Global Business 4th Edition by Mike Peng

Exercise 13

The Antitrust Case on the AT T-T-Mobile Merger1
Mike W. Peng (University of Texas at Dallas)
In 2011, the second-Icirgest US mobile wireless carrier AT T (with a 25% market share) proposed to merge with the fourth-largest carrier T-Mobile, which had a 15% market share and was a wholly owned subsidiary of Deutsch Telekom. Antitrust authorities blocked this merger. Why
The Merger
In March 2011, Dallas-based AT T announced that it had reached an agreement with Deutsch Telekom (DT) to purchase DT's wholly owned US subsidiary, T-Mobile USA, for $39 billion. The top four concentrations in mobile wireless telecommunications services in the United States accounted for more than 90% of market share. Of the Big Four, the second-ranked AT T had about 25% market share, and the fourth-ranked T-Mobile had 15%. The largest player was Verizon (31%), and the third was Sprint Nextel (20%). Although some small carriers competed in certain regions, no carriers other than the Big Four competed nationally. After the proposed merger, the combined AT TT- Mobile would become the nation's largest wireless carrier, commanding more than 40% of market share, with 132 million customers and $72 billion in revenues. The scale and scope of the merger would require regulatory approval. AT T indicated its willingness to sell off certain assets if necessary, and planned to complete the merger in one year.
AT T argued that the merger would allow AT T to expand 4G LTE broadband to another 55 million Americans, reaching a total of 97% of the population and especially benefitting rural areas currently without broadband coverage. Because T-Mobile was losing money and suffered from its poor economies of scale, it (and its parent company DT) had been unable to upgrade its networks and invest in 4G broadband. While AT T was booming and adding customers, T-Mobile was losing customers-it was the only major carrier that did not offer the iPhone. But T-Mobile possessed some hard-to-substitute resources: spectrum. Spectrum represented finite resources auctioned by the Federal Communications Commission (FCC). Exhausting its own spectrum, AT T could benefit from tapping into T-Mobile's underutilized spectrum. Accelerating 4G wireless deployment would not only generate new jobs due to AT T's own investment, but would also stimulate broader job creation and civil engagement due to better access to more affordable and more widespread wireless broadband services.
A variety of labor, environmental, and business groups supported the merger. These groups pointed to AT T's record and commitments to labor and environmental standards, and appreciated the investment and the jobs the merger would bring. Also, civil rights groups applauded the additional boost in civil engagement that could be facilitated by more widespread broadband. Governors of 26 states wrote letters to support the merger.
However, other diverse groups were opposed to this merger. Not surprisingly, Verizon and Sprint did not like this deal, because it would make them weaker. Sprint would become a distant third, so clearly it would not appreciate the outcome. Verizon would lose its top position, but it would still be a strong player in a new duopoly. Internet companies did not like the merger either, because the merger would leave them with fewer service providers to negotiate with for getting their content and applications to customers. The Computer and Communication Industry Association-which included eBay, Google, Microsoft, and Yahoo as its members- was opposed to the merger. Consumer groups argued that the merger would raise prices and stifle innovation by consolidating so much of the wireless industry in one firm.
On the core issue of whether increasing AT T's market power would hurt consumers, AT T pointed out that the average inflation-adjusted price for wireless services in the United States fell by 50% from 1999 to 2009, according to the Government Accountability Office. AT T also argued that in many local markets AT T would still be competing with four or more rivals, so taking T-Mobile (which was losing customers anyway) out of the mix would not dent competition. If AT T could not acquire T-Mobile (which had sizable infrastructure, such as cellular towers and significant spectrum), then AT T might be forced to build its own infrastructure, which would be an unnecessarily costly undertaking and social waste, especially in crowded urban areas such as San Francisco. But even if AT T went head-to-head with infrastructure building, it would still suffer from a shortage of spectrum, while T-Mobile, at the same time, could not fully utilize its spectrum-clearly a waste of finite resources.
The Antitrust Case
In August 2011, the US Department of Justice (DOJ) filed a lawsuit alleging that this merger would reduce competition and violate antitrust law. DOJ alleged that the "anticompetitive harm" of this merger would include:
(a) actual and potential competition between AT T and T-Mobile will be eliminated; (b) competition in general likely will be lessened substantially; (c) prices are likely to be higher than they otherwise would; (d) the quality and quantity of services are likely to be less than they otherwise would due to reduced incentives to invest in capacity and technology improvements; and (e) innovation and product variety likely will be reduced.
In particular, given T-Mobile's positioning as a selfstyled "Disruptive Pricing" provider, "AT T's acquisition of T-Mobile," alleged DOJ, "would eliminate the important price, quality, product variety, and innovation competition that an independent T-Mobile brings to the marketplace." In addition, DOJ argued:
The substantial increase in concentration that would result from this merger, and the reduction in the number of nationwide providers from four to three, likely will lead to lessened competition due to an enhanced risk of anticompetitive coordination. Certain aspects of mobile wireless communications services markets, including transparent pricing, little buyer-side market power, and high barriers to entry and expansion, make them particularly conductive to coordination.
In conclusion, DOJ argued that the proposed merger would violate Section 7 of the Clayton Act and that it should be stopped. In the lawsuit, DOJ also sued T-Mobile and DT as co-clefenclanLs. On behalf of the US government, DOJ was the sole plaintiff in its first complaint filed on August 31, 2011. In its first amended complaint filed on September 16, DOJ was joined by the states of New York, Washington, California, Illinois, Massachusetts, Ohio, and Pennsylvania as co-plaintiffs. In its second amended complaint filed on September 30, Puerto Rico joined as a co-plaintiff. The case was officially the United Stales el al. v. AT T Inc. et al.
AT T was not a stranger to antitrust lawsuits. Today's AT T is the direct result of the first United States v. AT 'T antitrust lawsuit. Because of its monopoly in longdistance (land-line) telephone, the original AT T ("Ma Bell") was forced by DOJ to break up into seven regional Bell operating companies (known as "Baby Bells") in 1983. Between 1983 and 2005, today's AT T was one of these Baby Bells-named Southwestern Bell Corporation between 1983 and 1995, and shortened to SBC between 1995 and 2005. Due to its successful market performance, SBC emerged as a leading offspring of the original AT T (Verizon was another leading offspring). In 2005, SBC spent $16 billion to purchase its former parent company, AT T Corporation-a Baby Bell acquiring Ma Bell. Quitting the SBC name, the merged entity named itself AT T Inc. ancl took on the iconic AT T branding (including its logo and its stock ticker "T," which simply stands for "telephone"). Before the filing of the second United States v. AT T case, the Economist asked: "Could the bid for T-Mobile be a sign that monopoly Ma is trying to return from her grave "
The Outcome
In November 2011, the FCC issued its opinion and joined DOJ in opposing the merger. In December 2011 (before the antitrust case went on trial), AT T gave up the merger and DOJ dismissed the case. A triumphant DOJ announced:
Consumers won today... Had AT T acquired T-Mobile, consumers in the wireless market place would have faced higher prices and reduced innovation. We sued to protect consumers who rely on competition in this important industry. With the parties' abandonment, we achieved that result.
A frustrated AT T noted in its press release:
[Dallas, Texas, December 19, 2011] AT T Inc. (NYSE: T) said today that after a thorough review of options it has agreed with Deutsch Telekom AG to end its bid to acquire T-Mobile USA, which began in March of this year.
The actions by the Federal Communications Commission and the Department of Justice to block this transaction do not change the realities of the US wireless industry. It is one of the most fiercely competitive industries in the world, with a mounting need for more spectrum that has not diminished and must be addressed immediately. The AT T and T-Mobile USA combination would have offered an interim solution to this spectrum shortage. In the absence of such steps, customers will be harmed and needed investment will be stifled.
"AT T will continue to be aggressive in leading the mobile Internet revolution," said Randall Stephenson, AT T chairman and CEO. "Over the past four years we have invested more in our networks than any other US company. As a result, today we deliver best-in-class mobile broadband speeds-connecting smartphones, tablets, and emerging devices at a record pace-and we are well underway with our nationwide 4G LTE deployment.
"To meet the needs of our customers, we will continue to invest," Stephenson said. "However, adding capacity to meet these needs will require policymakers to do two things. First, in the near term, they should allow the free markets to work so that additional spectrum is available to meet the immediate needs of the US wireless industry, including expeditiously approving our acquisition of unused Qualcomm spectrum currently pending before the FCC. Second, policymakers should enact legislation to meet our nation's longer-term spectrum needs.
"The mobile Internet is a dynamic industry that can be a critical driver in restoring American economic growth and job creation, but only if companies are allowed to react quickly to customer needs and market forces," Stephenson said.
The fine prints in the cleal included DOJ's blessing of AT T and T-Mobile's collaboration in roaming. The more significant (or, if you will, the more bizarre) outcome was that as per AT T's original deal with DT, in the event of merger failure, AT T would pay T-Mobile $3 billion as a break-up fee and give T-Mobile $1 billion worth of AT T-helcl wireless spectrum. In short, the US government reduced the competitiveness of a US firm by forcing a US firm to subsidize the wholly owned subsidiary of a foreign firm.
In the name of preserving (domestic) competition, the US government preserved a (foreign) competitor. "The problem is," noted one expert at Slate, "T-Mobile doesn't want to be a competitor anymore. Its parent company DT wants out of the US market." As the weakest among the Big Four, T-Mobile only added 89,000 new customers between 2009 ancl 2011, while the industry took in 33 million new customers. By essentially giving up since March 2011, T-Mobile lost 467,000 lucrative contract customers during the merger process. By focusing on its terms of exit, T-Mobile turned its attention away from network upgrades and improvements. DOJ ancl FCC cannot force T-Mobile to be in business just like no one can force customers to sign up for plans they do not want. By breathing a new lease on life into T-Mobile, that was exactly what DOJ and FCC did: forcing T-Mobile to be in business against its (and its parent company's) own wishes. The same expert at Slate continued:
Sure, companies like T-Mobile and Sprint can offer cheaper plans, but the success of Verizon and AT T shows price is not our primary concern when it comes to wireiess service. We want shiny smartphones and big, powerful, reliable networks... Rather than stifle competition, the merger would have intensified the war between the two giants, AT T and Verizon. And for those people for whom price is paramount, there would remain not only Sprint, but a slew of smaller, regional providers like Leap and MetroPCS.
1)This research was supported by the Jindal Chair at the Jindal School of Management, University of Texas at Dallas. All views and errors are those of the author. © Mike W. Peng. Reprinted with permission.
Sources: Based on (1) the author's interviews of AT T executives in Dallas, Texas, 2011; (2) AT T 2011, AT T ends bid to add network capacity through T-Mobile USA purchase, December 19, www.att.com; (3) AT T, 2011, AT T statement on Department of Justice action, August 31, www.att.com; (4) Bloomberg Businessweek, 2011, Behind AT T's epic lobbying failure, December 12: 40-42; (5) Bloomberg Businessweek, 2011, For wireless giants, reception may get spotty, July 18:35-36; (6) CBS News, 2011, What the AT T-TMobile breakup means for you, December 20, www.cbsnews.com; (7) Economist, 2011, An audacious merger with a poor reception, March 26: 71-72; (8) Economist, Tripped at the altar, September 3: 62; (9)W. Oremus, 2011, Truth, justice, and terrible mobile service, Slate, December 21, www.slate.com; (10) United States of America v. AT T, T-Mobile USA, Inc., and Deutsch Telecom AG, 2011, Complaint, Case 1:11-cv-01560, August 31, Washington, DC: US District Court for the District of Columbia; (11) United States of America et al. v. AT T Inc. et al., 2011, Amended complaint, Civil Action No. 11-01560 (ESH), September 16, Washington, DC: US District Court for the District of Columbia; (12) United States of America et al. v. AT T Inc. etal., 2011, Second amended complaint, Civil Action No. 11-01560 (ESH), September 30, Washington, DC: US District Court for the District of Columbia; (13) United States of America et al. v. AT T Inc. et al., 2011, Stipulation of dismissal, Civil Action No. 11-01560 (ESH), December 20, Washington, DC: US District Court for the District of Columbia; (14) Wall Street Journal, 2012, T-Mobile will focus on network quality in wake of deal failure, January 11, online.wsj.com.
Challenge AT T's position as an antitrust lawyer working for the government.