As Josh noted, the DOJ filed a complaint today to block the merger.  I’m sure we’ll have much, much more to say on the topic, but here are a few things that jump out at me from perusing the complaint:

• The DOJ distinguishes between the business (“Enterprise”) market and the consumer market.  This is actually a good play on their part, on the one hand, because it is more sensible to claim a national market for business customers who may be purchasing plans for widely-geographically-dispersed employees.  I would question how common this actually is, however, given that, I’m sure, most businesses that buy group cell plans are not IBM but are instead pretty small and pretty local, but still, it’s a good ploy.
• But it has one significant problem:  The DOJ also seems to be stressing a coordinated effects story, making T-Mobile out to be a disruptive maverick disciplining the bigger carriers.  But–and this is, of course an empirical matter I will have to look in to–I highly doubt that T-Mobile plays anything like this role in the Enterprise market, at least for those enterprises that fit the DOJ’s overly-broad description.  In fact, the DOJ admits as much in para. 43 of its Complaint.  Of course, the DOJ claims this was all about to change, but that’s not a very convincing story coupled with the fact that DT, T-Mobile’s parent, was reducing its investment in the company anyway.  The reality is that Enterprise was not a key part of T-Mobile’s business model–if it occupied any cognizable part of it at all– and it can hardly be considered a maverick in a market in which it doesn’t actually operate.
• On coordinated effects, I think the claim that T-Mobile is a maverick is pretty easily refuted, and not only in the Enterprise realm.  As Josh has pointed out in his Congressional testimony, a maverick is a term of art in antitrust, and it’s just not enough that a firm may be offering products at a lower price–there is nothing “maverick-y” about a firm that offers a different, less valuable product at a lower price.  I have seen no evidence to suggest that T-Mobile offered the kind of pricing constraint on AT&T that would be required to make it out to be a maverick.
• Meanwhile, I know this is just a complaint and even post-Twombly pleading standards are lower than standards of proof, but the DOJ does seem t make a lot out of its HHI numbers.  In part this is a function of its adoption of a national relevant geographic market.  But (as noted above even for most Enterprise customers) 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.

Quite the different tune, now that it’s the DOJ’s turn to spring into action rather than simply admonish the antitrust activities of a sister agency!

I’m sure there is lots more, but I must say I’m really surprised and disappointed by this filing.  Effective, efficient provision of mobile broadband service is a complicated business.  It is severely hampered by constraints of the government’s own doing — both in terms of the government’s failure to make available spectrum to enable companies to build out large-scale broadband networks, and in local governments’ continued intransigence in permitting new cell towers and even co-location of cell sites on existing towers that would relieve some of the infuriating congestion we now experience.

This decision by the DOJ is an ill-conceived assault on innovation and progress in what may be the one shining segment of our bedraggled economy.

Filed under: antitrust, business, doj, error costs, merger guidelines, mergers & acquisitions, technology, telecommunications Tagged: at&t, Federal Communications Commission, t-mobile, United States Department of Justice

More on this later.  For now, here is the complaint and the press release:

WASHINGTON – The Department of Justice today filed a civil antitrust lawsuit to block AT&T Inc.’s proposed acquisition of T-Mobile USA Inc.   The department said that the proposed $39 billion transaction would substantially lessen competition for mobile wireless telecommunications services across the United States, resulting in higher prices, poorer quality services, fewer choices and fewer innovative products for the millions of American consumers who rely on mobile wireless services in their everyday lives.

The department’s lawsuit, filed in U.S. District Court for the District of Columbia, seeks to prevent AT&T from acquiring T-Mobile from Deutsche Telekom AG.

“The combination of AT&T and T-Mobile would result in tens of millions of consumers all across the United States facing higher prices, fewer choices and lower quality products for mobile wireless services,” said Deputy Attorney General James M. Cole.   “Consumers across the country, including those in rural areas and those with lower incomes, benefit from competition among the nation’s wireless carriers, particularly the four remaining national carriers.   This lawsuit seeks to ensure that everyone can continue to receive the benefits of that competition.”

“T-Mobile has been an important source of competition among the national carriers, including through innovation and quality enhancements such as the roll-out of the first nationwide high-speed data network,” said Sharis A. Pozen, Acting Assistant Attorney General in charge of the Department of Justice’s Antitrust Division.   “Unless this merger is blocked, competition and innovation will be reduced, and consumers will suffer.”

Mobile wireless telecommunications services play a critical role in the way Americans live and work, with more than 300 million feature phones, smart phones, data cards, tablets and other mobile wireless devices in service today.   Four nationwide providers of these services – AT&T, T-Mobile, Sprint and Verizon – account for more than 90 percent of mobile wireless connections.   The proposed acquisition would combine two of those four, eliminating from the market T-Mobile, a firm that historically has been a value provider, offering particularly aggressive pricing.

According to the complaint, AT&T and T-Mobile compete head to head nationwide, including in 97 of the nation’s largest 100 cellular marketing areas.   They also compete nationwide to attract business and government customers.  AT&T’s acquisition of T-Mobile would eliminate a company that has been a disruptive force through low pricing and innovation by competing aggressively in the mobile wireless telecommunications services marketplace.

The complaint cites a T-Mobile document in which T-Mobile explains that it has been responsible for a number of significant “firsts” in the U.S. mobile wireless industry, including the first handset using the Android operating system, Blackberry wireless email, the Sidekick, national Wi-Fi “hotspot” access, and a variety of unlimited service plans.   T-Mobile was also the first company to roll out a nationwide high-speed data network based on advanced HSPA+ (High-Speed Packet Access) technology.  The complaint states that by January 2011, an AT&T employee was observing that “[T-Mobile] was first to have HSPA+ devices in their portfolio…we added them in reaction to potential loss of speed claims.”

The complaint details other ways that AT&T felt competitive pressure from T-Mobile.   The complaint quotes T-Mobile documents describing the company’s important role in the market:

• T-Mobile sees itself as “the No. 1 value challenger of the established big guys in the market and as well positioned in a consolidated 4-player national market”; and
• T-Mobile’s strategy is to “attack incumbents and find innovative ways to overcome scale disadvantages.   [T-Mobile] will be faster, more agile, and scrappy, with diligence on decisions and costs both big and small.   Our approach to market will not be conventional, and we will push to the boundaries where possible. . . . [T-Mobile] will champion the customer and break down industry barriers with innovations. . . .”

The complaint also states that regional providers face significant competitive limitations, largely stemming from their lack of national networks, and are therefore limited in their ability to compete with the four national carriers.   And, the department said that any potential entry from a new mobile wireless telecommunications services provider would be unable to offset the transaction’s anticompetitive effects because it would be difficult, time-consuming and expensive, requiring spectrum licenses and the construction of a network.

The department said that it gave serious consideration to the efficiencies that the merging parties claim would result from the transaction.   The department concluded AT&T had not demonstrated that the proposed transaction promised any efficiencies that would be sufficient to outweigh the transaction’s substantial adverse impact on competition and consumers.   Moreover, the department said that AT&T could obtain substantially the same network enhancements that it claims will come from the transaction if it simply invested in its own network without eliminating a close competitor.

AT&T is a Delaware corporation headquartered in Dallas.   AT&T is one of the world’s largest providers of communications services, and is the second largest mobile wireless telecommunications services provider in the United States as measured by subscribers.   It serves approximately 98.6 million connections to wireless devices.   In 2010, AT&T earned mobile wireless telecommunications services revenues of $53.5 billion, and its total revenues were in excess of $124 billion.

T-Mobile, is a Delaware corporation headquartered in Bellevue, Wash.   T-Mobile is the fourth-largest mobile wireless telecommunications services provider in the United States as measured by subscribers, and serves approximately 33.6 million wireless connections to wireless devices.   In 2010, T-Mobile earned mobile wireless telecommunications services revenues of $18.7 billion.   T-Mobile is a wholly-owned subsidiary of Deutsche Telekom AG.

Deutsche Telekom AG is a German corporation headquartered in Bonn, Germany.   It is the largest telecommunications operator in Europe with wireline and wireless interests in numerous countries and total annual revenues in 2010 of €62.4 billion.

Filed under: antitrust, business, economics, federal communications commission, merger guidelines, mergers & acquisitions, technology, telecommunications, wireless

Excerpt

The FCC published in June its annual report on the state of competition in the mobile services marketplace. Under ordinary circumstances, this 300-plus page tome would sit quietly on the shelf, since, like last year’s report, it ‘‘makes no formal finding as to whether there is, or is not, effective competition in the industry.’’

But these are not ordinary circumstances. Thanks to innovations including new smartphones and tablet computers, application (app) stores and the mania for games such as ‘‘Angry Birds,’’ the mobile industry is perhaps the only sector of the economy where consumer demand is growing explosively.

Meanwhile, the pending merger between AT&T and T-Mobile USA, valued at more than $39 billion, has the potential to accelerate development of the mobile ecosystem. All eyes, including many in Congress, are on the FCC and the Department of Justice. Their review of the deal could take the rest of the year. So the FCC’s refusal to make a definitive finding on the competitive state of the industry has left analysts poring through the report, reading the tea leaves for clues as to how the FCC will evaluate the proposed merger.

Make no mistake: this is some seriously expensive tea. If the deal is rejected, AT&T is reported to have agreed to pay T-Mobile $3 billion in cash for its troubles. Some competitors, notably Sprint, have declared full-scale war, marshaling an army of interest groups and friendly journalists.

But the deal makes good economic sense for consumers. Most important, T-Mobile’s spectrum assets will allow AT&T to roll out a second national 4G LTE (longterm evolution) network to compete with Verizon’s, and expand service to rural customers. (Currently, only 38 percent of rural customers have three or more choices for mobile broadband.)

More to the point, the government has no legal basis for turning down the deal based on its antitrust review. Under the law, the FCC must approve AT&T’s bid to buy T-Mobile USA unless the agency can prove the transaction is not ‘‘in the public interest.’’ While the FCC’s public interest standard is famously undefined, the agency typically balances the benefits of the deal against potential harm to consumers. If the benefits outweigh the harms, the Commission must approve.

The benefits are there, and the harms are few. Though the FCC refuses to acknowledge it explicitly, the report’s impressive detail amply supports what everyone already knows: falling prices, improved quality, dynamic competition and unflagging innovation have led to a golden age of mobile services. Indeed, the three main themes of the report all support AT&T’s contention that competition will thrive and the public’s interests will be well served by combining with T-Mobile.

 

Continue reading 

As I noted in a post last month, the Ninth Circuit recently threw out an antitrust challenge to cable operators’ refusal to provide cable channels on an a la carte, rather than bundled, basis.  (Josh also had some insightful comments on the Ninth Circuit’s Brantley decision.)  In my post, I promised that I would later explain how channel bundling, which permits cable operators to price discriminate and extract greater consumer surplus, may nonetheless benefit consumers by expanding output.  Having just finished incorporating a number of helpful comments Herbert Hovenkamp gave me on a forthcoming tying/bundling article (more about that later!), now seems like a swell time to return to the topic of cable bundling.

Read the full piece here. 

Its a Bruin.  Marius Schwartz will replace Jonathan Baker as the new Chief Economist at the FCC.  From the press release:

Schwartz’s teaching and research specialties are in industrial organization, competition and regulation. Before joining Georgetown University, Schwartz served as Economics Director of Enforcement at the Antitrust Division of the U.S. Department of Justice and as Acting Deputy Assistant Attorney General for Economics. He also served the President’s Council of Economic Advisers as the Senior Economist for industrial organization matters. Schwartz holds a B.Sc. degree from the London School of Economics and
a Ph.D. from UCLA, also in economics.

Casebook co-author, and previous TOTM contributor (see, e.g. here) Jonathan Baker will be heading back to American University.  However, the press release also notes that both Baker and Gregory Rosston will work on the AT&T – T-Mobile deal:

Outgoing Chief Economist Jonathan Baker and Gregory Rosston will both serve as Senior Economists for Transactions to work on the Commission’s reviews of the AT&T-T-Mobile and AT&T-Qualcomm transactions.

The Rosston appointment is interesting for those following the AT&T deal (more TOTM commentary here and here; my testimony is available here) because Rosston (with Roger Noll) has already publicly opined rather strongly on the merger.  In the short note, Rosston & Noll write that “the justifications for the acquisition do not seem particularly strong, and anticompetitive effects appear to be plausible,” and that “Superficially, the proposed acquisition appears to run seriously afoul of the merger policy of the antitrust enforcement agencies.”

Congratulations to Professor Schwartz, and to outgoing Chief Economist Baker.

Filed under: antitrust, economics, federal communications commission, mergers & acquisitions, wireless

As I mentioned previously, I testified at Thursday’s hearing on the AT&T / T-Mobile merger.  My written testimony is available here.  Links to the testimony from other witnesses are available at the link above.  I’ll post transcripts when they become available; same with the video link should one become available (I’m not aware of one — if you are, let me know).

Nothing much to report that is outside the written testimony.  Not surprisingly, most of the Committee’s attention was focused on the left hand side of the witness table.  Certainly, there was plenty of “firm counting” analysis and “what will this do for my constituents?” to go around.  But that one interesting development was that many of the hearing questions — certainly more than I anticipated based upon the Senate hearing — focused on vertical aspects of the merger (e.g. backhaul).

Filed under: antitrust, economics, federal communications commission, merger guidelines, mergers & acquisitions, wireless

Tomorrow morning.  I’ll post my written testimony here tomorrow.

Hearing on: “How Will the Proposed Merger Between AT&T and T-Mobile Affect Wireless Telecommunications Competition?”

Thursday 5/26/2011 – 10:30 a.m.

2141 Rayburn House Office Building

Subcommittee on Intellectual Property, Competition and the Internet

Witness List

Mr. Randall Stephenson
Chairman, Chief Executive Office and President
AT&T, Inc.

Mr. Rene Obermann
CEO

Deutsche Telekom AG

Mr. Steven K. Berry
President and CEO
Rural Cellular Association

Ms. Parul P. Desai
Communications Policy Counsel
Consumers Union

Professor Joshua Wright
George Mason University School of Law

Professor Andrew I. Gavil
Howard University School of Law

Filed under: antitrust, doj, economics, federal communications commission, merger guidelines, mergers & acquisitions, wireless

Intel Chairman and CEO Paul Otellini recently gave the keynote address at the Technology Policy Institute’s Aspen Forum on the US regulation environment and its effect of innovation and economic growth (HT: CNET, WSJ).  The speech got some play in the media because of its overall depressing tone for the US, and its frank criticism of the current state of US regulatory affairs.

Read the full piece here.

Danny Sokol has posted the most downloaded antitrust law professors.  I come in 4th behind Damien Geradin, David Evans, and Herb Hovenkamp.   It is flattering to be in company like that by any measure.  Cool.  But, as Danny points out, what is even cooler is that George Mason is one of only a handful of schools with more than one faculty member making the list, with my colleague, co-author, and fellow Bruin economist Bruce Kobayashi coming in at #15.

Read the full piece here.