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

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 @danielahanley. This piece is exclusive to Broadband Breakfast.

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