“Special Access” is one of those fun telecom terms that makes no sense to those outside of telecom. Briefly, it’s the rate that a regulated incumbent local exchange carrier (ILEC), like AT&T, charges for certain non-residential telecom services. As you can see, even my attempt to describe in one sentence without jargon failed, that’s how complicated this is. However, like many very complicated things, Special Access is one of the important ingredients that goes into how much people pay for phone and broadband service. You can find a five minute video of me explaining Special Access and why everyone needs to care about it here.
For this post, you need to know two things about Special Access. First, cell phone companies like Sprint and T-Mobile usually need to buy Special Access services for backhaul from their cell phone towers. When you use a smartphone, something has to connect that information hitting the cell tower to the Internet. Second, the biggest providers of Special Access service are the phone companies: AT&T, Verizon, and CenturyLink (formerly Qwest). In the territories these providers serve, the generally have market dominance or outright monopoly over the provision of special access services. This did not stop the FCC from substantially deregulating most of the Special Access market back in 2000 in the expectation that competition was just about to emerge and that deregulating critical input would not allow the telcos to totally crush the emerging competition. Mind you, the FCC did not totally deregulate Special Access, or competing mobile providers would probably have as much luck negotiating Special Access rates as they do data roaming agreements.
Not surprisingly, the issue has come up in the AT&T/T-Mobile merger. Sprint says that AT&T absorbing T-Mobile will make its Special Access problems worse and allow AT&T/T-Mobile to price it out of the market. AT&T responded in this blog post, in part by asking “How could absorbing T-Mobile, which doesn’t provide Special Access, hurt the Special Access market?” Sarah Jerome over at the Hill asked me that question, prompting me to offer this response (originally printed here).
“One, it’s a multiplier effect on the harm to competition. The merger disadvantages Sprint (and other competitors except Verizon) not only because AT&T’s market share increases, but because the increase works synergistically with all of AT&T’s other advantages, including special access. If Sprint were buying T-Mobile, it acquire not just the additional T-Mobile customers, but the expense associated with those customers for special access data transport. AT&T acquires the T-Mobile customers and actually reduces T-Mobile’s overall operation costs through the simple expedient of no longer charging access charges. A double whammy from Sprint’s perspective.
“Second, special access is a different market from a usual market because AT&T doesn’t want to sell special access. They are required to do it by law. That’s why the usual argument ‘but of course we would never hurt our special access customers, that would be bad for business’ argument is false. AT&T doesn’t want special access customers. But they are required to offer their special access services at just and reasonable rates, so they grudgingly do so.
“One measure of just and reasonable is comparing similarly situated customers. So AT&T has to at least be reasonably consistent in pricing. That means T-Mobile benefits to some degree from any pricing concessions that Sprint can negotiate, and vice versa. And if AT&T is too unreasonable to either one, or both, having two similarly situated companies complain to the FCC and produce evidence that AT&T is being unreasonable makes a stronger case than having just one company.
“Perhaps more importantly from Sprint’s perspective, it has at least one competitor laboring under the same disadvantage. In this dynamic, even if Sprint cannot overcome the advantages of AT&T and Verizon, it can at least hope to beat T-Mobile and become a stronger 3rd place contender.
“Post merger, Sprint is out there all alone. It has no other carrier to help it negotiate better prices. It has no benchmark it can point to if it claims AT&T is being unfairly discriminatory. And it has no other competitor laboring under a similar disadvantage. It’s bad enough when you are forced to pay your biggest competitor for a critical input. It’s far worse when you are the only one stuck with that competitive disadvantage — especially when that same biggest competitor is more than double your size.”
I’ll add one more consideration (lest I be accused of simply shamelessly repurposing content). This hopefully illustrates just how insanely dangerous to competition the proposed AT&T/T-Mobile merger would be. It’s not just a wireless merger. Like an earthquake causing a tsunami, the merger is so huge it impacts everything around it. That’s one of the reasons we don’t believe conditions can make this merger acceptable. There are so many markets where the combination enhances AT&T’s already existing market power that it is simply impossible for federal regulators to identify them all, let alone design effective conditions and enforce them.