United States v. Motorola, Inc. and Nextel Communications, Inc.; Public Comments and Response on Proposed Final Judgment
Federal RegisterApr 17, 1995
Ask Donna
What actually matters in this document.
Text
DEPARTMENT OF JUSTICE
Antitrust Division
United States v. Motorola, Inc. and Nextel Communications, Inc.;
Public Comments and Response on Proposed Final Judgment
Pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C.
16(b)-(h), the United States publishes below the comments received on
the proposed Final Judgment in United States of America v. Motorola,
Inc. and Nextel Communications, Inc., Civil Action No. 1:94CV02331,
filed in the United States District Court for the District of Columbia,
together with the response of the United States to the comments.
Copies of the response and the public comments are available on
request for inspection and copying in room 3233 of the Antitrust
Division, United States Department of Justice, Tenth Street and
Pennsylvania Avenue, NW., Washington, DC 20530, and for inspection at
the Office of the Clerk of the United States District Court for the
District of Columbia, United States Courthouse, Third Street and
Constitution Avenue, NW., Washington, DC 20001.
Constance K. Robinson,
Director of Operations, Antitrust Division.
Response to Public Comments to the Proposed Final Judgment
[Case No. 1:94CV02331]
Pursuant to the requirements of the Antitrust Procedures and
Penalties Act, 15 U.S.C. 16 (b)-(h) (``APPA''), the United States of
America hereby files its Response to Public Comments to the proposed
Final Judgment in this civil antitrust proceeding. The United States
has reviewed the comments on the proposed Final Judgment and remains
convinced that entry of the proposed Final Judgment is in the public
interest.
I. Summary of Proceedings
This proceeding relates to the proposed consolidation of the
trunked specialized mobile radio (``SMR'') businesses of Nextel
Communications, Inc. (``Nextel'') and Motorola, Inc. (``Motorola''),
the two largest providers of those services in the United States. This
transaction is part of Nextel's [[Page 19285]] seven-year effort to
accumulate sufficient radio spectrum to establish a digital wireless
network in competition with the cellular telephone companies.
Trunked SMR service is a type of radio service used by contractors,
service companies, delivery services and other businesses that need to
communicate with fleets of vehicles on a one-to-one or one-to-many
basis. It is provided pursuant to licenses granted by the Federal
Communications Commission (``FCC'') in the 800 MHz and 900 MHz spectrum
bands. A limited number of licenses are available for these services.
In the last seven years, Nextel has entered into agreements to
purchase or manage the assets of dozens of companies holding licenses
to provide SMR service in the 800 MHz band, making it the largest
holder of 800 MHz SMR spectrum, as well as the primary supplier of SMR
service, in the United States.\1\ Nextel's numerous acquisitions are
part of a plan to replace the currently deployed analog technologies
used in those systems with a new digital technology developed by
Motorola. Deployment of digital technology and the reconfiguration of
radio transmitters in a cellular-like pattern will greatly increase the
number of customers that may be served and allow Nextel to offer a
greater variety of services including, in addition to dispatch service,
data and wireless telephone service. Nextel also owns and manages a
substantial number of 900 MHz SMR channels in major cities around the
country. However, the new Motorola technology cannot be deployed on
them.
\1\Through its agreements to acquire OneComm Corporation and
Dial Page, Inc., which had been accumulating 800 MHz spectrum in
other regions, Nextel established a nationwide presence and now owns
SMR spectrum in most areas of the continental United States.
Motorola is the second largest holder of 800 MHz SMR spectrum and
Nextel's primary competitor in the provision of dispatch services in
many cities around the country. Motorola also owns and manages a
substantial number of 900 MHz SMR channels in major cities, including
many reached by Nextel's 800 MHz and 900 MHz SMR services. By an
agreement dated August 4, 1994, Motorola agreed to sell Nextel its SMR
business in the 800 MHz band. The agreement also provided that Nextel
would manage Motorola's 900 MHz SMR business for three years, subject
to renewal for subsequent periods of two years.\2\
\2\Motorola is to receive twenty-four percent of Nextel's voting
securities. Agreements entered the same day commit Nextel to
purchase Motorola equipment for its 800 MHz SMR business.
---------------------------------------------------------------------------
The United States commenced this action on October 27, 1994
alleging that Nextel's control of virtually all available options for
customers seeking SMR services, i.e., simultaneous control, of
virtually all channels on which such services are provided in both the
800 MHz and 900 MHz bands in fifteen (15) major cities in the United
States would substantially lessen competition in these markets.\3\ On
the same date, the United States submitted, with the consent of the
defendants, a proposed Final Judgment that requires defendants to
divest certain SMR assets and licenses and prevents defendants from
reacquiring the specified assets and licenses, or acquiring comparable
assets and licenses, in the fifteen (15) cities. With the exception of
Atlanta, Georgia, the contemplated relief is limited to 900 MHz
channels.
\3\The cities identified in the complaint and CIS were Atlanta,
Georgia; Boston, Massachusetts; Chicago, Illinois; Dallas and
Houston, Texas; Denver, Colorado; Detroit, Michigan; Los Angeles and
San Francisco, California; Miami and Orlando, Florida; New York, New
York; Philadelphia, Pennsylvania; Seattle, Washington; and
Washington, DC.
---------------------------------------------------------------------------
The relief provided in the proposed Final Judgment is intended to
prevent any lessening of competition in the provision of trunked SMR
service in a manner consistent with the efforts of the FCC to
facilitate the creation of a new digital wireless telephone service
competitor that would significantly benefit the public.\4\ Recognizing
that Nextel may require additional 800 MHz spectrum to compete, the FCC
has permitted Nextel to be assigned a substantial number of 800 MHz SMR
licenses and has initiated proceedings aimed at promoting the
aggregation of spectrum to facilitate the development of digital SMR
networks.\5\ In order to avoid any interference with these efforts by
the FCC, the relief required by the Final Judgment is, with the
exception of Atlanta, limited to 900 MHz spectrum. Since the Motorola
technology cannot be deployed on SMR channels in 900 MHz band, the
possible benefits from Nextel's creation of a digital wireless network
are not put at risk by requiring Nextel to relinquish control of 900
MHz SMR channels. Conversely, if Nextel is permitted to own and manage
the 900 MHz SMR channels, Nextel would gain control of the most widely
available alternative to dispatch services provided on the 800 MHz band
and significantly increase its ability to increase the prices of
dispatch services.
\4\In the Matter of Applications of Nextel Communications, Inc.,
FCC 95-263 at 13-14 (February 17, 1995).
\5\See Amendment of Part 90 to Facilitate Development of SMR
Systems in the 800 MHz Frequency Band, FCC 94-271 (November 4, 1994)
(Further Notice of Proposed Rulemaking).
---------------------------------------------------------------------------
Comments on the proposed Final Judgment were received from a group
composed of Clarks Electronics, Teton Communications, Radio Service
Company, Zundel's Radio, Inc., Business Radio, Inc., Accucomm, Inc.,
Earl's Distributing Inc., Earl's Wireless Communications, Total
Communications, Communications Center, Inc., and Leflore
Communications, Inc. (collectively ``the Clark Group'');\6\ from
Communications Center, Inc. (``CCI''); from General Electric Mobile
Communications Dealer Board of Directors (``GE''); and from Gerard and
Harold Pick (``Pick'').\7\ These commenters are all operators of SMR
systems and are competitors of Nextel or Motorola in various regions of
the United States. The primary concern in the comments is that Nextel's
acquisition of such a large percentage of 800 MHz SMR spectrum will
prevent competitors from being able to expand their systems and give
Nextel the power to raise prices and reduce the quality of service to
its customers. Generally they request that the Department withdraw its
consent.
\6\The Clark Group filed an initial comment on December 14,
1994, consisting of a copy of it filing with the FCC on the Nextel--
OneComm transaction. On January 9, 1995, it filed additional
comments. Its numerous pages of exhibits, consisting of, among other
things channel ownership tables, have been submitted to the Court,
but have not been published. Its December 14, 1994, and January 9,
1995, filings are Attachments A and B, respectively.
\7\The CCI, GE and Pick comments are Attachments C, D and E,
respectively.
As explained below, the United States concluded that the
divestiture and release of 900 MHz spectrum by the defendants would
address the principal anticompetitive effects of the transactions, and
that a requirement that Nextel divest or release 800 MHz channels would
unnecessarily impede the efforts of Nextel to deploy its digital
technology and compete in the provision of wireless telephone services.
If such additional action was required, Nextel's planned wireless
services would serve fewer people and the anticipated downward pressure
on cellular service rates would diminish or not materialize.
II. Compliance with the APPA
The APPA requires a sixty-day period for the submission of public
comments on the proposed Final Judgment, 15 U.S.C. 16(b). In this case,
the sixty-day comment period commenced on November 8, 1994, and was due
to terminate on January 9, 1996. On that date, the United States filed
a motion [[Page 19286]] with the Court on behalf of OneComm Corporation
requesting that the comment period be extended until January 17, 1995.
On January 17, 1995, OneComm notified the United States that it would
not, in fact, file a comment.\8\ The United States has received
comments from four persons. Upon publication of the comments and this
response in the Federal Register, pursuant to 15 U.S.C. 16(d) of the
APPA, the procedures required by the APPA prior to entry of the
proposed Final Judgment will be completed. The United States will move
the Court for entry of the proposed Final Judgment after publication of
the comments and this response, and the Court may then enter the
proposed Final Judgment.
\8\The OneComm filing is Attachment F.
---------------------------------------------------------------------------
III. Standard of Review
Under the APPA, the primary responsibility for enforcing the
antitrust laws and protecting the public interest in competitive
markets rests with the Department of Justice.\9\ In carrying out its
responsibilities, the Department has very broad discretion in
prosecuting alleged antitrust violations and determining appropriate
relief for the settlement of cases.\10\ Before entering a proposed
consent decree, the Court must determine that the decree is in the
public interest, 15 U.S.C. 16(e),\11\ but that test is limited to
ensuring that the government has met its public interest
responsibilities, that is, determining that the proposed Final Judgment
falls within the range of the government's antitrust enforcement
discretion. The Ninth Circuit Court of Appeals has explained these
respective obligations as follows:
\9\United States v. Waste Management, Inc., 1985-2 Trade Cas.
(CCH) para.66,651 at page 63,045 (D.D.C. 1985).
\10\United States v. Mid-American Dairymen, Inc., 1977-1 Trade
Cas. (CCH) para.61,508 at page 71,980 (W.D. Mo. 1977), citing Sam
Fox Publishing Co. v. United States, 366 U.S. 683, 689, (1961) and
Swift & Co. v. United States, 276 U.S. 311, 331-32 (1928).
\11\This determination can be properly made on the basis of the
Competitive Impact Statement and this Response. The procedures of 15
U.S.C. Sec. 16(f) are discretionary, and a court need not invoke any
of them unless it believes that the comments have raised significant
issues and that further proceedings would aid the Court in resolving
those issues. See H.R. Rep. 93-1463, 93d Cong. 2d Sess. 8-9
reprinted in [1974] U.S. CODE CONG. & AD. NEWS 6535, 6538.
---------------------------------------------------------------------------
The balancing of competing social and political interests
affected by a proposed antitrust consent decree must be left, in the
first instance, to the discretion of the Attorney General * * *. The
court's role in protecting the public interest is one of insuring
that the government has not breached its duty to the public in
consenting to the decree. The court is required to determine not
whether a particular decree is the one that will best serve society,
but whether the settlement is ``within the reaches of the public
interest.'' * * * More elaborate requirements might undermine the
effectiveness of antitrust enforcement by consent decrees.\12\
\12\United States v. Bechtel Corp., 648 F.2d 660, 666 (9th Cir.
1981) (citations omitted). See also United States v. Western
Electric Co., 900 F.2d 283, 309 (D.D. Cir.) cert denied, 498 U.S.
911 (1990).
Indeed, the courts repeatedly have held that the purpose of their
review of proposed consent decrees is not to determine ``whether this
is the best possible settlement that could have been obtained if, say,
the government had bargained a little harder.''\13\ or whether this is
the remedy ``the court might have imposed had the matter been
---------------------------------------------------------------------------
litigated.''\14\ Rather:
\13\United States v. National Broadcasting Co., 449 F. Supp.
1127, 1143 (C.D. Cal. 1978), quoting United States v. Gillette Co.,
406 F. Supp. 713, 716 (D. Mass. 1975).
\14\United States v. Alcan Aluminum Ltd., 605 F. Supp. 619, 622
(W.D. Ky. 1985).
---------------------------------------------------------------------------
Absent a showing of corrupt failure of the government to
discharge its duty, the Court, in making its public interest
finding, should * * * carefully consider the explanations of the
government in the competitive impact statement and its response to
comments in order to determine whether those explanations are
reasonable under the circumstances. The Court must also give
appropriate recognition * * * to the fact that every consent
judgment normally embodies a compromise, and that the parties each
give up something which they might have won had they proceeded to
trial.\15\
\15\United States v. Mid-American Dairymen, Inc., supra,
para.61,508 at 71,980.
The Court may reject the agreement of the parties as to how the
public interest is best served only if it has ``exceptional confidence
that adverse antitrust consequences will result.'' United States v.
Western Electric Co., 993 F.2d 1572, 1577 (D.C. Cir.), cert. denied,
114 S.Ct. 487 (1993).
In this case, the United States carefully considered the matters
that are now being raised in the comments when it formulated its
position with respect to the transaction. We concluded, for reasons
discussed below and in the Competitive Impact Statement, that the
public would be best served by the remedial action set forth in the
proposed Final Judgment. If the Court finds that the United States'
action represented a reasonable exercise of its antitrust enforcement
responsibility and prosecutorial discretion, it may enter the proposed
Final Judgment as soon as compliance with the APPA is completed by
publication of the comments and Response in the Federal Register.
IV. Response to Public Comments
In its comments, the Clark Group challenges the Competitive Impact
Statement insofar as it explains the proposed Final Judgment is in the
public interest. In support of its view, the Clark Group cites United
States v. Western Electric Co., 552 F.Supp. 131 (D.C.D.C. 1982) for the
proposition that a proposed Final Judgment is inadequate if it does not
render impotent the monopoly power found to violate the antitrust laws.
As explained below, the Clark Group's market definition is too narrowly
drawn and improperly fails to recognize the potential of these
transactions to increase competition in wireless services.
A. Benefits from New Wireless Services
The various comments on the proposed Final Judgment explicitly and
implicitly question whether Nextel's consolidation of 800 MHz SMR
spectrum, now being used to provide analog dispatch services to small
businesses, and its deployment of a new technology on that spectrum to
provide dispatch, wireless telephone and data services, is really in
the public interest. By granting numerous requests that SMR licenses be
transferred to companies consolidating spectrum, granting wide area
waivers, relaxing construction schedules, and other actions, the FCC
has indicated that it believes that the public would benefit from the
deployment of digital technology on 800 MHz SMR spectrum.\16\ Those
decisions were an exercise of policy judgment by an expert agency
within its area of expertise and jurisdiction. We do not believe that
it would be appropriate to revisit those decisions in the context of
this antitrust proceeding.\17\
\16\In February 1991, the FCC authorized Nextel, then called
Fleet Call, to construct digital mobile networks in six cities,
finding that doing so would ``generally encourage the larger and
more efficient use of radio in the public interest.'' In Re Request
of Fleet Call, Inc. for Waiver and Other Relief, 6 FCC Rcd 1533
(1991). Subsequently, the FCC granted additional waivers to Nextel
and other companies authorizing the construction of such systems and
facilitating their efforts to construct their systems. See, e.g., PR
Docket No. 92-210, FCC 93-256, (May 13, 1993) (giving companies
proposing digital wide-area systems five years to place their
systems in operation).
\17\We also note that insofar as the commenters question the
wisdom of the FCC's decision, they do so in an effort to protect
their interests as providers of analog SMR services and competitors
of Nextel. The antitrust laws were meant to protect competition, not
competitors. Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S.
477, 488 (1977). The commenters seek to limit the 800 MHz SMR
spectrum that Nextel may own or control and use in the provision of
its proposed digital wireless services. The FCC has determined,
however, that if Nextel is successful in deploying its digital
network, it will provide new competition to the cellular telephone
companies which would benefit the public far more than the continued
use of that spectrum for the provision of dispatch services to
businesses. The FCC decisions will displace many current SMR service
providers and their customers and make 800 MHz spectrum more scarce
for companies seek to increase their analog SMR capacity. In
reaching those decisions, however, the FCC concluded that Nextel's
deployment of its network, using the Motorola technology, will
dramatically increase the number of customers served on an 800 MHz
channel, over the number served currently with analog SMR
services. [[Page 19287]]
---------------------------------------------------------------------------
Section 16(e)(2) of the APPA permits the Court to consider,
determining whether the judgment is in the public interest, ``the
impact of entry of such judgment upon the public generally.'' Thus,
public policy considerations other than the competitive impact of the
judgment on the markets alleged, such as deference to the FCC's
judgment on possible benefits to the wireless market, may be
considered.\18\
\18\See United States v. BNS, Inc., 858 F.2d 456, 462-63 (9th
Cir. 1988).
---------------------------------------------------------------------------
The FCC's decisions, however, provide no basis for allowing Nextel
to acquire control of 900 MHz spectrum in the relevant geographic
markets, in addition to the substantial portion of 800 MHz spectrum
that it intends to use for its digital network. The complaint and CIS
reflect the conclusion of the United States that, given Nextel's
control of a large portion of available 800 MHz SMR spectrum, its
simultaneous control of the principal substitute for 800 MHz SMR
service, i.e., 900 MHz SMR service, would unnecessarily and
unreasonably restrain competition.
B. Product Market
GE and CCI state that the appropriate product market is not trunked
SMR service on 800 MHz, 900 MHz and 220 MHz, but, instead, comprises
only 800 MHz SMR service. GE and CCI exclude 900 MHz SMR from the
product market on the basis of different technical and regulatory
constraints which apply to the 900 MHz services, which they maintain
make 900 MHz service significantly more costly to provide than 800 MHz
service.\19\ GE and CCI also appear to believe that 220 MHz service is
and will be subject to sufficiently different technical and regulatory
constraints that it should not be included in the relevant product
market.
\19\GE asserts, among other things, that 900 MHz service
providers must construct more sites from which to send signals
because of its poorer signal propagation, thus increasing their cost
of infrastructure equipment vis-a-vis 800 MHz service providers.
---------------------------------------------------------------------------
The evidence developed by the government, however, showed that
these services, particularly 800 MHz and 900 MHz trunked SMR service,
are substitutes from the perspective of the potential dispatch
customer. Customers that have significant field operations and need to
provide their personnel with the ability to communicate directly with
each other perceive that the quality of 800 MHz and 900 MHz service is
comparable and, more important, often purchase 900 MHz service, rather
than 800 MHz service, when both services are available and 800 MHz
service increases a small but significant amount. As a result, 900 MHz
service acts to constrain the prices of 800 MHz service and the
relevant product market cannot be limited to 800 MHz trunked SMR
service.
Existing dispatch customers face a different purchase decision than
customers who have not previously purchased trunked SMR service. A
customer's initial investment in 800 MHz equipment may act as a
disincentive to move to 900 MHz service (or 220 MHz service) in the
event of a price increase by its 800 MHz service provider.\20\ However,
these customers, too, consider 900 MHz trunked SMR service when
evaluating whether to continue obtaining service from their current 800
MHz provider. Notwithstanding their sunk costs in equipment, existing
800 MHz customers are willing to move to 900 MHz service when the price
of their 800 MHz trunked SMR service increases significantly. SMR
service providers track customer changes--what is known as ``churn''
data. The churn data provided to the United States reveals that when
dispatch customers using 800 MHz change wireless service providers
(rather than dropping service altogether), they frequently move to 900
MHz services.\21\ Customers are willing to change formats and bands
because 900 MHz service providers have offered a variety of incentives
to customers to reduce their costs. In addition, customers can
sometimes reduce switching costs by selling their used equipment. As a
result, 800 MHz trunked SMR service providers have not been able to
impose significant, non-transitory price increases for their service
because of the availability of 900 MHz service alternatives.\22\
\20\This disincentive is also present when a customer considers
whether to change service providers within the 800 MHz band. A
service provider will generally deploy a particular format--Motorola
or GE/Ericsson or EF Johnson--that is not interchangeable with
another. Consequently, someone receiving service from an 800 MHz
Motorola trunked SMR system would have to buy new equipment to
receive service form an 800 MHz E F Johsnon trunked SMR system.
\21\For example, in response to a late-1993 price increase by
Transit Communications, a predecessor to Nextel's dominant 800 MHz
SMR service position in Atlanta, more than four times as many
dispatch units moved to Motorola's competing 900 MHz service, as to
its competing 800 MHz services.
\22\As was stated in the Complaint and CIS, the exact effect of
the deployment of 220 MHz SMR service in the trunked SMR market
cannot be determined with any precision at present. However, based
on the planned characteristics of 220 MHz SMR service, it cannot be
excluded from the relevant product market.
---------------------------------------------------------------------------
C. The Markets Selected by the United States
CCI, the Clark Group and GE comment that the Final Judgment is
inadequate in failing to address Nextel's dominance of 800 MHz spectrum
in other areas of the country, including markets below the top 50,
where 900 MHz SMR service was never licensed by the FCC. These areas
include New Orleans, where CCI operates, and the cities in which
members of the Clark Group operate. The Clark Group offers HHI
calculations that show very high concentration in seven selected small
cities around the country, which, it argues, constitutes prima facie
evidence of the illegality of Nextel's acquisitions in these areas.\23\
It states that many of the channels Nextel controls are not being used,
but ``warehoused'' to prevent their use by competitors.
\23\The Clark Group's channel count appears to count channels
that are re-used as multiple channels, rather than discrete
frequencies, thereby significantly overstating Nextel's channel
position.
---------------------------------------------------------------------------
The government believes, however, that market conditions are
significantly different in rural areas and smaller cities than in major
metropolitan areas and, moreover, that market conditions in rural areas
and smaller cities are likely to change soon. First, unlike the major
metropolitan areas, rural and smaller urban areas have generally not
experienced spectrum crowding. In the absence of spectrum constraints,
existing competitors could expand services in response to any effort by
Nextel to raise prices. Second, there is less differentiation between
conventional and trunked SMR services, and between trunked SMR services
and cellular services in rural areas and smaller cities.\24\ In those
areas, the lack of congestion reduces the difference in the reliability
of subscriber access to conventional versus trunked dispatch systems.
In addition, cellular and trunked SMR service are more readily
[[Page 19288]] substitutable in those areas.\25\ Thus, customers in
rural areas and smaller cities appear to be better able to turn to
alternative types of service in response to a significant increase in
price by trunked SMR service providers.
\24\As explained in the Complaint and CIS, conventional dispatch
service should generally be excluded from the trunked SMR product
market because it offers lesser privacy and lower reliability.
Cellular telephone service is not in the market because it is
significantly more expensive than trunked SMR service, is
significantly more difficult for customers to restrict
communications to the defined fleet or group, and because it cannot
be provided on a one-to-many dispatch basis.
\25\Trunked SMR providers in more rural areas use more of their
capacity to provide interconnection to the public switched telephone
network, deriving as much as 60% of their revenues from this mobile
telephone service. In major metropolitan areas trunked SMR service
providers generally limit the amount of interconnect sold on their
systems to 15 to 25% of their business in order to accommodate the
demand for dispatch services.
Third, the FCC will soon grant new 900 MHz and 220 MHz SMR licenses
in rural and small metropolitan areas. The Clark Group argues that the
additional spectrum to be introduced in these markets will not be
effective to constrain Nextel because Nextel's dominance in the 800 MHz
band is a predictor of its likely dominance of those other bands. There
is no reason to believe, however, that Nextel will be able to gain a
dominant position in the 900 MHz or 220 MHz bands. Given its position
in the 800 MHz band, and the commitment it has already made to
implement its planned digital network in that band, it is unlikely that
Nextel has the incentive to acquire significant blocks of 900 MHz or
220 MHz spectrum.
The Clark Group suggests that Nextel should be required to divest
itself of 800 MHz channels in excess of those necessary to construct
its planned digital network.\26\ As explained above, the United States
believes that such divestitures would be inconsistent with FCC efforts
to facilitate the creation of new digital systems that would
significantly benefit the public. Moreover, this suggestion would
entail severe practical difficulties in most of the markets at issue
because it would be extraordinarily difficult to establish how many
channels might be needed in each of the relevant markets.
\26\This is the relief the Clark Group seeks in its comments.
Clark Group Comments at 25, January 9, 1995.
---------------------------------------------------------------------------
There is no single number of channels at which the technology will
operate most efficiently or with the same costs as the cellular
companies. Evidence provided to the Department establishes that
Nextel's cost of doing business will decrease as the number of channels
it holds increases over a large number of channels. Moreover, any
calculation of operational efficiency will vary substantially from city
to city, based on the potential number of customers served, the
topography, the number of sites operated and other factors. Further,
the costs may well change as technology changes in the wireless
industry.\27\
\27\With respect to Atlanta, the United States found that Nextel
would own more channels than it needed to provide digital service
and another company was poised to enter the market. These factors
distinguished it from the other cities in the complaint.
---------------------------------------------------------------------------
In making its public interest determination this Court should focus
on whether the relief provided by the proposed Final Judgment is
adequate to remedy the antitrust violations alleged in the
Complaint.\28\ It should not look to ``markets other than those alleged
in the government's complaint.''\29\ In this case, the proposed Final
Judgment removes the threat to competition from defendants'
simultaneous control of virtually all available 800 MHz and 900 MHz SMR
spectrum in fifteen (15) of the largest cities in the country. At the
same time, the proposed Consent Decree allows Nextel to go forward with
its plans for a digital mobile network. Hamstringing its efforts by
limiting the number of 800 MHz SMR channels it may own or control to
preserve traditional competition between Nextel and analog dispatch
service providers should be rejected.
\28\United States v. Bechtel Corp., 1979-1 Trade Cas. (CCH)
para.62,430 at 76,565 (N.D. Cal. 1979), aff'd, 648 F.2d 660, 665-66
(9th Cir.), cert. denied, 454 U.S. 1083 (1981).
\29\United States v. BNS, Inc., supra, 858 F.2d at 462-63.
---------------------------------------------------------------------------
The Clark Group also asserts that the United States was only
evaluating the proposed Nextel/Motorola transaction, and did not give
adequate consideration to the effects of the Dial Page and OneComm
acquisitions.\30\ This assertion is wrong. The Complaint and proposed
Final Judgment both clearly indicate that they are intended to address
the competitive ramifications of the entire series of transactions by
which Nextel is to acquire the spectrum holdings of Motorola, Dial Page
and OneComm.\31\ Their objection really goes to the decision to limit
the relief sought to the fifteen (15) cities identified in the
complaint.
\30\As noted in the CIS, over the past few years a few
companies, including Nextel, Dial Page and OneComm, have purchased
hundreds of small companies holding licenses to provide trunked SMR
service in the 800 MHz band. As a result of those acquisitions,
OneComm is by far the largest holder of trunked SMR spectrum in 16
Western States, Dial Page is the largest holder of such spectrum in
12 Southeastern states, and Nextel is the largest holder of such
spectrum in the other states.
\31\The definition of ``Nextel'' includes both Dial Page and
OneComm. In addition, Atlanta, Miami and Orlando were identified as
problem cities in the Dial Page service area, while Seattle and
Denver were identified as problem cities in the OneComm service
area. Dial Page and Nextel announced a definitive merger agreement
on February 20, 1995.
D. Geographic Market
The Clark Group believes that the geographic markets in which the
transaction should be judged are Rand McNally Basic Trading Areas or
Metropolitan Statistical Areas, rather than the geographic core markets
defined in the Complaint and CIS. The Clark Group's proposal would
increase significantly the area in which concentration is assessed over
that in the proposed Final Judgment: frequencies owned or managed
within twenty five miles of each city's center.
However, neither the Clark Group nor any other commenter has
seriously challenged the geographic market definition posited by the
United States. The geographic market definition proposed by the United
States is based upon the method of license allocation historically
utilized by the FCC for the dispatch industry. The FCC has issued
licenses based upon a service radius from a center point in which the
licensee has exclusive use of a frequency. As described in the CIS,
because of the SMR operator's need to provide service in critical,
high-traffic areas, the geographic market in any particular city may be
approximated by a 25 mile radius from the center point of that city.
E. Regulatory Complaints
Many of the commenters' complaints relate more to the alleged
inadequacy or impropriety of the FCC's regulation of SMR than to the
proposed Final Judgment. Pick alleges that many of Motorola's licenses
have been fraudulently obtained. CCI asserts that the FCC's granting of
wide-area waivers led to the development of license mills and spectrum
warehousing, thus permitting the accumulation of channel concentrations
which would have been prohibited by the underlying rules. GE, CCI and
the Clark Group argue that the warehousing or holding of spectrum
injures other small operators (such as themselves) who cannot expand
their 800 MHz systems because there is no spectrum available to them to
do so. Their inability to expand their systems eventually leads to
degraded service quality as customers are added and congestion grows
worse.
In this antitrust proceeding, the United States has not attempted
to assess whether any person has improperly obtained or used the
licenses they hold. Improper conduct in obtaining licenses and the
failure to use the licenses in accordance with legal requirements are
matters within the jurisdiction of the FCC. Where any person has
information that a license [[Page 19289]] has been obtained through
fraud or misrepresentation, the matter is properly addressed to the FCC
for it to investigate as a possible violation of its licensing
regulations.
F. Effects in the Equipment Market
GE and the Clark Group (in a footnote) assert that the proposed
Final Judgment will permit Motorola to control the SMR equipment market
in the 800 MHz band because the proposed Final Judgment does not
address the possible effect of the ancillary agreements pursuant to
which Nextel will purchase Motorola's digital infrastructure and
subscriber equipment for its planned 800 MHz wide-area SMR system.
The ancillary equipment agreements require Nextel to implement
Motorola's digital system on its 800 MHz channels but do not control
Nextel's decision whether to utilize Motorola's analog equipment on its
800 MHz or the 900 MHz SMR channels.\32\ As discussed in the CIS, the
United States considered the desirability of requiring the modification
of the ancillary equipment agreements. The United States rejected that
alternative because Motorola's digital SMR equipment pricing practices
are likely to be constrained by those of other wireless equipment
suppliers to the cellular service providers and to the personal
communications service providers.
\32\Implementation of the digital SMR system will not be
immediate across the nation; some of Nextel's 800 MHz channels are
likely to remain analog for some interim period.
Moreover, a proceeding under the Tunney Act is to consider whether
entry of the proposed Final Judgment, agreed to by the parties, is in
the public interest. A Tunney Act proceeding should not consider
whether the government might have brought some other case or a
hypothetical settlement to which the parties have not agreed. Simply
stated, the Tunney Act does not give the Court the power to impose
different terms on the parties. See, e.g., United States v. American
Tel. & Tel. Co., 552 F.Supp. 131, 153 n.95 (D.D.C. 1982) aff'd sub nom.
Maryland v. United States, 460 U.S. 1001 (1983)(Mem).
G. Effects in a Second Market
GE, the Clark Group and CCI contend that the United States
inappropriately considered competitive benefits in a second market when
analyzing the likely effects of this transaction in the trunked SMR
market. All three argue that consideration of effects in the cellular
market was inappropriate, impermissible and irrelevant to a
determination of harm in the trunked SMR market. The commenters also
refer to a recent article in the Wall Street Journal of January 3,
1995. In that article, Nextel is said to have abandoned its ambitions
to become a cellular competitor, and chief executive Morgan O'Brien is
allegedly quoted as saying that Nextel never portrayed itself as a
provider of cellular-like services to consumers, but as a provider of
such services to persons now using analog dispatch services.\33\
\33\In addition, a Land Mobile Radio News article of December 2,
1994, a Motorola spokesperson discussed refocusing MIRS marketing
efforts to stress MIRS as a bundle of integrated wireless services
for dispatch rather than a third cellular competitor. The Wall
Street Journal and Land Mobile Radio News articles are Attachments G
and H, respectively.
---------------------------------------------------------------------------
The United States believes that it is entirely appropriate, in
exercising its discretion to devise an appropriate remedy in this case,
to consider the policies and decisions of the FCC, and the effects that
proposed remedies might have on the efforts of the FCC to achieve its
policy objectives.\34\
\34\The modified final judgment entered by the Court in United
States v. Western Electric, Co., 552 F.Supp. 131 (D.D.C. 1982),
reflected an extensive analysis of the FCC's regulatory policies and
its abilities to address specific competitive problems.
---------------------------------------------------------------------------
With respect to the newspaper articles Nextel has provided the
United States with letters from its executives and others in which they
challenge the accuracy of the statements in the articles, and an
affidavit from the Chairman of its Board in which he indicates that
Nextel's business plans have not changed. Given these statements, and
Nextel's other statements in filings to the Securities and Exchange
Commission, the FCC and the Department of Justice, the United States is
satisfied that Nextel is committed to the construction of a digital SMR
network that will soon compete with cellular service providers.\35\
\35\Nextel's letters and its affidavit to the Department of
Justice are Attachments I and J, respectively.
---------------------------------------------------------------------------
V. Conclusion
After careful consideration of the comments, the United States
continues to believe that, for the reasons stated herein and in the
Competitive Impact Statement, the proposed Final Judgment is adequate
to remedy the antitrust violations alleged in the Complaint. There has
been no showing that the proposed settlement constitutes an abuse of
discretion by the United States or that it is not within the zone of
settlements consistent with the public interest. Therefore, entry of
the proposed Final Judgment should be found to be in the public
interest and should be entered.
Respectfully submitted,
Dated: March 24, 1995.
Anne K. Bingaman,
Assistant Attorney General.
Steven C. Sunshine,
Deputy Assistant Attorney General.
Constance K. Robinson,
Director of Operations.
Donald J. Russell,
Chief, Telecommunications Task Force.
George S. Baranko,
Katherine E. Brown,
J. Philip Sauntry, Jr.,
Susanna M. Zwerling,
Attorneys.
Department of Justice,
Antitrust Division.
Certificate of Service
I, Kathy L. Cuff, hereby certify under penalty of perjury that I am
not a party to this action, that I am not less than 18 years of age,
and that I have on this 24th day of March 1995, caused a copy of the
accompanying United States Response to Public Comments to the Proposed
Final Judgment to be served by mailing a copy, postage prepaid, upon:
James D. Sonda,
Kirkland & Ellis.
Counsel for Motorola, Inc.
and
Charles A. James,
Jones, Day, Reavis & Pogue.
Counsel for Nextel Communications, Inc.
Kathy L. Cuff,
Dated: March 24, 1995.
Attachment A
Via Hand Delivery
George S. Baranko:
U.S. Department of Justice, Antitrust Division, 555 4th Street, N.W.,
Washington, D.C. 20002.
RE: U.S. Motorola, Nextel, Civil Action No. 94-2331
December 14, 1994.
Dear Mr. Baranko:
Please consider the enclosed pleading a comment by the Clarks'
Group to the proposed Final Judgment in the above referenced case.
Sincerely,
Raymond J. Kimball,
RJK/rid
Enclosure
cc: Michael R. Carper, Esquire, Counsel for OneComm Corporation;
Joel M. Margolis, Esquire, Counsel for Nextel Communications, Inc.;
R. Michael Senkowski, Esquire, Counsel for Motorola.
In the Matter of: Applications of Nextel Communications, Inc.
for Transfer of Control of ONECOMM Corporation, N.A. and C-Call
Corp.
To: Rules Branch, Land Mobile and Microwave Division, Private
Radio Bureau [[Page 19290]]
[DA 94-1087]
[File No. 903335]
[File No. 903334]
Comments on Proposed Antitrust Final Judgment
Raymond J. Kimball,
Ross & Hardies.
Attorneys for Clarks Electronics, Teton Communications, Radio Service
Company, Zundel's Radio, Inc., Business Radio, Inc., Accu Comm, Inc.,
Earl's Distributing Inc. and Earl's Wireless Communications.
Dated: December 14, 1994.
Table of Contents to Attachment A
Summary of Argument
I. Justice Department's Filings
II. Nextel Would Monopolize Trunked SMR Service in Sixteen (16)
Western States following the ONECOMM merger
A. Relevant Product Market
B. Geographic Market
III. Anti-Competitive Impact of Undue Concentration in the 800 MHz
SMR Markets
A. The Merger Would Inhibit the Deployment of Alternative
Technologies
B. Nextel and OneComm's Dominance of Available Frequencies is
Already Affecting the Quality of Service
C. The Proposed Merger Will Reduce Competition Between Nextel
and OneComm
D. Impact on the Cellular Market
Summary of Argument
Following the Nextel/OneComm merger, Nextel will control 91% of all
licensed frequencies in Washington State, Oregon, and Idaho. Nextel
would control ninety-six percent (96%) of all licensed 800 MHz SMR
trunked frequencies in Washington State, eighty-seven percent (87%) of
licensed frequencies in Oregon, and seventy-three percent (73%) of all
800 MHz SMR channels in Idaho. This concentration meets the classic
definition of monopoly power. 800 MHz SMR is the only relevant SMR
market in these and most of the other 13 Western states where this
monopoly will occur.
Nextel's monopoly will enable it to reduce actual and potential
competition, affect price and quality of service, and inhibit the
development of alternative technologies. Independent systems no longer
can expand; customer quality is falling, and employee layoffs and
cessation of radio sales will occur in 1995. 1994 capital expansion
plans already have been curtailed as a result of predatory practices by
monopoly companies.
There is enough room and spectrum for every kind of mobile radio
service provider, including independent operators, dispatch, low-
powered digital, mobile telephone, ``traditional'' SMR, high-powered
analogue and digital, and high-cost cellular-like and low-cost wide
area operations. It would be inconsistent with the public interest for
the FCC to approve monopoly mergers which will eliminate markets
created, matured and encouraged by the Commission for over a quarter-
century.
Comments on Proposed Antitrust Final Judgment
Clarks' Electronics, Lewiston, ID (``Clarks''); Teton
Communications, Idaho Falls, ID (``Teton''); Radio Service Company,
Burley and Twin Falls, ID (``RSI''); Zundel's Radio, Inc., Pocatello,
ID (``Zundel's''); Business Radio, Inc., Kennewick, WA, (``BRI''); and
Accu Comm, Inc., Mukilteo, WA (``AccuComm''); Earl's Distributing Inc.
and Earl's Wireless Communications (``Earl's'') (collectively
``Clarks''), by their attorneys and pursuant of Section 1.41 and 1.46
of the Commission rules, hereby files its comments in support of and in
supplement to its Preliminary Comments filed on November 30, 1994.\1\
\1\On November 30, 1994, Clarks filed a Motion to Accept
Pleading and filed preliminary comments, indicating that additional
factual showings were under preparation but could not have been
completed by November 21. See Declaration of William Holesworth
attached hereto. Acceptance of this additional information is in the
public interest. An additional Motion for Acceptance is filed
simultaneously.
---------------------------------------------------------------------------
These comments primarily provide factual information which
demonstrate monopolization of the 800 MHz Specialized Mobile Radio
(``SMR'') market, resulting from the proposed transfer of control of
Nextel and OneComm. As a result of the proposed merger, Nextel will
monopolize\2\ SMR frequencies in sixteen (16) western states.
\2\Monopoly control is used herein in its strict antitrust
definition, i.e., control of greater than 70% of the relevant
market. See Caldwell v. American Basketball Association, 825 F.
Supp. 558, 575 (S.D.N.Y. 1993) (noting that courts usually find
monopoly power where defendants possess more than 70% of the
market); United States v. Paramount Pictures, Inc., 334 U.S. 131,
167-69, 68 S. Ct. 915, 934-935 (1948) (finding monopoly power where
five major film-production companies effectively controlled which
theaters could exhibit first-run films through the companies'
affiliation with at least 70% of the first-run theaters in major
U.S. cities).
---------------------------------------------------------------------------
I. Justice Department's Filings
On October 27, 1994, the U.S. Department of Justice (``DOJ'') filed
an antitrust complaint and proposed Final Order, among other papers,
with the District of Columbia District Court, complaining that Nextel's
proposed merger with Motorola would monopolize SMR service in the
thirteen (13) largest urban markets.\3\
\3\United States of America v. Motorola, Inc., and Nextel
Communications, Inc., Case No. 1:94 CV02331 (Hogan, J.) (D.C.,
District of Columbia, filed October 27, 1994) (hereinafter ``US v.
Motorola, Nextel'').
---------------------------------------------------------------------------
On November 3, Motorola filed in this proceeding the proposed Final
Judgment, citing its relevance to the issues herein. Motorola failed to
file all the papers DOJ filed with the District Court, including the
complaint and the DOJ's Competitive Impact Statement (``CIS''). Those
additional papers clearly are relevant to this proceeding. The CIS
gives the context and reasoning of DOJ, and the complaint explains what
was examined in detail and what was not. The ``missing'' papers are
attached hereto as Exhibit A. Motorola's selective proffer of the Final
Judgment as the only document ``relevant'' to this proceeding is, to
say the least, a most narrow definition of relevancy.
In its complaint, the DOJ identified the relevant product market as
``trunked SMR service in 800 MHz, 900 MHz and 220 MHz.'' Complaint at
6. The relevant geographic markets were defined as ``the service areas
in which the FCC has issued licenses for the provision of SMR
service.'' Id. The DOJ noted that Nextel had agreed to acquire
OneComm's ``accumulated 800 MHz spectrum in sixteen Western states,''
and DialPage, Inc.'s 800 MHz holdings in ``twelve Southeastern
states.'' Id. at 8. The DOJ did not further analyze the monopoly effect
of such acquisitions on the relevant geographic markets in these
twenty-eight (28) states, concentrating only on the competitive impact
of Nextel's acquisition of Motorola licenses in the top thirteen urban
markets. The DOJ justified its lack of analysis of the OneComm
acquisition with only minimal discussion:
As an alternative to the proposed Final Judgment, the United
States considered litigation seeking to limit the number of 800 MHz
channels Nextel held in each affected city. The United States
rejected that alternative for two reasons: First, it is satisfied
that the relief it has obtained relating to 900 MHz frequencies will
adequately address the harm to competition alleged in the complaint;
Second, the Department did not want to inhibit Nextel's ability to
offer cellular telephone service.\4\
\4\CIS at 17-18.
The DOJ did not adequately analyze the anti-competitive impact on
the SMR markets in the sixteen (16) western states which would result
from the proposed OneComm merger. Indeed, the DOJ did not analyze the
impact at all, because that merger was not the focus of its complaint--
only the Motorola merger was. However, Nextel's ability to dominate the
SMR markets through market concentration following the OneComm merger
will violate Section 7 [[Page 19291]] of the Clayton Act in the
following ways:
(a) Actual and potential competition between Nextel and OneComm
(and the licenses they manage) in the sale of SMR services in the
sixteen (16) western states and their submarkets will be eliminated;
(b) Competition generally in the sale of trunked SMR services in
the sixteen (16) Western states where OneComm has licenses will be
substantially lessened; and
(c) The deployment of alternative technologies will be inhibited.
The following sections discuss these conclusions.
II. Nextel Would Monopolize Trunked SMR Service in Sixteen (16)
Western States Following the OneComm Merger
Nextel will monopolize trunked SMR service in sixteen (16) Western
states following the OneComm merger, if approved. Clarks has selected
three of those states for detailed study--Washington, Oregon and Idaho.
Clarks, et. al., believe, through their knowledge of SMR license
concentration in Western states that the concentration levels are
higher than or equal to the concentration levels in the three surveyed
states.
Following the merger, Nextel will control 91% of all licensed
frequencies in Washington, Oregon, and Idaho. Nextel would control
ninety-one percent (i.e., 90.65%) of all licensed frequencies in
Washington, Oregon, and Idaho:
------------------------------------------------------------------------
Nextel/
State Onecomm Total freq.
freq.
------------------------------------------------------------------------
Washington................................... 10,018 10,424
Oregon....................................... 6,543 7,461
Idaho........................................ 1,404 1,932
--------------------------
Total...................................... 17,965 19,817
\5\=90.65%
------------------------------------------------------------------------
\5\Source--FCC Database as of November 10, 1994, frequencies in the 800
MHz band licensed for trunked SMR (YX) service. See attached
Declaration of William Holesworth, Exhibit D.
Nextel would control 96% of all 800 MHz SMR channels in Washington
State, 88% of all 800 MHz SMR channels in Oregon, and 73% of all
licensed channels in Idaho.\6\ This level of concentration meets the
classic case law definitions of monopoly under the relevant case
law.\7\
\6\See attached Declaration of William Holesworth.
\7\United States v. Grinnell Corp., 385 U.S. 563, 571, 86 S. Ct.
1698, 1704 (1966) (stating monopoly power ``ordinarily is inferred
from the seller's possession of a predominant share of the market''
and finding monopoly where company controlled approximately 87% of
the market); Hiland Dairy, Inc. v. Kroger Co., 402 F.2d 968, 974 and
n.6 (noting that ``a substantial part of the market must be
controlled by the monopolist to enable the raising and lowering of
prices and the undue restriction on competition'' and surveying
monopoly findings in cases where companies controlled at least 70%
of the markets).
A. Relevant Product Market
Clarks agrees with the Department of Justice that a relevant
product market is the trunked SMR market. The trunked SMR market in
Washington, Oregon, and Idaho is slightly different from the thirteen
(13) largest urban markets, in that it does not primarily include 900
MHz channels, and only includes 220 MHz channels to a limited
extent.\8\
\8\The 900 MHz band presently is not licensed outside the top 50
urban markets. The 220 MHz band, while licensed, has not been
substantially constructed, based on lack of equipment. Neither of
these bands is a significant factor in the Western states smaller
cities or rural areas.
---------------------------------------------------------------------------
The 800 MHz SMR business dominates the SMR product and geographic
markets and is the only market for analyzing SMR concentration outside
the top 50 markets. Substantial 800 MHz market domination by Nextel in
the Western states also is a predictor of future 900 MHz and 220 MHz
frequency concentration. Many of the presently viable competitors to
Nextel would be eliminated prior to introduction of 900 MHz and 220 MHz
channels, based on the proposed Nextel/OneComm merger.
B. Geographic Market
The relevant geographic market was defined by the Department of
Justice for the top 13 markets as a 25-mile radius from center city.\9\
Most current independent SMR operators serve BTA\10\ or MSA\11\
markets. The Commission has proposed that 800 MHz SMRs be licensed
through auctions on an MTA market basis.\12\ The MTAs are indeed large
markets not reflective of the current market, but of what the FCC would
like the market to become through auction.\13\
\9\See Final Judgment 2. It is unclear whether this definition
is the only DOJ definition since it is not employed in the
complaint. See Complaint at 6-7.
\10\Rand McNalley Basic Trading Areas.
\11\Census Bureau Metropolitan Statistical Areas.
\12\Rand McNalley Major Trading Areas. There are 51 MTAs used by
the FCC for PCS purposes.
\13\See Further Notice of Proposed Rule Making, PR Docket 93-144
(November 4, 1994).
---------------------------------------------------------------------------
For example, the Salt Lake City MTA includes most of Utah, all of
Southern Idaho, including Boise and Twin Falls, and Eastern Oregon. No
one SMR operator presently provides service to this entire region;
however, through acquisition of OneComm, Nextel proposes to serve
state-sized regions in the Western states.
Clarks analyzed 800 MHz frequency concentration in the three
Western states in which its members provide service. Given the various
geographic market definitions currently operating in the SMR industry,
state-wide and 3-state combined analysis approximates actual business
patterns and the future prospective market sizes, including MTAs. The
results are set forth in the Declaration of William Holesworth,
attached hereto, showing frequency concentration levels in 800 MHz SMR
about 85% in many Western markets, and above 70% in virtually all
markets.
DOJ found that:
* * * Nextel holds a dominant share of the 800 MHz SMR spectrum
available for trunked SMR services in most of the largest markets in
the country.
It can be concluded, based on the material submitted herein, that:
Following the Nextel/OneComm merger, Nextel will hold a dominant
share of the 800 MHz SMR spectrum available for trunked SMR service
in most markets, large and small, in the states of Washington,
Oregon, and Idaho.
Further, based on this survey and based on the FCC's database
records of licensed frequency use by Nextel and OneComm, Nextel cannot
be heard to deny that it will hold a dominant share of the 800 MHz SMR
spectrum available for trunked SMR service in most markets in the 16
Western states in which OneComm operates if the merger with OneComm is
approved.
III. Anti-Competitive Impact of Undue Concentration in the 800 MHz
SMR Markets
Will Nextel's market domination in Washington, Oregon and Idaho,
and in the 13 other states in which OneComm is licensed, reduce actual
and potential competition, affect price and quality of service, and
inhibit the development of alternative technologies?\14\
\14\See DOJ Complaint at 15. See also American Tobacco Co. v.
United States, 328 U.S. 781, 811, 66 S.Ct. 1125, 1139-40 (1946)
(finding monopoly where ``power exists to raise prices or to exclude
competition when it desired to do so''); United States v. Pabst
Brewing Co., 384 U.S. 546, 86 S.Ct. 1665 (1966) (explaining purpose
of Clayton Act is to prevent companies from lessening competition
through acquisition).
Attached are declarations of various independent SMR operators in
Washington, Oregon, and Idaho describing in detail the present and
future effect of Nextel's proposed market domination through
---------------------------------------------------------------------------
acquisition of OneComm. Those effects include:
1. Product Market Expansion. Elimination of competitors' ability
to expand product service and maintain service
quality. [[Page 19292]]
2. Geographic Expansion. Elimination of competitors' ability to
expand geographic service areas, through dominant control and
warehousing of available frequencies, many of which frequencies will
not and cannot be built.
3. Consumer Prices. Increased pricing. Nextel is charging and
proposes to charge higher prices in its markets than independent
analogue SMR operators.\15\
\15\See Declaration of Rick E. Hafla, and attachments thereto.
---------------------------------------------------------------------------
4. Inhibiting Restraints on Competing Technologies. Nextel's
dominance threatens the development of new wide-area alliances by
independent operators, e.g., Northwest Wireless, by inhibiting
expansion and the continued viability of competing equipment
manufacturers to Motorola.
A. The Merger Would Inhibit the Deployment of Alternative Technologies
The Nextel/OneComm merger would inhibit the deployment of the
Northwest Wireless Network in these Western states, and would
effectively inhibit competition from other manufacturers. In Washington
State, where Nextel would dominate 96% of the available frequencies
using Motorola equipment, only 4% of the market is left to competing
SMR equipment manufacturers.\16\ This is hardly sufficient to sustain a
market presence. The percentage of the market available to competitors
in Oregon and Idaho is not much better--i.e., 13% and 27%,
respectively. If that largest market in Idaho is equally divided three
ways, each of the three competing equipment manufacturers could only
expect to serve less than 10% of the market.
\16\E.g., EF Johnson; Ericsson/GE; and Uniden, the major
competitors at this time in the SMR market.
---------------------------------------------------------------------------
The impact on the development of independent roaming alliances such
as Northwest Wireless Network would also be severe. NWN was formed to
give the operators of EF Johnson equipment an opportunity to offer
their customers an alternative to Motorola's planned MIRS system.
However, with continued short-spacing of SMR operators using EF Johnson
SMR equipment on the local level, and forcing small market shares on
competing manufacturers in the various states, Nextel/Motorola/OneComm
can use their dominant market position to keep NWN from successfully
offering alternative digital SMR service to new and existing customers.
B. Nextel and OneComm's Dominance of Available Frequencies Is Already
Affecting the Quality of Service
The monopoly impact on quality of service is already being
experienced in 1994, even in advance of the merger. The merger will
exacerbate the situation, by permitting Nextel to combine its Questar
and Motorola license holdings with those of OneComm.\17\
\17\The concentration is continuing with OneComm acquiring
seventeen (17) ``speculator'' channels recently constructed in the
Southwestern Idaho market.
---------------------------------------------------------------------------
A number of the attached declarations demonstrate that service
quality among independent operators is declining as a result of the
inability to get access to frequencies OneComm/Nextel have
warehoused.\18\ SMR frequency domination is leading to lessened service
quality to existing customers, both on a ``dropped call'' basis, and
through customer inability to expand on non-Motorola systems. These are
exactly the kind of anti-competitive effects the Clayton Act is
designed to prevent. This Commission also should take very seriously
the public interest considerations inherent in permitting market
concentration to squeeze out competing manufacturers and operators, and
to reduce quality service to the public.
\18\See Declarations of Rick Hafla, Steven T. Earl.
---------------------------------------------------------------------------
C. The Proposed Merger Will Reduce Competition Between Nextel and
OneComm
Nextel has purchased Questar's and Motorola's licenses in the
Western states, and has monopolized trunked SMR service in the major
urban markets, including Seattle, Washington among others.\19\ OneComm
is a major potential competitor to Nextel, both now and in the FCC's
proposed auctions of SMR markets.\20\ That actual and potential
competition would be completely eliminated by the proposed merger.
OneComm and CenCall are by far the largest SMR license holders in the
Western markets; in contrast, Motorola was the second largest
``provider of service'' in the nation.\21\
\19\Seattle is one of the subject markets in the DOJ Complaint.
See Complaint at 6.
\20\See Further Notice of Proposed Rule Making, D. 93-144
(November 4, 1994).
\21\DOJ Complaint at 8. OneComm's systems are not substantially
constructed, and therefore it is not presently the most significant
provider of service in all 16 states. However, its unconstructed
license holdings are prodigious in the Western states, including
Washington, Oregon, and Idaho, and every bit as dominant as
Motorola's existing operations on the present and near future status
of SMR services.
---------------------------------------------------------------------------
By eliminating this competition in the sixteen (16) Western states,
Nextel eliminates the potential for the following competitive
environment:
1. Sale of some of OneComm's frequencies to existing operators to
permit expansion, including possible forced divestiture by the FCC to
avoid anti-competitive effects.
2. Merger prevents another equipment manufacturer from obtaining a
significant share of the SMR market in the Western states.
D. Impact on the Cellular Market
The DOJ admits that it could litigate against Nextel on its 800 MHz
concentration--i.e., that the Clayton Act is violated by those
concentrations:
As an alternative to the proposed Final Judgment, the United
States considered litigation seeking to limit the number of 800 MHz
channels Nextel held in each affected city.\22\
\22\DOJ CIS at 17.
The DOJ refuses to disturb an admitted monopoly, in order, it says,
to permit Nextel to enter the ``cellular market.''\23\
\23\Id., at 17-18.
---------------------------------------------------------------------------
Contrary to DOJ's assumptions, Nextel is not entering the cellular
market. Motorola's MIRS technology is not competitive with cellular:
* * * Motorola, Inc.'s officials last week stressed the need to
adjust their marketing strategy for ESMR technology. The greatest
marketing change would attempt to alter the perception that ESMRs
would soon be a third cellular competitor, focusing instead on
integrated wireless services for dispatch, said Lise Farmer,
spokeswoman for the Motorola division supplying * * * MIRS
technology to Nextel * * * and its potential partners, OneComm Corp.
and DialPage, Inc.
Robert Pass: ``They just started talking about being a third
cellular carrier * * * but they didn't have technology that was
superior to cellular.'' [Without superior technology] and if they
can't price it well below cellular, then how are they going to
[complete with cellular].''\24\
\24\Land Mobile Radio News, Vol. 48, No. 47, p. 1, (December 2,
1994). (Emphasis and brackets in original.)
Thus, DOJ's concern that the Nextel should be allowed to enter the
cellular market through concentrating 800 MHz frequencies in one
operator ignores two important facts. Nextel/MIRS will not compete
effectively with cellular, and, as a system, is not designed to compete
effectively.
Take away the ``hype'' about entering the cellular market, which
Nextel and Motorola have successfully sold to the FCC (and now DOJ)
over the past few years, and it now becomes clear what independent
operators have been saying all along. The SMR market, as a stand-alone,
competitive, independent low-cost alternative market, has been and is
being systematically eliminated by Nextel's predatory acquisitions and
anti-competitive practices, simply so Nextel can dominate the frequency
spectrum's value.
The FCC has encouraged such predatory practices through permissive
[[Page 19293]] rule changes which encouraged frequency warehousing and
short-spacing rules which have been used to squeeze independent
operators out of the market. The FCC and DOJ acted in the mistaken
belief they were creating a third cellular operation. That premise is
no longer tenable.
Nextel is offering a ``next generation'' of digital SMR service,
which independent operators intend to provide also, through co-
operatives and alliances such as Northwest Wireless Network. The public
interest considerations which guide this Commission should not lead it
to approve a merger which will establish single-provider dominance,
once and for all, and eliminate independent competition in the emerging
and still growing mobile radio markets.
There is enough room for everyone--dispatch, mobile telephone
services, low-powered digital, high-powered analogue and digital, high-
cost and low cost operations. However, if the FCC signals
telecommunications providers that they can ignore the antitrust laws,
acquire 91% of a relevant market, drive equipment suppliers and low-
cost service providers, small businesses, and rural service out of the
market, and force service quality reductions on the surviving market
segments, then the Communications public interest standard does not
stand for much. While the Commission may not have jurisdiction to
enforce the Clayton Act, it is not empowered to ignore its existence or
impact on the public interest, especially where the impact on a
relevant market is so pronounced.
In fact, Congress intended for the Commission to avoid license
concentrations which would tend to lessen competition when the Congress
enacted 47 U.S.C. 309(j). Within the statute, Congress expressed its
interest in promoting the public interest through its promotion of
economic opportunity and competition. See 47 U.S.C. 309(j)(3)B). In the
House Report, the House Committee on Energy and Commerce declared that
although the Committee noted the Commission did not need to apply any
particular antitrust tests, the Commission should take into account
single licensee's domination of a service. H. Rep. No. 103-111, at p.
254. The Committee expressed its concern ``that, unless the Commission
is sensitive to the need to maintain opportunities for small
businesses, competitive bidding could result in a significant increase
in concentration in the telecommunications industries,'' Id. At no
point did Congress declare the anti-trust laws inapplicable to the
Commission's considerations.
The FCC should not approve mergers which will eliminate markets it
has created, nurtured and promoted over a quarter century. The FCC also
should adjust its short-spacing and warehousing policies to prevent the
present anti-competitive effects of those policies on existing, viable
businesses.
Wherefore, the premises considered, the above referenced
applications for transfer of control should be denied.
Respectively submitted,
Dated: December 14, 1994.
Raymond J. Kimball, Ross & Hardies.
Attorneys for Clarks Electronics, Teton Communications, Radio Service
Company, Zundel's Radio, Inc., Business Radio, Inc., Accu Comm, Inc.,
Earl's Distributing, Inc. and Earl's Wireless Communications.
Additional Comments of Clarks Electronics, Teton Communications,
Radio Service Company, Zundel's Radio, Inc., Business Radio, Inc.,
Accucomm, Inc., Earl's Distributing Inc., Earl's Wireless
Communications, Total Communications, Communications Center, Inc.,
and Leflore Communications, Inc. to the Proposed Antitrust Final
Judgment
[Case Number 1:94CV02331]
[Judge: Thomas F. Hogan]
[Deck Type: Antitrust]
[Date Stamp: 10/27/94]
Pursuant to 15 U.S.C.A. 16, Clarks Electronics, Teton
Communications, Radio Service Company, Zundel's Radio, Inc., Business
Radio, Inc., Accu-Comm, Inc., Earl's Distributing Inc., Earl's Wireless
Communications, Total Communications, Inc., Communications Center,
Inc., and Leflore Communications, Inc. (collectively referred to as
``Clarks''),\1\ by their counsel, hereby submit their additional
comments\2\ and attached exhibits in opposition to the proposed Final
Judgment between Motorola, Inc. (``Motorola''), Nextel Communications,
Inc. (``Nextel''), and the United States Department of Justice
(``Justice Department'') in the above-captioned action (the
``Action'').
\1\The aforementioned entities are licensees and managers of
Specialized Mobile Radio licenses in Idaho, Washington State,
Oregon, Oklahoma, Louisiana and Mississippi. They serve public
safety and individual customers throughout their local and regional
service areas. They are, or would be in direct competition with SMR
licenses, existing and unconstructed, owned, controlled or managed
by Nextel Communications, Inc.
\2\Clark submitted its initial comments, a Petition For
Rulemaking filed by Fleet Call, Inc. (now Nextel) to the Federal
Communications Commission on April 22, 1992, under cover of a letter
from their counsel to George S. Baranko dated December 14, 1994.
---------------------------------------------------------------------------
Introduction
The Justice Department has proposed this Final Judgment to address
the potential anticompetitive effect of the pending acquisitions by
Nextel of OneComm, Inc. (``OneComm''), Dial Page, Inc. (``Dial Page'')
and of all specialized mobile radio (``SMR'') licenses owned and
managed by Motorola (collectively, the ``Nextel Acquisitions'') on the
market for trunked SMR service. SMR is a unique blend of radio dispatch
and interconnect communication service. The Nextel Acquisitions will
have had a pronounced anticompetitive effect on many SMR service
markets, large and small, urban and rural, throughout the country. The
proposed Final Judgment purports to remedy this anticompetitive effect
in only ``fifteen of the largest cities in the United States'' (the
``15 Select Cities''), but does not address the anticompetitive effect
of the Nextel Acquisitions in other markets. Thus, the proposed Final
Judgment will permit Nextel to own or control a dominant (and in some
instances a monopoly) share of the SMR service markets in the smaller
urban and rural areas in which SMR operators such as Clarks operate and
compete. Because it neither addresses nor remedies the anticompetitive
effect of the Nextel Acquisition in these markets, nor in any markets
outside of the 15 Select Cities, as a matter of law, the proposed Final
Judgment cannot be in the public interest and must be rejected.
Background
A. SMR Technology
SMR is a form of land mobile communication service utilized by
business customers such as contractors, service companies, delivery
services and other businesses that have significant field operations.
(Competitive Impact Statement, October 27, 1994 (hereinafter ``CIS'')
at p. 3.) SMR permits a customer to communicate with its entire field
force on a one-to-many, or ``dispatch'' basis, yet also permits that
customer to communicate to a single person within its field force on a
one-to-one, or ``interconnected'' basis. (Id.).
SMR operators are licensed by the Federal Communications Commission
(``FCC''). Licensed SMR operators are assigned specific channels of
radio frequency by the FCC. The operator has exclusive use of that
channel within its service area (``Service Area''). There is a limited
amount of frequency spectrum [[Page 19294]] available for SMR service.
(Complaint at para.15.) Channels are assigned in pairs to facilitate
two-way communication. Id.
SMR systems typically use a single high-elevation base station
centrally located within each Service Area to receive, allocate and
transmit signals to and mobile units throughout the Service Area. (Id
at para.14.) The FCC generally mandates that SMR base stations be
constructed at least 70 miles apart, and that the signal from one base
station may not interfere with the same frequency channel assigned in
an adjoining Service Area. (47 CFR 90.621(b).) As a result, the minimum
Service Area of any SMR operator is generally defined by a 35 mile
radius from its base station, and the operator enjoys exclusive use of
its channels within that 35 mile radius. (CIS at p. 4.) An SMR signal,
however, can travel distances of up to 100 miles. Accordingly, where a
channel in use on one SMR system has not been allocated to a licensee
on an SMR system in an adjoining Service Area, the SMR coverage area
may extend beyond the minimum protected 35 mile radius.
B. Development of SMR Industry
The FCC first licensed SMR service in the late 1970's. The FCC
allocated 280 channel pairs in the 800 MHz radio band within each
Service Area to operators throughout the country.\3\ (Complaint at
para.15.) Licensees could apply for up to 5 trunked channels at a time,
with a maximum of 20 channel pairs per operator in any Service Area.
(47 CFR 90.621, 90.627; see also Complaint at para.19.) To retain its
channels, an SMR operator had to build its facility within one year and
``load'' each of its allocated channels with, at least, 70 radio units
within five years. (CIS at p. 7.) Any ``unbuilt'' or ``unloaded''
channels were reassigned to applicants on a waiting list. (Id.)
Unconstructed facilities could not be transferred or assigned. (See 47
CFR 90.609.)
\3\Additional 800 MHz channels are, in theory, available in some
cities for SMR trunked service use through ``intercategory sharing''
of capacity with various private systems. Most private systems,
however, utilize virtually all of the capacity on their allocated
channels. Accordingly, these systems are unwilling or unable to
participate in ``intercategory sharing'' of their 800 MHz capacity.
(See CIS at p. 5, n.1.)
---------------------------------------------------------------------------
By the mid-1980's, the allocated 800 MHz channels had reached their
capacity of 100 to 150 customers per channel in most large cities. (Id.
at para.15.) As a result, in 1986, the FCC allocated an additional 200
channel pairs in the 900 MHz radio band. (Id.) This 900 MHz capacity,
however, was allocated exclusively to Service Areas in the 50 largest
metropolitan service areas. (Id.) In the smaller urban and in the rural
markets, SMR operates exclusively on the originally allotted channels
in the 800 MHz frequency. (Id.) (emphasis supplied.)\4\
\4\To limited extent, a similar service is provided in the 220
MHz band in selected areas.
---------------------------------------------------------------------------
C. Recent Concentration in the SMR Industry
The competitive landscape of the markets for trunked SMR service
and equipment changed dramatically in 1993. Touting the benefits of a
wider-area national SMR network that might compete with existing mobile
cellular service, Nextel successfully lobbied the FCC to relax its
limitations on channel applications, holdings and temporal build-out/
loading requirements. (See In the Matter of Amendment of Part 90 of the
Commission's Rules Governing Extended Implementation Periods, 8 FCC
Rcd. 3975 (1993); Nextel's Petition For Rulemaking, RM 7985 (filed at
FCC April 22, 1992)). This signaled the beginning of the end for robust
competition between SMR providers, large and small. Instead, from that
point forward, the markets for trunked SMR service have been a study in
systematic concentration. In the second half of 1994 alone, Nextel
announced 21 mergers and acquisitions that promise to more than double
its SMR subscriber base. (See Report of Economic and Management
Consultants International, Inc. (``EMCI''), January 5, 1995, Table 3 at
p. 7, a true and correct copy of the report is attached as Exhibit A).
More importantly, however, these consolidations will give Nextel a
strangle-hold on the 800 MHz spectrum, the life-blood of the SMR
industry, in the smaller markets in which Clarks operates and competes.
D. The Nextel Acquisitions
The most significant of Nextel's mergers and acquisitions are those
involving OneComm, Dial Page and Motorola. Upon consummation of its
proposed agreement with Motorola, Nextel will acquire all of Motorola's
800 MHz SMR systems and the right to manage Motorola's 900 MHz SMR
systems. In doing so, Nextel will have effectively disarmed the
nation's second largest SMR operator and Nextel's single largest
competitor.\5\
\5\Moreover, by virtue of a contemporaneously executed equipment
supply agreement between Nextel and Motorola, Motorola will supply
Nextel, on an exclusive basis, with digital equipment to build out
all of the 800 MHz channels it will obtain. By doing so, Motorola
has essentially foreclosed a significant amount of competition in
the SMR equipment market in which it currently holds a dominant
(58%) share. (See EMCI Report, Ex. A at Figure 5) This is
particularly so where the future SMR equipment market lies primarily
in the build out of the 800 MHz channels. See generally United
States v. General Dynamics Corp., 415 U.S. 486 (1974) (in markets
characterized by long term performance, ability to meet future
demand rather than past performance is the best measure of a
company's ability to compete in the relevant market. This
concentration of market power in the hands of Motorola threatens to
abruptly reverse the trend of decreasing equipment prices. (See EMCI
Report, Ex. A at Figure 6).
---------------------------------------------------------------------------
Nextel's mergers with OneComm and Dial Page will have a similar,
and perhaps greater, anticompetitive effect. OneComm and Dial Page each
are operators of sizeable trunked SMR systems that presently compete
with Nextel in numerous markets in 16 western and 12 southeastern
states, respectively. The Nextel Acquisitions, therefore, will lessen
existing competition in the markets for trunked SMR service within
these states. In addition, however, Nextel's mergers with OneComm and
Dial Page will give Nextel a strangle-hold over future competition in
these markets. Indeed, by virtue of the FCC waiver, OneComm and Dial
Page have accumulated system licenses pursuant to which they control
virtually every available channel in the 800 MHz spectrum. (See Clarks'
Opposition Comments to the FCC, October 18, 1994, File Nos. 90335,
90334). Neither OneComm nor Dial Page have any present need for these
large blocks of channels in these states, and have ``warehoused'' these
channels. Neither OneComm nor Dial Page is required to build out its
facilities for five years. See Extended Implementation Periods, 8 FCC
Rcd. 3975 (1993); Letter to David E. Weisman, 8 FCC Rcd. 143-144-45
(1993).\6\
\6\This transfer of licenses to Nextel to operate such
facilities prior to their completion and construction, in apparent
violation of 47 CFR 90.609(b) is the subject of a separate petition
filed by Clarks before the FCC.
---------------------------------------------------------------------------
In short, the Nextel Acquisitions will give Nextel a dominant share
of both constructed and unconstructed facilities in the 800 MHz
spectrum throughout the country, including some of the largest
metropolitan markets. As a result, Nextel will control present and
future competition in this market through use and nonuse of the built-
out and warehoused capacity.
E. The Action and Proposed Final Judgment
The Justice Department commenced this Action on October 27, 1994 to
address the cumulative anticompetitive effects of the Nextel
Acquisitions. Although Nextel and Motorola are the [[Page 19295]] only
named Defendants, the proposed Final Judgment expressly purports to
``resolve issues with respect to . . . proposed mergers and
acquisitions between Nextel, OneComm Corporation and Dial Page,
Inc.''\7\ (Final Judgment, VIII.B.) (emphasis supplied).
\7\Indeed, for purposes of the proposed Final Judgment, Nextel,
by definition, includes OneComm and Dial Page. (See proposed Final
Judgment, II (Definitions) E and J).
---------------------------------------------------------------------------
The gravamen of the Action is that the Nextel Acquisitions would
have the cumulative effect of ``eliminating all but a few suppliers of
trunked SMR services in a number of cities in the United States.'' (CIS
at p. 11). By way of illustration, the Justice Department described the
effect of the Nextel Acquisitions in the 15 Select Cities in which
Nextel would control virtually all of the SMR spectrum. On October 27,
1994, the parties to the Action executed the proposed Final Judgment,
whereby Nextel/Motorola would divest itself only of ownership, control
or management of their 900 MHz channels in each of the 15 Selected
cities.
Analysis
The Justice Department commenced this Action because it determined
that the Nextel Acquisitions violated Section 7 of the Clayton Act in
three ways: (1) By substantially lessening competition between the
Nextel and Motorola, the industry's two largest providers of trunked
SMR service; (2) by substantially lessening competition generally in
the sale of trunked SMR service; and (3) by inhibiting the deployment
of alternative technologies. (Complaint at para. 43). Absent
intervention, the Justice Department determined that Nextel's dominance
would give it the ability ``to raise prices and reduce the quality or
quantity of [trunked SMR] service.'' (Id. at para. 25; CIS at p. 12-
13).
In proposing this Final Judgment, the Justice Department contends
that:
The risk to competition posed by the transaction would be
substantially eliminated by the relief provided in the proposed
Final Judgment which will ensure that alternative trunked SMR
service providers will be available in all the relevant geographic
markets.
(CIS at p. 10) (emphasis added).
In fact, however, the proposed Final Judgment does not eliminate
the risk to competition in ``all,'' or even most, relevant markets. Any
arguable remedial effect that the proposed Final Judgment might have on
the trunked SMR service market is limited to the 15 Select Cities in
which 900 MHz frequency divestiture was ordered. The proposed Final
Judgment does not remedy the anticompetitive effect of the Nextel
Acquisition on smaller markets in which SMR trunked service is licensed
exclusively on channels in the 800 MHz spectrum. Quite the contrary,
the proposed Final Judgment blesses monopolistic concentration in these
small markets.
The unambiguous mandate of the Clayton Act requires that the
proposed Final Judgment protect competition in all SMR markets, not
simply those within the 15 Select Cities. Because it fails to comply
with this mandate, entry of the proposed Final Judgment cannot be in
the public interest.
I. The Public Interest and Applicable Standard of Review
It is well settled that the ``public interest,'' within the meaning
of the Tunney Act, lies in the enforcement of the antitrust laws
designed to preserve ``free and unfettered competition as the rule of
trade.'' United States v. American Tel. and Tel. Co., 552 F. Supp. 131,
149 (D.D.C. 1982) aff'd, sub nom Maryland v. United States, 460 U.S.
1001 (1983)\8\ (quoting Northern Pacific Railway Co. v. United States,
356 U.S. 1, 4 (1958). This Court need not unquestioningly accept the
proposed decree proffered by the Justice Department as in the ``public
interest'' simply because it ``somehow, and however inadequately, deals
with the antitrust * * * problems implicated in the lawsuit.'' AT&T,
552 F. Supp. at 151. Rather, any consent decree must ``render impotent
the monopoly power found to be in violation of the [antitrust laws and]
* * * must leave the defendant without the ability to resume the
actions which constituted the antitrust violation in the first place.''
Id. at 150 (quoting 2 P. Areeda & D. Turner, Antitrust Laws section 327
(1978)).
\8\Citations to later proceedings omitted.
---------------------------------------------------------------------------
Section 7 of the Clayton Act, on which this Action is premised,
prohibits acquisitions where the effect would be to substantially
``lessen competition or tend to create a monopoly.'' 15 U.S.C.A.
Sec. 18. More importantly, the Clayton Act extends the protection of
this Section to ``any line of commerce or * * * any activity effecting
commerce in any section of the country.'' Id. (emphasis added). Indeed,
the United States Supreme Court has held that ``if anticompetitive
effects of a merger are probable in ``any'' significant market, the
merger--at least to that extent--is proscribed'' by Section 7. Brown
Shoe Co. v. United States, 370 U.S. 294, 336-37 (1962). See also RSR
Corp. v. Federal Trade Com., 602 F.2d 1317, 1323 (9th Cir. 1979) cert.
denied, 445 U.S. 927 (1980). The anticompetitive effects of a merger in
one market cannot be ignored simply because they are offset by
procompetitive effects in another market. Id. at 1325 (citing United
States v. Philadelphia National Bank, 374 U.S. 321, 370-71 (1973).
Under this standard, the proposed Final Judgment is not in the public
interest.
II. The Nextel Acquisitions Will Give Nextel a Dominant Market
Share in the Smaller Markets in which Operators Like Clarks Operate
and Compete
Although ignored or forsaken by the Justice Department, competition
in the smaller markets in which Clarks operates and competes will be
severely and adversely impacted by the Nextel Acquisitions. In United
States v. Philadelphia Nat'l Bank, 374 U.S. 321, 370-71 (1963), The
Supreme Court defined the appropriate analysis of a merger under
Section 7 of the Clayton Act:
[A] merger which produces a firm controlling an undue percentage
share of the relevant market, and results in a significant increase
in the concentration of firms in that market is so inherently likely
to lessen competition substantially that it must be enjoined in the
absence of evidence clearly showing that the merger is not likely to
have such anticompetitive effects.
Id. at 363. The Court expanded the rule of presumptive illegality in
United States v. Aluminum Co. of America, 377 U.S. 271, 279 (1964) when
it held that ``even slight increases in concentration'' which resulted
from horizontal acquisition would be presumed illegal if the
acquisition involved markets where the ``concentration was already
great.'' Applying this analysis to the smaller markets, the Nextel
Acquisition, without further proscription, would have the precise
anticompetitive effects that mandate an injunction.
A. The Relevant Market
The Justice Department expressly defined the relevant product and
geographic markets in analyzing the effect of the Nextel Acquisitions
in the 15 Select Cities. This same analysis, with a slight
modification, is adequate for use in defining the relevant markets in
the areas ignored by the Justice Department.
The Justice Department defined the relevant product market
accordingly:
The product market consists of trunked SMR service in the 800
MHz, 900 MHz and 220 MHz bands. Conventional dispatch service is not
a substitute for trunked SMR service because it affords lesser
privacy and lower reliability. Cellular telephone service is not a
substitute because it is significantly [[Page 19296]] more expensive
than SMR service, is significantly more difficult for customers to
restrict communications to a defined fleet or group, and because it
cannot be provided on a one-to-many dispatch basis.
(CIS at p. 6). For purposes of analyzing these effects in markets
outside these 15 Select Cities, however, the relevant product market
must be defined more narrowly. There are no SMR 900 MHz licenses in the
smaller markets in which SMR operators like Clarks operate. Moreover,
as the Justice Department concedes, 220 MHz frequency, to the extent it
becomes available and is constructed in these smaller markets, ``will
require some time to gain commercial acceptance and to effect
competition for the 800 MHz . . . service.'' (Complaint at para.
16).\9\ Accordingly, the relevant product market in which Clarks
competes is presently (and for the foreseeable future) limited to the
800 MHz frequency.\10\
\9\There are substantial differences in propagation, technology,
bandwidth, and customer use which distinguish the 800 MHz SMR market
from the 900 MHz and 220 MHz markets. Most importantly, 900 MHz and
220 MHz equipment is not compatible with traditional 800 MHz SMR
equipment and cannot be trunked into 800 MHz systems. Accordingly,
the equipment in the different bands limits an operator and the
customer to the spectrum for which the equipment is manufactured.
\10\In a market defined by scarce or finite resources, capacity
to meet future, rather than present demand is the appropriate
measure of market share. See generally United States v. General
Dynamics Corp., 415 U.S. 486 (1974).
---------------------------------------------------------------------------
The Justice Department's geographic market definition as each
license area in which, the FCC has authorized the provision of SMR
service (generally, a service area with a radius of 35 miles) is,
generally, adequate. Given, however, that the product market is defined
by availability of channel frequency within a Service Area and in
adjoining Service Areas, under the FCC's station separation and short
spacing rules, and their present effect on the Clarks markets, it is
more appropriate to expand the geographic radius from 35 to 70 miles.
See 47 CFR 90.621(b). This 70 mile radius provides the most accurate
measure of the geographic limits (and expandability) of frequency
availability, predatory licensing practices, propagation and customer
range, and is especially applicable in the 16 Western States markets
where Nextel proposes to merge with OneComm a given SMR Service
Area.\11\
\11\In any case, the expanded radius did not result in any
spill-over into any of the 50 largest markets in which the
availability of 900 MHz frequency capacity must be considered.
B. As a Result of the Nextel Acquisition, Nextel Will Dominate the 800
MHz Trunked SMR Service Market
Based on these definitions, Nextel would own, manage or control a
staggering percentage of the SMR market within the following smaller
markets in which Clarks operates and competes:
------------------------------------------------------------------------
800 MHz Nextel Percent
Market capacity owned Nextel
------------------------------------------------------------------------
Columbia, SC................................. 1733 1375 79
Sunnyside, WA................................ 3136 2897 92
Covington, LA................................ 2126 1626 76
Washington, IL............................... 1495 1038 69
Kosciusko, MS................................ 1003 588 59
Idaho Falls, ID.............................. 1376 882 64
Enid, OK..................................... 3109 2904 93
------------------------------------------------------------------------
See SMR Won-7 Market Frequency Study, a true and correct copy of
which is attached as Ex. B. These post-acquisition market shares are
presumptively illegal under Section 7 of the Clayton Act.\12\ See,
e.g., United States v. Philadelphia National Bank, 374 U.S. 321, 370-71
(1962) (post merger market share 33%, concentration ratio of five
largest competitors 78%); United States v. Aluminum Co. of America, 377
U.S. 271, 279 (1964) (post merger market share 29%, concentration ratio
of four largest competitors 76%); RSR Corp. v. Federal Trade Com., 602
F.2d at 1323 (post merger market share 15%, concentration ratio of
three largest competitors 65%); Liggett & Myers v. FTC, 567 F.2d 1273
(4th Cir. 1977) (post merger market share 19%, concentration ratio of
four largest competitors 54%); FTC v. Warner Communications, Inc., 742
F.2d 1156 (9th Cir. 1984) (post merger market share 26%, concentration
ratio of four largest competitors 67%); United States v. Rockford
Memorial Corp., 898 F.2d 1278 (7th Cir. 1990) (post merger market share
64%, concentration ratio of three largest competitors 90%) cert. denied
498 US 920 (1990). Nextel's post-merger market share in each of these
markets also approaches or exceeds the concentrated market share of the
largest three, four and five competitors in the referenced cases.
Accordingly, the presumptive illegality of the Nextel Acquisitions is a
foregone conclusion.\13\
\12\Most of those market shares exceed the 70% threshold figure
traditionally used to find monopoly power under the Sherman Act. See
Caldwell v. American Basketball Association, 825 F. Supp. 558, 575
(S.D.N.Y. 1993) (noting courts typically find monopoly power where
more than 70% of the market is possessed by the defendant); see also
Hiland Dairy, Inc. v. Kroger Co., 402 F.2d 968, 974 & n. 6 (8th Cir.
1968) (reviewing several anti-trust cases and noting that
percentages greater than 70% generally are found to constitute
monopoly power), cert. denied, 395 U.S. 961 (1969).
\13\This dominant market share is not a phenomenon existing only
in these rural markets. On the contrary, these shares reflect the
results of Nextel's systematic and concerted attempt to control 800
MHz capacity across the country. By virtue of these acquisitions,
Nextel will own or control between 67 and 95% of the total available
800 MHz spectrum allocated for trunked SMR service throughout the
following states: Washington, Idaho, Oregon, Utah, Colorado,
Georgia, Louisiana, New Jersey, Oklahoma, and South Carolina--all
states in which Clarks presently operates. See Declarations of
William Holesworth, attached hereto as Ex. C.
---------------------------------------------------------------------------
Similarly, the Herfindahl-Hirschman Index (``HHI'') as a measure of
``pre'' and ``post'' Nextel Acquisitions concentration in these
referenced markets also supports a finding that the Nextel
Acquisitions, without further proscription, are presumptively
illegal.\14\ With respect to the 15 Select Cities, the Justice
Department determined that the HHI of market concentration was already
greater than 2200 and that the Nextel-Motorola transaction alone would
increase the HHI in these markets by more than 1400 points. (Complaint
at para.25). These figures pale in comparison to the ``pre'' and
``post'' Nextel Acquisitions indices in some of smaller markets in
which SMR operators like Clarks operate and compete. In Sunnyside,
Washington, the post-Acquisition HHI will increase by more than 2,141,
from 6,464 to 8,606; in Idaho Falls, Idaho, the post-Acquisition HHI
will increase by more than 1,317, from 2,733 to 4,051; in Kosciusko,
Mississippi, the post-Acquisition HHI will increase by more than 534,
from 1,033 to 1,568; and in Enid, Oklahoma, the post-Acquisition HHI
would increase by more than 752, from 8,476 to 9,222. These staggering
figures vastly exceed those cited by the Justice Department in the 15
Select Cities, and plainly mandate further proscription of the Nextel
Acquisitions.
\14\The HHI takes into account the relative size and
distribution of competitors within a relevant market (Complaint
Appendix A). The HHI approaches zero when a market consists of a
large number of firms of relatively equal size, or can reach 10,000
in the case of pure monopoly power. (Id.) Markets in which the HHI
exceeds 1000 are moderately concentrated. (Id.) Markets in which HHI
exceeds 1800 are considered concentrated. (Id.) Transactions that
increase the HHI by more than 100 points in moderately concentrated
and concentrated markets ``presumptively raised antitrust
concerns.'' (Id.) (Emphasis supplied).
III. The Proposed Final Judgment Does Nothing To Remedy the
Substantial Anticompetitive Effects of the Nextel Acquisitions in
the Smaller Markets in Which Clarks Operates and Competes
Having demonstrated the presumptive illegality of the Nextel
Acquisitions, the burden shifts to the parties thereto to
[[Page 19297]] rebut this presumption with non-statistical evidence to
demonstrate that the Nextel Acquisitions will not reduce competition.
In this case, however, the relative size of the merging parties, the
trend toward market concentration and absolute barriers to market entry
plainly aggravate rather than ameliorate the monopolistic market share
that will result upon the consummation of the Nextel Acquisition.
The most direct anticompetitive effect of any merger is the
elimination of competition between the merging entities. Accordingly,
special attention must be paid to the relative size and number of
parties to the transaction. United States v. M.P.M. Inc., 397 F. Supp.
78 (D. Colo. 1975). In this case, each of the parties to the Nextel
Acquisitions have substantial channel holdings. Indeed, Nextel and
Motorola are the two largest competitors in the industry. An
acquisition involving two dominant firms, the effect of which
accelerates a trend to oligopoly in the market, provides a basis to
find a violation of Section 7 of the Clayton Act. United States v.
First National State Bancorporation, 479 F. Supp. 1339 (D.N.J. 1979).
The merger of three or four dominant firms which results in monopoly
power within the market mandates such a finding. This is particularly
so where the recent trend within the SMR industry has been toward
consolidation and concentration. See generally Department of Justice
and Federal Trade Commission ``Horizontal Merger Guidelines''
(hereinafter ``Guidelines'') Sec. 1.521 (April 7, 1992)
More importantly, this Court must consider the extreme barriers to
entry into the SMR markets. United States v. Black and Decker Mfg. Co.,
430 F. Supp. 729 (D. Md. 1976) (substantial entry barriers to market to
be considered in action brought under Clayton Section 7 to enjoin
merger); See also Guidelines, Secs. 1.522, 2.2 and 3.0. High entry
barriers into the market signal the potential that a particular merger
may potentially impair competition. See Fruehauf Corp. v. Federal Trade
Com., 603 F.2d 345 (2nd Cir. 1979). SMR operators need spectrum to
enter or expand within a market. No such frequency is available in the
smaller urban and rural areas in which SMR operators like Clarks
operate and compete. The Justice Department has acknowledged this.
(Complaint at para.14.) Upon consummation of the Nextel Acquisition,
nearly all available frequency in these markets will be controlled (and
warehoused) by Nextel. The result is an absolute entry barrier that
prevents new competition in the trunked 800 MHz market.
Moreover, by mere non-use of the warehoused frequency it will
control, Nextel will prevent existing SMR operators like Clarks from
strengthening their competitive position in the respective markets.
Unable to obtain additional frequencies, these operators cannot expand
their systems to accommodate additional subscribers or expand their
geographic coverage area of their systems.\15\ Overcrowding on these
systems will result in ``dropped calls'' and inhibit operators like
Clarks from adequately serving their existing clients.\16\ Without
access to this warehoused capacity, therefore, independent operators,
to the extent they can survive, will be essentially frozen in place. At
the same time, Nextel will have the luxury of adding channels to its
systems in these small markets only as needed, while its competition,
starved for capacity, weakens or disappears. Thereafter, Nextel can
build out the remaining channels to meet the remaining new and spill-
over demand. Indeed, Nextel's prices already exceed those charged by
independent operators. See letter from Fred Goodwin to Raymond J.
Kimball dated January 4, 1995, attached hereto as Ex. F. A monopoly
share of the market will only exacerbate that disparity.
\15\See the Declarations of William Holesworth, Richard Hafla
and Steven G. Earl, independent SMR operators in Washington and
Idaho, attached hereto as Exs. C, D and E, respectively.
\16\See Declarations of Rick Hafla, Steven T. Earl attached
hereto as Exs. D and E, respectively.
Finally, Nextel's dominance over the available capacity will retard
the growth and development of technological innovations in the SMR
market; namely co-operatives and alliances such as Northwest Wireless
Network through which independent operators can provide maximum
coverage area.
In short, the proposed Final Judgment does not safeguard
competition in these smaller markets in which Clarks operates and
competes. Quite the contrary, for these markets the proposed Final
Judgment offers lessened competition between the merging entities,
lessened competition in the market in general, increased prices,
decreased service and disincentive to innovate. Ironically, these are
the same anticompetitive effects that the Justice Department so
zealously sought to prevent, albeit only in the 15 Select Cities.
IV. Any Procompetive Impact on Competition In the Cellular Market
Can Have No Bearing on this Action
The only ``pro-competitive'' shading that Justice Department can
offer in support of the Final Judgment is that the proposed Final
Judgment could possibly benefit competition in the cellular market. For
that reason, the proposed Final Judgment was necessarily limited so as
not to inhibit Nextel's intention or ability to offer wide-area digital
SMR service using the newly unveiled Motorola Integrated Radio System
(``MIRS''). (CIS at pp. 17-18).\17\ This proposed rationale is
misplace, suspect and wholly inappropriate.
\17\The Justice Department acknowledged that it considered an
alternative to the proposed Final Judgment which would have limited
the number 800 MHz channels that Nextel could hold in each
``affected city.'' (CIS at p. 17) This alternative was purportedly
rejected because the Justice Department was satisfied that the
relief it had obtained relating to 900 MHz divestiture adequately
address harm to competition. (Id.) Again, however 900 MHz
divestiture was not ordered beyond outside of the 15 Select Cities,
nor possible in any market outside of the top 50 urban markets.
Accordingly, this ``relief'' was neither intended nor considered to
address the anticompetitive effect on the small market in which
Clarks operates.
---------------------------------------------------------------------------
First, as set forth above, the anticompetitive effects of these
Nextel Acquisitions in one market cannot be ignored simply because they
are offset by procompetive effects in another market. RSR Corp. v.
Federal Trade Com., 602 F.2d at 1325 (citing United States v.
Philadelphia National Bank, 374 U.S. 321, 370-71 (1973). This is
particularly so where, as in this case, the Justice Department has
expressly stated that the two markets, SMR and cellular, do not
complete and fill different market niches. In any case, whatever
Nextel's stated objective is for embarking on its course of mergers,
whether true or not, has no bearing in this action. Indeed, it is
axiomatic that the ``circumstances leading to an acquisition are
irrelevant in determining whether Sec. 7 has been violated.'' United
States v. Phillips Petroleum Co., 367 F. Supp. 1226, 1258 (C.D. Cal.
1973). The sole focus under Sec. 7 is the effect on competition of an
acquisition. Id.
Moreover, although Nextel has apparently convinced the Justice
Department that Motorola's MIRS equipment will enable it to compete
with cellular telephone service, Motorola, itself recently has doubt
over whether this even possible. Motorola admitted that its MIRS
technology will not compete with cellular:
* * * Motorola, Inc.'s officials last week stressed the need to
adjust their marketing strategy for ESMR technology. The greatest
marketing change would attempt to alter the perception that ESMRs
would soon be a third cellular competitor, focusing instead on
integrated wireless services for dispatch, said Lise Farmer,
spokeswoman for the Motorola division supplying * * * MIRS
technology [[Page 19298]] to Nextel * * * and its potential
partners, OneComm Corp. and Dial Page, Inc.
Robert Pass: ``They just started talking about being a third
cellular carrier * * * but they didn't have technology that was
superior to cellular.'' [Without superior technology] and if they
can't price it well below cellular, then how are they going to
[compete with cellular].''\18\
\18\Land Mobile Radio News, Vol. 48, No. 47, p. 1, (December 2,
1994). (Emphasis and brackets in original.) See also ``For Nextel,
`94 Was Best of Times and Worst of Times,'' Wall Street Journal,
Jan. 3, 1995, p. 14, See Exhibit H.
Finally, any bona fide interest that Nextel may have in
experimenting with a digital SMR seamless nationwide network can be
accomplished without monopolizing the 800 MHz frequency in any relevant
market. By its own admission, Nextel's envisioned digital network
requires no more than 42 800 MHz channel blocks to assure sufficient
capacity for subscriber growth and roaming capacity. (See pleading
already submitted to Justice at p. 7). The Nextel Acquisitions,
however, would give Nextel control over more channels in the 800 MHz
spectrum than it could possibly sue. For example, Nextel stands to
obtain blocks of 141 and 233 channels (representing all available
capacity) in the areas servicing the towns of Moscow, Idaho, and
Lewiston, Idaho, respectively. The aggregate population of these towns
is approximately 50,000. This population could not possibly support any
system, digital and/or conventional, that could utilize anywhere near
this number of channels. (See Petition for Reconsideration and Special
Relief, filed October 18, 1994, Exhibit G.) Nextel can simply warehouse
the substantial remaining capacity, effectively freezing its
competitors in place.
Accordingly, not even Nextel's hyped ``next generation'' of digital
SMR service (which independent operators intend to also provide)
necessitates approval of a merger which will establish single-provider
dominance, once and for all, and eliminate independent competition in
the emerging and still growing mobile radio markets. Indeed, it seems
unnecessary and counterproductive to destroy the market for SMR--a low
cost alternative to cellular--in small markets simply to enable SMR to
compete in the same product market with cellular on a large scale. This
is particularly so where the impact on the public interest of robust
competition in all markets is so adversely impacted.
V. The Public Interest Requires That the Proposed Final Judgment Be
Revised To Remedy the Anticompetitive Effects of the Nextel
Acquisitions in Every Market
There is substantial room to fashion a solution which meet the
needs of all parties while preserving the precepts of fair and even-
handed competition. The proposed Final Judgment should be revised to
provide for partial divestiture of 800 MHz channels in every market in
which the Nextel Acquisitions would result in Nextel's ownership or
control of more channels than is necessary to construct its planned
digital network. By making these remaining frequencies available to
existing operators for expansion, the Final Judgment will restore and
foster a competitive balance in the SMR service industry over the short
and long terms.
Dated: January 9, 1995.
Respectfully submitted,
Raymond J. Kimball,
Ross & Hardies, Attorneys for Clarks Electronics, Teton Communications,
Radio Service Company, Zundel's Radio, Inc., Business Radio, Inc., Accu
Comm, Inc., Earl's Distributing, Inc. and Earl's Wireless
Communications, Total Communications, Communications Center, Inc.,
Leflore Communications, Inc.
Attachment C
United States Department of Justice,
Antitrust Division,
555 4th Street N.W.,
Washington, D.C. 20002.
January 6, 1995.
Ref: Civil Action No. 1:94CV02331, United States vs. Motorola and
Nextel
Gentlemen: Please find enclosed the comments of the
Communications Center related to the above captioned matter. Please
contact me if you have any questions or if I can be of assistance.
Yours truly,
Walter Gallinghouse,
Owner/President.
Comments
United States vs. Motorola & Nextel Communications, Civil Action No.
1:94CV02331
Submitted To: United States Department of Justice, Antitrust Division,
January 6, 1995
Submitted by: Communications Center, Inc., Covington, Louisiana
I. Introduction
On November 8, 1994, the Final Judgment in the case of the
United States of America, Plaintiff versus Motorola, Inc. and Nextel
Communications, Inc, Defendants, was published in the Federal
Register under Civil Action Number 94-2331. Included within this
proceeding was a Competitive Impact Statement, herein referred to as
CIS, under case Number 1:94CV02331, Judge Thomas F. Hogan,
Antitrust, 10/27/94.
Section V of the CIS provides, ``any person who wishes to
comment should do so within (60 days) of the date of publication of
the CIS in the Federal Register. The United States will evaluate the
comments, determine whether it should withdraw its consent, and
respond to the comments.''
The Competitive Impact Statement and Final Judgment have been
reviewed by a large number of specialized mobile radio (SMR)
operators who will be directly effected by the Nextel/Motorola
consortium that has gained control of the majority of the 800 Mhz
radio spectrum nationwide. Pursuant to the provisions of section V
of the CIS, the following comments are hereby submitted.
Upon reviewing the information provided herein, it should be
obvious that because of the highly technical and complex nature of
the radio industry and FCC regulatory policies, the United States
has overlooked anticompetitive consequences of the ongoing Nextel/
Motorola activities as related to the 800 trunked SMR service. If
the Judgment is approved and the current trend continues, Nextel/
Motorola will have monopolistic control over the 800 Mhz SMR market
nationwide, leading to the closure of many small businesses, loss of
services to the public, higher rates for the consumers, and
restraint of trade.
The United States properly identified an antitrust problem with
the Motorola/Nextel control of the spectrum and it sought a prompt
solution by using the consent decree. The Judgment was based on
information contained within the Competitive Impact Statement. In
the opinion of operators who have extensive experience in the two-
way radio and 800 MHz SMR industry, the CIS is seriously flawed.
Based upon the reasons in these comments, it is respectfully
requested that the United States withdraw its consent to the
Judgment and conduct a more thorough investigation to properly
assess the anticompetitive impact on the trunked 800 MHz SMR
industry by the actions of Nextel/Motorola.
II. Background
The Communications Center, Inc. is filing comments in this
matter, submitted by the company's president Walter Gallinghouse.
The Communications Center, Inc. is a Louisiana corporation
providing mobile radio communications equipment sales and service,
UHF community repeater rental, and 800 Mhz SMR (Specialized Mobile
Radio) service. The company was incorporated in 1982. It has been
under current ownership since 1986.
Offices are located in Covington, on the northshore of Lake
Ponchartrain, approximately 30 miles from New Orleans. The
northshore area can be considered a suburb of New Orleans. According
to the Greater New Orleans Expressway Commission, over 8,000
commuters cross the Causeway from the northshore to New Orleans on a
daily basis.
The Communications Center's principal business territory
includes St. Tammany, Tangipahoa and Washington parishes. Repeater
coverage areas extend customer usage into adjoining parishes of
Louisiana and Mississippi. The SMR service area
[[Page 19299]] includes most of metropolitan New Orleans, a market
within the top 50 cities nationwide. The business serves
approximately 500 customers, which includes business, industry,
government and public safety accounts.
The Communications Center operates five sites within the three
parish area with 18 channels of 800 MHz SMR and 12 UHF (450-470 MHz)
relay stations. The Company is an authorized dealer for a number of
manufacturers, including Ericsson-General Electric, Maxon, Yaesu,
Uniden and Shinwa.
Walter Gallinghouse has fifteen years of experience in the land
mobile radio industry, with a background of 30 years in radio
communications. He is the former sales director of Electrocom, Inc.
one of the largest two-way dealers and SMR operators in the New
Orleans market. Under his leadership Electrocom was among the top
ten dealers in the nation for Standard Communications for five
consecutive years. He also pioneered development of the SMR
operations in St. Tammany Parish (Abita Springs and Lacombe). In
1986 he left Electrocom to open his own business in west St.
Tammany.
Walter Gallinghouse is also a director and secretary of SMR WON,
a trade association, incorporated in Washington, DC. SMR WON has
approximately 100 members, including SMR operators and two-way radio
equipment manufacturers.
The Communications Center manages and maintains SMR systems
using both General Electric Marc V/VE and Johnson LTR protocols. The
company not only sells SMR services to the public, it also sells SMR
airtime to other two-way radio dealers who are free to resell at
their own rates.
Resellers of GE Marc V airtime include Saber Communications, an
Alabama corporation based in Mobile that is a wholly owned
subsidiary of Nextel. The GE Marc V airtime resale arrangement was
assumed by Saber in its acquisition of the SMR assets of Electrocom.
Saber has however refused to resell service on the LTR systems it
acquired from other dealers in the market. Saber's Vice President of
operations said ``It is Nextel's policy that they do not resell
airtime on any type system.'' This is evidence of Nextel's intent to
control the 800 MHz SMR marketplace. This issue is addressed in more
detail at another point in these comments.
III. 800 MHz SMR History and the New Orleans Market
Prior to the acquisition of SMR assets by Nextel and affiliates
(including Coastel, Saber Communications, Motorola and Dial Page),
the New Orleans market had vigorous competition with a number of SMR
service providers using four manufacturers protocols (General
Electric, Motorola, Johnson, LTR and RCA Tactel). Equipment for use
on these systems was sold by a number of competing companies.
At the end of 1993 the Communications Center and other SMR
operators were contacted by several prospective buyers interested in
acquiring their SMR assets. The buyers used high pressure tactics,
advising dealers to ``avoid missing the window of opportunity.''
Many of the companies entered into agreements to sell their 800 SMR
systems to Saber Communications, Coastel Communications or Dial
Page.
The FCC had rules in place that would have prohibited these
acquisitions. Presumably the rules were originally designed to
prevent one company from obtaining a concentration of channels in
any market. With the intent of promoting the development of new
technology, the FCC waived its regulations upon request of Fleet
Call and Nextel.
The seed of wide area communications was firmly planted by Fleet
Call and Nextel. The concept was nurtured by the FCC in broad
acceptance that Nextel's proposals promised a wide area digital
communications system. Unfortunately, anticipating the buyouts by
Nextel and affiliates, speculators seized the opportunity to buy and
``flip'' channels for quick profits. This quickly led to licensing
mills that duped the public out of millions of dollars. It also led
to the warehousing of the radio spectrum for the purposes of
speculation. The end result was the licensing of all 800 Mhz
frequencies throughout the nation, leaving none for expansion of
systems owned by legitimate operators who had no affiliation with
Nextel.
The FCC was inundated by license applications in the wake of the
acquisitions. With some 40,000 applications pending, the FCC refused
to accept any additional applications and it froze all pending
applications.
With the FCC's freeze, the business plans of legitimate
operators have been damaged, public use of the spectrum has been
denied and the 800 MHz SMR industry is in turmoil. To compound
matters, the FCC has proposed the auctioning of 800 MHz spectrum
(which is already licensed) on a Market Trading Area (MTA) basis in
direct response to the Nextel's request for a more flexible wide
area licensing plan. Under such plan, small operators will be
virtually excluded from the bid process and denied further
expansion.
The acquisitions of SMR systems in the New Orleans market have
led to an excessive number of channels being controlled by Nextel
and affiliates.
IV. Comments--Flaws in the Justice Department Complaint and CIS
A. Arbitrary Selection of Markets Affected by Nextel Motorola
Activities
The CIS does not address the competitive impact in all the
geographic markets that are actually affected by the Motorola/Nextel
activities. It is restricted to 15 selected cities, ignoring the
balance of the nation where excessive concentrations actually exist.
The Nextel/Motorola transactions, including the mergers,
acquisitions and attempts to acquire the entire 800 Mhz SMR, are
likely to reduce competition in most cities and counties throughout
the entire nation.
The ability of Nextel to warehouse the majority of frequencies
nationwide for as long as five years under extended construction
deadlines (allowed by the FCC upon request of Nextel and
affiliates), will prevent the licensing of competing operators who
will sell products manufactured by companies other than Motorola.
With Nextel's control over this spectrum, competing companies have
no systems to sell on, and manufacturers competing with Motorola
will have no outlet for their 800 Mhz products.
The consequences are a restraint of trade, the loss of jobs and
probable closure of many businesses. Although Nextel & Motorola have
claimed they will build out the top 50 cities within a few years,
during this period the public will be deprived of the valuable
resources of the 800 spectrum. The vast population outside the top
50 markets may not see the build outs for many years, and it is
questionable if some areas will ever receive the digital service
described by Nextel. Existing radio dealers will be frozen in place
with no ability to expand their SMR services to the public. Rural
areas will be seriously impacted.
B. Contradictions
The CIS was based upon the concept that Nextel would be a major
competitor in the cellular market. According to a recent article in
the Wall Street Journal ``Nextel has all but abandoned ambitions to
become a cellular titan any time soon. It will get back to the
basics, jazzing up the dispatch services''. This is confirmed in
public statements by Motorola: ``the greatest marketing change would
attempt to alter the perceptions that ESMRs would soon be a third
cellular competitor, focusing instead on the integrated wireless
services for dispatch, said Lisa Farmer, spokeswoman for the
Motorola division supplying * * * MIRs technology to Nextel * * *
and its potential partners, OneComm Corp. and Dial Page, Inc. Just
three months earlier, August 31, 1994, headlines read ``Nextel Pins
Hopes for Cellular Riches Nationwide on Lowly Two-Way Dispatch
Systems''.
The Justice Department rejected litigation seeking to limit the
number of 800 MHz channels because ``the Department did not want to
inhibit Nextel's ability to offer cellular telephone service''. When
describing the Product Market, the Department says ``Cellular
telephone is not a substitute because it is significantly more
expensive than SMR service * * * and because it cannot be provided
on a one-to-many dispatch basis.'' Further, ``cellular telephone
companies ``reuse'' spectrum by dividing a licensed service area
into ``cells'' and reusing a frequency within the same system.
Several cells would have to be used to transmit a communication to
reach a group of vehicles; consequently, this method of operation is
not well suited for SMR customers who need the capability of sending
frequent, short messages over a broad area to one or many
recipients.''
The Motorola ``MIRS'' technology, according to the FCC multi
site licensing scheme with close spacing, is based on a ``cell''
concept with low antenna heights. Accordingly this ``is not well
suited for SMR customers'' because of the need to transmit over
multiple cells.
These contradictions and changes in marketing strategies
necessarily questions the planning, forethought and intent of the
800 MHz channel acquisition frenzy by Nextel and affiliates. The FCC
waived the very regulations that would have prevented any one
company from obtaining an [[Page 19300]] anticompetitive
concentration of channels in any market. Now we have a situation
where Nextel is not focusing on being a major competitor with
cellular, its ``MIRS'' cellular style technology is ``not well
suited'' for SMR, and it holds an excessive concentration of
channels that have been providing the public low cost mobile radio
communications services. Considering the enormous amounts of money
that were paid for the channel acquisitions, the capital
requirements for the future buildout for the system, one can
generally assume that if Nextel survives and builds the system, the
consumer will bear the burden in higher cost and less effective
service. In the meantime, using FCC waivers that granted extended
construction periods of up to five years, the public will have been
deprived of the use of the radio spectrum.
C. 800 MHz SMR is a Distinct Product Market
220 MHz, 800 MHz and 900 MHz SMR should not be considered the
same for the definition of product market. 220 MHz SMR and 900 MHz
SMR are not a substitute for 800 MHz SMR service. There are no
operational 200 MHz or 900 MHz SMR systems that can compete with the
existing mature 800 MHz service which has coverage throughout most
of the nation. There are significant technical differences in the
three bands. Each band has distinctive operational characteristics
that make one more suitable than the other in certain applications.
800 MHz SMR is the premium spectrum. It has a short wave length,
and on a lesser degree than 900 MHz, it is also absorbed by dense
foliage. The line of site range and limited periods of interference
from extended signal propagation have made it the mainstay of the
two-way radio industry. The propagation characteristics and FCC
channel spacing scheme make it an ideal spectrum for the majority of
two-way radio dispatch and interconnect services.
900 MHz has a very short wavelength (nearly microwave) with poor
performance in areas with dense foliage. The range slightly less
than 800 MHz. It is more particularly suited to large cities.
Because of the FCC's method of channel assignments with close spaced
frequencies, it has not been widely accepted by the industry. The
cost of system construction is much higher because of the
compensation for losses in close spaced antenna combiners (higher
losses of combiner, requires higher input power, hence higher cost
power amplifiers; as a substitute for combiners, separate antennas
and feedlines for repeater transmitters can be used, but at a very
high cost).
The modulation bandwidth on 900 MHz is narrower than 800 MHz,
and therefore the audio quality and range is not as good as 800 MHz
and 220 MHz.
220 MHz has greater range than 800 and 900 MHz and is more
suited to rural markets. It is more susceptible than 800 and 900 MHz
to interference caused by extended propagation during changes in
atmospheric conditions. Because of the FCC's past and present 220
MHz licensing process, the development of this band will be slow. It
will take some time to determine the band's effectiveness,
particularly in major markets.
Because of the FCC regulatory framework and the high cost of
buildout of 220 and 900, it is unlikely that systems will be
established on 220 MHz and 900 MHz spectrum within a reasonable
period of time. Considering the lack of available systems in
adjoining markets for networking between dealers, 900 MHz and 220
cannot be substituted for 800 MHz. The United States supports this
in its statements. ``At present, however, the only constructed 220
MHz SMR systems are in California. * * * 220 MHz service will
require time to gain commercial acceptance.'' ``SMR service in the
220 band will be a substitute for SMR service in 800 MHz and 900 MHz
at some point in the future. * * * Further 220 MHz service will
require some time to gain commercial acceptance, just as 800 MHz and
900 MHz services required when they were first implemented.''
The United States refers to 220 MHz as a future service, and the
comments about 900 MHz indicate 900 MHz SMR has not been widely
accepted. Thus, as a practical matter, it is not appropriate to
speculate on the acceptance of 220 or 900 and assume they can be
substituted for each other. The existing 800 MHz product market is
mature and at the present time, it is being substantially affected
by the Motorola/Nextel activities.
From the standpoint of products and service, there are a large
number of manufacturers providing equipment for operation within the
800 spectrum. This includes fixed stations, switching equipment,
system controllers, end user mobiles and portables. Robust
competition has existed in equipment sales of all 800 MHz products.
900 MHz SMR has not been widely accepted and product availability is
somewhat limited. 220 MHz SMR is relatively new and it is difficult
to enter this business because of FCC regulations.
From a product availability standpoint, 800 MHz should be
considered a distinct market.
D. CIS Ignores the Importance of 800 MHz SMR
The 800 MHz SMR service is mature industry providing an
effective low cost two-way radio service to business, industry and
public safety. Competing systems are now in operation covering a
large percentage of the United States. Recent technological
developments have spurred the development of wide area networking
between systems owned by radio dealers in adjoining markets.
The United States has also overlooked the importance of the
existing 800 MHz analog dispatch SMR services to business, industry
and public safety. It has taken the viewpoint that Nextel will
develop more competition for the cellular industry.
When the Justice Department stated it ``did not want to inhibit
Nextel's ability to offer cellular telephone service, it effectively
condoned the dismantling of the entire 800 MHz SMR analog dispatch
service in favor of the desires of the Nextel/Motorola, which
includes acquisition of the contiguous 861-865 SMR spectrum. It just
so happens that this part of the SMR spectrum is the most heavily
loaded with customers because it was the first SMR spectrum to be
released by the FCC. If the Department allows the dismantling of
this service, it will cause the displacement of hundreds of
thousands of radio systems, disruption of the communications of
hundreds of thousands of users, and an enormous cost in labor and
resources.
E. Damages to the Public Interest Not Fully Examined By CIS
Because there is no other service available with all the
existing low cost benefits of 800 MHz SMR, Nextel's acquisitions of
existing SMR dispatch systems and customer bases will force the
public to replace their equipment. The consumer will have to enter
into a new service which will be more expensive and less effective.
While the Nextel/Motorola team decides on its buildout method
and schedule, and it is uncertain about its position as being ``the
third cellular'' or a wide area dispatch provider, they will have
used the FCC's wide area waivers to side-step the original
regulations that were designed to prevent the development of
monopolies. Instead, they can use the extra freedoms granted by the
waivers, increase the cost of service to the public, and drive their
competitors out of business.
F. Anti-Competitive Problem Not Solved With Divestiture in Certain
Markets
The United States has totally ignored the anti-competitive
aspects of the Nextel/Motorola actions in the 800 MHz SMR product
market nationwide. On page 17, the United States says, ``It is
satisfied that the relief it has obtained relating to 900 MHz
frequencies will adequately address the harm to competition alleged
in the complaint.''
Although the CIS is relevant because within certain cities
Nextel/Motorola holds the majority of channels in 800 MHz and a
number of 900 MHz, the divestiture of the 900 channels and 40 800
MHz channels in one market does not solve the problem of the
monopolistic control of the 800 MHz product market. Nextel would
still control the majority of channels in 800 SMR, inhibiting the
ability of independent operators from providing services on non-
cellular type systems which use high-elevation base station
antennas. These systems are needed to continue to serve the needs of
business and industry for trunked 800 MHz that can provide dispatch
service over broad coverage areas.
IV. Analysis of New Orleans Market
Using various sources, including a FCC license data base from
Interactive Systems (ISI), Washington Radio Reports, frequency
monitoring, verifications with system operators, and first hand
knowledge, the Communications Center conducted an analysis of the
New Orleans market area. The geographic area used was generally in
line with the BEA Economic Areas as represented by the US Department
of Commerce in the Federal Register (Volume 59, No. 214). The study
was completed on January 3, 1995 and it is believed to be a fairly
accurate representation of the New Orleans market situation.
The analysis was conducted for 260 800 MHz SMR channels in the
FCC channels of 201 through 600. 900 MHz SMR was not
[[Page 19301]] considered. It is believed that 800 MHz SMR should
stand alone as a relevant product market because 220 MHz and 900 MHz
are not substitutes for 800 MHz SMR. The reasoning is further fully
described earlier in this document. In fact, there are no viable 900
MHz or 220 MHz systems in the New Orleans marketplace at this time.
The conclusion can be drawn that after the acquisitions are
completed by Nextel of the channels of Dial Page, Saber and
Motorola, Nextel and Motorola will have effective control of the New
Orleans 800 MHz SMR marketplace.
The study shows the following channel concentration:
------------------------------------------------------------------------
Percent
------------------------------------------------------------------------
Nextel & affiliates, 241 channels............................ 86.0
Independents, 27 channels.................................... 9.5
Unknown, 2 channels.......................................... 1.0
Other business (Motorola format), 10 channels................ 3.5
------------------------------------------------------------------------
To further determine the effect on competition, an analysis of
the principal sales and service providers in the New Orleans market
was conducted. These SMR sales and service operators of New Orleans
are listed below, followed with their office locations and
manufacturers SMR protocol. A copy of the telephone directory yellow
pages is attached (Exhibit A,B) which list some of the two-way radio
dealers in New Orleans. There are SMRS operators who are not listed
in the directory.
Tomba--Motorola
New Orleans
Slidell
Marrero
Metairie
Destrehan
Bogalusa
Electrocom--GE & LTR
New Orleans
Mandeville
Landline Communications--LTR
Chalmette
Two-Way Communications--LTR
Metairie
Morgan Communications--GE
New Orleans
Crescent Radio--GE
Metairie
New Orleans Carfone--LTR
Metairie
JMT Communications--LTR
Lacombe
SOLA Communications--Motorola
New Orleans
Communications Towers--Motorola
Covington
Communications Center--GE & LTR
Covington
The principal SMR operators who are non-Nextel affiliates are:
Communications Center--GE & LTR
Covington
Crescent Radio--GE
Metairie
Landline Communications--LTR
Chalmatte
Thus, after the final acquisitions are completed, the number of
providers of non-Nextel/Motorola service will be reduced from 11 to
only 3. This is a vivid illustration of the lack of service
alternatives once the Nextel/Motorola transactions are complete.
V. Evidence of Market Control
There is evidence that Nextel wishes to maintain complete
control of the marketplace, denying competing two-way radio dealers
of the ability to obtain recurring revenue through resale of SMR
services on Nextel's systems. Because of the acquisitions, Nextel
may be the only service SMR service provider in certain areas.
In a letter dated November 30, 1994 to Saber Communications
(Exhibit C) the Communications Center formally requested a suitable
agreement that would allow the resale of LTR SMR services on Saber's
Louisiana network. The letter outlines the Communications various
request for this service which dated back to October 26th, 1994.
Finally on December 9th, the Communications Center received a reply
(Exhibit D), but Saber denied the resellers agreement and said ``It
is Nextel's policy that they do not resell airtime on any type
system.'' Instead Saber offered a Independent Sales Representative
commission plan which required all new customers to be billed direct
by Saber. Thus, once the sale was made by the Communications Center,
that customer would be turned over to Saber for recurring billing.
Although there would be a commission paid for the turn on, there was
no allowance for recurring revenue.
Recurring revenue from SMR and repeater services is the primary
income for most successful two-way radio businesses. With the highly
reliable low cost end user products available today, the potential
for sales profits is somewhat reduced. Therefore recurring income
from resale of SMR services can be critically important to cover the
overhead of basic operations, including employment of office staff
and technicians. By drying up another source of revenue, Nextel can
effectively drive Motorola's competitors out of the two-way radio
sales and service business.
Independent Sales Representative plans may be suitable when used
for those in the consumer retail market, but when the primary
business is two-way radio sales and service, the plan is generally
unacceptable.
The fact that the customer is effectively relinquished after the
initial sale, allows Nextel and Saber to easily bypass the sales
representative when the user needs additional equipment. In the case
of Saber, the monthly bills emblazoned with the logos Motorola.
There are not advertisements for Johnson LTR products or General
Electric, even though Nextel owns systems with both protocols.
With multiple SMR operators in a marketplace there has been fair
competition. Open agreements for resale of SMR service are
commonplace. Networking over wide geographic areas has been
accomplished with cooperation between dealers in adjoining markets.
Refusals by Nextel to provide resellers agreements will lessen
competition and degrade services to the public.
VI. Conclusion
Trunked analog 800 MHz SMR is the most cost effective and
feature packed mobile radio communication service available to
business, industry and public safety. It is the mainstay of the
dispatch mobile radio communications industry, and the United States
should consider its importance before casting it aside upon the
request of a single service provider.
Because Nextel is using the Motorola ``MIRS'' switching
equipment, and because Motorola can control delivery, service and
software for the controllers on the Nextel ``MIRS'' systems, it can
effectively manipulate Nextel's policies. By using Nextel's
concentration of spectrum, Motorola can control the 800 Mhz SMR
marketplace. As stated in the US comments on Page 15 of the
Complaint, ``the deployment of alternative technologies will be
inhibited''.
With Nextel's control of such a significant portion of the radio
spectrum as a Commercial Mobile Radio Service (CMRS) provider, it
has an added responsibility of offering resale agreements to all
qualified CMRS providers.
The question then arises, is it appropriate, upon the request of
one manufacturer and one supplier of service, to dismantle
operational dispatch systems, disrupt the public's use of the
existing systems, and allow installation of a system that, according
to the Department's CIS, is not particularly suited to dispatch
service?
After evaluating the comments in this document, the Justice
Department should understand that a more thorough investigation is
needed to determine the true competitive impact of the Nextel/
Motorola activities.
Exhibits A and B
Exhibits A and B, copies of a Yellow Pages document, are omitted
from publication herein; a copy can be obtained on request for
inspection and copying in room 3235 of the Antitrust Division,
United States Department of Justice, Tenth Street and Pennsylvania
Avenue, N.W., Washington, D.C. 20530 and for inspection at the
Office of the Clerk of the United States District Court for the
District of Columbia, United States Courthouse, Third Street and
Constitution Avenue, N.W., Washington, D.C. 20001.
Saber Communications, Attn: Mr. Greg Wood,
Vice-President of Operations, 107 St. Francis, Suite 1900, Mobile,
AL 36602.
VIA FAX: (205) 415-8528 Re: Request for resellers agreement, LTR SMR
Service
November 30, 1994.
Dear Greg: On October 26, 1994, I called you and requested a
suitable agreement that would permit the Communications Center to
resell service on the Louisiana LTR SMR system which Saber acquired
from Two Way Communications. Further, we talked about the
Communications Center's GE Marc V SMR system, and our practice of
buying and reselling services from each other since the Saber
acquisition of Electrocom's GE Marc V SMR network. You advised me of
your interest in a LTR roaming arrangement, but you couldn't give me
a definite answer at the time.
October 27th, Slade Lindsey called me regarding the Antenna
Sites tower leases in Abita, Hammond and Kentwood. I asked
[[Page 19302]] about the LTR roaming agreement, but he said he would
talk with you and have you contact me.
October 31st, once again I spoke to Slade about the tower
leases. I asked about LTR roaming, but he said you had jury duty and
wouldn't be available for a couple of weeks.
November 8th, Slade came to my office to work on the tower site
leases, but he was unable to offer any information on my LTR roaming
request.
In 1993, after Fitzsimons received his SMR grant for five
channels at Abita Springs, I was involved in the system planning
when it was decided to use the LTR protocol. Lester Boihem agreed to
integrate the system into the Two Way Communications network with a
reseller's agreement for dispatch, interconnect and networking.
Before the Fitzsimons system was constructed. Two Way's network was
acquired by Saber Communications. The Fitzsimons system has been
fully constructed using Trident TNT controllers, with the capability
of dispatch, interconnect and networking. We are selling LTR systems
and have immediate need for the roaming and networking services that
were agreed upon in the system planning sessions last year.
This letter will serve as my formal request to provide resale
service on Saber's LTR SMR network in accordance with my agreement
with Two Way Communications in 1993. The principal interest at this
time is in the areas adjoining west St. Tammany, which includes the
systems at Lacombe, Slidell, New Orleans, Hammond, Kentwood,
Sheridan and Picayune. Limited service may be needed in Baton Rouge
and Biloxi/Gulfport. The services requested are: dispatch;
interconnect; and system networking. Please furnish the rates for
resale of these services and the method of process for turn-ons.
In the interest of providing improved mobile communications
services to the public, I trust you will respond favorably to my
request in writing, by mail or facsimile, before December 8th. I
remain,
Yours truly,
Walter Gallinghouse,
Owner-President.
Mr. Walter Gallinghouse,
Communications Center, Inc.,
16218 Highway 190,
Covington, LA 70434.
December 9, 1994.
Dear Walter: I have received your letter dated November 30, 1994
concerning a resellers agreement for LTR and GE SMR services. As you
know, Saber has been acquired by Nextel Communications and we are
now a wholly owned subsidiary. Since this transaction has taken
place, we are now bound by their policies and procedures. It is
Nextel's policy that they do not resell airtime on any type system.
They do welcome all loading and are willing to compensate the person
or company responsible under a Independent Sales Representative
commission plan. If you are interested in this plan I will have one
of our indirect representatives call on you.
Those customers already being invoiced on a Saber/Nextel managed
or Communications Center system will be allowed to remain under the
current plan along with any new unit they may add. All new customers
requesting service on our systems will be invoiced direct by Saber
and we will refer any customer requesting service in an area you
provide directly to you.
We are also unable to grant your request to access the network
currently managed by Saber for the system you manage in Abita
Springs, Louisiana. We were not made aware of any agreement between
Two-Way and the Communications Center concerning these channels
during our due diligence on this acquisition. In fact, Two-Way
suggested that Saber should talk to Fitzsimons about acquiring his
channels. As you know, we are operating three channels of LTR in
Abita Springs with excess capacity. Therefore there is no value to
us or our customers to include your system on the network.
Nextel and Saber are both dedicated to providing the best mobile
communications services available. We hope you will be interested in
our Independent Sales Rep Program and we look forward to working
with you on tower sites you own.
Sincerely;
Gregory T. Wood,
Operations Manager.
Attachment D
George S. Baranko, Esquire,
Attorney, Communications and Finance Section, Antitrust Division,
U.S. Department of Justice, 555 Fourth Street NW., Room 8104,
Washington, DC 20001.
January 9, 1995.
Re: Proposed Final Judgment in United States v. Motorola, Inc. and
Nextel Communications, Inc., Civ. No. 1:94 CV02331, U.S. District
Court for the District of Columbia
Dear Mr. Baranko: The General Electric Mobile Communications
Dealer Board of Directors (the ``Board''), a group of specialized
mobile radio (``SMR'') operators who own and operate SMR systems in
the 800 MHz and 900 MHz bands throughout the United States, hereby
submits its comments regarding the above referenced Proposed Final
Judgment and respectfully urges that the United States withdraw its
consent to the Proposed Final Judgment in its present form. The
Board represents the interests of a cross-section of the General
Electric SMR dealers throughout the United States.
In the Competitive Impact Statement, the Department of Justice
(``DOJ'') recognizes that Nextel ``has become the primary supplier
of trunked SMR services in the United States,'' and that Nextel
``controls far more 800 MHz SMR channel in the United States than
any other company.'' DOJ also recognizes that Motorola ``is the
second largest provider of trunked SMR services in the United
States'', and that it ``owns or manages a substantial number of 800
MHz and 900 MHz channels it has used to provide trunked SMR
services.''
DOJ correctly asserts that the combination of Nextel's and
Motorola's owned and managed 800 MHz and 900 MHz SMR channels
``would result in Nextel holding virtually all of the SMR spectrum
in 15 major cities.'' However, with the exception of requiring
Nextel and Motorola to divest a certain number of 800 MHz SMR
channels in Atlanta, Georgia, the relief in the Proposed Final
Judgment is directly exclusively to 900 MHz SMR channels. The Board
respectfully submits that the proposed relief ignores the realities
of competition in the SMR market in the United States, and is
inadequate to preserve and protect competition in that market.
I. 800 And 900 MHz Trunked SMR Service Is Not Interchangeable; 900 MHz
SMRs Are At A Significant Competitive Disadvantage
In the Competitive Impact Statement, DOJ states that while
``mobile radios used on 800 MHz and 900 MHz systems are not
compatible with each other, 800 MHz and 900 MHz systems provide
interchangeable service.'' While the Board agrees that 800 MHz and
900 MHz equipment is not interoperable, the Board strongly disagrees
that 800 MHz and 900 MHz SMR systems provide ``interchangeable
service.''
900 MHz SMR spectrum is channelized, allocated and technically
different than 800 MHz spectrum and, as a result, 900 MHz is
considerably less desirable to both the provider and the user than
800 MHz spectrum. For example, 900 MHz does not propagate as well as
800 MHz and, therefore, 900 MHz service providers are forced to
install more sites to get the same coverage as 800 MHz service
providers.\1\ Installing more sites means additional infrastructure
costs for purchasing and installing base stations. The net result of
more infrastructure equipment is that the cost of operating a 900
MHz system is higher than for a 800 MHz system; thereby putting 900
MHz SMRs at a competitive disadvantage.
\1\Both free-space transmission loss and ``knife edge''
diffraction increase as frequency increases. Higher frequencies
incur greater losses and, therefore, cover less area given
equivalent power output and antenna height.
---------------------------------------------------------------------------
The Federal Communications Commission (``FCC'') is well aware of
the differences in 900 MHz and 800 MHz SMR channels and addressed a
number of them in its Report and Order in PR Docket 92-17, August 4,
1992. The FCC stated that many 900 MHz SMR ``licensees have failed
to construct and place their systems in operation * * *.'' The FCC
also recognized that the 900 MHz licensing scheme ``may have placed
900 MHz SMR licensees at a competitive disadvantage to 800 MHz
licensees, by making it difficult to develop the types of wide-area
and regional systems characteristic of current, competitive (800
MHz) SMR offerings.'' (Emphasis added.) The FCC further noted that
``[o]ur multiphase licensing scheme has limited 900 MHz SMR systems
to artificially defined markets and has precluded a free selection
of sites in each market. As a result, licensees have been unable to
develop the kind of wide-area services expected by today's private
radio customers.''\2\ This conclusion was echoed by Nextel (formerly
Fleet Call) in its comments in the FCC docket.\3\ Thus, the
[[Page 19303]] 900 MHz spectrum does not offer the technological
capabilities for wide area service that are required by many SMR
customers, and the requirements to divest 900 MHz channels does not
adequately provide service alternatives for users with a need for
wide-area trunked SMR services or for other SMR operators who need
to provide such services in order to compete with Nextel.
\2\Report and Order, Docket 92-17, released August 4, 1992.
\3\See Comments filed by Fleet Call in Docket 92-17 on March 11,
1992.
Nextel is using Motorola Integrated Radio Service (MIRS)
products for its network backbone and Motorola handsets, which can
handle voice, paging and data capabilities on a single piece of
equipment. A Wall Street Journal article dated January 3, 1995
reported that Nextel believes that SMR customers will require these
enhanced features: ``Nextel must persuade customers who spend only
about $20 a month to spend as much as three times that sum to get a
new array of fancier features, such as wireless messaging and
cellular phone service.''\4\ 800 MHz spectrum is well-suited for
data applications due to the 25 KHz wide channels allocated in this
band. 900 MHz spectrum is allocated in 12.5 KHz channels which
limits the maximum data rate achievable on a 900 MHz channel to
approximately one-half that of an 800 MHz channel utilizing the same
radio technology.\5\ This negatively impacts the 900 MHz SMR's
competitiveness in offering data service.
\4\``For Nextel, '94 Was Best of Times and Worst of Times'', The
Wall Street Journal, January 3, 1995, p. A-14.
\5\See Nyquist's Theorem of Bandwidth Limitations.
---------------------------------------------------------------------------
The narrower bandwidth also impacts the number of SMR users that
can be placed on a channel. For example, MIRS is marketed as a 6:1
capacity gain per 800 MHz channel, i.e., 6 users per time slot
utilizing a 25 KHz channel. In contrast, if equivalent technology is
applied to narrowband 900 MHz channels, only a 3:1 capacity gain can
be achieved. Each user that is loaded onto an SMR system represents
revenue. Thus, one 800 MHz channel is essentially equivalent to two
900 MHz channels in terms of revenue generation potential.\6\
\6\See Motorola Paper presented to the European
Telecommunications Standards Institute, ``Advantages of Linear
Modulation For a Pan-European Digital Trunked System,'' dated
January, 1991.
---------------------------------------------------------------------------
II. Due to the Number of Channels and the Limited Areas in Which 900
MHz SMRs Licenses Are Allocated, 900 MHz SMRs Have Significant
Limitations On Equipment Availability and Price, and Ability to Load
Their Systems
At 800 MHz, there are 280 channels allocated to SMRs and, at 900
MHz, there are 200 channels allocated to SMRs. However, at 900 MHz,
only the top 50 cities (designated filing areas) have been licensed,
while at 800 MHz, licenses have been granted to all areas within the
United States. 900 MHz SMR systems are more expensive to build and
operate and, therefore, when 800 MHz service is available, 900 MHz
SMR operators are at a significant competitive disadvantage and it
is harder to attract 900 MHz customers. In addition, because of the
limited market, at 900 MHz there is less choice of equipment and
features, and the equipment is more expensive than similar 800 MHz
equipment. Nextel, in its SEC Form 10Q filing (June 30, 1993) noted
that ``900 MHz systems generate lower revenues and profitability
than the 800 MHz systems because: i) the revenue per subscriber unit
is lower on the 900 MHz systems than the 800 MHz systems due to
excess capacity, and ii) the operating costs on 900 MHz systems
often include management fees paid to licensees.''\7\
\7\Form 10-Q, filed with the Securities and Exchange Commission
for the quarter ended June 30, 1993 by Nextel Communications, Inc.,
p. 11.
---------------------------------------------------------------------------
The Proposed Final Judgment does nothing to protect competition
in the trunked SMR market outside of the 15 cities covered by the
Judgment. DOJ asserts that ``the proposed Final Judgment preserves
competition for trunked SMR customers by limiting the 900 MHz
spectrum Nextel and Motorola will own and control for the next ten
years.'' However, the proposed Final Judgment will do nothing to
protect the vast majority of SMR customers who are located outside
of the 15 covered cities, where Nextel will be permitted to maintain
and exploit its dominant position in 800 MHz SMR spectrum.
Furthermore, in cities outside of the top 50 cities, there will not
even be potential 900 MHz competition with Nextel until after the
FCC issues 900 MHz SMR licenses through its auction procedures.
Furthermore, current technology does not allow for equipment to
be interchangeable between the 800 MHz and 900 MHz bands. SMRs which
have significant investment in existing 800 MHz infrastructure and
subscriber units will not be able to expand their networks and
effectively compete against Nextel unless additional 800 MHz
channels are available. 900 MHz channels will be of no use to such
SMRs because customers cannot roam between 800 MHz and 900 MHz
systems. The unsatisfactory alternative would be for the SMR to
build and operate a separate 900 MHz system in addition to its
present 800 MHz system.
III. DOJ's Rationale For Providing No Relief With Regard To Nextel's
Control of 800 MHz SMR Spectrum Is Contrary To The Facts
DOJ states that ``[c]ellular telephone service is not a
substitute because it is significantly more expensive than SMR
service, is significantly more difficult for customers to restrict
communications to a defined fleet or group, and because it cannot be
provided on a one-to-many dispatch basis.'' Despite this, DOJ
contends, as its rationale for limiting relief to the 900 MHz SMR
spectrum, that: ``Nextel's consolidation of SMR spectrum, may enable
it to create a third mobile telephone service to compete with
established cellular services. The result could be a wider variety
of wireless services at a lower cost in the near future. The
Department saw substantial benefits to new competition in another
market [the cellular telephone market] if Nextel could obtain
sufficient capacity at 800 MHz to enable it to enter that market.''
(Emphasis added.)
It is simply impermissible under the antitrust laws to sanction
the acquisition of dominant market power in one market on the theory
that such dominance may have procompetitive benefits in a second
market. This is particularly so when, as in this case, the perceived
benefits in the second market are admittedly purely speculative!
Furthermore, the contention that Nextel/Motorola's consolidation
of SMR spectrum may have procompetitive benefits in the cellular
telephone market is expressly contradicted by recent pronouncements
by both Nextel and Motorola. As reported in the December 2, 1994
edition of Land Mobile Radio News, a spokeswoman for the Motorola
division that supplies Motorola Integrated Radio System (MIRS)
technology to Nextel and its potential partners. OneComm Corp. and
Dial Page Inc., stated that ``the greatest marketing change would
attempt to alter the perception that ESMRs soon would be a third
cellular competitor, focusing instead on integrated wireless
services for dispatch.''\8\ (Emphasis added.) Similarly, Nextel's
CEO, Morgan E. O'Brien, recently stated that ``Nextel never
portrayed itself as the next cellular giant pursuing `glove-
compartment' consumers. Instead, it has always aimed its new
cellular features at `the mobile work force' now using
dispatch.''\9\ As Nextel and Motorola are now publicly denying that
they will attempt to compete with cellular telephone, DOJ cannot
attempt to justify the Proposed Final Judgment on the basis of the
possible benefits of such competition. As its recent pronouncements
reflect, Nextel's objective is to dominate the SMR market by
obtaining all of the SMR spectrum it can obtain. Such
anticompetitive conduct should not be countenanced.
\8\``Motorola Rethinks Marketing Plans In Wake of ESMR Stock
Decline,'' Land Mobile Radio News, December 2, 1994, pp. 1 & 4.
\9\``For Nextel, '94 Was Best of Times and Worst of Times'', The
Wall Street Journal, January 3, 1995, p. A-14.
---------------------------------------------------------------------------
IV. Motorola Will Become the Sole Supplier for Virtually Every 800 MHz
SMR Enabling it to Control the Price, Quality and Availability of
Equipment
DOJ recognizes that, as a result of its agreement with Motorola,
Nextel would control ``virtually all of the frequencies currently
used for SMR service in fifteen (15) of the largest cities in the
United States.'' DOJ also states that ``Nextel's numerous
acquisitions of 800 MHz SMR service providers are part of a plan to
replace the currently deployed analog technologies in these systems
with the new Motorola Integrated Radio System (``MIRS'') developed
by Motorola.'' Since virtually all of the spectrum will be owned by
Nextel, all the equipment purchased will be provided by Motorola. As
a result, Motorola, which has an exclusive supply arrangement with
and a 24% ownership interest in Nextel, will become the dominant
supplier of 800 MHz SMR equipment, en
This text is long and has been trimmed here. Open the source document for the complete record.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.