The Department of Justice (“DOJ”) today filed suit in federal district court in the District of Columbia to permanently enjoin AT&T’s proposed acquisition of T-Mobile. The DOJ’s complaint alleges that AT&T’s acquisition of T-Mobile will lead to “higher prices, less product variety and innovation, and poorer quality services due to reduced incentives to invest than would exist absent the merger.” Although DOJ left the door open for negotiations to address its concerns about the merger, the language in the DOJ complaint may make it difficult to reach agreement on remedies sufficient to mitigate the alleged harms. The Chairman of the Federal Communications Commission, which is also reviewing the merger, stated that the record before his agency also raises serious concerns.
Relevant Product and Geographic Markets
As is always the case with antitrust merger review, the DOJ first identified the relevant product and geographic markets in which competitive harm could occur. The DOJ identified one product market as mobile wireless telecommunications services, including both voice and data services. No surprise there as this has been the relevant product market in past wireless mergers. More interestingly, the DOJ also identified a separate product market consisting of mobile wireless services provided to enterprise and government customers. Critics of the merger had pressed for this separate market designation because it is dominated by AT&T, Verizon and Sprint and the DOJ alleged that T-Mobile was poised to enter this market as an aggressive price cutter.
The definition of the relevant geographic market has been a major point of contention with AT&T arguing that regulators should assess competitive effects in local markets, which has been used in past wireless mergers, while opponents had argued for a national market review. The DOJ in a sense combined the two. It adopted local markets, specifically Cellular Market Areas (“CMAs”) as the relevant geographic market. The DOJ complaint notes that AT&T and T-Mobile compete directly with each other in at least 97 of the nation’s top 100 CMAs. The DOJ also alleged that competition between AT&T and T-Mobile “operates at a national level,” and that this national competition “is conducted in local markets.” The DOJ analysis is thus consistent with precedent in using local geographic markets, but also allows it to take into account the competitive effects of the merger on a national level. The DOJ also established a separate national geographic market for enterprise and government customers.
In the first instance, the DOJ assesses competitive effects of horizontal mergers, that is, where a merger of competitors that compete head to head in the same markets, by measuring concentration using the Herfindahl-Hirchman Index (“HHI”). The HHI can be considered a numerical proxy that triggers antitrust concerns. An HHI above 2500 is considered a highly concentrated market and a merger that increases this concentration level by more than 200 points is presumed to likely to enhance market power. The DOJ complaint alleges that 96 out of the 100 top CMAs would have a post-merger HHI in excess of 2500 and that in 91 markets, including the nation’s 40 largest markets, the HHI would increase by more than 200 points.
Concentration levels as measured by the HHI is only part of the analysis. The DOJ’s allegations regarding specific competitive harms shows that the agency wholly rejected AT&T’s claims that T-Mobile is an inconsequential competitor. Instead, the DOJ found, based on documents produced during discovery, that T-Mobile was a highly innovative price cutter that directly competed with and affected AT&T’s behavior. The complaint cites, for example, a January 2010 AT&T internal document stating, with respect to the roll-out of new competitive broadband networks by several carriers that, “[T]he more immediate threat to AT&T is T-Mobile” and quotes an AT&T employee in January 2011 stating that AT&T added HSPA+ (considered a 4G service) in AT&T devices because T-Mobile had done so. It also found, based on customer churn information, that many consumers moved between AT&T and TMobile, indicating that consumers view the two as close substitutes. The complaint further alleges that T-Mobile’s elimination as a competitive force cannot be replaced by the smaller regional carriers that AT&T relied upon in its application to demonstrate sufficient competition. Lacking nationwide spectrum and networks, these competitors will not have the ability to constrain AT&T’s behavior and the other major national wireless carriers. The DOJ also found that new entry on a nationwide level was not be likely or timely given the entry barriers.
The DOJ alleged that AT&T “cannot demonstrate merger-specific, cognizable efficiencies sufficient to reverse the acquisition’s anticompetitive effects.” AT&T has argued that the merger is necessary to meet increasing demands on its capacity and that the merger would enable it to build out to rural areas. In its press release, the DOJ concluded 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.”
The DOJ complaint has been filed in federal district where it has been assigned to Judge Huvelle. DOJ will have to prove the allegations in the complaint, but first months of discovery and pretrial maneuvering could take place. AT&T has said it was surprised by the DOJ decision and the it would fight the agency in court. Given that it would have to provide T-Mobile some $7 billion in cash and spectrum assets should the merger not go through, AT&T has strong incentives to battle the DOJ in court.
The DOJ has signaled, however, that it is open to further negotiations and concessions by AT&T. The filing of the complaint does not prevent DOJ from reaching a settlement, called a consent decree, at a later point in time. The judge would have to approve decree. The last time AT&T fought the DOJ in court, the parties filed a consent decree after nearly a year of trial and the trial judge, Judge Greene, modified that decree by adding further conditions. The FCC too, which now likely will not act until the DOJ case plays out, could also add conditions for approval should DOJ and AT&T reach a deal.
The strong language in the complaint suggests that it might be difficult for AT&T to come up with sufficient concessions to mitigate the alleged anticompetitive effects. The DOJ identified excessive concentration in all of the country’s top wireless markets. These are the same markets where AT&T has said it needs T-Mobile’s spectrum and network assets to address capacity concerns. Significant divestitures in such markets would seem to undermine the basis of the merger. Other “behavioral” conditions may also be adopted, such as compliance with net neutrality rules, reduced special access rates or better roaming agreements. The DOJ would have to convince the judge that such conditions sufficiently strengthen remaining competition as to overcome the loss of TMobile.