Column: T-Mobile, Sprint come up short in making their case for a wireless merger

Economists call it “perfect competition� and it’s basically the opposite of a monopoly. It’s when a market has a sufficient number of players to ensure the highest level of efficiency for both buyers and sellers.

It’s a principle that’s once again being put to the test as T-Mobile and Sprint seek a merger that would reduce the number of major wireless carriers in the United States from four to three.

The two companies make an interesting case. They’re arguing that amid a costly race to introduce next-generation 5G wireless networks, they’d be better able to compete with market leaders AT&T and Verizon by pooling their resources.

They’re saying it’s better for consumers to have three strong market players, rather than two strong ones and two weaker ones.

Analysts are mixed on the validity of this argument, but they’re not dismissing it out of hand.

“The story they’re telling is a plausible one,� said Daniel Lyons, an associate professor at Boston College Law School who specializes in telecom matters.

“The question is whether, after a merger, they’d have the scale to compete with the two larger players,� he said. “The answer is we don’t know — and we don’t know the effect this would have on the market.�

Nicholas Economides, an economist at New York University, said that for a market to be considered truly competitive, it should have at least 10 players.

“In the case of the wireless market,� he said, “we’re already talking about an oligopoly. So a merger would just make an even more concentrated oligopoly.�

Going from four to three players, Economides said, “makes it extremely likely prices will be higher.�

That’s usually the case. Less competition in an industry almost always translates to higher prices, worse service and less innovation.

Yet so far the wireless industry has largely bucked the trend.

Even with just a handful of providers, prices have remained relatively stable and at various intervals have come down amid price wars among carriers.

That’s mostly been a factor of T-Mobile keeping rivals honest with scrappy moves such as getting rid of contracts, roaming fees and data limits.

So the question for federal officials is whether a more muscular T-Mobile would be able to come up with even more disruptive and consumer-friendly ideas, or if the market would be better served by preserving what little numerical competition remains.

Last September, the Republican majority of the Federal Communications Commission issued a report saying the U.S. wireless market had reached a state of “effective competition� for the first time since 2009, when there were nearly twice as many players duking it out for market share.

“Most reasonable people see a fiercely competitive marketplace,� declared FCC Chairman Ajit Pai.

No, most reasonable people do not see a fiercely competitive marketplace. They see average monthly wireless bills of $73 and spotty coverage that can cause entire neighborhoods to fall into black holes.

And if four players constitute “fierce competition,� what does the FCC call the cable market, where consumers typically have only one provider to choose from? Moderate competition?

Both the FCC and Department of Justice are tasked with making sure proposed telecom mergers are in the public interest. Among other factors, they weigh how a possible decline in competition would affect consumers. The DOJ frequently requires merger partners to alter deal terms as a condition of approval.

My sense is that as our wireless oligopoly heads toward an eventual duopoly of AT&T and Verizon, the big dogs will feel increasingly comfortable exploiting their market clout, just as phone and cable companies have shown no hesitation pricing services as high as possible.

While having more market players than you can count on your fingers and toes is obviously preferable, economists frequently turn to what’s known as the Herfindahl-Hirschman index, or HHI. The Justice Department uses the HHI in its scrutiny of proposed mergers.

It’s a calculation that produces a number from less than 1 to 10,000 indicating the concentration of a market.

If there was only one company in a market, a monopoly, that would be an HHI of 10,000. If there were thousands of players, the HHI would be nearly zero — the blissful state of perfect competition mentioned above.

Any HHI above 1,800 is considered a sign that a market is highly concentrated, or seriously lacking competition.

As of last year, the HHI of the U.S. wireless market was close to 3,000. More than anything else, this stat poses trouble for the T-Mobile-Sprint deal.

The companies — which say they would ditch the Sprint name and call themselves T-Mobile — will need to make a case to authorities that somehow their merger will make for a more robust marketplace, all evidence to the contrary notwithstanding.

The combined companies “will create a fierce competitor with the network scale to deliver more for consumers and businesses in the form of lower prices, more innovation and a second-to-none network experience,� T-Mobile CEO John Legere said in a statement.

“The combination of these two dynamic companies can only benefit the U.S. consumer,� chimed in Sprint CEO Marcelo Claure.

That’s hooey. What is believable, though, is that a wireless landscape shaped by superfast 5G services will require size and very deep pockets, and a merged T-Mobile-Sprint arguably would be in better shape to stand up to AT&T and Verizon.

“That’s where they need to come up with a compelling story,� said Gerald Faulhaber, a Wharton University professor emeritus of economics and former chief economist for the FCC.

“The level of competition in wireless isn’t strictly determined by the number of players,� he said. “Is it four? Is it five? Is it six? There’s no hard and fast rule.�

But if the companies want to pass muster with the FCC and DOJ, Faulhaber said, they can’t just make lofty claims about being a stronger competitor. “They’re going to have to prove it.�

I don’t think they can — just as AT&T was unable to make the case when it tried (and failed) to merge with T-Mobile in 2011.

T-Mobile and Sprint aren’t helped by the fact that each company was crowing just a few months ago that they looked forward to being 5G leaders.

Nor does it bolster their case that Sprint last week reported its most profitable fiscal year ever. The company cited its growing customer base and “initiating deployment for the first truly mobile 5G network in the U.S.�

Teresa Harrison, an associate professor of economics at Drexel University, said corporate executives always try to defend proposed mergers by saying they just won’t be able to compete with other industry players unless they can combine forces.

“My guess is the data won’t bear that out here,� she said.

T-Mobile and Sprint are already big, and they’re already doing well. They just need to do better.

That means they’ll have to keep prices below those of AT&T and Verizon. They’ll have to offer superior service. They’ll have to innovate.

Maybe that’s not perfect competition in the economic sense. But it’s chutzpah.

I’d settle for chutzpah.

David Lazarus’ column runs Tuesdays and Fridays. He also can be seen daily on KTLA-TV Channel 5 and followed on Twitter @Davidlaz. Send your tips or feedback to [email protected].