Consolidation Seen as Key Factor in How Wireless Industry is Regulated

In 2011, AT&T’s proposed buy of T-Mobile went down in flames, in part because of FCC and Department of Justice concerns that it would have reduced from four to three the number of national carriers (see 1112200094). In 2014, Sprint and T-Mobile flirted with a combination but didn't proceed after federal regulators made clear their preference for four national carriers (see 1408070044). The consolidation continued last week with Shentel’s proposed buy of nTelos (see 1508110067). There hasn't been a merger of major national carriers since 2005, when Sprint joined with Nextel. Nonetheless, other major deals have taken place in recent years -- including T-Mobile/MetroPCS and AT&T/Leap Wireless, which involved two of the U.S.’s largest low-cost carriers.

The FCC 2014 wireless competition report noted that at the end of 2013, the weighted average Herfindahl-Hirschman Index for the wireless industry, a measure of market concentration, was 3,027, up from 2,966 at the end of 2012. “As in previous years, the most recent increases in the weighted average of HHIs reflect continued industry consolidation, such as the 2013 merger of T-Mobile and MetroPCS,” the report said.

The scarcity of spectrum makes the wireless industry unique among industries the FCC regulates, said Harold Feld, senior vice president at Public Knowledge. “There’s no substitute” for spectrum, and “it’s a government-controlled monopoly in that the government controls when and how they’re auctioning licenses and under what conditions,” he said. The government also sets regulation on roaming policies, an alternative to spectrum caps, he said.

Companies like Leap and MetroPCS found they had to merge with a larger player, Feld said. “They couldn’t get the spectrum they needed to provide reliable national service.” They couldn’t get the handsets at the right prices to remain competitive, he said. “What used to be the avenues by which competitors grow, find alternative business models, have been blocked, and we have not developed any policy solutions.” The FCC also hasn’t completely overhauled the data roaming regime or made sure smaller carriers can buy handsets at competitive prices, he said.

“Industry consolidation has been and will continue to be a real problem if the largest national carriers are allowed opportunities to buy competitors without addressing ways for smaller carriers to access an open ecosystem," said Steve Berry, president of the Competitive Carriers Association. "Today more than ever, competitive carriers need effective data roaming obligations, timely access to similar devices, reasonably priced backhaul, and access to spectrum, whether through auction or on the secondary market. The exploding demand for mobile data services coupled with limited spectrum availability drives further consolidation of wireless carriers.”

The TV incentive auction is critical to competition in the wireless industry, Berry said. "The largest carriers want to maintain their dominant position and already have the ability use the ‘power of the purse’ to foreclose smaller competitors," he said. "The incentive auction is an opportunity for the FCC to say ‘enough is enough’ by ensuring a competitive marketplace all consumers can enjoy. There is lots of data showing that more than two carriers could create effective competition. The key question is, ‘How much consumer choice is necessary to capture the benefits of a competitive marketplace without artificially regulating competition?’”

“The administration’s insistence on four has been a bit puzzling, especially when Sprint and T-Mobile would clearly be more effective together than alone,” said Doug Brake, telecom policy analyst at the Information Technology and Innovation Foundation. With Deutsche Telekom wanting to sell T-Mobile US and Sprint parent SoftBank wanting to buy the company “and those dynamics unlikely to change in the short-term, I would think a deal would be very possible under a more open-minded administration,” Brake said.

The long-term movement in the wireless industry has been toward consolidation, Brake said. “That consolidation has been a useful tool to find the right structure as the young industry got off the ground,” he said. “Easier to start with too many competitors and work down than start with too few. So government has to put its foot down at some point. Saying no to AT&T/T-Mobile was probably a good decision, but that doesn’t mean four is a magic number. In the end, four is fine, but three may well be better.”

"The Obama administration has made it clear that its philosophical conviction is to maintain four national carriers,” said former FCC Commissioner Robert McDowell, now at Wiley Rein. “Mountains of data illustrating how having three carriers has helped consumers in Europe and Japan don't seem to move the opinion needle at the White House, DOJ or FCC. Big companies looking to combine are going to have to wait to see whether the next presidency will be more sympathetic to their public interest arguments about the need for an economic and regulatory environment that will foster increased capital expenditures and innovation."

Generally, Democratic administrations allow industries to be consolidated to four competitors and Republican administrations to three, said Roger Entner, analyst at Recon Analytics. The FCC under Obama has been determined to increase the number of nationwide providers, he said. “The generous accommodations made to traditional satellite providers to enter the terrestrial wireless business are a testament to that effort, sometimes disregarding physics to further that goal,” Entner said. “It is difficult to see how this would change under another Democratic administration.”

But, Entner said, the consolidation of small carriers has been ongoing since the first FCC spectrum auction. “With all other things equal, wireless consumers prefer nationwide coverage,” he said. “This highlights the need for non-nationwide providers to offer a differentiated service. In the vast majority of countries, this consumer preference of nationwide coverage led the regulator to issue nationwide licenses. In some countries, there are regional licenses.” The FCC has divided the U.S. into as many as 734 geographical licenses, the smallest licenses traditionally offered in spectrum auctions, he said. “That these licenses reassemble into a near-nationwide patchwork is inevitable and should... have been completely foreseeable.” There are other good reasons the wireless industry has consolidated, he said. “The very small wireless operators that have been consolidated are very often family-owned businesses,” Entner said. “The owners are generally in their 60s and 70s often without a suitable successor in-house that has the same passion to compete and succeed as the current generation. These owners are living the American dream by selling the business that they created and deservedly retire comfortably and often provide enough wealth for generations. Who wants to deny American entrepreneurs [the ability] to retire in comfort by selling to the highest bidder?”

"The reality is the current FCC takes an overly stingy view of market competition, including the wireless marketplace, most likely to maintain a justification for regulation,” said Randolph May, president of the Free State Foundation. “There is no sound reason, in the face of the evident price competition, for the FCC to view the current four national wireless carriers as some sort of sacrosanct competitive marker. And the commission doesn't, and is unlikely to, take account of competition from various messaging services provided by Google, Facebook, and others who offer substitutable services. The notion that any 'consolidation' is inherently bad for consumers is just plain wrong."