Monday, May 23, 2011

Comments of Allen Grunes and Maurice Stucke on the AT&t/T-Mobile Proposed Merger

Editor's Note. I asked Maurice for around 800 words on the merger. Maurice responded that he and Allen would write something a bit longer. I received a 29 page article from them. I love Maurice. The link to the entire are is here. I have excerpted a portion of the article below.

Posted by Allen Grunes and Maurice Stucke


Under well-established U.S. law, there is a strong presumption of illegality when the merging firms’ market shares are significant in an industry with high entry barriers. As the Supreme Court said, “a merger which produces a firm controlling an undue percentage share of the relevant market, and results in a significant increase in the concentration of firms in that market is so inherently likely to lessen competition substantially that it must be enjoined in the absence of evidence clearly showing that the merger is not likely to have such anticompetitive effects.”5 Consistent with the legislative intent of the Clayton Act, courts have regarded a transaction that would lead to further concentration in an already highly concentrated market as presumptively illegal under Section 7.6 In United States v. Philadelphia National Bank, the Court held that a merger resulting in a single firm controlling 30 percent of a market trending toward concentration in which four firms controlled 70 percent of the sales was presumptively illegal.7 Unless the merging parties “meet their burden of rebutting this presumption, the merger must be enjoined.”8 That presumption applies to the AT&T/T-Mobile merger in an already highly concentrated industry with high entry barriers,

A. AT&T’s Post-Merger Market Share Would Exceed 40 Percent The likely candidate product market is the market for “mobile wireless telecommunications services.” This was the market definition used in prior DOJ cases such as U.S. v. AT&T and Dobson Communications (2007)9 and U.S. v. Verizon and Rural Cellular (2008).10 In those cases, DOJ noted that there were no cost-effective alternatives to mobile wireless telecommunications services, and it is unlikely that a sufficient number of customers would switch away from mobile wireless telecommunications services to make a small but significant non-transitory price increase in those services unprofitable.

This candidate product market includes voice, text messaging and data services. The data component of mobile wireless services has been rapidly growing in the past few years. There has been a high smartphone adoption and upgrade rate (close to 50% in 2009 according to the FCC’s latest Mobile Wireless Competition Report11). There has also been an expansion in the number of non-smartphone handsets that are subject to mandatory data plans. Data plans for mobile phones are typically sold as part of a bundle. At the end of the day, the DOJ’s likely product market candidate, which includes voice, messaging and data, is defensible.

The candidate geographic markets potentially include both local and national markets. Historically, viewed from the consumer perspective, geographic markets were local. This was because consumers purchasing mobile wireless telecommunications services chose among the providers that offered services where they lived, worked and traveled on a regular basis. Historically, providers offered different promotions, discounts, calling plans, and equipment subsidies in different geographic areas, varying the price for customers by geographic area.

However, by the end of 2008, there were four facilities-based mobile wireless service providers that industry observers typically described as “nationwide”: AT&T, Sprint Nextel, T-Mobile, and Verizon Wireless.12 In 2008, unlimited national flat-rate calling plans were launched by all the nationwide operators.13 Consumers increasingly have shifted away from restricted plans that included separate roaming charges and into these unlimited service options, and the focus of price competition has shifted accordingly.14 It now appears that pricing is for the most part set nationally by the four nationwide carriers, and regional and local competitors do not act as significant constraints on national pricing.

Indeed, in its FCC public interest statements in the both the Dobson15 and Centennial16 acquisitions, AT&T acknowledged that the geographic market is national precisely for these reasons. As AT&T wrote in its Centennial statement, supported by a declaration from its Chief Marketing Officer, “[i]n the mainland U.S., AT&T establishes its rate plans and pricing on a national basis, without reference to market structure at the CMA [Cellular Market Area] level.”17 AT&T’s statement continues: “One of AT&T’s objectives is to develop its rate plans, features and prices in response to competitive conditions and offerings at the national levels [sic] – primarily the plans offered by the other national carriers.”18

Although pricing by the four nationwide operators appears to be largely national, there may be promotions or discounts (e.g. of handsets) that occur on a local basis. How much of these promotions and discounts are driven by competition, and how big a factor they play in the overall pricing picture, needs to be looked at. For example, if a 2-year wireless plan costs $1200/year, but there is a $50 discount available in some cities on a new phone, that would amount to about a 2% discount over 2 years and would probably be small enough not to undercut the overall national pricing picture.

Viewed from the standpoint of business customers, the same conclusion appears likely: the geographic market is national. Similarly, viewed from the standpoint of suppliers (e.g., handset manufacturers), the geographic market is undoubtedly national. It is interesting to note that, according to an AT&T executive, Apple apparently approached Verizon, Sprint, AT&T and T-Mobile about the original iPhone.19 Consequently, under this proposed market definition, the merging parties will have a significant market share. As Senator Herb Kohl observed at the recent hearings on this merger, “The proposed merger between AT&T and T-Mobile will bring together two of the four remaining national cell phone carriers to create the nation’s largest cell phone network, with an estimated 43 percent market share. Should this deal be approved, AT&T and Verizon will control close to 80 percent of the national cell phone market.”20

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