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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federal Communications Commission Washington, D.C. 20554 ) In re Applications of ) ) Pittencrieff Communications, Inc. ) Transferor, ) ) and ) CWD No. 97-22 ) Nextel Communications, Inc. ) Transferee, ) ) For Consent to Transfer Control of ) Pittencrieff Communications, Inc. ) and its Subsidiaries ) ) ) MEMORANDUM OPINION AND ORDER Adopted: October 24, 1997 Released: October 24, 1997 By the Chief, Wireless Telecommunications Bureau: TABLE OF CONTENTS Paragraph I. INTRODUCTION AND EXECUTIVE SUMMARY. . . . . . . . . . . . . . . . 1 II. BACKGROUND. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 A. Application . . . . . . . . . . . . . . . . . . . . . . . 3 1. Applicants . . . . . . . . . . . . . . . . . . . . 3 2. Applications . . . . . . . . . . . . . . . . . . . 5 B. Legal Standards . . . . . . . . . . . . . . . . . . . . . 8 III. COMPETITIVE ANALYSIS UNDER PUBLIC INTEREST STANDARD . . . . . . 10 A. Analytical Framework. . . . . . . . . . . . . . . . . . 10 B. Market Definition . . . . . . . . . . . . . . . . . . . 18 1. Market Definition Principles . . . . . . . . . . 18 2. Relevant Markets Analysis. . . . . . . . . . . . . 23 a) Relevant Product Markets . . . . . . . . . . . 23 b) Interconnected Mobile Phone Services . . . . . 24 c) Dispatch Services. . . . . . . . . . . . . . . 30 d) Bundled Digital SMR Services . . . . . . . . . 36 e) Relevant Geographic Markets Analysis . . . . . 37 f) Relevant Markets Conclusions . . . . . . . . . 42 C. Market Concentration and Entry. . . . . . . . . . . . . . 44 1. Overview of SMR Competition. . . . . . . . . . . . 44 2. Competition in Interconnected Mobile Phone Markets 45 3. Competition in Dispatch Markets. . . . . . . . . . 49 4. Market Entry Prospects . . . . . . . . . . . . . . 51 D. Competitive Effects of Merger . . . . . . . . . . . . . . 55 1. Interconnected Mobile Phone Markets. . . . . . . . 56 2. Dispatch Markets . . . . . . . . . . . . . . . . . 60 E. Pro-Competitive and Efficiency Benefits . . . . . . . . . 64 1. Increased Spectrum Efficiency. . . . . . . . . . . 65 2. Introduction of Digital SMR Service. . . . . . . . 67 3. Increased Competition for Cellular/PCS . . . . . . 69 IV. CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 A. Impact in Rural Markets . . . . . . . . . . . . . . . . . 73 B. Impact in Urban Markets . . . . . . . . . . . . . . . . . 74 V. ORDERING CLAUSES. . . . . . . . . . . . . . . . . . . . . . . . . 78 APPENDIX A: DISTRIBUTION OF CONTROL OVER SMR CHANNELS BY MARKET I. INTRODUCTION AND EXECUTIVE SUMMARY 1. We have before us applications filed by Nextel Communications, Inc. ( Nextel ) and Pittencrieff Communications, Inc. ( PCI ) pursuant to Section 310(d) of the Communications Act of 1934, as amended ( the Communications Act ). Section 310(d) of the Communications Act requires that, before control over any radio construction permit, station license, or any rights thereunder may be transferred, we must determine whether the public interest, convenience and necessity will be served by the transfer of control. The applicants seek our consent to transfer ultimate control over certain FCC authorizations held by PCI and its subsidiaries to Nextel in connection with the proposed merger of Nextel and PCI. Under the terms of their merger agreement, PCI would become a wholly-owned subsidiary of Nextel. 2. Both companies currently provide instant two-way voice dispatch ( dispatch ) and two-way, interconnected mobile voice communications ( mobile phone ) services, among others, throughout certain southwestern states. Consequently, we find this merger has some potential to affect consumers of dispatch and mobile interconnected phone services in this region by reducing competition. We also determine, however, that most consumers in the region would benefit from the merger because it will enable Nextel to perform digital system upgrades that increase capacity and permit expanded services. Consumers will also benefit from the competitive pressures that Nextel's digital service package is likely to impose on the region's cellular and PCS carriers. Accordingly, on balance we find that the proposed transfer will serve the public interest, convenience and necessity. Thus, we grant the transfer-of-control applications. II. BACK GROUND A. Application 1. Applicants 3. Nextel Communications, Inc. ( Nextel ) is a leading provider of specialized mobile radio ( SMR ) wireless communications services. Nextel has significant SMR spectrum holdings in and around major business and population centers in the country, including the top 50 metropolitan market areas in the United States. As of March 31, 1997, Nextel reportedly had over 1.1 million subscribers, of whom more than 700,000 were on analog systems. Nextel is in the process of deploying a digital wireless network of integrated communications services with a nationwide footprint. Nextel offers mobile telephone service, two-way dispatch, paging and alphanumeric short-messaging. It also plans to offer data transmission. Nextel also conducts business outside of the United States through its wholly-owned subsidiary, McCaw International. 4. Pittencrieff Communications, Inc. ( PCI ) is also a provider of SMR communications services, incorporated under the laws of Delaware and conducting business primarily out of its headquarters in Abilene, Texas. As of year-end 1996, PCI serviced about 92,000 subscribers in the states of Texas, New Mexico, Oklahoma, Arizona, Colorado, North Dakota, and South Dakota. PCI offers mobile telephone, two-way dispatch, paging, telemetry, and microwave communications services. Historically, PCI has focused its SMR business strategy on channel positions and subscriber bases in rural areas and small to medium-sized cities. In recent years, PCI has expanded this strategy to include major metropolitan areas. 2. Applications 5. In October 1996, Nextel and PCI (collectively, Applicants ) filed a series of Form 490 and Form 703 applications to transfer control of SMR and microwave licenses held by PCI and its subsidiaries to Nextel. Included with the ten applications was a brief statement indicating that Nextel and PCI were to be merged, with PCI becoming a wholly-owned subsidiary of Nextel Finance Company ( NFC ). Applicants filed amendments to three of the ten applications on November 15, 1996. We issued Public Notices on November 19, 1996, December 24, 1996, and January 7, 1997 indicating acceptance of these transfer applications for filing. On December 13 and December 24, 1996, the Commission granted applications associated with the transfer of certain point-to-point microwave and PMRS licenses. These approvals were set aside on February 13, 1996 so that the applications could be considered herein. 6. On February 24, 1997, we advised Applicants that pursuant to Section 310(d) of the Communications Act, public interest submissions were required when filing transfer-of- control applications. Nextel submitted its response on March 11. We requested further information in a letter dated May 1, to which Nextel and PCI both responded on May 15, 1997. In connection with their May 15 submissions, both parties sought confidential treatment of certain proprietary information. We granted these requests on May 21, 1997. 7. On July 24, 1997, Nextel amended its transfer-of-control applications by adding eighteen 900 MHz SMR authorizations awarded to a subsidiary of PCI in August 1996 that had been inadvertently omitted from its prior submissions. Nextel filed a request on July 25, 1997 for a waiver of the agency's public notice requirements in connection with this amendment. We denied Nextel's request and placed these 900 MHz SMR applications on public notice. Nextel/PCI filed additional amendments to the transfer applications on August 8, requesting approval to transfer a second group of licenses previously omitted and providing for the transfer of pending license applications. These amendments were placed on Public Notice on August 26, 1997. B. Legal Standards 8. Our examination of a proposed transfer of control under the public interest standard of Section 310(d) requires consideration of the effects of the transfer on competition. In addition, Sections 7 and 11 of the Clayton Act empower the Commission to disapprove acquisition of common carriers engaged in wire or radio communications or radio transmissions of energy where in any line of commerce in any section of the country the effects of such an acquisition may be substantially to lessen competition, or to tend to create a monopoly. 9. The courts have construed these statutory provisions to mean that the Commission has discharged its responsibility to consider the effect of a proposed merger on competition when the Commission seriously considers the antitrust consequences of a proposal and weighs those consequences with other public interest factors. We have discretion whether to exercise our Clayton Act authority. We choose not to exercise it in this case because we find our jurisdiction under the Communications Act to be sufficient to address all of the competitive effects of the proposed transfer including the issue of whether the proposed transfer may substantially lessen competition or tend to create a monopoly. III. COMPETITIVE ANALYSIS UNDER PUBLIC INTEREST STANDARD A. Analytical Framework 10. In our public interest analysis, we begin by evaluating the current state of competition in the relevant markets, and the likely competitive effects of the proposed merger. In conducting this evaluation, we focus on how the merger will likely affect competitive conditions in the relevant markets, compared with the competitive conditions that would likely exist in these markets if Nextel and PCI did not merge. We then consider any beneficial efficiencies that are likely to result from the merger. We also take into account other public interest benefits that are likely as a result of the merger. Considering these factors taken together, we then assess whether the proposed merger would be in the public interest. Following the Commission's clear precedent interpreting the public interest requirement of Section 310(b), it is the applicants who bear the burden of demonstrating that the proposed transaction will enhance competition and thus be in the public interest. 11. In conducting our public interest analysis of competitive conditions in markets affected by this proposed merger, we follow the approach taken by the Commission in BA- NYNEX Order and BT-MCI Order. In these orders, we have followed the approach used in the LEC In-Region Interexchange Order, where the Commission found the Department of Justice and Federal Trade Commission 1992 Horizontal Merger Guidelines to be a useful analytical tool for evaluating the likely competitive effects of mergers. In the BA-NYNEX Order, the Commission fully articulated its general approach to merger analysis in a case concerning the competitive effects of a merger between adjacent incumbent LECs while the po-competitive, market-opening process developed in the Telecommunications Act of 1996 ( 1996 Act ) is taking effect. This approach is based heavily on both the Guidelines and the Commission's independent expertise which it has developed over several decades in its consideration of the distinguishing factors affecting competition in telecommunications markets. As a result, the Commission's framework is designed to ensure that its assessment of the competitive effects of a merger is based on generally accepted economic principles relating to market analysis. 12. Our application of the Commission's public interest analysis in this order consists of four steps. First, we define the relevant product and geographic markets. We note that, in defining relevant markets, we may distinguish end-user markets, where the product or service is sold to end-user customers, and input markets, where the product or service is sold to firms for use as an input to supply other products or services. 13. Second, we identify current and potential participants in each relevant market, especially those that are likely to have a significant competitive effect on those markets. In several recent mergers, the Commission has defined the most significant market participants to include both actual competitors and precluded competitors. However, we determine that the markets examined in this proceeding are not characterized by the transitional forces contemplated in the BA-NYNEX Order, where the Commission's analysis focused primarily on markets involving wireline local exchange and exchange access services. Prior to passage and implementation of the 1996 Act, entry into these markets was severely constrained by regulatory and other barriers, and these markets have been de facto monopolies. Accordingly, the Commission developed a framework to incorporate into its analysis of mergers the consideration of potential market entrants precluded from these wireline markets prior to 1996. Standard merger analysis considers potential entrants, whereas the precluded competition framework reflects the fact that local exchange markets are in the virtually unprecedented situation of a monopolized market on the verge of experiencing entry from a potentially large number of sources, including adjoining monopolists. 14. By contrast, conditions in the markets examined in this order -- mobile phone services and dispatch services -- are quite different. First, wireless markets are generally characterized by more competition. For example, individual markets for interconnected mobile phone services have had two cellular licensees with significant presence for more than a decade, and our recent broadband PCS licensing is contributing to further ongoing market entry. Second, mobile communications markets have been characterized by less restrictive regulatory barriers to entry. The Commission has greatly expanded licensing opportunities in recent years, and at present, expects to continue doing so. Moreover, greater flexibility is being afforded to licensees in their use of the spectrum they do acquire. While non-regulatory barriers to entry may also serve to limit competition in these wireless markets, we have no evidence indicating that any substantial lifting of these barriers has occurred or is imminent, which would otherwise warrant our examination of formerly precluded competitors. Hence, we do not identify precluded competitors, but consider instead potential market participants. In light of the considerable sunk costs involved in supplying the relevant services, we give consideration only to potential entrants capable of achieving significant market impact within a two-year horizon. 15. Third, we evaluate the effects that the merger may have on competition in the relevant markets. In the case of the proposed merger between Nextel and PCI, the transaction is between firms that provide similar services (a horizontal relationship) as opposed to a transaction between a firm that is a significant producer of a product or service that is used by the other firm in its operations (a vertical relationship). As a result, we confine our analysis in this order to the potential horizontal effects of the proposed merger. 16. Where a relevant market is concentrated and a merger results in a firm that controls a significant portion of this market, a merger in the absence of regulation may increase the ability of the merged firm to profitably exercise unilateral market power (or may slow any decline in this ability) by raising its price above competitive levels. Alternatively, where the relevant market is concentrated, a merger may also increase the ability of a relatively small number of significant market participants, including the merged firm, to exercise market power through coordinated action, either by increasing price or restricting output. Where the relevant market is a final product market, consumers could be directly injured through increased prices or reduced quality. Where the relevant product is an input market, end-users may be indirectly injured to the extent that suppliers of the final good can, and do, pass higher input prices on to end-users in the form of higher final product prices. We note that, for either unilateral or coordinated horizontal effects to occur, the merged firm, or a group of firms, must possess market power in the relevant product market. 17. Fourth, we consider whether the proposed transaction will result in merger- specific efficiencies such as cost reductions, productivity enhancements, or improved incentives for innovation. Our assessment takes into account any pro-competitive commitments made by the parties. In addition to our analysis of merger-specific efficiencies, which is consistent with the approach taken in the 1997 revisions to the Guidelines, we consider whether the merger is likely to produce other public interest benefits. Ultimately, we must weigh any competing harmful and beneficial effects to determine whether, on balance, the merger is likely to enhance competition in the relevant markets. B. Market Definition 1. Market Definition Principles 18. We begin our competitive analysis by determining the relevant product and geographic markets. To do so, we identify the products (or herein, services) offered by Nextel and PCI, and evaluate the extent to which services offered by other communications companies compete for the business conducted by the merging parties. Broad guidance for this inquiry is provided by the Guidelines: A market is defined as a product or group of products and a geographic area in which it is produced or sold such that a hypothetical profit-maximizing firm, not subject to price regulation, that was the only present and future producer or seller of those products in that area likely would impose at least a small but significant and nontransitory increase in price, assuming the terms of sale of all other products are held constant. A relevant market is a group of products and a geographic area that is no bigger than necessary to satisfy this test. Essentially, we define relevant product markets for goods or services in a manner ensuring that there are no close substitutes in demand. We recognize that relevant product markets may change over time. For example, as competition increases and more telecommunications carriers enter each others' markets, we note that wireless carriers are increasingly bundling packages of telecommunications services. As more carriers offer bundles of services, consumer expectations and perceptions of relevant products may change. To the extent that large numbers of consumers come to expect and demand bundled product offerings, and carriers supply such offerings, the bundled product offerings may well become a separate relevant product market. Moreover, within a particular relevant product market, it may also be appropriate to identify and separately aggregate groups of consumers with distinguishable demand patterns. 19. In defining commercial mobile radio services ( CMRS ), the Commission determined that actual competition among certain CMRS services exists already and the potential for competition among all CMRS services appears likely to increase over time due to expanding consumer demand and technological innovation. The Commission determined that adopting a narrow definition of the CMRS marketplace would have the effect of permitting disparate application of the Commission's rules as they apply to CMRS carriers and reclassified private carriers. The Commission concluded that this would undermine the Commission's goal, and Congressional mandate, to create a symmetrical regulatory structure for all CMRS carriers. 20. This inclusive definition of the CMRS market has been applied in previous transfers and acquisitions of SMR systems, including several significant acquisitions by Nextel. In these proceedings, the Bureau determined that all terrestrial CMRS services including paging, SMR, PCS, and cellular are actual or potential competitors with one another, and should be regarded as substantially similar for regulatory purposes. The Bureau concluded that the expansive product market definition was consistent with that adopted by the Commission in the CMRS Third Report and Order for purposes of determining substantial similarity among CMRS offerings. 21. In many policy contexts this perspective has been appropriate, and continues to be, as mobile service carriers operating on different frequencies expand their offerings to serve a wider range of consumer needs. From this perspective the industry is indeed converging, as companies increasingly offer new services that result in competition between providers where no such competition existed before. Nevertheless, in the context of our analysis of mergers, we are required to examine the extent to which consumers can obtain the services they desire from multiple competing sources. These demands tend to be more narrowly defined. Some products may satisfy them, while others may not. Hence, our focus in merger analysis is on a merger's impact on competition in the provision of the particular services offered, and any others that may meet these needs. It is not necessarily on the competition between mobile service carriers, per se. 22. Not only does the Commission have the authority to narrowly define product markets if it so deems necessary, the Commission expressly anticipated the need to define relevant product and geographic markets more narrowly in the Second Annual CMRS Competition Report. Therein, the Commission stated that an individual proceeding in which the Commission defines relevant product and geographic markets, such as a proposed license transfer, may present facts pointing to a narrower or broader product market definition than that used in this report. 2. Relevant Markets Analysis a) Relevant Product Markets 23. PCI principally offers interconnected mobile phone and dispatch services and uses primarily its 800 MHz SMR spectrum to do so. PCI s service area extends throughout the states of Texas, New Mexico, Oklahoma, and Arizona and includes portions of Colorado, North Dakota, and South Dakota. PCI s SMR systems are largely contiguous and offer some of the extended coverage characteristics of cellular systems. Nextel provides services similar to those offered by PCI, but with its broader collection of licenses is approaching a nationwide footprint. In some localities, Nextel also offers an integrated digital communications service package that combines and enhances the functional capabilities of its dispatch and mobile phone services, together with messaging capability. Hence, in light of the available evidence, interconnected mobile phone services and dispatch services constitute the relevant product markets. b) Interconnected Mobile Phone Services 24. We determine that our first relevant product market interconnected mobile phone services comprises all commercially available two-way, mobile voice telephony services encompassing access to the public switched telephone network ( PSTN ), such as those provided by cellular companies, personal communications service ( PCS ) providers, and interconnected, trunked SMR carriers. Following the Guidelines, we have considered whether consumers regard the range of alternative services taken together as a substitute for mobile phone services. 25. As an initial matter, we observe that the group of mobile phone services included in this relevant product market all provide essentially the same functionality two-way, interconnected, mobile voice telephone service. The majority of mobile phone service providers offer their services at roughly similar price levels. According to an annual survey sponsored by the American Mobile Telephone Association, SMR operators' average monthly revenues per unit for interconnected service were $50.10 during 1996, not substantially different from the $47.70 figure reported for cellular subscribers during the same period. PCI reports that it charges a fixed rate of $40 per month for an unlimited number of interconnected mobile phone calls of up to five minutes in length. 26. Like analog SMR, mobile phone services offered by digital SMRs appear to be quite price competitive with services offered by cellular and PCS carriers, especially for higher- volume users. More precise comparisons are not possible because of the variety of rate plans offered and the integration of other services with mobile phone capabilities. Nevertheless, one securities firm estimates that over the period 1997-1999, digital SMR providers will capture four to seven percent of net incremental growth in subscriptions for cellular-like services. Businesses appear to be finding digital SMR-based interconnection offerings appealing because of the versatility of the package relative to the current range of cellular and PCS services. Finally, we observe that Nextel is advertising itself as a direct competitor to cellular. Accordingly, we include interconnected mobile phone services provided by digital SMR carriers as part of this product market. 27. We have also considered information available on consumers' inclinations to switch between mobile phone services and other individual communications services (particularly potential substitutes like public payphones, pagers, private wireline services, etc.) in response to price changes or other competitive signals. Consumers appear to perceive these various services to be distinct, and the Commission has previously recognized that mobile communications services can be distinguished on the basis of functional differences. 28. Some evidence is available on the costs that customers would incur to switch among communications products. In the past, it was costly for potential customers to subscribe to mobile phone services because of expensive handsets/mobile units, and costly for existing subscribers to switch carriers, because of service contracts. However, retail prices for mobile phones have fallen dramatically and the elimination of contracts by some providers has further reduced the cost consumers now face when contemplating a switch to another vendor. Both trends support a view that mobile phone services offered by cellular and PCS providers belong in the same market. SMR providers have not yet adopted these particular aggressive mass- market strategies. However, there appear to be well-developed markets for used SMR equipment that would reduce the net cost of switching between providers operating with different technical standards. 29. While a variety of communications services now exist to serve the mobile work force, only mobile phone services provide users with interconnection to the public switched network and thereby allow them to communicate on an immediate, two-way, voice basis while mobile. Hence, there appears to be no basis for broadening the relevant product market beyond interconnected mobile phone services, as defined above. c) Dispatch Services 30. We define the market for dispatch services as including commercial dispatch services offered by carriers operating at 800 MHz, 900 MHz, and 220 MHz. This definition includes both private (one-to-one) and fleet (one-to-many) dispatch services, whether offered via trunked analog or digital systems. We also include the commercial dispatch services offered by qualified private land mobile operators. We exclude non-trunked (conventional) analog dispatch services, however, because of less reliable system access and the loss of privacy due to sharing of fixed channel assignments. 31. Accordingly, we have investigated the extent to which dispatch consumers would likely be prepared to switch to alternative telecommunications services in the event of a small but significant price increase imposed on dispatch services by all market suppliers. Stated differently, we have considered alternatives to dispatch service and examined whether consumers perceive these alternatives to be good substitutes. 32. In major metropolitan areas, taxicab and construction companies are typical dispatch subscribers. According to one recent annual survey, monthly revenues for SMRs' voice dispatch services averaged $16.40 per unit during 1996. Rates ranged from $8 per month per unit in rural areas to $24 in cities. These services typically provide unlimited airtime or assess airtime charges only on calls exceeding a given duration. Few other mobile communication services are priced this affordably, and aside from private or digital SMR providers, none offer instant, one-to-many mobile phone services. Conference calling via cellular phones over the PSTN, for example, is both far more inconvenient to arrange and generally much more expensive. 33. One alternative to which an analog dispatch consumer may turn, where available, is to a digital dispatch service provider. Digital dispatch services are typically provided in conjunction with other mobile communications services in packages bundling free airtime, measured service, and other features in combinations at different monthly access rates. Hence, the relative cost of subscribing to conventional analog services versus digital dispatch services depends on the volume of dispatch service used and the cost of contracting elsewhere for complementary cellular or paging services. As a general matter, this cannot be readily determined for a representative cross-section of businesses. Nevertheless, data furnished by Nextel on its subscribership levels in localities where digital services have been deployed suggest that a significant number of subscribers have regarded analog and digital services as competitive. 34. Dispatch capability is also available on a commercial basis from operators using private land mobile frequencies. However, most private systems utilize virtually all of their allocated channel capacity, limiting the extent to which dispatch consumers can avail themselves of this spectrum. Moreover, PMRS customers do not obtain exclusive channel use and broad eligibility is available only on private frequencies below 800 MHz. As an alternative to purchasing service from a communications provider, businesses with customized requirements may also choose to acquire licenses to use spectrum, construct transmission facilities, and then operate their own dispatch networks. However, this option would require companies with businesses outside of communications to divert significant resources to the establishment, operation and maintenance of communications systems. This alternative is unlikely to be viable for small businesses under most circumstances. Even for many larger businesses, more than a small but significant increase in price from a commercial dispatch monopoly would be needed to prompt a decision to establish a private system. 35. Hence, we conclude that businesses that have traditionally relied on dispatch capability demand the practical convenience of instant one-to-many voice communications needed to facilitate communications among work teams. This capability would be diminished, if not lost, by using other types of communications services that do not provide dispatch capability. Hence, we believe that a small but significant price change by a monopoly provider of dispatch services would be unlikely to spur many consumers to turn instead to non-dispatch services. Thus, the relevant product market includes all trunked dispatch services, whether provided by CMRS operators or PMRS companies on a commercial (for-profit) basis, and whether provided over analog or digital systems. d) Bundled Digital SMR Services 36. At this time, we do not find that bundled digital SMR services constitute a distinct product market. Rather, digital SMR providers compete for consumers that may otherwise purchase these multiple services separately from several providers specializing in these discrete services. Nextel s own statements regarding its marketing strategy provide compelling evidence that these various communications services namely mobile voice, dispatch, messaging, and data services are perceived by consumers to be complements, rather than substitutes, for one another. Nextel has built its business plan around the concept that a significant number of consumers demand an integrated communications package featuring combinations of these capabilities. As the basis for its plan, Nextel has apparently taken note that many of its analog dispatch customers also subscribe to cellular phones and/or pagers. Independent market research supports this assessment. e) Relevant Geographic Markets Analysis 37. A properly defined geographic market aggregates consumers that face similar choices regarding vendors of a particular product or service. Generally, communications products satisfy an individual customer s needs to the extent that a provider's transmission facilities accommodate that customer s point-to-point communications requirements. For the mobile communications services at issue in this proceeding, demand is indeed for transmission capability between two points, but where the transmission encompasses both origination and termination, and where one or more parties are mobile. Thus, following the approach to geographic market definition adopted in the LEC In-Region Interexchange Order, we define the relevant geographic markets for these services on a general level to be all possible routes that allow for complete end-to-end transmissions between two particular locations (i.e., point-to-point markets), but recognize that the points of origination and/or termination may not be fixed in location. The LEC In-Region Interexchange Order also noted that when a group of point-to-point markets exhibit sufficiently similar competitive characteristics (i.e., market structure), we may aggregate such markets, rather than examine each individual point-to-point market separately. The predominantly local nature of demand for mobile services, and the terms under which the Commission has previously licensed SMR operators, supports aggregating these point-to-point markets on a localized basis. Furthermore, we will distinguish between urban and rural market aggregates, for reasons set forth below. 38. While many customers will be adequately served by a carrier with a localized footprint, some customers may require more wide-ranging, perhaps even nationwide, service coverage. Roaming agreements may extend a customer s access to transmission capability beyond his or her home carrier s service area, but costs escalate and functionality often diminishes because of limited interoperability across systems. Consumers who travel extensively throughout the country may therefore constitute a separate market for nationwide mobile phone service. At this time, however, we decline to examine this market separately. 39. For SMR operators, the types of services that can be economically supplied will tend to vary between urban and rural areas. We agree with PCI's observation that [t]he 800 MHz SMR industry in major metropolitan areas has traditionally been characterized by a shortage of channels. Because the FCC previously imposed loading requirements in such spectrum-short areas, metropolitan SMR providers have offered primarily dispatch service. . . . In contrast, 800 MHz SMR operators in rural areas and small to medium-sized cities . . . traditionally did not face spectrum shortages. FCC loading requirements did not apply in such non-spectrum-short areas, and, therefore, 800 MHz SMR operators in these markets were able to provide wireless services comparable to cellular service. As a result, these 800 MHz SMR operators have attracted a broad cross section of subscribers and compete more directly against cellular service providers. 40. Competitive conditions in the supply of dispatch and mobile phone services also differ considerably between urban and rural areas. Most notably, rural areas tend to be less profitably served because of lower population densities relative to urban areas. Although cellular services are now relatively ubiquitous throughout the country, PCS and digital SMR providers are concentrating on deploying services initially in higher density metropolitan centers where analog cellular systems have been most heavily utilized. Service to smaller cities and rural areas is less likely to commence in the near term. Hence, consumers will find the selection of mobile communications service offerings to be quite different in urban versus rural settings. 41. Finally, the Commission's former rules for site licensing of SMR operators remain a major determinant of the supply of 800 MHz services in any particular market. This spectrum totals 21.5 MHz, allocated into 430 channel pairs of 25 KHz per channel. Regulations limit the power that SMR operators can use to avoid interfering with other SMRs operating on the same frequency in adjoining areas. Therefore, the potential for serving any given local market will usually be limited to those operators holding the site-specific licenses for one or more of the 430 channel pairs whose sites are situated nearest to any given market center. Hence, we define each relevant geographic market to be the service area generally covered by those SMR operators who enjoy exclusive use of their frequencies in and around each corresponding market center. These relevant geographic areas cannot be reliably defined in terms of distances around these market centers, although our definition corresponds roughly to the geographic boundaries suggested by the Applicants. f) Relevant Markets Conclusions 42. The Commission has previously noted that convergence in the wireless marketplace could support product markets emphasizing functionality, which would divide CMRS and related services into three categories telephone service, dispatch, and paging. Herein, we adopt this view. Accordingly, we find two relevant product markets of primary interest: two-way, interconnected mobile voice communications services, and instant, two-way dispatch communication services. While we do not yet find that integrated digital SMR service packages (comprising mobile phone and dispatch capabilities, among others) constitute a separate product market, these products do compete against carriers offering each of these constituent services on a stand alone basis. 43. We also determine that the relevant suppliers of these services are identified on the basis of their ability to provide end-to-end communications over localized areas. As a matter of primary concern, users base their choice of a vendor on its ability to serve them where they live and work. Thus, for many consumers, relatively localized coverage (perhaps with roaming capability) is sufficient. The structure of supply in these mobile communications markets also varies rather systematically between large urban centers or rural areas. Differences can be found in the number of competing communications providers, in the types of services offered, and as discussed below, in the extent to which spectrum constitutes a potential barrier to market entry. C. Market Concentration and Entry 1. Overview of SMR Competition 44. PCI acknowledges that it faces only limited competition from most SMR operators offering service in its markets. It notes that many of these [SMR] licensees only hold or manage five to ten channels, single site (i.e., limited coverage) licenses, have limited financial resources, and are serving a small number of subscribers. There are, however, a limited number of competitors within [PCI s] markets that hold significant channel positions, provide wide-area coverage, and service a significant number of subscribers. PCI expressly identifies three of these more substantial competitors Nextel, Geotek, and Southern. We observe, however, that Southern does not provide services within PCI s footprint, while Geotek currently provides its services only in Dallas. Hence, we conclude that competition within the region from among the larger SMR providers is largely limited to that which exists between Nextel and Pittencrieff. This assessment accords with our licensing records and with market studies prepared by industry analysts. 2. Competition in Interconnected Mobile Phone Markets 45. Urban Centers. In large urban centers, we find that the market for mobile interconnected voice communications includes services provided by cellular, PCS, and digital SMR carriers. Generally, smaller SMRs using analog technologies are not effective competitors in these markets because of limited capacity, limited geographic coverage, or both. Even larger SMR providers have been unable to compete effectively in mobile phone markets in large cities when using analog technologies. SMR operators [using analog technologies] have generally not been able to provide mobile telephone service competitive with that provided by cellular operators because of various factors affecting SMR capacity and quality. More specifically, Nextel notes that due to capacity constraints on its existing analog SMR systems in major metropolitan areas, Nextel has been able to offer mobile telephone service on such systems to only a limited number of its customers. 46. It was anticipated at one time that digital SMR services would challenge cellular providers directly. Nextel was expected, in essence, to become a third cellular carrier. However, the second large digital SMR carrier Geotek has never marketed itself to the mass market for mobile telephony, or as a substitute for cellular. And in mid-1995, Nextel altered its plans considerably, such that it no longer claims to be targeting the individual cellular subscriber market. Instead, Nextel seeks to targets its sales efforts toward business work groups. Hence, there are limits to the extent to which digital SMRs are currently competing with cellular/PCS providers. 47. Throughout the United States, competition from cellular companies in any given geographic market for mobile phone services is limited to two licensees. In most areas, licensees have been operational for over a decade and have extensive coverage areas. PCS services, by contrast, have been inaugurated only within the last year or so. Generally, at least one of the multiple PCS licensees in each large metropolitan area within the southwest region has begun offering service. Competition in mobile phone service from two PCS carriers currently exists in Phoenix, San Antonio, and Oklahoma City. Most of the remaining A- or B-block PCS companies are expected to become operational sometime in 1997, although coverage may be limited to the region s larger urban centers within the near future. Thus, it appears reasonable to conclude that competition in urban markets for mobile phone services is emerging and will intensify over the near term, regardless of the outcome of this merger. 48. Rural Areas. In rural areas and smaller cities, the market for mobile phone services generally includes only cellular and SMR providers. PCI reports that its marketing strategy in these areas has focused on providing interconnection. DOJ determined that trunked SMR operators in rural areas derive as much as 60 percent of their total revenues from mobile phone service. Nextel offers both dispatch and interconnection, but until recently, only 10 percent of its nationwide subscriber base was interconnected. PCS companies have been licensed to provide competing services in rural areas, but are not expected to begin offering services on a widespread basis for some time. Similarly, providers of digital SMR technologies (e.g., Nextel and Geotek) do not expect to offer interconnected mobile phone services to rural areas within the near future. 3. Competition in Dispatch Markets 49. Urban Centers. In large urban centers, the commercial markets for two-way dispatch services include conventional SMR and digital SMR carriers operating primarily at 800 MHz, but also at 900 MHz, and 220 MHz. In all, 28.5 MHz of spectrum is available on these frequencies. As noted previously, Nextel offers primarily dispatch services on its urban analog SMR systems. PCI also emphasizes dispatch in urban areas, notwithstanding its general marketing strategy emphasizing mobile phone service. Geotek is currently providing dispatch- related services in Dallas on 900 MHz bands, with additional facilities under construction in Houston, San Antonio, and El Paso. Other companies are planning to offer voice dispatch services on these frequencies, although the record does not indicate whether these services have commenced. Dispatch services at 220 MHz have been slow to develop because of litigation delays and limited consumer acceptance due in part to relatively higher equipment costs. Cellular and PCS carriers have been authorized to provide dispatch services since 1995, but to date none have launched competing services. 50. Rural Areas. In rural areas and smaller cities, the commercial markets for two- way dispatch service presently include only SMR carriers. Cellular and PCS carriers are authorized to provide dispatch services, but to date none have done so. Similarly, providers employing digital SMR technologies are not expected to offer such services on a widespread basis outside of major metropolitan areas in the near future. While the Commission has recently licensed additional spectrum on 220 MHz and 900 MHz bands suitable for offering dispatch services, it is not presently clear when these services will become available on a significant scale. 4. Market Entry Prospects 51. The federal regulatory environment facing potential mobile communications carriers has changed rather dramatically in recent years. In particular, the manner and terms on which the Commission now licenses wireless spectrum have been altered. Spectrum is being licensed in more suitably sized geographic parcels, auctions have accelerated the pace of licensing, and new policies afford license holders increasingly greater flexibility to use this spectrum in a manner that best meets society's needs. Small businesses have also been afforded special opportunities to acquire spectrum. This new climate has considerably enhanced prospects for entry into wireless communications generally. 52. The Commission is currently implementing policies that should greatly improve opportunities for entry into markets where this merger raises competitive concerns rural markets generally, and urban dispatch markets. In May 1996, the Commission licensed additional 900 MHz spectrum on a much broader geographic basis than the 50 metropolitan areas initially licensed in 1986. In our licensing of C-block PCS spectrum, licenses were auctioned using basic trading areas, which are relatively small geographic parcels. On July 10, 1997, the Commission released its second 800 MHz report, which among other things, clears the way for the auctioning on a wide-area basis of spectrum frozen since 1994. Our forthcoming auction of 220 MHz spectrum is expected to revive activity in dispatch services in particular. SMR spectrum at 220-222 MHz is licensed primarily to parties intending to offer dispatch services, although assorted obstacles have limited growth of this service to date. The Commission has also adopted rules that allow certain wireless carriers to assign portions of their spectrum blocks and/or geographic service areas to other qualified entities, and proposals exist to extend this freedom to other CMRS carriers. A number of partitioning agreements have already been reached by PCS carriers, and others are under negotiation. This flexibility is expected to promote service beyond core markets. 53. Most notable, however, has been the absence to date of entry by cellular and/or PCS providers into the markets for dispatch services. One research group concludes that it seems unlikely that SMR operators will face any meaningful competition for dispatch and group communications service from cellular or PCS companies. This group explains that cellular and PCS networks have been optimized to provide and bill for telephone-like service, and that dispatch would be an uneconomical use of these network s airtime, at least in major metropolitan areas, when compared with alternative uses. Indeed, according to this view, cellular carriers would have to retrofit their networks, and the feasibility of overcoming technical obstacles to provide dispatch capability is uncertain. Nextel disagrees, contending that entry is not constrained by any serious technological limitations, but has been limited by the absence of indications of adequate demand. Nextel suggests that its own success in the dispatch arena may be needed before serious interest in this market is taken by potential competitors. One large manufacturer of wireless communications equipment recently announced that by the spring of 1999 it will offer software, handsets, and other equipment that carriers using CDMA networks need to offer voice dispatch services over cellular and PCS networks. Bell Atlantic NYNEX Mobile is presently testing this system but has not decided whether to proceed with a commercial trial. 54. We believe that entry into dispatch services is not inherently costly, technically challenging, or unduly time-consuming. The architecture of dispatch systems is based on deploying a limited number of towers and the use of high-powered signals. Hence, dispatch services do not involve the costly and time-consuming process of installing multi-cell systems such as those employed by cellular and PCS vendors. In addition, there are no regulatory barriers preventing any spectrum holders from entering this market. While carriers may currently find it more profitable to devote their spectrum to uses other than voice dispatch, substantial growth in mobile communications service capacity, especially in urban centers, is likely to change the relative profitability of these other services and create incentives for carriers to allocate more spectrum to the provision of dispatch-type services. D. Competitive Effects of Merger 55. Having established above the conditions of existing and potential competition in these markets, we turn our focus to the likely effects of the Nextel-Pittencrieff merger on competition in the relevant markets. 1. Interconnected Mobile Phone Services 56. Urban Centers. Independent of whether this merger proceeds as proposed, prospects for competition in many large metropolitan areas appear adequate to promote competitive pricing for interconnected mobile phone services. The proposed merger would result in PCI s withdrawal from these markets, to the extent that PCI is currently present to any meaningful degree, as an independent provider of mobile phone services. However, PCI s spectrum would remain in service and would ultimately be used to deliver a variety of mobile communications services, including interconnected mobile phone service, as Nextel implements its digital system upgrades. 57. Even in cities where PCI s present holdings of 800 MHz spectrum are considerable, the impact of PCI s departure on concentration in urban mobile phone markets is unlikely to be competitively significant. PCI is not an active competitor in these markets, but instead offers its urban customers primarily dispatch services. Moreover, within the immediate future, if not already, consumers in the region's largest cities will be able to choose from among at least four mobile phone competitors (excluding SMR providers) with 110 MHz of total spectrum. By comparison, in the largest metropolitan centers PCI holds 800 MHz licenses with total core spectrum not exceeding 12.5 MHz. While concentration in these markets may increase slightly as a consequence of PCI s withdrawal, this would be more than adequately remedied by Nextel s conversion of PCI's urban analog systems (largely dispatch- only), which will enable Nextel's large-scale entry or expansion into urban interconnected mobile phone markets. 58. While Nextel promises to offer greater rivalry to the region's cellular and PCS companies, its SMR service will appeal primarily to business users who are more inclined to demand a versatile multi-service package. The merger would confer Nextel with 9 to 17 MHz of 800 MHz spectrum in the region's largest cities. (See Appendix A.) However, these interests would still remain well below the spectrum holdings of individual cellular and PCS providers, who control at least 25 or 30 MHz, respectively. Hence, Nextel's ability to market its services aggressively to the broader consumer segments of the market may ultimately hinge on either its ability to acquire additional spectrum or to achieve still greater spectrum efficiency. 59. Rural Areas. The principal benefits from this merger those related to the introduction of digital SMR service would not likely accrue to consumers outside of large metropolitan areas within PCI s footprint for some time to come. Consequently, the effects of this merger for rural customers will depend on the extent to which competition for mobile phone service will diminish in rural markets. PCI s business strategy has been focused on providing mobile phone services in rural areas. Nextel also offers mobile voice services, but only about 10 percent of its subscribers served via the analog systems (which are prevalent in rural areas) are interconnected. Hence, competition in these markets would diminish only to the limited extent to which these companies provide overlapping service. Cellular companies, who are well established throughout the region, are also well positioned to offer dispatch services in these regions should prices increase. Hence, this merger is unlikely to result in Nextel being able to exercise any unilateral market power as a result of the merger. 2. Dispatch Services 60. Urban Centers. The impact of this merger will most directly affect dispatch customers in the major metropolitan areas, where demand for mobile services relative to capacity is highest. PCI and, until recently Nextel, have emphasized the provision of dispatch service in these urban areas. As Nextel rolls out its digital SMR system, and in particular as demand for its digital services grows, Nextel has curtailed its analog dispatch service on 800 MHz. Furthermore, Nextel markets its new digital services as a cellular-like product, and its customers are increasingly electing to use this capacity for interconnected mobile phone services. Nextel would also acquire significant holdings of spectrum in the 900 MHz band that PCI controls. 61. As a result of the merger, Nextel would directly control roughly 45 to 68 percent of the 28.5 MHz of spectrum presently being used, or imminently planned for use, in offering dispatch services, according to our review of licensing records for eight major metropolitan cities in the region. We investigated SMR spectrum holdings in Albuquerque, Austin, Dallas, Houston, Oklahoma City, Phoenix, San Antonio, and Tulsa all cities whose BTA populations exceeded 1 million as of 1996. In two of the eight urban markets we examined, Nextel would control 75 percent or more of the 800 MHz SMR spectrum and 40 percent or more of the 900 MHz SMR spectrum. In addition, Nextel operates a large number of 800 MHz channels that it manages on behalf of third-party licensees. 62. Clearly, this merger will result in an increase in the concentration of spectrum within the SMR bands. However, there are no regulatory barriers preventing potential dispatch service providers from offering services using other bands. The Commission lifted restrictions in 1995 that prevented cellular and PCS companies from offering dispatch services. More recently, the Commission has implemented policies designed to allow CMRS license holders the freedom to use their spectrum more flexibly. Furthermore, Nextel will accelerate the conversion of PCI's analog networks to digital systems, with its attendant beneficial increases in system capacity. Indeed, Nextel's digital systems will continue to provide dispatch capability along with its mobile phone services and other mobile communication features. Thus, to the extent that Nextel's digital systems are used increasingly to provide mobile phone services rather than dispatch services, this process is the result of decisions by consumers to purchase one service over the other. The diversion of this capacity to alternative uses is consistent with the Commission's policies to promote more efficient allocation of spectrum based on market-driven mechanisms. As a general matter, we wish to encourage the adoption of innovative technologies and marketing strategies rather than inhibit such innovation. 63. Rural Areas. The net effects of this merger for rural dispatch customers will depend on whether competition for these services will diminish appreciably. While PCI s business strategy has focused on providing mobile phone services, Nextel offers primarily dispatch services throughout its analog service areas. Hence, competition in the commercial dispatch business would diminish as a result of the merger, but not substantially due to the apparently limited degree of service overlap. Rural areas do not face the conditions of congested spectrum experienced by urban users, and the construction of private SMR systems appears to be more of a viable option for these users. These alternatives are likely to discipline anticompetitive pricing in these markets. E. Pro-Competitive and Efficiency Benefits 64. Nextel and PCI propose to merge their operations and combined spectrum to provide wide-area digital SMR services. Through this and its previous acquisitions, Nextel proclaims that it is transforming a string of formerly overcrowded, spectrally-inefficient SMR systems into a state-of-the-art digital mobile network with the capacity and functionality necessary to address the needs of the modern mobile workforce. Nextel has also previously claimed that its digital SMR services will foster increased competition in the markets for mobile phone services. In broad terms, then, we examine three major alleged pro-competitive or efficiency benefits posited in support of the merger: increased spectrum efficiency, the introduction of innovative digital SMR services, and increased competition for existing telecommunication service carriers. 1. Increased Spectrum Efficiency 65. Nextel claims that its acquisition of PCI will enable it to introduce more spectrally efficient digital technology in PCI's footprint. In this proceeding, Nextel refers to the Commission's previous assessments that a critical mass of spectrum is needed to support the necessary investment in digital technologies. Nextel previously indicated that it needed the spectrum it acquired in the OneComm and Dial Page markets to construct its digital system. Nextel also argues that the infrastructure required to implement wide-area SMR services requires additional SMR spectrum consolidation in these markets. Nextel originally envisioned that its digital mobile service would offer a fifteen-fold increase in spectral efficiency relative to its analog systems. However, consumers did not react favorably to the quality of the voice transmissions in the mobile phone service mode under its first-generation digital technology. Motorola has since reconfigured its iDEN system designed for Nextel, which now provides a three-fold increase in spectrum efficiency for mobile phone service, and a six-fold increase in direct connect (i.e., dispatch) mode. While this technology does not generate the spectrum efficiencies originally anticipated, we conclude that the introduction of these digital systems constitutes a clear public interest benefit. Most notably, digital systems increase system capacity and spectrum reuse potential. Both effects would put downward pressures on consumer prices in a competitive market. PCI also had plans to implement its own digital system prior to its agreement to merge with Nextel. However, these plans do not appear to have progressed very far beyond the initial planning and license application stages. Thus, at the very least, it appears that this merger will accelerate the timetable for digital conversion of PCI's analog spectrum. 66. We also note that this merger would continue the process encouraged by the Bureau in previous SMR merger decisions that has consolidated the fragmented distribution of 800 MHz licenses. More efficient use of this spectrum, now and in the future, will be facilitated by this merger because it will reassemble contiguous spectrum now scattered among multiple users. At present, this will allow Nextel's existing spectrum and that which it acquires from PCI to be employed in more efficient, digital, wide-area systems. In the future, this consolidation will also increase the ability to reallocate this spectrum efficiently in response to market incentives. These efficiency benefits can be ascribed to Nextel's acquisition of spectrum throughout the region, including markets where Nextel has already deployed digital technologies. 2. Introduction of Digital SMR Service 67. Nextel is constructing a near-nationwide digital mobile communications network that will offer a wider range of features, better security, and improved transmission quality relative to existing cellular products. These services will be available on an integrated handset, with unified billing and customer support. Nextel also asserts that the merger is needed to extend digital coverage to its existing customers. Nextel further claims that, with its digital SMR services, it has bridged the gap between traditional dispatch radio service and advanced mobile telephony, thereby offering meaningful competition to firms at both ends of the service and functionality continuum. 68. While we recognize the value to society and to consumers represented by the introduction of this integrated package of mobile communications SMR services, Nextel's claims that it needs PCI's spectrum to launch its digital services or offer roaming capability to its existing digital subscribers are dubious. Nextel has already launched full-scale digital service in four cities within the region. However, we agree that Nextel's acquisition of PCI s spectrum in these communities will enable Nextel to realize cost economies in its multi-cellular architecture. Nextel has also constructed digital facilities in over 200 cities throughout the country by recovering some analog spectrum to allow its nationwide digital customers to roam with full functionality. Hence, the merger does not appear to be necessary to extend services to Nextel s roaming digital customers based outside the region. Nevertheless, Nextel's marketing strategy, and its credibility as a competitive rival to PCS and cellular companies, revolve around being the first company to integrate dispatch capability into a mobile communications device, and to offer this service on a near-nationwide basis. Nextel will need the spectrum currently held by PCI to offer its digital services to consumers residing in Albuquerque, Austin, and San Antonio. Nextel's ability to offer nationwide service is dependent upon its ability to launch digital services throughout all of the major metropolitan markets in the country. Nextel's acquisition of PCI s holdings would also serve to expand its capacity or extend its geographic range of service within the region's other metropolitan areas where it has already been able to launch its digital services. 3. Increased Competition for Cellular/PCS 69. At one time, Nextel proclaimed that it was positioning itself to become the third cellular carrier (prior to the advent of PCS), but with a national footprint. In mid-1995, however, Nextel altered its plans considerably, such that it no longer claim[ed] to be targeting the individual cellular subscriber market. Instead, Nextel seeks to target its sales efforts toward business work groups. 70. As a result of this marketing reorientation, the Commission subsequently determined that wide-area SMR should be considered competitive with cellular, but only in terms of the business market, particularly high-volume mobile communications users. Nevertheless, one securities firm has noted that recent advertising and pricing initiatives suggest that Nextel may be returning its attention to the non-business markets. Nextel's digital rollouts have been accompanied by marketing campaigns emphasizing the absence of roaming charges and measuring airtime in per-second rather than one-minute increments. Nextel's focus on these attributes of its service take aim at a broader cellular market. Existing cellular and PCS users would benefit considerably if these current competitive distinctions were to be copied, just as the innovative marketing that accompanied the introduction of PCS motivated cellular companies to react. 71. The Commission has previously determined that [l]imiting the aggregation of 800 MHz spectrum could handicap . . . potential competitors to broadband PCS and cellular providers with equal or larger spectrum holdings. Individual cellular providers, it should be noted, hold 25 MHz of spectrum, while A-, B- and C-block PCS providers have been awarded licenses for 30 MHz. Nextel's strategy of marketing initially to high-volume business users but eventually to a broader market is premised on its ability to aggregate spectrum within the smaller SMR band. We believe the aggregation that would occur as a result of this merger is consistent with the Commission's policy goals for the 800 MHz SMR band and increases the likelihood that Nextel will provide competition to cellular and PCS carriers in the relevant geographic markets and nationwide. VI. CONCLUSIONS 72. Nextel and PCI both currently provide dispatch and mobile phone services, among others, throughout PCI's service area. Hence, this merger has some potential to affect consumers of dispatch and mobile phone services in this region by reducing competition. While we find that the merger would result in reduced competition in several relevant markets, many more consumers would benefit directly as digital system upgrades are accelerated and provide increased capacity and expanded services. Other consumers may benefit indirectly from the competitive pressures that Nextel's digital service package appears likely to impose on the region's cellular and PCS carriers. In our efforts to weigh these factors, we take note that nationwide there are roughly twenty times the number of cellular/PCS subscribers relative to commercial SMR units in operation. A. Impact in Rural Markets 73. In rural areas within the region, we conclude that this merger would result in some small level of diminished competition among providers of dispatch and mobile phone services. Nextel and PCI both offer interconnected mobile phone and dispatch services. However, in these rural areas, PCI has focused primarily on providing interconnection, while Nextel has provided principally dispatch services. Hence, the limited degree to which these firms compete head-on attenuates our anticompetitive concerns. Moreover, the abundance of radio spectrum relative to demand in these outlying rural areas appears to afford existing providers and potential entrants with ample opportunities to provide these services, should economic incentives to do so become attractive. We are unaware of technical or regulatory barriers that would otherwise constitute a significant barrier to entry facing potential providers of these services. B. Impact in Urban Markets 74. In urban centers, the impact of this merger on competition is more complex. This merger will increase the concentration in urban markets for dispatch services, where competition is currently quite limited. In many instances, this merger would remove Nextel s largest existing dispatch competitor in the 800 MHz band. Moreover, Nextel would also acquire licenses controlled by PCI in the 900 MHz band, a major alternative vehicle for entry into these markets. As a direct consequence, Nextel would likely achieve or strengthen its dominant position in the urban markets for dispatch services within this region. However, the introduction and expansion of digital systems will afford dispatch consumers now served by Nextel and PCI with access to more capacity, a broader range of features, better security, and improved transmission quality. In particular, Nextel's conversion of PCI's spectrum not only will not divert dispatch capacity, but it will expand total transmission capacity and allow consumers to choose which services they wish to receive. On balance, we find that the benefits to urban users of mobile phone and business communications services outweigh the potential adverse effects of removing a significant competitor from urban dispatch markets. Until recently, Nextel has targeted high- volume business users with its business oriented services. The additional spectrum that Nextel is acquiring through this and its other acquisitions should provide it with incentives to expand its marketing efforts, thereby extending these benefits to additional users. 75. For users of interconnected mobile phone services, this merger will also likely contribute to the competition now developing in these markets. Neither firm is currently able to offer interconnected phone service to any significant extent on their existing analog systems because of high subscriber loads, difficulties adding capacity, and system priorities afforded to dispatch users. This merger will facilitate the upgrade of PCI's existing urban analog systems to digital, thereby allowing this spectrum to be used more efficiently. It will also permit the introduction of or expanded capacity for new service packages, which among other attributes, provide more reliable access to the public switched telephone network. 76. Nextel and PCI are both profit-driven enterprises inclined to tailor their offerings to those customers who will place the highest value on (i.e., pay the most for) their services. The fact that they propose, in effect, to devote PCI's spectrum to the expansion of Nextel's digital service in lieu of emphasizing traditional dispatch leads us to conclude that more consumers want, and are evidently willing to pay for, such digital service rather than traditional dispatch. We do not wish to frustrate the evident message that the marketplace has transmitted by obstructing the conversion of PCI's spectrum to digital services. Our general policy is to devote spectrum to its most highly-valued use. This is what Nextel proposes to do. If this has the effect of reducing the supply of traditional dispatch services, then these services constitute an less efficient use of this spectrum compared with digital mobile communications services. We will not preserve markets for their own sake, without regard to considerations in other markets and overall economic efficiency. Therefore, we find that the reduction of competition in the traditional dispatch market is outweighed by the pro-competitive effects in the digital mobile communications markets and the overall goal of achieving greater economic efficiency that competition promotes. 77. We conclude that the benefits that will accrue to urban, interconnected mobile phone users, together with the enhanced capacity, capabilities, and transmission quality of services available to urban dispatch-oriented customers, outweigh the possible harms that may result from diminished competition in these relevant markets generally. In particular, we note that in urban dispatch markets, where our competitive concerns may be the greatest, this merger will effectively facilitate an increase in transmission capacity. Indeed, this merger offers no likely prospect for mobile communications capacity being withdrawn anywhere within the affected region. This conclusion generally addresses the prospect raised on antitrust principles that is of utmost concern, namely that the merged entity will restrict supply and thereby raise prices. V. ORDERIN G CLAUSES 78. Accordingly, having reviewed the applications and the record in this matter, IT IS ORDERED, pursuant to Section 4(i) and (j), 309, and 310(d) of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), 154(j), 309, 310(d), that the applications filed by Pittencrieff Communications, Inc. and Nextel Communications, Inc. in the above-referenced proceedings ARE HEREBY GRANTED. 79. IT IS FURTHER ORDERED that the above grant shall include authority for Nextel to acquire control of: a) any authorization issued to Pittencrieff's subsidiaries and affiliates during the Commission's consideration of the transfer of control applications and the period required for consummation of the transaction following approval; b) construction permits held by licensees involved in this transfer that mature into licenses after closing and that may have been omitted from the transfer of control applications; and c) applications that will have been filed by such licensees and that are pending at the time of consummation of the proposed transfer of control. 80. IT IS FURTHER ORDERED that the Report and Order SHALL BE EFFECTIVE upon release in accordance with 47 C.F.R.  1.103. FEDERAL COMMUNICATIONS COMMISSION WIRELESS TELECOMMUNICATIONS BUREAU Daniel Phythyon Bureau Chief