Commentary

Is Blocking Mobile Merger an “Assault on Innovation?”

By Timothy B. Lee
This article appeared on Forbes.com on September 6, 2011.

Last week, the Department of Justice announced that it would seek to block the merger of AT&T and T-Mobile, the #2 and #4 wireless carriers, respectively. I’ve been on the fence about the deal since it was announced, and I’m not sure what to think about the government’s latest move. But I do think a lot of critics’ rhetoric has been overblown. The merger announcement isn’t “startling” — it’s been widely, and properly, debated for months. I see no reason to think the government’s decision is (as Geoffrey Manne puts it) an “assault on innovation and progress,” nor that it’s driven by (in Don Boudreaux’s words) an”anti-business anti-enterprise philosophy.”

Boudreaux argues that “History knows no example of a firm monopolizing a market and harming consumers over the long run unless it’s protected by government. These firms are not protected by government.” But as Manne points out, this isn’t actually true. These firms are protected by government:

Effective, efficient provision of mobile broadband service is a complicated business. It is severely hampered by constraints of the government’s own doing — both in terms of the government’s failure to make available spectrum to enable companies to build out large-scale broadband networks, and in local governments’ continued intransigence in permitting new cell towers and even co-location of cell sites on existing towers that would relieve some of the infuriating congestion we now experience.

If we lived in a world with only two cell phone providers who were trying to merge to become a monopoly, blocking that merger would be a no-brainer. And I don’t see any reason to consider the 2-to-1 case a bright line. If there were three cell phone providers and two of them wanted to merge, that would still be something for antitrust authorities to give careful scrutiny.

Thankfully, our mobile communications market is relatively competitive, with four to six major carriers (depending on how you count). In an ordinary market like shoes or soft drinks, the case for blocking the merger of two out of six firms would be pretty weak, because we could be confident that consumers could shift to smaller competitors or new entrants should the largest incumbents do a poor job of serving their customers. But thanks to mismanagement by the FCC, only a small slice of the electromagnetic spectrum is available for the flexible, exclusive licenses needed to provide cell phone service. And the incumbents own most of it. Indeed, one of the arguments for the merger is said to be that it’s the only way AT&T can get more spectrum. Those same capacity constraints make it hard for smaller competitors to obtain enough spectrum to pose a serious threat to the largest incumbents.

And this is particularly worrying because spectrum is increasingly becoming an essential input to the more competitive and strategically important IT sector. Our Droids, iPhones, and Kindles depend on spectrum to talk to the world, and the existence of robust competition among wireless network operators give Apple, Google, Amazon, and others leverage to build the kinds of devices they want and to get them into the hands of consumers. It’s not a coincidence that T-Mobile, the smallest of the four national carriers, is known for having the most liberal handset policies. Consolidation in the wireless industry risks shifting the balance of power away from Silicon Valley toward the much less innovative wireless carriers.

The ideal solution would be to enact spectrum reform that frees up larger swaths of the electromagnetic spectrum to be allocated by market forces. A more liquid market for spectrum would mean that consumers would be free to switch to smaller firms (or new entrants) should the largest firms do a poor job of serving their needs. Unfortunately, the prospects for serious spectrum reform in the near future are remote. Which means that the Justice Department faced a difficult choice. On the one hand, it’s probably true that the merger would allow AT&T to provide better service in the short run. But on the other hand, the merger will further insulate AT&T from competition, which could lead to declining service quality, rising prices, and reduced innovation in the long run. I’m not sure the Department of Justice made the right call, but it’s certainly not an “assault on innovation and progress.”

Timothy B. Lee is an adjunct scholar at the Cato Institute. He covers tech policy for Ars Technica and blogs at Forbes.com.