The U.S. Department of Justice has approved a merger between the wireless carriers T-Mobile and Sprint, which could speed the deployment of fifth generation (5G) wireless service and provide new broadband access in rural areas.
The merger and certain conditions of the settlement also must receive approval by the Federal Communications Commission (FCC), which regulates wireless firms and licenses them to use parts of the broadcast spectrum. FCC Chairman Agit Pai stated in a press release on August 14 he recommends approval of the settlement and an order allowing the transfer of spectrum allocations among the companies.
The draft order could be approved by the Republican majority of the commissioners after the FCC receives public comments this fall.
The Justice Department and attorneys general of five states approved the acquisition of Sprint by T-Mobile for $26.5 billon. The companies’ merger plans were challenged by lawsuits by several states and were reviewed by the Justice Department under antitrust law for potential anti-competitive effects.
Strength in Numbers
The merger would benefit both companies and increase competition in the industry, says Joseph P. Fuhr, an economics professor at the University of the Sciences in Philadelphia and a policy advisor to The Heartland Institute, which publishes Budget & Tax News.
“Sprint is financially weak, so the merger helps guard against what could have been a bankruptcy and the loss of subscribers to other competitors,” Fuhr said. “T-Mobile believes that with Sprint’s assets it will be a stronger competitor, because the combination now creates a company with the combined size to compete on the same scale as the other major competitors.”
Success Through Failure
It appears the Justice Department approved the deal based on the economic theory of the failing firm, Fuhr says.
“The theory allows a merger that generally would not be allowed—in this case between the third and fourth largest firms in the industry—because one of the firms is considered to be failing,” Fuhr said. “This seems to be the case with Sprint. The theory is that the combined firm will be a stronger competitor than the one firm with the other leaving the market.”
By combining their assets, Sprint and T-Mobile will be able to deploy faster wireless services, Fuhr says.
“The combination will have considerable valuable spectrum that the other players, AT&T and Verizon, do not have—particularly mid-band that is an important aspect for 5G,” Fuhr said.
‘Huge Investment to Compete’
To address concerns about the effect of concentration in the industry, T-Mobile and Sprint agreed to sell significant portions of their businesses to Dish Network, including spectrum allocations, cell towers, prepaid phone services, and other assets. This would allow Dish, which is primarily a satellite television operator, to create a fourth major wireless network. Dish will also have access to the T-Mobile network for seven years as it builds out its own system.
The cost of entry for companies looking to compete in the wireless market is high, and wireless carriers consistently top the list of companies with the highest expenditures, says Tom Giovanetti, president of the Institute for Policy Innovation.
“It takes huge investment to compete,” Giovanetti said.
The Obama administration’s DOJ wanted to maintain the four existing national carriers, and it blocked a proposed acquisition of T-Mobile by AT&T. The Trump administration takes a different view of antitrust, Giovanetti says.
“Democrats have a much more aggressive antitrust policy,” Giovanetti said.
‘Let the Market Decide’
Government concerns about lack of competition are overblown, Giovanetti says.
“We don’t know how many players there ought to be in a particular industry, so we let the market decide.”
It takes only two major wireless players—a duopoly—to compete, Giovanetti says.
“There’s a lot of consumers who only have two providers, and there’s still competition,” Giovanetti said. “As long as you have another product, there’s going to be competition.”
The number of competitors depends on the size of the market, Fuhr says.
“Some markets can only sustain so many competitors, and some markets are even perfectly fine with a duopoly,” Fuhr said.
T-Mobile, Sprint, and Dish would agree to meet certain service goals if the merger goes through. The combined company would promise to offer 5G service to 97 percent of the country within three years. Dish promises to offer new wireless service to 70 percent of the country within four years if the deal goes tthrough.
Requiring government approval of acquisitions and mergers allows unelected bureaucrats at the DOJ to write law rather than Congress, Giovanetti says.
“With these deals, they force things that would never make it through Congress,” Giovanetti said.
Antitrust assumes the government knows better than the market, Giovanetti says.
“If you have a view of the government running everything, then you think a couple of bureaucrats can pick who wins and loses,” Giovanetti said. “The DOJ is able to set policy during a merger review and extract all sorts of ridiculous concessions.”
Five states—Kansas, Nebraska, Ohio, Oklahoma, and South Dakota—joined the Justice Department settlement announced on July 26. More than a dozen other states, led by New York and including California and Texas, that have filed complaints could still object to the settlement in court. After a 60-day period for public comments, the DOJ settlement agreement will also have to be approved by a federal district judge.
Juliana Knot ([email protected]) writes from Grand Rapids, Michigan.
“Justice Department Settles with T-Mobile and Sprint in Their Proposed Merger by Requiring a Package of Divestitures to Dish,” U.S. Department of Justice, July 26, 2019: https://www.justice.gov/opa/pr/justice-department-settles-t-mobile-and-sprint-their-proposed-merger-requiring-package
“Chairman Pai Formally Recommends Approval of T-Mobile/Sprint Merger,” Federal Communications Commission, August 14, 2019: https://www.fcc.gov/document/chairman-pai-recommends-approving-t-mobilesprint-merger