There is no saving grace for the federal government approving what is on its face an illegal horizontal merger between T-Mobile and Sprint. The wireless market is already highly concentrated according to the Department of Justice’s own guidelines, and this merger only exacerbates the problem. Mergers that bring extreme levels of concentration are supposed to be blocked. No supposed benefit to consumers is actually waiting on this merger, including any and all claims about 5G. Here's what this merger really means: people will have fewer choices for wireless services, at higher prices, while innovation suffers.
It was not that long ago when the DOJ said that mergers that shrunk a highly concentrated market from four competitors into three competitors “significantly harmed” consumers per their own antitrust guidelines. What could possibly be different about this merger?
Ignoring Its Own Guidelines
To approve this deal, the DOJ had to ignore its own guidelines. The traditional scrutiny applied to these kind of mergers under the guidelines is to measure the market share of the relevant companies and combine them using a formula that indicates concentration levels in a market. That formula, called the Herfindahl-Hirschman Index (HHI), is calculated by squaring the market share percentages of each of the companies in a market and then adding them together. A complete monopoly has an HHI of 1002, or 10,000, while a highly competitive market can have a score close to 1.
For the U.S. wireless broadband market in 2018, the calculation looks like this:
AT&T (34.5)² + Verizon (34.6)² + T-Mobile (17.8)² + Sprint (13.1)² = 2875.86
This is considerably higher than 2500, the level at which the DOJ considers a market to be highly concentrated.
When two companies are merging, especially in already highly concentrated markets, the guidelines say that a merger that raises the total HHI by 100 to 200 points raises “significant competitive concerns,” and mergers that raise the index by more than 200 points “will be presumed to be likely to enhance market power.” The T-Mobile and Sprint merger blasts past the red zone and raises the market concentration numbers by 466 points nationally. By some estimates that number exceeds 1,000 points in some major metropolitan markets. This merger's anti-competitive warnings are effectively off the charts.
5G Hype Does Not Make an Illegal Merger Legal
The Sprint-T-Mobile merger has been the subject of a lot of 5G hype. EFF has called attention to the political leveraging of 5G before, and this merger is the perfect example of how it can be weaponized to blow holes in consumer protection laws. From the outset, Sprint and T-Mobile repeatedly over-represented, claiming the merger would bring 5G wireless services to all Americans. The companies’ argument is that Americans must accept fewer choices at higher prices if they want to see these new services. This is just untrue.
5G services can reach U.S. Internet users without the merger. The means of delivering those services is through government-regulated licenses. Those licenses can be modified with new policies to promote competition and access. In particular, instead of approving anti-competitive mergers, the government could simply change the terms of the licenses it gives companies for their use of spectrum, the radio frequencies used to transmit services.
Spectrum is not the scarce resource we are told it is, so long as there are effective rules for sharing it. We have government management of spectrum primarily to establish a logical structure for who can use the resource and how it can be used. Therefore, it is the government licensing of that resource that creates scarcity. When major wireless carriers are arguing that only a merger would allow them to deliver innovative new uses, they are arguing that scarcity of spectrum requires them to consolidate. This intentionally ignores the government's power to change the terms of their licenses, requiring competitors to share airwaves in order to enable 5G, without those competitors having to merge into a single company.
Innovation Will Suffer
At the end of the day, fewer wireless carriers means fewer risk-takers. And fewer risk-takers means less innovation.
The smartphone is ubiquitous in today’s wireless market, but it owes its success to a single carrier being willing to take a risk and try something different than its competitors. Prior to the iPhone, the wireless carriers dictated the design and functionality of cellular phones and were unwilling to push the envelope. Apple’s effort to build something very different than common handsets was originally rejected by Verizon because the carrier wanted more say over the design than Apple was willing to grant. Even the negotiations with AT&T Wireless (formerly Cingular) were contentious as they debated whether the phone would allow video streaming functionality, tethering, and video calling. But imagine if AT&T also rejected Apple’s idea? Apple would still have had other major national wireless carriers to pitch who might have a different set of values, and more willingness to try something risky to gain market share. That is the essence of how competition promotes innovation. The more entities there are competing with one another, the greater the possibility that one of those entities will try something different to win customers.
If the U.S. market is allowed to consolidate into three national carriers, future Apples will have fewer parties to negotiate with and there will be a greater reduction in risk-taking. Advancements from manufacturers in areas such as cognitive radio and other means to utilize spectrum in new and dynamic ways will have to hope that one of three carriers will engage productively with them, but that is exactly what mergers tend to diminish. It is well accepted in antitrust law that a smaller number of players have a greater propensity to behave like one another as they have fewer competitors to maneuver around and fewer reasons to rock the boat. The DoJ offers no solutions to this outcome, other than to say that DISH Network, which is acquiring a handful of assets from Sprint and T-Mobile, should hopefully fill that void (despite having no wireless broadband customers and no infrastructure to serve them). Such blind trust in a non-existent competitor to do a good enough job to compete with massive, entrenched incumbents is questionable at best. Ultimately, it argues in favor of just denying the merger.
Now it is up to the courts to decide if this merger can proceed. Ten state Attorneys General have sued to block this merger and they will make the case that what Sprint and T-Mobile are attempting is illegal. The difference this time is that unlike the last time the federal and state governments blocked a wireless telecom merger (the DoJ’s successful challenge to the proposed AT&T-TMobile merger in 2011), the DOJ and the FCC will be on the side of the monopolists in the courtroom.
But all is not lost. There is a burgeoning sense that many industries—not just Big Tech and telecoms (or even eyewear or professional wrestling)—have grown dangerously overconcentrated. America is losing patience with monopolistic conduct and lawmakers are waking up to public sentiment. Even though the DOJ and the FCC have changed sides in the fight against monopolistic mergers in the telecoms sector, there is a growing movement that is pushing back. This is just a skirmish in a bigger fight, and even if we lose it, the fight is just getting started.