| September 6, 2011

The Internet Paradox

[Editor’s note: As we went to press, the proposed AT&T/T-Mobile merger was thrown into chaos on August 31 when the Obama Justice Department announced plans to oppose it. Announcement of the suit came just hours after company officials had met with Justice lawyers to review the case, and no mention of litigation was made.]

Just when you thought nothing good could come from Washington, D.C., the federal government appears to be edging toward serious consideration of a transformative change in the wireless market. On August 26 a key agency began to move on an important deregulatory step—in accord with the fondest aspirations of the late Ronald Reagan. With anticipation, analysts expect “the magic of the marketplace” to raise the American quality of life, again.

AT&T wants to buy T-Mobile, and is planning over seven years to spend $8 billion on infrastructure after the transaction (which is awaiting regulatory approval). The company expects growth by 2015 to be eight, perhaps 10, times what it experienced in 2010. AT&T says flatly that customers in the two systems will see voice and data service improvements, increased spectrum efficiencies, dramatically better cell densities, and major shifts toward better capacity and output.

English translation: A lot more people will have a lot better service.

What’s perhaps most significant is that the company plans to go after the underserved rural market. When you add closed urban service gaps, the kind of folks who look at things like this say that the merger could mean the near-elimination of the “digital divide” afflicting those who have a comparative lack of service for broadband wireless in both rural areas and poorer pockets of America’s big cities.

The company predicts 55 million more Americans will have a chance to choose high-speed wireless broadband. At the end of the dynamic—and, advocates say, still competitive—process anticipated, 97 percent of Americans would have the ability to purchase affordable wireless services.

So, private capital would lead the way in improving the country’s competitive position in the world, while leveling the playing field for better access. Wait—it’s always been that way. It’s just that these specific circumstances are more unfamiliar to those of us over the age of 45. (OK, make that 55, or maybe 56.)

In cyberspace, this is about “4G LTE.” About the time I noticed something called 2G, there was 3G. “G” is for generation, indicating speed and utility. “LTE” is for “long-term evolution.” Put together, they mean mobility, utility, and speed (an album of music that once took four-and-a-half minutes to download will take 70 seconds on an operational 4G LTE system).

Oklahoma Gov. Mary Fallin is for the merger. This spring, she said in a letter that the Sooner State already has an economy with natural resources which are used to drive the economy “through small businesses and our aerospace, energy and military sectors” to “provide a path to prosperity.” She indicates high-end technology is the way to secure higher quality and more efficient health care, and better education. The merger and its implementation would “be transformative for many areas of our state and help eliminate many of the geographic disparities that exist.”

Fallin and Chickasaw tribal Gov. Bill Anoatubby are fighting in court over water policy, but figuratively they’re smoking the peace pipe over deregulation of the wireless marketplace. In a July 27 letter, he said the envisioned merger “can greatly improve the delivery of telehealth services … crucial to our tribe because we have five geographically dispersed clinics across south central Oklahoma, as well as a new hospital in Ada.”

Mike Spradling of the Oklahoma Farm Bureau backs the merger, telling regulators, “Today’s new generation of farmers and ranchers need robust, reliable wireless access to conduct their operations.” Farmers and their families can use “online resources to research growing markets and new products.”

Francisco Trevino of the Tulsa Hispanic Chamber of Commerce said access to better technology is the “lifeline” for his small-business members. In Oklahoma City, Debra Ponder-Nelson of the Minority Supplier Development Council is an advocate.

The idea has broad support across the state, and why not? In the past decade, a USTelecom analysis indicates, one-third of the nation’s productivity growth has come from broadband or related technology.

The big picture indicates something much like this merger is indicated. The same can be said of the individual or “micro” picture. Arik Hesseldahl, reporting in BusinessWeek (December 31, 2008), estimated that half of high school graduates with computers and Internet access at home have gone on to college; only one-fourth without that access did so.

In Oklahoma City, Bryan L. Gonterman runs AT&T’s operations. In a conversation last month, he conveyed enthusiasm for taking his firm’s services into under-served corners of the state.

Nationally, the loudest voices of concern over the merger have come from an AT&T competitor, Sprint chief executive officer Dan Hesse, who argues the AT&T/T-Mobile combo will mean higher prices and anti-competitive market concentration.

However, the past decade’s mergers have meant price competition and consumer choice. The Consumer Federation assailed the Cingular/AT&T wireless merger in 2004, but prices “per message” dropped 84 percent in five years. In 2007, a coalition of consumer groups used classic antitrust language to oppose the Verizon/Rural Cellular combination, yet a 30 percent decline in voice revenue was the result.

In two years, (third quarter 2008 through the end of 2010), the effective price per megabyte across the wireless industry has dropped 89 percent (Recon Analytics, Nielsen Customer Value Metrics).

Indeed, if the merger goes through, six major competitors will remain in the market, with a variety of smaller actors with niche roles (including Clearwire, a Sprint affiliate).

Hesse himself in February commented, “We believe that the market for wireless services has been characterized by intense competition on the basis of price, the types of services and devices offered, and quality of service.”

In Congress, both House and Senate Judiciary subcommittee hearings were held this spring and are anticipated again this fall. Some in the Oklahoma delegation have been silent, but merger supporters include U.S. Reps. Dan Boren of Muskogee and John Sullivan of Tulsa, and U.S. Sen. Tom Coburn of Muskogee.

Cautiously, there is something to be said for an idea that has, as this does, the support of both Jesse Jackson, Jr. and Steve King.

Congress is always important, but the key player on this will be the Federal Communications Commission (FCC). Until early summer, analysts anticipated action this fall, but a bureaucratic “shot clock” went into effect as remarkable projections of increased broadband coverage emerged. Filings for and against the merger have been rolling in since May. Deliberations will start edging forward in the next few weeks, in part because of the relatively rare bipartisan support, but commission proceedings lingering into the winter would not be surprising.

In the end, the Internet and today’s remarkable band spectrum of possibilities are a 2011 version of the issues raised in Robert H. Bork’s seminal work, The Antitrust Paradox (1978). He challenged prevailing academic orthodoxy, arguing that in some cases laws designed in the Roosevelt (Teddy) era to prevent monopolies had eventually led to anti-competitive practices, and poorer service to American consumers.

Then-Professor (later Judge) Bork asserted that government regulation should be driven by rational analysis of market conditions and that, in some or even many cases, mergers and acquisitions would serve not only the greater good, but also the specific good of increased choice for small businesses, and greater liberty for individuals. In slow motion, his daring views became conventional wisdom, eventually incorporated into binding Supreme Court precedents.

Issues raised in the proposed telecommunications merger are the latest and perhaps most intriguing recent example of the “paradox” of which Bork wrote so insightfully.

In the present discussion, there’s more than the Internet involved, of course. Still, we need a name, for the sake of convenience, for this year’s policy discussions in Congress, at the Federal Communications Commission, in Oklahoma City, in chat rooms and on Facebook, at water coolers and in texts, on the phone, and in our living rooms.

With the merger’s approval, broadband access will expand, reaching millions who now can get to the Internet and wireless technology either imperfectly or not at all. With less regulation, the market will be invigorated, costs per unit will decline, and consumer choice will expand. That will mean more opportunity.

So, a humble proposal from a reformed Luddite, a man seeking light and LTE, connections and connectivity. Let’s call the debate over the AT&T/T-Mobile merger an example of the Internet paradox—where less is more. A sprint to the future requires the FCC, in some ways the consummate regulator, to step back and let the future rush in.

Patrick B. McGuigan (M.A. in history, Oklahoma State University) owns a “Droid” device and is a Verizon customer. His home-bundled telecommunications services come from Cox Communications, but his friends work at AT&T, Cox, Sprint, and smaller companies whose names he cannot remember. CapitolBeatOK, the online news service where McGuigan is editor, uses a Google-based messaging program with access through Cox. McGuigan owns no stocks in the wireless industry.

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