-Mobile to acquire it at a significant savings.
When government intervenes to protect an underdog, it diminishes the rewards for success and the penalties for failure that drive competition and innovation.
In this case, T-Mobile is arguing that (1) spectrum is not created equal, (2) Verizon Wireless has acquired more than its “fair” share of the most valuable frequencies, (3) Verizon Wireless is acting with anticompetitive animus to foreclose T-Mobile’s access to a critical input, i.e., low-frequency spectrum, which (4) Verizon Wireless itself does not need but intends to “warehouse.”
The argument that Verizon Wireless has ended up with valuable frequencies while T-Mobile has not does not stand up to close scrutiny. The FCC has wisely declined to take this bait in the past.
Although it is true that it takes fewer towers or cell sites to serve a geographical area at a lower frequency, superior coverage counts for less in urban areas where heavier demand requires more towers to boost capacity. In higher population densities, low and high frequencies offer almost equivalent performance, according to Peter Rysavy. Operating in the higher frequencies in congested areas, as T-Mobile does, if anything, provides a competitive advantage, because those frequencies have a lower market value and therefore cost less to acquire.
Verizon Wireless does require additional spectrum, just like every other wireless provider. The issue here is simply who is more “deserving” of spectrum that is available for purchase now on a secondary market while the rest of the industry waits for the FCC to play its political games. No one is suggesting that any entity has more spectrum than needed to accommodate rapidly increasing demand for wireless services.
The contention that Verizon Wireless plans to warehouse the spectrum it seeks to purchase ignores the fact that the FCC imposes performance requirements on licensees. There are buildout deadlines, plus the necessity to demonstrate that substantial service was provided in order to win a license renewal every ten years or so.
When the Department of Justice and the FCC prevented AT&T from acquiring T-Mobile last year, they apparently thought they were promoting competition. But government efforts to enhance competition, accelerate private investment or attract new entrants almost always have unintended consequences.
The principle of moral hazard posits that if the cost of failure will be borne by someone else, those who are in the best position to minimize risk will have little incentive to do so. When government partners with private companies, it often ends in bankruptcy. As a nation, we depend on businesspeople to manage firms with skill and foresight, not on taxpayers to bail them out.
If T-Mobile can’t make it on its own, which seems more likely than not, the FCC and DOJ have merely laid the foundation for a vicious cycle of regulatory battles, of which Verizon Wireless/SpectrumCo/Cox Wireless transaction is just the beginning. One suspects the agencies have signed on a high-maintenance client.