The effects and aftereffects of the Sprint & T-Mobile Merger

Wanna know why your cell phone rates are going up?

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A Four to Three Merger
– via Matt Stollerhttps://substack.com/redirect/d437635a-b5bc-445c-806e-a71e07049746?u=24528449
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“Last Friday, the Wall Street Journal’s Drew Fitzgerald wrote a good story about how inflation is driving up the prices that don’t seem related to oil or commodity price spikes, like wireless communication. “Wireless companies have spent the past month boosting fees and raising the cost of some midrange wireless plans,” wrote Fitzgerald. “Industry executives say that consumers already numbed to surging prices for other necessities might absorb slightly higher rates instead of switching providers or dropping service.”
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By Drew FitzGerald

This summer will test whether Americans already absorbing surging costs for fuel and food can also shoulder the burden of costlier cellphone service.

Wireless companies have spent the past month boosting fees and raising the cost of some midrange wireless plans. Industry executives say that consumers already numbed to surging prices for other necessities might absorb slightly higher rates instead of switching providers or dropping service.

AT&T Inc., starting in June, raised the cost of its older wireless plans by up to $6 for single lines and $12 for family plans, encouraging subscribers to adopt newer unlimited data plans.

Verizon Communications Inc. later matched AT&T with a $6 or $12 monthly price increase on its metered-data plans. It also raised some monthly fees on consumer wireless plans by $1.35 and levied a monthly per-smartphone fee of up to $2.20 on many business plans.

Verizon consumer group chief Manon Brouillette said that consumers are worried about the economic environment but the cellphone carrier remained confident in its prices because its customers value its reliable network.

T-Mobile US Inc. has seized on its rivals’ price increases to burnish its lower-cost reputation, calling the decisions insensitive to overburdened consumers. Many T-Mobile rates are frozen anyway under a regulatory agreement tied to its 2020 takeover of Sprint Corp., though the company can still revise fees. The company in February raised monthly fees on some older plans by up to 31 cents.

T-Mobile said its fees will affect a smaller share of its customers. The company is meanwhile adding new perks to its most expensive consumer and business plans to convince customers to upgrade their service. New offerings include high-speed data service in more than 200 countries and free Wi-Fi on Alaska, American and Delta flights.

“What we’re doing is dramatically different,” T-Mobile marketing chief Mike Katz said in a recent interview.

Verizon is so far the only wireless carrier to raise fees on a plan advertised today. Most other rate increases have hit cheaper plans no longer offered to new customers.

“We didn’t do a broad stroke across the entire customer base,” AT&T Chief Operating Officer Jeff McElfresh said at a recent investor conference. “We looked at a cohort of customers that were on the oldest rate plans that didn’t have access to 5G or some of the best features and benefits.”

The top three U.S. carriers declined to detail how much the rate increases will benefit their revenue. Media and telecom research firm LightShed Partners estimates Verizon’s three price increases will add another $2.4 billion to Verizon’s annual revenue over time. It expects AT&T and T-Mobile’s increases to add $700 million and $100 million, respectively, to annual revenue.

Cellphone carriers have reinvested their revenue into their networks, which cost billions of dollars each year to maintain and billions more to reach fifth-generation standards capable of serving high-speed internet to customers on the go. AT&T and Verizon are also under pressure to boost revenue while still paying their investors a reliable dividend.

The price change dismayed Jim Polder, a retired law-enforcement officer from Lake Havasu City, Ariz., whose 97-year-old father learned of the $6 monthly increase by email.

“Financially, it’s not going to really bother him,” Mr. Polder said. “It’s really the principle of the thing. They want to add $6 for a network that’s already in place. The way gas is going, it will bother a lot of people who can’t afford the jump.”

Mr. Polder said his father doesn’t need a smartphone but will probably buy one to keep using Verizon, which will decommission its older 3G network later this year. He said neither he nor his father plan to pay for more expensive unlimited-data plans. T-Mobile is also shutting down its 3G networks this year. AT&T started shutting down its 3G systems earlier this year.

Customers on older wireless plans have so far borne the brunt of this year’s rate increases. Telecom executives have avoided touching the advertised price of their top-tier mobile-phone plans to avoid losing their most profitable customers. Cheaper prepaid wireless plans from Verizon’s Tracfone, T-Mobile’s Metro and AT&T’s Cricket brands have also kept their prices in check.

Higher prices for midrange wireless services could still prompt customers to pick a cheaper plan. They could also choose new cellphone plans that cable companies like Comcast Corp. bundle with their home internet services. But market analysts say higher prices aren’t likely to drive phone users to drop service altogether, even if they already have more than one line.

“This is the most important consumer product in people’s life,” said Walt Piecyk, an analyst for LightShed Partners. “Beyond your basic utilities, like food and electricity, it’s the last bill you’re going to cut.”

Write to Drew FitzGerald at andrew.fitzgerald@wsj.com

 une 25, 2022 07:30 ET (11:30 GMT)

Copyright (c) 2022 Dow Jones & Company, Inc.

(End of Drew FitzGerald’s article)
 (remainder of Matt Stoller’s article follows below)
“Here are some of the increases.
 
AT&T raised the cost of its older wireless plan “by up to $6 for single lines and $12 for family plans.”
 
Verizon raised prices by either $6 or $12 a month on some of its data plans, and slapped a monthly per-smartphone fee of $2.20 on business plans, and raised consumer wireless plans by $1.25 a month.
 
T-Mobile raised fees on older plans by 31 cents/month, and its activation and support fees by $5.
 
Missing from the story is why these prices are going up. From 2014-2019, cell phone prices had been going down, consistent with what happens in many high tech markets where technology is improving rapidly. There’s no obvious reason for that to have changed. Costs for materials and labor are up a bit, but not enough to substantially dent profit margins in a market largely based on already installed fixed communications equipment. (Plus prices started going up in 2020, before the current bout of broader inflation.) So what happened?
 
In 2019, there were four major carriers in the market for cell phones. Today, there are just three. And the reason is that the third largest cell phone provider, T-Mobile, was able to buy the fourth biggest, Sprint. In doing so, it ended a price war that had been lowering prices for consumers for six years.
 
This merger had been a long time coming. For years, T-Mobile, with its magenta clothed CEO John Legere flamboyantly calling itself the ‘Un-carrier,’ had been annoying the industry with its strategy of lowering prices to acquire consumers. It was what is known in economics as a ‘maverick’ firm, pursuing an unusual strategy that forced the whole industry to adapt and become less profitable.
 
In 2011, AT&T sought to put an end to this maverick strategy by offering to buy T-Mobile. Fortunately, the Obama administration, though generally weak on antitrust, blocked the merger, because antitrust officials, as well as then-FCC Chair Tom Wheeler, believed that a concentrated wireless market with four firms should not be allowed to consolidate further. From 2014 onward, because wireless competition continued, cell phone prices dropped by 6.3% annually.
 
ps: The merger of T-Mobile and Sprint was great for one guy – Former T-Mobile CEO John Legere jumps a shark on his way to receiving $137 million for completing a merger of T-Mobile and Sprint.

After AT&T was blocked from buying T-Mobile, and prices dropped, executives across the industry became increasingly agitated about competition in the market. Deutsche Telekom, which owned T-Mobile, saw removing one of four players as essential to cashing out. In 2015, Peter Ewens, T-Mobile’s head of strategy, told CEO Legere that, “if we can’t get four to three consolidation, the industry is headed for commoditization and [Deutsche Telekom] should limit their exposure to the U.S.” Basically, if they couldn’t make a merger happen, they should sell T-Mobile, possibly at a loss.

Enter Donald Trump’s new telecom-friendly administration.

The Obama administration was cozy with big tech but somewhat cold to telecom. By contrast, the Trump administration, with ex-Verizon lawyer Bill Barr as the Attorney General, was deeply aligned with the telecom industry. Immediately after Trump took office, Legere texted the higher-ups at Deutsche Telekom, saying that the “[r]egulatory environment will never be better than now” for a “four-to-three” merger. To highlight this point, he then added, “Big prizes. So smile and get to the table.”

Telecom mergers run through two different agencies, the Federal Communications Commission and the Department of Justice Antitrust Division. Trump chose Verizon lawyer Ajit Pai to run the FCC, and a lobbyist named Makan Delrahim to run point at DOJ. Both approved the merger, with Pai alleging it would be good for the public interest, and Delrahim trying to concoct a silly scheme for DISH to become a fourth major wireless player, (which it had no plans to become and has failed to achieve.)

Multiple states led by Democratic attorneys general tried to step into the breach to stop the merger. It’s difficult for a state to win an antitrust case when the Federal government is telling a judge that there’s no problem. Nonetheless, there was some hope. It was an obviously terrible merger, and the market was working well with four carriers. Unfortunately, a Bill Clinton-appointed judge, Victor Marrero, heard the case, and ruled against the states and for T-Mobile-Sprint. Marrero did so because throughout the process of buying Sprint, T-Mobile executives had promised they would continue its “past pattern of aggressive competition with AT&T and Verizon, and that the merger would therefore not result in higher prices.”

As soon as the merger closed, prices started going up. As DT’s CEO publicly bragged, “It’s harvest time.” It turns out that, yes, Legere had lied to the judge. Shocking, I know.It was a catastrophic merger for all sorts of reasons. T-Mobile was blocked by the merger agreement from raising its prices directly, but it raised prices in other ways, by hiking fees, changing contractual terms, passing through increases in the cost of third-party benefits like streaming services, and increasing the cost of devices and handsets. T-Mobile refused to let DISH use its network as it had promised, and did not follow through on promises to existing customers.

T-Mobile also immediately started spying on its customers by expanding a surveillance ad business, which is exactly the kind of invasion of privacy as a price hike at the heart of Dina Srinivasan’s theory of Facebook’s monopolization.

But the harm wasn’t isolated to T-Mobile customers. The rest of the industry also raised prices. For instance, in 2021, Verizon had a 4.66% increase in wireless service revenue for consumers, versus 0.4% and 2.5% growth in 2020 and 2019, respectively. AT&T is also raising prices, with its CEO saying on its first quarter call that prices would rise across the telecom industry “over the next several quarters.” T-Mobile also destroyed its independent dealers, shrinking the number of stores and forcing onerous terms on them.

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