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Executive Vice President Pete Sepp on the Proposed Merger between AT&T and T-Mobile

June 21, 2011

The Honorable Julius Genachowski
Chairman, Federal Communications Commission
445 12th St., SW
Washington, DC 20554

Dear Chairman Genachowski and Members of the Commission:

    I am pleased to present the following brief comments on behalf of the 362,000-member National Taxpayers Union (NTU), a non-profit, non-partisan citizen group founded in 1969 to advocate lower taxes, smaller government, and economic freedom at all levels.

    As you may be aware, for more than 15 years NTU has reached out to Members of the Commission on a number of telecommunications issues affecting taxpayer rights and consumer freedom of choice – two principles that our organization’s members have sought to protect and expand. For example, NTU has long championed a streamlined competitive auction process for spectrum, and was a founding member of the Coalition for Fair Spectrum Auctions.

    NTU has also asked the FCC to take a prudent and forbearing approach toward issues such as video services franchising, the XM-Sirius radio merger, the NBC-Comcast merger, the development of Voice over Internet Protocol technology, and so-called Network Neutrality proposals. Likewise, we have urged the FCC to oppose expansion of the Universal Service Fund, and have encouraged Commissioners to engage in reforming this program.

    All of these activities – and many more pursued through other government channels – are guided by NTU’s concern that telecommunications in particular represent one of the most heavily-taxed and -regulated areas of our economy. While technologies such as the Internet and wireless telephony have been able to deliver vast benefits for productivity, connectivity, and access to information, this progress has been uneven because of policies grounded in decades of heavy-handed government control. Moreover, the threat of retrenchment continues to this day.

    In order to chart a more consistent course that will lead to greater innovation, choice, affordability, and prosperity, NTU supports the merger between AT&T and T-Mobile. Indeed, in our opinion these ends constitute the essence of the “public interest” that will be served by the Commission’s swift approval of the proposal. Some limited elaboration follows.

“Concentration” Fears Can Betray Other Agendas

    For more than a decade, NTU has examined the link between regulatory policy toward business concentration and its impact upon taxpayers. In a comprehensive study published on December 11, 2000, our then-Director of Programs Mark Schmidt contended that government policies toward business consolidation have often proceeded from a paradoxical notion – complaints from competitors were prima facie evidence of a malfunctioning market in need of intervention. He noted that policymakers often confuse the threat of temporary economic concentration with a long-term threat to competition. Yet, market forces can often eventually work against these strategies, as they did against IBM (with punchcard technology) and Sony (with Betamax) to name just two. He also observed that antitrust actions can sometimes serve as “affirmative action for less efficient competitors” seeking government intervention to secure a market foothold they could not otherwise attain through conventional means, such as providing better products at more affordable prices.

    In examining cases that were at the time of the study contemporary, Schmidt pointed out that the Department of Justice (DOJ) acknowledged the “primary benefit of mergers to the economy” was their ability to generate cost savings to consumers. He suggested that DOJ’s legal actions often seemed to be distractions from “monopolies” of the government’s own creation that were directly costing consumers, and in many cases, taxpayers: First-Class mail delivery, dairy compacts, state-run liquor stores, and housing finance enterprises such as Fannie Mae and Freddie Mac. Schmidt concluded:

The greatest threat to free competition comes not from aggressive businesses, but from government intrusions into the marketplace. By undermining competition through antitrust enforcement or subsidies for failing industries, government uses tax dollars to make consumers pay higher prices. … If any party is guilty of engaging in “conspiracies in restraint of trade” that keep costs high for consumers, it is government.

    These words may seem to render a harsh verdict, but they continue to have relevance today, especially in the merger question you now confront. As many current observers of telecommunications markets have contended, complaints from AT&T’s competitors of the merger are by themselves admissions of concern that they will be forced to adopt new strategies for delivering services customers find attractive and valuable. In fact, if artificially high pricing levels were to be the result of the merger, the competitors would benefit and would likely stay silent.

“From Four to Three” Is Misleading Math

    Even on a more practical level, however, the argument that major national telecommunications firms will be reduced from four to three under the merger presents an incomplete picture of the market. Technology expert Larry Downes eloquently summarized this situation in an April 11 commentary for BNA’s Daily Report for Executives:

In today’s dynamic mobile industry, some national wireless carriers are strong in some cities or rural areas and weak or absent from others. Beyond the national carriers, lower-priced providers including MetroPCS and Cricket, as well as established regional companies including US Cellular, are strong in local markets. The Justice-FCC market analysis will consider market structure at the local level, counting all providers who are genuinely competitive.

    We believe that such an analysis should prevail over the unfounded fears of critics – fears made even less legitimate by the fact that the wireless industry in its entirety faces increasingly competitive pressures from technologies such as Skype and voice-chatting via Gmail. Granted, these services may not provide absolute alternatives to wireless but serve instead as third-party providers. Still, as an article in the November//December 2010 edition of Global Telecoms Business reported, “operators see Skype, Google and other over-the-top companies as threats” and warned:

So the message is clear: carriers have to move beyond being just bit-transporters. That means offering their paying customers services that they will value – and pay for. Operators should learn from Skype, Google and the other over-the-top players, not just by doing something of what they do, but also by creating the same sort of customer loyalty shown by those people who spend hours at a time logged into Facebook.

    These developments may cause many headaches for telecom providers, but consumers and policymakers should take reassurance and comfort from them, in that they demonstrate a vibrant and constantly evolving market which will remain so even after the merger.

Telecommunications Firms Are Highly (and Often Excessively) Constrained by Government

    Downes and others have likewise demonstrated that AT&T and T-Mobile are, taken separately, limited operationally by factors such as spectrum allocations. Allowing them to merge could make such network capacity on a finite bandwidth more efficient.

    Spectrum auctioning has largely proven to be a meritorious process for taxpayers. The actors involved in this bidding made decisions based on many business considerations, and the consequences of those decisions are theirs to bear. Yet, the Commission should not be unmindful of the external burdens government continues to place upon the telecommunications sector, with spectrum and other matters.

    NTU took note of this phenomenon in March of 2004 when commenting on a “Consensus Plan” to mitigate communications interference problems experienced by public safety agencies. This proposal involved a “swap” and government-supervised reorganization of spectrum with the firm Nextel, giving us cause to observe:

[T]he prospective value of spectrum is subject to many different interpretations, depending upon the business plans and motivations of the parties involved. Yet, this is precisely the most compelling reason for the auction process in the first place – to allow competitive bidding to actively establish a real-world, “best value” for airwaves whose sale will benefit taxpayers now (immediate proceeds) and in the future (market-driven private sector communications development).

    Unfortunately, despite offering $850 million in financing for the project, Nextel stood to benefit by obtaining through government edict a chunk of spectrum whose commercial value, according to an estimate reported by Kane Reece Associates, might have exceeded $7 billion.

    We recall this particular controversy not to rehash the past, but to illustrate that spectrum allocation has involved highly contentious regulatory minutiae which can severely complicate the auctioning concept. All market actors, including AT&T and T-Mobile, have had to contend with this complexity, often to their commercial detriment.

    Beyond these considerations is the continued burden of taxation on telecommunications, which far exceeds the rates typically applied to most retail goods and services. Earlier this year NTU’s former State Government Affairs Manager John Stephenson provided readers of our blog with results of a report from economist Scott Mackey published in State Tax Notes. Stephenson wrote that “wireless users now pay a combined federal, state, and local tax and fee burden of 16.3%, [more than] twice the rate of the average retail sales tax and the highest wireless rate in six years.” His blog post sounded an ominous alarm:

With states and cities in fiscal dire straits, there will be a strong temptation to raise wireless taxes and fees. This is a shame because as wireless taxes and fees increase, the cost of using those goods and services also increases, which could slow economic activity.

    Other kinds of telecommunications services, including cable and satellite television, can face severe tax loads from governments as well. While the Commission is not necessarily in a position to directly affect these actions, regulatory policymaking cannot operate in a vacuum. We would contend the Commission must take into account these considerable, artificially-imposed challenges that companies such as AT&T and T-Mobile face, and avoid imposing new ones that could erect new barriers to their success. 

Universal Service Subsidies Should Be an Entirely Separate Issue from this Merger

    Potential issues have been raised, from both inside and outside government, that taxpayers could in one way suffer from the AT&T/T-Mobile merger. During Congressional hearings in May, several lawmakers asserted that AT&T’s standing promise to aggressively extend broadband coverage could be facilitated through Universal Service Fund (USF) subsidies rather than solely through private investments. Critics likewise wondered aloud if a merged entity would receive a disproportionate windfall of USF resources. Not surprisingly, AT&T’s regulatory vice president has said that her firm’s commitment “is not contingent on the receipt of USF money.”

    As the introduction to our comments stated, NTU has long expressed the need for reform of the entire network of government subsidies for telecom service. In a recent article for my colleague, NTU’s Vice President for Government Affairs Andrew Moylan, called attention to one element of this scheme, the Rural Utilities Service’s (RUS) broadband loan program:

[I]n its ham-fisted attempt to bring high-speed Internet service to areas where there is none, RUS has consistently given money to organizations which build over existing private broadband networks. A 2005 report from the USDA Inspector General found that ‘RUS has not maintained its focus on rural communities without preexisting service.’ …

This should come as no surprise, since RUS had previously come under criticism for providing taxpayer-backed loans to rural electric cooperatives whose lines of business - such as propane sales – seemed to stray far from the basic, limited mission of helping deliver power to underserved places. …

Unfortunately, warnings from Congress fell on deaf ears. A subsequent USDA Inspector General Report issued in 2009 found little improvement in the agency’s strange habit of loaning money for projects that build over existing Internet service, rather than bringing it to those who don’t have any. President Obama has also ignored this tarnished record of gross mismanagement. In fact, he doubled down and put RUS in charge of doling out $2.4 billion in so-called “broadband stimulus” money.

    We bring this example to the Commission’s attention as a reminder that “universal service” is an entire web of subsidy programs – which we believe to be an outmoded, duplicative, and wasteful offense to taxpayers. Yet, precisely because this structure is so wide-ranging, reform efforts must be holistic and comprehensive, involving the entire industry.

    Here again, the Commission does not bear sole responsibility for such an effort, which must be led by elected officials and will involve the work of many agencies beyond your own. These urgent problems should not serve as a distraction to the merger issue you face; rather, they should serve as an equally urgent plea from taxpayers to begin a separate and distinct policy debate over the future of universal service subsidies. NTU and its members are eager to do so.

Conclusion: This Merger Does Not Harm – and Will Help to Serve – the Public Interest

    For the foregoing reasons, and many others, the proposed merger for AT&T and T-Mobile offers benefits for consumers, the economy, and the nation’s competitiveness abroad. Moreover, it does not pose a unique fiscal detriment to taxpayers that would recommend the merger’s disapproval. The proper focus of any such concerns should be a wholesale restructuring (and downsizing) of the government’s vast network of mandates and subsidies.

Thank you for your consideration of and attention to our remarks.

Pete Sepp
Executive Vice President