Home » Lawsuit

Category Archives: Lawsuit

Chronicling AT&T’s Divestiture

opening bell picEnd of year greetings from Fraser, CO and Lake Norman, NC.  This has been a week of reflection, not only on the year but also on the decade that was.  Taking some time to contemplate the changes that have occurred over the past ten years is instructive and helpful.  Scheduled broadcasts (except for live sports?) died over the last decade – the term “binge” was most likely preceded by “spending” in 2010, as opposed to referring to online watching today.  Our digital “wait time” expectations shortened (try to pull up a full version of any content-rich website in a poor coverage area).  The quality of our smartphone (video) cameras improved and became the “lead” or replacement for our social media posts.  And many of us now answer messages and calls that appear on our wrist from Bluetooth earbuds using speech recognition.

 

Against this technological whirlwind we evaluate the breakup of AT&T in this week’s TSB, an event that started on November 20, 1974, and culminated on January 1, 1984. Many books have been written on the topic in addition to Steve Coll’s “The Deal of the Century: The Breakup of AT&T” (including “The Fall of the Bell System” by Peter Temin and Louis Galambos and “Network Nation: Inventing American Telecommunications” by Richard John), and when applicable we will draw on them in this review.  Our focus, however, will be on Coll’s chronicle.  As we mentioned in Tim Wu’s The Master Switch (see TSB here), the study of history helps us understand the influences and beliefs that shaped business decisions, many of which parallel those seen in today’s world.

 

Understanding AT&T’s World in the Early 1970s

Against post-WWII prosperity, America came of age in the 1960s, with baby “boomers” going to work, battling communism in Vietnam, or pursuing university degrees.  Science and technology were national interests, and, as a result, subject to increased federal (and sometimes state) attention.  The Cold War embers were still hot, although the fiery and dramatic rhetoric of Kennedy and Johnson had evolved by the end of the 1960s – détente was in, shoe-banging was out.

 

For the two decades following the end of WWII, “systems development” was popular – components working in concert to achieve a particular national or social objective.  In the case of telephony, the system consisted of

  1. terminating equipment
  2. local networks
  3. switching (which was often assisted by personnel called operators)
  4. long-distance networks
  5. interconnection facilities (to complete calls to independent phone companies)
  6. operations support: customer service, billing/ collection, research & development, product management

 

To AT&T executives, the quality of the network was directly correlated to system control.  This was not necessarily, as some back-casting historians presume, a vestige of power-hungry monopolists eager to satisfy increasingly demanding shareholders.  No doubt that there were some malevolent managers at Ma Bell (as discussed below), but there is a fundamental difference between a stalwart belief in operational efficiency (providing telephone service to everyone at affordable rates) and overt anti-competitive monopolism.  Keeping the system together created consistent stability in an increasingly less stable world[1].

 

Equally as important, the system control depended on a delicate mix of businesses and consumers.  Too many consumers, particularly in high-cost rural locations, and profitability would be compromised.  Too many businesses, and capital and service costs would skyrocket.  Customer mix was a Jenga puzzle, and MCI’s focus on enterprise voice and private line services threatened its balance.

 

MCI and AT&T’s Initial Interconnection Discussions

Despite AT&T’s arguments to the contrary, the Federal Communications Commission (FCC) and the capital markets were very interested in MCI’s plans to disintermediate the Bell system.  Coll ends Chapter 1 summarizing MCI’s $100 million equity raise in June 1972 (and follow-on $72 million line of credit later that year) and begins the following chapter with a recap of the roundtable discussion that ensued at MCI.  Rather than a complete overbuild, MCI would negotiate connections to AT&T’s switches in St. Louis and Chicago (it’s hard to imagine the first interconnection negotiation given their commonplace nature today), and AT&T had complete leverage.

 

In March 1973, Jack McGowan, MCI’s Chairman, met with AT&T Chairman John deButts and George Cook, an AT&T attorney, at AT&T’s headquarters in New York City (195 Broadway).  McGowan dictated a memo after the meeting, saying:

 

“On the one hand, they piously state a willingness to be fair and are willing to believe it themselves while at the same time they interpret their mandate to compete hard by actions which they know will result in a denial of their position on fairness… It would be incorrect to be encouraged by the potential impact of antitrust action, although it might receive a very favorable reaction at 195 Broadway simply by having them spend more time being advised by counsel. ”[2]

 

For the next nine years, dozens of attorneys would be employed by each side engulfed in the largest antitrust lawsuit to date.  The system was breaking, and MCI cracked open AT&T at its most vulnerable point – interconnection.

 

The AT&T Chairman Speaks

 

john deButts picCompetition intensified over the summer of 1973, and AT&T Chairman John deButts used the fall meeting of the National Association of Regulatory Commissioners to respond.  Coll spends an entire chapter describing deButts’ speech, which culminates with the following recommendation:

 

“The time has come for a thinking-through of the future of telecommunications in this country, a thinking-through sufficiently objective as to at least admit the possibility that there may be sectors of our economy – and telecommunications [is] one of them – where the nation is better served by modes of cooperation than by modes of competition, by working together rather than by working at odds.

 

“The time has come, then, for a moratorium on further experiments in economics, a moratorium sufficient to permit a systematic evaluation not merely of whether competition might be feasible in this or that sector of telecommunications but of the more basic question of the long-term impact on the public.” [3]

 

The crowd of regulators stomped and cheered.  Bernie Strassburg, the head of the FCC Common Carrier Bureau for the past decade and a 21-year staff lawyer at the Commission prior to that, was in the audience and, according to Coll, took deButts’ comments to mean that AT&T was above the law.

 

Meanwhile, MCI continued to test the regulatory waters, expanding service from private lines (voice calls between two regional offices) to something called Foreign Exchange or FX, which can best be described as a precursor to toll-free 800 service (Coll offers the example of an airline customer calling a local New York City phone number and being serviced by a customer service representative in Chicago).  The challenger had moved from connecting two company locations to connecting customers to company locations.  Both private line and FX were highly profitable services.

 

AT&T took the case to court, and, after losing the first ruling, won on appeal.  Coll describes their activities after that decision:

 

“As soon as the appeals court decision was handed down, it was ordered that all of MCI’s FX lines be disconnected immediately.  AT&T engineers worked an entire weekend unplugging the circuits, inconveniencing MCI’s customers and infuriating McGowan.  John deButts would later say that the decision to disconnect MCI’s customers was one of the few he ever regretted.  The FCC ruled that MCI was, in fact, entitled to sell FX lines, and AT&T was forced to reconnect all of MCI’s customers.  The damage, however, was already done. ”[4]

 

It is tempting to draw some analogies of “above the law” behavior seen today by trillion-dollar market cap companies, but the behavior described above would be akin to Apple removing Google Maps, Netflix or Spotify from the iTunes store.  As we have described in very early TSB editions, there’s always been a delicate balance (Apple’s relationship with Google Maps in 2012-2013, for example) initially, but today’s systems, thanks to the role of applications, has been much more friendly than the early days of telecommunications competition.

 

Attorney General William Saxbe: “I Intend to Bring an Action.”

saxbe picThanks to the administrative turmoil created by Watergate (Nixon resigned in August, 1974), most of the attorneys in the Justice Department thought that the AT&T case would be placed on hold.  Nixon had appointed William Saxbe, an elder senator from Ohio who enjoyed the golf links much more than the office, as Attorney General earlier in 1974.

 

The recommendation to file an antitrust suit against AT&T made its way to General Saxbe’s desk in November, 1974.  After being briefed by two senior DOJ lawyers working on the case, it was AT&T’s turn to make their case.  Coll describes this situation as follows:

 

“John Wood, a Washington lawyer retained by AT&T, stood up to begin AT&T’s presentation.  Mark Garlinghouse, the company’s general counsel, was seated beside him.

 

“Mr. Saxbe,” Wood began, puffing on a pipe, “before we start our presentation, I’d like to know exactly what your state of mind is on this case.  It might help me shape my arguments to you.”

 

Saxbe paused, spit [tobacco juice], looked at Wood, and said, “I intend to bring an action against you.”[5]

 

Within an hour of this statement, the SEC stopped trading in AT&T’s stock.  John deButts, who happened to be the chairman of the United States Savings Bond campaign in 1974, called Treasury Secretary William Simon to let him know the news.  Even President Ford, who was in Japan while all of these actions unfolded, was caught unawares.  According to Coll, “Simon then tried to call Saxbe, but the attorney general had left the office for the day.  He had gone pheasant hunting.”[6]

 

Enter George Saunders

Of all of the characters in the AT&T drama, few rise to the importance of George Saunders, a partner at Chicago-based Sidley & Austin who would devote eight years of his life to defending AT&T from the attacks of MCI and the Justice Department.  Coll describes Saunders as follows:

 

“Saunders was an unabashed fat cat, a smooth, luxuriant attorney who wore expensive suits, drank martinis like they were water, and smoked more than a dozen cigars a day.  He had been born and raised in Birmingham, Alabama, the son of a house painter, and the first member of his family to ever attend college.  He went because even at age fifteen… his extraordinary intellectual gifts were obvious – his mind was like some strange machine.  He had nearly total recall of the most complex and obscure facts, and he could effortlessly organize knowledge in sophisticated, well-developed models.  The lawyers who worked with him later tried to describe this capacity to others by saying that it was like Saunders had a giant flip-chart in his head that he could summon up instantaneously, search for the information he needed, and then flip forward to make his next point without ever skipping a beat.”[7]

 

Saunders scored his first victory after a hearing before Judge Joseph Waddy in February, 1975, when he requested, purely as a tactic, that the federal government be required to preserve every document in its possession that might be relevant in the AT&T case (in the pre-email/ server environment, this is a bold request to say the least.  Saunders backed off the request from all federal agencies to a mere 44).

 

After some vigorous conversation (described by Coll in vivid language), Saunders convinced Judge Waddy that AT&T’s fate should be a decision of the FCC and not the courts.  He convinced Judge Waddy to postpone any discovery until the jurisdictional case was settled.  A mere three months after filing, the case against AT&T was dead and, due to Judge Waddy’s terminal illness, jurisdiction would not be decided for three years.

 

Enter Ken Anderson
One of my favorite characters in Coll’s book is Ken Anderson, chief of the Special Regulated Entities section of the Department of Justice and the owner of the AT&T case when it resumed in late 1977.  Coll describes Anderson as follows:

“Anderson’s approach to life and to the practice of law was somewhat unorthodox.  Though he worked in the heart of the city, he lived on a farm in rural Virginia, and on summer weekends he liked to ride around on his big tractor under the hot sun, and then pull off his shirt and bale some hay…. He was a health food enthusiast, and when he rode into Washington on the train he often carried a large paper sack full of raw vegetables.  He kept the sack on a shelf in his Justice department office, and during important meetings he would wander over, pull out a carrot stick or a piece of cauliflower, and take a large, loud bite.”[8]

 

With the previous DOJ attorney (Phil Verveer) off of the case, AT&T saw an opportunityKen Anderson pic to test the settlement waters as they sized up Anderson.  Hal Levy, an AT&T staff lawyer who was working side-by-side with George Saunders, proposed that the parties discuss injunctive relief with AT&T self-sourcing less equipment, and the government agreeing to keep AT&T intact.  After hearing Levy out, Anderson replies:

 

“I’ll tell you one thing.  This case is going to be a severed limbs case.  We’re going to have severed limbs, AT&T limbs, on the table dripping blood.  That’s the way this case is going to be settled.  We’re not going to settle this thing with injunctive relief.”[9]

 

AT&T was also preparing for a transition as John deButts was preparing for his planned retirement (announced in late 1978).  George Saunders’ boss, Howard Trienens, left his position as the managing partner of Sidley & Austin to become VP and General Counsel of AT&T under new Chairman Charles Brown in early 1979.

Enter Judge Greene

harold greene pic

Of the characters in this multi-act drama, none is as important as Judge Harold H. Greene, who was assigned the case in August, 1978.  Coll describes the influence of politics on Greene in the following manner:

 

“A Jew, Greene was raised in Germany during the 1920s and 1930s.  His father owned a jewelry store, and in 1939, as the terror of Hitler’s Reich reached fever pitch, his family fled to Belgium, where it had relatives.  Greene was just sixteen years old.  When the Germans invaded Belgium, the Greenes fled again, this time to Vichy France.  From there, they made their way to Spain, and later Portugal, before emigrating to the United States in 1943.  Young Harold Greene was immediately drafted into the U.S. Army and sent back to Europe with a military intelligence unit to work against the Nazis.  He saw combat action in his former homeland, but he escaped injury.”[10]

 

Greene grew up in the youthfulness of Attorney General Robert Kennedy and, according to Coll, wrote the Civil Rights Act of 1964 and the Voting Rights Act of 1965.  After leaving the Justice Department in 1967, Greene served as chief judge of the District of Columbia’s Court of General Sessions (municipal court for the District).  He would remain there until Jimmy Carter was elected to the presidency, when he was appointed a federal judge.  In his new role, he inherited the caseload of the late Joseph Waddy, and was thrown into the middle of a nearly four-year dispute.

 

Judge Greene was a strong believer in due process and the strict preservation of constitutional rights.  He also supported a strong judiciary to check the executive and legislative branches (a hot topic on the heels of Watergate).  Unsurprisingly (given his German descent), he was also focused on continuous improvement and courtroom efficiency.  Greene was very different from both Saunders and Anderson – his goal was to run his courtroom like clockwork.

 

The Ending

1981 marked the beginning of the fourth presidency to span the AT&T antitrust trial.  Conventional wisdom indicated that AT&T would finally be vindicated.  That was the case until President Ronald Reagan nominated Bill Baxter to lead the antitrust division of the Justice department.  While a conservative, Baxter strongly supported the Justice department lawsuit because he strongly believed that regulated local telephone divisions were subsidizing their unregulated counterparts.

 

This was not the position of other members of Reagan’s incoming cabinet.  Secretary of Commerce Malcom Baldridge, Secretary of Defense Casper Weinberger, and counselor Ed Meese all had publicly stated their preference to dismiss the lawsuit.  But Attorney General William French Smith was forced to recuse himself form the case due to his previous affiliations with Pacific Telephone.  And James Baker, who managed now Vice President George H.W. Bush’s 1980 campaign, was Reagan’s Chief of Staff.  Assisting Baxter was Jonathan Rose, an assistant attorney general for the DOJ Office of Legal Policy under Nixon.

 

Rose ultimately proved an effective partner to Baxter, carefully running point for Justice within the White House.  Over the July 4th weekend in 1981, after great deliberation, Baker decided to wait to dismiss the case.

 

Meanwhile, in Judge Greene’s courtroom, the prosecution had finished calling their witnesses and AT&T made a bold move to dismiss the case.  Judge Greene’s response denying the dismissal was succinct:

 

“Whatever the substantive merits of the motions and the case generally turn out to be, I don’t believe the government’s evidence justifies such cavalier treatment.  The government has presented a respectable case that the defendants have violated the antitrust laws, … Defenses have been raised, but I certainly could not say that these defenses are self-evident and will prevail…

 

I don’t propose to act on the basis of press reports or someone’s concerns unrelated to this lawsuit. The court has an obligation to deal with this lawsuit under existing antitrust laws, and it will do so irrespective of speculation outside the judicial arena.”[11]

 

The judge would later deny a proposal to continue the case until Congress could pass comprehensive telecommunications legislation (known as bill S. 898).  The defense continued to call witnesses throughout the fall of 1981, and, by a 90-4 vote, the Senate passed comprehensive telecommunications legislation to the House, led by Tim Wirth.  With a new report on competition released in November, it appeared to AT&T Chairman Brown that pursuing a solution other than complete divestiture was going to be difficult if not impossible.

 

On January 8, 1982, AT&T and the Justice department signed a consent decree that separated the local phone companies into independent operating units.  The concept of intra-LATA vs. inter-LATA access was established, and AT&T retained control of its equipment unit (Western Electric).  Over the next two years, AT&T would structurally separate and become independent companies on January 1, 1984.

 

While Coll’s book ends in 1988, we have the benefit of seeing the full effects of the breakup of AT&T:  The rise of multiple fiber-based networks, rapidly decreasing costs to call between states and globally, the rise of wireless spectrum and the rise of the Internet.  Had AT&T controlled the network, it’s unlikely a subsequent Telecommunications Act would have been enacted in 1996, the development of the enhanced services provider would never have occurred, and companies such as AOL would have raised capital to quickly establish early Internet infrastructure.  While it’s difficult to hang too many events on the AT&T tree, it’s important to understand and evaluate the fundamental changes the consent decree and Modified Final Judgement enabled.

 

 

That’s it for this week.  Next week, we’ll preview the 2020 Consumer Electronics Show.  Until then, if you have friends who would like to be on the email distribution, please have them send an email to sundaybrief@gmail.com and we will include them on the list.

 

Also, I’ll be at CES this year on the 7th and 8th.  We have set up a special Sunday Brief table at Gordon Ramsay’s Pub & Grill at 7:30 p.m. on Wednesday January 8 – only three additional slots available, but please reply to sundaybrief@gmail.com if you are interested in attending.

 

Have a great week… and GO CHIEFS!

 

[1] IBM, and to a lesser extent, Apple, shared this belief in systems efficiency.

[2] Coll, p. 26

[3] Coll, p. 43

[4] Coll, p. 52

[5] Coll, p. 68

[6] Coll, p. 71

[7] Coll, pp. 75-76

[8] Coll, p. 115

[9] Coll, p. 120

[10] Coll, p. 125

[11] Coll, p. 234

Four Earnings Questions

** Note – I will be at MWC-Americas on Wednesday (all day) and Thursday morning.  Please send a note to sundaybrief@gmail.com if you would like to catch up.  Thx, Jim **

opening pic

Greetings from Lake Norman, NC (picture of a recent sunrise is shown).  This week, we will discuss four questions that should be asked during earnings calls (which start this Thursday with Comcast, followed by Verizon and Charter on Friday and AT&T and Google the following Monday, Apple and Sprint (likely) on Oct 30 and CenturyLink on Nov 6).  Please note that these questions are not in priority order.  Here’s four questions we’d like to see answered in upcoming earnings calls:

 

1. To Apple: If Goldman Sachs is correct, and the Apple Card truly is “the most successful credit card launch… ever” how will Apple use these new relationships to increase the iPhone renewal rate?

To AT&T and Verizon:  Do you anticipate that Apple’s new credit card will disintermediate the store purchase and financing experience?  If that occurs, and customers finance their new device through Apple directly, how will that impact revenues, margins, and churn?

We received a strong indication of Apple Card’s success from Goldman Sachs this week when CEO David Solomon revealed on his earnings call that “we believe [the Apple Card] is the most successful credit card launch ever.”  Solomon went on to disclose:

…we have seen a pretty spectacular reception to the card as a product. The approval rates early on have been lower, and I say that that’s a decision, obviously, Goldman Sachs is making as the bank, but we’re doing that in concert with Apple. And it is because we’re quite vigilant from a risk point of view, of not being negatively selected out of the box. Meaning, over time, we’ll start to see better credits appear and the approval rates will go up, where we’ve seen an enormous inbound, we’ve issued a considerable amount of cards. We’ve just been through our first bill cycle, which went smoothly, and so from an operational point of view, it’s gone well

Apple announces earnings on October 30th.  It’s likely that they will not actively promote anything until after the Holidays (if demand is good, and they are throttling activations through selective credit scoring, probably not best to get promotionally aggressive).  However, if Apple attracts 10 million US card holders in the first year (we would not be surprised if this happens), you have to think that the ability to finance select transactions at 0% a.p.r is inevitable.

 

2.To AT&T: Do the list of divestitures you are working on with Elliott Management include unprofitable local phone exchanges?

 To each of the other local exchange providers (particularly rural):  How will you more effectively compete against a clustered (and therefore operationally efficient) cable industry?  Was your concern over valuation when you considered clustering in the past unfounded given the deep losses that have occurred in broadband acquisition over the past decade?

 

We briefly discussed this in the TSB focused on the Elliott Memo.  In our note, we described the diseconomies of scale arising from island or isolated exchanges in North Carolina.  To prove that the Tar Heel state was not a fluke, we show below the local telephone provider exchange map of South Carolina (link here):

sctba pic

In contrast with this menagerie of local exchange properties, cable broadband providers in South Carolina consist of the following (from the South Carolina Cable TV website and company websites):

  1. Spectrum/ Time Warner Communications: 72 million population covered
  2. Comcast Communications: 600,800 population covered
  3. Comporium Communications: 305,000 population covered
  4. Horry Broadband Cooperative: 205,000 population covered
  5. Northland Communications: 164,000 population covered
  6. Atlantic Broadband: 133,000 population covered
  7. Hargray Communications: 106,000 population covered

With a total population of about 5 million, to have more than 3.6 million (72%) covered by just three providers and more than 4.3 million (86%) by seven providers shows why cable broadband has an advantage:  they have clusters which produce economies of scale.

What is the critical importance of owning and operating the telephone exchange in Florence, SC (population just under 38,000) for AT&T?  Why not pursue a structure with other phone companies in Northeast South Carolina that mirrors the one proposed by Apollo Management for combining Dish and DirecTV assets?  What efficiencies (and increased business opportunities) could be realized from greater exchange consolidation?

How bad is it (likely) for AT&T?  Look at the May 29 Frontier sale announcement of their Northwestern exchanges, where they disclosed that the sold properties passed 1.7 million locations yet Frontier only had 350,000 consumer and business customers (20% relationship penetration).  Does AT&T (U-Verse/ Internet) have a relationship with 30% of the homes passed in Florence?  What are the value prospects, and how do they fit into all of the other things that AT&T is managing?

As for the other local exchanges, how long can they compete with the new T-Mobile, who, like we discussed in last week’s TSB, is promising 100 Mbps fixed wireless service to the vast majority of the United States (including Florence) in a few years?  Is it too late to change?

 

3.To T-Mobile: How do you continue to drive increased postpaid retail gross additions?  How much of it is driven by new device launch promotions (iPhone 11/ 11 Pro/ 11 Pro Max) versus increased 600 MHz footprint?

 

We have reported for the last several weeks on the lack of availability of both the iPhone 11 and the iPhone 11 Pro Max at T-Mobile (note: in last weeks report, most of the iPhone 11 issues were driven by specific colors).  Here’s the data for this week:

iphone 11 availability as of Oct 20

T-Mobile has really been selling a lot of iPhone 11 devices.  Their shortages on the 256GB storage level have been ongoing for three weeks, leading us to believe that this may be a supply chain miss (and perhaps a sign of economic good times).  Not surprisingly for Apple, the iPhone 11 in green (and, to a lesser extent, purple) is harder to come by than more standard red, white, and black.  Now the chart for the iPhone 11 Pro:

iPhone 11 Pro availability as of Oct 20

This is also an interesting chart for T-Mobile.  As we have pointed out several times, Magenta does not have a $0 option for either the iPhone 11 Pro or the iPhone 11 Pro Max.  Our guess is that the T-Mobile shortage is continuing for all but the 512GB memory model for two reasons:  a) greater upgrades within the T-Mobile base (presumably to get the 600 MHz coverage and all of the other iPhone features), and b) some movement from other carriers (Sprint?) to Magenta.  These are educated guesses (not stabs in the dark) and should not take away from any 600 MHz progress as a factor.

AT&T’s shortages (basically out of everything that is not gold colored) are likely much more weighted to upgrades.  A lot of changes have happened in AT&T’s network since the iPhone 7 (along with the 6S, most likely phone upgraded to the 11), and the business upgrade cycle is also in full swing (spending any available budget to improve corporate liable handsets).  There may also be a small amount attributable to the FirstNet initiative as their LTE band was not included until last year’s models (XR, XS, XS Max were the first models with LTE Band 14).

Similar trends are seen with the iPhone 11 Pro Max:

iPhone 11 Pro Max availability as of Oct 20

The backlog seems to be much more manageable here than for T-Mobile.  It’s likely that T-Mobile’s iPhone 11 Max shortages are attributable to supply chain/ forecasting, and nothing more.

 

4.To all carriers (especially CenturyLink): If low latency applications are critical to the value creation of 5G (basically keeping 5G more than a special access open expense reduction), what is your edge data center strategy?

This is a particularly important question for the large wireless carriers (including T-Mobile) and enterprise focused companies such as CenturyLink (who now owns Level3 Communications).  It’s hard to remember, but there was a time when both AT&T and Verizon (and Sprint and T-Mobile) owned several data centers apiece for internal use – both AT&T (Brookfield Infrastructure partners – $1.1 billion – 2018) and Verizon (Equinix – $3.6 billion in late 2016) sold their data center assets.  Investing in dozens (hundreds?) more could be necessary, however, if no closer solutions exist.

Also of interest with respect to edge is the entrance of Pensando Systems, who announced last week that they raised an additional $145 from Hewlett Packard Enterprise and Lightspeed Partners  to fund their edge computing interests.   Pensando has now raised a total of $278 million dollars (3 rounds in 3 years) with a high degree of interest from a wide variety of potential partners.  More on the startup (certainly a candidate for our next “Companies to Watch”) in this CNBC article (John Chambers of Cisco fame is their Chairman).

Also of interest are companies such as Qwilt, an edge video server company that has raised over $65 million from various partners including Cisco, Accel Ventures, and Bessemer.  Verizon has deployed Qwilt as their application edge delivery platform.

Understanding edge strategies is critical with the increase in over the top solutions (such as last week’s Hulu 4K device announcement which broadens their base to include Amazon Fire Stick, Microsoft’s Xbox One, and the LG WebOS TV platforms).  More capabilities will lead to higher expectations and even higher consumption.

 

TSB Follow Up

Several of you issued lengthy replies to last week’s TSB.  There is no doubt that strong feelings exist supporting maintaining equal outcomes of data packets.  There’s equal certainty that others see S.B. 822 (California Net Neutrality bill) as a stepping stone to more activist state proceedings with respect to cable unbundling (which would clearly deter new incumbent investments in the Golden State).  We decided not to go there in last week’s TSB (our focus was on how wireless companies would treat throttling) but see how and why the ghost of Brand X is more than a mirage to many of you.

One item that I think is undebatable – Congressional action would clearly eliminate the newfound love of Federalism that is breaking out in many state legislatures.  We will write more on this in the future, but we at TSB offer up the following bill parameters for consideration:

  1. Establishment of a minimum residential achieved average upload and download speed (wireless and wired) above which regulations would be loosened if not eliminated (we would propose 200 Mbps for 2020 (200 Mbps for stand-alone Hotspot; 100 Mbps per smartphone or tablet) and 500 Mbps for 2025 (500 for stand-alone Hotspot; 250 Mbps per smartphone or tablet) with agreement to establish the 2030 speed at no less than 700 Mbps). Residential averages would be evaluated by no less than two independent 3rd parties at a zip code level.

 

The rationale behind this is twofold:  a) Regardless of bit prioritization practices, the presence of 200 Mbps for 4-5 simultaneous users clearly provides a healthy broadband baseline.  This would be based on achieved as opposed to advertised speeds.

 

This also provides the ability to have lower speeds but uses market mechanisms to drive the mix.  If AT&T wants to offer Gbps speeds for $90/ month, then they will have a smaller fraction achieving this higher speed than if they offered the same product at $50.  The market will reach an equilibrium.

 

This would also greatly encourage the adoption of 5G services across wireless carriers.  If 50% of the base is wireless and achieving LTE speeds of 100 Mbps, they would need to be offset by 50% of the base experiencing average speeds of more than 300 Mbps.

 

It would also create a competitive mechanism assuming either telco or cable did not achieve the figure in the first measurement.  Some incremental capital expenditure would also occur (and this can be done prior to having a larger infrastructure spending bill if that is desired).

 

  1. Tighter enforcement of Type II provisions and regulations. Unbundling provisions in the 1996 Telecom Act have been watered down to a large extent, with telcos (and, to some extent, the business arms of the cable companies) replacing the harmful operational effects of unbundling with 60-month term discounts on traditional special access services.

 

If Type II were properly enforced (penalties properly monitored and assessed), there would be more impetus to be classified as an information service.  This is a fault of all regulators – state and federal – and should be addressed.

 

  1. Adding core control to Type II provisions for wireless providers. If national or regional wireless providers do not step up their game and have market-leading data infrastructure, they should allow others to disintermediate them (core control allows a rural-focused MVNO to set up infrastructure in the slower market and use the faster speeds in more metro areas).  This “nuclear option” would certainly spur innovation among the wireless carrier community and perhaps spawn a previously unthinkable concept – spectrum/ network sharing.

These are very measurable, practical legislative remedies which refocus objectives to weighted average usage (including testing price elasticities to a greater extent) and increased competition.  We clearly believe that the current approach will create a patchwork of network procedures as well as full employment for telecom attorneys.

 

Next week, we’ll look for clues from Comcast, Charter, and Verizon’s announcements, as well as some previews for AT&T’s earnings and the Time Warner analyst day (Oct 29).  Until then, if you have friends who would like to be on the email distribution, please have them send an email to sundaybrief@gmail.com and we will include them on the list.

 

Have a terrific week… and GO CHIEFS!

 

UPDATED: Deeper – The State Attorneys General Make Their Case

** Updated to include Chairman Pai’s press release **

The following nine articles serve as a good primer for the upcoming Attorneys General case against T-Mobile/ Sprint (we will add additional articles as they are suggested/ discovered):

  1. Original complaint filed by ten Attorneys General (nine states and DC) in mid-June. Note: most of the details of Dish’s involvement were not known at the time of publication
  2. An Economic Analysis of the T-Mobile/ Sprint Merger presented to the US House Subcommittee on Antitrust, Commercial and Administrative Law by Scott Wallsten. This is a true “balls and strikes” analysis
  3. Attorney General of Texas announcement that they were joining the T-Mobile/ Sprint merger complaint
  4. Bi-partisan letter from the Attorneys General of New Mexico (D) and Utah (R) to the US Senate Subcommittee on Antitrust explaining why they support the merger (hint: density matters). Their joint blog post on the topic reiterates the same points and is here
  5. New York Law Journal article reiterating the arguments that are made in the 9-state (+ DC) complaint
  6. The Electronic Frontier Foundation comments on the use of the Herfindahl Index concentration as the basis for rejecting the T-Mobile/ Sprint merger
  7. American Enterprise Institute analysis of the use of counterfactuals when considering the T-Mobile/ Sprint merger
  8. Former FCC Commissioner Robert McDowell: Blocking the T-Mobile/ Sprint merger is a “Fool’s Errand” (Bloomberg interview here).
  9. Oregon joins the lawsuit (but the NY Attorney General announces it) on August 12.  
  10. The FCC Chairman’s announcement that he is circulating a draft Order to approve the merger.