The Obama administration creates a new political market

When the Department of Justice and the Federal Communications Commission weighed the merits of AT&T’s proposed purchase of T-Mobile, they focused almost exclusively on the post-merger competition landscape. As a result, they failed to take into account a key rationale for the proposed deal: T-Mobile’s parent company, Deutsche Telekom (DTE), badly needed to get out of the U.S. market. Why? It concluded it could not compete effectively, and it needed to deploy its capital elsewhere.

Ignoring Deutsche Telekom’s needs, the DOJ and FCC blocked the merger. As a result, an uncompetitive firm is now trapped in a market it wanted to leave.

It didn’t take long, but we are now starting to see some of the unfortunate knock-on effects of the Obama administration’s effort to manage competition in telecommunications.

Deutsche Telekom is evaluating operations elsewhere around the globe as a result of the blocked deal. Recent press reports have the company looking to exit the UK market in an effort to raise much needed cash. According to one news account, “The former German phone monopoly had planned to use the proceeds [from the sale of T-Mobile to AT&T] to cut debt by 13 billion euros … Deutsche Telekom also needs funds to upgrade fiber and wireless networks in Germany and other European markets.”

Instead of Deustsche Telekom shareholders being free to allocate capital as they see fit, American regulators have forced them to prop up a wounded subsidiary, needlessly penalizing DTE shareholders.

Not only that, but Deutsche Telekom’s experience in the U.S. is a warning to other large companies to think twice before taking big risks in the American market, a consequence that will ultimately hurt U.S. consumers.

Unable to compete effectively in the U.S. private market, T-Mobile now has no choice but to compete in America’s political market. And this is where new troubles begin for American consumers.

For example, T-Mobile is now urging federal regulators to block Verizon’s planned acquisition of spectrum from cable providers such as Comcast and Time Warner. Keep in mind that Verizon is pursuing its deal with cable firms, just as AT&T pursued its purchase of T-Mobile, in an effort to respond to exploding customer demand for wireless data and services. Blocking the deals means customer needs won’t be met.

T-Mobile is now also pressuring the FCC to manipulate proposed spectrum auctions in their favor. This move is particularly worrisome.

In a rare bi-partisan accomplishment, Congress recently paved the way to free up spectrum to go to its highest value uses. And so television broadcasters and others who occupy airwaves in declining industries will have the incentive to sell their spectrum to entrepreneurs and established companies who can put it to better use, particularly for wireless broadband. It’s a first big step toward addressing the spectrum crunch—too much data flowing over too little bandwidth—that threatens the growth and ultimate success of wireless platforms.

But T-Mobile hopes to have regulators tip the scales in their favor, establishing rules that will enable them to acquire spectrum at below-market rates. They need to win in the political arena because they’ve been unable to compete effectively enough in the market.

One can hardly blame T-Mobile for its efforts. Deutsche Telekom is a fine company and its management tried to advance its shareholder interests in a responsible manner by exiting the American market via merger (a time-honored method of market exit). But Washington turned the telecom market into a kind of regulatory roach motel—you go in but never come out.

So if regulators hoped to generate “competition,” they’ve done so. The problem is they’ve generated political competition; the kind that, if history is any guide, results in higher prices and a loss of innovation for consumers. It also diverts valuable corporate resources—money and brainpower—that could be directed toward much more productive uses.

Obama administration regulators seem to believe that no scenario could be worse than AT&T and Verizon gaining additional market share. But the political manipulation of the market, in an effort to prop up uncompetitive firms or products, rarely advances consumer welfare. We have seen that several times with the Obama administration. Think of political manipulation of energy markets, with its wasteful flops like Solyndra; or a politicized auto market and the expensive push for uncompetitive electric cars.

Besides, the Federal Trade Commission, the federal agency designed to handle abusive trade practices, can address any hazards that may arise from overly strong market positions enjoyed by AT&T or Verizon.

An auction of spectrum should do two important things—distribute airwaves to those best able to realize their value, and fill the Treasury’s coffers to the benefit of taxpayers. Ensuring the auctions are open to all eligible bidders, free of political strings, is the best path to that outcome.

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Nick
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