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An AT&T/Verizon Story: Why Nothing Is Ever 'Over' in Washington

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This is a great week for taking a
step back for a good look at how Washington works.  It's also a great demonstration of that
wonderful saying, "It's never over until it's over.  And it's never over."

On the menu are AT&T's failed
takeover of T-Mobile, a bill to set rules for spectrum auctions, a payroll tax
bill pending in Congress, a bill to change FCC procedures, and Verizon's
planned collaboration with Comcast and other cable companies.   They
all have something in common:  big
companies trying to obtain their fair advantage over consumers and competitors.  In these cases, it's generally in the
wireless market.

When we last left AT&T, it had
ditched its $39 billion takeover plan. 
It had spent tens of millions in the pursuit of buying out its
competitor, recruiting all of its minions on Capitol Hill.  (It even tried giving away a tractor at an
event attended by influential politicians.) 
But the deal didn't pan out in the face of plain old common sense.  One might think that AT&T would just let
it die, and move on.  But no, AT&T
still is smarting from the loss and is taking out its ire at being thwarted on
its poor, unsuspecting customers.

In a petulant call with stock
analysts on Jan. 26, AT&T Chairman Randall Stephenson took out the collapse
of the deal on everyone but AT&T.  He
chastised the FCC, noting that, "this FCC has made it
abundantly clear that they'll not allow significant M&A to help bridge
their delays in freeing up new spectrum." 
By "significant M&A," he means merger and acquisition (M&A)
activity which consisted of his second-largest wireless company taking over the
fourth-largest wireless carrier, a deal opposed by the Antitrust Division of
the Justice Department, state attorneys general, consumers and public-interest
groups from around the country.

As a result of what AT&T sees as
the Commission's misguided actions, the company is taking it out on the
customers with higher prices and more throttling of data. Stephenson chastised
the FCC for paying attention to detail: 
"Even the smallest and most routine spectrum deals are receiving intense
scrutiny from this FCC, oftentimes taking up to a year and sometimes longer
before these are approved."  Never mind
that the FCC also approved AT&T's 
$1.9 billion spectrum purchase from Qualcomm. 

Will Shanklin at Geek.com got it right
when he said Stephenson "wore his resentment for the FCC on his sleeve," and
was still stuck in the second stage of grief. 
He has three more to go, and it's evident how the company will act out
on them - by continuing a campaign of revenge against the FCC. Or as Reuters
put it, AT&T is "spoiling for a fight" with the Commission.

This is where the "isn't over" part
comes in.  One might think that the
merger was an event to be considered as one and done.  Not so. 
It has carried over to Capitol Hill in AT&T's support for a couple
of bills, one which would give AT&T a competitive advantage in the wireless
business and another which would severely restrict the FCC's ability to carry
out its statutory responsibilities.

The spectrum legislation is due to be
worked in to the overall payroll tax reduction bill, so that's how something
seemingly unrelated to the wonderful world of telecommunications like payroll
tax winds up here.  House Republicans
have drawn up legislation that Senate Communications Subcommittee Chairman John
Kerry (D-MA) and Sen. Jerry Moran (R-KS) both opposed, while former FCC
Chairman Reed Hundt called it "the single worst telecom bill" he has ever
seen.  There are parts to the bill that
are problematic.  One is that the FCC
couldn't impose any restrictions on who participates in auctions.  They couldn't exclude the biggest companies
that already have most of the spectrum, in an effort to help smaller ones.  That gives the advantage automatically to the
biggest companies, like AT&T, while helping AT&T and Verizon to
maintain dominance in the wireless market and further tilting that market into
duopoly through spectrum policy. 

The GOP bill also would limit the FCC's
ability to impose service conditions on auctions, something it has always
done.  Gone would be guarantees of
nondiscrimination, or conditions related to making spectrum available on a
wholesale basis.

AT&T strongly endorsed the bill
more than once, with Stephenson saying at the earnings call that "it appears
the FCC is intent on picking winners and losers rather than letting these
markets work," ignoring the fact of course that AT&T with Verizon dominate
the market.  He also scorned the idea
that an agency which has conducted complex auctions for years might take
umbrage at the idea that Congress should write the auction rules favoring big
companies:  "A lot of recent comments and
speeches about certain members of this FCC suggest that they and not Congress
should decide how spectrum auctions are conducted, including who can
participate and what the conditions should be for participating. Meanwhile, we
pile more and more regulatory uncertainty on top of an industry that is a
foundation for a lot of today's innovation, making it difficult for all of us
to allocate and commit capital."  It's
not difficult at all.  Invest in your
network.  Use the spectrum you have
sitting around.  There are, to be sure,
lots of questions about just how spectrum-constrained AT&T is.

Not content to pick a fight with the
FCC over spectrum, AT&T also is endorsing another Republican effort that
would restrict the rest of what the FCC does. 
In a Jan. 31 letter, AT&T endorsed the bill (HR 3309) that would put
restrictions on conditions the Commission could impose on a merger and would
require rules to be based on "market failure." 
Of course, AT&T didn't like the Net Neutrality condition the FCC put
on its takeover of BellSouth in 2006, and the bill would in theory prohibit
it.  The larger point is that the bill
would turn 75 years of communications law on its head.  Instead of relying on a fundamental concept
of the public's interest, convenience and necessity in a rule, or in the
approval of a transaction, the legislation instead defers to industry's
interest, convenience and supposed necessity.

The irony, of course, is that AT&T
has pretty much had its way with the FCC up until the attempted takeover.  In the most blatant example, it demolished
and dominated the Commission on open Internet rules, beating Chairman Julius
Genachowski into submission multiple times by getting letters signed by the
company's pet members of Congress and ginning up "grass roots" letters from
companies and groups generally unaware of what was being proposed or the impact
on them, first after Genachowski's Sept. 2009 speech on an open Internet in a
successful attempt to alter the drafting of proposed rules, and again when the
chairman emerged in Sept. 2010 to propose a more modest "Third Way" to
guarantee some measure of public protection for the Internet by a regulatory
agency.

AT&T doesn't like to lose, even
once, so it will retaliate by throwing its weight around Congress in a vendetta
against the FCC.  Perhaps they would have
done this anyway without the sting of a T-Mobile defeat.  Then they would have been sore winners
instead of sore losers.  But here
AT&T's continued action show the company's ability to keep an issue going
in multiple ways, even if one seems closed off to them.

And just to get its last licks in,
AT&T also took what might be considered a shot at Genachowski's grand ideal
to have broadband deployed everywhere. 
Stephenson said that, "we've all been trying to find a broadband
solution that was economically viable to get out to rural America and we're not
finding one to be quite candid."  Even
the $1.3 billion AT&T receives from universal service subsidies aren't
enough, it appears.

Meanwhile, Verizon, the other major
beneficiary of the spectrum legislation, is keeping a low profile for the time
being.  Its strategy is to do what
AT&T is doing but only more subtly. 
Rather than be crude and buy out the largest competitor, Verizon is
going into business with it - or more correctly -- with them.  It cut a deal with the biggest cable
companies, which paid $2.4 billion for spectrum in a 2006 auction and then sold
it to Verizon for $3.6 billion.  Along
with the spectrum sale, however, are the side deals, which could raise the
company's profile.  Verizon Wireless will
market cable company high-speed Internet service everywhere but where Verizon
offers its fiber optic FiOS service. 
There will be a big fight at the FCC, which has to approve the spectrum
transfer, about the side marketing arrangements.  Verizon would be a big beneficiary as well of
a bill like the one AT&T endorsed which would eliminate the traditional
public-interest standard in favor of the industry-interest standard.

Unlike the AT&T takeover, which was
rather blatant in its anticompetitive aspects, Verizon's is more subtle but
just as dangerous.  Verizon Wireless is
dividing up the world between it and Comcast, Time Warner and Bright House, the
owners of the spectrum being purchased. 
Customers would still have fewer choices in landline Internet access by
lack of action, rather than positive action.

Look for this deal to get more
prominent in the coming weeks.  It has
already attracted the attention of the Antitrust Division, and chances are
Verizon will have to defend it to some in Congress as well.

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