TR Daily Democrats Raise Questions About T-Mobile-Sprint Merger
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Wednesday, February 13, 2019

Democrats Raise Questions About T-Mobile-Sprint Merger

Democrats on the House communications and technology subcommittee raised concerns during a hearing today about T-Mobile US, Inc.’s proposed acquisition of Sprint Corp., including whether the combined company would adequately serve rural areas, continue to offer Lifeline service, raise prices, and cut jobs.

Republicans on the subcommittee appeared generally supportive of the deal, with a number asking friendly questions to the T-Mobile and Sprint witnesses. But some Republicans from rural districts said they want to ensure that the transaction would deliver the promised benefits to rural areas.

Representatives of rural carriers, workers, and consumers who testified also raised concerns about the deal.

T-Mobile Chief Executive Officer John Legere and Sprint Executive Chairman Marcelo Claure said that the deal would result in a combined company that would have eight times the capacity, helping it better compete with AT&T, Inc., and Verizon Communications, Inc. They said the company would be able to build the best nationwide 5G network helping the U.S. win the race to 5G, lower prices, and better serve rural areas.

Mr. Legere also addressed national security concerns about the deal.

“Opponents of the transaction have set up a shadowy group that refuses to disclose its donors, to lob allegations that this transaction will allow Huawei and ZTE into U.S. networks,” he said. “That’s false, and they know it is. Let me be clear – we do not use Huawei or ZTE network equipment in any area of our network. Period. And we will never use it in our 5G network. New T-Mobile will buy network equipment only from trusted network equipment suppliers with a strong security track record in the United States. By accelerating deployment of true, robust nationwide 5G, New T-Mobile will provide a critical lift to these trusted network equipment vendors – Huawei’s competitors – protecting the 5G supply chain for the United States and our allies.”

Phillip Berenbroick, senior policy counsel for Public Knowledge, said, “The evidence Sprint and T-Mobile have presented shows that permitting the companies to merge and consolidating the wireless market down to only three national carriers would result in higher prices for consumers – inflicting significant harm on low-income, prepaid, and rural consumers; while also leading to tens of thousands of lost jobs; harming small and rural wireless providers; and eliminating avenues for potential new competitors to enter the wireless market.”

Carri Bennet, general counsel of the Rural Wireless Association, said the deal “will undermine the system of roaming that is a key component of telecommunications and broadband access in rural communities and degrade service quality.” She said that T-Mobile charges rural carriers 20 times more for roaming than Sprint does.

Chris Shelton, president of the Communications Workers of America, said the merger would result in the loss of about 30,000 jobs and up to $3,000 a year in lower wages for those with jobs. “Trusting Sprint and T-Mobile with American jobs is liking trusting a … vampire at a blood bank,” he said. “These are two of the worst companies in the United States when it comes to labor laws and the treatment of workers.”

But Doug Brake, director-broadband and spectrum policy for the Information Technology and Innovation Foundation, said when there are four national carriers, they can duplicate their resources, which is not efficient. He also argued that the merger would accelerate the deployment of 5G services by the companies.

In his opening statement, subcommittee Chairman Mike Doyle (D., Pa.) cited complaints about the deal from critics, including that it would result in job losses, leave rural carriers without a key roaming partner, compromise Lifeline service, and hurt competition and result in higher prices.

He noted that “the FCC found in their Communications Marketplace Report that wireless market concentration was currently at 3,100 HHI [Herfindahl-Hirschman Index]. HHI measures how competitive a market is – with a higher number indicating less competition. The Justice Department’s horizontal merger guidelines state that a market with an HHI above 2,500 is highly concentrated – so we really aren’t starting from a great spot. An increase of 200 points would raise significant concerns about competition.

“This merger is expected to result in a market power increase of 280 points for the postpaid market and 2,014 points for the pre-paid market. That would take the pre-paid market from where it is now at 2,467, which is just under the DOJ’s threshold, to 4,481 – a level that raises lots of red flags,” Mr. Doyle said. “These kinds of numbers have historically resulted in higher prices for consumers, less competition, and less innovation.”

The congressman said that he appreciates company executives’ statements “that they believe that this merger will benefit consumers and result in lower prices – and their commitments to an accelerated deployment of 5G and promises of expanded rural broadband. These are national objectives that are important to me and many members of this Committee. However, I’ve seen a lot of mergers in this industry and others, and it’s hard to think of one where consolidation didn’t result in people losing their jobs, prices going up, and innovation being stifled.”

Mr. Doyle also noted that T-Mobile and Sprint “have acted as disruptors, competitors, and low-cost options in the wireless marketplace. T-Mobile’s un-carrier strategy has ended anti-consumer practices such as data caps, restrictive contracts, and much more. They have also worked hard to build a robust national network that, by some accounts, is the fastest in the nation. For its part, Sprint has been a leader in roaming agreements for rural providers – and wholesale access for pre-paid and Lifeline providers.”

“I know we’re going to have many hard questions today, because the facts surrounding this merger are so in dispute,” said Rep. Frank Pallone Jr. (D., N.J.), chairman of the full Energy and Commerce Committee.

“For example, Mr. Legere says that New T-Mobile won’t raise consumer prices. But others say his company’s filings acknowledge consumers could see price hikes — some argue by up to 15 percent — with the merger being particularly hard on the poorest consumers,” Mr. Pallone noted. “How can we be sure that consumers who can least afford to pay more are not harmed by the merger? T-Mobile filed a letter committing not to raise prices with the FCC. Putting aside whether that is sufficient, there is a serious question as to whether the Trump FCC would be willing to impose any conditions in a merger order.”

Subcommittee members who represent rural areas or those with a large number of Lifeline recipients said they are worried about the impact of the deal on their constituents. Some lawmakers seemed frustrated at the answers of Messrs. Legere and Claure to their questions on these and other issues.

Rep. Peter Welch (D., Vt.) noted that T-Mobile and Sprint both say the combined company would deploy more broadband services and provide more jobs to rural areas.

“I’d like to believe that’s true, but I have an apprehension that it won’t necessarily occur,” he said.

He expressed anger that T-Mobile last year agreed to pay $40 million to settle an FCC investigation into its failure to take action to correct rural call completion problems and its violation of the FCC’s rule prohibiting carriers from inserting false ring tones in calls (TR Daily, April 16, 2018).

“That’s really upsetting to us, and I’m struggling to see how this past gives me confidence about the future,” Rep. Welch said.

Mr. Legere responded that the details of his company’s settlement with the FCC “are far more complex, and I’m not sure we can go into the process” at the hearing, but he agreed to discuss the issue with the congressman at another time. He added that there was “no admission” by T-Mobile that it participated in “any kind of fraud.”

Rep. Welch also noted that a newspaper in his state found that the coverage maps of T-Mobile and Sprint were overstated, with T-Mobile having no service or spotting service in 62% of the areas analyzed and Sprint having no service or spotty service in 50% of the areas. “I’m a little skeptical about the deployment promises in rural areas,” he said.

Mr. Claure said Sprint has “very limited” coverage in the state and said it relies on AT&T and Verizon for roaming, adding that the coverage maps are theirs.

Rep. Tom O'Halleran (D., Ariz.) said that half of the time, he finds that any carrier’s coverage maps are wrong.

“What I’ve … heard today are semi-commitments, and, you know, ‘we’re looking into it.’”

He asked Messrs. Legere and Claure if they would commit to continuing Lifeline and tribal Lifeline service if the deal is approved and, if so, for how long.

“It’s very clear Sprint is a big provider of Lifeline services, and we will honor their commitments and move forward providing Lifeline in the fashion that they do,” Mr. Legere said. Rep. O'Halleran asked for how long. “For as long as contracts are available,” Mr. Legere said. Mr. Claure said that Lifeline contracts “self-renew.”

But Mr. Berenbroick suggested that the combined company would have less incentive to provide wholesale access to Lifeline resellers, which could drive those providers out of the market.

Tony Cárdenas (D., Calif.) also sought a Lifeline commitment and said he wished that T-Mobile were more like Sprint when it came to offering Lifeline service.

Rep. Ben Ray Luján (D., N.M.) said his rural district has poor connectivity and asked Mr. Legere why the combined company would bring an improvement. Mr. Legere said that 90% of Americans would have speeds greater than 100 megabits per second by 2024.

The combined company would also reach nearly 96% of rural residents, according to Mr. Legere.

“There are some important aspects that we need some answers to,” including rural deployment and coverage maps, Mr. Luján said.

Rep. David Loebsack (D., Iowa) said he was worried about the impact of the deal on his district, citing criticism by CWA of T-Mobile’s purchase of iWireless.

Ms. Bennet said that T-Mobile signs one-way roaming agreements, preventing its subscribers from roaming on rural networks. Mr. Loebsack asked Mr. Legere if he could make “a structural commitment” to address that situation. Mr. Legere replied, “I’d be glad to look at ways to make that commitment.”

Mr. Legere also said today that the new company would partner with rural carriers and would honor all contracts that Sprint has, adding that he hopes it can “negotiate even better things” for those in rural areas. But Ms. Bennet said T-Mobile has not shown an interest in rural communities.

Rep. Jerry McNerney (D., Calif.) expressed concern about the impact of going from four to three nationwide wireless carriers. Mr. Berenbroick told the congressman that when the market in the Netherlands eliminated one of four carriers, prices increased between 10-17%, and prices in Austria went up 14-20% when the same thing happened there.

Rep. A. Donald McEachin (D., Va.) said he was worried about the impact of the deal on prepaid customers with poor credit. Mr. Berenbroick said the combined company would have the “power and incentive” to raise prepaid prices given its significant market share.

Mr. Legere said T-Mobile’s prepaid customers have seen prices declined 4% in the past five years while data amounts increased by 12%. Mr. Claure said the combined prepaid market share would be 38%.

Rep. Greg Walden (R., Ore.), ranking member of the full committee, said that “we need to take a holistic view, instead of focusing on a particular metric — like those who insist that the government must intervene to preserve four nationwide wireless operators at all costs. We have to consider scale and operational efficiencies in that equation, and the rapidly changing characteristics of the wireless marketplace, especially the convergence of functionality with nontraditional competitors such as cable and satellite operators. With almost 50 percent of digital video now consumed on smartphones, wireless service is not what it once was, and with the advent of 5G the capabilities are evolving at an exponential pace. So it’s important for legislators to adjust our expectations to this reality and resist the call for artificial market constraints that may not make any sense in a 5G world.”

During the questioning period, he asked witnesses if there was “a magic to No. 4 in terms of competition in this space.”

Mr. Berenbroick said there wasn’t, but he said that the correct “market structure” was important, noting that if T-Mobile and Sprint combine, “you eliminate the mavericks.”

Rep. Bob Latta (R., Ohio), ranking member of the subcommittee, said he understood that the merger “could pose some harms to consumers.” But he said it was up to the FCC and Department of Justice to review it. Congress’s role is to provide policy for the telecom market, he said.

Rep. Tim Walberg (R., Mich.) said he doesn’t want rural areas to get left behind in the deployment of 5G services. “I’m looking forward to the first time I have broadband to my house,” he said.

Rep. Bill Johnson (R., Ohio) asked whether the combined company would offer wholesale agreements that Sprint currently offers. Mr. Legere said it would honor current agreements and said that with greater expected capacity, wholesale agreements would be improved. He said that if parties had wholesale agreements with T-Mobile and Sprint today, they would be able to pick the best one.

But some Democrats noted that they support the merger, including Rep. Anna G. Eshoo (D., Calif.), who joined 12 of her House colleagues recently – Democrats and Republicans – to write a letter endorsing it (TR Daily, Jan. 29).

She noted that Verizon and AT&T have about a two-thirds market share, adding, “This is hardly a competitive dynamic market that we have.” She said that T-Mobile and Sprint have challenged them in recent years and prompted pro-consumer changes. But those smaller carriers don’t have what they need “to become heavyweights.” She said the deal would provide the needed resources with Sprint’s mid-band spectrum and the sounder financial footing of T-Mobile.

Ms. Eshoo said that while some people bemoan the fact that three nationwide providers will remain, the combined entity would “aggressively compete” to take subscribers from Verizon and AT&T.

Democrats, now in charge of the House, said that a hearing such as the one today on a merger was long overdue.

“This hearing marks the first time in eight years that the Committee has met to evaluate the consequences of any merger,” Rep. Pallone said. “For too long, this House and this Committee shirked that responsibility. But now, we resume the practice of reviewing major acquisitions, so we can fulfill our obligation for the people to determine how this proposed consolidation will affect consumers, workers, public safety and network resiliency, competition, and future innovation. For the last eight years major industry consolidation occurred without any oversight, and the consequences of that negligence have been borne by consumers and hardworking Americans. In the past, we’ve seen mergers jack up consumer prices, cut away meaningful choices, and outsource, undercut, and eviscerate good paying jobs. We’ve seen previous merger conditions that weren’t met or weren’t enforced. We’ve seen the public interest, in all of its forms, undermined, and that is why we must look carefully at these issues before a merger is approved.”

But Mr. Walden said that the committee has “generally avoided hearings focused on any specific transaction in an effort to allow the regulators who are responsible for assessing them to do their work, as much as possible, free from intense political influence. It is my hope the experts at the FCC and DOJ — who as we speak are reviewing this transaction, and its potential impact on the public interest and competition — will continue their analysis in this vein.” —Paul Kirby, [email protected]

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