Democracy & Technology Blog Bailout for Sprint?

Sprint Nextel Corp. is a troubled company, and that is unfortunate. Government cannot save Sprint, only subsidize it. That could harm our economy. Government can only subsidize the weak at the expense of the strong.
SprintNextel_logo.jpgSprint posted another dismal earnings report late last week. The company had a net loss of $847 million in the second quarter, for a total of $1.2 billion in net losses so far this year. Sprint also lost $3.5 billion in 2010, $2.4 billion in 2009, $2.8 billion in 2008 and it recognized net losses of $29.4 billion in 2007.
What is Sprint’s comeback plan? Not surprisingly, the company is quietly seeking a stealth bailout from the Federal Communications Commission.

To be sure, this bailout would not be financed by taxpayers, the banks and auto companies received. That would be too hard to pull off again. This bailout would be in the form of a mandate to lower prices for politically-favored buyers, even if that means raising prices for other buyers.
Sprint claims that it pays other carriers over $2 billion to connect Sprint’s cellphone towers with each other and other networks. These services are referred to as “special access,” and Sprint has been hounding the FCC for years to force its suppliers accept lower payments.
The ideal pretext for this type of bailout is the pending merger between AT&T and T-Mobile USA. The FCC could either impose conditions or withhold approval until AT&T and T-Mobile offer up “voluntary” concessions to sweeten the deal for whiny third parties. Sweeteners could include asset divestitures or terms of service commitments. For example, AT&T and T-Mobile could be forced to sell “special access” to Sprint at or below cost in exchange for Sprint calling off its high-priced lobbyists.
Or maybe Sprint wants T-Mobile for itself, and hopes to eliminate a competitive bidder. If the FCC refuses to approve the AT&T+T-Mobile merger, Sprint might be able to acquire T-Mobile on its own terms.
When government makes decisions such as these, it is picking winners and losers. Which is a form of industrial policy, where resources are allocated by politicians, not willing buyers and sellers. Central planning has the potential to punish investors and consumers, and to harm national competitiveness, by diverting resources from economically useful to politically-favored activities. Neither China’s Great Leap Forward nor any of the Soviet Union’s Five Year Plans produced economic prosperity. And just look at what has become of Japan. Or France, which actively promotes its “national champions.” Industrial policy is for losers.
Sprint’s troubles and/or dreams explain most of the limited opposition to the AT&T+T-Mobile deal. “Sprint has been a visible leader of the proposed takeover,” conceded CEO Dan Hesse, “but opposition is beginning to come from all corners.”
That may be wishful thinking. The only significant new opposition is from one fairly predictable corner: Chairman Herb Kohl of the Senate Antitrust Subcommittee, who criticized the combination in a seven page letter to agency officials two weeks ago. Citing Hesse’s own opinions that the merger would make the competitive environment “much more difficult for Sprint” and Sprint could become “much more of a takeover target,” the retiring Wisconsin Democrat concluded,

[W]e cannot turn a blind eye to the dangerous possibility that this acquisition could ultimately result in a duopoly in the national cell phone market.

There is little if any danger, realistically, of a duopoly even if T-Mobile merges with AT&T and Sprint were to disappear tomorrow. Kohl seems completely unaware of other sources of competition, as cited, for example, in a recent paper by Gerald R. Faulhaber, Robert W. Hahn and Hal J. Singer. For example, Clearwire’s fourth generation (4G) network was available in 71 cities and covered 120 million people in April. Clearwire’s website says that the company expects its subscriber base to more than double in 2011.
They also note that Leap Wireless (Cricket) and MetroPCS together cover over two-thirds of the population and serve 21 of the top 25 markets nationwide. They cite an analyst who says that the two carriers have effectively formed the “fifth nationwide carrier” as a result of a roaming agreement between themselves.
They also point to LightSquared, which expects to cover 260 million people in the U.S. with 4G service by 2015.
Sprint has partnered with both Clearwire and LightSquared.
Kohl also dismisses the fact that overall there are approximately 150 wireless providers offering national service utilizing their own facilities and/or roaming agreements with other providers. But according to Kohl, these competitors are “not competitively significant players.”
Although Kohl did not explain what he means by this term, Derek Turner at Free Press, for one, has said in the past that “when a market has fewer than the equivalent of six equal-sized competitors, the market just doesn’t function properly.” According to this definition, the wireless market we have now is dysfunctional. But we know it is not. A recent paper by Everett M. Ehrlich, Jeffrey A. Eisenach and Wayne A. Leighton concludes that the wireless market is fully functional.

If there was significant market power in the markets for mobile wireless carriage, devices, content and applications, one would expect to see evidence of that market power in market performance. In general, markets characterized by high levels of market power exhibit higher prices, lower levels of output, and slower innovation than more-competitive markets. In the case of mobile wireless, all of the metrics point in the opposite direction: The U.S. market exhibits low and falling prices, high levels of output, and rapid innovation, both in absolute terms and relative to other developed nations.

Turner is describing a “perfectly competitive market,” with many equally-sized competitors selling indistinguishable products, like the market for pork bellies or frozen concentrated orange juice. With no other way to distinguish commodity products, sellers compete on the basis of price only. Needless to say, there are very few perfectly competitive markets. Wireless providers, for example, compete not only on price, but also on coverage area, service quality, handset availability, etc. Innovative markets, where producers continually improve and enhance their products, are rarely if ever “perfectly competitive.”
The free market values smaller wireless providers even if Kohl does not. Kohl is concerned that because they are either reliant on roaming agreements with larger carriers, or must purchase “special access” circuits from larger carriers to connect their wireless towers with the telephone network and/or they cannot sell some of the smartphones which are available to larger carriers on an exclusive basis (such as the iPhone), they are insignificant. Yet, despite these challenges, the smaller carriers continue to attract investors and customers. This could not happen unless the smaller providers are delivering superior value.
In any event, observable outcomes notwithstanding, none of Kohl’s concerns are justified by the facts.
Although T-Mobile is an alternative roaming partner that will no longer be independent if it merges with AT&T, there are other alternatives. Clearwire, Leap / MetroPCS and LightSquared are — or soon will be — other potential roaming partners besides AT&T and Verizon Wireless.
T-Mobile does not provide “special access,” so even if it is acquired there will be no fewer providers of dedicated circuits between cellphone towers and other networks. This is another non-issue.
The acquisition of T-Mobile will not affect the availability of smartphones. AT&T and Verizon Wireless do not comprise 80% or 90% of the market for smartphones. That is a global business. Smartphone manufacturers have their sights on places like China, Europe, India and Russia, as well as North America. According to comments filed in the merger proceeding by Nokia,

Nokia disagrees with the predictions of commenters that forecast dramatic shifts in the U.S. mobile device market as a result of the proposed merger. Carrier input regarding handset development is only one factor considered by handset manufacturers, who compete against one another on a global stage regarding the features, functions, and quality of mobile devices. Manufacturers do not rely on carrier demands or requests to drive innovation. On the contrary, they have massive, independent, globally-driven incentives to offer the most advanced, fastest, feature-rich, and consumer-friendly devices to consumers. Manufacturers have similar incentives to sell these devices in multiple channels and make independent decisions in this regard based upon what best meets their chosen strategies.

* * * *

Even a cursory review of the device lineups of the various carriers demonstrates that there is perhaps more parity in device offerings today than there has ever been. The proposed transaction is unlikely to have any effect on innovation in the device market or the availability of a wide range of devices with the most attractive features to all carriers, and there is no need for [FCC] action on these issues.

The sole legitimate issue is not how will this merger impact other firms, but how will it affect consumers? Just because a merger causes some anxiety among competitors does not mean it will harm consumers.
Kohl claims T-Mobile has been a “price leader,” and that removal of such a “maverick price competitor” raises a substantial likelihood that prices will rise following this merger. But it does not appear that T-Mobile is a “maverick,” as Professor Joshua D. Wright recently testified.

Mergers can facilitate pricing coordination by eliminating a particularly disruptive and aggressive rival – a “maverick,” in antitrust parlance. A typical maverick disrupts stable and coordinated pricing with discounts, stealing market share and increasing output whenever possible. It does not appear that T-Mobile USA is a maverick in the antitrust sense of the term. (footnote omitted.)

Kohl cites contested theory but no facts when he suggests that prices may rise. On the other hand, Faulhaber, Hahn and Singer find no statistically significant relationship between a household’s monthly wireless bill and the concentration of the wireless industry (i.e., the number of wireless providers) in the market where they live.
And Larry Cohen of the Communications Workers of America reminds us that the prices consumers pay for cellphone service have continued to fall despite numerous significant mergers in the wireless industry.

To be sure, some contend that the merger will increase consolidation in the wireless industry, a development they maintain will harm consumers through higher prices and an insufficient range of choices. The facts, however, do not support this argument. Over the course of the last twelve years, we have witnessed numerous significant mergers in the wireless industry: Bell Atlantic-GTE-Airtouch in 2000; SBC Wireless-BellSouth Wireless in 2000; Cingular-AT&T Wireless in 2004; Sprint-Nextel in 2004; Verizon-Alltel in 2008; and AT&T-Centennial in 2009, just to name a few. And, how have these transactions impacted prices? As demonstrated in the following chart, prices paid by consumers for wireless service have continued to fall following such mergers.

If anything, the industry has become more competitive with fewer providers. The dynamics of the industry are one of the chief reasons why the wireless market is and will remain competitive, as Cohen explains.

[T]he dynamics of the marketplace discourage anti-competitive coordination or collusion. The wireless industry is constantly innovating, and there is a strong incentive for a company to be the leader in rolling out a new product or service. In addition, companies do not just compete on a single variable — price — but rather distinguish themselves with respect to a number of elements, including operating platforms, speed, and devices, thus making coordination or collusion far more difficult. Moreover, major players in the industry are under constant threat by the prospect of new entrants or the rapid growth of smaller rivals.

Cohen’s last point is a critical observation. If it ever becomes necessary for the government to promote competition in the wireless industry, that would be as simple as auctioning more spectrum.
Antitrust relies on subjective predictions, and no one is clairvoyant. When it works and when it does not cause unacceptable collateral damage — which is not always — antitrust is most useful in preventing market failures that would be difficult to fix. A market failure in this industry would be relatively easy to repair. Antitrust does not need to be, nor should it be, the government’s primary tool for promoting competition in the wireless market.
What would happen if this merger is blocked? Would T-Mobile remain a feisty and significant competitor? Probably not. As Cohen observes,

Unfortunately, T-Mobile simply lacks both the spectrum and the capital to build a 4G network.

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[B]efore this transaction was proposed, it was clear that Deutsche Telekom was going to sell T-Mobile. Therefore, the real question posed by this transaction is not whether T-Mobile will survive as an independent competitor. Rather, the operative question is whether T-Mobile will be acquired by Sprint or AT&T, and the record clearly indicates that an AT&T/T-Mobile merger will be better for consumers and competition than would a merger between T-Mobile and Sprint.

In the final analysis, the most notable objections to the AT&T/T-Mobile merger center on the possible impact to Sprint. Having stumbled badly in the marketplace, Sprint is aiming to become a significant competitor inside the Beltway. Sprint’s investors should take note. This is usually a red flag, a sign of hopeless desperation. The government cannot save Sprint, only prolong its agony. Sprint may be doomed if it expects to find salvation in Washington, DC.

Hance Haney

Director and Senior Fellow of the Technology & Democracy Project
Hance Haney served as Director and Senior Fellow of the Technology & Democracy Project at the Discovery Institute, in Washington, D.C. Haney spent ten years as an aide to former Senator Bob Packwood (OR), and advised him in his capacity as chairman of the Senate Communications Subcommittee during the deliberations leading to the Telecommunications Act of 1996. He subsequently held various positions with the United States Telecom Association and Qwest Communications. He earned a B.A. in history from Willamette University and a J.D. from Lewis and Clark Law School in Portland, Oregon.