Testimony Before the House Subcommittee on Communications and Technology on Protecting Consumers and Competition

Doug Brake February 13, 2019
February 13, 2019

ITIF has openly supported the proposed transaction since its announcement with the belief that the merger advances innovative wireless broadband services, offers significant benefits that will ultimately flow to consumers, and presents few concerns in terms of competition. The merger offers significant scale and operational efficiencies that will help accelerate the transition to next generation networks, intensify competition, and bring numerous benefits that flow throughout the economy. A future in which T-Mobile and Sprint are combined is far better future than one in which the two attempt to continue on separate paths.

We are not alone in favoring the proposed combination. Thirteen members of Congress recently wrote to FCC Chairman Pai and Assistant Attorney General Delrahim to say that “this merger will foster greater competition and consumer choice… and help ensure the U.S. remains a world leader in next-generation wireless broadband technology.” The members writing in support are correct in recognizing the reality of intermodal competition “as companies in the cable, satellite, wireline, and wireless industries now compete fiercely for broadband consumers.” We can expect that competition to likely intensify rather than abate after the combination, offering significant benefits to U.S. consumers and businesses alike. These benefits were also recognized by the New York Public Service Commission, which recently approved the transfer with modest conditions.

Some critics of the merger argue that the government must preserve four operators. We believe this view is mistaken for several reasons. This four-to-three lens also ignores the rapidly differentiating business models in and adjacent to wireless services. Raw connectivity is increasingly commodified and wireless companies are looking to new revenue streams—most notably home wireless broadband; Internet of things (IoT) applications, including connected vehicles and drones; overthe-top video, and advertising—to recoup large ongoing investments. These new business models built on top of basic Internet protocol (IP) connectivity are likely to keep downward pressure on price for voice, text, and data whether there are three or more facilities operators.

The fixation on four operators also under-appreciates companies on the cusp of wireless entry, such as cable firms, satellite companies, and other potential new entrants. Internet access provision continues to be a highly innovative area. Technologies and business models will likely change as much or more in the next ten years as they have in the past ten.

Even setting aside the dynamism of the market, changing business models, and shifting grounds for competition, we still believe this consolidation to three operators is in the public interest. As a general matter, competition is a means, not an end; if we can achieve an overall wireless system that is more productive and innovative that can be a good thing, even if that requires fewer competitors. Because of the tremendous fixed-cost investments involved in mobile communications, a smaller number of providers can more efficiently provide the needed infrastructure for a given customer base given adequate spectrum resources.

Critics also under-appreciate the specific spectrum synergies teed up for a 5G deployment. TMobile’s recently acquired 600 MHz spectrum and Sprint’s 2.5 GHz spectrum offer complimentary coverage and capacity, respectively. The performance capabilities enabled by the new 5G specification still depend on the type and amount of spectrum it is used with. A mix of low-, mid-, and high- band spectrum will offer the highest performing network. T-Mobile is looking to deploy 5G with their broad-coverage, but limited capacity 600 MHz spectrum. Sprint, on the other hand, has a respectable amount of potential capacity with its mid-band spectrum, but would lack the ability to offer wide-area 5G coverage. This means the combined firm will have the spectrum assets and financial strength to offer a much more robust next-generation network than either one alone.

Despite the FCC’s efforts to streamline the deployment of small cells for 5G networks, we are unlikely to see wide-scale deployment of very high-frequency “mmWave” spectrum for mobile services soon. This high-frequency spectrum has relatively limited propagation, which drives up infrastructure cost to cover a given geographic area. There are also remaining engineering challenges in applying massive multiple-input, multiple output (MIMO) and beamforming technologies in a mobile environment (as opposed to fixed wireless). The merger is a unique opportunity to combine synergistic spectrum assets at the beginning of a nationwide deployment of next generation technology that resists comparison to other markets.

Lastly, we have to consider the alternative to this transaction. Sprint, in particular, has been challenged financially, and bankruptcy is a potential possibility. The company was forced to take a significant write down on the Nextel acquisition, and bets on technology, such as WiMAX, have turned out poorly for the company.

A market of three relatively equal-sized companies in terms of subscribers that continue to invest and expand service, capacity, and offerings is a far, far better future than a lopsided market that competes only on price. A combination of T-Mobile, with about 80 million subscribers, and Sprint with about 54 million subscribers would result in a company that would be slightly smaller than its competitors AT&T and Verizon in terms of total connections. This market structure, with three roughly equal facilities-based firms competing at scale should be preferred to one with two strong providers and two smaller ones, especially as we enter what is expected to be a capital intensive phase of 5G deployment. Combining Sprint and T-Mobile allows the needed scale for the new company to more effectively compete with AT&T and Verizon and expand into adjacent markets.