AT&T’s subsidies an issue in merger

Capitol Hill is concerned that the government could end up footing the bill for an expensive promise from AT&T. 

Hoping to grease the wheels for its mega-merger with T-Mobile, AT&T pledged that the combination of the companies would bring perks for the public and help the U.S. “win the future.” 

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Specifically, the company promised to expand next-generation wireless Internet service to 97 percent of the U.S. population in the next six years. 

That promise could prove persuasive to the administration, since it would help President Obama fulfill a goal he set out in his State of the Union address: to expand access to speedy wireless Internet. 

Yet as AT&T’s chief executive heads to a Senate Judiciary Committee hearing Wednesday to explain how the acquisition of T-Mobile will benefit the public — the first test of the mega-merger on Capitol Hill — some lawmakers are worried that AT&T could use government funds to fulfill its broadband pledge.

A spokesman for Sen. Amy Klobuchar (D-Minn.), a fierce watchdog of the wireless industry and a member of the Commerce and Judiciary committees, said she is concerned about the possibility of AT&T using government subsidies to pay for its broadband promise. The spokesman said Klobuchar is monitoring the issue closely. 

A GOP aide on the Senate Judiciary Committee said Republicans are also concerned about the subsidies issue. He said he could see some Republicans breaking with their party’s typical stance against strict merger conditions to support a provision preventing AT&T from using government-collected money to fulfill its wireless promise. 

As timing would have it, AT&T stands to gain a lot of government-collected money in the next several years, as the Federal Communications Commission moves forward with a plan to subsidize broadband service through the $8 billion Universal Service Fund (USF). The transition of the fund follows years of AT&T advocacy directed at moving some of the money to broadband. The fund is collected through a surcharge on consumer telephone bills. 

AT&T says its does not need the government to shell out in order for it to fulfill its pledge.

“Our commitment to bring broadband to an additional 55 million Americans is not contingent on the receipt of USF money,” said Joan Marsh, AT&T’s federal regulatory vice president.

She would not say that AT&T wouldn’t use USF money to supplement its broadband build-out. She said it is “speculative” at this point to consider how government subsidies might factor into AT&T’s plans.

Michael Calabrese, a telecom advocate and senior fellow at the New America Foundation, said AT&T could disproportionately benefit from changes in the Universal Service Fund because of its size. He expects the issue to arise in the merger review process.

Consumer advocates — who would largely prefer that the merger be blocked — fear consumers will ultimately foot the bill for the broadband expansion. Small and medium-sized wireless companies have traditionally advocated that AT&T receive a smaller cut of the service fund money; AT&T is the top service fund recipient, according to data released last year. 

David Kaut, a telecom analyst at Stifel Nicolaus, said that if federal regulators decide to approve the deal, it’s possible they would add a condition to cement AT&T's wireless pledge and to prevent AT&T from using service fund money to pay for its wireless expansion. Sprint and Verizon both accepted such conditions in their own wireless mergers. 

Scott Wallsten, an economist and the vice president for research at the Technology Policy Institute, a market-oriented think-tank, said it would be tough lift for AT&T to voluntarily pass up USF money. 

“If there’s any money available, it’s not realistic for them to not take free money,” he said, noting that he would be open to supporting a merger condition preventing AT&T from using Universal Service funding for its pledge if that would contain the size of the fund. 

“It’s one of the problems with the Universal Service program in the first place. It’s just really expensive,” Wallsten said.

Another concern over AT&T’s pledge is the possibility that the U.S. would have reached the same level of wireless coverage without the merger taking place.

In order for the FCC to approve the deal, AT&T must prove it will benefit the public. An FCC official told The Hill that actualizing something that would’ve happened anyway is not a public benefit. 

“If something were going to happen otherwise, we wouldn’t consider it a public interest benefit or harm of the transaction,” the official said. 

AT&T is suggesting that Obama needs the merger to go through if he is to fulfill his goal of reaching 98 percent of U.S. residents with wireless access.

“The president will be looking to private industry to reach that goal. The FCC’s greatest policy lever is to direct USF money to broadband — absent that, it’s private carriers such as AT&T that will help accomplish the president’s goal,” Marsh said. 

It’s unlikely the U.S. would reach Obama’s broadband goal without the merger, according to the company. 

“It’s very speculative. You’d have to articulate how we would get there, and I don’t see a single carrier committing [to that level of expansion],” Marsh said. 

But some observers see it otherwise. After Obama announced his wireless goal, some of the fanfare was diminished by analyst commentary that the goal was, on some level, a foregone conclusion that could be achieved by normal market forces. 

Even without the merger, "it’s a relative no brainer that 97 percent of the population will have 4G broadband by 2015," Calabrese said, citing aggressive expansion goals from Verizon. 

In fact, Verizon is doing much of the heavy lifting on wireless expansion. The company has pledged to cover 92 percent of the population by 2013, and some analysts predict that the company will reach about 96 percent of U.S. residents within five years. 

“We’re very confident in the promise we made,” a Verizon Wireless spokesman told The Hill. “We have a history of under-promising and over-delivering.”