Perspective: Bumps in the road for AT&T-BellSouth merger?

The conventional wisdom in Washington is that regulatory approval of the proposed AT&T-BellSouth merger is a done deal. The consensus is that this deal will sail through with flying colors--and a few not very onerous merger conditions.

The conventional wisdom may be wrong. There is a twist that ought to give the regulators pause. Both BellSouth and AT&T own considerable chunks of prime wireless spectrum that is unused and that could quickly and relatively cheaply be used to provide broadband services that would compete with telecom and cable wireline broadband services--in other words, the long-sought "third pipe" to the home or business.

Competitors will no doubt argue that the Federal Communications Commission and the Justice Department should worry about the loss of intermodal competition that will result if the two companies are permitted to retain this valuable spectrum.

Over the last year, the development of worldwide standards for WiMax and improvements in equipment performance and cost have made the 2.3GHz and 2.5GHz frequencies more attractive. They are now among the most desirable for use in providing broadband voice, data and video services that will compete with telecom and cable wireline broadband services. These spectrum bands can also be used to compete in the backhaul and special access (both last-mile and interoffice transport) markets where the regional Bell operating companies are also dominant. Soon. they may even be used to compete with cellular and other mobile voice and data services. Equipment costs will be low and will keep falling as economies of scale kick in.

Intermodal competition cannot develop if two of the three modes--wireline and wireless--are in the hands of a single, gigantic company.

Off-the-shelf WiMax products for the 2.5GHz band will be available from numerous manufacturers later this year, and a 2.3GHz version of WiMax may be developed. Mobile WiMax equipment that provides voice and high-speed data is now being tested on KDDI's network in Japan and should be widely available by early 2007.

The competitive importance of this spectrum was acknowledged by the FCC last year. As a condition to its approval of the Sprint-Nextel merger, the FCC required that Sprint meet certain milestones for offering broadband service in the 2.5GHz band. Sprint agreed to offer such service to at least 15 million Americans within four years of the order (for instance, by fall 2009), and to offer it to an additional 15 million customers by two years later. Sprint controls the most 2.5GHz spectrum in the U.S., and its planned use of this spectrum to provide services competitive with (or as Sprint claims, better than) wireline broadband services is one of the key drivers of Sprint's ongoing spinoff of its wireline operations. But Sprint's spectrum holdings, large as they are, do not provide adequate coverage in many areas, particularly in the BellSouth footprint.

BellSouth, the second-largest owner of 2.5GHz spectrum in the U.S., controls spectrum in most of the 50 largest markets, according to published reports. It also has substantial 2.3GHz spectrum (acquired in auctions in 1997). SBC Communications also gained a large amount of 2.3GHz spectrum when it acquired AT&T. According to publicly available information, neither company has yet developed any of the spectrum into a commercial line of business; rather, the spectrum is effectively warehoused at present. (However, BellSouth has deployed test broadband service in nine in-region markets using its 2.3GHz spectrum, and it announced in March that it would use the 2.3GHz spectrum to provide "backup" broadband for its wireline broadband service.)

The proposed merger will concentrate huge blocks of spectrum in one company with every incentive not to use it. Assuming that AT&T's licenses are spread equally around the U.S. and that BellSouth's licenses are located primarily in the BellSouth service area (as appears to be the case), then prior to the merger, approximately 40 percent of the BellSouth and 30 percent to 35 percent of the AT&T licenses are located in the parent Bell operating company's (BOC) service area and are not likely to be used to compete with companies' wireline broadband services.

The postmerger wireline service area will be much larger, however, and substantially less than 50 percent of the spectrum would be out of region. It is unlikely that a postmerger AT&T would have any incentive to develop this spectrum for wireless broadband. Competing with itself in-region would not be attractive; and BOCs have yet to engage in meaningful competition out of region.

Given this scenario, competitors can be expected to argue that the FCC and the Antitrust Division should require BellSouth and AT&T to divest at least their in-region 2.3GHz and 2.5GHz spectrum (together with any existing deployments). Divestiture benefits consumers and businesses if the spectrum is used by an entity or entities that will compete in the broadband, backhaul and special access markets.

It may even be argued that AT&T and BellSouth should be required also to divest all their out-of-region spectrum in order to enable nationwide competition.

Preventing a BOC from acquiring assets that could be used to compete with its core wireline business--and in this case also with its growing wireless business--is not a novel idea. In the Primestar case a few years ago, for example, the Antitrust Division prevented cable operators from buying DBS satellite assets, for fear they would warehouse the satellites in order to prevent new entrants from using them to compete with traditional cable TV.

Biography
Mark Del Bianco practices law and publishes on issues at the intersection of communications law, antitrust and new technologies. His clients include a variety of VoIP and competitive telecommunications providers and e-commerce companies. He can be contacted at [e-mail].

More Perspectives

[nicmart]

Del Bianco's antipathy to property rights

It isn't at all surprising that Del Bianco is an attorney. His
profession has done a bang-up job of stripping Americans of
the property rights that James Madison rightly identified as the
basis for all other rights.

To borrow from an expression, if Del Bianco wants to tell AT&T
and BellSouth what to do, he should pay their rent; otherwise
their merger is none of his business. No one -- including
intrusive attorney, or the government -- has the right to
interfere in the consensual relations of adults.

The argument for action usually comes down to "we have laws
and should enforce them." This is intellectually feeble and
morally vapid. We had fugitive slave and racial segregation laws,
too, yet few people would argue in favor of such laws today.
Antitrust laws are no less immoral than were segregation laws.
They infringe on the right to self-ownership and self-control.

Del Biano represents competitors to AT&T and BellSouth. He is a
paid shill. If his effete clients can't compete in the market, then
let them shrivel to dust.

[nicmart]

Addendum

To clarify, the consensual relations of adults should not be
interfered with unless those adults are using violence, or the threat
of violence, against a third party, or are defrauding another party.
And those qualifiers rely on the genuine definitions of violence and
fraud, not infinitely elastic definitions cooked up by a crafty
attorney. (e.g., "John Doe should be quarantined because he is so
ugly that he does violence to my sense of esthetics.")

[maxwis]

Thank You Nic "Rush Limbaugh" Martin

Let the freeeeeee market deal with AT&T. Notions of monopolies, trusts, anti-competitive practices are such outmoded 20th century concepts. Why do we even need any commercial laws at all? If competitors are not cunning enough or ruthless enough, if they do not have enough soft money to spread around, enough paid lobbyists, then they deserve to go out of business. Why do we even need more than one phone company? Any more than one is a waste of resources. If they don't do a good job with their customers, the freeeee market will take care of it.

[fgoldstein]

Your fight with the author makes no sense

Nicolas, your comment makes no sense in the context of his article. Wingnutty corporate "property rights" is a weak argument in many cases but especially weak here. James Madison didn't know about radio waves, and in any case, the constitutional system is not all about property rights above all else, which could lead to a mercantilist, rather monarchist society. It is about balancing interests for the common good.

Spectrum is not "property" in the usual sense. He's not telling BellSouth to give up its Atlanta headquarters building, or telling SBC to give up its SONET multiplexors. The issue here is radio spectrum, which is licensed based on scarcity. It is not real property; it is a license to utilize a public resource.

In the instant case, BellSouth's radio spectrum licenses cover most of the country. Some of this goes back to their acquisition of a radio paging firm some years ago, and some may have been a result of some pre-2001 thinking about out-of-region competition. In any case, radio spectrum is incredibly precious under current rules. The FCC normally requires licensees to actually use it or lose it. The Powell-Martin FCC has been outrageously generous to the ILECs, though, and has been letting their affiliates "bank" spectrum, a violation of normal policy.

So it's quite rational to say that as part of an acquisition of BellSouth, SBC should give up radio spectrum that could otherwise be used to compete against it. Powell was vocal about "intermodal comptition" as justification for some of the anticompetitive deregulation steps he took. Letting SBC buy up the licenses in order to keep them from being used to compete against themselves would be very anticompetitive.

[Chronic]

Free Market Argument baseless

If merged company controls the majority of the spectrum then there is an automatic barrier to any competitor entering that market, hence they would not really be operating in a free market environment. Also the author did implictly suggest that the FCC could also force the company to use the spectrum as apart of it's agreement as in the case with Sprint-Nextel. So they either use it or lose it, either way the consumer benefits from having the freedom to choose what service they want.