DOJ antitrust probe of AT&T, Verizon could stall 4G investment

Michael Morisy
A Department of Justice (DOJ) preliminary antitrust investigation of telecom giants AT&T, Verizon and Sprint over price-fixing and handset exclusivity deals has investors worried that it could delay 4G network investment. Yet it's also giving hope to regional players, such as U.S. Cellular, which have struggled to overcome the dominant wireless companies' clout. Real change in how the telecommunication industry does business is unlikely, however, and even if change does come, it is years away.

Service providers still have plenty to worry about, though.

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The Wall Street Journal's report on Department of Justice's antitrust review revealed several key challenges for telecom carriers.

The most immediate concern is the probe's effect on planning cycles. Starting this fall, carriers will begin allocating capital expenditure budgets for the next seven years, and a cloud of financial uncertainty, however remote, could throw off investments for years to come.

"The real worry isn't extra regulation, so much as different regulation," said Tom Nolle, president of CIMI Corp. "It probably isn't going to be a radical change, but we need to decide that change soon because, this fall, telecom planners will hang back, and once they hang back, it's tough to get them moving again."

The biggest possible change is simply increased and lengthy involvement of the DOJ and Federal Trade Commission (FTC) in the affairs of telecom. Traditionally, the Federal Communications Commission (FCC) has regulated telecom issues, and prolonged DOJ probes have caused uncertainty in the market.

While the U.S. Congress recently held an inquiry into telecom practices, with Sen. John Kerry (D-Mass.) questioning carriers over exclusivity deals, these occasional threats of "telecom reform" are often defused by strong lobbying efforts.

Unlike Congress, independent government agencies like the FTC are appointed and liable to actually do something, Nolle said.

DOJ action could change telecom ROI calculations

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Strong action could drastically change the calculations service providers use to determine their returns on investment (ROI) for infrastructure. For example, disallowing the coupling of exclusive phones with carrier contracts would reduce what Nolle called the one bright spot for carriers in recent years.

"The only success service providers have had recently has been smartphones [and their high-ARPU data services], and every one of these smartphone successes has come from these sweetheart deals," he said. "The loss of these deals could mean the loss of the only revenue-positive event for these service providers."

The Department of Justice could also force wireless carriers to share the networks they build more freely with competitors, a practice the Obama administration has pushed with its broadband stimulus proposal. Nolle warned that if such a mandate is enacted for wireless carriers, 4G wireless network infrastructure investments would almost grind to a halt as the service's profitability would be drained.

New administration, new telecom regulation environment

Matthew S. Wild, a senior counsel who specializes in antitrust law at Levitt & Kaizer (New York), said the DOJ has traditionally adopted a hands-off approach to telecommunications enforcement. But under the Obama administration, it is taking a harder look at potential monopolies and violations of Section 2 of the Sherman Antitrust Act, which specifically outlaws monopolies and attempted monopolies.

"That's the kind of offense Microsoft was in trouble for," Wild explained. "The Department's always been vigilant about price fixing, but it recently changed its enforcement stance under Section 2 and has become much more aggressive. This could be a result of this administration, and it probably wouldn't have happened under the last administration."

Wireless trends may have increased government concern

Why exactly the major service providers are under investigation remains unclear, but recent statements indicate congressional disquiet over two wireless trends: exclusive devices locked to a specific carrier's network, and text messaging prices rising in lockstep from 10 cents to 15 cents to 20 cents in recent years.

Sen. Herb Kohl (D-Wis.), chairman of the Subcommittee on Antitrust, Competition Policy and Consumer Rights (which is part of the Judiciary Committee), appears to be another driving force behind the congressional hearings and the DOJ review. He recently wrote a column that questioned the telecom giants' text pricing.

DOJ in earliest stages of telecom investigation

Despite the increased regulatory scrutiny, this is just the earliest stage of the DOJ's investigation, and Wild said it will probably come to nothing. In many ways, investigations into text pricing or device exclusivity are par for the course for big business.

"These deals only begin to pose a problem if they foreclose a substantial amount of competition," he said. "Unless there is a deal between AT&T and Verizon, for example, or Nokia and Apple -- horizontal competitors -- it's not much of a concern."

If, after months or years, the preliminary investigation does uncover something substantial, the likely result will be a slap on the wrist and a requirement for service providers to change their ways, Wild said. With promises of more open, device-agnostic networks, carriers could already be on the way to fulfilling that requirement before government intervention.

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