A Further Look at AT&T And Its Planned Acquisition
The late great political economist Jude Wanniski used to say that even those most hostile to classical or supply-side theory apply it to their daily, micro lives. though many in the commercial world to this day question the empirical reality that a relatively low rate of taxation actually yields more taxable revenues, none question this notion as it applies to their own business and the sale of consumer goods.
No doubt some companies would relish the ability to charge nosebleed prices to goose profits, but frequently the surer path to profits is lower prices that drive exponentially more sales on the way to even greater profits. Taxes on the other hand are nothing but a price placed on work, so if taxable revenues are the goal, history says it’s better to lower the price placed on work to get more of it, along with more revenues in the bargain.
So while theories of taxation do not define present opposition to AT&T’s (NYSE:T) proposed purchase of T-Mobile, prices certainly do. As is seemingly the case every time a merger is announced, many members of the economic/business commentariat are predictably chirping about how the combination will be anti-consumer; the thinking here that with a competitor for mobile-phone service swallowed, AT&T (NYSE:T) will be able to increase prices.
The above is good in theory, but simple logic and historical realities disprove what naïve thinking.
For one, with the commercial outlook nothing if not hazy, there’s no certainty that absent T-Mobile’s sale that the latter would survive on its own. as John D. Rockefeller’s consolidation of the kerosene/oil industry back in the 19th century reveals, many of the competitors he purchased were lucky that he did so. In head-to-head competition they would have been put out of business, so shares in Standard Oil were quite the tradeoff when measured against failure.
Of course as a serial acquirer, it’s assumed by some to this day that with ever growing pricing power, Rockefeller bled hapless consumers lacking Standard competitors to turn to. In reality, and thanks to the efficiencies wrought by consolidation free of anti-trust meddling, Rockefeller continuously reduced prices.
About Rockefeller’s seeming generosity, to assume that it was just that would be every bit as naïve as the assumption that a more powerful AT&T (NYSE:T) would increase prices today. Simply put, high prices and grand profits are what attract competition that invariably lowers both.
Though the growth of the oil industry on a global basis eventually rendered as moot the then popular notion of Rockefeller as a monopolist, his intense focus on ever lower prices was surely rooted in self interest. once again, high prices are what attract competition eager to capture a portion of the profits gained from those prices.
Looking at AT&T (NYSE:T) and its planned acquisition, it’s fair to suggest that it could not attract the financing necessary to complete the purchase if its plan was to raise prices. not only would such a move be unrealistic given the existence of Verizon (NYSE:VZ) and other smaller competitors, it would also be self-defeating for high prices signaling to those outside the mobile-phone space a potentially profitable competitive opportunity.
But even absent new entrants eager to capture some of AT&T’s presumed new pricing power, the suggestion that Ma Bell would raise prices remains unrealistic and is born of naivete in the commentariat as to how businesses grow, and in growing, attract new capital. To put it very simply, any efficiencies and profits gained from an AT&T/T-Mobile combination are already somewhat priced by investors.
Looking ahead, what investors really want to know is what a newly formulated and more profitable AT&T will do beyond selling what is increasingly a low-priced commodity (mobile phone service) to voracious consumers. more specifically, investors want to know how much AT&T will achieve the efficiencies necessary to reduce the cost of mobile service with an eye on capturing the newly available dollars of their customers for other services, including those not yet on offer.
Indeed, while Apple Computer (NASDAQ:AAPL) certainly transformed the market for mobile phones, for it to have maintained the extraordinarily unique iPhone’s initially high price would not have a been a growth strategy. Basically Apple sought production efficiencies to reduce the cost of its phone so that eventually its worshipful customer base would have the means to acquire its other innovations, including the increasingly ubiquitous iPad. the latter is all the rage now, but in time the cost of it will decline and Apple will have yet more innovations ready for a ravenous customer base made relatively flush by falling prices in the core goods it presently sells.
The same applies to AT&T (NYSE:T), and if the Department of Justice correctly stays out of the way, a combined AT&T/T-Mobile. Today’s cellphone services are yesterday’s news, and indeed, that’s what the fatal conceit that is anti-trust seeks to regulate: yesterday’s news. Lacking hotlines to the future, anti-trust lawyers vainly work to oversee what’s already happened, and the act itself exposes the sheer folly of anti-trust.
So rather than block what shareholders in both companies apparently deem necessary, it’s time for the anti-trust establishment to reveal its humble side so that AT&T (NYSE:T) and T-Mobile can merge. After that, the very customer base that decides which companies will grow and which will fail can render a market-based judgment on the good and bad of this combination.
John Tamny is a senior economic advisor to Toreador Research & Trading, a senior economist with H.C. Wainwright Economics, and editor of RealClearMarkets and Forbes.