Will the Sprint and T-Mobile merger create competition?

This week for our interview series on The Vergecast, host and Verge editor-in-chief Nilay Patel talks to Gigi Sohn, a distinguished fellow at Georgetown Law’s Institute for Technology Law and Policy. We’ve had Gigi on the show before to talk about the ramifications following the repeal of net neutrality.

This time, we brought her back to talk about some recent developments in the tech policy world, including lawmakers in states like California introducing net neutrality bills.

We also talk to Gigi about the Sprint and T-Mobile merger and the issues surrounding how that merger will seemingly go through unless it’s stopped by a lawsuit from several states. Can Dish become a fourth mobile carrier?

Below is a lightly edited excerpt of that part of the conversation.

Nilay Patel: And that’s a good time to shift our attention to Sprint and T-Mobile.

I mean, in my mind, this is all one big issue. They’re actually separate issues. But in my mind, the lack of competition is what drove the net neutrality moment. There’s not enough competition for the market to provide options and choice and fairness. So here we have net neutrality is gone, save the states and potentially some appeals.

And on the other hand, you have the market consolidating, which seems like the whole reason that you’d want the regulatory scheme. This is, in my mind, a very complicated scheme to somehow preserve four wireless carriers. Describe the plan.

Gigi Sohn: So this plan came from the Department of Justice. Let me just ratchet back because the whole process to getting where we got has been so weird and so opaque that I think people need to understand what kind of gymnastics this administration has been doing in order to grant a four-to-three merger. And this is all in the same context. We’re talking about breaking up Google and Facebook, right? You know, antitrust is being revived, which I think is fantastic. It’s about time.

But we’re talking about Republicans and Democrats talking about the need to break up companies that are too powerful.

And while this is happening, we’re going from a four mobile carrier market to three, despite overwhelming evidence that it would diminish competition and raise prices.

So I think it’s important to talk about the machinations here. In late May of this year, Chairman Pai announced via a statement that he was going to circulate soon an order to his colleagues approving the Sprint T-Mobile merger — this was before there was any conversation about a fourth carrier — and that it would be good for 5G deployment. Which is, of course, the universal excuse for all deregulation, and it would be good for rural deployment, getting capacity, getting deployment to rural areas, which is a nonsensical argument. But I won’t address that now. Shortly thereafter, like within hours, Commissioner Carr said, “Me, too” without seeing an order. There’s no order because he’s going to circulate it in a couple of weeks.

And I think the next day or two days, Commissioner O’Rielly, the other Republican, says, “Me, too.” So already, they’ve all prejudged an order they’ve never seen. I never saw anything like that in my life. Two months later, the Department of Justice says, “You know what? Four to three is anti-competitive, at least in this case. It’s anti-competitive and illegal. So therefore, we are going to create (what I call a mobile Frankenstein), which is Dish Network. We’re going to basically create the conditions under which, in seven years, Dish Network will be able to provide service.”

Now, you don’t need to be genius to figure out that a lot can go wrong in seven years, particularly because this mobile Frankenstein can only operate at the behest of T-Mobile. So for the first seven years, Dish Network — which would get 9 million prepaid customers —they would get Boost Mobile, which is one of the pay ahead of time prepaid services that poor people use or people that don’t have good credit ratings use. So they get 9 million customers compared to Verizon’s 130 Sprint/T-Mobile’s 100 million and they could start to build a business using T Mobile’s network.

Now, tell me what incentive T-Mobile has to make that easy for Dish to do?

Again, this is a conservative Republican assistant attorney general who has said a million times that behavioral conditions don’t work, you know, essentially creating out of whole cloth “a new fourth competitor.” So that was the end of July.

Can you explain what you mean by “behavioral conditions”?

Okay. So behavioral conditions are, for example, “T-Mobile must let Dish use its network to provide service.” A structural condition is “Okay, Sprint must spin off Boost, must sell Boost to Dish.”

So that’s where, basically, you take a part of your business and you sell it to someone else or you give it to someone else. That’s where you’re actually reworking the structure of a company.

A behavioral condition is one where you’re saying, “Okay, company, you must be nice by doing X.”

So the FCC decision yesterday is going to say something along these lines: “The new Sprint / T-Mobile promises to serve X number of rural people in five years and plans to deploy 5G in 97 percent of communities in five years or seven years.”

That’s a behavioral condition where you’re depending on the company that’s merging to behave.

Now, why do Republicans — and, frankly, I’m not a Republican, but I don’t like them, either — why are they not really favored by antitrust authorities? Because the government has to make them do it. And usually, those companies have a hell of a lot more resources to lawyer the living daylights out of those conditions than the government does. And they often never come to fruition.

So you’ve got Makan Delrahim the assistant attorney general for antitrust who gave speech after speech of the last several years saying how behavioral conditions don’t work, creating this new entity mostly out of behavioral conditions. The spinoff of Boost and the only 9 million, it’s like one-tenth of what everybody else has. And they’re prepaid customers, which, by the way, is like having zero customers because a prepaid customer can walk away anytime. So the implementation risks for Dish to get up and running and compete in any way, shape, or form in seven years are enormous.

Is there any spectrum transfer to Dish?

Yes, but not really spectrum that they need. In fact, they’re transferring a bunch of the old Nextel. So Sprint bought Nextel years back...

A horrible lack of success, and, yes, Dish has the option to buy it. They don’t even have to buy it. So that will tell you how valuable it is if they don’t even have to buy. We’ve always known Dish has plenty of spectrum. That’s not the issue. What they don’t have is a network. So the idea here is, you know, let them use T-Mobile’s network for seven years and then let them cobble together their own. Let them get the backhaul. Let them get the antennas. Let them build their own network in the next seven years.

Now, my question is, if Sprint so desperately wants to get out of the market, why don’t they just sell their network to Dish? Why are we doing this thing where we allow these two entities to merge and then pray and hope that Dish can build a network?

So here’s the argument I’ve heard on that, and I hear it from our readers quite a bit: “We like T-Mobile. T-Mobile is great. They came into the market. John Legere is a firebrand. He took on the big carriers. He makes a product, a service that we like. The big competitors have had to react to him, and they have in certain ways. Why wouldn’t we want to strengthen T-Mobile by letting them run Sprint and getting Sprint spectrum and making them as big as AT&T? Why wouldn’t we want this company that we like to be an even better competitor to big companies that we don’t?”

Well, I like T-Mobile, too, and I’m a very satisfied T-Mobile customer. However, you know, when you go from four to three, the incentives change. Yes, it is definitely true. And by the way, I testified against the AT&T / T-Mobile merger, which led to T-Mobile becoming what it is today. So I feel like I’m partly responsible.

But when you have four, you had a situation where T-Mobile was not only competing with AT&T and Verizon and changing their behavior, but it was also competing with Sprint and Sprint with it for the low value customer. Once you shrink that to three evenly sized companies, the incentive to go after the low value customer goes away because you’ve gotten rid of Sprint, who is keeping your prices down. And we’ve seen this in many markets in Europe. The incentive becomes to act more like AT&T and Verizon and raise prices and not have as family-friendly plans. And in fact, the record at the FCC shows that this is exactly what would happen. The prices would go up. Now the companies say, “Yeah, well, you’re right. Prices will go up, but you’ll get more for your money.”

But where does that leave the value-conscious customers? Maybe they don’t want to pay 15 dollars more a month or whatever. I think it said between 15 and 21 percent more a month. Maybe they don’t want that super speedy service. So what happens to them?

Again, the problem is, as we’ve seen over and over again in four-to-three markets, prices go up, and people are left out in the cold.

Well, presumably they get to Dish. Isn’t it true that the argument here is it’s not four to three; it’s four to three for a minute and then four to four in seven years? I’m not saying that I believe it or I can make it without laughing, but that is the argument. We’ve cobbled together an interim solution where even like running the infrastructure of the network and like the administrative part of the network for Dish until Dish is up and running in seven years.

I think the better solution, the cleaner solution, is to have Sprint sell its assets. And it’s not only Dish that’s interested. The news reports were also saying that Charter was trying to become that fourth competitor as well. So they’re interested. There may be other cable companies interested in buying Sprint’s assets. I just think, you know, if Sprint sells its assets to a company like Dish or a company like Charter or somebody else, then a network will definitely be run, and it will be run right away. But, you know, you’re asking this company that has never run a mobile network — it runs a satellite video network, which is very different — to start with one-tenth of the customers, none of them postpaid and become a competitor in seven years and build a network.

I mean, you know, you’re assuming that they can get the backhaul, and if they can get the antennas and then they can actually build this thing. I just think that kind of risk, particularly when there’s another option that’s better, should not fall on consumers.

And by the way, T-Mobile is kicking butt. T-Mobile is taking customers away mostly from Sprint but also from AT&T and Verizon. So they’re actually growing the way you should: by competing.

Source: The Verge

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