T-Mobile and Sprint Pitch Their Case Before Congress

 You’re reading the Benton Foundation’s Weekly Round-up, a recap of the biggest (or most overlooked) telecommunications stories of the week. The round-up is delivered via e-mail each Friday.

Round-Up for the Week of June 25-29, 2018

Robbie McBeath

Last week, T-Mobile and Sprint officially filed their public interest statement on their merger to the Federal Communications Commission (FCC). This week, the bosses of T-Mobile and Sprint made their case before the Senate Subcommittee on Antitrust, Competition Policy, and Consumer Rights at a hearing titled, “Game of Phones: Examining the Competitive Impact of the T-Mobile – Sprint Transaction.” Though Congress will not be reviewing the deal (that job is left to the FCC and the Department of Justice), the hearing provided the companies a chance to make their case for the transaction that regulators will be reviewing over the next several months. Throughout the over two-hour hearing, some key disagreements surfaced over the state of wireless competition, the necessity of the deal for 5G buildout, and the certainty of consumer benefits.

Not surprisingly, T-Mobile CEO John Legere and Sprint CEO Marcelo Claure both largely stuck to the arguments they made in their public interest filings last week [See Benton's Disruptive Competition in 5G: T-Mobile and Sprint Submit Their Public Interest Statement]. In general, the companies claim the merger is necessary to ensure competition in the wireless and broadband marketplace. The combined company, the “New T-Mobile,” would use savings from “synergy” and shared resources to invest in fifth-generation (5G) wireless service, lower prices, and improve service, especially in the rural U.S.

Also testifying at the hearing were Asha Keddy (Vice President of Technology at Intel), Gene Kimmelman (President and CEO of Public Knowledge), Dr. Roslyn Layton (Visiting Scholar at the American Enterprise Institute), and George Slover (Senior Policy Counsel at Consumers Union).

From 4 to 3? Or 2 to 3? The Confusing State of Wireless Competition

T-Mobile CEO John Legere (left)
and Sprint CEO Marcelo Claure (right)

Most of the questions at the hearing attempted to get a better understanding of competition in the current wireless marketplace. T-Mobile CEO John Legere said the deal was “not about reducing four [competitors] to three,” but rather increasing from two to three.

The wireless industry is currently dominated by four major players: Verizon, AT&T, T-Mobile, and Sprint. [Although T-Mobile and Sprint highlighted new wireless markets entrants – like Comcast –  Legere has previously called wireless forays by Comcast and Charter a “charade” and “irrelevant” in conference calls with analysts and investors.] But the future wireless industry, particularly the market for 5G service, is where the New T-Mobile hopes to better compete with the biggest players, Verizon and AT&T. Legere said the merger, "is creating a viable competitor (that) can compete with AT&T and Verizon, who have shown historically they will only respond when forced to respond. We shouldn’t be punished for our competing aggressively in the past ... (or from) having the ability to create the arsenal of weapons that can take this innovation and competition to the next level."

Legere also pointed out that the New T-Mobile would still be much smaller than AT&T and Verizon, which, combined, serve more than two-thirds of total U.S. wireless subscribers.

Critics said T-Mobile is trying to have it both ways, by implying that there is both insufficient competition in wireless because of the dominance of AT&T and Verizon, while also claiming that the market is highly competitive because of the entry of cable companies.

“Which is it?” asked Gene Kimmelman. Kimmelman said that since AT&T abandoned its announced attempt to acquire T-Mobile in 2011, the marketplace has seen a competitive vibrancy "forced by direct competition between Sprint and T-Mobile, and upward pressure on AT&T and Verizon.” "The industry had enormous investment (and) massive innovation," he said. Consumers were offered lower-priced plans, options without long-term contracts, and easier ways to get new phones. "That is what we fear would be lost with this merger," Kimmelman said.

Subcommittee Chairman Mike Lee (R-UT) also highlighted T-Mobile’s shifting rhetoric on the cable industry’s role. Noting that Legere was now counting cable companies like Comcast as key competitors in the market, Chairman Lee said, “you appear to have walked back some statements you made as recently as February.” 

“I’m glad you brought this up,” Legere responded, going on to explain that he meant the cable companies hadn’t been competing up to their potential, but now had over half a million customers and are expected to grab 5 million within two years. “They’re becoming a viable player.”

George Slover said regulators should not let go of the "bird in the hand" competition, in hopes new competition will "fly in the window." He said that competition will, instead, evaporate. 

But Roslyn Layton, who served on the Trump-FCC transition team, said that there is no guarantee the current four-way battle royale will continue if the merger is blocked. Sprint could be acquired by T-Mobile or go out of business she said. "It’s a real risk to them if they are not (allowed to merge with T-Mobile)," she said.

The U.S. as a 5G Leader

"We will make sure America wins the global 5G race," said T-Mobile CEO John Legere. "Nearly every business in America will be able to use 5G to revolutionize how they create and deliver goods and services. To make this happen, and to deliver on the full promise of 5G, we need to combine Sprint and T-Mobile now.”

Sprint would struggle to deploy a 5G network on its own, CEO Marcelo Claure said. But Sprint and T-Mobile have complementary spectrum holdings and, combined, could more easily create a robust nationwide network, Claure continued. AT&T and Verizon "will be forced to react, invest and compete harder and that will be good for consumers and innovation," he said.

“A recent independent analysis by Accenture concludes that the United States is positioned to invest $275 billion in 5G, creating three million jobs and adding $500 billion to our economy. This merger will accelerate that investment,” Claure said in his testimony. He said the stars are aligned to allow T-Mobile and Sprint to combine their spectrum and networks to be a leader in 5G. "We need T-Mobile, and T-Mobile needs us."

Kimmelman said 5G is important, but the question is whether the combination yields the investment and benefits, or raises prices to consumers. Skeptics of the deal said a merger may not be the only path for Sprint and T-Mobile to deliver on their 5G ambitions, particularly if a deal means eliminating a competitor from the marketplace. Kimmelman said he was confident that the Department of Justice (DOJ) is likely to find that there are options for the market that will preserve the current four players. "At most, while the carriers may have succeeded in showing that a merger is one way to achieve 5G, they haven't shown that it's the only way, nor have they shown that the benefits of achieving 5G at the expense of competition is worth the tradeoff," he wrote in his testimony. Kimmelman added that both companies have not "convincingly" shown "how future upgrades to 5G are enough to justify a loss of competition in the meantime."

Slover from Consumers Union said the concentration levels of the merger are all in the "red zone." He said the faster, farther 5G network claim needs testing, but said the companies don't need to combine to build that network. He called the merger, at most, a short cut. Slover said the whole premise of antitrust enforcement is that it is better for consumers if companies "build it" rather than "buy it," with two companies racing to build competing networks and having to compete for customers.

Subcommittee Ranking Member Amy Klobuchar (D-MN) asked what has changed since AT&T attempted to purchase T-Mobile in 2011. Claure said it was simple: 5G. If the U.S. doesn’t launch 5G, China will pass us, and subsequently lead the future of innovation. The only truly nation-wide 5G network would be a combined T-Mobile & Sprint, according to Claure.

Roslyn Layton agreed. China is ready to "eat our lunch," she said and suggested that allowing free enterprise power like the proposed merger is a way to try to keep that lunch intact.

Consumer Benefits

Last week Benton examined the public interest statements T-Mobile and Sprint submitted, which claimed the merger will have numerous consumer benefits. Some of these claims, like lower prices for consumers, the creation of more jobs, and the maintenance of pre-paid plans, faced some contention at the hearing. 

Lower Prices

“Consolidation leads to lower practices?” Senator Klobuchar directly expressed to the panelists at one point. That’s the big question.  

T-Mobile believes the merger will lead to increased capacity, and therefore lower prices for consumers.  “...AT&T and Verizon will be forced to react and follow our lead or we will happily take their customers and give them more value and better price,” T-Mobile CEO John Legere said to the subcommittee. “All American customers will win with lower prices and better services.”

He told the subcommittee that consumers are extremely sensitive to changes in price and that any increases would probably be met with damaging blowback for T-Mobile.

Layton agreed. “It’s extremely difficult to try to raise prices in this particular market, especially when their competitors are able to offer a bundled solution," she said. “So I’m very skeptical that they would be able to raise prices.”

Kimmelman disagreed. He said that combining the companies would increase concentration and create an incentive to raise prices, or at least leave them higher than the market would set.  

Senator Klobuchar asked why the two companies couldn't just set prices just below the incumbents if they didn't have to compete with each other. Claure said they will have to lower prices -- and offer great services--to gain market share, which they will be able to do with the new, combined, capacity.

More Jobs

T-Mobile CEO John Legere frequently repeated that the merger will be jobs positive from day one.

Prior to the hearing, the Communications Workers of America called on the companies to commit to protecting workers' rights and to not eliminate jobs, and threatened to oppose the deal if they won't make that commitment. CWA said it wants job claims to be in binding form: "T-Mobile and Sprint must make a clear statement to regulators and to their employees that they will not interfere with union organizing activities and make binding guarantees to maintain, create and bring back jobs, without cutting current compensation for workers.” CWA said that according to its own analysis, the deal could result in more than 30,000 job losses stemming from closing 2,750 duplicative Boost (Sprint) and MetroPCS (T-Mobile) prepaid wireless stores.

On questioning from Senator Richard Blumenthal (D-CT), Legere offered more details into how exactly the New T-Mobile would arrive at an increase in jobs. Specifically, he said the combined company would bring Sprint’s customer care operations back to the United States from overseas, resulting in the hiring of 7,700 new employees. But at the same time, he said “there’ll be a rationalization of jobs in the first year,” meaning that the combined company would eliminate redundant jobs, including those in retail. On retail specifically, Legere said that New T-Mobile would eliminate 3,200 full-time retail jobs and 8,000 indirect and direct retail jobs, but would compensate for that by hiring over 10,000 employees to tackle the in-home broadband market and 12,000 to deploy new services in rural areas.

PrePaid Plans

Prepaid mobile phone service (commonly referred to as “pay-as-you-go”) is a plan offered in which credit is purchased in advance of service use. The advantages are that these plans often have lower costs, more control over spending and usage, and usually fewer contractual obligations. As a result, these plans are popular among travelers, students, and people with lower incomes.

Some Senators and consumer advocates worried that the merger would create fewer prepaid options, thus potentially affecting the low-income Americans who might sign up for such services. Kimmelman said the deal could be problematic for customers on prepaid plans that can’t afford to pay a few more dollars for a mobile data plan. “We don’t want to all fly the Concorde supersonic,” he said. “Some people want a plain old airplane.”

But Legere and Claure counted that the prepaid market is increasingly mirroring the postpaid market, such that prices and phone options between the two sectors are largely similar. “We are treating the prepaid customers pretty much the same as the postpaid customer,” Claure said. Legere added that, following T-Mobile’s purchase of MetroPCS, the company invested further into the prepaid sector. Prepaid customers will be "among the biggest beneficiaries," Legere said.

What’s Ahead

Near the end of the hearing, Chairman Lee dubbed some critics' concerns "legitimate." Senator Klobuchar also remained skeptical, at one point telling top company executives she wasn't sure how they would accomplish their merger plans and beef up network investments without raising consumer prices despite their pledges to the contrary.

Ultimately, it’s not Congress that T-Mobile and Sprint will have to convince. The FCC and DOJ will need to sign off on the deal in order for it to advance. As Kimmelman reminded everyone, the merger is about law enforcement and the DOJ enforcing antitrust law, not about promises. But the hearing on June 27 provided a good look into what regulators will be examining as the deal moves forward.

You can be sure to follow along as regulators continue to examine the deal in Headlines.

Quick Bits

Weekend Reads (resist tl;dr)

ICYMI from Benton

Upcoming Events

By Robbie McBeath.