Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age (39 page)

There are many similarities between the AT&T–TMobile and Comcast-NBCU mergers. Both were designed to achieve greater scale and thus lower the carrier's costs. Both involved an extensive political push to make any opposition to the deal look like antibusiness rhetoric. Both efforts employed narrative strategies (Comcast: “We're saving the NBC Peacock!” AT&T: “We're saving rural America!”) that turned out to be tangential to the business reasons for the transaction. Both took place in highly concentrated communications markets. As suppliers of high-speed Internet access, both
dominant players (Comcast and AT&T) routinely cherry-pick their areas of service, sell as many bundles as possible, and seek to retain as much pricing power and discretion in choosing customers as possible.

Like the Comcast-NBCU merger, the AT&T–TMobile deal helps shine a light on the enormous overall consolidation in U.S. communications-access providers. There are, in essence, two big markets: cable wired and telecommunications wireless. The few dominant companies in both sectors share an interest in making content available everywhere on a prioritized, fee basis. And all are threatened by disruptive moves in Internet content and applications as well as by the risk of the introduction of devices that they cannot control.

But AT&T's deal looked, on the surface, more horizontal than Comcast's did. AT&T also had the burden of following Comcast. By the time the Antitrust Division got to the AT&T deal, the department knew that it needed to shore up its antitrust bona fides—and it sued to block the transaction, shocking a confident AT&T.
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But whether the AT&T deal with TMobile went through or not almost didn't matter: AT&T won either way.

In America, wireless data is a separate marketplace from the cable wired data world. The physical-capacity constraints on wireless networks mean that wireless services cannot be substituted for wired connections. In order to build a wireless network that could be used by everyone and that would perform as well as wired high-speed Internet services, there would have to be a wireless tower on every rooftop—connected to a wire—that no user shared with any other. Each tower in a wireless network has to serve, on average, 436 times as many homes as a cable network, which connects to just one home at a time; each wireless network access point has one-thirty-seventh the information-carrying capacity as a cable wire; and there is vanishingly low interference inside a cable network.
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If the United States ever moves to ubiquitous fiber connections, as other countries are doing, the distinction between wired and wireless will become even clearer: the inherent capacity of fiber-optical links greatly exceeds that of wireless communications. Laser-transmitted information carried inside glass fiber-optical strands travels at the speed of light across great distances and carries millions more pieces of data per second than radio waves, without interference. The result is consistently high speeds,
with no delays. Wireless radio signals, by contrast, carry much less information, are easily interrupted by trees or buildings at high frequencies, and decay sharply over distance. As noted earlier FiOS and DOCSIS 3.0 speeds as of 2010 were twenty to a hundred times as fast as optimistic projections for 4G wireless speeds.
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But as a complementary service, wireless is very popular. Americans like the convenience of mobile devices and are willing to compromise on the quality of Web browsing or data access in exchange for mobility. The phone companies are happy to serve this preference because wireless is far more profitable than wireline. It is cheaper to build, for one thing; rather than string and maintain copper wires, wireless companies can locate their equipment at towers (base stations). And they can charge premiums for voice and aggregated data services because U.S. customers now expect to pay individually for each expensive service from their wireless company (even though online Internet-based voice and data services would probably be far less expensive than they currently are if the companies faced true competition).
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The wireless world in the United States has many of the same economic characteristics as the wired world; it is extraordinarily concentrated, with just two dominant players nationwide—Verizon and AT&T—and those two players have the power to segment the market much as Comcast and Time Warner do in wired services. Monthly wireless service plans (post-paid subscriptions) for smartphones and other devices can cost more than traditional high-speed Internet access; the carriers charge overage fees for large volumes of data, and users incur many additional fees (including activation fees and early-termination fees). But while well-off Americans can afford these services, poorer Americans often depend on government-subsidized “pre-paid” wireless plans. The fastest-growing segment of the wireless marketplace in mid-2011 was Universal Service Fund federally subsidized wireless services for the poor offered by companies like Tracfone. As Bernstein Research put it, “The top is trading up, the bottom is trading down, and the middle is being hollowed out.”
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But what is worth noting is how neatly the characters in this story have divided up their roles. The telephone companies stick to the wireless part of high-speed Internet access and have ceded the wired territory to Comcast
and Time Warner. Verizon and AT&T are no longer investing in fiber beyond their current commitments. AT&T made clear in 2011 that the company would not be installing any more U-Verse “fiber to the node” service and that 40–45 percent of its customers would be left with copper wires.
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(AT&T's U-Verse was not competitive with cable's services anyway because it brings fiber only to nodes or neighborhoods and runs last-mile communications over copper wires.) Here's AT&T CEO Randall Stephenson in early 2012: “Our U-verse build is now largely complete. … We have been apprehensive on moving, doing anything on rural access lines because the issue here is, do you have a broadband product for rural America? And we've all been trying to find a broadband solution that was economically viable to get out to rural America and we're not finding one to be quite candid.” AT&T is planning instead on selling expensive “LTE” (Long Term Evolution: a wireless high-data-transfer technology designed to support data access by way of handheld devices) services in rural areas. As we have seen, Verizon stopped expanding FiOS outside of franchise agreements already in place in big cities, leaving about 40 percent of its wired customers without upgrades. While FiOS is the only kind of last-mile infrastructure that could compete successfully with cable's DOCSIS 3.0, Verizon's investors do not want the company to pay for expensive fiber installations, for which the payoff will be slow.
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For both of these companies, there is no financially compelling reason to upgrade millions of Americans to globally competitive wired data access. The result, according to Columbia University telecommunications scholar Eli Noam: areas of the country relegated to AT&T's 4G wireless access will be limited to “little 4G mobile screens or tablets while their metropolitan brethren enjoy 2-way, 3D, 4K, 5.1 sound, and 6-foot screen televisions.”
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Relying on wireless access for rural and other “unserved” areas means forcing millions of Americans to use compressed, highly curated information over a second-best network characterized by lower speeds and higher prices. And thus, a racial and economic digital divide is emerging in America: Hispanics, rural Americans, African Americans, and low-income Internet users disproportionately rely on wireless connections for access to the Internet. The online world of the rich—who can afford truly high-speed wired Internet access—is growing increasingly divorced from the online world of the poor, who generally have only mobile access. This new digital
divide has significant consequences for the country's future, as health services, educational opportunities, and economic life migrate online. As the Media Action Grassroots Network put it in April 2011, “Many everyday Internet needs such as applying for a job, conducting research, registering for classes, or accessing government or social services are difficult or impossible on a mobile device.”
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Wireless is the near-term growth area for both Verizon and AT&T, and to please Wall Street, both companies have to focus their energies there, where they are wringing out profits. But even in the wireless realm, both AT&T and Verizon face enormous challenges. Their margins for voice services are ten times higher than their margins for data services, but Americans prefer data services, and data usage is skyrocketing. AT&T and Verizon need to keep wireless data usage as low as possible for as long as possible by managing scarcity: imposing usage-based billing and not installing fiber to their towers (or building additional towers) unless they have to. To keep their average revenues per user as high as possible, they need to spread their costs across as many users as they can. Faced with the unassailable advantages of scale and scope, the wireless companies have chosen to combine rather than compete.

And so AT&T in 2011 made a big play for TMobile, its scrappy, low-price national competitor. TMobile was pushing an open platform for development of new applications (the Android operating system), had great customer service, and was backing policy positions in Washington aimed at increasing competition. It had not been able to get access to the spectrum it needed in order to compete effectively with AT&T and Verizon, but discussions were under way with the third-place wireless carrier, Sprint, about joining forces. Then AT&T swooped in and proposed its own deal, and TMobile's investors could not turn it down; who wanted to partner with the number 3 company when they could do a deal with number 1?

How did AT&T and Verizon Wireless become the dominant providers of mobile wireless services in the United States? Accidents of history, combined with multiple mergers, led to this state of affairs.

When the cellular phone emerged as a consumer product in the 1980s, it operated in 800 megahertz (MHz) frequencies, for which the FCC initially gave away two licenses for 40 MHz of spectrum in each of the 306
market areas in the United States—one to a wireless provider and one to a wired provider. Small-market licenses frustrated the buildup of viable nationwide wireless infrastructure; companies in urban areas had only a few voice channels, which did not provide enough capacity to serve demand, and companies in rural areas could not earn enough revenue to survive. No one could operate at the scale needed to make the business worthwhile.
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The 1980s licensing process led, predictably, to quick consolidation and market-division agreements among the applicants.
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This desirable “beachfront” low-frequency spectrum—so-called because of their desirable properties: these frequencies travel well over long distances and inside buildings, which means operators can build 20 to 25 percent fewer towers as they do in areas which require higher frequencies—went to the corporate ancestors of today's AT&T and Verizon.

Two big breakthroughs came in the 1990s. First, the government had grown increasingly concerned that a decade of a wireless duopoly had led to too little competition and innovation in the mobile marketplace. Lack of competition and high interconnection charges made wireless calls about ten times more expensive per minute than wireline, turning them into tools for the rich. After the General Accounting Office (GAO) and others criticized the lack of competition, Congress and the Clinton White House allowed the FCC to auction additional spectrum to break up the wireless duopoly.
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The second big breakthrough was the development of digital standards, vaguely referred to as second-generation or 2G standards, that could compress audio signals and use spectrum more efficiently than the old analog standards, and across cheaper and smaller components. Though all were developed to use frequencies more efficiently, these 2G standards were often incompatible. They were based on different basic ideas, like separating users’ transmissions by frequency and time (users communicate using the same channel but have different time slots) and particular encryption codes (users use the same channel, but their communications travel within varied envelopes of encryption). This latter, CDMA (Code Division Multiple Access), standard was widely adopted in America, and was based on many redundant communications across a wide range of frequencies and careful
power control over all mobile units within a particular cell.
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At around the same time the European Groupe Spéciale Mobile developed its own standard based on dividing up the channel by both frequency and time. This standard was called GSM—later Global Systems for Mobile Communications—and had been adopted by consensus across 103 countries by 1996.
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In sum, this second digital generation of wireless service was more efficient, but users could not roam between standards or easily among countries.

The United States quickly stepped into the lead as it implemented the GAO's suggested legislation to allocate more spectrum at higher frequencies to more competitors for use in digital communications.
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The government auctioned these bands for billions of dollars beginning in late 1994—the so-called PCS, or Personal Communications Services, auction. The government was hoping to avoid the paperwork, delay, and deal-making associated with the spectrum licensing and lottery systems it had tried earlier. It also sought to break up the Bell wireless duopoly (the two licenses in each market that had been issued at no cost to the Bell Operating Companies and other providers) that had limited competition and innovation and left consumers with the worst wireless network of any developed nation. The goal was to increase the number of competitors in every market. The incumbent wireless operators tried to block the effort and forestall new competition, but Congress and the White House prevailed. The ensuing auctions sparked new competition, innovation, and investment, and wireless moved from being a tool for the rich to an affordable way for families to connect. The corporate ancestors of Verizon, Cingular, and AT&T Wireless paid billions for spectrum, as did Voice-stream, the corporate ancestor of TMobile.
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