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Another AT&T Breakup Could Be In The Cards

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U.S. Dist. Judge Ellen Huvelle made it clear yesterday she will be a strict traffic cop for the Justice Department's challenge to AT&T's takeover of T-Mobile. The trial will start next Feb. 13, splitting the difference between AT&T, which wanted a January start, and DoJ, which wanted March, and take about a month to get done.

Regardless of how the Justice Department's case comes out, however, one valuable lesson has already become clear. This country is only one deal away, two at most, of seeing the emergence of a new-age telecommunications industrial trust with power not seen since the old Bell System was broken up.

It was not certain whether the Obama Administration would challenge AT&T's audacious move to wipe out a competitor. That's a slender reed on which to hang an industry as basic to our economy as telecommunications. If we had a Republican administration, there is no question that deal would have scooted through the Justice Department and the Federal Communications Commission with nary a peep of protest because that's how Republicans (and, to be fair, many Democrats) roll these days -- any which way big business wants.

It wasn't always that way. Once upon a time, marketplace competition was a foundation of GOP philosophy, not like today, when competition is simply a talking point to be trotted out at convenient times and ignored otherwise. It was, after all, the Ford Administration, which filed the antitrust case that resulted in the breakup of Classic AT&T (aka the Bell System, which combined local and long distance operations).

The actual breakup was accomplished in the Reagan Administration by William Baxter, the head of the Antitrust Division, an economic conservative who saw the dismantling of the world's largest company as necessary for true competition to emerge and so wanted local and long-distance separated. It worked for a while as the long-distance industry flourished and consumers benefitted, at least until the Bell companies, aided by compliant regulators, slowly but surely allowed the old structure to be reassembled.

That's where we are today, with most of the telecommunications industry beholden to two mammoth, integrated companies with the ability to control the fates not only of their customers but also of their competitors.

The communications world is much more complex than it looks. Focusing on one sector, say the wireless industry, while ignoring the rest, would be a mistake. The Justice Department noted in its complaint that:

To provide service, mobile wireless telecommunications carriers typically must acquire FCC licenses to utilize electromagnetic spectrum to transmit signals; deploy extensive networks of radio transmitters and receivers at numerous telecommunications towers and other sites; and obtain 'backhaul' - copper, microwave, or fiber connections from those sites to the rest of the network. They must also deploy switches as part of their networks, and interconnect their networks with the networks of wireline carriers and other mobile wireless telecommunications services providers.

As the trial proceeds, chances are there will be evidence introduced about that crucial "backhaul" part of the wireless business. It's essential to understand that AT&T and Verizon control "virtually all" of the types of service (called "special access") that provides that high-capacity, industrial-grade service needed by, say competing cellular companies, to connect their cell towers to the telephone network. That's why cell companies like Sprint, US Cellular, Cricket and Clearwire are members of the No Chokepoints coalition (as are landline competitors like BT, XO Communications and TW Telecom). They are concerned that they are paying millions of dollars more than they should, to subsidize the networks of their competitors.

These companies and others in the coalition (including my day-job employer, Public Knowledge) are concerned that AT&T and Verizon are abusing their control over the backhaul market to put competitors at a disadvantage, as well as driving up prices for business users (represented by Ad Hoc Telecommunications Users Committee).

The companies dependent on AT&T and Verizon for that "backhaul" connection have talked to the Federal Communications Commission (FCC) and the Justice Department, arguing they are being overcharged due to the stranglehold those two carriers have. They note the rates of return that AT&T and Verizon earn are as high as 78 percent at a time when the supposed allowed rate of return was 11.25 percent. The FCC, of course, has studied the issues for years and has done nothing except continually ask for more data.

It would not be surprising that as DoJ staff attorneys review their case files after this AT&T trial, it will become clear that while keeping AT&T from buying T-Mobile helped maintain competition in the wireless business, the only solution to the larger, competitive problem is divestiture -- that the conglomerates be required to spin off their wireless operations. That way, the wireless operations formerly of AT&T and Verizon would have to deal at the same arms-length basis with AT&T and Verizon wired companies that other cellular companies do. Such a step would also make clear that each technology would have to stand on its own, without one subsidizing the other or creating a tilted playing field (the opposite of a level playing field). Such a breakup, of wireline and wireless, would be the 2011 equivalent of the local/long-distance breakup of 1984. Except maybe this time, the split would stick a little longer than the last one did.

Obviously, a divestiture case like that is a big step, and not to be taken lightly or even quickly. Those who look at the current case think that if T-Mobile is gobbled up, then regulation is inevitable. That thought is followed up by skeptics, who ask which institution would allow such regulation. They contend industry control over Congress and the FCC would preclude even such common-sense move as helping to protect the public from a dominant duopoly.

They are probably right. Odds are against it -- for now. It took AT&T stepping way over the line to get the Justice Dept. engaged, but who is to say that line won't be crossed again? And that some public officials who take the public interest and antitrust seriously won't act again?

By taking the T-Mobile case to trial, AT&T is showing that it's willing to fight for the right to spend $39 billion to improve its network when a mere $3.8 billion would do the same thing. While that "Remember The Alamo" Texas fighting spirit is at times admirable, the company at some point might be better off listening to country singer Kenny Rogers' sage advice before the stakes get even higher.

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