How Antitrust Enforcement And Pro-Competitive Regulation Encourage Investment, Encourage Innovation, Enhance Spectrum Efficiency And All That Other Good Stuff Despite CW To Contrary.

In the past month, to the complete surprise of just about every analyst and industry watcher, foreign investors spent the equivalent of $25 billion to invest in competing carriers T-Mobile and to acquire control of  Sprint and ClearWire. AT&T has announced a whole bunch of network upgrades such as repurposing its 2G spectrum, clearing up the interference in the WCS band, and a seemingly endless stream of license acquisitions. While the last is perhaps not so unusual, U.S. Cellular has likewise been spending money to coble together a broader footprint using the less—than—stellar—but—better—than–nothing 700 MHz A block.

Quite a turnaround from the start of 2011, when the industry appeared on a glide-path for a duopoly. Last year, T-Mo parent Deutsche Telekom (DT) was looking for a U.S. exit, AT&T and Verizon seemed more focused on buying out competitors than on developing the spectrum they already held, cable operators were giving up whatever plans they had to enter the market, and competing carriers couldn’t find financing to build out networks or pick up licenses in the secondary market. So what happened?

The Department of Justice (DOJ) and the Federal Communications Commission (FCC) have made clear over the last two years that (a) we will have 4 national carriers, and (b) the FCC cares about ensuring enough spectrum access to keep Sprint and T-Mobile (and hopefully other competitors) viable. Contrary to all conventional wisdom, two years of FCC regulation like data roaming and special access reform, combined with antitrust enforcement around AT&T/T-Mo and Verizon/SpectrumCo, stimulates investment in the wireless industry and forces companies like AT&T and Verizon to get serious about developing the spectrum they need and ditching the spectrum they don’t need on the secondary market.

Does that blow your mind? Is that just all freaky and too much for you to handle in a neo-con policy world that worships The Gods of the Marketplace and can’t tell the difference between a “competitive market” and a “deregulated market?” If you think you can handle the wisdom, pilgrim, then see my explanation below. . . .

It’s worth recalling that at the opening of 2011, the general conclusion of the universe was that the DoJ and FCC planned to continue the fine tradition of totally rolling over for industry consolidation and doing absolutely nothing for competition beyond piously hoping that bringing more spectrum to market for auction would magically make these problems go away. Despite high expectations when Genachowski was appointed, the FCC had failed to move on pending items pushed by competitive carriers and consumer groups (such as my employer Public Knowledge) such as special access reform or data roaming. The FCC net neutrality rules contained a huge carve out for wireless, largely seen as a huge victory AT&T. The DoJ and FCC approved Comcast/NBCU with behavioral conditions — signaling to many that other previously “unthinkable” mergers were now thinkable. The election of 2010 flipped the House to Republican control, creating a much more hostile and anti-regulatory environment. Even outside of telecom, the Obama Administration seemed to be scrambling to position itself as “deregulatory” and “business friendly.” Small wonder that AT&T assumed it could use its lobbying might to absorb T-Mobile, leaving Sprint for Verizon to consume, just as Verizon had absorbed MCI/Worldcom and SBC absorbed AT&T. Even when the FCC finally approved the data roaming rules, it was widely seen as too little too late and unlikely to survive review by the D.C. Circuit anyway.

But a funny thing happened on the way to consolidation. First the DoJ, then the FCC, successfully blocked the AT&T/T-Mo deal. That might have been a one off. A lot of people usually opposed to anti-trust enforcement thought AT&T/T-Mo was just too much concentration, of both spectrum and market share, to get through. But then the FCC started to get serious on making sure competitors had sufficient spectrum to stay viable. The FCC stunned pretty much everyone by making it clear that Verizon would need to divest spectrum to get its deal with SpectrumCo approved. The result was a fairly pro-competitive divestiture to T-Mo, giving T-Mo a decent network and clear path to LTE. And whether or not one believes the DoJ did enough to keep the agreement between Verizon and the cable cos from becoming a true cartel, the fact that they did anything at all confirmed that AT&T/T-Mo was not a fluke and that the DoJ (at least for now) thinks competition in the wireless market needs protecting.

On top of this, the FCC sudden started getting all serious about regulatory reforms designed to keep carriers other than AT&T and Verizon in the game as serious players. This included not just the long-awaited data roaming order (which now looks like it will probably survive review by the D.C. Circuit after all), but also revisiting special access, 700 MHz Interoperability, and renewed interest in clarifying the spectrum screen/possibly reviving the spectrum cap. While the last three are still in progress, the fact that the FCC is even talking about them in a serious way  is so radically different from what folks expected at the beginning of 2011 that it puts heart into investors and competitors who were looking for some sign that anyone in DC gave a crap or if competitive wireless would end up going the way of competitive telecom and competitive ISPs.

Needless to say, each one of these antitrust actions and regulatory proceedings has been greeted by the usual chorus of how any antitrust enforcement discourages network investment and prevents efficient deployment of spectrum, and how regulation will create uncertainty that will drive away investment. After all, the worshippers of the Gods of the Marketplace intoned from their well-worn hymnals, regulation always imposes costs, it always discourages investment. Government policy can never create jobs or encourage innovation. Never nevernevernevernevernever!!! And anyone who even suggests such a thing is either a well-meaning but laughably ignorant bleeding heart or a vile Socialist out to destroy our way of life.

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.

Yes, there’s lots of other stuff as well, such as the fact that the U.S. market is looking a shade more attractive now and previously bright spots like Europe look somewhat less bright. But none of it would matter a rat’s patootie if investors (and everyone else) believed the DoJ and FCC would remain complicit in further consolidation of the industry because no one invests if they think the two largest providers are going to crush them like grapes. And no, I am not saying that everything is now hunky-dorey wonderful and all competitive in the wireless market. I’m not even saying I think the FCC has done all it needs to do to protect competition.

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.

I fully expect the usual suspects to pretend I am arguing that regulation or antitrust enforcement is always the right answer. This is, sadly the rather simplistic level to which policy debates have descended, and why regulatory filings and even presidential debates now sound as if they are being conducted by a collection of snide 11-year olds during recess. So let me be clear. The actual lesson is: “the argument that antitrust enforcement and/or other types of regulation always  discourage investment and cannot possibly create jobs or promote innovation is just as wrong as the argument that all mergers are bad and a regulatory response is always appropriate.” Or, put another way, efforts to apply simplistic approaches to complex issues are usually wrong (and often disastrously so).

When properly applied, antitrust enforcement and light-touch regulation actually encourages investment and thus creates jobs and stuff, whereas an unregulated consolidated free-for-all encourages stagnation and collection of monopoly rents in lieu of investment and innovation. I particularly point this out to everyone who told me and the rest of the folks at PK – with considerable emotion – what evil people we were to oppose the AT&T/T-Mo deal because it would mean the death of T-Mo and the loss of thousands of jobs.  The next time someone tries to tell you that Government policy “can’t create jobs,” or that regulation and antitrust enforcement “always chill investment,” remind them that blocking AT&T/T-Mo was the first step in bringing investment capital back into the competitive wireless market.

Stay tuned . . . .

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