Tales of the Sausage Factory

Why DoJ’s Win Against H&R Block Is Bad News For AT&T/T-Mo.

The Department of Justice Antitrust Division (DoJ) just won its lawsuit to block H&R Block from acquiring its smaller, “maverick” competitor Tax Act. Even with the actual Order sealed for a month to let parties scrub out the trade secrets, a few important things stand out for why this is good news for DoJ in its lawsuit to block AT&T taking over T-Mo. In sports terms, this is like DoJ having a super strong exhibition season going into the regular season of play. While you still need to play the games to see who wins, anyone facing them ought to be worried.

My major takeaways from what we know so far below . . . .

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Tales of the Sausage Factory

Will Wall St. Put The Kibosh On The AT&T/T-Mo Takeover Before the DoJ Does?

The more I see AT&T frantically spend money like water and call in every political chip it has to try to pressure the Department of Justice to settle its case, the more I become convinced that it will ultimately be the Wall St. financial community that will finally persuade Randal  Stephenson to give up before AT&T gets to trial. Oh, I expect to see more wild gyrations. There’s perpetual whispers that AT&T will find a dance partner in the form of MetroPCS (the current favorite of the rumor mongers) or Leap or U.S. Cellular (one even occasionally hears Sprint, but that doesn’t even pass the laugh test) and they will publicly announce some big proposed settlement so that AT&T’s political friends and its cadre of honest politicians can howl some more for DoJ to settle. Who knows? We have five months until trial, and AT&T seems infinitely capable of making all sorts of political noise.

But the more I look at it, the more convinced I become that the upper management at AT&T and that of T-Mobile’s parent, Deutsche Telekom (DT), have not really thought through just what kind of a settlement they would now have to offer and how radically different it is from what AT&T expected to offer before DoJ brought suit. A settlement now is far, far more expensive than anything AT&T envisioned and quietly vetted with Wall St. analysts back in March. Back then, AT&T expected to divest from 30-50 midsized markets via a divestiture trust (allowing them to sell licenses at profit-maximizing prices over time), some wussy roaming and deployment conditions that could be easily evaded or ignored. Now, AT&T will need to divest enough to create a “T-Mo Lite,” something that can at least pretend to replace the loss of a national carrier. As I explain below, that becomes so expensive and complicated that even if AT&T can find the financing to make it happen, its stock is likely to tank on the mere announcement of such a deal.

Mind you, I am not saying a settlement is desirable or good policy. I continue to believe that AT&T’s take over of T-Mobile is so thoroughly awful as a mater of both antitrust and telecom policy that no conditions or divestitures can save it. But even discounting my opinion on the matter, there are certain practical realities that make a settlement at this point not merely bad policy, but so expensive and complicated to manage that it is effectively impossible.

If I’m right, the only question is how much shareholder money and political capital AT&T spends lobbying for a settlement that can’t be done for financial reasons before enough officers on the AT&T and DT Boards sit down AT&T CEO Randal Stephenson and DT CEO Rene Obermann and explain to them that the time has come to face reality, renegotiate the break up fee to let DT out early, and cut their loses before AT&T stock starts to tank big time.

I demonstrate why below. Warning, as this is a “show your work” thing, it’s kinda long . . .

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Tales of the Sausage Factory

Deutsche Telekom Keeps Messing Up “T-Mo Is Doomed Unless AT&T Buys It” Song By Explaining Who Else Could Buy T-Mo

 Two weeks ago, Deutsche Telekom (DT) Chief Technology Officer Olivier Baujard accidentally spoke truth about T-Mobile to an audience of German investment analysts. After running through the usual company talking points about the effort to sell T-Mobile to AT&T (e.g., it will happen, DoJ is just playing hardball with negotiations, etc.), Baujard said at a public presentation at a Paris broadband conference that: “any rational company had a Plan B and that Deutsche Telekom had other opportunities for its U.S. operations should the U.S. Department of Justice succeed in terminating the deal.”

This is vitally important because, after accidentally shooting the “this is the only way to bring 4G to rural America” argument in the foot by accidentally leaking documents proving AT&T could bring 4G to rural America whenever it wants, and T-Mobile killed the ‘this will create jobs’ argument by confirming that it was preparing pink slips for more than 20,000 employees after the acquisition gets approved, the “T-Mobile is a sickly gazelle” argument is about all AT&T and it supporters have left. Unfortunately for AT&T, this is not the first time Deutsche Telekom has screwed up the “sickly gazelle” storyline by revealing inconvenient truths about its other options. And while there is usually a rule in Washington that “we totally ignore what you say to investors when it contradicts your chosen story,” this deal is sufficiently high profile and has sufficient problems that eventually someone may notice if AT&T’s “Sickly Gazelle Chorus” keeps getting thrown off key by Deutsche Telekom’s “We Have Lots of Other Options Counterpoint.”

More below . . . .

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Tales of the Sausage Factory

What the DoJ Documents Tell Us About the Comcast/NBCU Merger

In all the hoo ha about the Comcast/NBCU Merger, few folks troubled to read the Department of Justice Competitive Impact StatementComplaint, andConsent Decree. That’s rather unfortunate, as these documents sets forth a straightforward case under the antitrust laws for program access conditions for online competitors and for network neutrality. Here’s the short version:  Comcast pre-merger makes almost 30 times more money from providing cable service than from programming revenues. Even adding all of NBCU’s revenue, Comcast will still make more than twice as much from selling cable service ($34 billion) as from programming ($16.9 billion). Anyone who can do basic arithmetic would therefore conclude that yes, Comcast’s incentive to protect its cable business from erosion by online distributors (or even from traditional rivals) outweighs the potential gain from increasing programming distribution. As an added bonus, for those ideologically committed to believing otherwise, turns out Comcast’s own documents agree with the simple arithmetic and not the fun theoretical models their experts submitted. Which is why (among other reasons) DoJ continued oversight is not merely something extra. It really matters.

Lets break this out some below …

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Tales of the Sausage Factory

Genachowski's Secret $15 bn Piggy Bank, or T-mobile Triumphs Over M2Z.

I’ve been rather pressed for time, hence have not had much chance to blog on the FCC’s recent spectrum policy announcements for D-Block and the broadcast migration offer. Combine these two speeches with Genachowski’s recent statement in an interview that the NBP will finance the $25 billion via existing programs and it is clear that the FCC will adopt the T-Mobile’s “asymmetric auction” proposal for the AWS-2 and AWS-3 band, leaving M2Z high and dry. The only question is whether or not there will be spectrum caps to keep AT&T and Verizon from snarfing the good stuff, but do not expect the NBP to touch something as “controversial” as spectrum caps even by veiled implication the way the DoJ did in its comments.

Mind, this is another example of the “spectrum auctions are the crack cocaine of public policy” problem. The thirst for revenue pushes all other considerations out the window. I’m not convinced the T-Mobile approach is wrong (especially if subject to spectrum caps), and I think the D-Block finesse was extremely clever. But when revenue sits in the driver’s seat, policy invariably takes a wrong turn somewhere along the road. But it is difficult to imagine how Genachowski could resist a $15 bn secret cash cow to fend off accusations that Democrats are once again writing checks against our children’s future blah blah blah.

I unpack all this below. . . .

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Tales of the Sausage Factory

DOJ May Investigate Telco Market Power: The Dawn of a New Paradigm For Antitrust?

Although the Department of Justice Antitrust Division (DOJ) has not confirmed it, the Wall St. Journal reported that DOJ is internally considering whether or not companies “such as AT&T and Verizon” have abused their market power. Most traditional antitrust lawyers I’ve seen quoted don’t think it likely the telcos have market power — especially given the hostility that courts have recently shown to antitrust. Indeed, in a world where even potential competition is supposed to be part of the market analysis, how can a modest 60% of the wireless market shared by the two companies, with no evidence of price fixing or coordinated behavior, support any sort of antitrust action?

Welcome to the more grown up and sophisticated view of market power in the more complex real world. After more than 25 years, U.S. antitrust authorities may be ready to reexamine the underlying limitations of antitrust in light of a new generation of economic scholarship on the subject of market power and the exercise thereof.

So are we at the dawn of a new age of antitrust, one that recognizes such modern economic phenomena as network effects, the power to constrain choice through non-disclosure agreements that create information asymetry, and the power of vertical integration to eliminate traditional geographic and product market distinctions? Will Christine Varney and John Lebowitz do to the the U of C worshipers of the gods of the marketplace as Copernicus and Galileo did to Ptolmey and his fanatics who preferred to reject the evidence of their eyes in favor of ever more complex theories of deferents and epicycles? Or will the judicial activists of the D.C. Circuit and the political might of the incumbents once again force regulatory agencies to abjure, curse and detest such heresies?

E pur si muove below . . . .

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Tales of the Sausage Factory

Congratulations to Gene Kimmelman, and to the American People.

I haven’t been posting much and will continue to be busy for the next while, owing to Passover and bunch of other things. But I had to give a brief post of congratulations to Gene Kimmelman on his appointment to the Department of Justice as Chief Counsel for Competition Policy and Intergovernmental Relations. Gene has been a tireless advocate for consumer protection and pro-competitive policies as the head of Consumers Unions Washington office. His addition to the DoJ in this critical office is good news for those who want to see policies that genuinely promote competition rather than deregulation for its own sake.

Stay tuned . . . .

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Tales of the Sausage Factory

2:30 P.M., Still No Meeting . . . .

O.K., I hope tonight’s election results go better. Rumor is the hold up is on roaming conditions in the VZ/Alltel merger. Still, after the DOJ approved the merger with a few divestitures, there was no doubt that the FCC will roll over. The only question is whether Tate or McDowell will side with the Ds to exact some additional conditions for the benefit of the rural carriers or competitors. Hence the speculation that this involves roaming. But I still expect a vote today. You can almost hear the Verizon charatcer in the Alltel ads whispering “Soon Chad . . . .soon you will share your circle for the last time . . . . you ding dong.”

While we wait, here are some preliminary thoughts about the items.

Here’s the original agenda. The FCC dropped item 1, Universal Service/Intercarrier Compensation (USF/ICC), and voted the item on distributed television systems (DTS) and closed captioning on circulation.

Of these, the voted items were fairly non-controversial. DTS is designed to address the fact that DTV signals don’t work the same way as analog, and will allow broadcasters to maintain their audience after the conversion. The only possible pitfall was whether it would allow broadcasters to expand their footprint which would (a) eat into the available white spaces, and (b) give them yet more free spectrum goodies for no good reason. My info is that the order will emphasize that the intent is to maintain the status quo ante transition. I have no idea on the closed captioning item.

That leaves USF/ICC. USF/ICC is a huge mess of biblical proportions that causes even a hardened policy wonk like me to quail and flee the room screaming. It is famously broken, everyone hates it, but no one can agree on how to fix it. There is absolutely no right answer, and any piece of it impacts all the other pieces.

What is interesting is that this created another 4-1 revolt by the other offices against Martin. While I give Martin credit for trying to get hideously controversial stuff done, you are clearly doing something wrong if you have managed to uniformly piss off all four Commissioners to the point where they are making pointed public statements that boil down to “Kevin, you ain’t the boss of me.” It is always hard for a Chairman to get stuff done in the last months of an administration, but unless Martin and the other offices figure out a way to get along, it is going to be a very viscious and unproductive couple of months until January 21.

The delay on this meeting, which caught Martin totally by surprise, is not exactly an auspicious omen.

Stay tuned . . . .

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Tales of the Sausage Factory

The Final FISA Sellout and My One Last Desperate Push for Sanity

The capacity of the Democratic Leadership to destroy the party will never cease to amaze me. In 2006 the Dems ran to take over Congress on a platform that included, among other things, ending illegal wiretaps on Americans. Now, the same Democrats propose to grant immunity to the telcos who cooperated with the Administration on a theory that — and I kid you not — if we don’t immunize the telcos for breaking the law this time, they might not break the law for us next time. Alternatively, some argue we should not “punish” companies whose only crime was that they cared so deeply about the safety and security of the United States that they “stepped up to the plate” when the President asked them to break the law and spy on people for their own good. Of course, these same selfless, patriotic, noble companies refused to implement judicially authorized wiretaps because the DoJ neglected to pay the fees. But it appears that Republicans, and now a sufficient number of Democrats, understand that we cannot expect patriotism to extend to things that actually cost megacorporations money. You can read this shameful betrayal of everything the Democrats pledged in ’06 here, with EFF’s analysis here.

What makes this more astounding is that there is not a single, rational reason for the Democrats to do this, and every reason not to do it. The Republicans tried to scare monger and make this an issue for them. That tactic failed miserably. You may recall how back last winter when the Republicans pulled out all the usual stops about how this was about national security and blah blah blah. No one bought it. The magic deadlines lapsed and nothing happened.

So either the Democratic Leadership continues to suffer from a pre-11/06 mentality, or they think they can continue to abuse their active base and collect corporate contributions as well. After all, the thinking goes, it’s not like the mainstream electorate cares about this and its not like the netroots are going to vote Republican. So why not treat them the way we’ve treated unions, African Americans, and unions over the years? i.e., talk tough, but cave when it counts because we know there are no consequences for it.

I’ve already made my impassioned plea based on the ideal of the Rule of Law. Now, in a last desperate effort, I shall make my plea based on practicality and — in what is apprently the universal language of party leadership — cash.

Democrats, meet me below . . . .

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Tales of the Sausage Factory

The Bush Administration DOJ Just Can't Do Enough For Its Friends

I’ve said it before and I’ll say it again. For AT&T and its industry compatriots, domestic spying is the gift that keeps on giving.

Today, the Department of Justice Antitrust Division announced it had filed written comments in the FCC’s Inquiry Into Broadband Industry Practices, aka lets do a wussy study on net neutrality so we can pretend we are defending the public by ‘being vigillant.’ And — surprise, surpirse, SURPRISE! — the DOJ Antiutrust division comments look like the “Cliffsnotes version” of the AT&T filing.

So to recap, in the last few weeks, we have seen top Administration officials go public with classified data to push for retroactive immunity for the telcos for domestic spying, we’ve seen AT&T admit that they “accidentally” bleeped out Pearl Jam’s anti-Bush lyrics, and now we have the DOJ Antitrust division going to the mat for their buddies at the FCC.

I tell you, in this day and age of rampant cynicism and political opportunism, it warms my heart to see the Bushies stick with their buddies through thick and thin, and to see AT&T doing the same. Never mind what it looks like! As Mirror Universe (Evil) Cartman would sing: “You guys are my best friends, through tick and thin we’ll always be together . . . I love you guys.”

Of course, it probably helps that the tiering that the telcos and cable cos want to do makes it much easier to monitor traffic via deep packet inspection, and the fact that it is an “information service” rather than a telecom service means the telcos and cable cos can do whatever they want with the data (they don’t even need to get a warrant, as they would to take advantage of CALEA). But it’s mutual self-interest like this that keeps friendships strong! This way the DOJ gets its domestic spying built into the architecture, and the cable and telcos get to fulfill their fantasies of exacting monopoly rents out of every single bit that crosses their networks (despite the collateral damage to free speech and the long term damage to the economy as a whole). But hey, a “duopoly tax” in the form of higher costs for slower speeds is a small price to pay to have surveillance equipment built directly into the network architecture — and to help a true friend.

You can read my official reaction as VP Media Access Project in this press release on the MAP web page (also reproduced below).

Stay tuned . . . .

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