Wireless telecommunication is once again in a changing climate. There is a strong demand for more and faster data as well as peer to peer sharing possibilities. Previous generations of mobile networks have improved little by little, expanding the possibilities of the communications services. The emergence of 5G enables gigabyte download and upload speeds, supports more devices and creates possibilities for businesses through faster cloud computing. Some countries like Finland and China have already adopted consumer 5G tech but the US has been lagging behind. This can be the result of the lack of competition. The only big nationwide wireless network providers are AT&T and Verizon Wireless. But soon there will be a third as Federal Communications Commission (FCC) authorised a merger between T-Mobile and Sprint, the two next biggest providers. This will create a strong third competitor in the business with the resources to develop and deploy 5G technologies. A major point in the FCC report on the merger was to create a more competitive environment that would be socially beneficial. A 900-million-dollar question is, will it work?
T-Mobile and Sprint are both smaller broadband companies, but they are different in their field of expertise. T-Mobile has mid band services whereas Sprint has low band services. Different band widths are separated by their carrying capacity and therefore serve consumers with differing needs of data. These two companies thus complement each other in terms of assets. Merger would allow them to more easily increase the range and capacity of their bands and introduce the new 5G technology (FCC-19-103, Applications of T-Mobile US, Inc., and Sprint Corporation For Consent To Transfer Control of Licenses and Authorizations; et al (2019) pp. 3). FCC was worried about the increasing prices for some consumers as the merger would mean the disappearance of the Boost Mobile and Metro which compete against each other. But the improvements in network quality will result that the merger is socially beneficial. The coverage of 5G network and the network speeds will increase significantly. Especially the rural areas benefit from the faster connection and improved access to the network. It is estimated in the report that the development of 5G wireless networks could create millions of jobs and generate up to 500 billion in GDP growth. Impressive numbers but do they hold true?
Theory behind mergers
Important question when considering every merger and its effects is the market definition and the description of participants in that market. FCC defines the mobile telephony/broadband services market in three areas; product-, geographic- and input market (FCC-19-103 pp. 24). They tested each of these areas with the hypothetical monopolist test. In the this test the merged firm is compared to the rest of the defined market. If the new firm has market power, meaning it can charge a price above marginal cost, the merger usually gets cancelled. If it doesn’t the smallest firm from the market is added to the hypothetical monopoly and the test is run again. This way a clear picture of the effects of the merger can be drawn. Defining markets is important as the hypothetical monopolist is compared to other firms of the same industry or field (Ware R. & Church J. R., Industrial Organization: A Strategic Approach (2000) pp. 602). As communications markets are complex and mix old wire and voice technology with data transfer, the defining relevant markets is challenging.
First of the areas is the product market. Interestingly FCC considers a lot of the consumer effects compared to the corporate or government use. In terms of total social benefit this makes sense but on the other hand the major users of data and wireless networks are corporations. Product market is defined to be in line with older decisions; it includes voice, data, prepaid as well as post-paid services. T-Mobile and Sprint made an argument that the bandwidth below 2,5 GHz should be excluded and not used to define the market. This was because the under 2,5 GHz market was argued to be in a different, low use market. FCC declined the argument and included the bandwidth.
The geographic market is considered in the cellular market areas (CMA). These are local county or city sized areas. This is because the services offered in distant counties or other states are not substitutes for local communications services. The prices between the areas are uniform as the four major service providers compete and offer plans in virtually every area. This is why FCC also evaluates the mergers effect on the national level between all of the service providers. The corporations also bid and negotiate on the national level, so the geographic market is different for them. This all brings us to the last part, input market for spectrum. There were no changes in this area and the available spectrum for telephony/broadband use is 715,5 megahertz. The total available spectrum is 4950 megahertz of mmW. These create the boundary of the usage of the spectrum that T-Mobile-Sprint merger can impose.
Other market participants are defined as the telecommunications providers that offer larger services in terms of megahertz. This definition excludes mobile virtual network operators. I expect this was done because the MVNOs providers don’t have nation-wide networks and equivalent facilities to compete with T-Mobile, Sprint, Verizon and AT&T. Although T-Mobile and Sprint do compete in some of the same market on the local level as the MVNOs the main competition is on a national level with big telecommunications providers.
When discussing about the impact of this merger the main point in the FCC report seems to be lowering of costs for consumers and corporations. This is what is defined to be in public interest. From the conclusions I went through in the previous paragraphs, the merger would seem to reduce prices on a national level in the future. It would also offer more capabilities in terms of data transfer and network security. Lower costs for consumers usually mean that the profit margins of the providers go down. This is expected as the more competition drives prices down to marginal costs. But in telecommunications services the definition of marginal cost is not straightforward. Infrastructure needed for the new 5G network requires new towers and new antennas to support the tech. 5G antennas are multi input-multi output devices that can handle traffic on many users at the same time. The predicted figure is that they could support a thousand more devices than the old 4G network (Gupta A. & Jha R. K., A Survey of 5G Network: Architecture and Emerging Technologies (2015). Sections 1 and 2.). Not as many towers would then be needed for the same carrying capacity as before. This makes is possible to improve the remote rural areas’ connections with smaller costs and is a major point that FCC brings up in the report.
“Pricing at marginal cost cannot therefore break the firm even if this market is characterized as duo or triopoly.”
The total cost in data transfer consist of facilities (including servers, towers, staff) and the data itself. The facilities are the part of the fixed costs so in perfect competition the price would be defined as the price of the data. More precisely the marginal cost is the storage price of data. Data is just electronic ones and zeroes so in some sense the servers could be counted as marginal costs. Depending on how MC is counted the price could be very different. But the main thing is that the initial investment is big in telecommunications. Pricing at marginal cost cannot therefore break the firm even if this market is characterized as duo or triopoly. High entrance cost of setting up network infrastructure also suggest a natural N-polistic market. By allowing the merger there will be a triopoly in network services in the US. The price resulting from this change will be smaller than the prices before but not at MC. It would still be in the public interest.
Implications for regulation
The effects of merger to consumers and prices depend on firm specific information. This information is private and is covered in part in the FCC document. Some light is shed on the nature of consumers in each firm and extensive description of the measurement is given. First the diversion rates are defined. This means how many consumers switch from one operator to another in face of changing prices. FCC uses LNP database with census and porting data. The consensus in the report is that the market share of the company defines largely the consumer numbers. Meaning that the provider gets a quarter of consumers if they make up a quarter of the market. Merger would create a third strong provider and gain consumers on the national level. This could drive down the prices as discussed in previous paragraph. On the more local level the competition would not change much either. This is due to a part of the deal for T-Mobile and Sprint is to divest Boost Mobile and Metro. This would ensure that the prices and presumably consumers would remain at least as well off after the merger.
There is a considerable upwards pricing pressure from the merger when estimated with simple Gross Upward Pricing Pressure Index and Compensating Marginal Cost Reduction. These calculations don’t consider entry barriers or capture all of the changes in competition due to the merger. The models are static in their perception. Both still agree that the prices would increase 4-6% after. (FCC-19-103 pp. 60)
T-Mobile and Sprint submitted their own calculations (IKK model) taking into consideration the market effects during as well as after the merger period. They concluded that the merger would be beneficial for the economy and would not induce upward pricing pressure if a certain dollar amount (This information is confidential and is not available in the document) of efficiency per user is achieved. FCC found some questionable presumptions in the IKK, most notably the pricing commitment of T-Mobile and Sprint. For regulators, there is no trusting in the firms. They have an incentive to lie. Other presumption of IKK was that the prices would fall, and quality would increase on the national level, as they see the whole telephony services to be connected nationally. It is true that the competition on the national level would indeed increase but this might not be the case on the local level. Main concern becomes that the merger would result in uncompetitive behaviour in more localised areas and networks.
IKK model relies heavily on the assumptions on the efficiency development in the future. These estimations are highly volatile and because of this FCC measured the changes in three scenarios with different expectations on efficiency. These estimations are confidential information so I can’t comment on them for now, time will tell what the efficiency gain is in the long run. It is possible to say that the concern becomes more pressing under the uncertainty underlying the calculations. Regulation is at its best when the regulator doesn’t have to interfere in the markets daily. By ordering that the Boost Mobile has to be divested, FCC ensures that there is local competition that will keep the prices socially beneficial no matter what the long run efficiency gain is. FCC defined components for ensuring the continuous competition; wholesale price of access must be sufficient to create incentive for competition and improved 5G network must benefit also the divested Boost in the long run. (FCC-19-103 pp. 87-90)
Interesting question about the improved competition, that is not considered in the FCC report is the nature of nationwide networks. Could the market be duopoly? In that case the introduction of a third competitor would drive the prices down to a situation where the average cost is above marginal cost. This would drive out one of the providers. The costs in telecommunications industry are hard to define as mentioned above. Some countries like Finland and Germany have more than two providers and both of the markets are sustainable and competitive. There are some geographic and demographic differences between these countries and the US. The population in the US is much more scattered and larger than in either Finland or Germany. This raises the marginal cost of data. The optimal number of providers may then very likely be lower. Future will tell if the market is duopoly or if it can support three competitors.
All of the effects of the merger are not bad of course. T-Mobile has the coverage to deploy 5G network but not the spectrum to support it. Sprint has the opposite problem. By combining they could achieve nationwide 5G network. This would also reduce costs in building the network. This would provide robust network in a specified timeframe to the US. Changes are in the public interest and increases welfare (FCC-19-103 pp. 112). The merger would also increase the phase of 5G development and deployment. There are also benefits for the firms of other industries from the accelerated development of 5G network. Corporation clients for wireless and data transfer services have been concentrated between Verizon and AT&T even though both T-Mobile and Sprint have been trying to break in to the market. FCC agrees that with the merger the they have a better chance of competing for big clients. Increased competition in lowers prices and offers more advanced data solutions which make the US firms more competitive in the global market. I presume this is part of the reasoning for the billion-dollar growth that 5G might bring.
Concluding I can say that the merger is not without its problems. Many of them are considered by FCC but some, for example the market capacity is not. The merger brings much needed competition and innovation to the mobile network market in a crucial development in technology industry. The positive effects seem to outweigh the possible negative ones, especially after the local competition is ensured with the separation of Boost Mobile. This merger will pave a way for the US firms to compete both in- and outside of the country.
References:
FCC-19-103 (2019). Applications of T-Mobile US, Inc., and Sprint Corporation For Consent To Transfer Control of Licenses and Authorizations; et al.
Gupta A. & Jha R. K. (2015) A Survey of 5G Network: Architecture and Emerging Technologies.
Ware R. & Church J. R. (2000) Industrial Organization: A Strategic Approach.