[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
HOW WILL THE PROPOSED MERGER BETWEEN AT&T
AND T-MOBILE AFFECT WIRELESS
TELECOMMUNICATIONS COMPETITION?
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
INTELLECTUAL PROPERTY,
COMPETITION, AND THE INTERNET
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
----------
MAY 26, 2011
----------
Serial No. 112-45
----------
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.govFOR
SPINE deg.
HOW WILL THE PROPOSED MERGER BETWEEN AT&T AND T-MOBILE
AFFECT WIRELESS TELECOMMUNICATIONS COMPETITION?
HOW WILL THE PROPOSED MERGER BETWEEN AT&T AND T-MOBILE AFFECT WIRELESS
TELECOMMUNICATIONS COMPETITION?
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
INTELLECTUAL PROPERTY,
COMPETITION, AND THE INTERNET
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
MAY 26, 2011
__________
Serial No. 112-45
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
----------
U.S. GOVERNMENT PRINTING OFFICE
66-543 PDF WASHINGTON : 2011
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800;
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Washington, DC 20402-0001
COMMITTEE ON THE JUDICIARY
LAMAR SMITH, Texas, Chairman
F. JAMES SENSENBRENNER, Jr., JOHN CONYERS, Jr., Michigan
Wisconsin HOWARD L. BERMAN, California
HOWARD COBLE, North Carolina JERROLD NADLER, New York
ELTON GALLEGLY, California ROBERT C. ``BOBBY'' SCOTT,
BOB GOODLATTE, Virginia Virginia
DANIEL E. LUNGREN, California MELVIN L. WATT, North Carolina
STEVE CHABOT, Ohio ZOE LOFGREN, California
DARRELL E. ISSA, California SHEILA JACKSON LEE, Texas
MIKE PENCE, Indiana MAXINE WATERS, California
J. RANDY FORBES, Virginia STEVE COHEN, Tennessee
STEVE KING, Iowa HENRY C. ``HANK'' JOHNSON, Jr.,
TRENT FRANKS, Arizona Georgia
LOUIE GOHMERT, Texas PEDRO R. PIERLUISI, Puerto Rico
JIM JORDAN, Ohio MIKE QUIGLEY, Illinois
TED POE, Texas JUDY CHU, California
JASON CHAFFETZ, Utah TED DEUTCH, Florida
TIM GRIFFIN, Arkansas LINDA T. SANCHEZ, California
TOM MARINO, Pennsylvania DEBBIE WASSERMAN SCHULTZ, Florida
TREY GOWDY, South Carolina
DENNIS ROSS, Florida
SANDY ADAMS, Florida
BEN QUAYLE, Arizona
[Vacant]
Sean McLaughlin, Majority Chief of Staff and General Counsel
Perry Apelbaum, Minority Staff Director and Chief Counsel
------
Subcommittee on Intellectual Property, Competition, and the Internet
BOB GOODLATTE, Virginia, Chairman
BEN QUAYLE, Arizona, Vice-Chairman
F. JAMES SENSENBRENNER, Jr., MELVIN L. WATT, North Carolina
Wisconsin JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina HOWARD L. BERMAN, California
STEVE CHABOT, Ohio JUDY CHU, California
DARRELL E. ISSA, California TED DEUTCH, Florida
MIKE PENCE, Indiana LINDA T. SANCHEZ, California
JIM JORDAN, Ohio JERROLD NADLER, New York
TED POE, Texas ZOE LOFGREN, California
JASON CHAFFETZ, Utah SHEILA JACKSON LEE, Texas
TIM GRIFFIN, Arkansas MAXINE WATERS, California
TOM MARINO, Pennsylvania DEBBIE WASSERMAN SCHULTZ, Florida
SANDY ADAMS, Florida
[Vacant]
Blaine Merritt, Chief Counsel
Stephanie Moore, Minority Counsel
C O N T E N T S
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MAY 26, 2011
Page
OPENING STATEMENTS
The Honorable Bob Goodlatte, a Representative in Congress from
the State of Virginia, and Chairman, Subcommittee on
Intellectual Property, Competition, and the Internet........... 1
The Honorable Melvin L. Watt, a Representative in Congress from
the State of North Carolina, and Ranking Member, Subcommittee
on Intellectual Property, Competition, and the Internet........ 2
The Honorable Lamar Smith, a Representative in Congress from the
State of Texas, and Chairman, Committee on the Judiciary....... 4
The Honorable John Conyers, Jr., a Representative in Congress
from the State of Michigan, Ranking Member, Committee on the
Judiciary, and Member, Subcommittee on Intellectual Property,
Competition, and the Internet.................................. 5
WITNESSES
Randall Stephenson, Chairman, Chief Executive Officer, and
President, AT&T, Inc.
Oral Testimony................................................. 14
Prepared Statement............................................. 16
Rene Obermann, CEO, Deutsche Telekom AG
Oral Testimony................................................. 21
Prepared Statement............................................. 23
Steven K. Berry, President and CEO, Rural Cellular Association
Oral Testimony................................................. 26
Prepared Statement............................................. 28
Parul P. Desai, Policy Counsel, Consumers Union
Oral Testimony................................................. 41
Prepared Statement............................................. 43
Joshua D. Wright, Professor, George Mason University School of
Law
Oral Testimony................................................. 88
Prepared Statement............................................. 91
Andrew I. Gavil, Professor, Howard University School of Law
Oral Testimony................................................. 116
Prepared Statement............................................. 118
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Prepared Statement of the Honorable John Conyers, Jr., a
Representative in Congress from the State of Michigan, Ranking
Member, Committee on the Judiciary, and Member, Subcommittee on
Intellectual Property, Competition, and the Internet........... 5
Material submitted by Parul P. Desai, Policy Counsel, Consumers
Union.......................................................... 54
Material submitted by the Honorable Melvin L. Watt, a
Representative in Congress from the State of North Carolina,
and Ranking Member, Subcommittee on Intellectual Property,
Competition, and the Internet.................................. 143
APPENDIX
Material Submitted for the Hearing Record
Response to Post-Hearing Questions from Randall Stephenson,
Chairman, Chief Executive Officer, and President, AT&T, Inc.... 199
Response to Post-Hearing Questions from Rene Obermann, CEO,
Deutsche Telekom AG............................................ 212
Response to Post-Hearing Questions from Steven K. Berry,
President and CEO, Rural Cellular Association.................. 214
Response to Post-Hearing Questions from Parul P. Desai,
Communications Policy Counsel, Consumers Union................. 313
Response to Post-Hearing Questions from Joshua D. Wright,
Professor, George Mason University School of Law............... 315
Response to Post-Hearing Questions from Andrew I. Gavil,
Professor, Howard University School of Law..................... 320
HOW WILL THE PROPOSED MERGER BETWEEN AT&T AND T-MOBILE AFFECT WIRELESS
TELECOMMUNICATIONS COMPETITION?
----------
THURSDAY, MAY 26, 2011
House of Representatives,
Subcommittee on Intellectual Property,
Competition, and the Internet,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:35 a.m., in
room 2141, Rayburn Office Building, the Honorable Bob Goodlatte
(Chairman of the Subcommittee) presiding.
Present: Representatives Goodlatte, Smith, Quayle,
Sensenbrenner, Coble, Chabot, Issa, Pence, Jordan, Poe,
Chaffetz, Griffin, Marino, Adams, Watt, Conyers, Deutch,
Sanchez, Nadler, Lofgren, Jackson Lee, and Waters.
Staff present: (Majority) Holt Lackey, Counsel; Olivia Lee,
Clerk; and Stephanie Moore, Minority Counsel.
Mr. Goodlatte. Good morning and welcome to this hearing of
the Subcommittee on Intellectual Property, Competition, and the
Internet.
This hearing poses the question: How will the proposed
merger between AT&T and T-Mobile affect wireless
telecommunications competition?
Companies merge and acquire one another every day in
America. In a free market economy like ours, companies are
generally free to organize themselves and their assets as they
see fit. While there is general freedom for companies to merge,
even if the merger forms a large company, the antitrust laws do
place some limits on these transactions. The specific limit is
set by section 7 of the Clayton Act which prohibits mergers
that substantially lessen competition or tend to create a
monopoly.
This strikes the right balance. Competition is the backbone
of a successful, free market. Competition spurs innovation and
ensures that the market allocates resources efficiently. A free
market cannot work without competition, and a merger that
decreases competition weakens the free market.
The Department of Justice is in the process of reviewing
the proposed merger between AT&T and T-Mobile to determine if
it is anticompetitive. In general terms, the Department will
block the merger if it believes that after the merger AT&T or
Verizon would have enough market power to raise prices,
decrease output, or diminish innovation without being held to
account by competition.
AT&T and T-Mobile argue that this merger will improve
competition. They believe that the merger will let them
increase their spectrum capacity and network range so that they
can increase output and compete more vigorously for customers.
Past mergers in the wireless industry have not led to price
increases, output reductions, or less innovation. Over the past
decade, the wireless market has been marked by innovation,
expansion, and lower prices despite a series of mergers that
significantly consolidated the industry.
But there are legitimate questions about whether this
merger could move the wireless market past an anticompetitive
tipping point. This merger results in more concentration than
any previous merger in the wireless market. The merger combines
the second and fourth largest wireless carriers to create the
largest carrier which will control over 40 percent of the
wireless market. Unlike previous mergers, this merger is
between two nationwide wireless networks, and it will reduce
the number of nationwide wireless networks from four to three.
Can the wireless industry remain competitive with this
level of concentration?
AT&T, like Verizon, controls much of the wireline telephone
networks that were originally built by the old Bell monopoly.
Other wireless carriers have to pay AT&T and Verizon to carry
their calls and data over this wireline network. This service
is called ``backhaul.'' Will AT&T and Verizon be able to
manipulate their power in the backhaul market to raise prices
on other wireless companies and stifle competition?
Smaller providers who only have regional networks have to
enter roaming agreements so that their customers can have
service when they venture beyond network range. Will this
merger give AT&T market power to raise roaming prices?
Increasingly wireless companies enter into agreements with
mobile device manufacturers to be the exclusive service
provider for a new device. Famously, for years after its
introduction, the iPhone was only available with AT&T service.
Will AT&T and Verizon be able to leverage their wireless market
share to deny the best devices to their competitors or to
stifle handset innovation?
It is ultimately the Department of Justice's job to answer
these and other questions raised by this merger. The Department
should follow the facts and the law in an evenhanded manner and
block the merger only if they conclude that it is
anticompetitive.
Congress has no formal role in the DOJ or FCC merger review
process, but hearings like this provide a public venue to ask,
answer, and debate these questions which are of great
importance to American consumers. I look forward to the
testimony of the witnesses, the debate among the Members of the
Committee, and in the end, a wise decision by the Department of
Justice that ensures a competitive future for wireless
communications in America.
It is now my pleasure to recognize the Ranking Member of
the Subcommittee, the gentleman from North Carolina, Mr. Watt.
Mr. Watt. I thank you, Mr. Chairman.
The proposed merger between AT&T and T-Mobile raises
important issues of competition policy in the wireless space.
Over the last 2 decades, the wireless industry has grown
exponentially from just over 3 million subscribers in the late
1980's to almost 300 million today.
In the current wireless market, four major carriers provide
service throughout the country: Verizon, AT&T, Sprint, and T-
Mobile, in order of market share. Therefore, when the
horizontal merger between the second and fourth largest
wireless carriers was announced in late March, a predictable
frenzy of concerns about the probable impact of the merger on
competition and consumers erupted in the press and in general
discussion.
Will the proposed merger result in an unregulated or
heavily regulated duopoly of Verizon and AT&T with a combined
share of almost 76 percent of the market?
What, in fact, is the relevant market definition?
Will prices increase?
What are other potential impacts on consumers, short- and
long-term?
What will be the impact on innovation?
Will Verizon and AT&T corner the market on handsets,
applications, and other devices?
How will access to roaming and backhaul services be
impacted?
Will future spectrum auctions be less competitive or
otherwise negatively impacted?
How will the merger impact younger and poorer customers,
disproportionately minority based on recent reports, who rely
on their wireless service to access the Internet?
What about jobs? Are the synergies identified by the merger
participants a euphemism for massive job loss?
These are all legitimate and complicated questions, and
they are precisely why the Federal Communications Commission
and the Department of Justice are conducting independent, fact-
intensive investigations into the public interest and
competitive implications of the deal.
The Department of Justice conducts its review under the
antitrust laws, while the FCC acts pursuant to the
Communications Act to assess whether an industry merger is
within the public interest. Presumably what will be the impact
on consumers? The Department of Justice's evaluation alone is
projected to last up to 1 year.
My belief in this context is that we should allow these
agencies to do their jobs unfettered by political pressure from
Congress. While I believe this hearing will educate Members of
Congress and the public, I also know that we will never have
access to all the facts and data on which the agencies base
their determination of whether to approve or disapprove the
merger with or without conditions.
I appreciate the Chairman's scheduling the hearing,
however, because I believe it enables the public to learn more
about what is at stake, and an informed public is an
incentivized public and an educated and active public is good
for democracy. So it is in the spirit of acquiring as much
information as we can in this limited forum to develop a
publicly available record that I look forward to hearing from
our panel today.
And with that, Mr. Chairman, I yield back the balance of my
time.
Mr. Goodlatte. I thank the gentleman.
And now it is my pleasure to recognize the Chairman of the
Judiciary Committee, the gentleman from Texas, Mr. Smith.
Mr. Smith. Thank you, Mr. Chairman.
The past 2 decades have seen astonishing growth and
innovation in wireless communications. In 1989, just over 3
million Americans had wireless telephones. Today there are
nearly 300 million wireless subscribers. A cell phone is no
longer just for making voice calls. Americans now use wireless
technology to download books and music, send email and text,
surf the Web, and stream movies and TV shows. This wireless
revolution, together with the Internet revolution, promises to
transform the spread of ideas and information more than any
development since the printing of the Gutenberg Bible.
We can thank competition for this world-changing
innovation. Competition has spurred invention and improvements
at every level of the wireless economy. It has led to new
devices, applications, and networks that were the stuff of
science fiction not long ago. Wireless competition has produced
miracles in the recent past. Today's hearing is about wireless
competition's future.
The Department of Justice is currently reviewing the
proposed merger between AT&T and T-Mobile to determine if it
will lessen competition. This proposed merger means tremendous
change for the wireless industry and millions of consumers.
That is why it is important to proceed carefully and make sure
we get it right.
A merger of this size, which would concentrate over 40
percent of the wireless market in one company, raises some
questions. AT&T and T-Mobile argue that the merger will
actually increase competition. They say the merger will allow
them to unleash the next generation of wireless service more
efficiently than either could alone.
And AT&T says that it is facing a spectrum crunch brought
about by the advent of smart phones and tablet computers that
transmit large amounts of data. AT&T argues that its spectrum
shortage will limit its ability to compete effectively unless
the merger is approved. AT&T and T-Mobile argue that the merger
will solve both AT&T's spectrum crunch and T-Mobile's lack of a
4G LTE network.
Combined, AT&T and T-Mobile hope to improve service,
innovate, and expand their network into underserved rural
areas. In their vision wireless companies, including upstarts
like MetroPCS and LightSquared, will continue to compete,
innovate, and decrease prices.
Opponents of the merger paint a different picture. Many
wireless competitors and consumer advocates believe that a more
concentrated wireless industry will reduce competition, stifle
innovation, and raise prices. In particular, merger opponents
worry about access to new devices, roaming agreements, and
backhaul services.
It is the Department of Justice's job to predict which of
these very different pictures of the merger is more likely. The
Department should make this prediction based on a fair analysis
of the facts, economics, and the law.
A single congressional hearing cannot examine all of the
detailed economic evidence that is needed to accurately predict
the effects of this merger, but this open forum should serve to
clarify and illuminate the issues presented by this merger. The
Americans deserve the full picture.
Thank you, Mr. Chairman. I will yield back.
Mr. Goodlatte. I thank the gentleman.
The Ranking Member of the full Committee, the gentleman
from Michigan, Mr. Conyers, is recognized.
Mr. Conyers. Thank you, Chairman Goodlatte.
I applaud the comments that have been made before me, and I
particularly agree with Chairman Smith in suggesting that we
may need more than this hearing to continue our examination of
the merger.
Now, as one who is widely known for having an open mind
about issues, I want to confess that I have never met a merger
that I liked. They always cost jobs and they create less
competition and they hurt consumers.
That being said, that is what makes the hearing so
important here because we will never know what the Justice
Department
and FCC did to come to their agreements. At least we will get a
glimpse of what the corporate leaders claim their rationale is
for this merger.
There are a lot of people that need to be heard here:
Communications Workers of America and Sprint, labor, the
president of the UAW, Bob King.
Now, we concede that AT&T has a unionized workforce. That
makes them good corporate people, and they are more responsible
than some of their competitors. We give them all that kind of
credit.
But here is the concern here. Everything that we are
talking about that is going to happen that is so great from
this merger is really already accomplishable. You don't need a
merger to do what you claim you need the merger for to
accomplish. What are the two-page ads going on on the Hill
papers today? We need the merger to reach 97 percent of
Americans instead of the 80 percent that would be covered under
the current plan.
Industry analysts and competitors point to the fact that
AT&T currently has spectrum holdings to already accomplish this
laudable goal. They do not need T-Mobile to do it. If the
acquisition is allowed by the regulators, the deal would give
AT&T and Verizon over 70 percent of the wireless market.
And what about the little guys? Where does creation come
from in this business? It doesn't come from the biggest people
unless they buy up the small people. It comes from the small
people. And so we are missing a big opportunity here if we
don't look very carefully at what is going to happen.
And what is the other result? The next biggest people have
got to do the same thing that they are proposing here today.
This won't be the last one. If this gets through, there is
another one on the drawing boards already. Who doesn't know
that?
And so I will submit the rest of my statement so we can
hear the witnesses.
[The prepared statement of Mr. Conyers follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Goodlatte. I thank the gentleman.
Without objection, all other opening statements will be
made a part of the record.
We have a very distinguished panel of witnesses today. Each
of the witnesses' written statements will be made a part of the
record in its entirety. And I ask that each witness summarize
his or her testimony in 5 minutes or less. To help you stay
within that time, there is a timing light on your table. When
the light switches from green to yellow, you will have 1 minute
to conclude your testimony. When the light turns red, it
signals that the witness' 5 minutes have expired.
It is the custom of this Committee to swear in our
witnesses before their testimony. So at this time, I would ask
them to stand and be sworn.
[Witnesses sworn.]
Mr. Goodlatte. Thank you and please be seated.
Our first witness is Randall Stephenson, Chairman, CEO, and
President of AT&T, Inc.
Our second witness is Rene Obermann, CEO of Deutsche
Telekom AG, the German-based parent company of T-Mobile USA.
Our third witness is Steven Berry, President and CEO of the
Rural Cellular Association, a trade association made up of
nearly 100 wireless carrier companies ranging from small, rural
carriers to larger carriers like Sprint.
Our fourth witness is Parul Desai, Communications Policy
Counsel for Consumers Union, publisher of Consumer Reports
magazine.
Our fifth witness is Professor Joshua Wright of George
Mason School of Law. Professor Wright focuses academic work on
antitrust law and holds a J.D. and Ph.D. in economics from
UCLA.
Our sixth and final witness is Professor Andrew Gavil of
Howard University School of Law where he has taught antitrust
law since 1989. Professor Gavil received his J.D. from
Northwestern University School of Law.
We will be pleased to start with Mr. Stephenson. Welcome.
TESTIMONY OF RANDALL STEPHENSON, CHAIRMAN,
CHIEF EXECUTIVE OFFICER, AND PRESIDENT, AT&T, INC.
Mr. Stephenson. Thank you, Chairman Smith and Chairman
Goodlatte and Ranking Member Conyers and Ranking Member Watt,
other Members of the Subcommittee.
I am Randal Stephenson, Chairman and CEO of AT&T, and I do
want to thank you for the opportunity to talk with you about
the consumer benefits of AT&T's acquisition of T-Mobile USA
from Deutsche Telekom because, first and foremost, this
transaction is about consumers. It is about specifically
keeping up with consumer demand. It is about having the
capacity to drive innovation and competitive prices. It is
about giving consumers what they expect and that is fewer
dropped calls, faster speeds, and access to high-speed fourth
generation LTE mobile Internet service, and that is whether
they live in a large city, in a small town, or out in the
country.
It is about achieving these benefits purely with private
capital, helping to deliver a private market solution to a very
important public policy objectives, as we take fourth
generation LTE to more than 97 percent of all Americans.
And I would underscore the fact that this means good jobs,
good jobs for employees of the combined company, good jobs for
the vendors who support our efforts, and good jobs in the
communities served by the network that will result from this
investment.
Over the past 4 years, we have seen a revolution in
wireless. Smart phones and mobile apps have exploded.
Innovation has cycled at an amazing pace. Consumers and the
economy have all benefitted, and our network, more than any
other network, has carried the load. In fact, over the past 4
years, data volumes on our mobile network have shot up by 8,000
percent.
To meet this demand, over this same 4-year period, AT&T
invested more in the United States than any other public
company, $75 billion in capital. And we continue to invest at a
very aggressive pace because the next wave is now already upon
us and it is in the form of tablets and it is in the form of
services like mobile high-definition video. In 2015, just 4
years from now, by the time we get to February of 2015, we
estimate our network will have already carried as much mobile
traffic as we carried for the entire year in 2010. And that is
how fast the mobile Internet is growing.
Just about the only thing that we know of that can slow
down this cycle is the lack of capacity to meet the demand. As
FCC Chairman Genachowski has said--and I would like to quote
him--if we do nothing in the face of the looming spectrum
crunch, many consumers will face higher prices as the market is
forced to respond to supply and demand and frustrating service.
End quote. None of us want that, and I do applaud the FCC and
Members of Congress for their leadership on this issue, but the
fact is even with everyone's best efforts, it will be several
years before significant amounts of new spectrum are placed
into service.
So to meet growing consumer demand we have to find more
ways to get more capacity from the existing spectrum, and that
is exactly what this combination will do. Our two companies
have very complementary assets and spectrum, which means
combining them will create much more network capacity than we
have operating independently. More capacity means improved
service. And it is a very basic concept. In any industry,
greater capacity is the fundamental driver of sustained
vigorous competition, innovation, and pricing.
The U.S. wireless marketplace is among the most competitive
in the world and it will remain so. Over the past decade U.S.
wireless prices have steadily and dramatically come down, and
this transaction allows that trend to continue.
With this transaction, we are also committed to providing
LTE mobile Internet service to more than 97 percent of the U.S.
population. That is nearly 55 million more Americans than our
pre-merger plans and millions more than any other provider has
committed to at this point. We all understand the benefits this
will bring to small towns and rural communities in areas like
education, health care, and economic development. And we will
deliver these benefits with the only unionized workforce of any
major wireless carrier in America.
Current T-Mobile customers will be able to retain their
existing rate plans, and they will gain access to LTE service
which is something T-Mobile had no clear path to offer on a
standalone basis.
So, Mr. Chairman, that is a quick overview. It is some of
the reasons this transaction has won strong support from
unions, minorities, local representatives, as well as industry
experts.
So, again, I thank you for the opportunity and I look
forward to your questions.
[The prepared statement of Mr. Stephenson follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Goodlatte. Thank you, Mr. Stephenson.
Mr. Obermann, welcome.
TESTIMONY OF RENE OBERMANN, CEO,
DEUTSCHE TELEKOM AG
Mr. Obermann. Thank you, Chairman Goodlatte, Chairman
Smith, Ranking Member Watt, Ranking Member Conyers, and Members
of the Subcommittee. My name is Rene Obermann and I am Chief
Executive Officer of Deutsche Telekom AG based on Bonn,
Germany. I appreciate the opportunity to testify today on
behalf of Deutsche Telekom.
First of all, I fully agree with Mr. Stephenson's
introductory comments, and I firmly believe that this
transaction is the best possible outcome not only for DT, for
our group, for T-Mobile USA, and for AT&T, but for our
customers and for wireless competition and for innovation in
the United States.
Before I discuss the substantial benefits of this
transaction for T-Mobile's customers, I would like to first
provide some background on our decision to proceed with the
sale of T-Mobile.
Since Deutsche Telekom's acquisition of VoiceStream almost
exactly 10 years ago, our U.S. business has faced intense and
evolving competition in the wireless sector. In recent years,
in particular, T-Mobile USA has faced increasingly fierce
competition from a growing number of players, including not
only large facility-based competitors but also smaller ``no
contract'' value players, including not only large facility-
based but value players and others such as virtual network
operators, mobile virtual network operators, regional wireless
carriers, and so-called over-the-top providers that include
mobile voice-over-Internet solutions such as Skype which is now
being acquired by Microsoft.
T-Mobile has been caught in the middle of this dynamic
marketplace and has had an increasingly difficult time
competing. We have lost market share over the past 2 years. In
the most recent quarter alone, we lost 471,000 contract
customers while other competitors are growing rapidly, and
while other competitors are moving quickly to build out and to
develop their new LTE networks, T-Mobile lacks a clear path to
LTE deployment.
To meet the exponential growth in demand for bandwidth and
network capacity, T-Mobile will need to move to LTE to remain
competitive, but the company simply does not have access to the
wireless spectrum needed to deploy LTE effectively. T-Mobile
has already dedicated its existing spectrum resources to its
less spectrally efficient GSM and HSPA+ networks. As it is, the
company is likely to face a spectrum crunch in several key
markets in the coming years on those technologies alone, even
without the move to LTE.
With this backdrop, T-Mobile and Deutsche Telekom had to
make some difficult decisions. Remaining a competitive force in
the U.S. wireless marketplace was going to require a very
significant additional capital investment, both in spectrum and
in infrastructure. However, it has become increasingly apparent
that the prospect of additional spectrum becoming available for
acquisition is uncertain at best. Even if available, such an
acquisition would force Deutsche Telekom to reallocate funds
from our core European operations into T-Mobile USA, which
would be very difficult for us given our overall group debt
situation and our high capital investment needs in Europe.
This transaction resolves these issues in a manner that
delivers more value with substantially less execution risks
both to Deutsche Telekom and to T-Mobile's customers than any
other alternative which is theoretically available to us. It
allows DT to advance its international business strategy while
making available the necessary resources to modernize and
upgrade our core businesses in Europe. And as a significant
shareholder of AT&T after the transaction, this transaction
will also mean that Deutsche Telekom maintains an interest in
and can continue to contribute to the rapidly growing and
highly competitive United States wireless business.
At the same time, the transaction will mean significant
benefits for our U.S. T-Mobile customers, and let me highlight
just a few of these benefits.
First, T-Mobile customers will enjoy substantial
improvements in their coverage through access to AT&T's low-
band 850 megahertz spectrum. In particular, this will mean
significantly improved deep in-building and rural coverage.
Second, the transaction will result in near-term network
quality improvements for T-Mobile customers. Merging the
companies' complementary networks and polling their spectrum
will very quickly lead to significant operating efficiencies
which will mean better coverage, fewer dropped and blocked
calls, and faster and more consistent data downloads,
particularly at peak times and in high-demand locations.
Third, the transaction will further give the combined
company the resources and spectrum it needs to broadly deploy
next generation 4G-LTE service to more than 97 percent of
Americans. T-Mobile on its own simply did not have the spectrum
to roll out its own competitive nationwide LTE network.
And fourth, the transaction will allow the combined company
to increase capacity and to reduce costs significantly which
will drive prices down and enhance opportunities for
innovation, making the U.S. an even more competitive and
innovative marketplace. As I have already described, the U.S.
wireless marketplace is extremely dynamic and competitive today
and it will become even more so with the capacity growth and
cost savings which are made possible by this transaction.
To conclude, Deutsche Telekom sale of T-Mobile USA to AT&T
is a true win-win solution. It not only advances Deutsche
Telekom's business strategy but also directly addresses T-
Mobile USA's strategic challenges and delivers significant
benefits to T-Mobile customers and the wireless competition in
general.
Thank you for your time. I welcome the questions.
[The prepared statement of Mr. Obermann follows:]
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Mr. Goodlatte. Thank you, Mr. Obermann.
Mr. Berry, welcome.
TESTIMONY OF STEVEN K. BERRY, PRESIDENT AND CEO, RURAL CELLULAR
ASSOCIATION
Mr. Berry. Good morning, Chairman Goodlatte, Ranking Member
Watt, Chairman Smith, and Ranking Member Conyers. Thank you for
the opportunity to testify today.
The AT&T takeover of T-Mobile is a game-changer. This
anticompetitive shock wave will reverberate through the entire
wireless industry. If approved, this merger virtually
guarantees a wireless duopoly. It harms competitive carriers
and consumers. It frustrates the goal of mobile broadband
deployment across our Nation and will require re-regulation of
the wireless industry.
RCA represents competitive carriers, rural, regional,
urban, and suburban carriers, all across the Nation. Today I
testify on behalf of nearly 100 carrier members and 145 vendor/
supplier members of RCA, many of which are small businesses who
compete for customers with robust service offerings, own and
build their own wireless networks, and remain involved in their
local communities. The David versus Goliath competition against
the largest national carriers is nothing new, but if this
proposed takeover is approved, it will be a bridge too far. The
advantages of size, scale, vertical integration in the wireless
value chain will overwhelm our Nation's local competitive
carriers.
Let me offer five specific reasons why this transaction
should not happen.
It eliminates meaningful competition. This takeover would
consolidate the industry to the extreme: two large carriers,
AT&T and Verizon, who control almost 80 percent of the market.
Such consolidation would leave these consumers at the mercy of
a duopoly, and history tells us the results. Customers,
consumers will face price increases, reduced innovation, and
fewer choices.
It disrupts data roaming. Voice roaming and now data
roaming are fundamental building blocks of our Nation's
wireless networks. ``Roaming'' is just another word for
``national mobility.'' Without it, some customers will not have
service. Ask yourself which of your constituents would want to
buy a phone that only works in your congressional district.
That is why wireless is a national market.
AT&T operates a digital technology called GSM and is
proposing to buy the only other national GSM provider, T-
Mobile. Therefore, if this deal is approved, small GSM
providers face an AT&T roaming monopoly immediately. If you use
the other technology, CDMA technology, you have only two
roaming choices, Verizon Wireless or Sprint Nextel. If this
deal is approved, how long before Verizon attempts to buy
Sprint Nextel? This does not look or sound like a competitive
marketplace for the future.
Three, it limits innovation technology and
interoperability. Just as all consumers want service
nationwide, they also want new, innovative devices. Imagine the
market power when two big companies control 80 percent of the
wireless market. Will any of the smaller wireless carriers who
serve rural towns across our Nation have a fair shot at getting
these new, latest devices? Well, I think not. Apple will tell
you that the iPhone is not exclusive, but yet only AT&T and
Verizon offer the iPhone after 4 years.
Number four, it concentrates spectrum. This takeover will
concentrate spectrum in the hands of AT&T and will do nothing
in itself to bring 4G broadband services to rural America. T-
Mobile owns few licenses in rural markets. AT&T already holds
the prime low-band spectrum needed to serve rural areas. Today
without this deal, AT&T could build out the low-band spectrum
it already owns and commit to support ubiquitous data roaming
and harmonization across the 700 megahertz band, and that would
help rural America. Bringing wireless broadband to rural
America should not be held hostage in an attempt to win
regulatory favor for this anticompetitive deal.
And finally, eliminating competition means additional
regulation. Today's light touch regulatory regime is founded on
the presence of vigorous competition. Turn competition into a
duopoly and Congress and the FCC will have to reevaluate this
light tough regulatory regime. The FCC will seek to increase
regulatory involvement to artificially maintain the benefits
competition should bring to your constituents.
Please recognize this proposed takeover for what it is: a
horizontal merger. It entirely eliminates a national competitor
and it threatens the ability of all other carriers to provide
competitive services. This takeover cannot be conditioned into
acceptance and must be stopped.
And I welcome any questions that you may have. Thank you.
[The prepared statement of Mr. Berry follows:]
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Mr. Goodlatte. Thank you, Mr. Berry.
Ms. Desai, welcome.
TESTIMONY OF PARUL P. DESAI,
POLICY COUNSEL, CONSUMERS UNION
Ms. Desai. Thank you, Chairman Goodlatte, Ranking Member
Watt, and Members of Congress for this forum and for this
opportunity to talk a little bit about how this transaction
will affect consumers.
For 75 years, Consumers Union has been working to ensure
that consumers do have access to a fair marketplace for all
consumers. However, we do have great concerns about the
negative effect that this will have on consumers and in the
fair marketplace, especially the effect that it will have on
meaningful choice, consumers' pocketbooks, quality service, and
access to innovative products.
My written testimony goes into detail on all those factors,
but for the remainder of my 5 minutes, I will focus on two main
issues: prices and choice.
Mobile devices and mobile broadband are becoming integral
in people's lives. Mobile broadband is especially a critical
entry point and sometimes the only entry point to the Internet
for many communities such as rural communities, communities of
color, and low-income communities. The last thing consumers
need right now is a takeover that will result in higher prices
for consumers, many of whom are already struggling in a very
tight economy. Our magazine, Consumer Reports, has compared the
plans between AT&T and T-Mobile and for comparable plans, our
magazine has found that T-Mobile offers up to $15 to $50 a
month plans that are cheaper than AT&T's. For most Americans
these days, $15 to $50 a month can go a long way. $15 can be a
child's school lunch for a week. $50 could be the price of
filling up a tank of gas.
It is inevitable that T-Mobile customers who are already
paying lower prices than they would on AT&T's plan will see
rate hikes, but we are also concerned about the ripple effect
this will have on all consumers. If two companies are allowed
to control 80 percent of the market with little to no consumer
protections, there is very little reason to believe that these
two companies will discipline each other when it comes to
prices. We already see that Verizon and AT&T don't discipline
each other when it comes to prices. So there is no reason why
they would do so moving forward.
So faced with higher prices, consumers will have difficult
choices to make. Do they just forgo access to mobile broadband
or do they pay the higher prices and continue to make even more
sacrifices than they do now to make ends meet?
This leads me to my second point, choice. Under this
merger, if consumers are unhappy with the prices or the
services that they are getting from the two big providers,
where can they go? Well, first, the consumer would have to
finish his or her long 2-year term wireless contract or be
willing to pay the early termination fee to break that
contract. Long-term contracts and ETF's discourage consumers
from one day just taking their phone to another service
provider.
But even if you get over that hurdle, you have to assume
that the consumer can get the phone that they want from a
different carrier. We know today that more and more consumers
are choosing their wireless provider based on the handset that
they are able to get from a provider. However, due to exclusive
contracts and the inability of phones to operate from one
network to another, many carriers, especially those represented
by Steve here today, cannot get the latest and greatest devices
that consumers actually want. And that trend would only be
exacerbated by the merger. With AT&T and Verizon able to
control 80 percent of the market, more than ever they will be
able to force handset makers, who have to rely on economies of
scale to reach customers to succeed--they will be forced into
exclusive deals. So if the consumer wants that latest popular
device, she will have no choice but to stick with AT&T or
Verizon.
On top of this, AT&T and Verizon will have more power over
which devices they allow on their network, what features they
allow on these devices, or what applications are available in
the App Store. So consumers will find themselves with limited
choices for applications and probably face less innovative
products.
We have seen this story before. Back in 1982 when the FCC
first made cell phone licenses available, it decided to award
two licenses in each cellular market. One license was awarded
to the local incumbent telephone company, the Bell Companies.
The other license wasn't awarded until 9 years later, in 1991.
By that time, the incumbent Bell Company served 80 percent of
the population, had received half the spectrum, and had a 9-
year head start in the cellular market for most of the country.
The Bell Companies had little incentive to develop a new
technology that would compete with their wireline services.
Mobile wireless developed much more quickly after the FCC made
additional licenses available and companies without legacy
wireline investments had entered the market.
To me this merger is a lot like deja vu. Going back to the
anticompetitive 1980's is not the future we should be aspiring
to. The FCC and DOJ should not allow this merger to proceed.
Instead, we urge Congress and regulators to focus on ways to
foster true and healthy competition in the market so that
consumers can benefit from fair prices in the wireless
marketplace.
Thank you and I look forward to any questions that you
have.
[The prepared statement of Ms. Desai follows:]
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Ms. Desai. And, Mr. Chairman, if possible, I would like to
introduce this recent antitrust analysis by Alan Grunes and
Maurice Stucke regarding how this merger is presentably
anticompetitive.
Mr. Goodlatte. Without objection, it will be made a part of
the record. Thank you, Ms. Desai.
[The information referred to follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Goodlatte. Professor Wright, we are pleased to hear
your testimony.
TESTIMONY OF JOSHUA D. WRIGHT, PROFESSOR,
GEORGE MASON UNIVERSITY SCHOOL OF LAW
Mr. Wright. Chairman Goodlatte, Ranking Member Watt,
Members of the Subcommittee, Chairman Smith and Ranking Member
Conyers, my name is Joshua Wright. I hold a Ph.D. in economics,
formerly an employee of the Federal Trade Commission and the
Bureau of Competition, and am currently an antitrust law
professor at George Mason University School of Law. I
appreciate the opportunity to testify before you today on this
important issue.
My testimony focuses upon how we should think about
evaluating the likely competitive effects of the proposed
transaction from a consumer welfare perspective.
I want to start by observing that there is a standard and
well understood economic framework for analyzing horizontal
mergers. That framework is articulated in the 2010 Horizontal
Merger Guidelines that were recently promulgated by the DOJ and
FTC under the Obama administration. Economists and lawyers at
antitrust agencies apply these guidelines through highly fact-
intensive investigations. The agencies then conduct various
quantitative and qualitative analyses with these data.
My goal here is not to replicate or anticipate the analyses
that those agencies will conduct, but to highlight the types of
issues that the agencies are likely to confront along the way
in applying that analytical framework to this merger.
I would like to begin with what is a broad and overarching
principle of economic analysis of merger review that has
emerged over the past 30 years of learning in the economics
literature.
Modern merger analysis focuses, to the extent possible, on
competitive effects directly and does not merely look at market
structure to make inferences about the future effects of a
merger. In other words, the economic theory and evidence is
fairly clear that simply counting the number of firms in a
market is an unreliable way to go about predicting the
competitive effects of mergers.
The current agency guidelines reflect this consensus view
in industrial organization economics that merely relying on a
crude proxy like market structure is likely to lead in errors
in both directions with respect to antitrust review. Instead,
modern merger analysis focuses upon two issues, the likelihood
a merger will create an incentive to raise price relative to
the world without the merger on the one hand and, on the other,
whether the merger will create efficiencies that will result in
benefits to consumers.
On the efficiency side, as Mr. Stephenson alluded to
earlier and as the FCC has recognized in its wireless report
and elsewhere, capacity constraints characterize the current
wireless competitive landscape. Wireless carriers must make
significant investments to expand and upgrade network capacity.
Given the practical difficulties and delays associated with
expanding spectrum holdings through new auctions, acquisition
of incremental spectrum through merger is desirable relative to
delay and, importantly, through another feasible alternative
which would be rationing existing spectrum through higher
prices. These efficiencies from relaxing those capacity
constraints are likely to result in benefits to consumers from
increased usage.
On the anticompetitive side of the evaluation are two
possibilities that the agencies will explore. Unilateral price
effects arise when a post-merger firm is able to, without
coordinating with its rivals, have the power to increase price.
Coordinated price effects, as articulated in those same
guidelines, by contrast arise when coordinated pricing or
collusion between firms is made more likely by a specific
merger. Unilateral price effects do not appear likely from the
proposed transaction. Those effects are unlikely when a merger
allows for expansion of capacity and reduction of the marginal
cost of expanding capacity to increase output for consumers.
Further, a unilateral price effect is especially relevant
when two merging firms sell products that are close
substitutes. There is some evidence here that consumers do not
perceive AT&T and T-Mobile USA wireless products as
particularly close substitutes. For example, the 2010 FCC
report emphasizes the close price competition between AT&T and
Verizon rather than between AT&T and T-Mobile. Given the
continued presence of Verizon and Sprint after the merger, the
likelihood that AT&T will be able to unilaterally raise prices
appears questionable. Similarly, given the continued presence
of Sprint, MetroPCS, Leap, and others that cater to value-
oriented consumers that have been the focus of T-Mobile's
business, it also appears questionable whether there would be
unilateral effects with respect to those consumers.
Nor does it appear that a coordinated effect, in other
words, a price increase from coordination between rivals is
likely. Mergers can facilitate coordinated pricing through
eliminating of a maverick. It does not appear that T-Mobile is
a maverick in the antitrust sense of the term. In contrast, in
a period of growth, T-Mobile has steadily lost consumers and
has not increased output and market share.
It appears, in conclusion, that T-Mobile is neither a
particularly close competitor or a maverick as would be
required for either of the anticompetitive theories.
I am hopeful that my testimony has highlighted some of the
relevant issues, and I thank you for your time and allowing me
to speak on this topic.
[The prepared statement of Mr. Wright follows:]
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Mr. Goodlatte. Thank you, Professor Wright.
Professor Gavil, welcome.
TESTIMONY OF ANDREW I. GAVIL, PROFESSOR,
HOWARD UNIVERSITY SCHOOL OF LAW
Mr. Gavil. Good morning, Chairman Goodlatte, Ranking Member
Watt, Chairman Smith, and Ranking Member Conyers. Thank you all
for this opportunity to offer my views on the competitive
issues posed by the proposed acquisition by AT&T of T-Mobile
USA.
As the Subcommittee is well aware, few industries are
likely to be as important to our national economic, social, and
political health in the 21st century as wireless
telecommunications, and the proposed merger will significantly
alter the shape of that industry.
Will the merger enhance the competitiveness of this field,
producing lower prices, higher quality, and robust innovation?
Or will it increase the incentives of the merging firms and
other firms in the industry to exploit consumers, impair
rivals, and stunt the growth and advancement of the industry?
These are challenging and fact-intensive questions, as my
colleague, Professor Wright, has pointed out.
Without access to the full range of information necessary
to a fully informed analysis, I cannot offer you a confident,
professional opinion today as to whether the merger will likely
or not prove to be a violation of section 7. My goal is far
more modest. In my brief time, I hope that I can help to
identify some of the critical questions this Subcommittee's
Members may want to pose in reaching your own conclusions.
I will confess, however, that I am deeply concerned that
the proposed merger presents very substantial risks of
anticompetitive effects across multiple dimensions of
competition, not merely cell phone service to consumers.
While AT&T and T-Mobile have begun to make their case that
consumers will realize benefits from the merger, the assertions
are as yet not fully substantiated.
I am also very skeptical that a negotiated settlement
between the Government agencies and AT&T and T-Mobile that
permits the merger to go forward with conditions could be
effective and consistent with the Clayton and
Telecommunications Act's commitment to competition.
Hence, the question I am asking myself and the question I
urge you to ask as well is why would we want to take this risk.
Once this merger is complete, there will be no method for
either the agencies or Congress to resurrect competition once
it is gone.
My remarks focus on three points: competitive effects,
efficiencies, and that last point about the quality that we
could expect out of a regulatory settlement.
First, competitive effects. I would completely agree with
the framework that Professor Wright has set out about how we go
about analyzing mergers in a modern framework, but I think we
disagree in the application here. And I know I am not as
optimistic as he is about the outcome and not as certain as he
is in the conclusions he has reached in terms of the record
that we have before us today.
Yes, it is true that we don't today look solely at
concentration. But we do look at concentration. The proposed
merger would reduce the number from four to three which, under
the guidelines promulgated by the Government, creates a strong
presumption that it will be anticompetitive, and if the merger
marginalizes Sprint as a major national player, the effective
result could be to reduce competition from four to two.
What impact will that have on the incentives of these firms
to compete? Will they compete aggressively post-merger?
AT&T has urged that they face aggressive competition from
fringe competitors in local markets and that we should analyze
the merger based on those local markets. But they are the
principal conduits through which all of the extraordinary
technological advances in this industry flow. Smaller fringe
rivals simply do not perform that gateway function and would
not be able to compete on the same footing. So concentration
levels remain high today and they will be even higher.
This idea that we should analyze it on a local basis, city
by city, can easily be seen to be a challenge if we just
imagine some other examples. We buy major appliances and
automobiles locally as well, but would a merger between
Whirlpool and General Electric or a merger between General
Motors and Chrysler be something that we would look at at a
local level and think about fixing it through spinning off
dealers? I think not.
Another concern I have is not just how much of a competitor
T-Mobile is but what kind of a competitor it is. Has it been
especially disruptive in this industry? Has it been especially
price-sensitive? If it has, then its loss could be a loss out
of dimension to its apparent size.
I am concerned about the impact the merger may have on
innovation. As I said, many of the innovations we now enjoy are
channeled through these two mega-portals, AT&T and Verizon.
That will be more so in the future and they will be gatekeepers
for innovation in the industry.
And finally, I am concerned about exclusionary conduct.
What will their incentives be with respect to their rivals
because of the dependency those rivals already face in terms of
interconnection and roaming?
In conclusion, I would just again come back to my concern
about a regulatory decree. I would urge the agencies who are
reviewing this deal to reach an up or down, yes or no decision.
I am very concerned that a judicially managed regulatory
approach would be contrary to the spirit of the
Telecommunications Act, indeed contrary to the reliance on
competition that it was designed to implement. We should not go
back to the days of regulated monopoly and Ma Bell.
Thank you very much, and I stand ready to answer any
questions.
[The prepared statement of Mr. Gavil follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Goodlatte. Thank you, Professor Gavil.
I will begin the questioning.
Professor Wright, I would like to follow up with a comment
made by Professor Gavil. You discussed the horizontal nature of
this merger, but aren't there pretty significant vertical
implications to this as well? And my question to you is, should
the Justice Department consider the merger's effect on
competition in markets other than consumer wireless services
such as the market for business-to-business agreements
involving backhaul, roaming, or handset development?
Mr. Wright. Thank you, and I believe the answer is, yes,
they should and will consider those issues, again through the
same sort of fact-intensive analysis that is articulated in the
guidelines. I did not focus on either backhaul or roaming in my
written testimony, but I am happy to make some remarks here and
elaborate, if you so desire.
With respect to backhaul, this is purely, in essence, a
vertical issue. The merger, as a few of the witnesses have
identified, would increase the post-merger share to
approximately 40 percent. This is lower from an antitrust
perspective than the level of a share that would typically give
rise to vertical concerns.
Now, the agency guidelines do allow the agency to consider
and look carefully at vertical issues, but there is both a body
of case law, economic theory, and empirical evidence on when
those sorts of vertical concerns arise and when they don't.
Mr. Goodlatte. Let me interrupt, since I have got a limited
amount of time and some other questions I want to ask. We will
submit some additional written questions. You may want to flesh
that out more in a written response because I do want to have
the benefit of that case law and your thoughts on that.
Mr. Wright. I would be happy to.
Mr. Goodlatte. Let me turn to Mr. Stephenson and follow up
on that very issue.
AT&T sells backhaul to most of its competitors but can
backhaul its own calls free of charge. Backhaul is a crucial
input for your competitors' wireless services. Couldn't AT&T
price backhaul at rates that force competitors to raise their
prices?
Mr. Stephenson. We do offer backhaul in the marketplace and
we offer it to a number of carriers represented in Mr. Berry's
organization, in fact, all carriers across the United States.
We are also a large purchaser of backhaul. In fact, we cover
somewhere around 40 percent of the U.S. with our own backhaul.
So 50-60 percent of the U.S.--we are purchasing backhaul
ourselves from other competitors.
And we are having little difficulty finding competitive
alternatives for backhaul. The cable companies--you can read
their quarterly reports--are having a lot of success in
offering backhaul to wireless carriers. There are alternative
providers of backhaul--CLEX we like to call them in the
industry--who are offering backhaul services. There are
microwave solutions. In a lot of areas, we are investing our
own capital and building our own backhaul when it is outside of
our wireline franchise territories. So there is extensive
opportunity for buying backhaul. It is a very competitive
environment.
And I would also offer the FCC does currently have a
proceeding open on this very issue, and they are dealing with
this now within the FCC. And so I think there will be an open
and full hearing of that issue as well.
Mr. Goodlatte. Thank you.
Mr. Berry, did you want to comment on that as well?
Mr. Berry. Yes, Mr. Chairman. I would just suggest that
around 30 percent of the cost of running a cellular operating
cost is getting that signal back to the main trunk, the
backhaul. AT&T and Verizon own over 90 percent of the backhaul
capacity in the United States and last year made over $8
billion on that service. 93 percent of the profit came from
people other than AT&T and Verizon on backhaul. So I think the
vertical integration and the potential impact that it has,
especially on my smaller members, is huge.
And you are right. We do have backhaul with AT&T, and AT&T
does, in some instances, use our members that also have
backhaul. But overall, it is a huge problem and it will be a
place where AT&T will be able to use their market power.
Mr. Goodlatte. Thank you.
Mr. Obermann, I am going to allow you to respond to that,
but I want to ask you another question and we will just put it
all out there and you can respond.
You testify that T-Mobile has had an increasingly difficult
time competing, arguing that the merger was the best option
available for T-Mobile, but in January you told investors,
quote, we have the best 4G network in the U.S. We have a
sufficient spectrum position medium term. We have a variety of
attractive smart phones on our shelves, including the largest
lineup of android smart phones. You also described T-Mobile's
spectrum position as, quote, better than most of our
competitors.
Is T-Mobile today a viable competitor in the U.S. market or
is it not?
Mr. Obermann. Well, both are true. I said that on the long
term or longer term, we are lacking the spectrum----
Mr. Goodlatte. You might want to pull the microphone a
little closer to you.
Mr. Obermann. So on the longer term, we are lacking the
spectrum to upgrade our technology to LTE. That is the new
technology for fourth generation networks, and LTE is the
superior technology over time. But as of today, we are trying
to make the best out of our existing HSPA+ technology out of
our network, and so we are trying to compete by aggressively
marketing that facility. But currently the facts are that--and
the Q1 numbers demonstrate that--we are losing customers still.
We have lost 470,000 customers roughly, while Sprint, for
instance, gained 1.1 million, Metro and Leap--they all gained
customers and we lost customers. So the current position we are
in is not easy. It is actually difficult. Yet, we are trying
our best, of course, to market what we have with more success.
Mr. Goodlatte. Thank you.
The gentleman from North Carolina, Mr. Watt, is recognized.
Mr. Watt. Thank you, Mr. Chairman.
Mr. Obermann, I guess that raises the question in my mind.
I guess T-Mobile really wants out of the United States market
one way or another I take it. So what is the alternative if
this merger is not approved?
Mr. Obermann. I am not sure I understood the question
correctly. Was your question why we would stay as a shareholder
in AT&T?
Mr. Watt. No. I take it that given the economic situation
of T-Mobile--I mean, it sounded to me like from your testimony
your preferred market is the Europe market, and you want out of
the U.S. market. So you are going to divest T-Mobile in the
United States to somebody, AT&T or somebody else, because you
want out of the market. Am I misreading what you said or just
misunderstanding what you said?
Mr. Obermann. I think it is fair to say that we are
fighting both in Europe and in the U.S. with big capital
investment needs because also in Europe we need to upgrade our
networks, wireline and wireless networks, which costs huge
amounts of money, and also in the U.S., we would have to
continuously build out the network and acquire new spectrum. So
really the fundamental strategic problem we are facing here is
the longer-term perspective, the lack of enough spectrum to
build our LTE network.
The reason why we have chosen this combination with AT&T,
after having analyzed the other theoretical options available,
is that it is the most----
Mr. Watt. I think you answered that question. I asked a
different question. My purpose is not to make you bear your
financial situation here in this room. I don't think that is
appropriate. So I won't pursue that line of questioning.
The real question I have--and I always hate to raise it
because it sounds self-serving. In my congressional district,
we have strong competition, wireless, all kinds of options
because I represent particularly urban areas. But the older I
have gotten, the more time I have spent in the mountains of
North Carolina. When I go up there, there is no service.
So I understand, Mr. Stephenson, that AT&T already has a
minimum of 21 megahertz and in some areas of the North Carolina
mountains 40 megahertz of unused spectrum in the North Carolina
mountains. Why would you not build that out now in the absence
of this merger? And what is the likelihood that you will do
that even if the merger is approved? I guess you all keep
telling me that you got 97 percent coverage and all of this,
but folks in the North Carolina mountains can't even get mobile
service. In a lot of the parts of the North Carolina mountains,
there is just no mobile service. There is no competition.
Mr. Stephenson. Yes, sir, I think I understand your
question. I will tell you one of the biggest dilemmas, issues
that I face as a CEO--I have been dealing with this for quite
some time--is what to do about rural America. And rural America
is a difficult equation for us, particularly getting broadband
to rural America.
Mr. Watt. I am just talking about basic cell phone service.
I am not even talking about broadband. I guess broadband would
follow but I am talking about basic cell phone service in parts
of the country that seem to me to need it.
Mr. Stephenson. Yes. So cellular service is going to follow
the same equation as fixed line service. It is just more
difficult and costly to get to rural America. It is going to
take more time.
The elegance of what we are proposing here is it is going
to give us an opportunity to use wireless technology to get
high-speed and basic wireless services to rural America. That
is the commitment with this deal. We do have scale now. We
would have spectrum position that would allow us to cover 55
million more people in rural and small-town America with these
capabilities, and that is the commitment we are making with
this merger. It does provide the right incentives for us to
begin to build out rural and small-town America with these
wireless services, particularly broadband.
Ms. Desai. Can I comment very quickly on that?
Mr. Watt. Go ahead.
Ms. Desai. I just wanted to point out that Mr. Obermann
earlier stated that the lower band frequency that T-Mobile
would get after acquiring AT&T would provide rural coverage. So
it is not clear that AT&T is actually getting something from T-
Mobile. Mr. Obermann just said earlier that they would be
acquiring lower band coverage that helps in rural areas.
Mr. Watt. Anybody else got any--Mr. Berry, maybe you can
help me. You are from rural America here.
Mr. Berry. Yes, sir. We have one carrier in your
congressional district, Alltel, and we have five of my member
carriers in North Carolina. And it is very difficult----
Mr. Watt. In the mountains of North Carolina, you got five
carriers?
Mr. Berry. Yes, sir. Not in your district. In your district
we have----
Mr. Watt. This is not about my district really. It is about
North Carolina in general, the rural areas of North Carolina.
Mr. Berry. Correct. And many of our members focus, like you
say, on building out that rural area. It is very difficult in
rural America, especially in the Smoky Mountains down there and
the difficult terrain of North Carolina. But my members are
committed to building out in the areas and the communities
which they serve and live and occupy, and that has been very
difficult. And we will certainly talk to you more about how we
can improve the coverage.
But you are absolutely right. There are unused spectrum
allotments in North Carolina, particularly that AT&T owns, that
have not been built out.
Mr. Stephenson. Could I respond to that, Ranking Member?
Mr. Watt. Yes, sir.
Mr. Stephenson. The unused spectrum, if I could clarify
this. We have acquired a large amount of spectrum in several
geographies around the United States. It is the 700 megahertz
spectrum. The Government auctioned it off. We acquired that for
one very specific purpose. That is where we are building these
LTE broadband networks. It requires a big block of spectrum to
build these broadband networks, 20 contiguous megahertz just to
build these networks. And so we have acquired that spectrum,
and that is where we are deploying it now. In fact, we
announced that we will be launching five markets midyear this
year in that spectrum. So it will take time to build these
networks out, undoubtedly. But that is why we are holding that
spectrum.
Mr. Watt. I guess somebody--who was it that said how long.
Not long. I have been hearing that for a number of years now,
and I keep asking. I won't go there.
Mr. Chairman, I ask unanimous consent to submit for the
record the testimony of Larry Cohen, President of the
Communications Workers of America, and the written statement of
Daniel R. Hesse, Chief Executive Officer, Spring/Nextel
Corporation so that we will have a complete record here.
Mr. Goodlatte. Without objection, they will be made a part
of the record.
[The information referred to follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Watt. I yield back, Mr. Chairman.
Mr. Goodlatte. I thank the gentleman.
The Chair recognizes the Vice-Chairman of the Committee,
the gentleman from Arizona, Mr. Quayle, for 5 minutes.
Mr. Quayle. Thank you, Mr. Chairman.
Mr. Stephenson, there are a lot of companies here that are
U.S.-based but they have a lot of operations overseas and in
Europe and in Asia, and a lot of times they are required to get
a phone that is on a GSM network. Now, if the merger goes
through between AT&T and T-Mobile, will there be a competitive
alternative for these types of companies and individuals who
require a plan that is on the GSM network?
Mr. Stephenson. So today if you are in Europe--pick an
example--and you have a 3G device and you want to roam in the
United States, there are very few phones in Europe that roam on
the other GSM provider, which is T-Mobile. In fact, I might
surmise that my friend Rene here is roaming on my network
today, on the 3G network, for that very reason. This
transaction does not change that one iota.
The importance to understand in the roaming world is the
pricing discipline comes by virtue of we trade traffic. So if
Rene needs for his customers to roam in the United States, I
need my customers to roam in Europe, we exchange traffic, and
then we set rates based on exchanges of traffic. That is the
pricing discipline.
I will tell you I am aware of no situation around the globe
where we have roaming arrangements where AT&T is paying less
than the carrier who is bringing traffic to the United States.
So the pricing discipline comes by virtue of those exchanges of
traffic.
Mr. Quayle. Okay, thank you.
Mr. Berry, in your testimony, you talked about how the
consolidation within the wireless market has led to higher
prices. Anecdotally I just have to dispute that because I just
don't know where you are getting--basing that on factual
information because looking at my own wireless bill in the last
few years, the prices have come down and the services have gone
up. So where are you basing that assertion on?
Mr. Berry. I said that prices would go up through
consolidation.
Mr. Quayle. Well, in your statement, you actually pointed
to the fact that--in your written statement that the
consolidation that has occurred over the last 5 years has
actually increased prices. And I just want to know where you
base that on.
Mr. Berry. Well, two factors. For example, you were talking
about international. The United States prices are actually a
little higher than they are in the international arena. We have
had a lot of cost decreases because of technology. The
correlation is not always cause and effect. I think what you
are seeing is higher bills because of greater data usage and
greater utilization from U.S. consumers. So your basic bill may
go up.
Mr. Quayle. But that doesn't mean the consolidation has
actually----
Mr. Berry. The data----
Mr. Quayle. Sorry to interrupt, but that doesn't mean that
the consolidation has actually led to higher prices based on
what you are actually receiving. You are actually receiving
more for less. So that is all I was trying to figure out what
that actual statement was based upon.
Professor Gavil, you stated in your testimony that if this
merger does go through, Congress may not have the ability to
bring back competition within the wireless sphere. But wouldn't
the marketplace be able to take care of that? Wouldn't the
marketplace be able to bring back that competition if you have
a situation where a company is gouging pricing? And one of the
things that we have been seeing right now is T-Mobile has the
low-cost provider. Now, doesn't that, first of all, give Sprint
the ability to actually take up market share, take over
customers who are looking for that low cost? And also doesn't
that also give cable companies who have talked about getting in
the wireless sphere, various Internet companies have also--if
they see that there is the ability to go in and to have the
capital to actually provide a service to those who feel that
they are going to be under-provided and allowing the
marketplace to bring back competition?
Mr. Gavil. I think it is an important question,
Congressman. And the answer has to do with barriers to entry
that already exist in the industry. This is not an easy
industry to get into. So even if the prices were higher--and in
fact, if you think about it, the incentive to raise price is
affected by those companies' estimation of whether they are
likely to see new entry, new competition. It is not easy to
acquire spectrum. It is not easy, as we have been hearing, to
build out. It is not easy to produce 4G LTE systems.
So if you are looking at all of those factors, in theory,
yes, you would hope that if prices go up, there would be
interest from others in entering the market and bringing new
competition. But the merger itself may make entry more
difficult, as we have been talking about, these issues about
interconnection and roaming. That would be a way a smaller
carrier would want to enter the market, and yet they would be
subject to having to engage in agreements with Verizon and AT&T
even to get into the market, and they would probably be at a
price disadvantage because of that.
So in theory, yes, but one of the things that is troubling
about this market is the issue of entry barriers, and the
merger will probably make those entry barriers even more
difficult.
Mr. Quayle. But if a company that is currently not in the
marketplace but does have the sufficient amount of capital to
be able to enter and provide direct competition because they
see that there is an area of this market that isn't being
serviced and they can actually make a profit, even though the
initial capital outlay will be substantial because, like you
talked about, the barriers to entry, wouldn't you see that as a
way for the market to just govern itself?
Mr. Gavil. Yes, and in fact, under the Horizontal Merger
Guidelines the Government uses, you look at the likelihood of
entry and you ask whether it would be timely, whether it would
be likely, and whether it would be sufficient to counteract any
incentive to raise price. So that would most certainly be a
part of the analysis.
Mr. Quayle. Okay. Thank you very much.
I yield back.
Mr. Goodlatte. I thank the gentleman.
The gentleman from Michigan, Mr. Conyers, is recognized.
Mr. Conyers. Thank you, Chairman.
You know, during the Clinton administration, outside of
Microsoft, the Department of Justice antitrust was pretty
dormant. During the Bush administration, the door was shut and
we don't know if they were asleep or awake. It didn't make much
difference. And under Obama, I can count on one hand the number
of mergers that have been blocked, very few. Oh, yes, they put
on conditions. That is the last anybody ever hears about the
conditions.
Now, normally at antitrust hearings, we get the promises
that there won't be losses of jobs. We won't raise the rates.
The thing I like about these witnesses is they don't even
promise that, and so I thank you for your evasiveness on this
issue. Then I don't have to come back next year and say they
promised us they wouldn't cut any jobs.
So I am concerned. I see absolutely no redeeming reason for
this merger to go through, not even one. T-Mobile is probably
broke. I am glad Mel Watt doesn't want to reveal their
finances. They are pretty desperate.
And we never ever do anything--the reason that the
mountains of North Carolina don't have any services is it is
not profitable. What is so hard to figure out about that? You
don't make any money. You make $29 billion a year, but you
don't make any money up in the country or in the rural areas or
in small towns or in the mountains. That is why you don't give
them any service. And so what makes me think that T-Mobile
joining you is going to make that any different?
Mr. Stephenson. May I respond to that?
Mr. Conyers. Sure.
Mr. Stephenson. I would not argue with you that the profit
motive does not drive us to invest in a lot of rural America.
It has been that way in this industry for quite some time. The
Universal Service Fund was, in fact, developed for exactly that
reason.
What I believe this transaction affords is there does
become a profit incentive for us to build out 97 percent of the
U.S. with this mobile capability and mobile broadband. The
significance of that is we are no longer looking for Universal
Service funding and Government funding to cover all of rural
America. There is 3 percent remaining. We get to 97 percent
with this transaction. There is 3 percent remaining for the
Universal Service Fund. That is a manageable approach in
getting rural coverage.
Mr. Conyers. Let me ask the professor from Howard. What are
your reservations about this deal?
Mr. Gavil. I think beyond the reduction in the direct
competition between the two firms, which I think clearly could
result in higher prices for consumers, I am very concerned
about what it means for the basic structure of the industry as
a whole. As Chairman Goodlatte was asking Professor Wright
earlier, this is not what we would traditionally call just a
horizontal merger. The question is not just about the reduction
of competition between two rivals. It is about them winding up
in a situation where they are portals for lots of other firms
with which they have vertical relationships.
Think about all the technology that has advanced in the
last 5 years in handsets, in operating systems, in
applications, all of the things that we can do with our smart
phones and our new tablet PC's and iPads. All of those things
have come from people who now must interact and negotiate with
a market that will be dominated by AT&T and Verizon. And we can
count on those two companies to do what is best in their
interest, but I don't know that we want to entrust them with
all of the decisions about what the next technology ought to
be.
A competitive market can be more creative, can take some
risks, and those kinds of creativity and risks can bring us a
more interesting and broader variety of products, allowing
those products to be tested through competition, not through
the judgment of two large portals.
Ms. Desai. To go to your comment about incentives for
building out, Verizon has said that it will build out to about
95 percent of the country with the spectrum holdings that it
has now. It is hard to believe that AT&T, which has similar
holdings as Verizon, would just give up 15 percent of the
market and not build out to 95 percent of the country. So I
think we all expected that even before the merger, AT&T was
going to compete with Verizon to build out. I don't think AT&T
would simply give up 15 percent of the market to Verizon.
Mr. Stephenson. Would you mind if I corrected one thing? We
do not have the same spectrum holdings as Verizon. Verizon has
a nationwide 24 megahertz swath of 700 megahertz spectrum. We
do not have that. Make no mistake about it. We are not on equal
footing in terms of spectrum. We do need the spectrum that T-
Mobile holds to do a complete 97 percent build-out of the U.S.
Ms. Desai. I would just say I am going by the recent
Congressional Research Service note that came out a couple of
weeks ago that stated that the two companies had similar
holdings, maybe not the same holdings, but they do have similar
holdings.
Mr. Goodlatte. The time of the gentleman has expired.
The Chair now recognizes the gentleman from North Carolina,
Mr. Coble, for 5 minutes.
Mr. Coble. Thank you, Mr. Chairman.
Good to have you all with us this morning, ladies and
gentlemen.
Mr. Stephenson, let me revisit a question that has been
kicked around several times this morning. How do carriers
actually determine when to build out, expand, or upgrade
service in small towns or rural areas, of which I have many in
my district?
Mr. Stephenson. Ranking Member Conyers is accurate. We are
a market-driven company and we build out when we can deploy
capital and earn a return on that capital. And generally, it is
only when technology is mature and the cost curves come down
that costs justify deploying technology into rural America. And
that is kind of the equation.
What is unique about this opportunity is around the globe,
we are scaling LTE fourth generation mobile broadband. These
cost curves are already coming down very, very quickly. And so
if you put two things together, first of all, a spectrum
position that will allow us to build into rural America and,
second of all, a larger customer base against which you
leverage that investment--we gain another 30 million
subscribers with T-Mobile--it changes the economics. And that
is why this basically affords a private market solution to
cover rural America. That is one of the most exciting things
about this. I have been looking for 5 years for a broadband
solution to get to rural America cost effectively. I have not
been able to find one. This is the first instance where we have
a good, solid economic justification for getting to rural
America.
Mr. Coble. I thank you, sir.
Mr. Obermann, I am told that T-Mobile invested in
infrastructure build-outs in Europe but elected not to do so in
the United States. If this is accurate, why in Europe and not
in the U.S.?
Mr. Obermann. With due respect, sir, that is not the fact.
That is not the case. We invested continuously between $2
billion and $3 billion, roughly, per year over the last years
and even in some years beyond $3 billion. So we keep investing
into this market, but the fact of the matter is we haven't yet
been able to acquire spectrum, radio spectrum, which gives us
the opportunity to build the next generation networks, and this
combination gives us and our customers the chance to get the
benefits of the next generation technology and it frees up
capacity. Neither AT&T nor us would have been able to build LTE
to 97 percent of American customers.
Mr. Coble. Thank you, sir.
Let me hear from Mr. Stephenson and Mr. Berry on this
question.
I am told that AT&T intends to offer roaming agreements to
all rural providers. Are there any limitations to this offer?
And do these agreements also apply to data services? Why don't
we start with you, Mr. Stephenson, and then I will hear from
Mr. Berry.
Mr. Stephenson. I would tell you we are open for business
for folks to roam on our networks, both 3G data as well as
voice. I envision in the LTE environment, we will do roaming
deals, and I would be glad to do roaming deals. The FCC, about
a month ago, issued an order requiring companies to negotiate
roaming deals at reasonable commercial terms. Before that order
came out, we had a number of roaming agreements. Since that
order came out, we have signed seven new roaming agreements on
our 3G networks. So to answer your question directly, yes, we
are open for business. It is actually a good business
proposition for us.
Mr. Coble. Thank you, sir.
Mr. Berry?
Mr. Berry. Yes, Chairman Coble.
We are very glad to see the FCC order on data roaming. As a
matter of fact, until the FCC began its NPRM and its process of
directing a data roaming mandate, we were unable to obtain
those type of agreements and especially in rural America.
For the LTE solution that Mr. Stephenson has just talked
about, there is another problem and that is that AT&T has
created its own private band plan within the lower 700
megahertz. Most of my members own band 12. Band 17 is a subset
of that. If AT&T were to join with us and create interoperable
standards for that band, we would join with them immediately
and build out LTE throughout the rural area in the United
States. We can't get access to handsets and devices and we
can't--as you said, you have to make money in your build-out.
We would like and we welcome the opportunity to join in roaming
agreements.
But Verizon has already appealed that agreement of the FCC,
and so it is on appeal. And we have yet to see whether or not
that is actually going to make a difference. And we encourage
every one of our members to continue to monitor that and try to
enter into agreements with AT&T.
If you are a GSM provider, there are no other options. It
is either roam with AT&T, if this deal goes through, or no one
else. And right now, T-Mobile is the value partner for those
roaming agreements. Once this deal goes through, there will
only be one choice.
Mr. Coble. Mr. Obermann, did you want to be heard?
Mr. Obermann. Sir, first of all, I just confirmed the
number with my colleague. It was well beyond $30 billion which
we have invested over the last 10 years into this market.
Second, to the point of roaming, I cannot see a reason--but
maybe Mr. Stephenson should confirm that--why the existing
roaming contracts with regional carriers--and there are quite
many--would not be continued after the merger.
Mr. Coble. I thank you, sir.
Mr. Chairman, I see my red light has illuminated. I yield
back.
Mr. Goodlatte. I thank the gentleman.
The gentleman from Florida, Mr. Deutch, is recognized for 5
minutes.
Mr. Deutch. Thank you, Mr. Chairman.
I would like to bring up something that was raised in the
testimony submitted for the record by the Communications
Workers of America. There has been an awful lot of complex
analysis of these issues, and I appreciated CWA's succinct
statement of their position. Their President, Larry Cohen, said
that they have studied the transaction carefully. They reached
the following conclusion, that the acquisition of T-Mobile by
AT&T will be good for broadband deployment, good for consumers,
good for jobs, good for workers rights, and good for rural
citizens. I would like to get into some of those issues since
there seems to be some difference of opinion, but he was quite
clear.
I, importantly, would like to focus on the effect of
mergers on U.S. workers. Workers have borne the brunt of this
recession, and it is especially relevant in my State of Florida
where unemployment continues to exceed 10 percent. So when I
hear about a proposal of this magnitude, my first inclination
is to look at what it will do for jobs and for workers, as
Ranking Member Conyers brought up earlier.
I understand from Mr. Cohen's testimony, AT&T is the
Nation's only union wireless company with 43,000 union workers.
I trust, Mr. Stephenson, you would agree that that is a good
thing for the company and for the employees at the company.
But returning to the question at hand, I would like to hear
from the panel about how specifically the proposed merger will
affect jobs. Are we looking at a net job loss because of
redundancies between T-Mobile and AT&T? Or would there be new
jobs created if the Department of Justice ultimately approves
the merger?
I will start, Mr. Stephenson, with your views on that. Is
there reason to think that this will have an affect on jobs
overall?
Mr. Stephenson. As it relates to what it does to
specifically union jobs, I can go back and tell you what has
happened historically. When we combined Cingular with AT&T
Wireless, we had the same situation. Since we put those two
companies together, the number of union jobs have doubled in
our company. What is driving that?
In our industry, but certainly no different than any other
industry, but you only are hiring where you are investing. In
our business, if you are not investing, you are not hiring. You
can look at our plain old telephone service business. We are
not investing over there anymore, and you know what is
happening to employment. Employment is decreasing. In wireless,
we are investing. We are investing aggressively, and so
employment continues to grow in our wireless businesses.
This transaction, when consummated, to build out the LTE
footprint, this broadband footprint we are talking about, and
to do all the integration required will entail $8 billion of
investment over a 3-year period of time. Again, in our
industry, investment means hiring.
This is why the CWA and the unions across America--all
major unions have endorsed this deal because there will be
hiring associated with that investment.
Now, I don't want to mislead anybody. You put two companies
together like this, there are redundancies. We will not need
two finance organizations, for example. We will not require two
marketing organizations. And so we will have to address areas
where we have redundancies. We have a long history, in terms of
how we address those.
In fact, Larry Cohen of the CWA and I directly negotiated 5
years ago a concept we call JOG. It is called the Job Offer
Guarantee. And the way we manage these surplus situations is we
offer each employee a job within a certain geographic area. And
it has allowed us over the last few years to very effectively
move employees out of declining businesses into growth
businesses. It is very elegant. It doesn't happen real quickly,
but we do get there. Using that and attrition, we believe we
can manage through this.
Mr. Deutch. I think the Ranking Member was getting at this
earlier. Ultimately, then I understand there will be an
increase in union jobs. Is there anyone on the panel that can
tell us or give their forecast on what this will mean to jobs
overall? Will there be a net increase? Can we estimate what
that net increase might be? What will we see? How will this
affect the labor market?
Mr. Stephenson. I have not been able to do a detailed
analysis literally of this organization. Traditionally what you
will see is through attrition, there will be a short-term
reduction in jobs through attrition and through the process we
discussed. But both of us have a large labor force that has
been outsourced, a lot of them out of the country. Our
commitment has always been if we have to go down in
redundancies, we go down there first and not in the United
States. So I think in general in the short term, there may be a
modest reduction, but over the 2- to 3-year time horizon, this
should be a job creator. It historically has been.
Mr. Deutch. Mr. Obermann?
Mr. Obermann. If you can agree to the assumption that there
is an additional build-out enabled by this merger, then you can
also assume that the stimulating effects on jobs are
significant by the broadband build-out. By additional broad
band facilities and by building out the networks, it has a very
stimulating effect on the economy overall. That is supported by
a number of studies which we may deliver after the meeting.
Mr. Deutch. Thank you.
Mr. Chairman, it would be immensely helpful I think to
understand better the possible downturn to the reduction short-
term. Ultimately, the increase is long-term. If we could get a
better appreciation for what that would look like, I think we
would certainly all be better informed and it would help in
this process.
And I yield back.
Ms. Desai. Can I just quickly comment on that, if that is
okay? I would just point out that AT&T has reduced their
workforce in 8 of the last 9 years. So it is hard to see how
moving forward they will continue to increase that workforce.
Mr. Stephenson. May I address that? This is a wireless
transaction, and if you look at our wireless business over the
same time horizon that Ms. Desai just articulated, the wireless
workforce has been increasing steadily and in fact
significantly. The declines have come on the side of the fixed
line business, which those businesses are declining, and we
have, I think, done a nice job of using attrition to manage
those workforces down, as well as these job offer guarantees I
discussed earlier. We have worked very hard with our labor
union to try to migrate our workforce to the growing parts of
the business.
Mr. Goodlatte. I thank the gentleman.
The Chair now recognizes the Chairman of the Government
Oversight Committee, the gentleman from California, Mr. Issa.
Mr. Issa. I thank you, Chairman.
This has been very, very interesting. I guess since my
Committee oversees the Post Office, we have lost almost 200,000
jobs over the last decade, union jobs. Guess what. If the
business goes away, you are going to lose those jobs.
But I am going to take a different tact. Having been at the
first Chicago show when cellular was rolled out and we were all
so excited for this regional phenomenon that might catch on and
allow us not to carry suitcases as our telephones and talk to
operators who would then connect us. As I watch this go on from
analog to digital and so on, I have seen one thing, which is,
first of all, the tie-in with wireline does concern me. The
fact is we are reassembling a duopoly on the back end. And I am
going to want to know, in this process as we look at it, that
the protections for the remaining wireless carriers--because I
remember when it was wireline, and it basically cut those into
two groups, those who had wire and those who didn't initially.
And I am going to want to be concerned for the remaining non-
wireline carriers, of which there are a very large amount with
a very small amount--that that backhaul capability is delivered
at a fair price.
Having said that, I want to mostly talk to Mr. Obermann.
You are not putting money into your business and you are losing
market share as we speak. Right? You are not putting sufficient
money into your business. You are a 2G and 3G sort of entity
with no rollout of new technology. Is that roughly a fair
statement without insulting your company?
Mr. Obermann. No. I think that contradicts the facts to be
honest because we have invested more than $30 billion,
significantly more than $30 billion----
Mr. Issa. Are you behind AT&T in technology rollout today?
Mr. Obermann. I am sorry?
Mr. Issa. Are you ahead or behind AT&T in technology
rollout, high-speed data?
Mr. Obermann. We are not on the same level in terms of
network coverage but we cover about 280 million U.S. customers.
Mr. Issa. So you have less coverage.
And back to the original question. Your data speed
enhancements, your investment in new data and in the bandwidth
to go with it--are you ahead or behind AT&T?
Mr. Obermann. No. As we speak today, we have a good
performance on our HSPA+ network. We can compete well, but the
fact is that going forward, we cannot upgrade our network to
the next generation technology called LTE and that is faster.
It is more efficient, and it has a couple of advantages,
including efficiency gains.
Mr. Issa. Okay. So cutting you off a little bit here, but
for sales purposes, you would say you are not behind. You are
not this and that. But your forecast is you are clearly not
going to stay up. You are going to become the behind carrier in
the current projection based on the capital available.
Mr. Obermann. In the longer term, we are lacking the
essential prerequisites to upgrade the network. Currently I
must say that we are a little stuck in the middle because we
are attacked by a number of value-based smaller players. There
are, as my neighbor says, more than 100 in his association
alone, and I think we haven't mentioned the fact that every
market, including the markets in California, they have four or
more facility-based carriers, almost every major market. And
there is a lot of competition and it is not just----
Mr. Issa. Okay.
Mr. Obermann. We are being attacked by a number of smaller
players.
Mr. Issa. Right, and I have got more questions for your
answers, if you can bear with me.
So I am looking at a company that is being offered $39
billion today. You are the only two major GSM players today. If
somebody wanted to buy you that wasn't GSM-based, what would
you be worth versus the $39 billion we are talking about here
today?
Mr. Obermann. I am afraid I cannot answer that question,
sir.
Mr. Issa. Well, I'm going to guess you are worth about half
as much to anybody, other than the partner that is willing to
pay.
To me the real question here today is, is this a synergy
that is good for the market? Is this in fact the highest and
best value for your stockholders I think is undeniable? Does it
allow for the bandwidth, which is probably about half your
value maybe, plus or minus a little bit, to be used efficiently
by a new carrier? I have got a yes to all of those.
My real question to Mr. Stephenson is how am I going to be
comfortable that all of these smaller players that remain--and
I use that term not to be negative to them but percentage-
wise--that they are going to have access to get their cell
towers efficiently delivered to you. You are not going to roam
with them. You are not on the same standard today. But how are
they going to be assured that they are going to get fair value
versus you and Verizon that have competitive advantages on that
legacy part of your system?
Mr. Stephenson. In terms of the backhaul----
Mr. Issa. Backhaul, exactly.
Mr. Stephenson. As I said earlier, we are outside of our
footprint, which is 40 percent of the U.S. roughly. We are
having to buy this both in rural as well as urban America. And
we are finding multiple options for buying backhaul across the
United States. Rene would tell you the same thing. We have
multiple options.
By that same token, I think we do a very good job of
offering backhaul to anybody that comes to us. It is actually a
very good business for us. It is a very competitive business.
The pricing discipline is in the marketplace and we are seeing
it today. And there is, again, an FCC proceeding on this issue
right now where this is being addressed to ensure fair and good
price access to these facilities.
Mr. Issa. Mr. Chairman, I hope as we continue with this
process, we will look at that whole question of whether two
incumbent monopolies in fact on the wired side, the backhaul
side as we are talking about here today, are going to be looked
at very carefully. I wasn't here when Judge Greene executed the
breakup, but now that is reassembled, I hope that this
Committee will look at that part of it. I have no doubt that
this is a good deal for the synergies of the wireless, but I do
want to make sure that I am very, very cognizant of how the
wireless companies are treated relative to the wireline part of
these two companies that will remain.
Thank you, Mr. Chairman.
Mr. Goodlatte. I thank the gentleman. The gentleman's point
is well taken and we certainly will be following that aspect of
this issue closely.
The Chair now recognizes the gentlewoman from California,
Ms. Sanchez, for 5 minutes.
Ms. Sanchez. Thank you, Mr. Chairman. I want to thank you
for convening the hearing today to talk about this important
proposed merger. The wireless industry has consolidated
previously, and yet, much like we saw when this Committee
examined the Comcast/NBCU merger in the last Congress, this
merger has aspects that simply did not exist in previous
mergers.
So I appreciate the testimony of all our witnesses here
today.
Wireless is increasingly becoming more and more necessary
for people to keep up with technology and to manage their
lives. I know that Members of Congress would be lost without
their wireless devices.
So I am interested in some of the information that I have
been hearing. There are parts of me that like some of what I am
hearing, and there are parts of me that don't like some of what
I am hearing. So I am going to try to pose a few questions to
get at some of the things that are niggling at the back of my
mind.
Mr. Obermann, I want to start with you. And maybe it is
because this merger has made me more aware, but I have taken
notice lately of the TV ads that T-Mobile is running on
television. And I have seen the ads both in California and
D.C., and they are identical television ads across the country.
And it seems clear that T-Mobile seems to be competing
nationally with customers across the United States who have
similar wireless needs.
And I am interested in knowing for the discussion on
competition and whether competition will be thwarted because of
the merger. I mean, would it be a fair statement to say that
you believe that T-Mobile competes with AT&T on a nationwide
basis and has a nationwide customer base?
Mr. Obermann. Well, first of all, the reason why we are
going heavy into the advertisement campaigns on network is
because our network perception--one of the reasons for
customers to churn--has to be improved. And we have worked very
hard to improve our network performance and we try now to make
the best out of it in terms of marketing.
Do we compete nationally? In fact, I would argue that
regional markets vary a lot, and the competitive situation in
every market is quite different. And there are very good
examples for that. For instance, in California--sorry--in
Florida, you have companies like MetroPCS which are very
strong. In fact, I believe they are either number one or two in
Miami. You have in other markets such as Wisconsin U.S.
Cellular being very strong, if I am not mistaken. And
therefore, you have in different regions different strength of
players and different propositions.
We recently changed our approach and we are now going more
regional with regards to promotions and campaigns because
customers clearly make their choices locally. It is more
important that when you live, for instance, in Ohio that your
local player, your local service provider, has good coverage
and good devices and good tariffs and good rate plans and so
forth, and therefore, customers make local decisions. We are
now, therefore, going more aggressively on the local level and
compete more locally and recognize that fact.
Ms. Sanchez. Maybe it was just the ads that I saw that are
identical on both coasts of the Nation, but it sort of seems to
poke fun at AT&T. And so it seems to me if you look at the
promotion and the advertising, that it seems that you are in
direct competition. And that is an important component here
because when we are talking about two market players that
compete against each other potentially merging, there are
implications for how much competition remains if that were to
happen.
Mr. Stephenson, you spoke in your testimony a lot about the
impact on rural customers and trying to reach more customers to
provide coverage. My district is not a rural district. And so I
am curious if you could please let me know what is the impact
of this merger on urban consumers, specifically if you want to
get more local California or the Los Angeles market to be
specific.
Mr. Stephenson. Los Angeles, San Francisco, and New York
have been our greatest challenges over the last 3 or 4 years
because of the advent of these smart phones and very
specifically the iPhone, and the volumes that these devices are
generating on our network has been very, very dramatic.
We have talked about the spectrum situation, the need for
more spectrum. The way to mitigate or to extend the utilization
of your existing spectrum--one of the key ways is to build more
cell sites and you get better utilization out of your existing
system. California is a classic case where we have been
building aggressively the number of cell sites we are trying to
deploy.
As you know, it is not very popular to come into LA or San
Francisco and put up a new cell site. The permitting and the
zoning is very, very burdensome. It can take 2 and even 3 years
to get permits and zoning to build a cell site in those areas.
And so it really extends the time frame to get service quality
improved in places like those.
The significance of this transaction is T-Mobile has a very
significant cell site grid that we put with ours. It is the
equivalent in both of those cities in California of
accelerating our cell site build by 8 years the day we close
it. So you begin to do the integration of the networks, but you
now have a much more dense cell site grid. More cell sites
means better service. More cell sites means fewer dropped
calls, fewer blocked calls, and better data throughput speeds.
So that is one of the most attractive aspects of this.
Rene's company and mine--we operate on the exact same
spectrum frequencies which is very advantageous, makes us go
faster, and we use the exact same network technology which will
make this go faster. His 2G customers that he spoke of
earlier--literally the day we close this, we can over the air
redirect his customers to our 2G network so that they have the
very rich spectrum access. They can get in-building coverage
immediately and we have access to his cell towers. So there
should be a very quick lift in service quality.
Ms. Sanchez. My time has expired. I have additional
questions that deal with consumer issues that I would have
loved to get to, but I will submit those in writing for our
panelists and would appreciate your responses. And I will yield
back.
Mr. Goodlatte. I thank the gentlewoman.
The gentleman from Indiana, Mr. Pence, is recognized for 5
minutes.
Mr. Pence. Thanks, Chairman. Let me begin by thanking you
for today's hearing on the proposed merger.
I also want to welcome this distinguished panel for what
has been an illuminating and informative conversation.
And I expect much of the public interest in this is
reflective of the fact that we are growing completely dependent
in our economy and in commerce on these terrible gadgets which
to me should have a chain attached to them and be the size of a
cannonball.
I actually got my first BlackBerry, Mr. Chairman, when I
was first elected early in 2001. They were being offered to
Members of the freshmen class as something of an affectation. I
got one because my chief of staff lived and worked in Indiana,
which he still does, and I said, you mean that little gadget
would let me talk to him at any time? And they said sure.
As a point of history, you all might be interested to know
that on 9/11 when my BlackBerry was working in the security
building when nothing else was working, the congressional
leadership, as has been documented, started to make inquiries
about why cell phones weren't working and these BlackBerry
things were. A week later, they were issued to every Member of
Congress.
So the conversation about how we continue to expand the
availability of not only voice transmission but data
transmission has expanded rapidly in my short tenure in the
Congress, and the impact on this business merger relative to
continuing to widen that to every American I think is what is
of most interest to everyone on this Committee.
And I am intrigued by some of the dialogue. Mr. Stephenson,
you were just talking about the symmetry between the 2G
technologies between AT&T and T-Mobile. Correct me if I am
wrong, but AT&T, about 20 percent is at 2G, about two times
that with T-Mobile. You said that the ability to immediately
integrate a large portion of T-Mobile's customer base and begin
to immediately provide data and information services would
become available as opposed to looking at months or years
before that happened.
T-Mobile has a significant presence in the Hoosier State.
We are grateful for that.
I guess my questions would be, first, practical and maybe
the two on the end of the table there that could address this
would be--Mr. Stephenson, AT&T is committed to providing LTE
coverage to more than 97 percent of the population. That is a
big increase prior to this announcement. I would like you to
speak to how that is--and you have addressed this broadly, but
would welcome your additional comments on how this merger will
further expand the availability of this critical technology to
rural areas like my district and all across the State of
Indiana.
And secondly, since T-Mobile does have a presence in
Indiana, we continue in Indiana, as we do around the country to
struggle in a difficult economy. And I am struck by some of the
other testimony about workforce reductions, which are
understandable in a hard economy. Companies are making tough
decisions but would like either one of you to reflect on what
impact this may have on jobs in our area or more broadly.
Mr. Stephenson. I will start. Rene, I will let you chime in
where you see fit.
The rural broadband build-out--I will go back, and I just
want to drill down one layer deeper in terms of what is
required to deploy these mobile broadband services. And I have
said it earlier, but it is important to reinforce that you
can't just go out and deploy these services on top of existing
technology. You have to have new, unused, clear, clean spectrum
to deploy these services, and it has to be rather large blocks,
20 megahertz. That probably doesn't mean anything to most of
you, but that is a big block of this spectrum. And there are a
number of places where we have this block of spectrum,
particularly in the lower bandwidth, 700 megahertz. In those
areas, we are building. Places where we don't have the 700,
there is a higher frequency band that we are using. And we
don't have good, ubiquitous coverage of that throughout rural
America. That is the same spectrum where T-Mobile has deployed
their 3G technologies.
And so the beauty and the elegance of this transaction is
it will allow us to put these two networks together. We can
begin to move the 3G technology out of those bands of spectrum,
clear it out for fourth generation mobile broadband
particularly in a lot of these rural areas. So it cleans this
out and it gives us a spectrum position to really begin to
ubiquitously deploy this capability.
And I will say it again. There is a further profit-
enhancing reason for this. He has a rather large customer base
that we can leverage also. Frankly, we can make money in rural
America, which I think what has always been the incentive we
have been looking for. And so there is a profit motive. It is a
private market solution to accomplishing this objective and
allow us to do this 97 percent coverage.
Mr. Obermann. Just a complementary piece of information not
related to the labor topic, but to our presence and relevance
in Indiana. We only have 2 percent and in some markets such as
Indianapolis a 7 percent share. Other players such as U.S.
Cellular and Leap Cricket, as well as Rebel--and then I am not
quite certain whether all the others. Sprint, AT&T, and
Verizon, are there as well. It is quite a contested area. It is
a very competitive environment there. Our market share in that
area is fairly small.
Mr. Stephenson. If I could add one more thing. We have a
long history in terms of employment in the State of Indiana,
and the State of Indiana has done a number of things in the
past to clear roadblocks for us to deploy broadband. We have
always made commitments on our investment, our deployment, and
our hiring, and we have always hit those. And I think we have a
good track record in Indiana. This is a specific case where
Indiana will be affected exclusively by the rural build, and
again investment in our industry means hiring. So this should
be a net job creator for the State of Indiana specifically.
Mr. Pence. I appreciate that very much.
Mr. Berry?
Mr. Berry. Yes, Congressman Pence. Thank you for the
opportunity.
We have six members of RCA members in your congressional
district. And, yes, they want to roll out broadband as dearly
as everyone else.
I sort of dispute the contention that you need clean,
clear, unused spectrum in order to roll out broadband. I mean,
the first broadband 4G network was rolled out by MetroPCS with
1.5 megahertz of spectrum. Granted, they are going to grow and
we hope they will grow all over the Nation.
Normally when you are adding onto your house, you don't
normally buy the next house next door until your sunroom is
finished. You can, through managing the network, do both. And
that is what the small carriers are doing right now. They are
rolling out high-speed 4G in your area right now. If we had
interoperability and data roaming, then Randall Stephenson and
AT&T and T-Mobile would have many partners in doing that.
The 55 million people that you talk about--that is AT&T new
potential users. It doesn't mean that those 55 million people
right now don't have some coverage or broadband capability like
other carriers.
Mr. Pence. Well, I am someone that really believes--the
Chairman knows--in competition, but my objective is to create
a--support policies and practices that create a level playing
field. I believe, Mr. Chairman--and you represent a rural area
too--we get this technology out to rural America, medium-sized
cities, small towns, we will show the east coast and the west
coast a thing or two about job creation and growth.
Mr. Goodlatte. I thank the gentleman. My rural area is on
the east coast. [Laughter.]
The Chair now recognizes the gentleman from New York, Mr.
Nadler, for 5 minutes.
Mr. Nadler. Thank you, Mr. Chairman.
Ms. Desai, one solution you propose for AT&T to increase
its capacity is to build more infrastructure, cell towers, for
example. But I am sure you would agree that building
infrastructure takes time. And let's assume that AT&T is
correct that a combine AT&T/T-Mobile entity can use its combine
spectrum more efficiently than the two companies can
separately. Wouldn't we increase capacity a lot faster by
having AT&T and T-Mobile combined than we would by waiting for
either or both to be able to build cell towers, buy spectrum,
et cetera?
Ms. Desai. So I think when you try to combine the two
networks, it is still going to take time to convert.
Mr. Nadler. But wouldn't it be faster?
Ms. Desai. I don't think it is clear it would be faster. If
they invest in their network work, they have the spectrum. They
have the assets to invest in their network now rather than
trying to integrate T-Mobile customers into AT&T customers. I
think that is a question----
Mr. Nadler. Thank you.
Mr. Stephenson, would it be faster?
Mr. Stephenson. No, sir, it would not. In fact, your
particular market is a specific example of where you would get
overnight efficiencies if you combine these two networks.
Mr. Nadler. That is what I just said. Would it be faster if
you combined them than if you didn't?
Mr. Stephenson. Oh, yes. If we put these two networks
together, it is a much faster path to improve service.
Mr. Nadler. So Ms. Desai is saying it is the same, and you
are saying it is much faster. Okay.
Mr. Stephenson. Much faster.
Mr. Nadler. Ms. Desai, since 1999 the overall price of cell
phone service has declined in inflation-adjusted terms. There
were a lot of mergers in that period. Does this suggest that
fewer competitors doesn't always mean higher prices?
Ms. Desai. So I think that data relates to voice prices,
and voice prices should go down, especially since the cost of
providing voice service has gone down. So I think it is natural
over 10 years for voice----
Mr. Nadler. Natural because of better technology. It has
nothing to do with----
Ms. Desai. Right. It is cheaper now to deliver voice
service. But more and more, people are now using data service,
and we have seen that in the last almost 10 years the average
revenue per user nationally has gone up for carriers. So we are
seeing that revenues are going up on average. The ARPU, the
average revenue per user, is going up. So I think if you ask
most people in this room, they would say that their cell phone
bills have actually gone----
Mr. Nadler. Okay, thank you.
Mr. Stephenson, obviously--and several other members have
alluded to this before--a key question for the antitrust review
is whether the analysis is done assuming one national market or
multiple local markets. Viewed as a national market, in terms
of 2010 revenue, combined AT&T/T-Mobile would control 44
percent; Verizon, 35 percent; and Sprint, 16 percent. It would
essentially be a duopoly raising serious competitive concerns
in any traditional antitrust analysis.
Not surprisingly in your testimony you dispute relying on a
national market and suggest we should be looking at each
individual market. You say that, quote, wireless competition
occurs primarily on the local level, that there are many other
strong competitors in the marketplace besides Sprint, Verizon,
and AT&T, and this is consistent with your FCC filing on this
transaction.
In 2008, however, AT&T took a different position. As part
of its acquisition of Centennial Communications, David
Christopher, AT&T's Chief Marketing Officer, signed an
affidavit to the FCC in which he very clearly argued that AT&T
competes in a national market and that regional operators like
Centennial were not real competitors.
For example, he made the following statements. I am just
going to read one out of that declaration. This is a quote.
``AT&T makes nearly all competitive decisions in response to
national competition. AT&T offers national plans that gives
subscribers a consistent number of minutes of service for a
single monthly price with no roaming charges and does not
provide regional or local plans that vary depending on
subscriber location.'' These statements--and there are a couple
other statements that I don't have time to read--mirror what
AT&T has told the FCC with respect to other transactions in the
past.
There is clearly a--at least apparently, I should say--if I
am wrong, tell me so, but there is apparently a reversal in
AT&T's position on this national versus regional market
question between 2008 in the Centennial proceeding and now.
One, do you agree that there is such a reversal? And two,
to what do you attribute it?
Mr. Stephenson. Yes, sir. We did make that assertion in
2008, and we have done it in other time frames as well. The FCC
and the Department of Justice have consistently and routinely
rejected that. They have consistently and routinely said that
these markets are local markets, that the customer's decision
is made at the local level.
And I would tell you over the last 3 years, there has been
a significant change in this marketplace. When we made our
analysis of this particular transaction, our view was that this
local marketplace has changed. If you look at San Antonio, if
you look at New York versus Miami, those markets are
fundamentally different. Our key competitor in--take the
valley, for example. Our key competitor there and in Miami are
Leap and MetroPCS. They are the focus of our competition. You
go to Houston, our key competitor is Verizon. You go to New
York----
Mr. Nadler. Excuse me. Well, wasn't that true a few years
ago also in any local market?
Mr. Stephenson. No. The market has fundamentally changed.
MetroPCS and Leap are the basic examples of where this is
changing. In fact, if you look at the last quarter, in the last
quarter, the largest gainers in the mobile industry were those
two providers, MetroPCS gaining 700,000 customers, Leap gaining
in excess----
Mr. Nadler. So, in other words, you are giving me two
answers. You are saying, one, the market has fundamentally
changed. And two, even before the market changed, the FCC said
look at the local market.
Mr. Stephenson. They consistently told us--DOJ actually
consistently told us--these are local markets, and so that is
where we are.
Mr. Nadler. Okay. Thank you. My time has expired. Thank
you.
Mr. Goodlatte. I thank the gentleman.
We have just a few minutes left in a series of votes. The
series is going to go on for a long time. We have several
Members of the Committee who still wish to ask questions. So we
will recess the Committee. We encourage you to go out and get
some lunch because it is going to be at least an hour, probably
longer than that. And then we will reconvene just as soon as
the series of votes ends. The Committee will stand in recess.
[Whereupon, at 12:37 p.m., the Subcommittee recessed, to
reconvene at 2:51 p.m., the same day.]
Mr. Goodlatte. The Committee will reconvene.
And the Chair now recognizes the gentleman from Texas, Mr.
Poe, for 5 minutes.
We probably could use wireless technology. [Laughter.]
Mr. Poe. Somewhat ironic, is it not?
Thank you, Mr. Chairman. Thank you for being here and
coming back.
Mr. Stephenson, I want to talk about some issues regarding
coverage. 97 percent with the merger. 97 percent of the country
will be covered. I want to know kind of where that 3 percent
is.
Here is the background. When I go down to the Texas-Mexico
border, ranchers don't have cell service in every area.
Recently I was in Arizona as a guest of Gabby Giffords and her
staff, and while I was down on the Arizona border with Mexico,
no cell service, except I was getting service from service from
Mexico. It wasn't Mexico Bell, but it was something. And that
was the only cell service I was getting.
Bob Krentz. His wife Sue and many of the other ranchers in
Arizona believe that the reason he was murdered was because
when he was ambushed, he could not use his cell phone. And so I
have introduced, with the support of Congresswoman Giffords,
legislation to try to get a private/public partnership so the
ranchers can have cell service on the border with Mexico for
national security reasons.
My question is, is that 3 percent going to be still on the
border with Mexico, or is that going to be covered with this
merger?
Mr. Stephenson. I am sorry. I cannot tell you definitively.
I don't know. I will have to go check it out, but we will
respond for the record to let you know where the coverage, as
it relates to the border, is. As I look at the maps, it tends
to be in the very mountainous regions, particularly in what we
call the ``square States,'' so the Montanas and Idahos. There
are some areas in there that, just quite frankly, it is very
difficult to cover. But I will have to get back to you on the
border States.
What I would suggest, Congressman, is irrespective, that 3
percent still has to be a goal of ours. I don't think we as a
country should give up on that 3 percent. What I would offer
and suggest is as we build these networks out and as private
capital finances the 97 percent, then we can really turn our
attention from a Universal Service Fund standpoint to the 3
percent. And I reinforce that that is probably an achievable
goal from a public policy standpoint rather than Universal
Service funds trying to cover 20 or 15 percent.
But I will have to get back to you to tell you exactly
where we stand as it relates to the border areas.
Mr. Poe. I appreciate that and I have a list of questions
that I will also submit for the record. Send the answers back
to the Chair, if you would.
I think universal coverage is important, but it is
especially important to people who live on the border because
of the national security--their own personal security, rather,
that they have a very strong concern about throughout those
regions.
Mr. Berry, did you want to weigh in on that?
Mr. Berry. Well, I just wanted to say the 97 percent, as I
understand it, is 97 percent of the population, not 97 percent
of the geographic territory of the United States.
Many of the small carriers, like the ones I represent, have
the lower 700 megahertz band spectrum, and they have a
geographic build-out requirement. Most of the spectrum that
Verizon has and most of the spectrum that AT&T has has a
population build-out requirement. So there are two different
requirements for the same type of spectrum.
But if you cover 97 percent of the population in the United
States, you are probably still short around 13 to 15 percent of
the geographic territory in the United States.
Mr. Stephenson. Oh, no. It is much higher than that
actually. 97 percent of the population is only 55 percent of
the land mass. So there is 45 percent of the land mass that
will not be covered by this build, which is 3 percent of the
population. That is why I say I will have to get back to you.
Mr. Poe. All right. Thank you very much for that.
In southeast Texas that, as you know, I represent, I have
had some concern with people that have Cricket. They think
Cricket is going to go out of business with this merger. Weigh
in on that. Are you going to put them out of business, Mr.
Stephenson? They think you are. They think you are going to put
them out of business.
Mr. Stephenson. There is no indication of that yet. In
fact, I would suggest to you Leap, Cricket, MetroPCS, these
what we will call no-contract participants, have done, I
believe, a very masterful job at penetrating the lower end of
the marketplace with low-end price plans. And then what they
have been doing of recent is bringing smart phones into the
marketplace and moving up into the mid tier of our customer
base. So, obviously, at the mid tier, there is starting to be
some more definitive competition.
But if you look at the last quarter results, Congressman,
what you will see is those two companies together added a
million subscribers. So Leap added 300,000 subscribers.
MetroPCS, same type company, added 700,000 subscribers, as
opposed to T-Mobile who actually shrank in the first quarter of
this year, and Sprint adding a million subscribers. So they are
actually the fastest growing in the industry at this point.
Mr. Poe. I am out of time. I have some other questions I
would submit for the record with the Chairman's consent.
Mr. Berry. Mr. Poe, I don't want Randall Stephenson to just
brag on my members alone. I think we ought to also indicate
that his company was very successful in adding 1.9 million new
customers and Verizon was 1.7 million new customers in the last
quarter. So I think the entire industry, for the most part, is
growing, and consumers are accepting the type of product that
we are putting out there.
Mr. Stephenson. No argument.
Ms. Desai. Can I just briefly add----
Mr. Goodlatte. Yes, Ms. Desai, you can respond as well.
Ms. Desai. The GAO report found that the more concentrated
the market gets, it makes it easier for the larger carriers to
grow, but it makes it more difficult for the smaller and more
regional carriers to grow because of barriers to entry. So the
bigger that the companies get, it makes it more difficult for
the smaller carriers to compete. So I think we should be
concerned about what happens to smaller carriers.
Mr. Poe. Thank you, Mr. Chairman.
Mr. Goodlatte. I thank the gentleman.
The gentlewoman from California, Ms. Lofgren, is recognized
for 5 minutes.
Ms. Lofgren. Thank you, Mr. Chairman. And I think this
hearing is a helpful one. I think these are very difficult
questions that we are facing.
As I think about this, with this merger, we won't be
entirely back to where we were when Judge Greene had the case,
but we are definitely moving in that direction. When I think
about what we accomplished with Judge Greene and the Telecom
Act in 1996, not just in your space, but the innovation that
was a result of that is astonishing. I remember a time when you
could only buy your phone from Ma Bell, and now you have got
smart phones. That innovation was because of the competition
that happened. So not to have a competitive environment does
concern me a tremendous amount.
On the other hand, I listened carefully to what Mr.
Obermann said, and it sounds like you have made the decision--
your company has made the decision you are not going to build
out to 4G. And if you are not going to build out to 4G, you are
not going to have a customer base.
So my question to you, Mr. Obermann, is this. What if the
Department of Justice says you can't do this merger? What do
you do then?
Mr. Obermann. The situation is that we have built out 4G
services with our HSPA+ network. ``4G'' is a term which we can
also claim for us----
Ms. Lofgren. All right.
Mr. Obermann [continuing]. Because the existing network--we
have upgraded it to----
Ms. Lofgren. Let me just say you have made your decision. I
don't want to argue on who is claiming 4G that it isn't really
4G. But you are not going to make the next level of investment
you said.
Mr. Obermann. No. I said that we are lacking the
precondition to build our network from what we have today,
which is HSPA+ to the next generation technology based on LTE,
long-term evolution. That is a technology which will offer more
speed, more efficiency----
Ms. Lofgren. So you are not going to do LTE.
Mr. Obermann. Which we cannot do given our spectrum
position. And also, even if we had the spectrum, it would
require significant additional investments----
Ms. Lofgren. No. I got that. The question is if the
Department of Justice nixes this deal with you and AT&T, what
is your company going to do?
Mr. Obermann. Well, we would, obviously, try to make the
best out of what we have and try to compete. But let me be
clear on this. This would be over the longer term. We would be
in a very difficult situation. We would probably have to change
our market approach completely.
I don't think we would end up there because once the facts
are on the table, you will see the benefits of this
transaction, and I am sure that these benefits give good enough
reason for this merger to be approved. So I don't think we will
end up in that scenario. I think there are very good reasons.
The benefits are enormous for our customers and for AT&T
customers and for the market as a whole.
Ms. Lofgren. You know, I was thinking that if this merger
goes through, the obvious response is going to have to be a
heavier regulatory load in the wireless space to try and
preserve some competition. And then I was remembering COVAD
which was in my district, and I remember as COVAD started as a
DSL provider, AT&T was required to allow them access but they
had to have more lawyers than engineers because they had to
file lawsuit after lawsuit to enforce their rights. So I am
wondering if the two professors have any advice for us in terms
of how effective an increased regulatory approach through the
FCC in the wireless space would be if this merger goes through.
Mr. Wright. Thank you. The short answer is going to be it
depends on the problem that you are talking about. With respect
to, for example, roaming, there is, as I understand it, a
regulatory framework in place with respect to those concerns.
With respect to concerns some have raised, for example, with
backhaul issues, although I stated in my earlier testimony that
I do not think that those raise a particular concern here,
given that we are not in that space----
Ms. Lofgren. I am almost out of time. I don't want to
appear rude, but I have got just a few seconds left.
Professor Gavil, one concern that has been expressed is
that with a duopoly or monopoly, you would actually have the
ability to deter innovation outside of the space. What could
the FCC do about that?
Mr. Gavil. As I understand it, right now that would really
not be directly in their realm of regulation. That is one of
the things I am concerned about.
I think on your first point, as I indicated at length in my
prepared statement, I am very concerned about returning to a
regulatory scheme that is a combination of the FCC, the
Department of Justice, and the Federal courts. I think we tried
to get away from that in the Telecommunications Act, and I
think that a negotiated settlement of this deal would be a step
backwards from the kind of competition framework that the
Telecom Act was designed to create.
And in terms of innovation, we are going to essentially
have two gatekeepers that will be picking winners and losers in
terms of technology. It will be very difficult I think in that
setting for new handset developments, new operating system
developments to break through into the market. There will be
fewer choices in terms of carriers with sufficient customer
base to attract the capital it takes to innovate on a large
scale.
Mr. Obermann. Congresswoman, please give me a chance to
disagree with that. I think there is going to be enough
competition. I just happened to find an ad where a new company
called LightSquared is announcing that they are going to build
out a broadband network and that this will be a nationwide
built-out network today. There are plenty of other regional or
large facility-based carriers such as Sprint and the regional
ones. We don't have such a constrained competition. We have
extensive competition in this market, and the market shares in
the respective markets speak for themselves. There are some
markets where U.S. Cellular or Metro or Leap or others are very
strong players, where they are stronger than us, for instance.
So we have intensive competition, and we create more capacity,
which is badly needed and that will even enhance competition
further.
Mr. Berry. Congresswoman, if I may.
Ms. Lofgren. It is up to the Chair. My time is up.
Mr. Goodlatte. Mr. Berry is allowed to answer the question.
Mr. Berry. Real quick just on that. I would like to quote
John Stankey who is the head of AT&T Enterprise Business. Just
2 weeks ago, he said that Clearwater and LightSquared, which
Mr. Obermann just mentioned, would be better off consolidating
and the best hope for the U.S. mobile wholesale market
providers is that they should get swallowed up by a merger.
There really isn't a profitable wholesale market in the
wireless industry today.
And to suggest that my regional carriers are potentially
equal in their competitive advantage to an AT&T or Verizon is
just not correct. We would say in Virginia that that dog won't
hunt.
Ms. Lofgren. Thank you, Mr. Chairman. My time has expired
and I appreciate your indulgence in letting me go over.
Mr. Goodlatte. I thank the gentlewoman.
And the Chair now recognizes the gentlewoman from Texas for
5 minutes, Ms. Jackson Lee.
Ms. Jackson Lee. Let me thank you very much. Our Committee
has really been consistent with our diligence in oversight over
a number of mergers that have occurred or been proposed over
the last 12 months to 2 years. So I thank the Chairman and the
Ranking Member as well.
Some of these questions have been asked and maybe asked
again, but I would like to pose them in a way of trying to
deliberate on solutions and to also focus on accountability.
Let me be very clear. I frankly believe that section 7 that
we repeat so frequently does not have the framework and the
teeth to do what we need to do. In my conversations with some
of those in the Justice Department who have responsibility for
that oversight, they would admit that it is not a particularly
piercing set of criteria that allows for what I would call
very, very detailed and strict review. That was evident from my
perspective, personalized view, from United Airlines and
Continental that I still consider a questionable decision.
But I think that we have some opportunities going forward
in this instance to see what our solutions are. I think it is
important to consider the driving factors in the wireless
telecommunications industry, those offerings that drive
consumer decisions, price, service, quality, and variety of
devices. And we have a world of devices.
In addition, I think it is important to note and to put on
the record that AT&T is a union company and its union friends
or workers are in support of this. That is an important
statement, albeit that job decisions have to be made.
So I am interested in, to AT&T's representative, in
particular, what will be measures that you will be able to
evidence that will ensure that the company's expansion
minimizes the number of job loss particularly since T-Mobile
has overlapping, if you will, job descriptions and positions.
In addition, T-Mobile and others have lost less jobs than what
AT&T has decided to do as they have merged or have been
involved with other smaller companies. What is the measure of
what kind of commitment, what kind of measure will you utilize
or will you be able to present to the DOJ, to the FTC on the
lack of job loss? Mr. Stephenson?
Mr. Stephenson. We report to, obviously, both the
Department of Labor and then to our external public the level
of jobs in our company on a routine basis.
What I would expect is if one were to look at our wireless
business, which this is a wireless merger, that one could look
at the employment levels in the wireless business to ascertain
what has happened to employment. You pick the period of time,
over whatever period of time that we evaluate this. There are
going to be a lot of things going on.
The primary thing going on that I think is going to be most
important is the broadband build-out. That is an $8 billion
investment over a several-year time horizon. And I think there
are couple of things that we all ought to evaluate. I can tell
you what I will be looking at. A 97.3 percent population
coverage of broadband. Do we achieve that? The investment
required to get there, the $8 billion--the $8 billion
investment is what will drive the job creation, is the $8
billion being invested? Are you achieve the coverage? Is the
money being spent? Is the investment being put in the ground?
Are the cell sites being constructed, et cetera, the antennas
being erected? So can you evaluate those? Those are the metrics
you look at to discern whether this merger is doing what you
want it to do.
Ms. Jackson Lee. Mr. Stephenson, you understand the inquiry
because we have had these hearings before. Certainly I have had
some wonderful briefings and explanations. I think it is the
question of how serious the company will be and not going down
the pathway. You have the opportunity for expansion. You need
spectrum. You need broadband, and so do poor communities and
rural communities where I think there is an intent to serve.
Why can't we simply say we are creating jobs? We don't need to
lose jobs. You are creating work. You are creating expanded
work, expanded reach. Why do we have to lose jobs?
Mr. Stephenson. Well, that is the expectation. As I said at
the very beginning, when you do these types of transactions and
you put the companies together, there are redundant
responsibilities. Again, you don't need two finance departments
and marketing departments. We have a history of how you deal
with those redundancies, and I think we have been very
effective at dealing with them properly and offering folks
opportunities to move into the growth sides of the business.
But this merger is about investment. It is about $8 billion
in investment and broadband build-out to rural America, and so
the jobs must go with that.
Ms. Jackson Lee. Can I just ask Mr. Berry? What does this
merger need to do for you to make you whole?
Thank you, Mr. Stephenson.
Mr. Berry. Thank you for the question.
Ms. Jackson Lee. The ultimate possibility of a merger. How
are you made whole?
Mr. Berry. I don't think you can. That is why I say I do
not think that this deal can be conditioned into approval. I
think the basic ecosystem of not only the companies, but the
suppliers, the vendors that support the tier 2 and 3 carriers
will be irrevocably changed if you have this merger. There will
be fewer partners to partner with to roam. There will be fewer
opportunities for the smaller carriers to grow and share their
nationwide footprint with that they need so desperately in
order to----
Ms. Jackson Lee. What about cost? Pricing.
Mr. Berry. Well, I think the pricing will ultimately go up.
I think it will go up on several ends. You have this vertical
integration, and we talked a little about it earlier. Chairman
Goodlatte mentioned it. You are going to have a monopoly on the
GSM side of the backhaul. So it is not going to be multiple
people setting a competitive price on the backhaul.
Ms. Jackson Lee. Mr. Stephenson, can you quickly just
answer? It is a rural area. You are talking about expanding
broadband into the rural area. I don't want Mr. Berry to go out
of business.
Mr. Stephenson. There is an interesting fact here, and that
is why Mr. Berry and his organization are opposed to this
merger. We are going to build vast broadband to rural America.
We will be a direct competitor to Mr. Berry and his companies
that he represents. There will be direct, full competition. And
I thought that is what we were about. And so we are actually
bringing a new competitor to bear to rural America. And so I
understand why they don't like the merger. That doesn't change
the fact that it does enhance and bring more competition, which
I believe is good for rural America. For the first time,
rural----
Mr. Goodlatte. The time of gentlewoman has expired.
Ms. Jackson Lee. Well, let me thank them. Let me just put
this on the record, Mr. Chairman, and then I will yield. And I
thank you very much.
You heard me say service, pricing are key elements besides
the whole expansion of the service. I just want to pierce even
more about the pricing for rural and less economically endowed
consumers. Competition is good. I am going to keep probing that
question.
Thank you. I yield back.
Mr. Goodlatte. I thank the gentlewoman.
The Chair is now pleased to recognize the gentlewoman from
California, Ms. Waters, for 5 minutes.
Ms. Waters. Thank you very much, Mr. Chairman. I appreciate
this hearing and I came early and I have sat because I want
very much to learn.
I see the work of this Committee, particularly as it
relates to antitrust laws and mergers, et cetera, as extremely
important. And I believe that I and others who are elected by
the people have a responsibility to hold regulators accountable
to their statutory responsibilities. The FCC is supposed to
consider the public interest and diversity, and the DOJ is
supposed to preserve competition. And so I think that we should
get right in the middle of this. We should understand
everything that is going on. We should be able to challenge,
and that is precisely what I intend to do.
I want to start with a question that I would like to ask
about access. There has been some conversation today about
backhaul and special access. In previous comments to the FCC,
T-Mobile has said that the FCC should consider fundamental
reforms to its regulation of the rates for special access
services. That, in T-Mobile's experience, are at least subject
to competition. T-Mobile continues to seek an alternative to
subsidizing its two largest competitors, but today AT&T and
Verizon continue to supply the majority of T-Mobile's backhaul
services. What implications could this merger have on special
access rates, and how competitive can smaller carriers be if
they have to pay high rates to offer consumers competitive
plans?
Mr. Obermann, you started this conversation. Now, what are
you saying about it today?
Mr. Obermann. I can say, Congresswoman, that we have made
ourselves increasingly independent from the local telephone
companies over the last few years and that there are now
numerous--or there are sources to get special access from such
as subsidiaries of utility companies, such as fiber companies,
such as cable companies, or you can do it by microwave links.
So it is a very competitive environment. And we have reduced
already our dependency on the local telephone carriers.
The merger as such, ma'am, doesn't change the situation
because we are not selling special access to third parties. So
we are not a part in the competition there. And hence, since we
don't sell, the merger between AT&T and us doesn't change the
picture.
Ms. Waters. Mr. Berry, I think you had something to say
about backhaul and access.
Mr. Berry. Yes. I guess the question I would ask is how do
you determine what is a competitive price in a monopoly
situation. I mean, normally in a monopoly situation, the market
dominance of an individual or a company sort of trumps every
other competitive price that is set by market forces. So if you
are a GSM provider, there are not many alternatives there. By
taking T-Mobile out of the market--and they are a competitive
purchaser of backhaul--you shrink that market availability, and
AT&T will fold them into their capability and it will be part
of the preference service that AT&T provides.
Ms. Waters. Some of us are going to pay special attention
to this.
I really am concerned about the jobs. You have answered a
lot of questions about jobs, and you talked about where your
investments are going, where the growth is, all of that. But I
want you to know it is a major concern for many Members of
Congress.
I want to move to something else. In the merger of Verizon
and Alltel in 2008, the Justice Department ordered Verizon to
divest assets in 100 areas in 22 States in order to proceed
with its $28 billion acquisition of Alltel. The Bush
administration's DOJ ordered Verizon to divest wireless
businesses in certain areas, as well as radio spectrum. Verizon
retained Morgan Stanley to sell the assets. However, we learned
that AT&T bought the lion's share of Verizon's assets in 79
rural areas for $2.35 billion. AT&T acquired spectrum licenses,
cell towers, and 1.5 million subscribers in the deal. Since
AT&T phones were not compatible with Verizon phones, all of
those subscribers had to upgrade and get new phones. That is a
cost that we have to be concerned about.
Beyond that, I think you know the information about how
minorities are using wireless. From what I can see, Latinos and
African Americans lead the way in the mobile broadband use,
subscribing at a rate of 53 percent and 58 percent,
respectively. That is big.
And so having said that, I know we are early in the
process, but do you anticipate having to divest any assets,
small or rural businesses, as a result of this merger? And if
so, have you thought about ways to extend opportunities for
small, minority women-owned businesses to participate in some
way? I am really focused on wealth-building these days, job
creation, and ownership. Do you have any thoughts on that, Mr.
Stephenson?
Mr. Stephenson. Yes, ma'am. Virtually every transaction we
have done over the last few years has had similar requirements
to achieve the approval. There will be certain markets that the
DOJ will deem to be too much concentration, and so they will
require us to divest networks, spectrum, and customer bases.
And so I have an expectation there will be markets like that in
this particular transaction that we will have to divest.
And I will tell you I have every expectation that we would
entertain any number of options of people to come in and
acquire these assets. They will be good standing businesses,
businesses with revenue streams. It will require some capital,
obviously, to keep them going. But, yes, we would obviously
look at any kind consideration for other folks we could help in
business development and economic development and folks who
would not ordinarily have an opportunity to do this. We would
give that evaluation.
Ms. Waters. Well, I appreciate that. As Mr. Conyers said
earlier, we get a lot of these conditions in these mergers that
never get realized. And I am not focused on conditions right
now. I think the case has been made that this may not lend
itself to conditions because this is so big. We are talking
about creating a duopoly here.
But I still want you to think about minority ownership and
participation in a real way. It is about time that minorities
who are consumers who are spending huge amounts of money in any
industry be considered as owners in some way. And so I will be
watching that.
Thank you very much, Mr. Chairman.
Mr. Stephenson. We have done those in the past too, madam.
Ms. Waters. But I don't know of any that have been
successful at this point.
Mr. Goodlatte. We will allow Mr. Obermann to respond too.
Mr. Obermann. We have always taken great pride----
Ms. Waters. I can't hear you.
Mr. Obermann. We have always taken great pride in serving
minorities both as customers. We also have preferred suppliers.
About 21 percent or so of our suppliers are minorities. So are
our consumers. 50 percent are minority. And they will get
access to better coverage, to better service, eventually to the
best possible network and they can keep their rate plans. At
least that is how I understood Mr. Stephenson in previous
discussions. To me that is an important point. We care. And to
them, it is beneficial.
Ms. Waters. That is great. You add to that ownership and
you excite me.
Thank you. I yield back.
Mr. Goodlatte. I thank the gentlewoman.
And I want to thank all of our witnesses today. There has
been a lot more activity at this half of the table than at this
half, but Professor Wright and Professor Gavil, Ms. Desai, your
contributions were all important and very welcome. On this
side, you had a lot of pointed questions directed to all three
of you. I think you did well with your answers.
We have a number of additional questions that will be
coming forward in writing, and we hope that you will respond to
those quickly so they can be included in the record.
Ms. Jackson Lee. Mr. Chairman?
Mr. Goodlatte. The gentlewoman from Texas?
Ms. Jackson Lee. Yes, Mr. Chairman. As the gentlelady is
leaving, I just wanted to make sure, since I understand Mr.
Conyers might have had that line of questioning, that Mr.
Stephenson, a third person is interested in the opportunity for
spin-offs and business development. That is myself.
And the other individuals at the other end of the table,
Mr. Chairman, we didn't ignore. We will be reading their
materials. I really believe this will be a long process that we
all will be engaged in.
So I yield back. Thank you very much.
Mr. Goodlatte. Without objection, all Members will have 5
legislative days to submit to the Chair additional written
questions for the witnesses which we will forward and ask the
witnesses to respond as promptly as they can so their answers
may be made a part of the record.
Without objection, all Members will have 5 legislative days
to submit any additional materials for inclusion in the record.
With that, I again thank our witnesses and declare the
hearing adjourned.
[Whereupon, at 3:25 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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