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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.

Broadband Breakfast is a decade-old news organization based in Washington that is building a community of interest around broadband policy and internet technology, with a particular focus on better broadband infrastructure, the politics of privacy and the regulation of social media. Learn more about Broadband Breakfast.

Antitrust

Key Republican: Anticompetitive Practices of Big Tech Present a Threat to Innovation

Rep. Ken Buck said tech companies’ practices are anticompetitive and threaten innovation, free speech and national security.

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Screenshot of Rep. Ken Buck from the Heritage Foundation webcast

WASHINGTON, January 13, 2023 — Rep. Ken Buck, R-Colo., argued on Wednesday that the anticompetitive practices of large tech companies present a threat to innovation, free speech and national security — and that even Republicans who are traditionally wary of antitrust legislation should view it as a key tool for curbing Big Tech’s power.

“I’m a free market person — I apply that principle to just about everywhere — but if you don’t have a market, you can’t have a free market,” Buck said at a Heritage Foundation event. “And when Google controls 94 percent of the online searches in this country, you don’t have a free market.”

Buck said that it was the responsibility of Congress to actively shape antitrust law, rather than “leaving it up to the courts to create something over the next 30 years.”

Among the several anti-Big Tech bills that have been proposed, Buck highlighted as his priority legislation that would prevent certain companies from acting as both buyers and sellers in digital advertising markets.

The bill applies to companies that generate more than $20 billion in digital ad revenues — specifically targeting Google and Facebook — and has so far received bipartisan support in both the House and the Senate.

Tech companies have spent millions of dollars lobbying against proposed antitrust bills, making it politically precarious for some members of Congress to support them, Buck said. Still, he urged his colleagues to consider the harms allegedly caused by social media platforms.

“We know that Instagram recognized that there was body shaming going on, there was depression among teenage girls, there was a higher suicide rate among teenage girls, and they doubled down,” Buck said. “They didn’t just say, ‘We’ve got to deal with this issue’ — they decided they were going to start marketing to a younger group.”

More competition in the market could give teens and parents access to better alternatives, Buck said, but the power held by the largest platforms makes it nearly impossible for competitors to emerge.

Rep. Buck linked free speech issues for tech industry to antitrust

“How do you have free speech, how do you have competition in the marketplace when you’ve got four companies that are so big that they can wipe out any kind of competitor?” he asked.

Buck has long been a critic of Big Tech, and introduced legislation to ban the TikTok app from U.S. government devices more than a year before similar legislation was passed as part of the bipartisan spending bill in December. This decision had nothing to do with fear of TikTok as a competitor to U.S. companies, he said.

“TikTok is dangerous, not because of its competition in the marketplace — I think it’s healthy in that sense; if Microsoft or some company had bought it, I’d be all in favor of that kind of competition for Facebook — but the bottom line is [that] how it’s being used by an adversary is dangerous and concerning.”

Although the TikTok ban won broad Republican support, alongside a variety of proposals to target tech companies’ privacy or content moderation practices, many antitrust bills have been less popular.

Buck has been open about his struggles in convincing other Republicans to pursue antitrust action, telling The Washington Post in March that “the antitrust bills that we are currently considering will not move forward under Republican leadership, and that’s been a very clear signal that has been sent.”

And now that the House is under Republican control, several experts have predicted that antitrust legislation is unlikely to move forward any time soon.

In an op-ed published Wednesday, President Joe Biden called on members of Congress to overcome partisan disagreements and keep tech companies in check by passing digital privacy, antitrust and content moderation legislation.

Rep. Cathy McMorris Rodgers, R-Wash., who chairs the House Energy and Commerce Committee, responded to Biden’s comments in a statement that agreed with the need for privacy and content moderation action but did not mention antitrust.

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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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