TR Daily T-Mobile-Sprint Merger Proponents, Critics Clash at Hearing
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Wednesday, June 27, 2018

T-Mobile-Sprint Merger Proponents, Critics Clash at Hearing

Supporters and critics of T-Mobile US, Inc.’s proposed acquisition of Sprint Corp. clashed today on whether the deal would benefit consumers or hurt them.

During a hearing this afternoon before the Senate Judiciary Committee’s antitrust, competition policy and consumer rights subcommittee, T-Mobile Chief Executive Officer John Legere and Sprint Executive Chairman Marcelo Claure argued repeatedly that the deal is necessary for the carriers to deploy a 5G network with the necessary speed and depth to compete with Verizon Communications, Inc., and AT&T, Inc.

They said the deal is needed even though lawmakers and witnesses noted that T-Mobile and Sprint have already announced their plans to deploy 5G networks. Messrs. Legere and Claure said their combined 5G network would help the U.S. lead the world — including China — in that deployment.

But critics of the deal, including Sen. Amy Klobuchar (D., Minn.), the ranking member of the subcommittee, suggested that consumers would lose from the merger because it would remove a dynamic competitor from the market and result in only three nationwide carriers. She and others cited the benefits that the market and consumers have seen since AT&T failed to acquire T-Mobile in 2011. Also during today’s hearing, Mr. Legere was asked to answer why some of his past statements about the market are no longer true.

In her opening statement, Ms. Klobuchar cited an estimate that 20% of Americans rely solely on smartphones for Internet access at home, and she noted the companies’ large chunk of the pre-paid market through MetroPCS and Boost Mobile, services that are popular with lower-income consumers.

“Let’s be clear: We need competition and innovation. We need consumer choice and 5G, but we should not have to choose between them,” Ms. Klobuchar said.

The senator noted that the number of nationwide wireless carriers in the U.S. dropped from seven in 2002 to four in 2009 due to consolidation — saying that even the current four “is not very many” — and cited the “maverick behavior of T-Mobile and Sprint” in the wake of AT&T’s failed purchase of T-Mobile that drove down prices and resulted in the introduction of popular plans. Ms. Klobuchar said that merging companies often promise billions of dollars in efficiencies — T-Mobile and Sprint say their deal would produce synergies of $43 billion — but she said the key question is whether savings would be passed on to consumers.

In his opening statement, Sen. Mike Lee (R., Utah), the subcommittee’s chairman, outlined the arguments that proponents and critics of the deal have made, saying he hoped today’s hearing “can help frame the relevant issues and arguments for the public.”

Mr. Legere told the lawmakers that the deal would result in thousands of new jobs, lower prices, and additional innovation. He said the $40 billion the combined company plans on investing in the first three years would drive increased spending by Verizon and AT&T. He also said that rural deployment would be a priority, and that the company would open at least 600 new stores and five call centers in rural areas. He said the company also would compete with the Big Two for enterprise customers over which he said they currently hold a 90% share. The combined carrier also plans to take on AT&T, Charter Communications, Inc., and Comcast Corp. in serving the residential broadband market, Mr. Legere said.

There was considerable discussion during the hearing about whether the deal should be viewed as reducing the number of wireless carriers from 4 to 3. Mr. Legere said it can be viewed as adding another strong competitor in a market that also includes cable and other companies or going from two to three by creating a company that can challenge Verizon and AT&T.

“This is creating a viable competitor who can compete with AT&T and Verizon,” he said. “We shouldn’t be punished for our competing aggressively in the past.”

But Mr. Legere has often mocked AT&T and Verizon and suggested that T-Mobile was doing a great job competing with the largest carriers, who he called “Dumb and Dumber.”

Mr. Claure painted Sprint as a troubled company, saying that it has lost more than $25 billion in the past decade and has struggled to attract and keep customers. He said if it builds its own 5G network, it would only cover dense metro areas and require an investment of $20 billion to $25 billion. In light of its current $32 billion net debt load, Sprint would have to raise prices to pay for the build-out, Mr. Claure said. The 5G network that the combined company would build would have “true nationwide coverage,” he said. “We need T-Mobile and T-Mobile needs us,” Mr. Claure said.

Gene Kimmelman, president and CEO of Public Knowledge, noted that the wireless industry has grown more concentrated over the years and highlighted the market disruption led by T-Mobile following the failed AT&T acquisition. He said that 5G is important but that “there are many ways” the companies can deploy their own networks. Mr. Kimmelman, a former official in the Department of Justice’s Antitrust Division during the Obama administration, said he thinks that DoJ would conclude that “there are other ways four players can survive in this market.” He also suggested that while prices may not increase if the two companies merge, they might not continue to decline.

Mr. Kimmelman also said that while he was willing to accept the assumption that a combination of the companies would provide a significant expansion in capacity, he stressed that doesn’t necessarily translate into lower prices for consumers, including in the prepaid market. There are different ways to apply synergies, he added. Without competition from each other, they would have an incentive to price services just lower than Verizon and AT&T. He said the government should secure firm commitments from T-Mobile and Sprint if it considers approving the deal.

George Slover, senior policy counsel for Consumers Union, said in his prepared testimony that “[t]he big benefit Sprint and T-Mobile are promising with this merger is development and deployment of 5G wireless network technology. And we all want that, of course. But that’s just the latest shiny new object. And it’s far from clear that Sprint and T-Mobile need to merge in order to give it to us. AT&T and T-Mobile gave the same pitch for why they needed to merge in 2011 — except then it was 4G. The merger was challenged, and dropped, and as we know, 4G ended up being built anyway — not only by AT&T, and Verizon, but by T-Mobile and Sprint.”

Sprint and T-Mobile argue “that they are stuck in a 4G world, and are going to be left behind in the race to 5G, unless they can combine assets and forces,” Mr. Slover added. “But both carriers have made clear that they are each independently committed to building a full 5G network. In fact, their plans are already well underway. They don’t need to combine forces to do that.”

Mr. Slover also expressed concern about the impact of a merger on the prepaid market.

In response to witnesses who criticized the deal, Mr. Legere cited the “duopolist-protection statements of my fellow panelists.” He said the combined T-Mobile and Sprint would be “one-half to one-third of the size of AT&T and Verizon and [have] one-eighth of the free cash flow of AT&T.”

Messrs. Legere and Claure repeatedly pushed back at suggestions that the combined company would become the second largest wireless carrier in the U.S.

At the time the merger was announced in April (TR Daily, April 30), T-Mobile and Sprint had a combined 127 million subscribers, while AT&T had nearly 143.8 million wireless connections, and Verizon had 116.2 retail wireless connections. It did not report wholesale customers.

Sen. Lee asked Roslyn Layton, a visiting scholar at the American Enterprise Institute, whether the combined company would have the incentive to compete aggressively against Verizon and AT&T.

“They have a high incentive to steal market share from the larger players,” she replied, including market share in the wholesale market. She repeatedly rejected the arguments of critics of the deal.

In her prepared testimony, Ms. Layton said, “How will this merger affect prices, and how will it affect investment in infrastructure? In spite of or because of consolidation, consumers have never had it better than they do today, and that trend should only continue. Government should not freeze the market in place, saddle it with some arbitrary number, or favor some players in the name of the ‘public interest.’ The role of government is to protect freedom, entrepreneurship, and competition. We should welcome 5G because it is another milestone in the never-ending story of our civilization as a constant, dynamic evolution, continuously improving our quality of life.”

Sen. Klobuchar said Sprint is still very competitive on pricing and asked Mr. Legere if the companies were committing to offering each other’s lower prices. He said T-Mobile has said it would honor Sprint’s pricing.

Ms. Klobuchar asked Mr. Claure if there was not an independent Sprint whether the companies could set prices just below Verizon’s and AT&T’s.

Mr. Claure replied that the combined entity would need to lower prices to grow market share to use the additional capacity.

Sen. Richard Blumenthal (D., Conn.), the only other senator to ask questions at today’s hearing, said he was concerned about the deal’s impact on jobs.

He noted that the Communications Workers of America suggested that the merger could result in the loss of more than 30,000 jobs. CWA is calling on T-Mobile and Sprint to make binding commitments that they won’t eliminate any jobs. Otherwise, the union said it won’t support the deal.

Mr. Legere said that CWA did not mention that onshoring and customer care expansion would add about 7,700 new customer care positions in the U.S.

Mr. Legere said that while the combined entity would increase jobs overall from the first day, he acknowledged that there would also be job losses in some areas, which he called “rationalization,” such as in urban retail stores and in the headquarters of the two carriers.

Pressed by Sen. Blumenthal, Mr. Legere said full-time equivalent employees would decline 3,295 through 2024 and full-time and part-time direct and indirect positions, including distributors, would drop 8,000 through 2024. But he said that more than 10,000 jobs would be created in the in-home broadband unit and 12,000 jobs would be created in rural America.

Mr. Legere also said that Boost and MetroPCS stores near each other are not as likely to close as T-Mobile and Sprint stores near each other, and he said when a store is closed in those situations, the staffing at the remaining store may be increased.

Sen. Lee said that Mr. Legere has appeared “to have walked back” statements he made in February downplaying the competitive threat from cable companies that resell wireless services.

Mr. Legere did not directly answer the senator’s question and, in fact, attempted to highlight how competitive cable companies have been, including Comcast, which he said has added more customers in the past five quarters than Verizon and AT&T combined. “They’re very viable competitors, especially as the markets converge,” he added.

In response to a question from Sen. Klobuchar about why the combined company would serve rural areas when Verizon and AT&T often haven’t, Mr. Legere cited T-Mobile’s 600 megahertz band footprint, adding, “Rural America is the biggest beneficiary of every part of our plan.”

Ms. Klobuchar also asked how the deal would affect pricing for prepaid services given the fact that T-Mobile and Sprint hold a nearly 40% market share. Mr. Kimmelman said DoJ should view the prepaid market as a separate market and said there would be a danger of prices increasing. “Justice would have a hard time of allowing” the deal based on the market share, he said.

But Messrs. Legere and Claure said prepaid customers would continue to benefit under the merger and that the only difference between those subscribers and postpaid customers is they pay upfront.

Meanwhile, various parties are continuing to weigh in on the proposed deal.

For example, 21 groups have written leaders of the Senate Judiciary Committee and the antitrust subcommittee to express support for the T-Mobile–Sprint deal.

“We believe that the proposed transaction between T-Mobile US, Inc. and Sprint Corporation is consistent with existing antitrust law because it will be greatly beneficial to consumers and favor the transaction’s completion,” said yesterday’s letter, whose signatories included TechFreedom, Americans for Tax Reform, the American Consumer Institute, Citizens Against Government Waste, the Competitive Enterprise Institute, Digital Liberty, the FreedomWorks Foundation, and the National Taxpayers Union.

Also, seven antitrust and economics scholars affiliated with the International Center for Law & Economics said in a letter to the Senate Judiciary Committee today that the analysis by the government of T-Mobile’s acquisition of Sprint “should rely upon rigorous economic analysis, not outdated structural thinking” such as the supposed danger to competition of reducing the number of nationwide wireless carriers from four to three.

“Excessive reliance on obsolete, market-share–based analysis to evaluate the proposed merger would be tantamount to a rejection of modern antitrust principles and the economic learning that undergirds them,” the letter said. “Put simply: market share and industry concentration are poor predictors of competitive effects. As a result, analysis that relies primarily upon structural considerations is likely to lead to decisions that reduce rather than promote consumer welfare and the public interest.”

The scholars, who say they don’t take a position on the actual merger, said, “Modern antitrust principles, sound economics, and the public interest dictate that an analysis of the proposed merger incorporate these foundational precepts: 1. The resolute avoidance of a presumption of illegality based upon purely static market shares and measures of industry concentration; 2. The rigorous consideration of the effect of the merger on the dynamic competition that has long characterized the telecommunications industry; and 3. The careful assessment of the long-term benefits of the deal to consumers and the economy as a whole.”

Also today, a press release issued on behalf of T-Mobile and Sprint highlighted statements in support of the deal from about a dozen groups and individuals, including some who signed onto the letter sent yesterday.

The press release included statements of support from former Rep. Henry Waxman (D., Calif.), a former chairman and ranking member of the House Energy and Commerce Committee who has lobbied for T-Mobile; and former FCC Commissioner Robert McDowell, who also has done work for the carrier.

But the Rural Wireless Association said today it opposes the deal.

“The proposed merger between T-Mobile and Sprint will allegedly bring the bounties of 5G wireless broadband to the United States by a German/Japanese controlled company if allowed to proceed. The merger will eliminate a nationwide, facilities-based LTE wireless competitor and should be blocked,” said Carri Bennet, RWA’s general counsel. “The major question facing the FCC and DOJ is whether American consumers will be better off with one less retail option, one less wholesale network option for IoT, and one less potential disrupter in the innovation, device and application marketplace. RWA strongly believes the answer is ‘No.’” —Paul Kirby [email protected]

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