The hottest companies in Washington, DC right now include Netflix, Sprint and T-Mobile. What do these firms have in common? They are all marketplace losers.
A few years ago, the Supreme Court said that the Sherman Act “does not give judges carte blanche to insist that a monopolist alter its way of doing business whenever some other approach might yield greater competition” (see: Verizon v. Trinko, 2004). Yet this is precisely the course of action that technocrats are taking as a result of accepting invitations from Netflix to conduct a “wide-ranging antitrust investigation” of the cable industry and from Sprint and T-Mobile to find a way to block Verizon Wireless’ acquisition of additional spectrum.
Netflix built a successful mail order DVD business when it wasn’t very practical to download movies over the Internet. Fortunately for Netflix, consumers can send and receive, but they cannot rent DVDs from the Post Office. There are legal and political constraints that prevet the U.S. Postal Service from diversifying into new lines of business, and these restrictions conferred a significant degree of monopoly protection on Netflix. Incidentally, saving the Postal Service requires diversification, among other things. What was great for Netflix wasn’t so good for the postal system (upon which we all depend).
Although some advocates of network neutrality wanted to postalize broadband, the Federal Communications Commission said no. Apparently, we are going to have that debate all over again.
Cable companies obviously will not be prevented from competing against Netflix and other online video providers. But a drive to eliminate any conceivable competitive advantage that cable providers may have would ultimately lead to extensive regulation, including, most likely, infrastructure sharing rules like those the Supreme Court looked at in AT&T v. Iowa Utilities Board (1999). In his separate opinion, Justice Stephen Breyer warned that “rules that force firms to share every resource or element of a business would create, not competition, but pervasive regulation, for the regulators, not the marketplace, would set the relevant terms.”
The current administration promised to reinvigorate antitrust enforcement. What that means is a return to the economic stagnation of the 1970s, when antitrust forced consumers to do business with uncompetitive, inefficient firms. It is no exaggeration to speak of antitrust as a form of corporate welfare financed by hidden taxes on consumers. The reality is that government cannot create competition; it can only suppress competitors.
Verizon Wireless Spectrum Acquisition
This is what is happening to Verizon Wireless, which is seeking to acquire unused spectrum from a group of cable companies to help overcome a spectrum crunch that afflicts the entire wireless industry. The FCC recently projected that mobile data demand will exceed available capacity by 2013, and the President’s Council of Economic Advisors confirmed a couple months ago that it is unlikely that wireless carriers will be able to accommodate surging demand without additional spectrum.
The Alliance for Broadband Competition, a group which includes Sprint, T-Mobile and two trade associations representing small wireless argues that competition could be enhanced if someone like T-Mobile could acquire the spectrum isntead of Verizon Wireless.
That the group calls itself the Alliance for Broadband Competition is itself interesting. Back when it was convenient to argue that broadband was a cable-telco duopoly justifying net neutrality regulation, those arguing for an expansion of the regulatory state denied that wireless could compete with traditional broadband services. “They are not comparable in either performance or price; they are not substitutable services; and they are certainly not direct competitors,” said Ben Scott of Free Press in 2007. For that matter, recall that Gene Kimmelman of Consumers Union pronounced competition dead in 2005,
The recent wave of proposed mergers in the telecommunications industry – SBC attempting to gobble up AT&T, and Verizon trying to swallow MCI – mark the ultimate demise of the era during which consumers were led to expect more and more choics and lower prices for local, long distance, wireless, and the new Internet-based services exploding on the market.
Setting that aside, Section 7 of the Clayton Act prohibits mergers if the effect may be “substantially to lessen competition, or to tend to create a monopoly,” not simply because a different combination might yield greater competition. The FCC, which must approve the license transfers, is free to decide whatever it feels is in the “public interest.” In general, most people can agree it is not in the public interest for government to intervene in the free market for the purpose of picking winners and losers.
Senator Herb Kohl (D-WI) seems to be insinuating that Verizon Wireless may be acquiring the spectrum with a nefarious anticompetitive motive to reduce the spectrum available to its smaller rivals. “Spectrum acquisitions,” he notes, “can be a strategic tool employed by dominant wireless carriers to entrench their market position and suppress competition.”
Kohl is grasping at straws. It is beyond dispute that the spectrum crunch affects the entire industry. Besides, the Department of Justice recently observed that “foreclosure” theory is of concern only where there is market power, and that for foreclosure value to be high there would have to be an established oligopoly with large margins between the price and the incremental cost of existing services. No one is claiming that the wireless industry satisfies these conditions.
Opponents are also taking aim at agreements between Verizon Wireless and the same cable operators providing for the sale of various products and services (see this and this).
Although the FCC does not have jurisdiction to review the commercial agreements, it is no secret that the agency frequently exceeds its jurisdiction and sometimes gets away it.
The Alliance claims that the commercial agreements are potentially anti-competitive and discriminatory because they provide no guarantee that Sprint and T-Mobile will gain access under the same terms and conditions as Verizon Wireless to
- 50,000 metropolitan WiFi hotspots owned by the participating cable companies
- cable set-top boxes that can double as in-home WiFi points of presence
- wireline trunks owned by Verizon or the participating cable companies that Sprint and T-Mobile lease to connect their cell towers
With the exception of incumbent local exchange carrier-provided trunks not subject to competition, Sprint and T-Mobile have generally thrived in the absence of open access regulation. The firms do of course face unrelated challenges that have nothing to do with Verizon or any of the participating cable companies, namely Sprint’s disastrous merger with Nextel in 2005 and Deutsche Telekom’s wish that T-Mobile become self-reliant so DT can target investment in its core European operations.
Sprint argues that “[r]easonably priced and broadly available private line services are particularly important for wireless carriers who depend on affordable backhaul to offer their wireless services” (emphasis added), and alleges that ILECs charge “supra-competitive rates” and “impose unreasonable and anti-competitive service terms that many purchasers of private line services are forced to accept because in many areas there are insufficient competitive alternatives.”
Sprint has offered flimsy evidence to date that the terms and conditions for ILEC-provided backhaul services are unjust. A 2009 report commissioned by the National Association of Regulatory Utility Commissioners (NARUC) flatly contradicts these claims, which have been around for years. The report concluded that the data upon which the allegations of excessive earnings are based is “virtually meaningless,” and that the actual earnings are probably “substantially less.” In any event, basic economics teaches that if a supplier imposes unreasonable terms and conditions, then competitors can profitably enter the market.
Senator Kohl is skeptical that the agreement which will allow the cable companies to purchase Verizon Wireless network capacity on a wholesale basis in order to launch their own wireless services will promote competition.
As compared to a full-fledged facilities-based competitor, relying on [“Mobile Virtual Network Operators”] to provide competition does not seem to be sufficient because they will be wholly dependent on Verizon Wireless for pricing and access to its network.
The Senator seems to have had an epiphany. He certainly did not make these views known in 2004 when he co-wrote a letter urging the Attorney General to support an appeal of a ruling by the D.C. Circuit Court of Appeals that struck down an FCC mandate requring incumbent local exchange carriers to unbundle every network element. The FCC rule allowed new entrants to offer telecommunications services without investing a dime in their own network facilities. By advocating an appeal of the D.C. Circuit ruling, Kohl was attempting to protect non-facilities-based competitors, who he apparently thought were providing a valuable service to consumers. That was the fashionable opinion of the time.
Does the real issue here revolve around the fact that the cable companies have decided it is no longer in their interest to partner with the competitors of Verizon Wireless, and the jilted lovers are leveraging their access to specialized and sympathetic government bureaucracies that can do their bidding? According to the American Antitrust Institute,
For the cable companies, partnering with Verizon may be superior to their partnerships with Sprint and Clearwire, but it is hard to see how competition in the wireless market is benefitted when cable companies become sales agents rather than resellers, or team up with one of the dominant firms rather than Sprint/Clearwire. (footnote omitted.)
Government technocrats are supposed to be thinking about what is best for consumers and the economy as a whole. But here is a pleading from a group of insiders who apparently believe that the bureaucrats seem to care less about what is in the best interest of the cable industry — or, for that matter, the nation — and more about whatever will benefit competition in the wireless industry — which is to say, will boost the prospects of Sprint and T-Mobile.
If this is what is going on, it is an excellent example of why we sould not permit the government to meddle in the economy. The government does not understand the economy. It struggles just to manage politics. The government has a soft spot for losers, because they are the most grateful for government assistance.
Cable companies have invested billions of dollars in broadband platforms that will drive economic growth. Netflix hasn’t contributed a single valuable innovation. Verizon Wireless has arguably built the best wireless network in the world. Sprint and T-Mobile are struggling to stay in the game. Our government wants to investigate cable companies and block Verizon Wireless’ attempt to acquire new spectrum. What can this signify other than that government seems to care more about politics than the economy?