A reasonable observer would conclude that a recent and unusual decision by the Federal Communications Commission to hold an extra hearing on the proposed AT&T (News - Alert) acquisition of T-Mobile USA, said to be the first in nearly a decade, signifies in a clear way that the FCC has misgivings about the deal, and leans towards blocking it. The hearing before an administrative law judge has a lower test of evidence than that faced by the Department of Justice lawyers who also are working to block the deal.

Where DoJ has to prove that the proposed AT&T purchase of T-Mobile USA would substantially lessen competition is in the wireless market. The FCC's judge only has to find that the deal is "not in the public interest." Many would agree that the second test has a lower threshold than the first, even though some also would agree that the quantifiable argument about reduced competition already can be demonstrated using the standard HHI test.

HHI, the Herfindahl-Hirschman Index, a commonly accepted measure of market concentration, specifically is used by Justice Department lawyers when weighing antitrust matters. 

It is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. For example, for a market consisting of four firms with shares of thirty, thirty, twenty and twenty percent, the HHI is 2600 (30² + 30² + 20² + 20² = 2600).

The HHI takes into account the relative size and distribution of the firms in a market and approaches zero when a market consists of a large number of firms of relatively equal size. The HHI increases both as the number of firms in the market decreases and as the disparity in size between those firms increases. 

The problem AT&T faces is that the pre-merger HHI already suggests that the market is not competitive. In other words, the HHI score already is above the threshold that indicates market concentration. 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 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 the T-Mobile USA assets AT&T can shed to satisfy DoJ that there is not an HHI problem, because, by definition, AT&T--without acquiring any assets from T-Mobile USA-- already has an HHI problem. HHI for the AT&T deal

The merger agreement requires AT&T to secure all necessary approvals to close the deal by Sept. 20, 2012, a timeline observers say now is at risk. FCC Chief to Seek Hearing on AT&T Deal

But even a rejection of the proposed deal would not end the instability among the top ranks of the U.S. mobile market. Denied this particular "answer" to the question of how T-Mobile USA can exit the U.S. market, many would argue that T-Mobile still must do so. 

On the assumption that the DoJ would not sanction a merger between Sprint and T-Mobile USA, which, despite its many complications, would create three relatively balanced contestants at the top of the U.S. market, the likelihood, in the medium term, is some effort by T-Mobile USA to dispose of its U.S. holdings some other way.

That would logically include finding another buyer not currently among the top-four U.S. mobile companies. T-Mobile USA arguably does not have the financial resources to buy 4G spectrum of its own, though as a breakup fee AT&T is supposed to provide T-Mobile USA with spectrum assets and $3 billion in cash. Some think AT&T will avoid paying so much. 

But none of that "solves" the problem that T-Mobile USA is being squeezed both from the top of the market and the bottom. As it always is tough to be in the middle of a market, so T-Mobile USA finds itself pressured by lower-cost rivals as well as the "premium" offers from Verizon Wireless (News - Alert) and AT&T Wireless. Sprint faces similar issues, one might argue. 

Though none of the issues around the merger are finally resolved, there is a growing sense that the deal might, in fact, not be approved. Given a widespread belief that T-Mobile simply must exit the market for other reasons (it needs to redeploy capital elsewhere), we likely are not done with the issue of T-Mobile USA asset ownership.