Senator Kohl, Wireless Economics and the “Public Interest” Standard…

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Last week, Senator Herb Kohl, the powerful Chairman of the Antitrust, Competition Policy and Consumer Rights Sub-Committee of the Senate Judiciary Committee, wrote a letter to Attorney General Eric Holder and FCC Chairman Julius Genachowski informing them that he “believes” that the pending acquisition of unused spectrum by Verizon from a consortium of cable companies “presents serious competition concerns.”  In support of this position, Senator Kohl not only argues that there is excess concentration in the current wireless market (dominated by Verizon and AT&T), but that the transaction would allow a “dominant firm” to gain “access to essential inputs needed by a rival to compete.”  As such, Senator Kohl suggests that the reviewing agencies specifically “consider excluding AT&T from eligibility to purchase any spectrum divested (or from acquiring the 700 MHz spectrum to be sold by Verizon Wireless).”

So, let’s start with the old sawhorse, “spectrum concentration.”  As we explained just last week, contrary to conventional notions of antitrust, fewer—not more—competitors could mean lower prices and more innovation in a market suffering from spectrum exhaust.  Counting heads is never a proper indicator of competition, especially for an expert agency, but when the capacity of an industry is exhausted due to a constrained input (like spectrum in this case), counting heads may very well lead you down exactly the wrong path when trying to obtain low prices and innovative services for consumers.  Thus, the example cited by Senator Kohl—an anecdotal claim by the American Antitrust Institute that “the aggregation of spectrum can lead directly to higher prices and lower output”—is meritless under spectrum exhaust.  Indeed, the aggregation of spectrum may lead to lower prices and higher output.

Second, unlike the hotly contested AT&T/T-Mobile deal, the Verizon/Spectrum Co. deal does not involve reducing the number of players in the market.  To the contrary, and as I pointed out in a blog post last January, the cable companies had no plans to enter the already competitive wireless market because there is no profit in it.  If you are not removing a competitor, it’s tough to see how a transaction would “substantially lessen competition.”

Third, while perhaps scoring some political points with Free Press, imposing a de facto spectrum cap on AT&T (who is not even a party to the transaction under review) makes little economic sense given the onset of spectrum exhaust.  A large number of U.S. mobile subscribers have without compulsion chosen AT&T as their provider, and they deserve high quality and low priced services going forward.  Moreover, as we demonstrated in a paper we published last year in the Federal Communications Law Journal, A Policy Framework for Spectrum Allocation in Mobile Communications and as George explained in layman’s terms in this blog, the incumbent-exclusion rules championed by Senator Kohl are unlikely to increase consumer welfare under current conditions.

But there is more.

Senator Kohl repeatedly cites the arguments made by T-Mobile that the proposed transaction is anticompetitive because the spectrum at issue is “essential for [T-Mobile] to compete with Verizon (and AT&T), especially in delivering what is know [sic] as 4G LTE service used by data-driven smart phones.”  In fact, Senator Kohl goes so far as to cite T-Mobile’s argument that the Verizon/Spectrum Co. deal was deliberately “timed to effectively deny T-Mobile an opportunity to bid on the spectrum” because it was in the middle of trying to sell itself to AT&T.  So, stating it a bit more bluntly, despite the fact that T-Mobile could have bid in the original 700 MHz auctions of DTV spectrum and subsequent AWS auctions but declined (they did bid in the original original AWS auction), and then willingly entered into a transaction among sophisticated business entities to sell itself to AT&T which eventually failed, Senator Kohl nonetheless would have the government give T-Mobile a third bite at the apple to acquire more spectrum by denying the Verizon/Spectrum Co. deal.

With all due respect to Senator Kohl, the mere acknowledgement of T-Mobile’s arguments send a chilling signal that the head of a powerful Senate Sub-Committee does not believe in one of the core tenants of antitrust law as articulated by the Supreme Court in such landmark cases as Brown Shoe and Pueblo Bowl-O-Mat: i.e., that the antitrust laws were enacted for “the protection of competition, not competitors.”  Senator Kohl’s reliance on the FCC’s self-defined merger standard (originated by former FCC Chairman Reed Hundt) that a merger must “enhance competition” is equally misplaced.  As my former colleague Tom Koutsky and I demonstrated in our law review entitled Separating Politics from Policy in FCC Merger Reviews: A Basic Legal Primer of the “Public Interest” Standard, despite the FCC’s mantra over the last decade or so that a merger must “enhance competition,” the case law simply does not support such an expansion of the agency’s power.  To the contrary, the case law is clear that the FCC is bound by the same standard as antitrust enforcement agencies in that the “Commission is not at liberty . . . to subordinate the public interest to the interest of ‘equalizing competition among competitors.’” (See, e.g., SBC Communications Inc. v. FCC, 56 F.3d 1484, 1491 (D.C. Cir. 1995) (quoting Hawaiian Tel. Co. v. FCC, 498 F.2d 771, 776 (D.C. Cir. 1974) (emphasis added).

Which brings us back to the point of the pencil:  as we are never going to completely eliminate politics from the process, the big question for the Verizon/SpectrumCo transaction is what type of “voluntary” conditions will the reviewing agencies force the parties to accept?  As I have said before, if there is a legitimate transaction-related harm, then the DOJ and FCC are completely within their rights to impose a remedy so long as this condition is consistent with applicable law.  However, the types of “remedies” suggested by Senator Kohl go far beyond any transaction-related harms; instead, these so-called remedies would nakedly seek to subvert the antitrust and regulatory review system to cynically benefit individual competitors.

To the House of Representative’s credit, they recently passed a bill to reform the FCC’s processes and, in particular, clarify the FCC’s license review authority along the lines of the case law discussed above.  Under this bill, the “Commission shall condition its approval of a transfer of lines, a transfer of licenses, or any other transaction under section 214, 309, or 310 or any other provision of this Act only if”—

(A)     the imposed condition is narrowly tailored to remedy a harm that arises as a direct result of the specific transfer or specific transaction that this Act empowers the Commission to review; and

(B)     the Commission could impose a similar requirement under the authority of a specific provision of law other than a provision empowering the Commission to review a transfer of lines, a transfer of licenses, or other transaction.

In this particular case, perhaps the Senate Judiciary Committee could learn a lesson from the lower house.

JUNE 1, 2012 CORRECTION:  In the original post, I said that “T-Mobile could have bid in the original AWS auction but declined.”  T-Mobile did in fact participate in the original AWS Auction.  However, T-Mobile declined to participate in future AWS auctions and T-Mobile also declined to participate in the 700 MHz auction for DTV spectrum.  The blog has been edited accordingly.