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.
* * *
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.
The scam continued after the first round of spectrum auctions took place. However, the scheme did not escape the notice of all FCC commissioners. For example, in April 2006, Commissioner Jonathan Adelstein noted:
We missed a real opportunity to shut down what almost everyone recognizes has the potential for the largest abuse of our Designated Entity program: giant wireless companies using false fronts to get spectrum on the cheap.
Commissioner Michael Copps echoed this assessment:
News reports indicate that, in prior auctions, entities with deep pockets helped themselves to discounts they were never meant to enjoy. This unacceptable behavior threatens the integrity of our auctions and, worse, it cheats consumers. … It also means that spectrum goes to those most willing and able to manipulate the rules of the game, rather than to the entities Congress actually intended to benefit...
Obviously, AT&T, Verizon and the rest of the telecom trust are not very small businesses. Nor can one honestly claim that dummy “small businesses” – or, better yet, false fronts for the majors – should be entitled to the benefits set aside for truly small companies in the name of competitiveness.
Failure to address this issue during the AT&T/T-Mobile merger process will only encourage further duplicity.
* * *
While Adelstein and Copps made comments about this practice, it is clear that the FCC’s role in this was – and is! -- to foster deception. It does this by using market analytic data that is more than a decade old. In 2011, the FCC data about small business wireless spectrum markets is from 1997, 1999, 2000 and 2001. And it uses this same out-of-date data in every docket pertaining to broadband Internet, net neutrality and wireless spectrum. The FCC is required to undertake a “Regulatory Flexibility Act” analysis to examine how their regulations will impact small businesses.
A telling insight into how this plays out is revealed in a 2011 FCC docket about the wireless auction in 1997 for very small business wireless spectrum:
Wireless Communications Services. This service can be used for fixed, mobile, radiolocation, and digital audio broadcasting satellite uses. The Commission established small business size standards for the wireless communications services (WCS) auction. A "small business" is an entity with average gross revenues of $40 million for each of the three preceding years, and a "very small business" is an entity with average gross revenues of $15 million for each of the three preceding years. … In the auction, held in April 1997, there were seven winning bidders that qualified as "very small business" entities, and one that qualified as a "small business" entity.
The FCC is the overseer of nation’s wireless spectrum. It has avoided an investigation to fix this data because they would find that the large companies essentially gamed the regulatory system, costing the government billions of dollars and harming both American consumes and wireless competitors.
* * *
Is a wireless duopoly in our future?
For those with short memories, old Ma Bell, the original AT&T system of local and long-distance services, equipment manufacturing and research, was broken up in 1984 into seven companies know as RBOCs: Regional Bell Operating Companies.
Over the intervening three decades, federal regulatory policies have helped propel the RBOCs into what Victor "Hu" Meena, the president and CEO of Mississippi-based Cellular South who spoke in opposition to the Senate merger hearing, identifies “a duopoly made up of Ma Bell's two behemoth descendants."
Meena was joined by Sprint’s CEO Daniel Hesse in opposing the merger. He addressed Sen. Leahy’s concern for the needs of rural customers. “If AT&T’s real goal was to reach more people in rural areas,” he said, “it could invest the $39 billion it is spending to buy T-Mobile to build out service to rural areas rather than raise the prospect of rural development as a pretext to swallow a competitor.”
Approval of the T-Mobile acquisition will likely set the scene for the remaining piece of the puzzle, Sprint Nextel. Will it be absorbed by Verizon to complete the duopoly? Stay tuned.
At the Senate hearing, Sen. Al Franken noted, “It took the Department of Justice more than 35 years of litigation before they eventually broke up Ma Bell, so it’s important to keep in mind the stakes of a merger of this size and scope.” He added, “I hope that this will be the first of several hearings on the proposed merger. We all know the merger is going to raise prices for American families and may cost thousands of jobs.”
Before the AT&T/T-Mobile is approved, the Senate needs to expose the scandal about the misuse of “small business” status and the awarding of wireless spectrum to the telecom behemoths. Equally critical, senators should insist that the FCC use accurate and current data in its deliberations.
In all likelihood the AT&T/T-Mobile merger will go forward – the federal government works for the trusts. Sen. Leahy and his Vermont constituency, along with the rest of the country, will be left holding the bag, witnesses to greater industry consolidation, inferior services and higher prices. And AT&T executives will laugh all the way to the bank.