Audit Notes: Ma Bell II—Duopoly Edition

The Financial Times’s John Gapper has an excellent column on why the AT&T’s proposed deal for T-Mobile should be shot down.

Again, unless it’s forced to divest customers and assets, AT&T and Verizon would now dominate the cellphones with a combined 73 percent market share.

Verizon conspicuously avoided criticising the deal this week since a 4G duopoly would suit it very well.

Verizon, which would suddenly lose its No. 1 position, knows it would benefit from the faux competition it would face from AT&T. It’s worth noting that while Sprint, the red ink spilling distant third in the market, is yelling about the threat to competition.

But this is my favorite part:

AT&T has presented the deal as a means for the US government to achieve its target for increasing mobile broadband coverage and penetration - an “American company investing billions in America”, as Wayne Watts, AT&T’s company lawyer, phrased it. It has promised to spend $8bn on rolling out a 4G network to 95 per cent of the population.

When a company wraps itself in the flag so blatantly, it pays to look at the fine print. AT&T insisted that US consolidation has not hurt price competition, quoting a US General Accountability Office report saying that US mobile service charges fell 50 per cent between 1999 and 2009. The report itself, however, showed that the bulk of the cuts occurred between 1999 and 2001.

I’m sorry to say, I skimmed through that report looking for that stat and didn’t find it. Neither, apparently, did anyone else in the press. I’m sure glad Gapper did.

It blows a big hole in the only argument, flimsy as it already was, that AT&T’s got that this merger won’t mean higher prices for consumers.

Gapper also makes a very good point here and it’s one I’d like to see explored in depth:

The US already performs badly in fixed-line broadband services in terms of price and speed compared with other countries, hurt by Verizon and AT&T having shrugged off the imposition of competition. The last thing the US now needs is AT&T, which already has mobile operating margins of more than 40 per cent, pulling that trick again.

Any company in an industry as mature as this one with margins that high is not facing enough competition. Either that, or they’re something of a natural monopoly that’s not facing enough regulation.

— Speaking of regulation, David Lazarus of the Los Angeles Times makes this smart point on how we got to this point:

In 1996, the Federal Communications Commission deregulated phone companies in hopes of fostering increased competition.

What we got instead is a clear effort by leading telcos to resurrect the scope of the old Bell telephone system, which once gave AT&T a monopoly over service, but without much of the regulation that previously kept Ma Bell in check.

And anyone who saw that this deregulation would be accompanied by antitrust enforcement could have seen it coming. Why not corner a market by snapping up your competitors if the government’s going to just look the other way? Monopoly rents are the ultimate prize.

— And Slate’s Annie Lowrey looks at an FCC report that shows the commission was already worried about concentration in the cellphone industry.

It noted that market concentration had increased 32 percent between 2003 and 2009. It did not see that consolidation as a good thing. Sure, prices for service had fallen, but perhaps not as much as they should have. And virtually every company’s profit margins had increased—in T-Mobile’s case, from 9.1 to 33.1 percent between 2002 and 2009.

There are those profit margins again. Remember those next time your iPhone gets zero bars. I had a lot of that in San Francisco last weekend.

Like Gapper, Lowrey doesn’t mince words on what the deal would mean for prices:

That means higher prices, full stop. The proposed deal is, in finance-speak, a “horizontal acquisition.” AT&T is not attempting to buy a company that makes software or runs network improvements or streamlines back-end systems. AT&T is buying a company that has the broadband it needs and cutting out a competitor to boot—a competitor that had, of late, pushed hard to compete on price. Perhaps it’s telling that AT&T has made no indications as of yet that it will keep T-Mobile’s lower rates.

Has America ever needed a media watchdog more than now? Help us by joining CJR today.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , , ,