AT&T's miscalculations: The company did not expect the level of opposition it would face in
pushing through the T-Mobile merger.

Allen Grunes
September 12, 2011

The National Law Journal

Many of us remember when the U.S. Department of Justice broke up the old telephone monopoly. As Tim Wu describes it in his compelling history The Master Switch, the breakup of the Bell system unleashed a powerful round of innovation. We enjoy the fruits of that innovation today.

The open Internet, and many of the devices and applications we now take for granted, would have been anathema to the giant phone company that suppressed the answering machine for decades and resisted all attempts to interconnect with its network.

But, as Wu argues, information empires seem to have an innate desire to control everything. And like some Hollywood monster, AT&T has been busy reassembling itself. So, to some of us in the antitrust world, it came as no surprise when, on Aug. 31, DOJ filed suit to block the proposed merger of AT&T Inc. and T-Mobile USA Inc.

AT&T was undoubtedly aware that there were real antitrust risks when it decided to gobble up its smaller rival earlier this year. Certainly T-Mobile recognized those risks; it demanded a package of cash, spectrum and a roaming agreement worth an estimated $6 billion to $7 billion if the deal didn't go through.

AT&T miscalculated the level of opposition it would face in pushing the deal through. After the merger was announced in March, numerous telecommunications firms came out in opposition. The opponents were in all parts of the wireless ecosystem, ranging from equipment and infrastructure providers to smaller wireless providers to roaming partners to potential new entrants. Many of these firms do business with AT&T today, and their willingness to brave AT&T's displeasure by taking a public stand is noteworthy.

In mid-July, AT&T presented a "new economic model" on efficiencies to the Federal Communications Commission (FCC). That was a sign the merger was facing challenges. It was significant, first, because AT&T apparently felt compelled to change its economic theory. Changing horses in midstream is never a good thing for parties in the midst of merger review. Second, in the antitrust world, one only argues efficiencies when a merger is likely to be considered anti-competitive.

Then Sen. Herb Kohl (D-Wis.) spoke out. Kohl, who is chairman of the Senate antitrust subcommittee, sent a detailed letter to DOJ and the FCC on July 20 urging that the merger be blocked. The seven-page letter, which resulted from the subcommittee's hearing on the merger in May, is a masterpiece of antitrust analysis. In it, Kohl takes aim at, and refutes, AT&T's arguments point by point, with citations to the record and prior statements by the parties. Ever the antitrust tactician, his examination laid waste to AT&T's claims through a skillful dissection of each fallacy that had been presented.

In response, AT&T dismissed the chairman's letter as "inconsistent with
antitrust law."

When Sen. Al Franken (D-Minn.) sent an even longer letter to the agencies on July 26, T-Mobile said the senator was "just wrong."

A potentially more serious misstep occurred in mid-August, when AT&T posted a partially redacted letter on the FCC Web site. The letter was later removed and fully redacted. But the damage was done.

For months, AT&T had been claiming that it needed the merger to bring high-speed wireless broadband to 97% of America, especially rural America. This is what it told Congress. But AT&T apparently had done some internal analysis suggesting it could accomplish the same objective - even without the T-Mobile merger - at a cost of $3.8 billion. That number apparently should have been redacted.

As a result of this misstep, AT&T created for itself a major credibility nightmare. One may well ask why it needed to spend $39 billion to buy a competitor when it could accomplish the same goal for one-tenth of the price. AT&T's response was that the letter "contained no new information." Maybe it was not new information for the FCC, but it was new to Congress and the rest of the world.

And then, of course, on Aug. 31, DOJ filed suit to block the merger.

The lawsuit reportedly came as a shock to both AT&T and T-Mobile. AT&T put out a statement that it was "surprised and disappointed." But it should not have been so surprised. After all, the mobile wireless market is highly concentrated, it is very difficult to enter, and T-Mobile is an aggressive competitor on price - and price competition is what antitrust law worries about most. In addition, AT&T had submitted sworn affidavits in prior mergers that this is a national market, meaning there are only four firms that really count: AT&T, Verizon, Sprint and T-Mobile.

PROBABLY NOT A PLOY

There is some speculation that the lawsuit is a negotiating ploy to get a settlement out of AT&T. I very much doubt it. First, that is not the way DOJ operates. The decision to file a complaint is never taken lightly. Second, judging from the complaint itself, DOJ believes that T-Mobile is an important source of competition and does not believe that this competition could be easily replaced. For that reason DOJ is not likely to let AT&T kill T-Mobile, carve it up and sell off the little pieces.

There is one miscalculation that AT&T has not made yet, but which stands as a temptation. AT&T has connections in the White House. It would be a mistake for AT&T to attempt to use those connections to influence the process. One only need remember Richard Nixon's interference in DOJ's case against International Telephone & Telegraph, a major campaign contributor, to realize what could happen.

Almost a century ago, AT&T's chairman, Theodore Vail, remarked that the public never benefited from the "strife" of competition. Vail believed instead that the phone company should be an enlightened monopoly.

As a country, we favor competition over monopoly. The old AT&T did not share this view, and, unfortunately, the new AT&T is beginning to look and act like the old AT&T. Perhaps some old monopoly gene has started to become active again in its corporate DNA. Could this be at the heart of its miscalculations?

Allen Grunes practices antitrust law and litigation in the Washington office of Brownstein Hyatt Farber Schreck. Previously, he served in the U.S. Department of Justice's Antitrust Division. He currently serves as chair of the Antitrust Committee of the Bar Association of the District of Columbia. His firm represents DISH Network, which opposes AT&T's proposed merger with T-Mobile.

Reprinted with permission from the September 12, 2011 issue of The National Law Journal. © 2011 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.