By traditional antitrust analysis, T-Mobile’s proposed $26.5 billion acquisition of Sprint doesn’t come close to satisfying the law’s requirement that it not “substantially … lessen competition” in the market for mobile phone and Internet service. That is why the attorneys general of 10 states and the District of Columbia went to federal court this month to block it. And it is why the career antitrust lawyers at the Justice Department reportedly have recommended the federal government do the same.
This is, after all, the merger of the No. 3 and No. 4 competitors in a market with only four national players. It is also a market in which there is almost no chance that a new firm would try to enter the competition, both because of the tens of billions of dollars in upfront costs that would be needed to build a national network of cell towers and switches, and because of the limited amount of radio spectrum that is still available on which to operate a new network.
Americans of a certain age will remember when there were only three large U.S. automakers, which competed fiercely with one another in every way other than on price. Every July, General Motors would put out a news release announcing that it would raise prices, say, by 3 percent in the new model year beginning in September, and within an hour, Ford and Chrysler would announce — what a coincidence! — that they would be raising prices by exactly the same amount. Today we see the same lack of price competition in the highly concentrated airline industry, in which as soon as one of the big carriers announces a fee, the others follow suit. Dozens of other markets exhibit this cozy kind of competition.
As the attorneys general point out in their court filing, it has been T-Mobile and Sprint — each roughly half the size of Verizon and AT&T — that have been responsible for price competition in mobile phone service in recent years, offering short-term contracts or waiving international roaming charges, or providing unlimited voice, text and data for only $15 a month. Internal documents obtained by the attorneys general show that T-Mobile executives saw a merger with Sprint as the only way for T-Mobile to end the price-cutting and become as profitable as Verizon and AT&T. The companies’ own economists estimate that the merger would cost their customers an extra $4.5 billion a year, according to the attorneys general, while the experience of other countries suggests that moving from four to three dominant carriers eventually increases prices 16 percent over what they otherwise would have been.
As T-Mobile and Sprint see it, however, most of these arguments are beside the point because they fail to take into account the big thing about to happen in the marketplace: the transition to a new generation of technology known as 5G. It will allow mobile devices to receive so much data so quickly that they will be able compete with fiber-optic cable in sending messages, browsing the Web and streaming videos while making possible innovations such as driverless cars and home appliances that can be managed from your wristwatch.
To make that possible, however, any company wanting to compete in that market will have to invest an estimated $30 billion in towers, computing capacity and software to handle the volume of traffic and extend service to every part of the country, according to industry analysts. In seeking approval for their merger, T-Mobile and Sprint argue that there won’t be enough 5G revenue for four companies to recoup all that investment and operate profitable 5G networks, with Sprint the likely casualty.
Or put another way, given the limited spectrum, the efficiencies of scale and the natural tendency of customers to belong to the biggest networks, mobile telephony might be a “natural triopoly.” Antitrust regulators reached a similar conclusion when they decided that the market can support only two manufacturers of large passenger jets — a “natural duopoly” — and allowed Airbus and Boeing to buy smaller rivals Bombardier and Embraer.
In truth, it’s hard to know whether mobile telephony is a natural triopoly. What we know from experience, however, is that if a four-into-three merger is allowed, we can’t rely solely on market competition to restrain prices or prevent the companies from carving up the country into regional monopolies. Some additional regulation — in this case from the Federal Communications Commission — would be needed to protect the public interest.
What would such regulation look like? At a minimum, it would probably take the form of requiring the three companies to set aside a portion of their network capacity for resale at reasonable prices to smaller regional competitors. It might require companies to offer the same level of service in rural areas as in cities, or require that they maintain a 25 percent market share in every region of the country. It could include prohibitions on locking customers into long-term contracts, or selling only bundles of services rather than letting customers buy them a la carte. And it would surely include prohibiting any of the three companies from buying up or squashing a start-up firm that comes with a potentially disruptive new technology. If none of that worked, regulators might have to set ceilings on price and profits.
Anticipating such concerns, T-Mobile and Sprint have won support for their merger from the Republican majority of the FCC by promising not to raise prices for three years (a somewhat hollow promise in a market in which prices have been falling) and to guarantee 5G service in rural areas within three years. More recently, Bloomberg News reported, the Justice Department is pushing the companies to agree to spin off enough of their assets — or offer sufficient access to their network — to ensure that a new and viable fourth competitor will emerge. Such “fixes,” however, only raise the question of why, if they are necessary to protect consumers, such commitments should not be extended into the future and apply to Verizon and AT&T as well.
The past 40 years in the United States has been characterized by a steady deregulation of business, and in many respects it has been a big success, lowering prices, spurring innovation and improving U.S. competitiveness globally. Now, however, it is pretty clear the process has run its course, while the anti-regulatory ideology propagated by the business community now prevents the government from addressing the challenges posed by new technologies and new competitive realities. A functioning Congress would have long ago addressed the issue of excessive consolidation in the tech and telecommunications sectors, whether on issues of access, privacy or competition. In the absence of legislation, however, consumers have a right to expect the Justice Department and the FCC to use their existing authority to put the public interest ahead of greater profitability for private companies.
The political choice that faces the tech and telecom industries is either to work out reasonable accommodations with a friendly Republican administration or run roughshod over consumers and help elect a populist Democratic administration that will surely have something more muscular in mind. One way or another, however, the regulatory pendulum is about to swing in the other direction. Leaving it to the market is no longer an option.