FTC Staff Comment Before the Federal Communications Commission Concerning Multipoint Distribution Service

UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
BEFORE THE
FEDERAL COMMUNICATIONS COMMISSION
WASHINGTON, D.C.
In the Matter of
Rulemaking to Amend Parts 1, 2, 21, and 25 of the Commission’s Rules
to Redesignate the 27.5-29.5 gHz Frequency Band,
to Reallocate the 29.5-30.0 gHz Frequency Band,
to Establish Rules and Policies for
Local Multipoint Distribution Service and for Fixed Satellite Services)
CC Docket No. 92 -297
Reply Comment of the Staff of the
Bureau of Economics of the Federal Trade Commission(1)
August 22, 1996
I. Introduction
The Staff of the Bureau of Economics of the Federal Trade Commission (“FTC Staff”) welcomes
this opportunity to comment on proposed regulations concerning eligibility restrictions on Local
Multipoint Distribution Service (“LMDS”) spectrum licenses in the 28 gHz band.(1) The Federal
Communications Commission (“FCC”) recently released the First Report & Order and Fourth
Notice of Proposed Rulemaking (“4th NPRM”) in its ongoing proceeding to allocate spectrum in
this band.(2) Spectrum in this bandwidth can be used for a variety of purposes, including the
provision of LMDS. LMDS uses super-high frequency microwaves to send and receive two-way
signals in an area, or cell, approximately 3 to 6 miles in diameter. In some respects, it works like
the narrowband operations of cellular telephone systems. However, the video, voice, and data
broadband LMDS signals are two-way capable (i.e.,subscribers can both send and receive
signals). Based on the material accumulated over the course of this proceeding, the FCC has
concluded (4th NPRM, ¶ 14) that there is a substantial likelihood that LMDS will be able to
provide competition to facilities-based local phone companies (local exchange carriers, or
“LECs”) and to cable television operators.(3)
II. Expertise of the Staff of the Federal Trade Commission
The FTC is an independent agency responsible for preventing unfair methods of competition and
unfair or deceptive acts or practices.(4) In response to requests by federal, state, and local
government bodies, the staff of the FTC often analyzes regulatory or legislative proposals that
may affect competition or the efficiency of the economy. In the course of this work, as well as in
antitrust and consumer protection research, nonpublic investigations, and litigation, the staff

applies established principles and recent developments in economics to the analysis of
competition and consumer protection matters.
The staff of the FTC frequently has commented on competition issues in communications,
beginning with a 1924 report to the House of Representatives about competition issues in
radio.(5) More recently the staff has submitted comments to the FCC on the implementation of
the portion of the Telecommunications Act of 1996(6) that relates to the establishment of open
video systems (OVS);(7) the Prime Time Access Rule;(8) television and radio ownership rules
and policies;(9) competition, rate deregulation, and cable television service;(10) common
ownership of cable systems and national television networks;(11) the “must carry” rules applied
to cable television systems;(12) the rules requiring broadcast licenses to be held for three years
before being transferred;(13) network ownership of financial interests and syndication rights;(14)
spectrum allocation and standards for digital audio broadcasting;(15) and the regulation of “900”
telephone number services.(16)
III. Restrictions on LMDS License Eligibility
According to the 4th NPRM (¶ 105), a principal objective of the Telecommunications Act of
1996 (“1996 Act”) is to expedite the introduction of competition to incumbent LECs and cable
operators. Because LMDS has the potential to compete both with LECs and cable systems, the
FCC is considering whether to adopt eligibility or use restrictions on LECs and cable operators
seeking to acquire LMDS spectrum licenses within their geographic service areas (4th NPRM, ¶
1). The FCC intends to allocate only one LMDS license in each service area (4th NPRM, ¶ 106);
hence, there will be no direct competition among LMDS providers. Restricting or proscribing the
acquisition of the LMDS license by a LEC or cable operator serving that same service area
eliminates the possibility that either could anticompetitively preclude entry by a third party
provider of LMDS. The risk from restricting license eligibility is that incumbent LECs or cable
operators may be prevented from attaining scale or scope economies in the provision of existing
or new services.
The FCC raised similar issues in the 3rd NPRM in this proceeding, in considering whether the
acquisition of an LMDS license by a LEC or cable operator with an overlapping service area
would result in the “warehousing” of spectrum or its diversion to less competitive uses (3rd
NPRM, ¶¶ 108-109, 130).(17) The LECs and cable multisystem operators (“MSOs”) that
responded to the 3rd and 4th NPRM argued that there is no competition-based rationale for such
limitations, contending that (1) LECs and cable MSOs would have no financial incentive to
warehouse LMDS spectrum (even assuming substantial incumbent market power in markets for
multichannel video program distribution (“MVPD”) and local telephony); (2) incumbent cable
operators and LECs in fact have no market power in either of these markets; (3) preventing LECs
and cable operators from holding LMDS licenses in overlapping markets would result in
substantial forgone scope economies between wireline and LMDS services; and (4) the
geographic overlap between the service areas of incumbent wireline carriers (in particular, cable
operators) and the LMDS in many cases will be sufficiently small to eliminate any concern that
the acquisition of the LMDS license will be anticompetitive. In the 4th NPRM the FCC has
requested comment again on these issues; we discuss them below.

A. Financial Incentives of a Monopolist to Preempt Entry
Several of the LECs and cable interests responding to the 3rd and 4th NPRMs contended that
concerns that a LEC would “warehouse” the LMDS spectrum are groundless because “auctions
will prevent the warehousing of LMDS spectrum.(18) Similarly, GTE argues that “[g]iven that
the LEC will have paid market price for the spectrum in the auction process, it would make no
sense to warehouse the spectrum.(19) In its response to the 4th NPRM, the National Cable
Television Association (“NCTA”) contended that the FCC’s concerns are misplaced because
“incumbent cable operators will invest in LMDS [only] if they believe their investment in that
service will earn greater returns to capital than other investments.(20) U.S. West asserted that “it
is highly implausible that a LEC or cable operator would ?sit’ on something for which it bid
thousands/millions of dollars simply to prevent competition.(21)
It is difficult to reconcile these arguments with economic analysis. First, the amount spent by a
LEC — or any party — on spectrum rights becomes a sunk cost once the expenditure is made;
the subsequent disposition of the spectrum will be determined by which use offers the highest
profits. The amount spent acquiring the spectrum rights is irrelevant to this profit calculation.
Second, the amount bid by an incumbent LEC or cable operator for LMDS spectrum rights will
reflect in part any monopoly profits that are preserved by the “warehousing” (or, more generally,
the anticompetitive disposition) of the spectrum; moreover, there are compelling theoretical
reasons why an incumbent monopolist often will outbid a prospective entrant for property rights
that would permit entry. The basic reasoning is as follows:(22) if entry does not occur, a
monopolist continues to earn profits of PM, while if entry does occur (resulting in duopoly), the
incumbent earns and the entrant earns (where the “I” and “E” superscripts represent “incumbent”
and “entrant”, and the “D” subscript represents “duopoly”). Total industry profits without entry
therefore are PM; with entry, total industry profits are + . Assuming no cost disadvantages from
monopoly, total industry profits under monopoly generally will be greater than total industry
profits under noncollusive duopoly (i.e., PM > + ). To prevent entry, the monopolist would
willingly bid up to the difference between its monopoly profits and its duopoly profits, PM ¾ .
To obtain the right to enter, the prospective entrant would willingly bid an amount up to its
profits as a duopolist, . Because the monopolist's loss from entry exceeds the entrant's gain (i.e.,
PM ¾ > ), the monopolist will be able to outbid the prospective entrant for the resource (here, the
sole LMDS license in a given geographic area) that would allow entry to occur.(23)
The incentive of a monopolist to outbid a potential entrant for an essential input (known in the
economics literature as the “persistence of monopoly” effect) will be attenuated, perhaps
completely, if the monopolist lacks the means to credibly (and profitably) preempt entry.(24)
This could occur, for example, if there are no well-defined property rights to the resources
required for entry, or if the entrant possesses a technology not possessed by the incumbent. But
in the current case, where only one LMDS license will be made available in each service area,
there would seem to be considerable risk that anticompetitive entry preemption would be a
profitable strategy for incumbent monopolists to pursue.
While incumbent LECs or cable operators may have substantial anticompetitive incentives to
outbid prospective entrants for LMDS spectrum rights, it is probably correct (even in these

circumstances) that the former would not find it most profitable to “warehouse” these rights (i.e.,
hold them idle). But this does not mean that the acquisition of these rights could not be
anticompetitive (compared to the acquisition of those rights by an equally efficient third party).
This point is most easily seen by simple analogy to horizontal merger analysis. In those
horizontal mergers where conditions are conducive to the creation of post-merger market
power,(25) it seldom is alleged the merged entity will retire completely (i.e., “warehouse”) the
productive assets of the acquired entity. Rather, a more general prediction as to the exercise of
post-merger market power is that the merged entity simply will raise the price of both
products,(26) while continuing to use the productive capacity of both merger partners (albeit less
intensively). It is for this reason that the antitrust agencies generally would find it insufficient to
remedy post-merger market power with an order requiring only that both sets of productive
capacity continue to be used post-merger. For the same reason, a “build-out” requirement (i.e.,
requiring the installation of productive capacity within a certain period of time) is not sufficient
to remedy the market power that might be created when a LEC acquires an LMDS license. The
FCC also would have to regulate the firm to ensure that the output of the firm (i.e., its capacity
utilization rate) approximated that of a competitive firm. We conclude, therefore, that requiring
only that an incumbent LEC offer LMDS would fail to prevent any consumer welfare losses
resulting from the joint pricing of local telephony and LMDS.
B. Market Power of LECs and Cable Operators
The analysis in the preceding section assumes, arguendo, that LECs and cable operators could be
characterized as monopolists (or, more generally, as firms with substantial market power). The
LECs and cable MSOs that responded to the 3rd NPRM contest this characterization, arguing
that telephony and (especially) MVPD markets now are highly competitive, which eliminates
any anticompetitive motivation for the acquisition of a geographically overlapping LMDS
license and, therefore, any basis for restrictions on LMDS license acquisition. For example, Cox
Enterprises, Comcast, and Jones Intercable asserted in a joint comment that “cable television is
facing increasing competition from DBS [direct broadcast satellite], wireless cable, LEC cable
and LEC video dialtone systems … cable has no market power in the LMDS market and no
incentive to quash LMDS as a pro-competitive market force.(27) Similarly, Bell Atlantic claimed
that the MVPD market “includes competitors using a wide variety of technologies such as
traditional cable systems, DBS systems, Multipoint Multichannel Distribution Systems (MMDS),
and satellite master antenna television systems. It is inconceivable that any single entity could
gain control of all these technologies and monopolize the MVPD market.(28) BellSouth also
opposed any restrictions on LMDS license acquisition, claiming that “[the MVPD] market is
already competitive.(29)
Although all consumers now have at least one alternative — DBS — to wireline cable service for
MVPD services,(30) and the promise of several other alternatives, it nonetheless seems
premature to characterize the numerous geographic markets for MVPD services as competitive.
As the FCC noted in last year’s Second Annual Report on competition in MVPD services,(31)
notwithstanding the rapid growth rates recently experienced by alternatives to cable (most
notably MMDS and DBS), subscribership for noncable MVPD services still is only 9 percent of
total MVPD subscribership In our view, the FCC’s principal conclusion in that Report(32) —

that “cable television systems remain the primary distributors of multichannel video
programming services and continue to enjoy market power in local markets” — remains valid.
A similar conclusion appears warranted with respect to competition in local telephony markets.
Although it appears likely that some local markets will witness competitive alternatives to
wireline services purchased directly from traditional LECs — a development that likely will be
accelerated by the recent FCC action in CC Docket No. 96-98(33) — it would appear, as with
MVPD markets, that it is premature to conclude that local telephony is now sufficiently
competitive to eliminate competitive concerns that would arise from a LEC acquiring the sole
LMDS license in an overlapping service area.(34) Some users — mainly large business
customers — have been able to bypass LEC trunk lines by purchasing private line access to the
interexchange (i.e., long distance) carriers from “competitive access providers.” But these
providers still account for only a very small share of the market for access to local exchange
networks. Most small businesses and residential customers are still dependent upon the LECs for
access to interexchange carriers, and for the completion of local calls.(35)
C. Scope Economies Between Wireline Services and LMDS Services.
Several commenters argued (implicitly) that eligibility restrictions would deprive them (and
therefore consumers) of scope economies between the provision of LMDS and cable (or local
telephony) services. For example, Bell Atlantic has argued that “imposing restrictions on the
ownership of LMDS licenses might stifle competition [because restrictions] would likely prevent
competitors from utilizing an efficient mix of technologies to distribute multichannel video
programming. They would also stifle investment by the very entities that are best equipped to
become viable competitors through the use of this technology.(36) The National Cable
Television Association (“NCTA”) argued that “LMDS spectrum may be an important adjunct to
wired facilities in the provision of local telecommunications services.(37) U.S. West contended
that “[h]aving been in similar businesses for years, these companies [LECs and cable operators]
are best equipped to become viable LMDS competitors. These incumbents have the efficiencies
of scale and scope and the necessary expertise, capital, existing infrastructure, and experience to
promote the early development of LMDS.(38)
We have two observations on the scope economy issue. First, it is plausible that scope economies
could exist between LMDS and traditional wireline MVPD or local telephony, and the issue
surely is entitled to serious consideration. However, none of the parties have discussed, or
documented in any detail, the source or magnitude of those economies. Indeed, the entire
discussion of scope economies in the comments of the LECs and cable MSOs in response to the
3rd NPRM is limited to the types of nonspecific assertions quoted in the preceding paragraph.
While it is difficult to prescribe precisely how much documentation of prospective efficiencies
parties should have to supply in a proceeding of this sort, the responses to the 3rd and 4th
NPRMs do not adequately support the asserted existence of substantial scope economies between
wireline services and LMDS.(39)
Second, the types of scope economies hinted at by the LECs and MSOs — scope economies
deriving from factors such as generalized telecommunications technological marketing expertise
— are not necessarily specific to a particular geographic market. Because the FCC has

contemplated restrictions only on LMDS license acquisition in overlapping geographic markets,
the only scope economies relevant to assessing the costs of such policy are those that require
joint operation of a local exchange (or cable system) and the overlapping LMDS. To the extent
that one can infer anything about the source or nature of the possible scope economies from the
parties’ comments in response to the 3rd and 4th NPRMs, there is no basis for concluding that
exploitation of these economies requires joint operation of overlapping wireline and LMDS
systems.
D. Implementation of a License Restriction
Although a reasonable case can be made for restricting the ability of LECs and cable operators to
acquire LMDS licenses when there would be substantial overlap in their service areas, defining
practical criteria for what constitutes a significant geographic overlap is not straightforward. The
FCC plans to issue one LMDS per Rand-McNally “Basic Trading Area” (“BTA”). These BTAs
can be quite large;(40) several of the cable MSOs have argued (see 4th NPRM, ¶ 113) that “upon
a comparison of the average BTA and the average cable franchise, cable operators will have de
minimis overlap, and de minimis market power for any one service throughout a BTA.” The FCC
agrees that this is a legitimate issue, and proposes (4th NPRM, ¶ 132) a rule along the lines of its
cellular/PCS cross-ownership rule, whereby a LEC or cable operator would be considered “in-
region” if 20 percent or more of the BTA population is within the bidder’s service area.
We agree that when overlaps between a prospective bidder’s (e.g., a cable operator) service area
and the LMDS are small, it would probably be incorrect to ascribe a substantial anticompetitive
purpose or effect to the acquisition of the LMDS spectrum license. The anticompetitive effect
would be limited to that area where the actual overlap existed; and if there are regulations
requiring uniform pricing within the BTA, there might not be an anticompetitive effect even in
that area.(41)
The situation confronted by the FCC in implementing an overlap restriction arises frequently in
merger analysis, where a large (in dollar value) transaction results in some small horizontal
overlaps in one or more relevant markets. When the overlaps appear to present significant
competitive problems,(42) the FTC may in appropriate cases seek structural relief (e.g., a
divestiture order directed at the overlapping assets).
In principle, the FCC could adopt a stringent policy against any overlaps, in which case potential
bidders for LMDS spectrum would have to decide for themselves whether to divest the
overlapping assets as a condition of spectrum acquisition. While one can conceive of circum
stances where this might be a relatively low cost option,(43) there likely would be many
instances where this is not the case. There could be situations, for example, where a BTA
straddles the service areas of two different LECs, but where the overlaps are very unequal (e.g., 1
percent of the BTA is served by one LEC, the remainder by another).(44) A strict policy against
any service area overlaps would effectively bar the LEC with the small overlap from acquiring
the LMDS license,(45) even though the overall competitive risks from this acquisition would
appear slight.

As a possible approach to address this issue, the FCC has proposed (4th NPRM, ¶ 132) to adopt a
rule similar to the cellular/PCS cross-ownership rule. Consistent with this rule, an incumbent
LEC or cable operator would be considered “in-region” if 20 percent or more of the population
of a BTA is within a LEC’s telephone service area or a cable company’s franchised service area.
While the FTC staff lacks sufficient information to recommend or endorse a particular numerical
threshold for such a rule, in principle the use of such a threshold could contribute to economic
efficiency.
IV. Conclusion
Until such time as effective competition is present in MVPD and local telephony markets, the
acquisition of LMDS spectrum licenses by competing LECs and cable operators presents
potentially significant competitive risks.(46) Accordingly, we believe that there is a reasonable
basis for restricting these parties from acquiring LMDS licenses when substantial geographic
service area overlaps would result. Although we cannot endorse a particular numerical criterion
for determining when such eligibility restrictions would be triggered, we believe that the
approach suggested by the FCC in the 4th NPRM is sound.
(1) This comment represents the views of the staff of the Federal Trade Commission. They are
not necessarily the views of the Federal Trade Commission or any individual Commissioner.
Inquiries regarding this comment should be directed to Mike Vita (202-326-3493).
(2) First Report & Order and Fourth Notice of Proposed Rulemaking in the Matter of
Rulemaking to Amend Parts 1, 2, 21, and 25 of the Commission’s Rules to Designate the 27.5-
29.5 gHz Frequency Band, to Reallocate the 29.5-30.0 gHz Frequency Band, to Establish Rules
and Policies for Local Multipoint Distribution Service and for Fixed Satellite Services, CC
Docket No. 92-297, July 22, 1996.
(3) Currently there is a 50 channel LMDS system operating in Brighton Beach, NY (Brooklyn),
that has approximately 5,000 subscribers.
(4) 15 U.S.C. §§ 41-49.
(5) Federal Trade Commission, Report on the Radio Industry, GPO, 1924.
(6) Pub. L. No. 104-104, 110 Stat. 56.
(7) CS No. 96-46 (1996).
(8) MM No. 94-123 (1994).
(9) MM Docket No. 91-140 (1991); MM Docket No. 91-221 (1992)..
(10) MM No. 89-600 (1990).
(11) CT No. 82-434 (1982).

(12) MM No. 90-4 (1991).
(13) BC No. 81-897 (1982).
(14) MM Nos. 82-345 (1983) and 90-162 (1990).
(15) GEN No. 90-357 (1991).
(16) CC No. 91-65 (1991).
(17) We believe that “warehousing,” as used in the NPRM, means a scenario whereby the
spectrum rights remain unused. If this were the only means by which market power could be
exercised, it potentially could be addressed satisfactorily by imposing a “build-out” requirement
on the licensee, as is proposed in the 4th NPRM, ¶ 130. As we discuss below, however,
“warehousing” is unlikely to be the most profitable anticompetitive disposition of LMDS
spectrum; consequently, a “build-out” requirement would not satisfactorily address the
competitive problems we identify in § III.A below.
(18)” BellSouth, Comments in Response to the 3rd NPRM, September 7, 1995, p. 12.
(19)” GTE, Comments in Response to the 3rd NPRM, September 7, 1995, p. 8.
(20)” NCTA, Comments in Response to the 4th NPRM, August 12, 1996, p. 3. The NCTA goes
on to argue (p. 10) that “[i]nstitution of auctions imposes a major constraint on companies that
might consider such a [warehousing] strategy, because they are required to tie up scarce capital
assets in ventures that produce no returns.”
(21)” U.S. West, Comments in Response to the 4th NPRM, August 12, 1996, p. 4.
(22) See Tirole, The Theory of Industrial Organization, 1988, pp. 346-52, for a more detailed
exposition of this argument. See also Gilbert and Newberry, “Preemptive Patenting and the
Persistence of Monopoly,” American Economic Review, 72 (1982), 514-26.
(23) Thus, the NCTA is correct when it argues (Comments in Response to the 4th NPRM, supra
note 20, p.2) that auction revenues likely will be higher if the FCC permits incumbent LECs to
bid for overlapping LMDS spectrum rights. This is because the amount bid is determined solely
by the profits associated with a particular allocation of spectrum rights. When market power is
present, this bid will reflect the monopoly profits created or preserved by a particular allocation
of the spectrum.
(24) See Tirole, supra note 22, pp. 350-52. See also Krishna, “Auctions With Endogenous
Evaluations: The Persistence of Monopoly Revisited,” American Economic Review 83 (1993),
147-60.
(25) See the Horizontal Merger Guidelines issued by the U.S. Department of Justice and the
Federal Trade Commission, April 2, 1992, § 0.2, for a general overview of these conditions.

(26) See, e.g., Deneckere and Davidson, “Incentives to Form Coalitions with Bertrand
Competition,” RAND Journal of Economics16 (1985), 473-86; and Willig, “Merger Analysis,
Industrial Organization Theory, and Merger Guidelines,” Brookings Papers on Economic
Activity (Microeconomics), 1991, 281-32, esp. 299-305. It should be noted that market power can
manifest itself in dimensions other than price and output; see, e.g., Spence, “Monopoly, Quality,
and Regulation,” Bell Journal of Economics 6 (1975), 417-29; Rosen and Mussa, “Monopoly
and Product Quality,” Journal of Economic Theory 18 (1978), 301-17; and Leffler, “Ambiguous
Changes in Product Quality,” American Economic Review 72 (1982), 956-67.
(27)” Joint Parties, Comments in Response to the 3rd NPRM, September 7, 1995, p. 5.
(28)” Bell Atlantic, Comments in Response to the 3rd NPRM, September 7, 1995, p. 6.
(29)” BellSouth, Comments in Response to the 3rd NPRM, supra note 18, p. 10.
(30) According to the FCC’s Second Annual Report In the Matter of Assessment of the Status of
Competition in the Market for the Delivery of Video Programming (CS Docket No. 95-61,
December 11, 1995), ¶ 50, DBS service is now available in all 48 contiguous states and Alaska.
(31) Supra note 30, ¶ 5.
(32) Id.
(33) In this order (adopted August 1, 1996) the FCC established a framework of minimum
national rules that will enable the states and the FCC to begin implementing the local
competition provisions of the Telecommunications Act of 1996. Section 251(c) of the Act
requires incumbent LECs to make available to entrants interconnection and access to unbundled
network elements, and to offer LEC retail services for resale to telecommunications carriers at
wholesale rates. Access to unbundled elements and resale opportunities are methods by which
telecommunications carriers can enter local exchange markets. The Order addresses the three
paths of entry into the local telephone market enumerated by the 1996 Act. These three methods
of entry are full facilities-based entry, purchasing of unbundled network elements from the
incumbent LEC, and resale of the incumbent's retail services. The FCC also adopted a minimum
list of unbundled network elements that incumbent LECs must make available to new entrants,
upon request.
(34) BellSouth (supra note 18, p. 10) contends that “LECs would have no bottleneck power
through the provision of LMDS,” and therefore that LECs should not be restricted from
acquiring LMDS licenses in overlapping service areas. BellSouth apparently is referring to the
problems of access discrimination that can arise when a regulated monopolist enters the market
for a complementary (but unregulated) service. As is well known, this integration can provide the
monopolist an opportunity to evade the regulation (see Brennan, “Why Regulated Firms Should
be Kept Out of Unregulated Markets: Understanding the Divestiture in United States v. AT&T,”
Antitrust Bull. 32 (1987), 741-93). With regard to BellSouth’s argument, several points seem
relevant. First, even if it were true that an LMDS provider would not require any access to the
local LEC’s facilities (e.g.,switches, etc.), there would still be a straightforward competitive

concern arising from the LEC’s acquisition of a potential competitor. Second, if (as seems likely)
LMDS providers will require access to some of the LEC’s “bottleneck” facilities, then joint
ownership of these facilities and the LMDS license could (depending upon the effectiveness of
Federal and state antidiscrimination regulations) result in the LEC discriminating in favor of its
LMDS affiliate, to the detriment of other local wireline competitors (i.e., full- and partial-
facilities entrants, and “resellers”). Third, if the provision of LMDS does not involve the use of
the LEC’s local physical facilities, this seemingly rules out one source of scope economy that
could provide an efficiency rationale for the LEC to acquire an overlapping LMDS license. We
discuss further the issue of scope economies in § III.C below.
(35) For a general discussion of these issues, see Schwartz, “Telecommunications Reform in the
United States: Promises and Pitfalls,” in Welfens and Yarrow, eds., Telecommunications and
Energy in Systemic Transformation: International Dynamics , Deregulation, and Adjustment in
Network Industries, 1996, esp. § 4.3.
(36)” Bell Atlantic, Comments in Response to the 3rd NPRM, supra note 28, p. 6.
(37)” NCTA, Comments in Response to the 3rd NPRM, September 7, 1995, p. 5.
(38)” U.S. West, Comments in Response to the 4th NPRM, supra note 21, p. 3.
(39) The recently issued FTC Staff Report Anticipating the 21st Century: Competition in the
New High-Tech, Global Marketplace (vol. I), May 1996, ch. 2.III.H, discusses in greater detail
evidentiary issues associated with assessment of economic efficiencies in merger analysis.
(40) Basic Trading Areas (BTA) surround a metropolitan area or city and are made up of one or
more county boundaries. These areas contain the residents who make the majority of purchases
for general merchandise or specialized services such as medical care and entertainment within
that metro area. Some Basic Trading Areas contain more than one city because residents may
conveniently shop at either one. For example, the New York BTA includes a total of 26 counties
from NY, CT, NJ and PA that surround the New York metropolitan area. The Washington BTA,
for example, includes the immediate D.C. and Baltimore metro area, and includes Frederick and
Washington counties (MD) to the north, and Charles and St. Mary counties to the south.
(41) If a cable system acquired an LMDS license yielding a very small overlap, in the absence of
a uniform pricing requirement, the system would charge a relatively high price for LMDS video
services and cable services in the overlap area, and a lower price in non-overlap areas (where the
LMDS would face competition from independent incumbent cable operators). With a uniform
pricing requirement, the system would have to choose between charging the high price
throughout the LMDS service area (resulting in a price exceeding the profit-maximizing price in
the non-overlap area), or the low price (resulting in a price below the profit-maximizing price in
the overlap area). If the nonoverlap area is sufficiently large, the low price will prevail
throughout.

(42) As we argued above, given the current structure of most local MVPD markets, acquisition
of the overlapping LMDS license by the incumbent cable operator license would likely increase
the latter’s market power.
(43) A possible example might be when a cable MSO owning a small system contained entirely
within the BTA seeks to acquire the associated LMDS license. There, the MSO could alleviate
any anticompetitive concerns simply by selling the system. Unless there are substantial
efficiency losses to the MSO from this divestiture (or from forgone scope economies; see § III.D,
supra), this will be an efficient way to address the FCC’s competitive concerns.
(44) As the 4th NPRM notes (¶ 132), “LATA lines and cable franchise areas are not coincident
with BTA boundaries.”
(45) Similar situations could of course arise in the case of cable systems.
(46) We agree with the FCC (4th NPRM, ¶ 135) that any blanket restrictions on LMDS license
eligibility should be imposed only until there is effective competition in MVPD and local
telephony markets.