Justice Reaches Out and Smacks AT&T

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Washington — In what could be a death-blow combination,
the Justice Department and the Federal Communications
Commission last week delivered a one-two punch
to AT&T’s hopes of buying rival wireless carrier T-Mobile.

The result of the $39 billion deal — which would
bring together the nation’s second (AT&T) and fourth
(T-Mobile) biggest cellular providers — was characterized
by one blogger as “Ma Cell.”

Even as AT&T was announcing a pledge to sweeten
the deal by bringing call-center jobs on shore, the Justice
Department was filing an antitrust suit to block it in a
Washington, D.C., federal district court. The DOJ said the
merger would reduce competition in the wireless market,
raise prices, reduce choices and hurt service.

The FCC continues to review the deal, but chairman
Julius Genachowski said following the DOJ announcement
that the commission had issues as well.

“Although our process is not complete, the record before
this agency also raises serious concerns about the
impact of the proposed transaction on competition,”
Genachowski said.


The suit — filed during the run-up to Labor Day weekend,
generally one of the sleepiest weeks in Washington — appeared
to take AT&T off guard. Congress has yet to return
from its August break and many FCC staffers and others
are wrapping up summer vacations.

In a statement, AT&T senior executive vice president
and general counsel Wayne Watts said he was “surprised
and disappointed” by the lawsuit.

“[W]e have met repeatedly with the Department
of Justice [an AT&T source confi
rms a meeting only the day before the
announced suit] and there was no indication
from the DOJ that this action was
being contemplated,” he said.
A Justice Department spokesperson
told Multichannel News: “The department
has consistently told AT&T that we had
serious concerns with the transaction.”

AT&T vowed to continue to fight for
the deal. “We plan to ask for an expedited
hearing so the enormous benefits of
this merger can be fully reviewed,” said
Watts. “The DOJ has the burden of proving
alleged anti-competitive effects and
we intend to vigorously contest this matter
in court.”

The Justice Department also said that
its door is always open if AT&T wanted
to try to resolve the issues, which would
likely be via divestitures of some type. But
AT&T has said from the outset it expected
to have to divest some assets to get the
deal done.

So while AT&T plans to pursue the
court route — it will file for an expedited
hearing — it is also expected to check out
that door as well.

AT&T certainly has reason to fight for
the deal. If it falls through, a source with
the telco confirmed, the company will
have to pony up $3 billion to T-Mobile, plus some spectrum
and a roaming agreement.

The odds are against a successful merger consummation,
however. This is the first wireless-merger case that the
DOJ has taken to court without an accompanying consent
decree (as it does with deals with conditions it has proposed
and the parties have agreed to, such as the Comcast-
NBCUniversal transaction and many others).

But the two other telecom deals it sued to block in the
past two years — a satellite-TV merger between top-two
players EchoStar Communications and DirecTV in 2002,
and the tie-up of long-distance companies WorldCom and
Sprint in 2000 — both fell apart. And since 2000, according
to the DOJ, it has filed 19 suits (not including AT&T)
without consent decrees.

A dozen of those lawsuits resulted in either settlements
or abandoned deals, with six going to trial and Justice losing
two of those (a suit involving tax-preparation firm H&R
Block’s merger with TaxACT is ongoing).


But even if AT&T convinced the court
the deal did not violate antitrust laws,
or made peace with the DOJ, the FCC’s
review goes beyond that finding to a
public-interest test that sets an even
higher bar.

And Justice’s suit leaves no doubt
where the bar has been set. In the suit,
it essentially defined the relative competitive
market as the four main carriers
— No. 1 Verizon Wireless, AT&T, No.
3 Sprint Nextel and T-Mobile — saying
competing regional wireless firms are
“significantly different.”

In that market, it says, T-Mobile is an
important governor of price and service
— but particularly price — on the other
three in both the residential and business

“The combinat ion 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,” Deputy Attorney
General James M. Cole said in announcing
the suit. “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.”

Justice said it gave “serious consideration” to the efficiencies that AT&T said would result from the merger, but
said they were “ insufficient” to outweigh the transaction’s
substantial adverse impact on competition and consumers.”
It also argued that AT&T could get the same benefits
from investing in its own network rather
than buying a “close competitor.”

“AT&T’s elimination of T-Mobile
as an independent, low-priced rival
would remove a significant competitive
force from the market,” Justice
said in the suit, which was filed in the
U.S. District Court for the District of
Columbia. “Unless this acquisition is
enjoined, customers of mobile wireless
telecommunications services likely
will face higher prices, less product
variety and innovation, and poorer
quality services doe to reduced incentives
to invest than would exist absent
the merger.”

Justice said it was clear that the two
companies were head-to-head competitors,
including in “97 of the nation’s largest
100 cellular marketing areas,” as well as
nationally for enterprise (business) service, including with
the U.S. government.

But Geoffrey Manne, executive director of the International
Center for Law & Economics, said he is not
convinced that T-Mobile is a “disruptive maverick” disciplining
the bigger carriers, as the DOJ suggests. “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,” he said.


According to Bernstein Research analyst Craig Moffett,
the suit and the FCC’s competition concerns mean the
deal is “all but definitively dead.” That could be bad for
the whole wireless space, including the deal’s biggest
critic, Sprint, but good for cable and satellite companies,
he said.

In a client advisory issued in the wake of Justice’s suit,
Moffett said the news would wind up being bad for “all”
carriers by leaving an independent price and service
competitor in the market, which was the reason Justice
blocked the deal. He points out that a more consolidated
market would have more “stable pricing.”

As for Sprint, it would regain “a competitor (T-Mobile)
forced to re-energize its competitiveness in Sprint’s core
middle market,” Moffett said. “Sprint also potentially loses
support of the Cable MSOs, who have been rumored
partners for Sprint’s 4G strategy but who now may have a
better option in T-Mobile USA.”

Moffett sees an upside for cable operators if the deal is,
in fact, DOA.

“Perhaps the only real winners here are the pay TV
providers,” Moffett said. “For Comcast and TWC, this significantly reduces the near term risk of a good-moneyafter-
bad investment in Clearwire and/or Sprint.”

Moreover, he said, T-Mobile and parent Deutsche
Telekom now become a potential buyer for cable mobile
backhaul services.

Dish Network would also be a big winner, Moffett said,
since T-Mobile is now left free to to partner on a wireless
strategy with the satellite operator, which has spectrum
and an eye on the wireless phone market.