Comments on AT&T-T-Mobile Merger

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					           Comments on
    AT&T/T-Mobile Merger
                     Hal J. Singer
               Navigant Economics




1
Major Points
       Wireless markets are highly competitive
       No nexus between market structure and market conduct
        in the wireless industry
                                 g           g y           g
        Price effects from the merger turn largely on the degree
        to which consumers perceive AT&T and T-Mobile to be
        close in product space
       Mistakes of merger opponents




    2
Wireless markets are highly competitive
       Prices are falling
                                                1997     2.9% 2010,
            Cellular CPI (BLS) fell by 40% since 1997, by 2 9% in 2010 and
            another 3.3% in first five months of 2011
           ARPU by carrier fell between 2 and 13% from 2008 to 2010
            (SNL K     )
                  Kagan)
           Average monthly bill fell by 33% from 2005 to 2010 (Recon
            Analytics)
                y )




    3
Wireless plans available in DC for less
than $40 per month
                                      PRICE POINT

    MINUTES          $29.99              $35.00              $39.99
     Unlimited                             Leap               Sprint
                                      (Voice +Text)     (After 12 months)
                                          Sprint 
                                    (After 18 months)
                                    (               )
       1500         T‐Mobile
                 (Mthly PP, Data)
       500                                                  T‐Mobile
                                                             (
                                                             (Voice))
       450                                                   Verizon  
                                                             (Voice)
                                                              AT&T
                                                             (Voice)
                                                             (      )
                                                              Sprint 
                                                             (Voice)
       200            Sprint 
                     (
                     (Voice))
                      AT&T
                   (65+ only)
4
Effective Price Per Message/MB/MOU
for Data Service




5
    Source: Nielsen Customer Value Metrics, Q3 2008 – Q4 2010.
Wireless markets are highly competitive
       Entry is robust
                                                ;
            Clearwire: 4.4 million subscribers; 4G network was available
            in 71 cities; financial support from Sprint-Nextel, Comcast and
            Google
           LightSquared: Will cover 260 million people in the United
            States with its wireless broadband network by 2015; 59 MHz
            of spectrum nationwide
           Leap: faster subscriber growth than either AT&T or Verizon;
            5.4 million wireless subscribers; held spectrum in 35 of the 50
            largest U.S. markets; launch its commercial 4G trial in late 2011
                           8.9
            MetroPCS: 8 9 million subscribers; covers 90% of the United
            States; finishing its “phase-1” 4G-LTE build out sometime in
            2011


    6
No nexus between market structure and
market conduct
          2900                                                             1.000


          2800                                                             0 995
                                                                           0.995


                                                                           0.990
          2700

                                                                           0.985
          2600

                                                                           0.980
          2500
                                             HHI     Cellular CPI
    HHI




                                                                                   CPI
                                                                           0.975
          2400
                                                                           0.970

          2300
                                                                           0.965

          2200
                                                                           0.960

          2100                                                             0.955


          2000                                                             0.950
                 2003   2004   2005   2006    2007         2008     2009




7
No nexus between market structure and
market conduct
       Econometric results of Faulhaber, Hahn, Singer
        (forthcoming 2011)
       Regressed wireless bills of 7600 customers from TNS
        database on household characteristics, usage,
        demographics, and local HHI in which household resides
       Finding: No statistical significance on local HHI
       Implication: Changing HHI/market structure over relevant
        range (4 to 6 carriers) is not predicted to increase prices




    8
Merger price effects
       Turn largely on the degree to which consumers perceive
                   T Mobile
        AT&T and T-Mobile to be close in product space
           Close substitutes imply large price effects
           Distant substitutes imply small price effects
       DOJ’s SIRIUS-XM Merger Review
           Found no evidence of price discipline due to declining
            importance of retail channel d pit reduction i suppliers
            i     t     f t il h       l despite d ti in           li
            from two to one




    9
Reasons Why AT&T and T-Mobile Might Not
    Close
Be “Close”
    Churn data: AT&T 1.32%; Verizon 1.34%; Sprint 2.44%; T-
                    (     prepaid)
     Mobile 3.60% (more p p )
    T-Mobile was the last major carrier to offer 3G data service;
     no plans for LTE
    T-Mobile was unsuccessful in attracting data-intensive users
    T-Mobile has limited business-oriented offerings (wireline plus
     wireless)
    T-Mobile positioned itself to appeal to a price-sensitive
     customer segments
    Verizon (Droid) and Sprint (Epic 4G, EVO 4G) responded
     aggressively to AT&T (iPhone), T-Mobile (MyTouch) did not
     enjoy comparable success

    10
Upward Pricing Pressure Models
    Upward pricing pressure (UPP) model uses diversion and
     margins to measures the degree to which the merger
         g                     g                     g
     creates UPP
        Assumes (unrealistically) no capacity constraints
                                    post-merger
     Net pressure to increase prices post merger is low
     whenever:
        the diversion ratio between two products is low;
        markups are low;
        there is significant downward pressure on pricing as a result of
         merger-driven efficiencies.
             g
    Solve for “critical value” of the efficiency credit that
     would perfectly offset any UPP

    11
Upward Pricing Pressure Models
    Suppose diversion ratio is 4.2% and AT&T’s own-price
                   -2.67
     elasticity is -2 67 (hypothetical econometric
     estimates)
                                       p      y
         If AT&T were to increase its prices by 10%, it would lose 26.7%
         of its subscribers, but only 1.1% (0.267*0.042) of subscribers
         would migrate to T-Mobile
    Suppose f rther that AT&T’s mar in is 40% and T
     S     se further             margin           T-
     Mobile’s margin is 30% (actual EBITDAs)
        Efficiency credit that would be required to offset any
         incentives for AT&T to raise prices would be roughly 2%



    12
Application of UPP Models by Sprint’s
Economists
    Assumes diversion ratio of 10 to 16% (based on
     market shares), and margins of 70% for AT&T and
                       ),        g
     T-Mobile (provides no basis)
    Finds that efficiency credit that would be required to
      ff                   f AT T                       ld
     offset any incentives for AT&T to raise prices would
     be roughly 51%
    Simply fixing the margin assumption (and not
     addressing diversion rate) reduces the required credit
     to 15%
    Same problem with T-Mobile: Fixing the margin
     assumption (and not addressing diversion rate)
     reduces the required credit from 106 to 15%
    13
Arguments by Public Knowledge’s
Economists
    No need for merger when cell splitting is available
        Slow, cumbersome process. Need time to locate available sites, negotiate
         leases obtain local permits.
         leases,             permits
    Relevant geographic market
        Inputs to the UPP model are the same (margin, prices, diversion) as you
                         country.
         move across the country
    Prior competition has been stifled by iPhone exclusivity
        Exclusive (which is now expired) likely spurred Android-powered
         p       (       )              (Sprint)
         phones (Verizon) and Palm Pre ( p )
    T-Mobile is a “maverick”
        Higher churn, only carrier to lose customers in 2010, lack of LTE,
         undercut by Leap and MetroPCS
    Roaming agreements
        MVNOs are agnostic about type of spectrum, Clearwire & LightSquared
         replace loss of T-Mobile as a wholesaler


    14

				
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