Soft promises, hard arguments offered for CPUC approval of T-Mobile Sprint merger

by Steve Blum • , , , ,

Kim putin

T-Mobile’s closing case for the California Public Utilities Commission review of its merger with Sprint boils down to trust us, it’ll be glorious. Opponents, led by the CPUC’s Public Advocates Office (PAO), say you gotta be kidding. T-Mobile (and Sprint and the California Emerging Technology Fund, but T-Mobile is the lead dog in that pack) filed final arguments on Friday, saying the CPUC should approve the merger. The PAO, the Communications Workers of America (CWA), TURN and the Greenlining Institute urged commissioners to deny it, because consumer prices will rise and rural communities will be left out, among other ills. Links to the “reply briefs” are below.

The PAO argues that any benefits to the public – as opposed to rents extracted by special interest groups – “will occur without the merger, if at all”. Its rebuttal dismisses T-Mobile’s promises as “vague” and “not specific, measurable, verifiable, and enforceable”.

Just so. In Friday’s filing, T-Mobile included a long list of what it calls “commitments”, but what a careful reading shows to be mostly meaningless fluff.

For example, it promises to offer lifeline service “indefinitely”, which sounds like “forever” but could also mean “for an unspecified period of time”. High sounding goals are guarded by weasel words like “strive to” and “good faith efforts”. Any firm promises – for example pricing, wholesale terms and data caps – are limited to no more than three years, which is something like the minimum amount of time required to fully integrate the two companies.

The grand network buildout T-Mobile first promised will be limited to “90% of the cell site locations” identified in the plan it submitted earlier as evidence of its good intentions. As CWA points out, the original pledge was for a 99% build out, but the California Emerging Technology Fund helpfully negotiated it down to 90%.

And 90% of cell site locations is not the same as 90% of California’s land area. Given the far higher density of cell sites in cities and suburbs, it’s not hard to guess where the unfortunate 10% will be. Roughly 95% of California’s population lives on 5% of the land and cell site deployment correlates with population density. So eliminating the least profitable 10% of cell sites from T-Mobile’s aspirational powerpoint presentation could leave the majority of rural Californians in the dark.

By omission, T-Mobile’s brief confirms (if confirmation was needed) that it won’t offer the full benefits of 5G service to rural Californians. It talks a lot about using low and mid-band spectrum in rural communities, but not the high capacity, high frequency millimeter wave bands or high density, low latency deployments that will be used to improve service in urban areas where affluent customers are thickest.

It also tries to rebut a key point made earlier by an economist working for the PAO, Lee Selwyn, who said that T-Mobile’s promises of a rural 5G renaissance were bogus because even its mid-band coverage claims were based on unrealistic assumptions about how many new cell sites would be built. T-Mobile offered a quibbling response about coverage patterns, but didn’t address the core economic question of whether there’s enough revenue potential in, say, Kings County to justify building a significant number of new towers or small cell facilities.

Selwyn also leaned on conventional anti-trust analysis to show that reducing the mobile market from four carriers to three will reduce competition and result in increased prices. T-Mobile hit back at that conclusion by touting the supposedly superior (and certainly more creative) economic model produced by three economists it hired.

Who to believe? If you think the new, merged company would, as T-Mobile plausibly claims, have lower marginal – e.g. operating – costs, then the question becomes whether those savings would be used to lower consumer prices or increase corporate profits. The answer depends in large part on whether T-Mobile, AT&T and Verizon reach a comfortable pricing equilibrium instead of fighting a bloody price slashing war. Profitable equilibriums are even easier to find in a three player oligopoly than in a more heated four player market. As the PAO’s rebuttal puts it, “AT&T and Verizon already have substantially higher prices” than T-Mobile. That’s despite having lower marginal costs. Without Sprint nipping at its heels, T-Mobile can join that club too.

T-Mobile’s rebuttal also goes on at great length about its plan to offer in-home service via its 5G network, but doesn’t explain where the necessary capacity will come from, or why it would want to sell 5G bandwidth at residential prices when there’s more money to be made filling the booming demand for mobile data. The fundamental business case for 5G deployment is based on mobile revenue streams. In-home data consumption is a couple orders of magnitude greater than mobile usage, so it’s hard to see how residential service will be a mainstream offering, rather than a tactic to offload temporarily surplus capacity. Wall Street analysts are not buying residential 5G pitches, not least because what’s known publicly about Verizon’s Sacramento experiment is not encouraging.

Some of T-Mobile’s rebuttal focuses on legal issues, particularly its claim that the CPUC has no business reviewing a merger between two mobile carriers because, among other things, it says that’s the Federal Communications Commission’s job. T-Mobile’s objections will set the stage for court challenges to any adverse decision the CPUC might reach, which could kill any conditions or restrictions the CPUC might impose.

There are a few procedural loose ends to tie up, but the substantive evidence and lawyerly pleadings are in the record. The next step is for the CPUC administrative law judge managing the review, Karl Bemesderfer, to draft a proposed decision for the commission to consider. If he does that in the next couple of weeks, commissioners could vote on it as soon as 27 June 2019. It’s a complicated case and there are other potential bumps in the road, though. T-Mobile and Sprint’s agreement to extend their self imposed deadline to the end of July was a wise move.

“Reply briefs” regarding T-Mobile’s acquisition of Sprint, filed with the CPUC on 10 May 2019:

T-Mobile and Sprint (aka Joint Applicants)

(Technically, two CPUC reviews are underway. One concerns Sprint’s wireline operations in California, and the other involves mobile services. The two reviews were combined into a single proceeding, but T-Mobile is trying to split them up again. The wireline transfer is relatively uncontroversial, but is squarely within the CPUC’s jurisdiction; the mobile merger is hotly contested, but the CPUC’s authority is less certain. It would benefit T-Mobile if the two issues were handled separately).

Opposition

Collected documents from the CPUC’s review of the proposed merger of Sprint and T-Mobile are here.