Already this year, we’ve seen announcements of two major transactions in the media and telecommunications space: Comcast announced plans to acquire Time Warner Cable, and AT&T announced plans to acquire DirecTV. Congress has begun weighing in on these transactions and, if recent press reports are to be believed, they will soon have an opportunity to review the long-rumored merger of Sprint and T-Mobile. It is this third proposed transaction that is most interesting because it carries the potential of a policy dilemma for both Republicans and Democrats in Congress.
For Congressional Republicans, the typical starting point is that every merger is a good merger. In the telecommunications industry, one need only consider the proposed AT&T takeover of T-Mobile in 2011 to see how Republicans were virtually unanimous in their support of an acquisition that would have seen a dominant player in the wireless industry with a history of abusing its market power become even larger.
However, a merger of Sprint and T-Mobile would put Republicans in an awkward position. Reflexively supporting this transaction would mean creating a third wireless carrier with total subscribers equal to the largest two wireless operators — AT&T and Verizon — and the scale to offer real competition to both. Greater competition is generally a good thing for free market proponents, but the competition from a combined Sprint and T-Mobile would be a real threat to AT&T and Verizon — each a well-heeled and long-tenured patron of congressional Republicans.
It is possible that congressional Republicans could tether their opposition to the well-publicized skepticism of such a deal that has been expressed by the Department of Justice and, to a lesser extent, by the Federal Communications Commission. Of course, this would put Republicans in the position of siding with President Obama’s Justice Department and the Democrat-led FCC, not to mention implicitly ceding some of their investigatory authority to the bureaucracy. Ultimately, the path to policy consistency for congressional Republicans is to support a merger of Sprint and T-Mobile, despite the threat that the new entity would pose to AT&T and Verizon. It will be interesting to see whether they can do it.
The Democrats in Congress have an easier path to consistency, though perhaps a more difficult philosophical hurdle to overcome. On one hand, congressional Democrats typically are committed to promoting and strengthening consumer benefits in the marketplace. But on the other hand, they generally are skeptical of large corporations and, particularly, large-scale mergers where major players in an industry become even bigger through transactions. Again, one need only consider the positions congressional Democrats took in AT&T’s failed acquisition of T-Mobile in 2011.
The Democrats’ path to policy consistency is easy in this hypothetical for the same reason it is difficult for Republicans. That is, the combination of Sprint and T-Mobile creates a third carrier with the scale to be an effective competitive counterbalance to AT&T and Verizon, each of which is proportionally massive when compared to the rest of the industry.
Consider that, today, AT&T and Verizon control 80 percent of the industry earnings, have 70 percent of the wireless customers in the U.S., own licenses for over 80 percent of the ultra-efficient low band spectrum, and own the networks supplying most of the landline connections to the towers used by all other wireless carriers. Note that AT&T and Verizon did not reach their tremendous size by beating their competition; they did so by buying their competition during an era of unfettered acquisitions and near-total regulatory disinterest. The several “Baby Bell” descendants of the original AT&T spent a decade reconstituting themselves into the “Twin Bells,” while also acquiring various smaller operators. That era of consolidation is why we now have a wireless duopoly. Without market-based competition from a third comparably-sized wireless carrier, heavy-handed, public utility-style regulation is the only option for promoting competition in the industry. Since that solution is generally regarded as politically untenable, a merger of Sprint and T-Mobile provides the best option to inject competition into the wireless industry.
Congressional Democrats still must reconcile their support for such a transaction with the Justice Department’s stated opposition and the FCC’s less-than-lukewarm interest, but the FCC is an independent agency that may be convinced of the public interest benefits such a transaction would deliver, and the Justice Department, when presented with an actual transaction to evaluate, could easily determine that their preconceptions about the industry and their fears about such a merger are unfounded.
If the wireless industry is to be competitive and deliver the benefits of competition to the consumer, Sprint and T-Mobile must be allowed to merge and then must work with the nation’s smaller competitive carriers to create both the scale and combined footprint of a third national wireless carrier. Then, and only then, will we have a counterbalance to the wireless Twin Bells, and true competition for the U.S. wireless consumer.