Magical Thinking Triumphs at the FCC

While shoppers were hitting the malls Friday–a fair percentage of them no doubt evaluating the many choices of wireless smartphones and service plans available–AT&T said it was withdrawing its FCC application to merge with T-Mobile.

AT&T’s move was in response to FCC Chairman Julius Genachowski’s decision to refer the merger to an administrative law judge, coupled with a statement that he remains opposed to the $39 billion merger.

Many analysts see this as the beginning of the unraveling of the acquisition. Although AT&T said it plans to defend the deal in court against a Department of Justice antitrust suit, the company has taken accounting steps that signal it is prepared to pay Deutsche Telekom, T-Mobile’s current parent, the $4 billion it pledged if it could not close the purchase by September 2012.

“The fat lady hasn’t sung yet,” said Craig Moffett, an investment analyst for Sanford C. Bernstein, as quoted by the Washington Post’s Cecilia Kang. “But she has taken the stage. And the band has begun to play.”

By itself, Genachowski’s move is a tremendous exercise of executive power, as an ALJ hearing would only occur if AT&T wins its suit with the DoJ or settles it satisfactorily. In essence, the FCC is attempting to craft an ad hoc court of appeals in order to abrogate a separate judicial ruling.

Genachowski says he opposes the merger because it will lead to higher prices for consumers, less innovation, less investment and fewer U.S. jobs, assertions that are all questionable. What Genachowski really thinks, as spelled out when the merger was first announced, is that there should be four national wireless network services providers in the U.S. (Cue Monty Python: Four, not three, not five, but four!), as it were some golden number.

This is technocratic thinking at its worst. Although over the course of his term Genachowski has correctly identified the pressing problems of spectrum shortages and rural broadband build-out, he believes telecom policy begins with enforcing what he sees as a “correct” number of wireless carriers. And while the FCC likes to point to market concentration metrics, including the highly dubious HHI scale, much of the commission’s analysis (as does the DoJ’s) relies on narrow definitions that exclude legitimate regional competitors and acrobatic number-crunching. All of these can be answered with equally, if not more significant numbers, much of it from the FCC’s own research.

What Genachowski and other fans of central economic planning overlook is that no matter what happens with AT&T, T-Mobile is going away. Deutsche Telekom doesn’t want it. It is losing customers and lacks the capital to invest.

Business analysts say a cable company or non-U.S.-based service provider like America Movil might step up, but as I’ve argued before, many of the same FCC objections would still hold. Now that the FCC has pressed ahead with its opposition, approval of any future T-Mobile buyer will appear arbitrary.

In the short term, the real impact of the FCC’s intransigence will be felt by the millions of wireless customers who are beginning to experience service degradation because of the spectrum crunch. The AT&T-T-Mobile merger was a market-driven response to that problem, as it would have combined the spectrum owned by each company, opening more channels to customers of both companies. It’s curious as to why the FCC, which acknowledges the spectrum shortage as well as its own dilemmas in addressing it, would short circuit a workable path toward some relief.

But you can always count on the magical thinking of government central planning to trump basic mathematics. According to Peter Rysavy, a wireless engineering consultant who spoke at on a spectrum policy panel at the DCWeek conference earlier this month, there is 10 MHz available per cell in a wireless downlink. 1 MHz of bandwidth can support about 1.4 Mb/s, he said, which means each cell can support only about 10 to 15 YouTube video streams at one time. This is why wireless data service often times out even in the middle of a big city. It’s only going to get worse as wireless data use increases.

It is ironic that the FCC, along with the consumer groups who have lined up against the merger, generally frown on the idea of bandwidth caps or throttling (indeed, consumers don’t like the either). But if the regulators are bent on preventing the market from fashioning solutions, while they themselves drag their feet on spectrum availability, restrictive pricing models are inevitable.

The FCC, in forcing AT&T’s retreat, virtually guarantees to bring about that which it wants to prevent-higher prices, poor service and reduced investment.