AT&T (News - Alert) will offer concessions in an attempt to head off the U.S. Department of Justice lawsuit opposing its purchase of T-Mobile USA, Reuters reports. AT&T seeks deal Reuters says sources say AT&T will promise to keep existing T-Mobile USA retail plans, and sell some assets, representing perhaps 25 percent of customers.

Some may question the viability of those remedies, if the DoJ objection really is that the acquisition violates the concentration index it routinely uses.

One of the ways to measure market concentration is the Heffindahl-Hirshman Index or HHI, often used as a measure of market concentration. The HHI is the square of the percentage market share of each firm summed over the largest 50 firms in a market. Here is the pre-merger market HHI which already suggests that the market is uncompetitive. HHI is the problem

For some of us who just want a quick rule of thumb that tells you when there is potential antitrust concern, 30 percent market share tends to work.That has been the figure cable TV executives in the United States have worried about, and which the Federal Communication Commission at one point set as the limit of subscriber market share for any U.S. cable operator. Both AT&T and Verizon (News - Alert) Wireless already have market share that exceeds that figure.
 

The Justice Department will generally investigate any merger of firms in a market where the HHI exceeds 1,000 and will very likely challenge any merger if the HHI is greater than 1,800. With a HHI over 2,300 any deal will be heavily scrutinized and most likely rejected. Even a merger between T-Mobile USA and Sprint, with a resulting 28 percent market share, would probably not be allowed on the same antitrust grounds.

It isn’t clear how much of T-Mobile USA AT&T can shed to satisfy DoJ that there is not an HHI problem, because, by definition, AT&T already has an HHI problem. AT&T executives have planned, or expected, to make some divestitures to win approval. The issue right now is that if the issue is the HHI, some divestitures won't help. 

Oddly enough, even the oft-suggested merger of Sprint and T-Mobile USA might now be impossible for regulatory reasons, and that had not been among the big concerns observers have mentioned about that particular pairing. The big issues there were seen to be incompatible networks and the complexity of managing four air interfaces at a time. If DoJ sticks with the HHI test, regulatory approval would have to become the biggest obstacle.

It is not a surprise that the U.S. mobile industry is concentrated. Many would argue that heavily capital-intensive industries always take that market structure. Some would argue that "regulated" industries are more prone to more concentration than "unregulated" industries, but that seems not to be the case for the post-1996 Telecom Act market. Regulated industry concentration Some would argue that market dynamics lead contestants to "get bigger" in response to new competition. 

Some of us would argue that drive to get bigger also was driven by the difficulty of getting high-margin revenue anymore in a market whose major products had reached or passed the peak of their respective product life cycles, and a major shift of value to Web and Internet applications. When margins contract, suppliers try to maintain revenue by selling more units.

"Selling more units" is easier when a firm has many more customers. One might argue, paradoxically, that all of the major providers would be more innovative, and ultimately more successful, if they could no longer rely on acquisitions and scale in the legacy business to sustain revenue growth, but had to really work on creating the new products everybody seems to acknowledge they must have.

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