As one of the conditions for nabbing the Federal Communications Commission’s recommendation of approval of the T-Mobile/Sprint merger, Sprint plans to sell Boost Mobile, a telecom subsidiary that offers unlimited data, talk and text plans for as little as $50 per month.
T-Mobile and Sprint also made a series of promises to the FCC about how they will bring 5G to rural America and bridge the digital divide, two big priorities for FCC Chairman Ajit Pai.
The American Enterprise Institute’s visiting tech scholar Roslyn Layton (who testified before Senate Committee on the Judiciary Subcommittee on Antitrust, Competition Policy, and Consumer Rights last summer on the potential impact of the merger), uses a “Game of Thrones” analogy to describe why she thinks the merger is a good idea.
“The key critique of this merger is that reducing the number of players reduces competition,” she said. “That logic does not hold up in ‘Game of Thrones’: When you reduce the number of warring parties vying for the thrones, you will likely increase rivalry. Who wins is a function of innovation — with (a better) weapon and the superior strategy. The point is merely that what we care about in a competitive market is rivalry, not the number of firms. Remember it only takes two to start a bar fight.”
Boost piggybacks on Sprint’s network, and according to the FCC filing detailing Sprint’s and T-Mobile’s commitments should the merger succeed, Boost “could leverage the powerful New T-Mobile 5G network to provide a high-quality, 5G prepaid service at a low price.”
As with other small carriers like Credo Mobile (hosted by Verizon), Cricket Mobile (hosted by AT&T), Republic Wireless (hosted by Sprint and T-Mobile) and Straight Talk (hosted by the all Big Four: AT&T, Sprint, T-Mobile and Verizon), many telecom experts argue Boost wouldn’t become a meaningful competitor in the telecom industry because it would still rely on the Big Four’s networks, even though Boost and other small carriers offer lower prices than the Big Four.
“Divesting Boost Mobile, Sprint’s prepaid brand, will do nothing to benefit prepaid customers,” said Public Knowledge Senior Policy Counsel Philip Berenboick. “No matter how many virtual operators like Boost resell and repackage service from AT&T, Verizon, T-Mobile, and Sprint, the fundamental competitive bottleneck of the major carriers remains. While virtual operators serve a valuable role, the major carriers are not going to allow themselves to be out-competed and undercut by their customers. The transaction dramatically concentrates the wireless wholesale market that all [lower cost carriers like Boost], including a divested Boost, must purchase access from.”
In other words, if the Big Four become the Big Three, market concentration will raise prices for smaller carriers piggybacking on their networks, who will pass those higher costs on to consumers.
“Further,” Berenboick added, “Lifeline [operators like Boost] that service approximately 70 percent of Lifeline subscribers will also be forced to purchase wholesale access in this more concentrated wholesale marketplace. As a result, low-income and prepaid consumers who have turned to lower cost [mobile carriers like Boost] will likely be forced to pay higher prices post-merger as a combined T-Mobile/Sprint exercise their market power to raise wholesale prices.”
Layton points out that wireless rates have trended downward for the past 20 years despite increasing consolidation in the telecom industry.
“Mobile wireless providers have been consolidating from five to four to three for over a decade and prices are going only one way: down,” she said. “Value is going up.”
Some economists argue that prices should be lower than they are, but continued consolidation and anti-competitive practices within the industry prevent prices from dropping even farther. Layton says this is because of “misguided regulatory policy.”
“Theoretically, the price of mobile broadband could be zero or very low-cost,” she said. Consider when Netflix sent a DVD by the U.S. Postal Service. The customer paid a subscription, and Netflix paid the postage. Now that Netflix is (entirely) online, the customer still pays the subscription fee but Netflix sends the postal fee to the broadband provider. The broadband provider must thus collect that fee from the[ir] entire subscriber base whether or not they subscribe to Netflix. In other terms, Netflix has been able to grow its customer base without meaningfully having to increase its delivery costs. It comprises 35 percent of downstream fixed traffic today in North America. As for downstream mobile traffic, Google makes up about 21 percent of traffic, and Facebook 14 percent.”
According to Layton, then, Silicon Valley’s lobbying in Washington is one of the reasons why phone bills aren’t as low as they could be, but it shouldn’t stop regulators from allowing a merger in the telecom industry that could increase rivalry between the top mobile carriers.
Meanwhile the Rural Wireless Association (RWA) told InsideSources in an emailed statement they’re “extremely disappointed” that the FCC recommends approval of the merger because Big Telecom’s track record in rural America is so poor.
“T-Mobile has a history of misleading the [FCC] — such as by overstating its rural coverage in the FCC’s Mobility Fund Phase II proceeding — and of ignoring its obligations to rural consumers — such as by failing to enter commercially reasonable bilateral roaming agreements and by failing to complete hundreds of millions of calls intended for rural America, for which it paid a $40 million-dollar in 2018,” the RWA said. “The proposed ‘penalties’ for failing to comply with the conditions offered are illusory and will not force T-Mobile to keep its promises, as the carrier will only be fined a small fraction of the $100-billion-plus of rural network buildout costs that it will take to meet the conditions imposed.”
The RWA also suggested Pai acted hypocritically by recommending approval of the merger given Pai’s own track record on mergers.
“Chairman Pai has previously chastised merger applicants for the type of ambiguous, undefined promises and behavioral conditions proposed by T-Mobile and Sprint, and RWA believes that the Chairman and Commissioner Carr had substantial grounds to take the same action, here,” the RWA said.