A recent phenomenon in competition policy is the acquisition of a private firm by an enterprise that is either wholly owned by government or in the midst of privatization. Such an acquisition poses the question of how public ownership may alter the incentives of a firm to engage in anticompetitive conduct. It also prompts one to examine the process by which such altered incentives revert, as the level of government ownership declines, to the same incentives that face purely private firms. Using Deutsche Telekom's acquisition of VoiceStream Wireless as a case study, this Article presents the economic questions relevant to evaluating the competitive consequences of acquisitions by partially privatized firms. It predicts gains or losses to various constituencies of producer groups. It then analyzes bond ratings and weighted-average costs of capital to determine whether such data are consistent with the hypothesis, advanced by parties opposed to such foreign investment, that partially privatized acquirers benefit from government subsidization of their credit.
A recent phenomenon in American competition policy is the acquisition of a private firm by an enterprise that is either wholly owned by government or in the midst of privatization. Such an acquisition poses the question of how public ownership may alter the incentives of a finn to engage in anticompetitive conduct. It also prompts one to examine the process by which such altered incentives revert, as the level of government ownership declines, to the same incentives that face purely private firms. The competitive significance of partial privatization is increasingly important as a matter of competition policy. The privatization, in Europe and elsewhere, of government owned providers of telecommunications, energy, transportation, and postal services is creating many new corporations. These corporations each have billions of dollars to pursue strategies of acquisition and entry into markets currently populated by private firms. This Article focuses on the telecommunications industry, and especially wireless telecommunications, because they are well down the road of privatization and foreign direct investment.
American consumers gain from foreign direct investment in the U.S. telecommunications services market in at least three different ways. First, foreign investment can increase competition in the market and thus improve qu~ity and decrease prices for American consumers.
Second, foreign direct investment increases the supply of capital in the United States. That influx decreases the cost of capital for U.S. telecommunications firms-particularly the riskier upstarts-and thus enables them to fund greater levels of expansion and service enhancements than would be possible in the presence of a higher cost of capital. A lower cost of capital eventually works its way into lower prices, which again benefits U.S. consumers.
Third, foreign direct investment may generate beneficial spillovers for U.S. telecommunications firms. These benefits consist of the transfer of new technology and management practices to U.S. firms and their workers. Americans may be accustomed to thinking that U.S. firms are consistently in the vanguard of new technologies, but in the case of wireless telecommunications services, however, several other nations are more advanced than the United States in terms of customer penetration and breadth of service offerings. These spilloyers of technology and management expertise benefit U.S. consumers.
There is no reason to believe that any of these significant benefits to U.S. consumers from foreign investment would not accrue if the foreign firm making the investment were still undergoing the process of privatization. Each of these benefits is unrelated to the nature of the shareholders of the investing company. Nevertheless, to date, the debate over acquisitions by . government owned enterprises has paid virtually no attention to the effect of such acquisitions on consumer welfare maximization. Although the welfare of consumers is universally understood to be relevant to enforcement of antitrust law, the typical industry-specific statute, the Telecommunications Act of 1996 (Communications Act),l delegates vast discretion to an independent agency authorized to advance the largely undefined "public interest." In connection with its evaluation of an application to transfer a license (which is necessary to any acquisition), the Federal Communications Commission ("FCC") has the authority to deny any license transfer that would contradict its understanding of the public interest. This standard is so elastic, at least in the minds af those currently empowered to make decisions or influence policy, that it encompasses an evaluation of the effects of the acquisition on the welfare of American firms, with or without a corresponding evaluation of the acquisition's effect on American consumers. Thus, in a manner reminiscent of U.S. antidumping law, the public interest analysis of acquisitions by firms that are partially or wholly owned by a foreign government has taken on a producer-welfare orientation. That orientation is also evident in the legislative initiatives of the members of Congress most resistant to foreign direct investment in the U.S. telecommunications industry.
This Article takes as given the unfortunate starting point that consumer welfare is subordinated to producer welfare when evaluating the competitive consequences of telecommunications acquisitions by partially privatized firms. Given that unfortunate orientation, the challenge is to give economic content to that producer-protection orientation in the manner least deleterious to aggregate producer welfare in the United States. If we are stuck with a producer-welfare standard, we should at least ensure that no group of American producers is treated as more equal than another.
The 2000 acquisition of the American wireless telecommunications firm VoiceStream Wireless by Deutsche Telekom AG of Germany supplies the factual basis for developing this framework. The FCC approved the acquisition in April 2001 and, in the process, embraced the economic analysis that forms the basis for this Article. Despite its approval by the FCC, the acquisition was vigorously opposed by the ranking Democrat on the Senate Commerce Committee, Senator Ernest F. Hollings of South Carolina. In May 2001, the Deutsche Telekom-VoiceStream transaction also received U.S. government approval on national security grounds. This Article will not address this topic.
Part IIof this Article summarizes the legal analysis conducted by the FCC in approving the license transfer application associated with Deutsche Telekom's acquisition of VoiceStream. After reviewing legislative history, statutory language, and its own precedent, the FCC determined that section 31O(a) of the Communications Act does not apply to indirect ownership of a U.S. wireless communications licensee by a foreign government. Under its analysis of section 31O(b)(4), the FCC found no basis to overcome the statute's rebuttable presumption that the proposed license transfer from VoiceStream to Deutsche Telekom would serve the public interest. The FCC explained that partial government ownership conferred no unique advantages to Deutsche Telekom, found that the corporation lacked both the incentive and the ability to act anticompetitively in U.S. communications markets and concluded that American consumers would likely benefit from increased competition if the FCC approved the license transfer.
Part III explains how economics can be used to predict, among various constituents of U.S. producers, the likely winners and losers created by Deutsche Telekom's investment in the U.S. telecommunications sector.
Part IV completes the analysis by examining an anticompetitive hypothesis that could explain the predicted decline in the market value of U.S. incumbent wireless carriers. That hypothesis, however, must be rejected (and subsequently was rejected by the FCC) because Deutsche Telekom cannot engage in predatory pricing and cross-subsidization in the U.S. wireless telecommunications market. Deutsche Telekom does not benefit from subsidized capital because of its partial government ownership. Its bond ratings and weighted average cost of capital are inconsistent with the credit-subsidization hypothesis. Moreover, Deutsche Telekom does not have the opportunity to engage in predatory behavior because: (1) Deutsche Telekom must pursue profit maximization, (2) its fiduciary duties reinforce profit maximization, and (3) in Germany, it faces competitive telecommunications markets as well as effective and transparent regulation. Finally, Deutsche Telekom does not have the incentive to engage in predatory behavior in the U.S. wireless telecommunications market largely due to certain production characteristics of the wireless telecommunications industry. In particular, the low variable costs of wireless communications and the durability of spectrum ensure that no predatory policy would payoff in the long term.
J. Gregory Sidak is an Expert Economist in the fields of Antitrust, Telecommunications Regulation, Commercial and Investment Arbitration, and Intellectual Property Law. Prof. Sidak is the Ronald Coase Professor of Law & Economics at Tilburg University and the Chief Economic Expert at Criterion Economics in Washington, DC. The focus of his research has been regulation of network industries, antitrust policy, the Internet and electronic commerce, intellectual property, and constitutional law issues concerning economic regulation.
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