Decoding the DOJ’s Lawsuit Against the AT&T and T-Mobile Merger

8/31/11Follow @curtwoodward

The federal government has put its foot on AT&T’s proposed $39 billion buyout of Bellevue, WA-based T-Mobile USA, filing a lawsuit today that yanks the merger away from regulators at the Federal Communications Comission and puts the whole thing in the court system. If the Justice Department has its way, that’s where the story will end. AT&T, for its part, says it didn’t see the lawsuit coming and will fight for the deal.

Killing the deal would prompt AT&T to pay T-Mobile’s parent company, Deutsche Telekom, a hefty breakup fee of cash and spectrum valued at about $7 billion. Interestingly, DT had been looking to unload T-Mobile and get out of the U.S. market because it apparently wasn’t interested in spending the money to build out a next-generation network. Could the breakup package, if it comes to that, make T-Mobile an attractive unit again for the German company? Or would it still try a spin-off or some other change?

The Justice Department’s antitrust lawsuit emphasizes three big points: Consumers will inevitably pay more when they have fewer wireless carriers to choose from, business and government contracts will have fewer bidders, and the market is so well-established nationally that nobody else is likely to charge in and fill the No. 4 spot behind AT&T, Verizon, and Sprint.

You can check out the entire complaint here, where the DOJ has uploaded its filing as a PDF. Skip the cover sheet, read pages two and three for an overview, and jump down to the bottom of page 12 to get to the actual meat of the complaint—everything in between is a recitation of facts and court procedure.

CONSUMERS
The lawsuit devotes most of its attention to this topic. The lawsuit’s argument leans in several places on T-Mobile’s previous marketing and promotional materials positioning itself as the challenger to the other big three carriers, a low-cost competitor, and an innovator—even though some of those innovations are pretty stale, such as the introduction of the Sidekick phone and BlackBerry e-mail.

The lawsuit returns a couple of times to the fact that T-Mobile competes on wireless plan price and has targeted millions of people who don’t have smartphones yet. The DOJ says AT&T wouldn’t keep those lower-end plans alive post-merger, driving up costs for consumers.

One interesting tidbit is the DOJ’s citation of an internal AT&T document from early 2010, analyzing broadband rollouts by competitors, which is quoted as saying “the more immediate threat to AT&T is T-Mobile … The one-two punch of an advanced network and the backhaul required to support the additional data demands should be taken seriously.”

The feds also say that AT&T, Sprint and Verizon would be far more likely to fix prices and otherwise cheat consumers—or as the lawyers call it, “an enhanced risk of anticompetitive coordination.”

“Certain aspects of mobile wireless telecommunications services markets, including transparent pricing, little buyer­side market power, and high barriers to entry and expansion, make them particularly conducive to coordination. Any anti-competitive coordination at a national level would result in higher nationwide prices (or other nationwide harm) by the remaining national providers, Verizon, Sprint, and the merged entity,” the lawsuit says on page 16.

The DOJ adds that there is plenty of evidence that T-Mobile is not just an inconsequential small player, but actually competes head-to-head with AT&T—and there’s even a shout-out to the marketers who came up with the magenta-dress-wearing gal who pokes fun at AT&T in those ubiquitous TV commercials.

“Documents produced by AT&T and T -Mobile establish that a significant portion of customers who ‘chum’ from AT&T switch to T-Mobile, and vice versa. This shows a significant degree of head-to-head competition between the two companies, as demonstrated by T-Mobile’s recent television ads directly targeting AT&T,” the complaint says on page 18.

BUSINESS & GOVERNMENT
The DOJ also points out that reducing the number of carriers could lead to higher prices on bids for big business and government contracts. The feds acknowledge that this hasn’t been a big area for T-Mobile, but says that it was poised for change, and would have expected it to continue competing on price.

“In the past, enterprise and government customers were not a primary focus for T-Mobile. As part of its 2011 business plan, however, T-Mobile re-dedicated itself to becoming a bigger player with the stated goal of growing enterprise revenues substantially by 2013,” the complaint says on page 19.

BARRIERS TO ENTRY
Finally, the DOJ points out that national wireless carriers have grown to the point where it’s essentially a closed market for new competitors—the government made the point several times in the filing that local or regional carriers are just bit players, and “none is as effective a constraint as is T-Mobile on AT&T, Verizon, and Sprint.”

“To replace the competition that would be lost from AT&T’ s elimination of T-Mobile as an independent competitor … a new entrant would need to have nationwide spectrum, a national network, scale economies that arise from having tens of millions of customers, and a strong brand,” the DOJ writes on page 20. “Therefore, entry in response to a small but significant price increase for mobile wireless telecommunications services would not be likely, timely, and sufficient to thwart the competitive harm resulting from AT&T’ s proposed acquisition of T-Mobile, if it were consummated.”

NOT CONVINCED
AT&T’s main stated justification for buying T-Mobile is its spectrum, which is becoming increasingly valuable as more consumers adopt bandwidth-gobbling smartphones and tablets. Of course, AT&T would get millions more subscribers to boot. The DOJ’s lawsuit brushes aside the spectrum argument thusly: “The Defendants cannot demonstrate merger-specific, cognizable efficiencies sufficient to reverse the acquisition’s anti competitive effects.”

Curt Woodward is a senior editor for Xconomy based in Boston. Email: cwoodward@xconomy.com Follow @curtwoodward

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  • Tangair

    No problem. This will go away as soon as DT and AT&T boards are brought into conversation with Eric Holder’s DOJ. I smell a shake-down.