TheHonorable Julius Genachowski
Chairman, Federal Communications Commission
445 12th St., SW
Washington, DC 20554
DearChairman Genachowski and Members of the Commission:
I am pleased to present thefollowing brief comments on behalf of the 362,000-member National TaxpayersUnion (NTU), a non-profit, non-partisan citizen group founded in 1969 toadvocate lower taxes, smaller government, and economic freedom at all levels.
As you may be aware, for more than 15years NTU has reached out to Members of the Commission on a number oftelecommunications issues affecting taxpayer rights and consumer freedom ofchoice – two principles that our organization’s members have sought to protectand expand. For example, NTU has long championed a streamlined competitiveauction process for spectrum, and was a founding member of the Coalition forFair Spectrum Auctions.
NTU has also asked the FCC to take aprudent and forbearing approach toward issues such as video servicesfranchising, the XM-Sirius radio merger, the NBC-Comcast merger, the developmentof Voice over Internet Protocol technology, and so-called Network Neutralityproposals. Likewise, we have urged the FCC to oppose expansion of the UniversalService Fund, and have encouraged Commissioners to engage in reforming this program.
All of these activities – and manymore pursued through other government channels – are guided by NTU’s concernthat telecommunications in particular represent one of the most heavily-taxedand -regulated areas of our economy. While technologies such as the Internetand wireless telephony have been able to deliver vast benefits forproductivity, connectivity, and access to information, this progress has beenuneven because of policies grounded in decades of heavy-handed governmentcontrol. Moreover, the threat of retrenchment continues to this day.
In order to chart a more consistentcourse that will lead to greater innovation, choice, affordability, and prosperity,NTU supports the merger between AT&T and T-Mobile. Indeed, in our opinionthese ends constitute the essence of the “public interest” that will be servedby the Commission’s swift approval of the proposal. Some limited elaborationfollows.
“Concentration”Fears Can Betray Other Agendas
For more than a decade, NTU hasexamined the link between regulatory policy toward business concentration andits impact upon taxpayers. In a comprehensive study published on December 11,2000, our then-Director of Programs Mark Schmidt contended that governmentpolicies toward business consolidation have often proceeded from a paradoxicalnotion – complaints from competitors were prima facie evidence of amalfunctioning market in need of intervention. He noted that policymakers oftenconfuse the threat of temporary economic concentration with a long-term threatto competition. Yet, market forces can often eventually work against thesestrategies, as they did against IBM (with punchcard technology) and Sony (withBetamax) to name just two. He also observed that antitrust actions cansometimes serve as “affirmative action for less efficient competitors” seekinggovernment intervention to secure a market foothold they could not otherwiseattain through conventional means, such as providing better products at moreaffordable prices.
In examining cases that were at thetime of the study contemporary, Schmidt pointed out that the Department ofJustice (DOJ) acknowledged the “primary benefit of mergers to the economy” wastheir ability to generate cost savings to consumers. He suggested that DOJ’slegal actions often seemed to be distractions from “monopolies” of thegovernment’s own creation that were directly costing consumers, and in manycases, taxpayers: First-Class mail delivery, dairy compacts, state-run liquorstores, and housing finance enterprises such as Fannie Mae and Freddie Mac. Schmidtconcluded:
The greatestthreat to free competition comes not from aggressive businesses, but fromgovernment intrusions into the marketplace. By undermining competition through antitrustenforcement or subsidies for failing industries, government uses tax dollars tomake consumers pay higher prices. … If any party is guilty of engaging in“conspiracies in restraint of trade” that keep costs high for consumers, it isgovernment.
These words may seem to render aharsh verdict, but they continue to have relevance today, especially in themerger question you now confront. As many current observers oftelecommunications markets have contended, complaints from AT&T’scompetitors of the merger are by themselves admissions of concern that theywill be forced to adopt new strategies for delivering services customers findattractive and valuable. In fact, if artificially high pricing levels were tobe the result of the merger, the competitors would benefit and would likelystay silent.
“From Four toThree” Is Misleading Math
Even on a more practical level,however, the argument that major national telecommunications firms will bereduced from four to three under the merger presents an incomplete picture ofthe market. Technology expert Larry Downes eloquently summarized this situationin an April 11 commentary for BNA’s DailyReport for Executives:
Intoday’s dynamic mobile industry, some national wireless carriers are strong insome cities or rural areas and weakor absent from others. Beyond the national carriers, lower-priced providers including MetroPCSand Cricket, as well as established regional companiesincluding US Cellular, are strong in local markets. The Justice-FCC market analysis will consider market structure atthe local level, counting all providers who are genuinely competitive.
Webelieve that such an analysis should prevail over the unfounded fears ofcritics – fears made even less legitimate by the fact that the wirelessindustry in its entirety faces increasingly competitive pressures fromtechnologies such as Skype and voice-chatting via Gmail. Granted, theseservices may not provide absolute alternatives to wireless but serve instead asthird-party providers. Still, as an article in the November//December 2010edition of Global Telecoms Businessreported, “operators see Skype, Google and other over-the-top companies asthreats” and warned:
So themessage is clear: carriers have to move beyond being just bit-transporters.That means offering their paying customers services that they will value – andpay for. Operators should learnfrom Skype, Google and the other over-the-top players, not just by doingsomething of what they do, but also by creating the same sort of customer loyalty shown by those people who spendhours at a time logged into Facebook.
Thesedevelopments may cause many headaches for telecom providers, but consumers andpolicymakers should take reassurance and comfort from them, in that theydemonstrate a vibrant and constantly evolving market which will remain so evenafter the merger.
Telecommunications Firms Are Highly (and Often Excessively)Constrained by Government
Downesand others have likewise demonstrated that AT&T and T-Mobile are, takenseparately, limited operationally by factors such as spectrum allocations.Allowing them to merge could make such network capacity on a finite bandwidthmore efficient.
Spectrumauctioning has largely proven to be a meritorious process for taxpayers. Theactors involved in this bidding made decisions based on many businessconsiderations, and the consequences of those decisions are theirs to bear.Yet, the Commission should not be unmindful of the external burdens governmentcontinues to place upon the telecommunications sector, with spectrum and othermatters.
NTU tooknote of this phenomenon in March of 2004 when commenting on a “Consensus Plan” tomitigate communications interference problems experienced by public safetyagencies. This proposal involved a “swap” and government-supervisedreorganization of spectrum with the firm Nextel, giving us cause to observe:
[T]heprospective 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 thefirst place – to allow competitive bidding to actively establish a real-world,“best value” for airwaves whose sale will benefit taxpayers now (immediateproceeds) and in the future (market-driven private sector communicationsdevelopment).
Unfortunately,despite offering $850 million in financing for the project, Nextel stood to benefitby 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 recallthis particular controversy not to rehash the past, but to illustrate thatspectrum allocation has involved highly contentious regulatory minutiae whichcan severely complicate the auctioning concept. All market actors, includingAT&T and T-Mobile, have had to contend with this complexity, often to theircommercial detriment.
Beyondthese considerations is the continued burden of taxation on telecommunications,which far exceeds the rates typically applied to most retail goods andservices. Earlier this year NTU’s former State Government Affairs Manager JohnStephenson provided readers of our blog with results of a report from economistScott Mackey published in State Tax Notes.Stephenson wrote that “wireless users now pay a combined federal, state, andlocal tax and fee burden of 16.3%, [more than] twice the rate of the averageretail sales tax and the highest wireless rate in six years.” His blog postsounded an ominous alarm:
Withstates and cities in fiscal dire straits, there will be a strong temptation toraise wireless taxes and fees.This is a shame because as wireless taxes and fees increase, the cost of using those goods andservices also increases, which could slow economic activity.
Otherkinds of telecommunications services, including cable and satellite television,can face severe tax loads from governments as well. While the Commission is notnecessarily in a position to directly affect these actions, regulatorypolicymaking cannot operate in a vacuum. We would contend the Commission musttake into account these considerable, artificially-imposed challenges thatcompanies such as AT&T and T-Mobile face, and avoid imposing new ones thatcould erect new barriers to their success.
Universal Service Subsidies Should Be an Entirely Separate Issuefrom this Merger
Potentialissues have been raised, from both inside and outside government, thattaxpayers could in one way suffer from the AT&T/T-Mobile merger. DuringCongressional hearings in May, several lawmakers asserted that AT&T’sstanding promise to aggressively extend broadband coverage could be facilitatedthrough Universal Service Fund (USF) subsidies rather than solely throughprivate investments. Critics likewise wondered aloud if a merged entity wouldreceive a disproportionate windfall of USF resources. Not surprisingly,AT&T’s regulatory vice president has said that her firm’s commitment “isnot contingent on the receipt of USF money.”
Asthe introduction to our comments stated, NTU has long expressed the need forreform of the entire network of government subsidies for telecom service. In a recentarticle for biggovernment.com my colleague, NTU’s Vice President for GovernmentAffairs Andrew Moylan, called attention to one element of this scheme, theRural Utilities Service’s (RUS) broadband loan program:
[I]nits ham-fisted attempt to bring high-speed Internet service to areas wherethere is none, RUS has consistentlygiven money to organizations which build over existing private broadband networks. A 2005 report from the USDAInspector General found that ‘RUShas not maintained its focus on rural communities without preexisting service.’…
Thisshould come as no surprise, since RUS had previously come under criticism for providing taxpayer-backed loans torural electric cooperatives whose lines of business - such as propane sales – seemed to stray far from the basic,limited mission of helping deliverpower to underserved places. …
Unfortunately,warnings from Congress fell on deaf ears. A subsequent USDA Inspector General Report issued in 2009 found littleimprovement in the agency’s strange habit of loaningmoney for projects that build over existing Internet service, rather thanbringing it to those who don’thave any. President Obama has also ignored this tarnished record of gross mismanagement. In fact, hedoubled down and put RUS in charge of doling out $2.4 billion in so-called “broadband stimulus” money.
Webring this example to the Commission’s attention as a reminder that “universalservice” is an entire web of subsidy programs – which we believe to be anoutmoded, duplicative, and wasteful offense to taxpayers. Yet, preciselybecause this structure is so wide-ranging, reform efforts must be holistic andcomprehensive, involving the entire industry.
Hereagain, the Commission does not bear sole responsibility for such an effort,which must be led by elected officials and will involve the work of manyagencies beyond your own. These urgent problems should not serve as adistraction to the merger issue you face; rather, they should serve as anequally urgent plea from taxpayers to begin a separate and distinct policydebate over the future of universal service subsidies. NTU and its members areeager to do so.
Conclusion: This Merger Does Not Harm – and Will Help toServe – the Public Interest
Forthe foregoing reasons, and many others, the proposed merger for AT&T andT-Mobile offers benefits for consumers, the economy, and the nation’scompetitiveness abroad. Moreover, it does not pose a unique fiscal detriment totaxpayers that would recommend the merger’s disapproval. The proper focus ofany such concerns should be a wholesale restructuring (and downsizing) of the government’svast network of mandates and subsidies.
Thankyou for your consideration of and attention to our remarks.
Respectfully,PeteSeppExecutiveVice President