WASHINGTON (Reuters) – T-Mobile US Inc’s $26 billion acquisition of rival Sprint Corp won the support of the head of the Federal Communications Commission on Monday, in a big step toward the deal’s approval.

FCC Chairman Ajit Pai, a Republican, came out in favor of the combination after the companies offered concessions including selling Sprint’s Boost Mobile prepaid cell service.

Sprint shares surged 23.2% while T-Mobile shares rose 5.1%. If okayed by the FCC, the deal would still need approval from the U.S. Justice Department’s antitrust division.

If the deal is completed, the number of U.S. wireless carriers would drop to three from four, with Verizon Communications Inc and AT&T Inc leading the pack.

Some telecommunications experts have predicted that prices for cell phone service would rise as a result, and U.S. Senator Richard Blumenthal agreed.

“The FCC’s seeming abdication makes it even more important for the Department of Justice to step up to the plate to block this merger,” the Democratic senator said in a statement.

Pai will recommend that the other four FCC commissioners vote to approve the merger. Commissioner Brendan Carr, a Republican, said on Monday he will vote in favor.

The third Republican, Mike O’Rielly, did not reply to a request for comment. The Commission is made up of three Republicans and two Democrats.

Pai

FCC Commissioner Jessica Rosenworcel, a Democrat, tweeted her disapproval.

“We’ve seen this kind of consolidation in airlines and with drug companies,” she said. “It hasn’t worked out well for consumers. But now the @FCC wants to bless the same kind of consolidation for wireless carriers. I have serious doubts.”

The FCC will not formally vote on the merger on Monday but will first draft an order, two people briefed on the matter said.

The FCC move boded well for the Justice Department to also approve the deal, Citi analysts said in a note.

“While the two federal agencies have different standards of review that could lead to different outcomes, we believe the likelihood for some coordination between the agencies is encouraging for the approval prospects by the (Justice Department),” the note said.

Reviews by state attorneys general and public utility commissions could push full approval back to the third quarter of this year, the Citi note said.

CONCESSIONS

In a filing with the FCC on Monday, the companies pledged to sell prepaid wireless provider Boost Mobile.

The sale will include the brand name, any active accounts and dedicated Boost assets and staff but no wireless spectrum. The new Boost could buy network access from T-Mobile for at least six years.

One critic of the deal called the concession weak.

“I don’t understand how the mere spinning off of one of three prepaid services would satisfy (Pai), given all the evidence in the record that post-paid (wireless) prices will go up,” said Gigi Sohn, who held a senior FCC position during the Obama administration. “I just think this is very weak tea.”

The Boost sale is aimed at resolving concerns that the deal would give the combined company 54% of the prepaid market, which generally includes those with poor credit who cannot pay with a credit card.

T-Mobile, which is about 63 percent owned by Deutsche Telekom AG, also promised the new company would build a “world-leading” 5G network, which is supposed to be the next generation of wireless service. It promises to give rural Americans robust 5G broadband and enhance home broadband.

The FCC and Justice Department had been expected to make a decision in early June. They have been weighing potential a loss of competition and higher prices for consumers against the prospect of a more powerful No. 3 wireless carrier that can build a faster, better 5G network.

T-Mobile has about 80 million customers and Sprint has about 55 million customers.

Reporting by David Shepardson and Diane Bartz, additional reporting by Douglas Busvine in Frankfurt; Editing by Susan Heavey, Paul Simao and Jeffrey Benkoe

Justice Department staffers have told T-Mobile and Sprint that their $26 billion merger is unlikely to win approval as presently structured, according to a report in the Wall Street Journal.

Unnamed sources familiar with the deal told the newspaper the Justice Department’s Antitrust Division is among the most skeptical of those reviewing the deal, questioning claims from the companies that the merger will create synergy and increased efficiency that could free up resources to dramatically expand the combined company’s wireless business.

At the core of the concern is the impact of combining the nation’s third and fourth largest wireless carriers, reducing competition to just three national postpaid companies — AT&T, Verizon Wireless, and T-Mobile. That could present an unacceptable threat to competition.

The Justice Department is not alone expressing concern over the merger deal. Multiple state attorneys general are still reviewing the deal and several have announced they are prepared to sue the companies involved to stop the merger if it manages to win approval on the federal level. The Federal Communications Commission is also said to be questioning some of the claims of the company about the merits of its promised 5G home broadband service and exactly how much consumers could save should they subscribe.

The Financial Times also published a story this afternoon essentially confirming the Journal story.

John Legere, CEO of T-Mobile USA, denied the premise of the Journal’s story in a tweet late this afternoon, calling it “simply untrue,” but refused further comment.

The premise of this story, as summarized in the first paragraph, is simply untrue. Out of respect for the process, we have no further comment. This continues to be our policy since we announced our merger last year. https://t.co/3q9CVgkRfv key info: https://t.co/N5YvuuJtPZ

— John Legere (@JohnLegere) April 16, 2019

Any decision about the merger is not expected for several weeks, and any recommendations from the staff report on the deal can be overruled by the political appointees that run the Justice Department. The Times reports that the final decision will likely rest with Makan Delrahim, President Trump’s pick as chief of the antitrust division. With staff objections now leaked to the press, Delrahim could be in a politically difficult situation overruling his staff’s recommendations. In the meantime, company officials can offer concessions, such as selling off certain assets to overcome regulator objections.

Many Wall Street analysts feel the chances of the merger winning approval are reduced the longer the merger review remains underway in Washington. Many have placed the odds at less than 50% that the deal will ultimately be approved. If it is rejected, T-Mobile is expected to continue its business without any significant financial hurdles. Sprint may be a different matter, as its Japanese backer SoftBank has soured on the merits of pouring additional money into Sprint’s wireless business.

A dispute is emerging in New York between Sprint and T-Mobile and the Communications Workers of America (CWA) and pro-consumer group the Public Utility Law Project (PULP) over the wireless companies’ attempt to argue for their merger deal in a partly secretive filing not open to review by the public.

In a joint letter signed by Richard Brodsky, on behalf of the CWA and Richard Berkley, on behalf of PULP, the two groups argue Sprint’s initial summer filing promoting its merger did not come close to meeting the state’s burden of proof that allowing the two companies to join forces would be good for New York consumers. But even worse, the two wireless companies are now trying to introduce new arguments in favor of their merger, while redacting them from public view and comment.

“The use of the public comment process to recast the Petition, to attempt to repair the fatal defects in the Petition, and to insulate this new information from public comment is fundamentally unfair,” the two men wrote. “This maneuver deprives Parties of the opportunity to respond to the full set of arguments and assertions made by the Joint Applicants; it undermines the usefulness and value of the public comment policies so fundamental to the Commissions’ history and values and the proper conduct of a rulemaking proceeding; it is not contemplated by Commission rules; and it sets a precedent for future misuse of comments to short-circuit full public analysis.”

The companies filed what they called “comments” on Nov. 16. Detailed information about how the merger will impact on New York consumers was left redacted:

Sprint and T-Mobile’s arguments regarding the consumer benefits of its merger for New Yorkers remain a public mystery. The companies redacted this submission to keep the prying eyes of average consumers from reading it.

The CWA and PULP are asking the Commission for an order that:

1) Requires the Joint Applicants to provide unredacted submissions or to withdraw any document relying on redactions; and/or
2) Convenes an evidentiary hearing permitting examination and testimony relating to the Petition and the submission; and/or
3) Grants our previous request for a formal Public Hearing on the Petition and the submission; and/or
4) Removes from the record the Joint Applicants’ November 16 submission from the record; and/or
5) Extends the deadline for Notice and Comment in the October 19 Order to December 15, 2018; and/or such other relief as the Commission may order.

The merger of the two wireless companies requires state and federal approval. Alaska, Colorado, Delaware, Georgia, Louisiana, Maryland, Minnesota, Nevada, Texas, Utah, West Virginia and the District of Columbia have already essentially “rubber-stamped” approval of the merger deal with little comment. Pennsylvania regulators submitted a series of questions that the two companies answered earlier this week.

Sprint and T-Mobile are having a tougher time dealing with regulators in New York and New Jersey, however — the two most likely to either deny approval or impose significant deal conditions in approving the transaction. A review is pending in California, which routinely asks a lot of questions but rarely opposes telecommunications company mergers. Hawaii and Mississippi will also examine the merger in the near future, but neither are expected to oppose it.

New York regulators are likely to consider the impact of the merger on the availability of affordable cellphone plans, the Lifeline program that offers discounted phone service for the poor, and how the transaction will affect rural wireless service in upstate New York.

“You’re giving it away… you are giving it all away!” — An unknown Wall Street analyst tossing and turning in the night.

America is simply not paying enough for wireless service. Thanks to dastardly competition introduced by T-Mobile and Sprint (potentially to be snuffed out in due course if their merger gets approved), wireless pricing is no longer a license to print money. Forced to offer one-size-fits-all affordable $40-50 unlimited plans, the prospects to grow Average Revenue Per User (ARPU) have never been worse because you can’t charge people for more service on an “unlimited plan” without admitting that plan is not exactly “unlimited.”

Wall Street analysts, already upset at the thought of carriers spending more than $100 billion on 5G network upgrades, are in a real tizzy about how companies are going to quickly recoup that investment. No matter that some wireless companies have profit margins in the 50% range and customers have paid providers for a service they were assured would keep up with the times and network demand. If there is to be a 5G revolution in the United States, some insist it must not come at the cost of reliable profits — so the industry must find a way to stick consumers with the bill.

It is not common for industry analysts to go public brainstorming higher prices and more customer gouging. After all, North Americans already pay some of the highest cell phone bills in the world, only mitigated (for now) by scrappy T-Mobile and Sprint. Mark Lowenstein, a leading industry analyst, consultant, and commentator, was willing to go public in the pages of Fierce Wireless, arguing “operators should be considering charging a premium price for what will hopefully be a premium service.” That is likely music to the ears of AT&T and Verizon, both frustrated their pricing power in the market has been reduced by credible competition from a significantly improved T-Mobile.

Lowenstein fears the prospects of a “race-to-the-bottom 5G price war” which could arrive if America’s wireless companies offer a credible home internet replacement that lets consumers tell the local phone or cable company to ‘take a hike.’ Since wireless operators will bundle significant discounts for those who subscribe to both home and mobile plans, telecommunications services may actually cost less than what Wall Street was banking on.

Something must be done. Lowenstein:

In mobile, there’s been premium pricing for premium phones. And Verizon Wireless, for a few years when it had a clear network lead, was sort of able to charge a higher price for its service (but not a premium price). But today, there isn’t really premium pricing for premium services. That should change when 5G really kicks into gear.

So how do you extract more cash from consumers’ wallets? Create artificial tiers that have no relationship to the actual cost of the network, but could potentially get people to willingly pay a lot more for something they will initially get for a simple, flat price:

One simple way would be a flat premium price, similar to the “tiers” of Netflix for a higher number of devices or 4K/Ultra HD.  So, perhaps $10 per line for 5G, or $25 for a family plan. Another approach would be more akin to broadband, where there are pricing tiers for different levels of service performance. So if the base 4G LTE plan is $50 per month today, for an average 100 Mbps service, 5G packages could be sold in gradations of $10 for higher speeds (i.e. $60 for 300 Mbps, $70 for 500, $80 for 1 Gbps, and so on). An interesting angle on this is that some of the higher-end 4G LTE services such as Gigabit LTE (and beyond) could get incorporated into this, so it becomes less of a 4G vs. 5G discussion and more of a tier of service discussion.

I would also like to see some flexibility with regard to how one can purchase 5G capabilities. For example, a user might only need those premium 5G features occasionally, and might only be prepared to pay that higher price when the service is being used. Here, we can borrow from the Wi-Fi model, where operators offer a “day pack” for 5G, or for a certain city, location, or 5G-centic app or experience. 5G is going to be hot-spotty for awhile anyway, so why not use a Wi-Fi type model for pricing?

Even better, now with net neutrality in the ash heap of history, courtesy of the Republican-dominated FCC, providers can extract even more of your money by artificially messing with wireless traffic!

Lowenstein sees a brand new world of “app-centric pricing” where wireless carriers can charge even more to assure a fast lane for those entertainment, gaming, and virtual reality apps of the future, designed to take full advantage of 5G. Early tests have shown millimeter wave 5G networks can deliver extremely low latency traffic to customers from day one. That kills the market for selling premium, low-latency add-ons for demanding apps before companies can even start counting the money. So assuming providers are willing to purposely impede network performance, there just could be a market selling sub-100ms assured latency for an extra fee.

The potential of a Money Party only 5G can deliver is coming, but time is short to get the foundation laid for surprise toll lanes and “premium traffic” enhancements made possible without net neutrality. But first, the wireless industry has to get consumers hooked on 5G at a tantalizingly reasonable price. Charge too much, too soon and consumers may decide 4G LTE is good enough for them. That is why Lowenstein recommends operators not get carried away when 5G first launches.

“We don’t want to be setting ourselves up for a WiMAX-like disappointment,” Lowenstein writes. “The next 12-18 months are largely going to be ‘5G Experimentation’ mode, with limited markets, coverage, and devices. Heck, it’s likely to be two years before there’s a 5G iPhone in the United States, where iOS still commands nearly half the market.”

The disappointment will eventually be all yours, dear readers, if Lowenstein’s recommendations are adopted — when “certain milestones” trigger “rate adjustment” letters some day in the future.

Lowenstein sees four signs to start the pillaging, and we’ve paraphrased them:

• Coverage: Wait until 30-40% of a city is covered with 5G, then jack up the price. As long as customers get something akin to 5G one-third of the time, they’ll moan about why their 5G footprint is so limited, but they will keep paying more for the scraps of coverage they get.
• Markets: Price the service differently in each market depending on how stingy customers are likely to be at different price points. Then hike those prices to a new “nationwide” standard plan when 5G is available in the top 20-30 cities in the country. Since there may not be much competition, customers can take it or leave it.
• Performance: AT&T and Verizon’s gotta gouge, but it’s hard to do it with a straight face if your 5G service is barely faster than 4G LTE. Lowenstein recommends waiting until speeds are reliably north of 100 Mbps, then you can let rip with those diamond-priced plans.
• Devices: It’s hard to extract another $50-100 a month from family plan accounts if there are an inadequate number of devices that support 5G. While your kids “languish” with 4G LTE smartphones and dad enjoys his 5G experience, mom may shut it all down when the bill comes. Wait until everyone in the family can get a 5G phone before delivering some good old-fashioned bill shock, just like companies did in the golden days of uncompetitive wireless.

These ideas can only be adopted if a lack of competition assures all players nobody is going to call them out for pickpocketing customers. Ajit Pai’s FCC won’t interfere, and is even subsidizing some of the operators’ costs with taxpayer dollars and slanted deregulation to let companies construct next generation 5G networks as cheaply as possible (claiming it is important to beat China, where 5G service will cost much less). Should actual competition remain in the wireless market, all the dreams of rate-hikes-because-we-can will never come true, as long as one carrier decides they can grow their business by charging reasonable prices at their competitors’ expense.