The Secret $8 Billion Wireless Scam: How AT&T, T-Mobile and Verizon Game the System

On May 11, the U.S. Senate Judiciary Committee held a hearing astutely titled, "The AT&T/T-Mobile Merger: Is Humpty Dumpty Being Put Back Together Again?"

At the hearing, Chairman Patrick Leahy, D-Vermont, raised a fundamental challenge: “At present, four companies control nearly 90 percent of the national wireless market. The proposed acquisition would further consolidate an already concentrated market for wireless communication.”

The four companies that control the market (and their estimated market share) are: AT&T (26.8%), Verizon (26.0%), Sprint (22.9%) and T-Mobile (11.0%). With the merger of AT&T and T-Mobile, AT&T (44.0%) and Verizon (30.5%) will control nearly three-fourths of the market; Sprint’s share will increase to 16 percent; and the rest of the providers will drop to 6.3 percent.

If history is our guide, the FCC will approve the merger and come up with loosey-goosey voluntary commitments. And Verizon will most likely seek to acquire Sprint. This will return the U.S. to a wireless duopoly.

In 1984, when AT&T was broken up, only two wireless licenses were allowed per market. The local Bell Operating phone companies received one of the licenses for their entire territories and the second license was put up for bid.

In 1992, the U.S. General Accounting Office (GAO) issued a report that stated: “by giving consumers an additional choice, the new PCS provider could spur cellular telephone carriers to improve their services and lower their prices.” In 1993, Congress pushed for multiple carriers in each market by including competition from “small” and “very small competitors” to service local markets.

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In our "Break ‘Em Up" series, we argue that the only way to improve the U.S. telecommunications system is by breaking the stranglehold exercised by the dominant conglomerates – the Communications Trust – that control it.

Sadly, at the Senate hearing, none of the esteemed senators raised the most disturbing episode in the recent history of wireless communications. AT&T, T-Mobile and Verizon gamed the regulatory system and were able to garner over $8 billion worth of discounted spectrum by posing as “very small businesses.” It was a massive rip-off of wireless spectrum that blocked legitimate small competitors from offering services, as they were “out-bid” by deep-pocketed impostors.

Three examples of the “very small business” scam are:

• Salmon -- in November 2000, Cingular formed Salmon PCS LLC to bid on certain 1900 MHz band PCS licenses.
• Edge Mobile -- in November 2004, Cingular partnered with Edge Mobile Wireless to bid as an “entrepreneur” for certain 1900 MHz band PCS licenses. [AT&T Wireless’s financial statements include other “variable interest entities” (i.e., very small business), similar to Salmon and Edge Mobile Wireless.]
• Vista -- in February 2005, the FCC’s auction of broadband personal communications services licenses ended and Verizon Wireless and Vista PCS, a Verizon partner, were the highest bidders for 63 licenses totaling approximately $697 million.

Fearing no action from the FCC or other federal regulatory agencies, the major telecoms openly acknowledged this duplicity. For example, Cingular (a joint venture of SBC and BellSouth was acquired by AT&T in 2004), reported in its 2002 annual report:

The Company has investments in affiliates for which it does not have a controlling interest that are accounted for under the equity method. The more significant of these investments are GSM Facilities, LLC (Factory), a jointly-controlled infrastructure venture with T-Mobile for networks in the New York City metropolitan area, California and Nevada, and Salmon, formed to bid as a “very small business” on FCC licenses and build out and operate wireless voice and data communications systems using those licenses.

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