Telcom Merger Opposed by Justice Department

[Andrew J.]

From the New York Times

U.S. Moves to Block Merger Between AT&T and T-Mobile
By EDWARD WYATT

WASHINGTON — The Justice Department on Wednesday sued to block the proposed $39 billion merger between the cellphone giants AT&T and T-Mobile USA, arguing that keeping them separate would preserve competition in the wireless industry and even help save jobs of American workers.

In a lawsuit filed in Federal District Court here, the Justice Department argued that the proposed deal, which would join the nation’s second- and fourth-largest wireless phone carriers, would result in higher prices and give consumers fewer innovative products. The companies disputed those assertions, and labor unions that support the deal said that the merger would add jobs, not cost them.

“The view that this administration has is that through innovation and through competition, we create jobs,” said James M. Cole, the deputy attorney general, at a news conference announcing the lawsuit. Mergers usually reduce jobs through the elimination of redundancies, he said, “so we see this as a move that will help protect jobs in the economy, not a move that is going in any way to reduce them.”

The lawsuit, which could take years to wind its way through the courts, sets up a prominent antitrust battle — a rarity since the election of President Obama, who campaigned with promises to revitalize the Justice Department’s policing of mergers and their effects on competition, which he said had declined significantly under the Bush administration.

AT&T said it would fight the lawsuit. “We plan to ask for an expedited hearing so the enormous benefits of this merger can be fully reviewed,” Wayne Watts, an executive vice president and general counsel at AT&T, said in a statement. “The D.O.J. has the burden of proving alleged anticompetitive effects, and we intend to vigorously contest this matter in court.”

Deutsche Telekom, the German parent of T-Mobile USA, said that the Justice Department “failed to acknowledge the robust competition in the U.S. wireless telecommunications industry and the tremendous efficiencies associated with the proposed transaction, which would lead to significant customer, shareholder and public benefits.”

AT&T has been actively involved in discussions with both the Justice Department and the Federal Communications Commission since the proposal was announced in March. The company has indicated that it would consider divestitures or other business actions to allow the deal to go forward.

But Justice Department officials said that those discussions led it to believe that it would be difficult to arrange conditions under which the merger could proceed. “Unless this merger is blocked, competition and innovation will be reduced, and consumers will suffer,” said Sharis A. Pozen, acting assistant attorney general in charge of the antitrust division. Offering AT&T only a glimmer of hope, she added that the department’s “door is open” to discuss possible remedies.

Both the F.C.C. and the Justice Department would need to approve the merger, and though they consider a proposed combination on different scales, they usually reach the same conclusion. The F.C.C., which has never approved a significant merger that the Justice Department is challenging in court, hinted that it was leaning in the same direction of blocking the AT&T deal with T-Mobile.

“Competition is an essential component of the F.C.C.’s statutory public interest analysis,” said Julius Genachowski, the F.C.C. chairman. “Although our process is not complete, the record before this agency also raises serious concerns about the impact of the proposed transaction on competition.”

Consumer advocacy groups cheered the administration’s move. “This announcement is something for consumers to celebrate,” said Parul P. Desai, the policy counsel for Consumers Union. “We have consistently warned that eliminating T-Mobile as a low-cost option will raise prices, lower choices and turn the cellular market into a duopoly controlled by AT&T and Verizon.”

Harold Feld, legal director of Public Knowledge, a nonprofit group, said that “fighting this job-killing merger is the best Labor Day present anyone can give the American people.” Labor groups, however, have generally supported the merger, in part because a substantial number of AT&T employees are members of the Communication Workers of America, while T-Mobile is a largely nonunion company.

Mr. Cole said the department thought that an independent T-Mobile would be more likely to expand its business and add jobs, while mergers often eliminate jobs.

Critics have faulted the Obama administration for not doing more to block big corporate mergers. Those involving Comcast and NBC Universal, Ticketmaster and Live Nation, and United and Continental Airlines were all approved with conditions attached.

But the challenge to the merger makes the future of an independent T-Mobile more of a question than before the deal was announced. Deutsche Telekom has said it does not want to continue to invest in the American wireless market, preferring to focus on the growth of its telecommunications business in Europe.

Before AT&T announced plans to buy T-Mobile, there was consistent speculation that a merger between T-Mobile and Sprint Nextel, the third-largest provider, was in the works. But such a deal seems unlikely in light of the arguments mustered by the Justice Department against the AT&T deal.

Those arguments include the assertion that a combination that took the number of nationwide wireless phone providers down to three from four would harm competition, because the four nationwide service providers already account for more than 90 percent of the mobile wireless connections nationwide.

The proposed merger has been a topic of robust debate in Congress, where both houses have held committee hearings on the merger. At one of them in May, Randall L. Stephenson, the chief executive of AT&T, tried to convince lawmakers that AT&T and T-Mobile should not even be considered as competitors.

He later abandoned that assertion, going back to the company’s main point: While the two companies are competitors, plenty of other competition exists in local wireless markets, with most potential customers having a choice among at least five providers.

“Certain critics may attempt to create a myth that only a few national competitors exist, but wireless competition occurs primarily on the local level,” Mr. Stephenson said.

The Justice Department turned some of AT&T’s own statements against it, however. “As AT&T acknowledged less than three years ago during a merger proceeding,” referring to AT&T’s acquisition of Centennial Wireless, “it aims to ‘develop its rate plans, features and prices in response to competitive conditions and offerings at the national levels — primarily the plans offered by the other national carriers,’ ” the Justice Department said in its lawsuit. “As AT&T recognized, ‘the predominant forces driving competition among wireless carriers operate at the national level.’ That remains the case today.”

[kc8tbe]

As well the merger should be opposed, especially after this information came to light:
http://www.broadbandreports.com/shownews/113065

To begin with there are really only four telecoms in the US that operate large networks of their own: Verizon, AT&T, T-Mobile, and Sprint. Pretty much everyone else has to lease bandwidth from them. Of those four, AT&T and T-Mobile are the only GSM providers. So if they merge, AT&T will have a monopoly on GSM networks in the US. How the formation of such a monopoly can not run afoul of anti-trust laws is a mystery to me.

The sad thing is, every since the merger was announced T-Mobile's customer service, once the best in the US, has (in my anecdotal experience) really gone down the toilet as evidenced by their loss of half a million customers in Q2 of 2011. When my contract is up I'll probably switch to someone else even if the company still exists as an independent entity at that time.

[Master of Ossus]

The thing is, Deutsche Telecom has already announced that they're done investing in the T-Mobile network. So T-Mobile can't possibly upgrade to 4G in the foreseeable future, nor can they significantly expand either their capacity or their coverage. So the question should really be, "Is it better for consumers if T-Mobile just dies a slow death and probably firesales its assets within the next 5 or 10 years, or is it better if they are sold as a collective block to AT&T?" I'm sure there are arguments both ways, but the latter position seems stronger: AT&T is the only nationwide carrier that can easily integrate their existing capital (since Verizon and Sprint both use different technologies to form their network backbones). There seem to be more efficiencies in allowing AT&T to buy them up rather than just leaving them to die and then divide what's left into many hundreds or thousands of pieces, later.

[kc8tbe]

If Deutsche Telecom really does pull out (which I think would be idiot move by them, but hey... short term corporate profit, right?) AT&T will just end up owning T-Mobile anyway, and for much less than $39 billion. Like you said, AT&T it the only carrier that can integrate their existing capital. I see three possible outcomes:

1. AT&T buys T-Mobile outright and becomes a monopoly.
2. Deutsche Telecom pulls out, AT&T buys T-Mobile and becomes a monopoly.
3. Deutsche Telecom stays, things continue as they are now.

If AT&T thought (2) was likely, I don't think they would have bid $39 billion for T-Mobile. Why pay top price when you can buy for a fraction of the cost in a couple of years? The Fed may be thinking this too. If they let the merger go ahead, there's a 100% chance AT&T gets its monopoly position. If they block the merger, then there is still a chance AT&T wins the game of monopoly, but it's less than 100%.

[Master of Ossus]

If Deutsche Telecom really does pull out (which I think would be idiot move by them, but hey... short term corporate profit, right?)

Serious question: why is it an idiot move? What evidence is there that T-Mobile can compete long-term with AT&T and Verizon, given that they've hemmorhaged subscribers despite slashing their prices and have lost money for four of the last five years? Moreover, DT doesn't have enough cash to upgrade even their European network unless the sale goes through, so it's really an issue that their overall operations haven't been bringing in enough to reinvest as it is. T-Mobile was just an albatross.

AT&T will just end up owning T-Mobile anyway, and for much less than $39 billion. Like you said, AT&T it the only carrier that can integrate their existing capital. I see three possible outcomes:

1. AT&T buys T-Mobile outright and becomes a monopoly.
2. Deutsche Telecom pulls out, AT&T buys T-Mobile and becomes a monopoly.
3. Deutsche Telecom stays, things continue as they are now.

If AT&T thought (2) was likely, I don't think they would have bid $39 billion for T-Mobile. Why pay top price when you can buy for a fraction of the cost in a couple of years?

A parcelled out T-Mobile isn't nearly as valuable to AT&T as the complete package is. AT&T's spotty coverage is instantly fixed with T-Mobile, whereas the parcelled-out network doesn't provide nearly this benefit and requires years of additional network layout which would distract from the upgrade to 4G. Arguably more important, discontinuous blocks of spectrum are very expensive to properly utilize and vastly less efficient than contiguous blocks, and so if they only buy up 90% of the spectrum that's dramatically less than 90% as valuable as the entire T-Mobile tract.

The Fed may be thinking this too. If they let the merger go ahead, there's a 100% chance AT&T gets its monopoly position. If they block the merger, then there is still a chance AT&T wins the game of monopoly, but it's less than 100%.

I don't see how a company with 41.6% of the market="100% monopoly position" when having a company with 32% marketshare isn't already a monopoly. AT&T+T-Mobile isn't that much bigger than Verizon is right now, and given DT's announced refusal to continue to invest capital in T-Mobile (which they really can't do--it's not an issue of short-term focus), I cannot see how they can continue to compete.

I'm pretty ambivalent in terms of the monopoly argument since I don't understand why regulation of the telecom market under a single firm would be so objectionable, but I certainly understand that if the DoJ can block the merger then substantial value will be destroyed, and that seems like a net drain on society rather than a positive.

[phongn]

I don't see how a company with 41.6% of the market="100% monopoly position" when having a company with 32% marketshare isn't already a monopoly. AT&T+T-Mobile isn't that much bigger than Verizon is right now, and given DT's announced refusal to continue to invest capital in T-Mobile (which they really can't do--it's not an issue of short-term focus), I cannot see how they can continue to compete.

AT&T&T by itself wouldn't be a monopoly, no. The fear is that we'll end up with two national carriers (in such an environment, Sprint is unlikely to survive and will probably be devoured by Verizon) with virtually no competition.

Should the deal fall through, T-Mobile USA stands to receive a fairly handsome package - $3bn in cash plus spectrum plus some use of AT&T's network. It won't be enough to get them into the magic land of LTE, but it does strengthen their position.

I'm pretty ambivalent in terms of the monopoly argument since I don't understand why regulation of the telecom market under a single firm would be so objectionable, but I certainly understand that if the DoJ can block the merger then substantial value will be destroyed, and that seems like a net drain on society rather than a positive.

A tightly-regulated telecom monopoly isn't necessarily a bad thing but it seems likely that a national market of two Bells would be not exactly be well-regulated.