AT&T and the Economics of Monopoly
For almost the entire 20th century, AT&T was proof that the only sustainable monopolies are those granted and enforced by government. The telecommunications industry was supposedly deregulated in 1984, when AT&T was broken up. But the latest lawsuit from the Justice Department reflects a mindset reminiscent of 1913, when Washington first set the terms for the industry and made AT&T a powerful monopoly.
The government's antitrust lawyers recently challenged the acquisition by AT&T of T-Mobile, another wireless provider. They sued in the name of increasing competition, but this instead signals that Washington again prefers industrial policy to markets. No one in the Obama administration wants to admit to century-old thinking, but how else to explain its lawyers-know-better approach to an industry as dynamic as wireless?
The great threat to competition for wireless data and mobile phones is not mergers—it's government failure to free enough spectrum to meet demand. Deutsche Telekom agreed to sell T-Mobile, the fourth-largest wireless provider in the U.S., because it couldn't get enough spectrum to compete and wanted out of the U.S. market. For AT&T, the $39 billion purchase price was the best way to get the spectrum and local cell towers it needs to serve 97% of U.S. consumers with a new 4G LTE network—a technology currently provided only by Verizon. In other words, this merger would mean more competition, not less.
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Wireless bandwidth is controlled by the Federal Communications Commission, which knows it has a spectrum problem. "If we do nothing in the face of the looming spectrum crunch, many customers will face higher prices—as the market is forced to respond to supply and demand—and frustrating service," Chairman Julius Genachowski told a recent wireless conference. "The result will be downward pressure on consumer use of wireless service and a slowing down of innovation and investment."
Congress is dragging its feet in approving the FCC's proposed "voluntary incentive actions" that would let companies more freely buy and sell spectrum from one another, transferring spectrum to more valued uses such as wireless from older technologies such as broadcasting.
Instead of acknowledging the pace of technological change in wireless or the problem of limited spectrum, the Justice Department operates with an Industrial Age test called the Herfindahl-Hirschman Index, which measures the concentration of companies in industries. A formula does not settle the question of consumer harm. There are fewer providers, yet consumer prices for bandwidth continue to fall as the network effect of larger scale enables better use of spectrum. There is no evidence that even Verizon, the largest provider, has enough market power to manipulate prices. Market share is not the same thing as market power.
The number of wireless subscribers has tripled to 300 million during the past decade. These subscribers are overtaxing the 3G network with smart phones, iPads and the many devices running Google's Android operating system. AT&T is infamous for dropping cellphone calls even in places like Silicon Valley.
According to the FCC, more than 90% of U.S. consumers can choose among at least five wireless providers, including low-price competitors such as MetroPCS and Cricket. A $5 billion startup called LightSquared is building a wireless data network to sell capacity to small wireless services such as U.S. Cellular, Cellular South and TracFone.
The Justice Department has a dismal record in bringing antitrust cases in fast-moving industries. In the 1960s, IBM had to defend its "dominant" mainframe business, which the personal computer soon rendered obsolete. Then Microsoft was accused of having monopoly power it only wishes it ever had. Today Google is in the regulatory crosshairs just as it faces many new competitors.
"In treating technology markets as if they were fixed in size and closed to new entrants," tech author Larry Downes wrote recently for Forbes, the case against AT&T "marks a new low in Washington's appreciation for how and why the Internet economy works."
In its focus on market concentration instead of on market power or any evidence of harm to consumers, the Obama administration is a throwback to the old style of antitrust. The last thing consumers need is the government protecting some wireless providers at the expense of others, especially if this prevents cheaper and more reliable wireless service. AT&T may not be the most sympathetic underdog, but the rationale for blocking this merger could make a target of any successful tech company.
Instead of trying to pick winners and losers, the White House and Congress should let the FCC finally hold its auctions for spectrum, then let the most innovative wireless companies compete to serve growing consumer demand.
