Not So Fast, DoJ

by Mike Wendy on September 1, 2011

Yes, it’s true that in a practical sense the DoJ’s move to block the AT&T / T-Mobile merger puts the deal’s approval on shakier ground.  Contemporaneous, similar concerns noted by FCC Chairman, Julius Genachowski, aren’t any more hopeful for the deal either.

But, much as the left-leaning anti-merger crowd has crowed that you can stick a fork in the deal…well, the fat lady hasn’t yet sung.  And, there’s ample reason to believe she may not ever.

According to the Wall Street Journal today:

To be sure, just because the U.S. government has filed to block the transaction, it isn’t yet over. AT&T made clear it would fight the case. There are precedents for companies winning–notably Oracle beating back a Justice Department challenge over its PeopleSoft acquisition in 2004…

As it pertains to the Oracle model, WSJ’s Rolfe Winkler notes:

…In the PeopleSoft case, the judge ignored the government’s key evidence: testimony from PeopleSoft customers apprehensive about the deal. He also disagreed with the government’s contention that customers had only three large suppliers for business-applications software, which would fall to two. Others could emerge if Oracle raised prices, say.

Given huge capital costs in wireless, new entrants aren’t likely. But AT&T argues there is plenty of competition when you include regional players. The judge could agree.

Interestingly, Ellen Segal Huvelle, who will hear the case against AT&T, previously smacked down the Justice Department when it challenged SunGard’s proposed acquisition of Comdisco’s disaster-recovery business 10 years ago. Similar to the Oracle case, the government argued that the number of competitors would fall from 3 to 2. But Ms. Huvelle concluded that the Justice Department had a too-narrow view of the market.

Technology scholar, Larry Downes, seems to confirm this, writing in Forbes:

Last year, the same DoJ cautioned other regulators that the mobile services market is unlikely to ever resemble “a textbook model of perfect competition.”  Nor, the agency argued, should it.  Yet despite high costs of entry and regulatory limits on spectrum availability and infrastructure investment, new technologies (LTE, satellite, microwave, and higher-frequency communications) and new competitors continue to enter the market all the time.  Mobile competition is increasing, not shrinking to a “duopoly.”

LightSquared, for example, has already raised $5 billion to offer satellite-based mobile broadband to 100 million consumers, a network held back only by waffling regulators.  And just last week, Dish Network made clear that its planned acquisition of spectrum from TerreStar will allow it to offer a competitive mobile broadband service.  As Recon Analytics’ Roger Entner notes,, “the country’s third largest pay-TV provider with more than 14 million customers, [Dish] will be positioned as a formidable provider of a complete telecom offer–Internet, TV and mobile–with greater geographic and population reach than AT&T, CenturyLink, Comcast, Cox, or Verizon.”

Amplifying this, industry watcher Geoffrey Manne opines:

…[T]he DOJ does seem to make a lot out of its HHI [market concentration] numbers. In part this is a function of its adoption of a national relevant geographic market. But…this is just absurd. As the FCC itself has noted, consumers buy cell service where they “live, work and travel.” For most everyone, this is local.

Meanwhile, even on a national level, the blithe dismissal of a whole range of competitors is untenable. MetroPCS, Cell South and many other companies have broad regional coverage (MetroPCS even has next-gen LTE service in something like 17 cities) and roaming agreements with each other and with the larger carriers that give them national coverage. Why they should be excluded from consideration is baffling. Moreover, Dish has just announced plans to build a national 4G network (take that, DOJ claim that entry is just impossible here!). And perhaps most important the real competition here is not for mobile telephone service. The merger is about broadband. Mobile is one way of getting broadband. So is cable and DSL and WiMax, etc. That market includes such insignificant competitors as Time Warner, Comcast and Cox. Calling this a 4 to 3 merger strains credulity, particularly under the new merger guidelines.

Moreover, the DOJ already said as much! In its letter to the FCC on the FCC’s National Broadband Plan the DOJ says:

Ultimately what matters for any given consumer is the set of broadband offerings available to that consumer, including their technical characteristics and the commercial terms and conditions on which they are offered. Competitive conditions vary considerably for consumers in different geographic locales.

The DOJ also said this, in the same letter:

[W]ith differentiated products subject to large economies of scale (relative to the size of the market), the Department does not expect to see a large number of suppliers. . . . [Rather, the DOJ cautions the FCC agains] striving for broadband markets that look like textbook markets of perfect competition, with many price-taking firms. That market structure is unsuitable for the provision of broadband services.

Other industry think-tankers – such as economist and former FTC official, Jerry Ellig –  see the DoJ move as an opportunity for AT&T:

I can’t help but think that there might be  a big advantage of having the AT&T-T-Mobile merger go to court.  For once, the high-profile action everyone pays attention to will occur in an antitrust forum where the decision criterion is the effects of the merger on consumer welfare, period.   Regardless of what one thinks about the merger, it’s nice to see that we’ll finally have a knock-down, drag-out fight based on whether a big telecommunications merger harms consumers and competition.  That’s the antitrust standard the Department of Justice has to satisfy in order to prevent the merger.

This will be a refreshing change from the Federal Communications Commission’s “public interest” standard, which allows the commission to object on grounds other than consumer welfare and demand all manner of concessions that have nothing to do with remedying anticompetitive effects of a deal…

…In short, if AT&T wins in court, the FCC should approve the merger promptly without additional conditions.

The first big hurdle for the DoJ suit will be whether the judge approves AT&T’s request to expedite a hearing.  If that does not occur, then the deal – through delay – faces a stiffer chance of going through regardless of whether AT&T wins on the merits.

Of course, this could change, too.  As the Washington Post notes:

There is still time, however, for the deal to go through with some modifications. Justice officials said Wednesday that “the door was open” for AT&T to sit at the table and negotiate.

This route may become more important, or realistic, as the administration may want to deflect criticism that it – through its DoJ – stands in the way of a deal that has been billed as being a job creator in a time of high, sustained unemployment – a deal that also has strong support from traditional allies of the administration.

Writes the Hill:

While the merger involved some of the biggest names in business, the deal also enjoyed strong support from organized labor. The Communications Workers of America (CWA), the largest media labor union, was a big backer of the deal, as T-Mobile’s non-union workforce would be assimilated within AT&T’s union employees.

As a result, DOJ’s decision to throw a blockade in front of the deal has earned the ire of a political force that Obama will need to harness in 2012.
 The CWA blasted the move as “simply wrong.”

“The DOJ apparently believes that workers should be on their own instead of having a fair choice about union representation,” it said.

I don’t think the fat lady has even entered the opera hall.  In fact, she may have to cancel her performance altogether.

One can only hope.  I’m tired of hearing her sing.

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