AT&T Flexes Its Regulatory Muscle in Attempt to Thwart Upstart T-Mobile’s 5G Success
Two weeks ago, AT&T, the oldest and best known telecom carrier in the U.S. and possibly the world, leveraged its considerable regulatory weight to tip the competitive scale for 5G services away from rival T-Mobile (the current leader in 5G) and thus in its own direction. Obviously frustrated at its slow start out of the blocks (to mix metaphors), AT&T must feel the need to hobble T-Mobile’s head start and ensure that T-Mobile cannot maintain its competitive lead in the race to 5G, by trying to prevent it from amassing large swaths of precious mid-band spectrum, the “gold coast” of spectrum suitable for 5G. While there is some merit to AT&T’s approach, summarized below, it is ironic to witness the once mighty monopolist provider of telecom services resort to regulatory pressure to subvert a spunky, daring young rival.
In a Petition for Rulemaking that it filed with the Federal Communications Commission on September 1, 2021, AT&T has argued that the Commission should adopt a “spectrum screen” using a heightened level of scrutiny to prevent any single licensee from amassing more than a third of the available mid-band spectrum in any market. “Mid-band spectrum” generally means any spectrum in the 2.5 GHz – 6 GHz frequency range. Because of its superior propagation and bandwidth and large contiguous swaths of spectrum, mid-band spectrum is ideal for use in mobile and fixed 5G services in urban and suburban areas.
T-Mobile’s acquisition of Sprint gave it access to a treasure trove of spectrum, much of which was in the lower end of the mid-band range – 2.5 GHz. T-Mobile has admitted, however, that a successful 5G strategy will require what it calls a “layer cake” approach in which lower band, mid-band, and millimeter wave frequencies are all used for different use cases under the rubric “5G.”
Earlier this year, AT&T spent almost $30B to acquire mid-band spectrum in an auction, deepening the debt hole it had already dug before the auction, and leaving it with little financial maneuverability for building out its expensive 5G network. For its part, Verizon Wireless spent almost twice that amount, but its overall balance sheet is stronger than AT&T’s, so it is better positioned to catch up with T-Mobile in the 5G race than is AT&T – which apparently has driven AT&T to resort to regulatory wrangling to “level” the playing field.
This ham-handed strategy is right out of the former monopolist’s playbook. Remember MCI?
For years, the FCC has, at Congressional direction, employed two levels of caps on spectrum holdings in an effort to guard against anti-competitive concentrations of spectrum licenses in any single market. First, the Commission uses an overall cap that looks at the total MHz of spectrum a single licensee holds in a particular market; but AT&T claims that this analysis is not granular enough to ensure competition in 5G services, which will rely heavily on mid-band spectrum. For sub-1 GHz and millimeter wave bands, the Commission has employed a heightened or “enhanced” level of scrutiny to ensure that no single licensee holds more than a third of the total amount of spectrum in each of those bands in any market. The philosophy behind this approach is that the frequencies in those bands have unique technical characteristics and competitive significance, and while the frequencies in each of those ranges may be substitutable with each other (i.e., 600 MHz is substitutable for 700 MHz), they are not substitutable with frequencies in other spectrum bands.
AT&T has argued that the Commission should extend this same approach to mid-band spectrum, particularly given its importance to 5G. Interestingly, AT&T concedes that “each major provider can handle 5G demand with its existing spectrum assets in the near term,” but it urges the FCC to adopt the enhanced scrutiny for mid-band assets “to prevent any breakdown in competitive equilibrium” in the future.
One of AT&T’s chief grievances is that the FCC allowed T-Mobile’s acquisition of spectrum-rich Sprint to proceed without requiring any divestiture of spectrum in a single market. Sprint had built-up considerable reserves of 2.5 GHz spectrum, the lowest end of the mid-band range, over the years. And despite these large holdings, T-Mobile participated in the recent C-Band auction, in which it bid up the price for the spectrum and ultimately walked away with 40 MHz for which it spent only $9B, or about a third of what AT&T spent. T-Mobile’s CEO, Mike Sievert, later bragged that T-Mobile’s strategy of bidding up the price worked, and forced its rivals to “go all in with a break-the-bank-attempt to remain relevant in the 5G era.” Some things are better left unsaid.
AT&T has seized on that admission as evidence of anti-competitive jockeying by T-Mobile to acquire spectrum not because it needs it for its own use but because it wants to foreclose its competitors from acquiring it. AT&T refers to that as the “foreclosure value” of the additional spectrum, and it points to prior FCC endorsements of that theory as grounds for the enhanced scrutiny of low-band and millimeter wave holdings. AT&T claims that T-Mobile will own 40% of the available mid-band spectrum in many markets – significantly more than the one-third limit the FCC has adopted for low-band and millimeter wave. AT&T urges the Commission not only to adopt the one-third limit for mid-band frequencies but to require licensees who exceed the cap to divest excess spectrum to willing buyers. No self-dealing here, surely!
It will be interesting to see how the Commission responds to AT&T’s Petition for Rulemaking. We expect it to initiate the rulemaking, ask for comment, and issue an order within the next twelve months. There is simply too much at stake in 5G to let this issue drag on, particularly given T-Mobile’s substantial 12-18-month lead in deploying true 5G service. Even if the FCC ultimately grants AT&T’s requested relief, and imposes the cap, the question remains whether AT&T will have the resources to build out its network in a timely enough manner to become a viable 5G competitor or whether it will have gone to all this trouble, and incurred enormous debt to acquire mid-band spectrum, only to find itself unable to put that spectrum to good use and stake out its place among 5G competitors. Knowing AT&T, it will find a way to stay in the race.
The winners in this scrum are wireless customers. AT&T’s core point is correct that too much concentration of spectrum in a single provider is bad for competition. For the first time in history, the wireless market has three strong, viable, evenly matched players who each will be forced to offer better services at lower prices to win customers away from its two rivals. If 5G lives up to all the hype, the range of possible use cases will be limited only by our imaginations.
You may also enjoy Kevin’s related podcast on this subject, where he, Andrew Brown and Joe Schmidt discuss this AT&T – T-Mobile race in more detail.