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Antitrust

Daniel Hanley: Federal Communications Commission Must Block Verizon’s Acquisition of TracFone

Verizon sees an opportunity to acquire and neutralize an important competitor, but the FCC should stop that.

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The author of this Expert Opinion is Daniel Hanley, a policy analyst at the Open Markets Institute

In late July, Democratic senators sent a letter to the Federal Communications Commission urging the agency to investigate the acquisition of TracFone, the largest prepaid carrier, by Verizon, the second-largest wireless phone carrier in the U.S. The FCC should use its broad merger review authority to block it outright.

With prepaid service, consumers pay for a set amount of cellular usage upfront rather than receive a bill at the end of the month. While such a service may seem like a relic of the 1990s, more than 74 million Americans rely on the service as a low-cost and accessible alternative to traditional cellular plans provided by Verizon, AT&T, and T-Mobile.

Verizon is one of the most dominant telecommunications companies in the U.S., occupying 30% of the entire cellular market. Up until now, the company has focused on its traditional postpaid service and almost entirely ignored the prepaid cellular market. Verizon now sees an opportunity to use its financial firepower to acquire an important competitor with its attempted acquisition of TracFone.

A staggering potential windfall for Verizon

The potential windfall for Verizon is staggering. If this deal were to be approved, the FCC would anoint Verizon as the largest wireless prepaid service operator in the United States and the company would obtain an additional 21 million customers. The merger would also allow Verizon to acquire the fourth-largest wireless company by subscribership in the U.S. The acquisition of TracFone by Verizon will also add $8.1 billion in revenue for Verizon and an additional 90,000 retail locations. Such a position will only continue the wave of consolidation in the cellular service sector and fortify Verizon’s market power as one of the largest wireless communications providers in the country.

The Federal Trade Commission and the Department of Justice review almost all mergers in the United States. However, the communications industry is so important that Congress also gave the FCC the authority to review and deny mergers and acquisitions in the sector. Unlike the legal standard set in the Clayton Act, which structures the merger litigation of the DOJ and the FTC, the FCC reviews mergers in the communications field under a “public interest standard.” The public interest standard is highly deferential to the FCC’s interpretation. As such, the FCC has broad discretion and can consider a range of factors when analyzing a merger under its jurisdiction. The Supreme Court has stated that the standard “no doubt leaves wide discretion and calls for imaginative interpretation” and that the agency has “comprehensive powers to promote and realize the vast potentialities” of communications technologies.

A merger of this magnitude will undoubtedly cause the traditional litany of harms derived from mergers, such as an increase in the barriers to entry for the communications sector and increased potential collusion between firms as a result of increased concentration. However, even a moderate review of the facts would show that Verizon’s acquisition of TracFone is not in the public interest and that the FCC should block the merger.

The FCC should not allow Verizon to acquire a critical competitor

First, as with most mergers by corporate monopolies, Verizon does not need to acquire TracFone to accomplish its operational goals. The FCC should not allow Verizon to use its dominant financial position to acquire (and subsequently neutralize) a critical competitor and market participant and forgo operational investments and other necessary market research to expand its network. Instead, the FCC can force the corporation to use its vast finances to develop its own rival prepaid network by blocking the merger.

Such a circumstance would increase competition in the industry and benefit consumers. Additionally, such a course of action would facilitate the kind of business conduct and investments in internal expansion the antitrust laws and other antimonopoly policies actively encourage, while increasing market competition and firm rivalry. The Supreme Court has consistently praised and encouraged growth from internal operations rather than acquisition. In Philadelphia National Bank, the Supreme Court stated, “[S]urely one premise of an antimerger statute…is that corporate growth by internal expansion is socially preferable to growth by acquisition.”

Second, prepaid providers like TracFone provide critical competitive pressure to larger carriers like Verizon. Prepaid carriers like TracFone often rent the communications infrastructure from postpaid carriers like Verizon to provide their service. Thus, rather than focusing on expanding and maintaining network infrastructure, renting it provides prepaid carriers the ability to provide lower-cost service, more tailored service, and a better customer experience overall.

Third, mergers like Verizon’s acquisition of TracFone are harmful to consumers. In this case, potential price increases are not only likely, but they would also be exceptionally harmful. Concerning TracFone specifically, the company provides a critical service to vulnerable sectors of the population that are extremely sensitive to price increases – particularly low-income consumers and people of color who live within the geographic area which TracFone serves.

Importantly, TracFone participates in the federal Lifeline Program, a crucial government program that provides low-income individuals subsidies to afford phone service. If Verizon were allowed to acquire TracFone, Verizon would obtain full control of TracFone’s 21 million customers consisting of a population it has historically ignored. Moreover, because of the increased market concentration, which would thus deprive customers of one less carrier to switch to, Verizon would face significantly fewer incentives to keep its prices low for such a vulnerable population.

Additionally, cell phones are a critical and vital tool for the public, particularly during the pandemic. Indeed, 37% of Americans use the internet only via a mobile device. Low-income students as well are now heavily reliant on cell phones for online education during the COVID-19 pandemic. In a 2020 survey, between 29 and 43 percent of parents said their children will have to do their schoolwork and engage in online learning from a cell phone. Access to low-cost cell phones is thus imperative for a large fraction of children to remote learning, which some states are considering for the fall 2021 semester.

History does not bode for Verizon’s claims of consumer benefit

Verizon has asserted that “when TracFone’s customers become part of Verizon, they will benefit from the enhanced choices, better services, and new features that follow from Verizon’s investment while still enjoying the flexibility and control that they have come to value with TracFone’s prepaid plans” and that it “will not require any TracFone customers to move to a more expensive plan when the transaction closes.”

However, history does not bode well for Verizon and its claims that its acquisition will benefit consumers. The economist John Kwoka found that 80% of studied mergers led to higher prices and even reduced output. Other comprehensive studies have found that acquisitions cause “significantly increase[d] markups on average” and reveal “no evidence for efficiency gains.” As New York University business professor Melissa Schilling has stated, most mergers “do not create value for anyone, except perhaps the investment bankers that negotiated the deal.”

Concerning the communications industry specifically, when telecommunications giant AT&T was acquiring Time Warner, the corporation stated that “the evidence overwhelmingly showed that this merger is likely to enhance competition substantially, because it will enable the merged company to “reduce prices, offer innovative video products.” Judge Richard Leon, who oversaw the litigation challenging the merger, was ultimately persuaded by AT&T’s statements holding that AT&T’s acquisition of Time Warner would “lead to lower prices for consumers.” Despite these claims, subsequent evidence revealed that AT&T did raise prices on consumers.

Although Verizon has committed to supporting TracFone’s presence in the Lifeline program for three years, the company has made no concrete promises to keep their prices at current levels for TracFone customers or to increase customer incentives to move to a higher-cost plan after the transaction closes. Like most mergers, Verizon’s asserted efficiencies and promises to improve competition as a results of the merger are likely theoretical and dubious.

A worrisome wave of acquisitions by telecom giants

Lastly, due to certain aspects of the market, such as the high infrastructure costs of cell towers, prepaid phone carriers tend to reduce to one or two carriers in a geographic area. Even more worrisome is that there has been a wave of acquisitions by the telecommunications giants over the past decade. In the prepaid industry, AT&T acquired Cricket Wireless and T-Mobile acquired MetroPCS in 2013.

Other blockbuster mergers among the group are the acquisition of Sprint by T-Mobile and the acquisition of Time Warner by AT&T. All these mergers went unchallenged by the FCC. Moreover, since AT&T and T-Mobile have already acquired firms to enter the prepaid industry, Verizon is the last remaining national carrier that could enter this market and likely the only wireless carrier with the finances to do so meaningfully.

The FCC has clear discretion to block this merger. Given the harmful effects of similar mergers, the sheer number of acquisitions that have already taken place in the communications industry that the agency has previously failed to stop, and the potential harms that could result directly from this merger, the FCC should review Verizon’s acquisition of TracFone with extreme suspicion and block it outright. The agency has the authority and must use it.

Daniel A. Hanley is a policy analyst at the Open Markets Institute. You can follow him on Twitter @danielahanleyThis piece is exclusive to Broadband Breakfast.

BroadbandBreakfast.com accepts commentary from informed observers of the broadband scene. Please send pieces to commentary@breakfast.media. The views reflected in Expert Opinion pieces do not necessarily reflect the views of Broadband Breakfast and Breakfast Media LLC.

Antitrust

‘Time is Now’ for Separate Big Tech Regulatory Agency, Public Interest Group Says

‘We need to recognize that absolutely the time is now. It is neither too soon nor too late.’

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Photo of Harold Feld, senior vice president at Public Knowledge

WASHINGTON, June 21, 2022 – Public Knowledge, non-profit public interest group, further advocated Thursday support for the Digital Platform Commission Act introduced in the Senate in May that would create a new federal agency designed to regulate digital platforms on an ongoing basis.

“We need to recognize that absolutely the time is now. It is neither too soon nor too late,” said Harold Feld, senior vice president at Public Knowledge.

The DPCA, introduced by Senator Michael Bennet, D-CO., and Representative Peter Welch, D-VT., would, if adopted, create a new federal agency designed to “provide comprehensive, sector-specific regulation of digital platforms to protect consumers, promote competition, and defend the public interest.”

The independent body would conduct hearings, research and investigations all while promoting competition and establishing rules with appropriate penalties.

Public Knowledge primarily focuses on competition in the digital marketplace. It champions for open internet and has openly advocated for antitrust legislation that would limit Big Tech action in favor of fair competition in the digital marketspace.

Feld published a book in 2019 titled, “The Case for the Digital Platform Act: Breakups, Starfish Problems and Tech Regulation.” In it, Feld explains the need for a separate government agency to regulate digital platforms.

Digital regulation is new but has rapidly become critical to the economy, continued Feld. As such, it is necessary for the government to create a completely new agency in order to provide the proper oversight.

In the past, Congress empowered independent bodies with effective tools and expert teams when it lacked expertise to oversee complex sectors of the economy but there is no such body for digital platforms, said Feld.

“The reality is that [Congress] can’t keep up,” said Welch. This comes at a time when antitrust action continues to pile up in Congress, sparking debate across all sides of the issue.

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Antitrust

FTC Commissioner Concerned About Antitrust Impact on Already Rising Consumer Prices

Noah Phillips said Tuesday he wants the commission to think about the impact of antitrust rules on rising prices.

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Screenshot of Federal Trade Commissioner Noah Phillips

WASHINGTON, May 17, 2022 – Rising inflation should be a primary concern for the Federal Trade Commission when considering antitrust regulations on Big Tech, said Commissioner Noah Phillips Tuesday.

When considering laws, “the important thing is what impact it has on the consumer,” said Phillips. “We need to continue to guard like a hawk against conduct and against laws that have the effect of raising prices for consumers.”

Current record highs in the inflation rate, which means money is becoming less valuable as products become more expensive, has meant Washington must become sensitive to further price increases that could come out of such antitrust legislation, the commissioner said.

Phillips did not comment on how such movies would mean higher prices, but that signals, such as theHouse Judiciary Committee’s antitrust report two years ago, that reign in Big Tech companies and bring back enforcement of laws could mean higher prices. He raised concerns that recent policies are prohibiting competition rather than facilitating it.

This follows recent concerns that the American Innovation and Choice Online Act, currently awaiting Senate floor consideration, will inhibit America’s global competitiveness by weakening major American companies, thus impairing the American economy. That legislation would prohibit platform owners from giving preference to their products against third-party products.

This act is one of many currently under consideration at Congress, including Ending Platform Monopolies Act and Platform Competition and Opportunity Act.

Small businesses have worried that by enacting some legislation targeting Big Tech, they would be impacted because they rely on such platforms for success.

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Antitrust

Critics and Supporters Trade Views on American Innovation and Choice Online Act

American Innovation and Choice Online Act is intended to protect fair competition among businesses, but panelists differed on its impact.

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Photo of Amy Klobuchar from August 2019 by Gage Skidmore used with permission

WASHINGTON, May 10, 2022 – Experts differed on the effect that antitrust legislation targeting big tech companies allegedly engaging in discriminatory behavior would have on small businesses.

Small businesses “want Congress not to do anything that will screw up or weaken the services that they rely on for their business,” said Michael Petricone, senior vice present of the Consumer Technology Association, at a Protocol Live event on Thursday.

Petricone said that antitrust bill would encourage tech companies to relocate to other countries, harming the American economy. He said small businesses would be affected the most.

Instead, Petricone called for  a “smarter immigration policy” to allow foreign innovators access to American tech market, as well as the defeat of the antitrust legislation.

But other said that small businesses suffer from predatory behavior by big tech companies. “Companies can’t get their foot in the door when there is already self-preferencing,” said Awesta Sarkash, representative for Small Business Majority, an advocacy organization, adding that 80% of small businesses say they want antitrust laws to protect them.

Self-preferencing on online platforms is detrimental to the success of small businesses who rely on social media advertising for business, she said. The new antitrust proposals would ensure an level playing field and promote fair competition, she said.

The American Innovation and Choice Online Act would prohibit certain online platforms from unfairly preferencing products, limiting another business’ ability to operate on a platform, or discriminating against competing products and services.

The bill sponsored by Sen. Amy Klobuchar, D-Minn, was introduced to the Senate on May 2 and is awaiting Senate floor consideration.

The debate follows concerns raised by both democrats and republicans about America’s global competitiveness as the bill would weaken major American companies.

If passed, the bill will follow the European Union’s Digital Services Act which similarly sets accountability standards for online platforms, preventing potentially harmful content and behavior.

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