Open minded on the AT&T/T-Mobile merger

by on April 19, 2011 · 8 comments

Is it “insane” for free market oriented thinkers to support the AT&T/T-Mobile merger?  Although AT&T says there are five choices of wireless providers to choose from in 18 of 20 major markets, Milton Mueller argues that 93 percent of wireless subscribers prefer a seamless, nationwide provider.  If the merger is approved, there would only be three such providers.

A market dominated by three major providers is neither competitive nor noncompetitive as a definitional matter.  Factual analysis is necessary to determine competitiveness.

And it may be premature to conclude that there is no competitive significance either to the fact there are over a hundred providers currently delivering nationwide service on the basis of voluntary roaming agreements that are common in the industry, or to assume that the possibility the FCC will double the amount of spectrum available for wireless services will not impact the structure of the industry.

The trouble with antitrust generally is the possibility that government will choose to protect weak or inefficient competitors, thus preventing meaningful competition that attracts private investment which leads to innovation, better services and lower prices.  Antitrust is supposed to protect consumers, not politically influential producers.  Although this sounds simple in theory, it can get confusing in practice.  As free market oriented thinkers, we do not want government picking winners and losers.

As Larry Downes correctly points out, if concentration leads to higher prices there will be more profits for competitors and more competition.  Schumpeter teaches that short-run monopolies come and go, while long-run monopolies are exceedingly rare – unless “buttressed by public authority.”

Mueller makes a couple other important points that reflect the thinking of a lot of people.  One is AT&T’s customer satisfaction ratings, prices and network performance.   This merger would provide extra spectrum the carrier needs to address each of these issues, however.

Although there are other ways to increase network capacity, they won’t be enough.  The National Broadband Plan notes that data traffic on AT&T’s mobile network increased 5,000% between 2006 and 2009.  According to the chairman of the FCC, “We need to tackle the looming spectrum crunch by dramatically increasing the new spectrum available for mobile broadband, and the efficiency of its use.”  That’s why the broadband plan is proposing to double the amount of spectrum available for wireless, a process that could take several years.  Historically, it has taken 6-13 years to reallocate spectrum.

Mueller also points out that AT&T cited network capacity issues when it opposed microwave-based competition in long-distance (in the 1960s).  AT&T has been criticized for the advocacy it used in those days.  The real problem the company faced then was being saddled with a pricing structure that was incompatible with competition, but policymakers were not about to change that.  Regulation mandated that AT&T charge high prices for long-distance to subsidize “affordable” (i.e., at-or-below cost) local service.  That set up an attractive cream-skimming opportunity for potential competitors such as MCI.  The new entrant’s business plan was to compete for the fat long-distance profits and not get stuck with money-losing local service obligations.  That was a real problem.

Finally, Mueller suggests limited government intervention as a preventative for excessive government intervention.

If you support a competitive industry where one can reasonably expect the public and legislators to rely on market forces as the primary industry regulator, this merger has to be stopped. On the other hand, if you welcome the growing pressures for regulating carriers and making them the policemen and chokepoints for network control, a bigger AT&T is just what the doctor ordered.

A similar argument was made in the early 1980s with regard to local and long-distance service.  Regulate local so long-distance can be free.  This is so defeatist.  As free market thinkers, we need to stand for principle.  Unwarranted government intervention in the free market should be opposed.

If the FTC, Department of Justice and/or FCC do find that such a merger would substantially lessen competition, they could also impose specific conditions to ameliorate the impact – making it unnecessary to block a merger outright.  Minimum intervention ought to be the first choice for free market thinkers.

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