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Geeks Need to Know Economics

April 27, 2011

Tags Financial MarketsFree MarketsCalculation and Knowledge

Geeks Need to Know Economics

I have a confession to make. I am a geek. I have been for years. I love reading articles on all the latest gadgets and gizmos, the new apps and software, all the hacks, and all the technological breakthroughs that happen daily. I can't get enough of it, but I often come to find that when a tech author is reporting on certain events, he lacks a proper understanding of economic theory.

This is understandable in a world where specialization is necessary; but in a world with government, a lack of knowledge in the field of economics often leads to people advocating government action that will make us all worse off rather than better. This applies especially to geeks. Geeks need to know that advocating certain government policies meant to help the advancement of technology will in fact hinder it or cause it to retrogress.

AT&T and T-Mobile: Microsoft All Over Again?

When on March 20, 2011, Deutsche Telekom AG agreed to sell T-Mobile USA to AT&T Inc. for $25 billion in cash and $14 billion in AT&T stock, giving Deutsche Telekom an 8 percent share in AT&T and a representative on AT&T's board of directors, it was huge for the tech market. It was like hearing that Ford and GM were going into a merger. Immediately, the geek pundits began crying, "Monopoly!"

In blogpost after blogpost, statistics were thrown up about how acquiring T-Mobile would make AT&T the "biggest" wireless provider in the United States. One article on Engadget uses such scary nouns as "behemoth" and such ominous claims as "we don't have to wait that long to start discussing life with only three major US carriers."

AT&T rightly saw this kind of hysteria coming, and the company mentions in its own press release,

The U.S. wireless industry is one of the most fiercely competitive markets in the world and will remain so after this deal. The U.S. is one of the few countries in the world where a large majority of consumers can choose from five or more wireless providers in their local market. For example, in 18 of the top 20 U.S. local markets, there are five or more providers. Local market competition is escalating among larger carriers, low-cost carriers and several regional wireless players with nationwide service plans. This intense competition is only increasing with the build-out of new 4G networks and the emergence of new market entrants.

AT&T also felt the need to point out its progressive track record by mentioning that it is "the only major U.S. wireless company with a union workforce, offering leading wages, benefits, training and development for employees."

The most astounding part of this story is that only a week after the deal was announced, Sprint openly declared its opposition to the deal.

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The transaction, which requires the approval of the Department of Justice and the Federal Communications Commission, and will likely spark a host of hearings in the U.S. Congress, would reverse nearly three decades of actions by the U.S. government and the courts that modernized and opened U.S. communications markets to competition. The wireless industry has sparked unprecedented levels of competition, innovation, job creation and investment for the American economy, all of which could be undone by this transaction. … "Sprint urges the United States government to block this anti-competitive acquisition," said Vonya McCann, senior vice president, Government Affairs. … "So on behalf of our customers, our industry and our country, Sprint will fight this attempt by AT&T to undo the progress of the past 25 years and create a new Ma Bell duopoly."

Contrast this with Verizon's much earlier response to the deal. Verizon's CEO, Daniel Mead, announced that his company is neither opposed to nor worried about AT&T acquiring T-Mobile. Attempting to use the government to squash their competition would distract the company from being "the most profitable wireless carrier in the country." When asked if Verizon would seek to acquire Sprint in response, Mead said, "We're not interested in Sprint. We don't need them." Zing!

Thankfully, in addition to Verizon's Daniel Mead, there are a few cooler heads in the geek realm. Brian Osborne, writing for the appropriately named geek.com, shows that there is little to be alarmed about when you compare the US telecom market to other markets.

Looking at the Japanese picture, post-merger AT&T's new market share with T-Mobile would still be about 10% less than what Japan's leading wireless carrier, NTT DoCoMo, currently enjoys. While it is safe to say that any acquisition by Verizon Wireless, AT&T or Sprint bringing a single carrier closer to 50% market share would be more criticized by federal regulators, an argument can be made that AT&T's new market share won't be as dominant as NTT DoCoMo's in Japan. …

If we look at the average market share enjoyed by leading operators in Europe and compare that once again to the expected market share AT&T would enjoy if an acquisition of T-Mobile is approved, the result would be that AT&T's market share would only have a variance of above 1%.

While Sprint's CEO (Dan Hesse) brings up the statistic that AT&T and Verizon Wireless would together hold 79% of the U.S. market, the reality is that it is not uncommon for the #1 and #2 wireless carrier in international markets to hold around 70% or more of their perspective markets. AT&T's new market share also wouldn't be significantly more than the average market share of leading operators in Europe and it would be significantly less than the leading operator in Japan. In the end, Hesse will have to make his case not based on big picture numbers alone, but on specific markets where there will be limited competition as a result of AT&T's acquisition of T-Mobile.

Background: The Rise of the Verizon iPhone

Yes, AT&T will indeed become the largest wireless provider in the United States (provided that the market shares of both AT&T and T-Mobile do not drastically fall between now and when the deal is completed) but a big company does not a monopoly make. Nor does that "bigness" in any way preclude any sort of success on the part of AT&T after it becomes the largest provider. Even among those who are not panicking over T-Mobile coming under new ownership, there seems to be little understanding as to why this might be a good thing for the two companies and consumers as a whole. To really understand why this is taking place, we need to look back a little ways and see the journeys that these two companies took to reach this point.

The current uproar notwithstanding, AT&T has been having a bit of an image problem among consumers. The problem is that AT&T is not seen as a great cell-phone service provider. In a 2008 consumer report, one year after the release of the first iPhone, AT&T was ranked second to last in terms of customer satisfaction, with Verizon on top. In 2009, AT&T was dead last, and Verizon held on to its lead.

The primary reason for dissatisfaction cited among AT&T's customers is the high rate of dropped calls. While there are several reasons why any one call may be dropped, the most common reason is when one enters a "dead zone," an area out of range of any nearby cell-phone towers. Lack of cell-tower coverage is precisely what has been AT&T's problem, a fact Verizon pointed out in its infamous "There's a map for that" ad.

With such low customer satisfaction, you might think that customers would simply stop using AT&T. Perhaps they would have, were it not for the fact that in order to get your new iPhone for the $200 price you had to sign on to a two-year, $60-per-month service contract with AT&T. While the flame wars rage on over whether iOS or Android is the better operating system, in terms of hardware the iPhone is considered the very best. (Besides, hacking makes these arguments moot.) If you wanted the best, and you didn't want to pay the extra $300 or more for a contract-free iPhone, you were stuck with AT&T.

It wasn't long until the masses started to get vocal. Owners of the best cell phone wanted the best service provider to go with it. They wanted Verizon. Soon rumor mills were buzzing about a Verizon iPhone. By the spring of 2010, things were getting a little out of hand. Comedy superstar Jon Stewart (warning: strong language) even publicly criticized Apple and AT&T on his own show.

The final nail in the coffin came that summer, during Apple's 2010 Worldwide Developers Conference. While on stage in front of several thousand people, Steve Jobs began to experience some technical difficulties. When he asked, "Any suggestions?" there was a very audible response of "Verizon!" The audience laughed and applauded, as did the Internet. Another consumer report at the end of the year, yet again, had Verizon at number one and AT&T dead last.

In January of 2011, the Verizon iPhone was officially announced, along with a new commercial from Verizon. In the commercial there is a series of ticking clocks with a voice saying, "To our millions of customers, who never stopped believing this day would come, thank you." It was the first of its kind. It wasn't just an ordinary commercial advertising a new product; it was a visual thank-you letter to a movement that was also the first of its kind. Consumers literally, audibly, demanded a particular product into existence.

Now that iPhone users have the option to choose Verizon, AT&T is at risk of losing a major portion of its current market share. A recent study by ChangeWave Research showed prospective iPhone buyers wanting Verizon over AT&T 46 percent to 27 percent. While current owners of both iPhones seem fairly satisfied, Verizon beating AT&T at just 82 percent versus 80 percent, AT&T still has the highest dropped call rate; and data actually shows that AT&T's dropped call rate was increasing between September of 2008 and September of 2010, whereas Verizon's was steadily decreasing.

AT&T seems set to lose big to Verizon this summer when the new iPhone 5 comes out. By the summer of 2012, even more two-year AT&T contracts will be expiring. Regardless of any improvements in AT&T's service from here on out, the damage has been done, and it will take some time before AT&T can recover its image.

T-Mobile's Push into the 4G Market

Meanwhile, T-Mobile USA had its own goals. It needed to upgrade its network from 3G (3rd Generation) to 4G. There were two different ways it could go about this. It could continue using its High Speed Packet Access (HSPA) method, or it could convert over to the Long Term Evolution (LTE) standard used by AT&T and Verizon. To the surprise of many, T-Mobile announced in December of 2010 that it would do both.

The first part of this project involved a partnership with Nokia Siemens Networks. The two companies would develop new antennas to upgrade their existing cell-phone-tower infrastructure. This would allow T-Mobile to provide 4G that is comparable to, or even faster than, AT&T and Verizon's LTE 4G. HSPA 4G also gives T-Mobile a great cost advantage over its competitors, because it won't have to build a whole new cell-phone-tower infrastructure to support it as AT&T and Verizon must do with their LTE network. However, T-Mobile still wants to develop LTE technology for the future.

This is where AT&T comes in. Joining with AT&T gives T-Mobile access to all the research and development that AT&T has done over the past several years. It also gives T-Mobile access to AT&T's much-larger portion of licensed spectrum. (T-Mobile has a much smaller spectrum than either AT&T or Verizon, which is why it developed HSPA to begin with. HSPA makes use of the electromagnetic spectrum much more efficiently than LTE.) AT&T in return gains access to T-Mobile's technology as well as its vast network of upgraded towers. This essentially fixes AT&T's coverage problem without the time and money needed to build new towers.

How the Free Market Works

For any geek still concerned about a possible reemergence of the old Ma Bell monopoly, it is important to remember that it was government that created the monopoly in the first place.Download PDF This knowledge is so common and undisputed, you would think that someone would have brought it up by now. A simple Google search could clear that fact up for anyone, but actually acknowledging this fact in any discussion would require a radical paradigm shift from what one is taught in government schools.

The primary factor in what causes any particular market to become monopolized is neither the number of companies providing the service nor the size of those companies but rather freedom of entry into that market. So long as there is at least a threat of competition from new entrants into the telecommunications market, there will be a pressure on all wireless providers to keep increasing their efficiency and decreasing their prices.

If any conclusion can be drawn from all this, it is not that AT&T is on the verge of achieving total control over the telecommunications market. If anything, this ought to be interpreted as a sign of AT&T's imminent decline. AT&T has consistently provided poor service relative to other wireless providers, and it is now beginning to pay the price. Now that AT&T is no longer exclusively subsidized by iPhone sales, it is possible that AT&T's projected four percent size advantage over Verizon will disappear within the next year.

Firms that provide their customers with superior service are rewarded, while those that provide inferior service are not. We don't need the government to forcibly keep AT&T as only the second-largest wireless-service provider. Rather, it seems perfectly capable of doing that itself.

The merger with T-Mobile is AT&T's attempt to get back on its feet. It will allow AT&T to provide faster service with wider coverage and fewer dropped calls at a more competitive price. Will AT&T succeed in winning back the hearts of iPhone users? It's a possibility, but nothing is for certain. All an FCC blocking of the acquisition will do is stop AT&T from even trying to please its customers.

The amount of choice and variety in the wireless market is not shrinking but increasing exponentially. While government forces us to choose between the lesser of two evils, the market allows us to freely choose from a massive spectrum of goods. Those who think there is too much variety are free to not even bother. This is how the market works, and I can't help but geek out over it.


Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

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