AT&T and T-Mobile: Troubled Reasoning Despite Good Policy

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While I applaud the decision of the Department of Justice to file suit to block the merger of AT&T and T-Mobile as a sound free-market and pro-competive decision, recent quotes from Administration officials leave us to believe that this positive and constructive move may be more of a case of a blind squirell finding a nut than any sort of visionary and sound policy posture.  Moreover, in reading the reviews of this action, I remain convinced that the knowledge of economics on the part of journalists remain sourced in partisan talking points rather than any fundamental knowledge of the arcane science, as evidenced in the wholly biased article by Ben Protess and J. Michael Merced in today’s New York Times entitled The Anti-Trust Battle Ahead.

The battle lines in the case involving the merger are quite clear.  AT&T and T-Mobile claim that the US mobile communications market is highly competitive and that the combination of the two will provide economic synergies resulting in efficiencies and better service for consumers.  The Department of Justice is claiming that the combination is anti-competitive and will harm consumers.  Both are correct and both miss the larger issue that is wrapped in a smaller subset of facts and proven theories.

First off, the United States wireless communications market is highly competitive.  The very fact that Deutsche Telecom, the parent of T-Mobile, finds it difficult to compete in the market is sufficient testimony to that circumstance as the German powerhouse does not face similar market dynamics in a range of other countries in which it competes.  The United States market, however, also has market segments in which there is far less competition, each one dileneated by the technology deployed by the competing companies.  Unlike most of the rest of the world that operates on the GSM standard for cellular communications, the US features three primary technologies – CDMA, TDMA and GSM.  Therein lies the rub for AT&T and T-Mobile – there are only two major carriers in the US that use the worldwide standard and they are T-Mobile and AT&T.

Although each country in the world uses GSM on an arrary of different frequencies, most modern phones are multiple freuquency enabled.  Consquently, travellers from abroad or US citizens travelling abroad often use only GSM freuqncy phones. The combination of AT&T and T-Mobile in the US will eliminate competition for those users More importantly, the combination will leave the US without healthy competition to produce superior companies in the world’s dominant mobile communications technology.  Contrary to the proclamations of journalists writing about business, monopolies are not consistent with free market or free enterprise principles and are, in fact, counter to the normal function of a free market.  It is for this fundamental reason, therefore, that we cheer the decision of the Justice Department to pursue the combination of AT&T and T-Mobile.

The fact that the combination of the two companies may provide enhanced efficiencies is irrelevant to the economic policy decision to approve or oppose the merger.  This enhanced efficiency may be good for AT&T and T-Mobile as well as for their employees.  That, however, is a business analysis, not an economic one.  Business decisions are most often dictated by economics.  Economic policy, however, is not dictated by the needs of individual businesses.  Competion, in a free market, is fundamental to its efficiency as is the lack of it counter to efficient free enterprise.

Comments from Administration officials, however, show that this decision may have been driven by a ideology that is not aligned with free market principles but, rather, one of their traditional anti-business stance, resulting in my evaluation that the DOJ action was more like a blind squirrel finding a nut by accident.  From the aforementioned New York Times article, I extracted these gems…

‘In 2009, President Obama tapped Christine A. Varney, a former Internet lobbyist and Federal Trade Commission official, to lead the antitrust division, signaling a split from his predecessor. Shortly after her appointment, she told the Center for American Progress that the Bush administration “lost sight of an ultimate goal of antitrust laws — the protection of consumer welfare.” Ms. Varney, who left the government to join the law firm Cravath Swaine & Moore this month, promised to “change course and take a new tack.”’

And..

“We believe the combination of AT&T and T-Mobile would result in tens of millions of consumers all across the United States facing higher prices, fewer choices and lower-quality products for their mobile wireless services,” said James M. Cole, the deputy attorney general.

Once again, the Administration misses the point.  Insurance of a freely competing market provide an array of benefits which include enhanced innovation, lower costs, improved customer experiences, and a more competitive industry worldwide.  Analyzing a potential merger through the narrow lens of “consumers” is a narrow minded, simplistic premise from which to work because it can lead to all sorts of poor economic decisions.

In a truly well functioning free market, entry and exit from it are larely unregulated and uncontrolled allowing for free competition.  In competitive markets, the profit of the “industry” overall is at or near zero, with some companies profiting handsomely, some losing money horribly and some treading water.  This remarkable result provides innovation, constant change, creative destruction and end products that are, on an industry wide basis, free of profit.  This observation is the basis of Capitalism and its benefits as firs expounded by Adam Smith and explained by his theory of the “invisible hand”.  Of course, anti-capitalists like to deploy a decpetive practice of focusing on the obscene profits of the winners while conveniently ignoring the losses of the losers.

When government and business collide, there are often variations of these well functioning markets.  Government granted monopolies, for example, are guaranteed profits largely resulting in less innovation, higher prices, and less dynamism.  There are cases in which, on a technical economic basis (known as inelasticity of demand for economics nerds out there) where it may be desirable to have a government reglated monopoly in a particular market, despite the negative impacts.

Businesses also seek to lower competition; in fact, competing is the function of eradicating it.  In order to avoid this consequence, the United States and most modern countries have developed anti-trust laws.  More egregious, however, is the collaboration of government and business to restrict competition, whether it be by regulatory actions that increase barriers to entry or collaborative legal actions to impair competiton, characteristics of which have been in abundancy throughout history from the extreme of Socialist controlled and directed private enterprise of the National Socialist Party in Germany, the consequences of corruption and favors of the Gilded Age in America, to the Social Democratic movement in Europe.

In other words, there are an infinite number of market characteristics that occur once government policy interacts with a “market”, some marginally desirable and many quite undesirable.

For example, the statements reflected above focus on a singular objective of anti-trust law:  the protection of consumers from higher prices.  Imagine for a moment an industry so competitive that everyone is losing money (which is and has been characteristic of the “internet backbone” in the US for quite some time).  In order for companies to survive this competitive bloodbath, some consolidation may be necessary (in fact there are an array of business strategies based on losing more money than the other guys to be one of the last standing).  That consolidation, despite its necessity to provide sufficient capital to continue devloping and investing in that market, may result in higher consumer prices.  Opposition to that consolidation, however, may result in deteriorating service, lower investment, less technological change, and an introduction to well-heeled foreign companies to enter the competition through product (rather than price) differentiation.  All in all, a bad result for our national economy.

For once, I would like to see the Obama Adminstration take a constructive action based on the economics of the issue, not some doctrinaire, devisive consumer versus business, rich versus poor posturing.  That the Department of Justice took the correct action in opposing the merger of AT&T is of no comfort to me as it is the right action for all the wrong reasons, no matter how good those reasons sound in the popular culture.

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As an aside to this issue, I continue, as mentioned above, to be flabergasted by the ideological talking points reflected in basic news or news analysis pieces.  Consider the following paragraphs from Messrs.  Protess and Merced..

Under President Clinton and his antitrust chief, Joel Klein, the government scuttled several notable deals, including the proposed marriages of the telecommunication companies WorldCom and Sprint, and the airlines Northwest and Continental. Mr. Klein — who later served as New York City schools chancellor and is now overseeing the News Corporation’s internal investigation of phone hacking — also took onMicrosoft.

But President George W. Bush’s administration took a more permissive stance, promoting the value of free enterprise. Critics contend that his antitrust authorities rubber-stamped nearly every major telecommunications deal, like the controversial merger of the satellite radio companies Sirius and XM.

Consider the phrase “But President George W. Bush’s administration took a more permissive stance, promoting the value of free enterprise.” which is in reality an opinion couched as fact.  Free enterprise is one in which competition flourishes, not diminished, a fact lost on the authors who seem to believe in some post Marxist dialectic that equates “free enterprise” with market dominance.  That continued posturing is both misrepresentative and destructive to understanding the ills of our national economy.

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