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August 31, 2011

Justice Department Sues to Block AT&T Acquisition of T-Mobile

By Peter Bernstein, Senior Editor

In an unexpected turn in what has been an extremely convoluted drama, the U.S. Department of Justice “DOJ” as rumored earlier today, has just released its strong formal statement about its filing of a civil antitrust lawsuit to block AT&T’s proposed acquisition of the T-Mobile USA arm of Deutche Telekom AG. In minutes of the filing, AT&T’s stock took a hit and Sprint’s (News - Alert) (whose future has been under a cloud since the announcement of the deal) rose significantly. 

Rationale behind the lawsuit

The logic of the DOJ was relatively straightforward. In a press release detailing the filing and the reasoning behind it, DOJ stated:

The department said that the proposed $39 billion transaction would substantially lessen competition for mobile wireless telecommunications services across the United States, resulting in higher prices, poorer quality services, fewer choices and fewer innovative products for the millions of American consumers who rely on mobile wireless services in their everyday lives.

It sums it up succinctly. Sharis A. Pozen, acting assistant attorney general in charge of the Department of Justice’s Antitrust Division is quoted as saying, “Unless this merger is blocked, competition and innovation will be reduced, and consumers will suffer.” 

Much of the complaint centers around what the disappearance of T-Mobile would have as a competitor to AT&T, and by extension to Sprint and even the other major U.S. wireless provider Verizon (News - Alert). Citing the fact that T-Mobile is a competitor in 97 of the top 100 cellular markets in the U.S., the DOJ complaint, based in some instances on internal T-Mobile documents, states that:

  • The acquisition 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.” (They complain numerous examples of such disruptive innovations).
  • T-Mobile sees itself as “the No. 1 value challenger of the established big guys in the market and as well positioned in a consolidated 4-player national market”; and
  • T-Mobile’s strategy is to “attack incumbents and find innovative ways to overcome scale disadvantages. [T-Mobile] will be faster, more agile, and scrappy, with diligence on decisions and costs both big and small. Our approach to market will not be conventional, and we will push to the boundaries where possible. . . . [T-Mobile] will champion the customer and break down industry barriers with innovations. . . .”

Echoing much of the language that has been filed by smaller competitors and consumer groups in the FCC (News - Alert) and California PUC’s review of the merger, the complaint also states that:

“regional providers face significant competitive limitations, largely stemming from their lack of national networks, and are therefore limited in their ability to compete with the four national carriers. And, the department said that any potential entry from a new mobile wireless telecommunications services provider would be unable to offset the transaction’s anticompetitive effects because it would be difficult, time-consuming and expensive, requiring spectrum licenses and the construction of a network.”

DOJ was also careful to say that the merits of the deal as outlined by AT&T were given very serious consideration. However, the department concluded that AT&T had not demonstrated that the proposed transaction’s promised efficiencies would be sufficient to outweigh the transaction’s substantial adverse impact on competition and consumers. 

Finally, again echoing concerns that have appeared before, the department said that, “AT&T could obtain substantially the same network enhancements that it claims will come from the transaction if it simply invested in its own network without eliminating a close competitor.” This is a reference to the fact that it would cost AT&T roughly $4.0 billion to build out its own national 4G LTE network instead of the $39 billion purchasing T-Mobile will cost.

What’s next?

The short answer to the above question is, “who knows?”  While the FCC just last Friday turned the “shot clock” back on for its consideration of the deal prompting praise from AT&T and T-Mobile, the weight of the DOJ suit on that proceeding will be palpable. One can only imagine the recalibration going on concerning strategy at AT&T today. They have been engaged in a very heavy national advertising campaign promoting the deal, and reportedly clinched the deal by bettering an offer from Sprint by saying they would pay Deutche Telekom $25 billion in cash and include a $3 billion breakup fee.

Whether AT&T has the intestinal fortitude to press ahead now that DOJ has weighed in will be interesting to watch. As a person who started in this industry many years ago as a telecom industry lobbyist, I know from experience that going the route of getting support from members of Congress during an election cycle, especially during an impending presidential year, is a slippery slope. 

Reality is that our elected officials like to play both sides against the middle when it comes to telecom industry issues so they can collect from everyone. The reason is, as important as these matters are to those of us who are deeply passionate about them and have spent our professional careers in this wonderful industry, telecom policies are not things voters change their voting preferences about.   Thus, expect to see a lot of bluster to fill campaign coffers, but not much real support for the deal coming out of Congress. 

What will come out of Congress will be statements of satisfaction with the DOJ from those who have opposed the deal. In fact, not surprisingly, Rep. Ed Markey (D-Mass.), a strong opponent of the deal since its announcement, issued a statement that says: 

“It is innovation, investment in new technology and paranoia-driven Darwinian competition that ultimately leads to the changes that help consumers and competition. Today’s decision by the Justice Department promotes these values, benefiting consumers and our economy.”

With the congressional support route so problematic, the path to success for AT&T on this deal certainly got  a whole lot harder.  However, since this is now potential political theater as well as grist for the regulatory and legal mills, as Yogi Berra is famously quoted as saying, “It ain’t over til it’s over.” A lot of people in Washington, D.C. now are going to be very busy over Labor Day. 

This is certain to be a very fluid story. We will be back with more news as quickly as events dictate.

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Peter Bernstein is a technology industry veteran, having worked in multiple capacities with several of the industry's biggest brands, including Avaya, Alcatel-Lucent (News - Alert), Telcordia, HP, Siemens, Nortel, France Telecom, and others, and having served on the Advisory Boards of 15 technology startups. To read more of Peter's work, please visit his columnist page.

Edited by Stefania Viscusi
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