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U.S. telecom regime provides strong model for Ottawa

The T-Mobile store sign is seen in Broomfield, Colorado in this file photo taken February 25, 2014. In 2011, the Federal Communications Commission and the Department of Justice’s anti-trust division blocked AT&T Inc.’s attempted purchase of smaller rival T-Mobile US Inc., a combination that would have shrunk the American wireless market to three big players from four. The government’s decision created a monster.

RICK WILKING/REUTERS

Think a heavy-handed government agency is bad for competition? Take a look at the U.S. wireless industry, which has become one of the most consumer-friendly markets on earth because Washington short-circuited the impulses of the U.S.'s profit-seeking telecommunications executives. Ottawa, which has struggled mightily to germinate a competitor for Canada's Big Three telecoms companies, should study the U.S. situation closely for inspiration.

In 2011, the Federal Communications Commission and the Department of Justice's anti-trust division blocked AT&T Inc.'s attempted purchase of smaller rival T-Mobile US Inc., a combination that would have shrunk the American wireless market to three big players from four. The government's decision created a monster. John Legere, the relatively staid telecommunications executive who was appointed to lead T-Mobile in 2012, morphed into a wild man, tossing his suits and ties for pink t-shirts and leather jackets as he went about shredding every pricing convention that the cellular-phone industry had held dear.

T-Mobile reported Thursday that it added 908,000 customers in the second quarter, compared with about 1-million additional subscribers at AT&T and 1.4-million new users at Verizon Communications Inc., two companies that are much bigger than T-Mobile. Mr. Legere raised his estimate of the number of postpaid subscribers he will add this year to as many as 3.5-million.

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At the same time, the competition is holding prices in check. The average postpaid phone bill at T-Mobile fell 2.3 per cent from the first quarter to $49.32 (U.S.). An average bill at AT&T dropped to $62.28 from $67.49 a year earlier, while the average monthly charge at Verizon grew 4.7 per cent to $159.73. Sprint Corp. chief executive Dan Hesse told Bloomberg News this week that he is considering prices cuts to retain customers.

This is what a dynamic market looks like. There are lots of doubts about how long it can last. Mr. Legere is winning customers but losing money. Japan's Softbank Corp., which controls Sprint, wants to buy T-Mobile, and Mr. Legere concedes that his "un-carrier movement" could sputter because AT&T and Verizon have such a great advantage in scale and capital.

When talk of a Sprint and T-Mobile merger surfaced, the FCC went out of its way to signal its misgivings with the idea. The authorities blocked an attempt to shrink the wireless market to three big companies, and they let it be known that they were pleased with the results. The FCC's intervention invited criticism that Washington was in denial of the economic realities of the wireless business. Perhaps, but within hours of the release of T-Mobile's second-quarter results, news surfaced that French telecommunications company Illiad SA had offered $15-billion cash to buy a controlling stake in T-Mobile. Deutsche Telekom AG, T-Mobile's parent, reportedly considers the offer too small. The FCC, however, must be smiling: By holding firm, it protected the four-company market it wants, while potentially creating the environment for Mr. Legere to get the capital he says he needs.

The most obvious lesson for Canada is that the government's desire for a fourth competitor in the wireless market is a worthy one. While it's debatable whether there's a great price difference between the two countries, there's little denying that U.S. carriers are being pushed to offer more for their customers' money. The other lesson is that authorities must take a firm hand. Prime Minister Stephen Harper's attempts to add a fourth player have looked ham-handed; like he can't quite accept that there isn't a new entrant dying to risk his or her capital to take on three well established incumbents. There is a strong gravitational pull in the telecommunications business to consolidate to achieve economies of scale. A government can counter those forces, but only if it is resolute about it.

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More

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