Integrative Case 3.4
The Antitrust Case on the AT&T-T MobileMerger
Mike W. Peng
In 2011, the second-largest US mobile wirelesscarrier AT&T (with a 25% market share) proposed to merger withthe fourth-largest carrier T-Mobile, which had a 15% market shareand was a wholly owned subsidiary of Deutsch Telekom. Antitrustauthorities blocked this merger. Why?
The Merger
In March 2011, Dallas-based AT&T announced that it hadreached an agreement with Deutsch Telekom. (DT) to purchase DTsholy into US subsidiary, T-Mobile USA, four $39 billion. The tubfor concentrations in mobile wireless telecommunication services inthe US the counter for more than 90% of the market share. Of thebig four, the second range AT&T had about 25% market share, andthe fourth-ranked T-Mobile had 15%. The largest player was Verizonwith 31%, and the third was Sprint Nextel at 20%. Although somesmall carriers competed in certain regions, no carriers other thanthe big four competed nationally. After the proposed merger, thecombined AT&T and T-Mobile would become the nation’s largestwireless carrier, commanding more than 40% of market share, with132 million customers and 72 billion in revenues. The scale andscope of the merger would require regulatory approval. AT&Tindicated its willingness to sell off certain assets if necessary,and plan to complete merger in one year.
AT&T argued that the merger would allow AT&T to expand4G LTE broadband to another 55 million Americans, reaching a totalof 97% of the population and especially benefit in rural areascurrently without broadband coverage. Because T-Mobile was losingmoney and suffering from its poor economies of scale, and it (andits parent company DT) had been unable to upgrade its networks andinvest in 4G broadband. While AT&T was booming and addingcustomers, T-Mobile was losing customers- it was the only majorcarrier that did not offer the iPhone. But T-Mobile possessed somehard-to-substitute resources: spectrum. Spectrum represented finiteresources auctioned by the federal communications commission (FCC).Exhausting its own spectrum, AT&T could benefit from tappinginto T-Mobile’s underutilize spectrum. Accelerating 4G wirelessdeployment would not only generate new jobs due to AT&T’s owninvestment, but would also stimulate broader job creation and civilengagement due to better access to more affordable and morewidespread wireless broadband services.
A variety of labor, environmental, and business groups supportedthe merger. These groups pointed to AT&T’s record andcommitments to labor and environmental standards, and appreciatedthe investment and the jobs the merger would bring. Also, civilrights groups applauded the additional boost and civil engagementthat could be facilitated by more widespread broadband. Governorsof 26 states wrote letters to support the merger.
However, other diverse groups were opposed to this merger. Notsurprisingly, Verizon and Sprint did not like the deal, because itwould make them weaker. Sprint would become a distant third, soclearly it would not appreciate the outcome. Verizonwould lose its top position, but it would still be a strong playerin a new duopoly. Internet companies did not like the mergereither, because the merger would leave them with fewer serviceproviders to negotiate with for getting their content andapplications to customers. The computer and communication industryAssociation- which included eBay, Google, Microsoft, and Yahoo asits members- was opposed to the merger. Consumer groups argued thatthe merger would raise prices and stifle innovation byconsolidating so much of the wireless industry in one firm.
On the core issue of whether increasing AT&T’s market powerwould hurt consumers, AT&T pointed out that the averageinflation-adjusted price for wireless services in the United Statesfell by 50% from 1999 to 2009, according to the governmentaccountability office. AT&T also argued that in many marketsAT&T would still be competing with four or more rivals, sotaking T-Mobile (which was losing customers anyway) out of the mixwould not dent competition. If AT&T could not acquire T-Mobile(which had sizable infrastructure, such as cellular towers andsignificant spectrum), then AT&T might be forced to build itsown infrastructure, which would be an unnecessarily costlyundertaking and social waste, especially in crowded urban areassuch as San Francisco. But even if AT&T went head-to-head withinfrastructure building, it would still suffer from a shortage ofspectrum, while T-Mobile, at the same time, could not fully utilizeits spectrum- clearly a waste of finite resources.
The Antitrust Case
In August 2011, the US department of justice filed a lawsuitalleging that this merger would reduce competition and violateantitrust law. DOJ alleges that the “anticompetitive harm” of thismerger would include:
(a) actual and potential competition between AT&T andT-Mobile would be of limited; (b) competition in general likelywill be lessened substantially; (c) prices are likely to be higherthan they otherwise would; (d) the quality and quantity of servicesare likely to be less than they otherwise would due to reduceincentives 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 self-styled “disruptive pricing” provider, “AT&T’s acquisition of T-Mobile,”alleged DOJ, “would eliminate the important price, quality, productvariety, and innovation competition that an independent T-Mobilebrings to the marketplace.” In addition, DOJ argued:
The substantial increase in concentration that would result fromthis merger, and the reduction in the number of nationwideproviders from 4 to 3, likely will lead to lessened competition dueto an enhanced risk of anticompetitive coordination. Certainaspects of mobile wireless communications services markets,including transparent pricing, little buyer-side market power, andhigh barriers to entry and expansion, make them particularlyconductive to coordination.
In conclusion, DOJ argued that the proposed merger would violatesection 7 of the Clayton act and that it should be stopped. In thelawsuit, DOJ also sued T-Mobile and DT as co-defendants. On behalfof the US government, DOJ was the sole plaintiff in its firstcomplaint filed on August 31, 2011. In its first amended complaintfiled on September 16, DOJ was joined by the states of New York,Washington, California, Illinois, Massachusetts, Ohio, andPennsylvania as co-plaintiffs. And it’s second amended complaintfiled on September 30, Puerto Rico joined as a co-plaintiff. Thecase was officially the United States et al. v. AT&T Inc. etal.
AT&T was not a stranger to antitrust lawsuits. Today’sAT&T is the direct result of the first United States vsAT&T antitrust lawsuit. Because of its monopoly andlong-distance (land-line) telephone, the original AT&T (“MaBell”) was forced by DOJ to break up into Sevan regional belloperating companies (known as “Baby Bells”) in 1983. Between 1983and 2005, today’s AT&T was one of these Baby Bells namedSouthwestern Bell Corporation between 1983 and 1995, and shortenedto SBC between 1995 and 2005. Due to its successful marketperformance, SBC emerged as a leading offspring of the originalAT&T (Verizon was another leading off-spring). In 2005, SBCspent $16 billion to purchase its former parent company, AT&Tcorporation- a Baby Bell acquiring Ma Bell. Quitting in the SBCname, the merged entity named itself AT&T Inc. and took on theiconic AT&T branding (including it’s logo and its stock ticker“T”, which simply sounds for “telephone”). Before the filing of thesecond United States versus AT&T case, the economist asked:“Could the bid for T-Mobile be a sign that monopoly Ma is trying toreturn from her grave?”
The Outcome
In November 2011, the FCC issued its opinion and joined DOJ inopposing the merger. In December 2011 (before the antitrust casewent on trial), AT&T gave up the merger and DOJ dismissed thecase. A triumphant DOJ announced:
Consumers won today… Had AT&T acquire T-Mobile, consumers inthe wireless market place would have faced higher prices and reduceinnovation. We sued to protect consumers who rely on competition inthis important industry. With the parties’ abandonment, we achievedthat result.
A frustrated AT&T noted in its press release:
[Dallas, Texas, December 19, 2011] AT&T Inc. (NYSE: T) saidtoday bad after a thorough review of options it has agreed withDeutsch Telekom AG to end its bid to acquire T-Mobile USA, whichbegan in March of this year.
The actions by the federal communications commission and theDepartment of Justice to block this transaction did not change therealities of the US wireless industry. It is one of the mostfiercely competitive industries in the world, with a mounting needfor more spectrum that has not diminished and must be addressedimmediately. The AT&T and T-Mobile USA combination would haveoffered an interim solution to the spectrum shortage. In theabsence of such steps, customers will be harmed and neededinvestment will be stifled.
“AT&T will continue to be aggressive in leading the mobileInternet revolution,” said Randall Stephenson, AT&T chairmanand CEO. “Over the past four years we have invested more in ournetworks than any other US company. As a result, today we deliverbest-in-class mobile broadband speeds- connecting smartphones,tablets, and emerging devices at a record pace- and we are wellunderway with our nationwide 4G LTE deployment.
“To meet the needs of our customers, we will continue toinvest,” Stephenson said. “However, adding capacity to meet theseneeds will require policymakers to do two things. First, in thenear term, they should allow the free markets to work so thatadditional spectrum is available to meet the immediate needs of theUS wireless industry, including expeditiously approving ouracquisition of unused Qualcomm spectrum currently pending beforethe FCC. Second, policymakers should enact legislation to meet ournation’s longer-term spectrum needs.
“ The mobile Internet is a dynamic industry that can be acritical driver in restoring American economic growth and jobcreation, but only if companies are allowed to react quickly toconsumer needs and market forces’, Stephenson said.
The fine prints in the deal included DOJ’s blessing of AT&Tand T-Mobile’s collaboration in roaming. The more significant (or,if you will, the more bizarre) outcome was that as per AT&T’soriginal deal with DT, in the event of merger failure, AT&Twould pay T-Mobile $3 billion as a break-up fee and give T-Mobile$1 billion worth of AT&T-held wireless spectrum. In short, theUS government reduced the competitiveness of a US firm by forcing aUS firm to subsidize the wholly owned subsidiary of a foreignfirm.
In the name of preserving (domestic) competition, the USgovernment preserved a (foreign) competitor. “The problem is,”noted one expert at Slate, “ T-Mobile doesn’t want to be acompetitor anymore. It’s parent company DT wants out of the USmarket.” As the weakest among the big four, T-Mobile only added89,000 new customers between 2009 and 2011, while the industry tookin 33 million new customers. By essentially giving up since March2011, T-Mobile lost 467,000 lucrative contract customers during themerger process. By focusing on its terms of exit, T-Mobile turnedits attention away from network upgrades and improvements. DOJ andFCC cannot force T-Mobile to be in business, just like no one canforce customers to sign up for plans they do not want. By breathinga new lease on life into T-Mobile, that was exactly what DOJ andFCC did: forcing T-Mobile to be in business against its (and it’sparents company’s) own wishes. The same expert at Slatecontinued:
Sure, companies like T-Mobile and Sprint can offer cheaperplans, but the success of Verizon and AT&T shows price is notour primary concern when it comes to wireless service. We wantshiny smartphones and big, powerful, reliable networks… Rather thanstay for competition, the merger would have intensified the warbetween the two giants, AT&T and Verizon. And for those peoplefor whom price is paramount, there would remain not only Sprint,but a slew of smaller, regional providers like Leap andMetroPCS.
In 150 words or more complete the following (use outsidesources/ information if possible):
Defend this merger as T-Mobile‘s or Deutsch Telekom’sCEO (both firms were co-defendants in this case).
