TR Daily Opponents of T-Mobile-Sprint Merger Blast Econometric Analysis
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Wednesday, December 5, 2018

Opponents of T-Mobile-Sprint Merger Blast Econometric Analysis

Dish Network Corp. and the Communications Workers of America have blasted an econometric filing submitted last month by T-Mobile US, Inc., and Sprint Corp. in support of their proposed merger. Meanwhile, the FCC restarted its informal 180-day clock on its review of the deal yesterday; today is Day 56 on the review clock.

“The new study describes itself as a ‘merger simulation offer[ing] an economically coherent framework, grounded in detailed industry data, for understanding the competitive significance of the proposed merger,’” an FCC public notice released last month seeking comment on the analysis observed (TR Daily, Nov. 13). “The analysis represents a substantial body of new material on economic issues central to the review of the proposed transaction. It relies on a newly submitted data set and new methodologies to reach conclusions about the specific effects of the transaction not previously in the record.”

In a redacted filing in WT docket 18-197 on the econometric filing, Dish submitted a report prepared by the Brattle Group to criticize the Cornerstone Research econometric study submitted by T-Mobile and Sprint.

Dish said that “like the Applicants’ previous economic analysis, this new and belated effort fails. The Cornerstone Report again confirms, as the Compass Lexecon Report did before it, that this transaction will lead to higher prices for tens of millions of consumers. Instead of denying the prospect of price increases, the Applicants seem to stake their entire case on the proposition that consumers will accept New T-Mobile’s higher prices because they are supposedly willing to pay a disproportionately large amount of money for even an ounce of improvement in the quality of their current 4G LTE service.”

Dish said that “even if these valuations [in the report] were correct (which they are not), they are not enough to offset the merger’s price increases under Cornerstone’s own method. For these reasons, among others, the Cornerstone Report does nothing to improve the case for this merger.

“DISH’s Reply explained that the economic report prepared by the Applicants’ first team of economists, Compass Lexecon, hurts more than helps the Applicants, as it confirms that the consumer price increases likely resulting from this transaction would be significantly higher than DISH initially estimated. Whether or not the Cornerstone Report is an attempt on the Applicants’ part to scramble a response to DISH’s economic analysis, it is unresponsive and methodologically unsound,” Dish added. “Indeed, it does not even purport to rebut DISH’s evidence. At most, it is a fresh attempt at making a new case for the Applicants. The submission of the Cornerstone Report thus reveals the Applicants’ justified lack of confidence in the Compass Lexecon study, but the new Report does not inspire any confidence of its own.”

“The Applicants’ new study attempts to recast higher prices for New T-Mobile’s services as a consumer benefit,” Dish said. “But review of Cornerstone’s methodology shows that the absurdly high valuations it assigns to small service quality improvements are as wrong as they sound. First of all, Cornerstone’s method disguises the manner in which the merger’s harm will fall on consumers. Among many other errors, Cornerstone has disregarded the fact that a consumer’s willingness to pay is affected by her income. Cornerstone has assumed a nation of Americans for whom money is no object when it comes to purchasing wireless services.”

In its redacted filing, CWA said, “Five months after their Public Interest Statement was filed and subsequent to the end of the comment cycle in this proceeding, the Applicants now have come forward with a completely new merger simulation model prepared by a new group of economists. In doing so, they have presented the Commission and third-parties with a moving target as they continue to attempt to sell the benefits of this anticompetitive merger.

“Applicants, however, are not writing on a clean slate. Over the past five months, starting with the Public Interest Statement and continuing through the comment period, Applicants and their many outside consultants have made numerous sworn and unsworn statements about the proposed transaction. These assertions, to the extent they are inconsistent with Applicants’ latest effort, should not simply be disregarded by the Commission. There is a record here, and inconsistency matters,” CWA added.

“As we showed in our prior comments, nothing so far in the record supports the four major claims made in the Public Interest Statement. The merger will not increase employment, will not result in better service to rural America, is not justified by Sprint’s alleged competitive weakness, and is not necessary for the rollout of advanced 5G services,” CWA said. “The only consistency among Applicants’ army of economists to date is that they are willing to make whatever assumptions that will lead them to the results Applicants are seeking. In this respect, the latest effort, which the Commission has characterized as ‘a substantial body of new material,’ which relies on ‘a newly submitted data set and new methodologies,’ is no different.”

CWA said the Cornerstone Research report “directionally overstates the alleged merger benefits through various assumptions and omissions. For example, the discussion of consumer behavior relegates price sensitivity to a footnote. The model assigns a single price to each brand, which does not reflect the fact that consumers actually face a variety of prices and terms. It ignores potentially important determinants of consumer choice such the location of stores. And it makes assumptions which suggest that consumers may be more sensitive to small changes in quality than they really are. These and other modelling decisions in the Cornerstone Report are likely to have led to overestimates of the benefits of the proposed merger.”

“Significantly, the Cornerstone Report also does not make use of the parties’ own engineering model despite [T-Mobile Chief Technology Officer] Neville Ray’s sworn statement that ‘[a]ny other approach would be highly misleading and provide outcomes that are not factually based.’ Nor does it make use [of] actual network performance data (or pricing data, switching data or demographic data) even though such data is readily available to the Applicants and could provide relevant inputs as well as a means to check the model’s results,” CWA said. “At the same time, however, the Cornerstone Report simply imports Compass Lexecon’s earlier 5G efficiency analysis into Cornerstone’s 4G LTE model, despite the fact that none of Compass Lexecon’s claimed efficiencies would materialize for a minimum of 3 years.”

“In short, the Cornerstone Report diverges sharply from the major claims Applicants have been making over the past five months, contains modeling decisions that likely overestimate the merger’s benefits, ignores actual data that is readily available to the Applicants, jettisons their own engineering model, and imports speculative efficiencies claims,” CWA added. “The proposed merger, as currently structured, does not serve the public interest.”

OpenMedia, a community-based organization that also opposes the merger, said the econometric analysis submitted by T-Mobile and Sprint “fails to address the concerns of many OpenMedia community members throughout the United States — namely that it will decrease competition and increase prices in the U.S. cell phone market.

“While T-Mobile’s analysis places much emphasis on the way in which the merger will support improved network quality and generate investment for its 5G network, the analysis stays silent on the issue of consumer pricing, wholesale pricing for MVNOs, reduced choice, and the impact this could all have on the American public’s connectivity,” the group added. —Paul Kirby, [email protected]

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