DOJ lawsuit dashes AT&T’s hopes of an easy merger review

The agency with antitrust oversight over AT&T’s proposed $39-billion acquisition of T-Mobile just sent some strong signals that the deal doesn’t get its stamp of approval. The U.S. Department of Justice filed a complaint in a D.C. federal court seeking to block the deal on the grounds it would “substantially lessen competition.”

While multiple regulatory agencies get to weigh in on the merger, the DOJ and the Federal Trade Commission solely weigh anti-competitive concerns. The FCC gets to approve or deny wireless mergers and acquisitions outright since they all involve spectrum—a public asset—changing hands, but the DOJ and FTC enforce their decisions through litigation, filing civil lawsuits under the Sherman Antitrust Act—and in rare cases the DOJ can press criminal charges.

In the case of AT&T, the DOJ is trying to prevent anti-competitive practices, not punishing already existing practices in the market, so its actions will be limited to the civil courts. The department’s arguments, however, are pretty damning. In a DOJ statement, Deputy Attorney General said “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.”

That directly contradicts AT&T’s claim that merging with T-Mobile would not only preserve competition, but create economies of scale that would ultimately benefit consumers (CP: AT&T: T-Mobile deal will produce a bigger, better operator ultimately benefiting consumers). AT&T senior vice president and general counsel Wayne Watts immediately issued a statement, expressing shock that the DOJ is challenging the deal:

“We are surprised and disappointed by today's action, particularly since we have met repeatedly with the Department of Justice and there was no indication from the DOJ that this action was being contemplated. We plan to ask for an expedited hearing so the enormous benefits of this merger can be fully reviewed. The DOJ has the burden of proving alleged anti-competitive affects and we intend to vigorously contest this matter in court.

“At the end of the day, we believe facts will guide any final decision and the facts are clear. This merger will:

- Help solve our nation's spectrum exhaust situation and improve wireless service for millions.

- Allow AT&T to expand 4G mobile broadband to another 55 million Americans, or 97% of the population;

· Result in billions of additional investment and tens of thousands of jobs, at a time when our nation needs them most.

“We remain confident that this merger is in the best interest of consumers and our country, and the facts will prevail in court.”

While Watts said AT&T plans to challenge the suit in court, the operator could attempt a settlement. AT&T could offer to divest more markets or give up some spectrum in an effort to make the deal more palatable to regulators, but the DOJ seems to be far less concerned about the market-by-market impact of the deal than it is by the overarching implications of removing the lowest-cost nationwide operator from the competitive landscape. The statement reads:

“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.”

One analyst firm saw this lawsuit coming. This summer, the Yankee Group applied the DOJ’s own antitrust methodology to its wireless survey data and concluded that operator concentration levels in the nation’s biggest markets would raise red flags among antitrust regulators. In a separate analysis the Yankee Group also found that the elimination of T-Mobile as a competitive force would cause overall wireless bills to climb in many major markets, in some cases by more than $8 a month (CP: Going deep on the AT&T-T-Mobile merger).

AT&T challenged the study and its basic premise that fewer operators mean higher prices, pointing to the rapid decline in per-unit costs of voice minutes, SMS and data over the last decade. AT&T has also stated that T-Mobile customers would be allowed to keep their cheaper service plans, keeping its competitive pricing in the market.

But Yankee took those factors into account, basing its price estimates on the overall attrition of T-Mobile customers. In two of the nine markets Yankee studied, T-Mobile customers had slightly higher average bills than those of  AT&T, but in the remaining seven AT&T prices were significantly higher. So as T-Mobile customers churned off the network after the merger, the study concluded, they would generally gravitate to higher price plans offered by AT&T, Verizon and Sprint as new service under T-Mobile’s rate structure would no longer be an option.

Since announcing the merger last spring, AT&T and T-Mobile have been aggressively and methodically defending the merger, taking every opportunity to promote its benefits. Today AT&T promised to bring call center jobs back to the U.S. from overseas, creating 5000 domestic jobs (CP: AT&T will bring back 5000 jobs if T-Mobile deal is approved).

But it’s also had to put out fires. Earlier this month, unredacted documents appeared on the FCC’s public filing systems stating that AT&T could accomplish a nationwide build of LTE to 97% of the population—one of the stated major benefits of the merger—on its own for $3.8 billion. In the ensuing controversy, the FCC asked AT&T to submit more cost models and analysis that explained why acquiring T-Mobile was necessary to its mobile broadband ambitions (CP: FCC pans for more info on why AT&T needs T-Mobile).