When "Overregulation" Ruined Your Cell Phone (But Actually Didn't)

Blog ››› ››› SIMON MALOY

Last year, the regulatory agencies charged with overseeing the wireless communications market did something unusual: they actually regulated. After spending the Bush years eagerly facilitating the consolidation of the wireless market, in 2011 the FCC and the Justice Department blocked AT&T from merging with T-Mobile over fears that the deal would be anti-competitive and result in job losses. At the time, conservatives in the media decried this move as gross overregulation of a burgeoning market that would dampen investment and stifle technological development. But here we are almost one year out, and those dire prognostications haven't played out. In fact, quite the opposite has happened.

First, the doomsaying. As the merger neared the bottom of its death spiral in early December 2011, the Wall Street Journal's L. Gordon Crovitz complained of the "risks of overregulation" and declared that this new era of technological wonders "requires more regulatory humility." According to Crovitz: "So long as regulators apply rules for mature industries to new technologies, we will have problems such as spectrum scarcity and industries kept artificially inefficient. Until regulators change their ways, blame a meddling FCC when calls get dropped on your mobile phone."

After the merger officially went kaput a couple of weeks later, the Journal editorial board weighed in, calling the regulatory roadblock "top-down economic tinkering" and coughing up the same dropped-call imagery as Crovitz: "The next time your cellphone is slow or your call is dropped, don't blame AT&T. Point the phone at Washington."

So what's happened since then? Well, when the AT&T/T-Mobile merger was first announced, T-Mobile's parent company, Deutsche Telekom, was looking to wash its hands of the U.S. market. But after the merger fell through and AT&T was obligated to fork over $3 billion to T-Mobile along with a sizeable chunk of wireless spectrum, T-Mobile took the money and invested it almost immediately in network modernization. Now Deutsche Telekom -- once eager to be done with the U.S. -- is moving to acquire low-cost carrier Metro PCS to build out T-Mobile's high-speed 4G LTE network.

Meanwhile, the Japanese telecommunications firm Softbank is snapping up Sprint Nextel and infusing $8 billion into the wireless carrier, which will be used to build out its own network. Back when people still thought the AT&T/T-Mobile merger was a sure thing, it was assumed that Sprint would have had to merge with Verizon and we'd be left with a wireless duopoly. Now both Sprint and T-Mobile are investing in their own networks and working to emerge as serious competitors.

And what of AT&T? When the company first announced the proposed merger with T-Mobile in March 2011, it made much of the fact that it would "increase AT&T's infrastructure investment in the U.S. by more than $8 billion over seven years." Three weeks ago, AT&T bumped up that number significantly, announcing that "it would invest an extra $14 billion to expand its wireless and broadband services over the next three years." The New York Times reported on November 9 that the decision to boost infrastructure investment "was motivated by AT&T's failed $39 billion takeover of T-Mobile USA."

The plan was born of the collapse of the T-Mobile deal late last year, [CEO Randall Stephenson] said. Buying the smaller rival -- which now plans to merge with another service provider, MetroPCS -- was meant to give AT&T much-needed spectrum to upgrade to LTE.

With that transaction's death, AT&T was forced to consider how it would acquire more spectrum, as well as how it would spend the enormous amount of cash on its books and deal with nonessential operations like a yellow pages business.

So in the wake of FCC/DOJ blocking the merger, we've seen one company that would have been swallowed whole (T-Mobile) and another that very likely would have been swallowed whole (Sprint Nextel) significantly boost investment in their networks in an attempt to compete with their erstwhile swallowers. And while AT&T denies it's feeling any heat from Sprint or T-Mobile, they are nonetheless feeling pressure to invest more in new wireless technologies and improved infrastructure. As Public Knowledge senior vice president Harold Feld put it last month:

But oddly, despite all this antitrust enforcement and the faint regulatory buzz coming out of the FCC for the first time in a decade, $25 billion in new capital has found its way into the market. Verizon, T-Mo, Sprint, and even AT&T are scrambling to totally rework their networks and enhance the use of their spectrum. Dare we suppose that this dramatic turnaround is because the DoJ and FCC have taken these steps to show investors there is a future for competition in the wireless world.


What I am saying is that the DoJ and FCC have done enough to persuade investors that competition in the wireless industry may have a future after all. Contrary to the espoused doctrine of incumbent providers and the Wall St. analysts and neo-con think tanks who love them, surgical intervention by regulatory agencies has attracted new investment, forced incumbents (in the case of AT&T) to invest in developing spectrum they already have and (in the case of Verizon) to sell off spectrum they don't need after all to its rivals.

"Surgical intervention" is the key phrase here, as the decision to stand athwart AT&T and T-Mobile was only the second time in 40 years that the FCC blocked a merger on anti-competitive grounds -- hardly the "overregulation" or "top-down economic tinkering" that the Wall Street Journal would have us believe took place. And the movement in the wireless market over the last year certainly cuts against the notion that all regulation is bad regulation when it comes to mobile phone technology.

Posted In
Media Structures & Regulations
Wall Street Journal
L. Gordon Crovitz
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