Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age (40 page)

After the auction, consolidation proceeded apace. Bell Atlantic absorbed NYNEX in 1996 and then merged with GTE; then in 1999 the company merged with Vodafone to become Verizon. South Western Bell became SBC, bought Pacific Telesis in 1997 and Ameritech in 1999, and finally merged with Bell South in 2000 to become Cingular.
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Prices did go down for cell service during the late 1990s because of the new competition, the breakup of AT&T in 1984, and increased efficiencies from better technology. Spurred on by the breakup and by its technological
advantages, AT&T introduced the Digital One flat rate in 1998 for wireless service, which was wildly popular with both consumers and businesses.
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Still, by 2003, enough companies had consolidated that Americans were left with just three large wireless providers. Verizon had a nationwide CDMA network and 30 percent of the market; Cingular had a GSM network that covered urban areas and a 15 percent share; and AT&T Wireless (the former McCaw Communications) had a 13 percent market share from an old-fashioned standard (D-AMPS) that was unable to produce sufficient bit rates for Internet access. Sprint PCS, TMobile, Nextel Communications, Alltel, and others divided up the rest of the market.
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Then something big happened: Cingular bought AT&T Wireless (and adopted its name) in 2004 for $41 billion. The new AT&T Wireless got the GSM standard and a new lease on wireless life.
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Meanwhile, technical innovation continued. Again the government found additional spectrum, this time for the third generation of wireless phones, and held another round of auctions in 2008. The goods were again beachfront property—low-frequency spectrum that had been reclaimed from TV broadcasters and was perfect for building out wireless phone systems. The problem was that the established licensees had no incentive to allow new entrants into the market, and could afford to bid high enough to keep them out. Verizon paid $9.6 billion to win a national allocation of 22 MHz in a single contiguous nationwide block. AT&T spent $6.6 billion for more than two hundred 12-MHz licenses in mostly small geographic areas around the country, amounting to 35 percent of these available licenses. It also bought two smaller blocks in private purchases. Between them, the two companies accounted for about 85 percent of the $19.6 billion raised by the auction.
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Even before this auction, the low-frequency spectrum that the corporate ancestors of today's AT&T and Verizon had bought in 1993 represented a significant windfall advantage that Sprint or TMobile could not replicate. As a result, an enormous gap had existed between AT&T/Verizon and everyone else in terms of subscribers, revenues, profit margins, and cash flow.

This gap increased following the 2008 sale. Because it was clear that the value to the two giants of keeping a new competitor out of the arena would exceed any reasonable market value for the spectrum, and because the
giants were allowed to bid even though they already had enormous holdings in beachfront low-frequency spectrum, TMobile did not even enter the auction.

And so in some ways by 2011 the wireless marketplace was even less competitive than the wired market: it had been a concentrated field since 1995, and it was growing more concentrated every year. If AT&T were allowed to merge with TMobile, the combined company, along with Verizon, would control 80 percent of the national market.
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But even without the merger, Verizon (31 percent) and AT&T (32 percent) divided most of the market between them in terms of both spectrum holdings and revenues, with Sprint (17 percent market share) and TMobile (11 percent) barely hanging on as distant third and fourth players, with uncertain ability to constrain the prices charged by Verizon and AT&T.
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And by 2011, AT&T and Verizon had done an impressive job of shaping the federal government's policies for the future of high-speed data access along lines that favored their own business plans.

The federal government's problem was that almost a third of Americans were not subscribing to high-speed Internet access (often because of price), and many of those nonsubscribers were rural, minority, or low-income residents.
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In 2011 an estimated 18 million Americans had no wired access at all; it was unavailable where they lived.
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To solve this problem, AT&T and Verizon offered a compelling proposal to policy makers and journalists. Arguing that wireless access would help close the broadband gap in rural areas, they pointed out that data usage was exploding across wireless networks. Wireless had become so popular that their networks were buckling under the strain. The carriers helpfully pinpointed the source of the problem: given this popularity and the greatly increased use of data services by way of smartphones like the iPhone, limitations on the frequencies available to them for data access were constraining their ability to serve U.S. consumers—particularly in rural areas, where Internet access adoption was low.
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The Obama administration, seeking to spark innovation, investment, and competition in the wireless market, took seriously the talking point about a “looming spectrum crisis.” The administration proclaimed that spectrum reallocation and auctions of the resulting freed-up spectrum for
high-speed Internet access use were the keys to the future of mobile Internet access in America. If spectrum were reassigned from old-fashioned, inefficient uses like broadcast television, the argument went, more companies and more people would have access to broadband. And if some of that spectrum were auctioned off, it would bring billions into the U.S. Treasury. Other reallocated spectrum could be made available to public safety officials, and based on the explosive benefits of technologies like WiFi (which uses unlicensed radio waves at low power to connect to access points), some could be reserved for unlicensed uses. At the same time, a lot of money could be made by Americans manufacturing devices and selling wireless applications to be used across the newly available broadband spectrum.
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Spectrum reform became the focus of the administration's approach to mobile high-speed Internet access: the FCC's March 2010 National Broadband Plan relied on revenue obtained by reallocating and auctioning off spectrum to fund its recommendations and asserted that improving wireless access was the best way of solving the country's high-speed Internet access deficit.
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The Justice Department went along, saying, “Given the potential of wireless services to reach underserved areas and to provide an alternative to wireline broadband providers in other areas, the Commission's primary tool for promoting broadband competition should be freeing up spectrum.”
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It sounded like a win-win-win: wireless would fix the nation's high-speed access problems, auctions could raise billions of dollars for the Treasury, and the administration could solve a public safety problem by using the auction proceeds to fund the development of interoperable networks and devices. The administration could help make more wireless high-speed Internet access possible by releasing more spectrum. And all this could be done without a dime of federal spending.

There were just two problems. First, AT&T and Verizon had plenty of spectrum—the spectrum crisis did not exist. But their investors did not want them to spend money improving the wires and adding the additional towers that facilitated better wireless communications. Without a high-capacity wire and a tower in close proximity to the wireless communicator, a wireless transmission cannot go very far. Capital expenditures would obviously reduce the companies’ return on capital—bad for investors.

Second, unless the administration set auction rules that limited who was allowed to bid for spectrum—something it had little interest in doing given the deficit-reduction anxiety sweeping the nation—AT&T and Verizon would again spend whatever they needed to keep competitors at bay. Releasing spectrum under these conditions would have no effect on the duopoly's power to charge more for services and to pick and choose service areas. Without competition forcing prices down, lower-income Americans would still find high-speed Internet access too expensive; adoption would not increase, even if more spectrum was out there.

But having worked with the administration to frame both the policy problem (more spectrum capacity!) and its solution (take spectrum away from the broadcasters and give it to broadband!), AT&T found the perfect way to capitalize on the administration's messaging: merge with a company that had spectrum. The result, it promised, would be more capacity for AT&T and a solution to the nation's telecommunications failures.

On April 21, 2011, AT&T told the FCC that it was seeking permission to acquire TMobile for $39 billion.
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JPMorgan Chase had put up a $20 billion loan to support the deal.
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It was like watching Humpty-Dumpty being put back together again: Ma Bell would reappear in the form of Ma Cell. AT&T claimed that the synergies inherent in merging with TMobile would instantaneously free up new capacity that was the “functional equivalent of new spectrum.” With TMobile's spectrum holdings and cell-tower placements, AT&T said, it would be able to avoid dropped calls and frustrating iPhone experiences in New York and San Francisco and build out a higher-speed wireless network to 97 percent of the country within six years.
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In making this last claim, AT&T banked on Americans’ lack of interest in telecommunications issues. Verizon and AT&T had already said that this level of coverage would be reached by the two companies together almost as quickly.
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AT&T also conveniently ignored the fact that its rural infrastructure overlapped almost completely with TMobile's; rural Americans would get no help from the merger.
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But AT&T argued forcefully that the deal would give more Americans access to broadband and would spur innovation in devices and applications. Not only that, the merger would be so helpful to AT&T's ability to do business—it would create so many synergies in the form of complementary
network infrastructure, reduced advertising and marketing costs, and complementary retail store and customer support—that it would end up adding as much to AT&T's business as it cost. And the broadcasters had been irritated at having to give up their spectrum; with the merger, they would not have to.

AT&T pointed out that the president himself, in his 2011 State of the Union Address, had placed great emphasis on all these points: he had vowed to “make it possible for businesses to deploy the next generation of high-speed wireless coverage” throughout America, not only to produce a “faster Internet” and “fewer dropped calls” but also to “connect every part of America to the digital age.” Given that its goals for the merger aligned neatly with the administration's goals for the country, the company asserted to the press that regulatory approval was all but certain.
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The American telecommunications chattering class was briefly surprised; would such a major consolidation be allowed? But within a week after the merger was announced, the deal began to seem likely. Only Sprint Nextel, a company that had hoped to buy TMobile to bolster its own market share in the United States, protested strongly, saying that the acquisition would harm consumers and jeopardize the country's future.
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But Sprint was in an awkward position; it was a direct competitor complaining about a rival's possible success. Jim Cicconi, AT&T's senior executive vice president for external and legislative affairs, countered that Sprint was being hypocritical: just a few months earlier, as he had sought to bolster the administration's focus on spectrum policy and lay the groundwork for Sprint's possible merger with TMobile, Sprint's CEO, Dan Hesse, had called the wireless sector “hypercompetitive” and said that some consolidation would be healthy.
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Cicconi held his ground, even as the sense of the deal's inevitability began to dissipate. “Opposition is not growing,” he told the
Wall Street Journal
that May. “If anything, it seems fairly confined to the usual people and the usual organizations and does not seem to be growing beyond that.”
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Cicconi had already lined up letters of support from eleven state governors. He also had the backing of the Communications Workers of America, an influential voice among Democratic elected leaders, which issued a press release lauding the deal within hours after it was
announced.
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Support also came quickly from the NAACP and the Hispanic Federation, a familiar ally for large communications companies.
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And since TMobile's parent company was Deutsche Telekom, AT&T could claim to be transforming a German company's holdings in America into an American operation run by unionized workers.

The deal was designed to work out well for AT&T from every direction. The company offered Deutsche Telekom a $3 billion breakup fee and some high-frequency spectrum if the deal didn't go through. But if the adverse effects of regulatory conditions (like divestitures) added up to more than $7.8 billion, AT&T could back out and not pay the fee.
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AT&T's own canny assessment of its risks were expressed in the breakup fee: that three billion dollars was more than Sprint could hope to put on the table in any counteroffer. Even if the deal did not take place, while it was under consideration AT&T had not only kept Sprint and TMobile from joining, it had taken TMobile out of the game. With its low pricing plans, policy aggressiveness, support for an open-source operating system that gave developers a competing outlet for their applications, and dreams of its own high-speed wireless network, TMobile had been a maverick, a threat to the AT&T (and Verizon) model. No matter what it meant for American consumers, in oligopolist's terms, the deal was genius.