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December 31, 2011 3:54 PM

The Year of "The Whale"

Well, here it is: New Year's Eve 2011, and--in case you haven't been reading along--over the past several months, I kind of took to calling Sprint "the Whale" in one of my blog posts based on their disproportionate (to their size in the market) influence in Washington (everything they do is "crazy big").  So when it came time to recognize a regulatory "player of the year", I have to give props where they're due, and congratulate the Whale.

Whether you like it or not, and whether by skill or luck, you have to give the Whale credit . . . of all the big telecom players/issues considered this year, the Whale pulled a clear-cut victory on their priority issue when AT&T and DT announced they were abandoning their deal to allow AT&T to acquire T-Mobile.  This doesn't happen much, and you have to recognize that this is no easy feat.  For this alone, 2011 was the year of the Whale, and 2012 will, by virtue of the Whale's win in 2011, by no means be the year of the consumer

Not taking anything away from Sprint's achievement, the coordinated actions of the DoJ and the FCC, did ensure that AT&T was never going to get an opportunity to defend itself on the merits in front of an impartial arbiter.  This is because, once it becomes clear that the regulator (which has much broader authority to deny the merger than that conferred on federal judges under Section 7 of the Clayton Act) has made up its mind to deny a merger, a court has a lot less incentive to even try an antitrust case. 

Consider that a U.S. District Court--under its Section 7 analysis--can only prevent the merger if it finds that it will lessen competition.  The FCC, on the other hand, seems free to ignore the analytical framework the court is bound by, and the FCC does not have to approve a merger unless the parties convincingly demonstrate that the merger "promotes" the public interest.  Thus, the FCC always holds the final cards. 

In cases like the DoJ/AT&T case--where DoJ seeks a permanent injunction (equitable relief that requires a longer trial/discovery period than traditional "extraordinary" merger relief, such as preliminary injunctions and temporary restraining orders, courts might well be much more likely to include the regulator in the process early, so as to avoid "wasting time."  Unfortunately, administrative/judicial efficiency can come at the cost of the merging parties' due process rights.

So, Congratulations! are in order for Sprint this New Year's Eve, and, looking forward, I would say that the way the "2 layer" merger review process (Justice/FTC + Regulatory Agency review) was exploited this year by the Agency, will possibly tee up this issue for legislative elimination in 2012. 

Happy New Years! to all my readers.  Thanks for taking the time to read my blog--I'm grateful for every "unique" view that I get--so tell all your friends!  Best wishes to all for a safe and successful 2012!

November 30, 2011 10:47 AM

FCC Dismisses Applications, But Can't Let Go

Yesterday, the FCC issued an Order Dismissing the Applications of AT&T and Deutsche Telecom for license transfers.  This was not unusual.  The way the Commission did it, and the drama leading up to yesterday's events was.

As AT&T's Jim Cicconi succinctly and thoroughly notes in a blog post yesterday, the Commission's action was the only legally correct response to AT&T and DT's request to withdraw their license transfer applications.  So far, so good, but then the FCC decided to include a 109 page document entitled "Staff Analysis and Findings", which is primarily FCC staff's attempt to analyze the merger under Section 7 of the Clayton Act (the subject of pending litigation by the agency charged with enforcing Section 7 of the Clayton Act in a venue authorized to decide challenges brought under that statute)  This is where it gets interesting.

Yesterday's action--the appending of the "Staff Analysis and Findings" to the Dismissal Order--was interesting, not only because it was unusual and unnecessary to accompany an order terminating an FCC matter, but because the Commission seemed so intent on releasing its own primarily antitrust analysis, when the parties are already engaged in active antitrust litigation in a court with the jurisdiction to decide antitrust claims.  

While the Commission attempts to offer some superficially unpersuasive justifications in paragraph 8 of its order, these justifications are laughable. For example, they note that "a lot of people spent a lot of time on this"--in what large matter do they not?  The Commission also argues that releasing the document "furthers transparency"--this is the one that is laughable.  The Commission never releases pre-decisional, deliberative documents.  In fact, there is a Freedom of Information Act exception that allows agencies to withhold exactly this information.

Finally, the FCC notes that "the parties could still re-file."  But, doesn't this argue for just holding on to the original draft order?  Far from persuading, the order's empty reasoning leaves the reader with the question of "why did the Commission really bother?"  

Comm-temptible?

Personally, when I heard the Commission planned to release a report containing the "Commission staff's" opinions (that were allegedly the basis of the draft designation order) along with an order approving the parties' withdrawal of their applications, my reaction was that the agency was engaging in a distasteful, rude, and uncivil disregard for the legal process. After all, the proper authorities were already well engaged in antitrust litigation with the parties before a U.S. District Court.

You would hope that the FCC would show some respect for the rule of law, and the responsibilities of the judiciary, and simply take the action they were legally bound to take--dismissing the license transfers.  But instead, the FCC displayed a relative contempt for the law.

The Commission certainly understood that it was extinguishing its own jurisdiction over the applications it was dismissing. So, what purpose did the Commission have that was so important that would cause it to include--in a dismissal order--its own, non-expert, antitrust analysis that was admittedly not based on solid evidence (which is why the FCC wanted to refer the matter to an ALJ)?  

It's hard to believe that the Commission wasn't aware that it would at least create the perception that it was attempting to exert some extra-legal influence over the pending antitrust litigation.  Thus, my initial reaction--when I heard what the Commission planned to do--was one of disappointment at the agency's disregard (if not contempt) for the integrity of the court proceeding.  

Or Comm-edic?

I spoke to a reporter last night who had talked to a lot of other attorneys.  The reporter wanted to get my "take" on the Commission's action--which I just described.  The reporter told me that I was the only person that had expressed this opinion.  It turns out that most people were focused on the substance of the staff report, and what (generally negative) effect this report would have on AT&T's prospects for its antitrust litigation.

Many people opining on the matter claimed to be under the impression that the FCC was asked to release its report at the request of the Antitrust Division. Personally, I don't believe this to be true, because it just sounds silly on its face.  The basis of this report was a draft order, prepared by Commission staff for the Commission's own internal purposes.  The "draft order" was clearly converted to a "staff report and analysis" in an awfully short period of time, and this is what makes the "Antitrust Division request" theory all the more incredible.

First, what Antitrust Division attorney, working on their own case, would want to be stuck with a report, analysis, and support prepared by FCC staff, and released under a cloud of bias?  It makes no sense.  FCC staff did not write the Division's complaint, FCC staff have not reviewed the same evidence as the Division staff, so it is more likely that the FCC staff report would lock the Division into a weaker case than the Division should be able to make for itself.

Second, why would the Antitrust Division want its case, including supporting materials, laid out for AT&T's inspection for a full two and a half months prior to trial?  What attorney would be comfortable with this arrangement?

Third, whether the DoJ asked for it or not, they now have to deal with the prospect of bias in the eyes of the court.  Even though the defendant is a big company, courts are mindful of fairness.  Any contradictory inconsistency between the Division's actual case and the staff report will be the government's burden to reconcile and justify.

To What End?

There is no good answer for why the FCC included its report in its dismissal order.  By showing bias at this point, can the FCC really re-claim the mantle of the "public interest?"  If the case settles, or the parties win the litigation, can the FCC do anything more than process and approve a new application?  

November 16, 2011 3:13 PM

H&R Block, AT&T, and the Error of Recency

Last week, the U.S. District Court for the District of Columbia, released its opinion granting the Antitrust Division of the U.S. Department of Justice a preliminary injunction preventing H&R Block ("HRB") from acquiring the stock of "2SS Holdings, Inc.", the maker of TaxACT, a digital "do it yourself" ("DDIY") tax preparation software.  

Since this news was released on November 2nd, many have speculated, opined and hypothesized--without basis--that this decision does not bode well for AT&T's acquisition of T-Mobile USA from Deutsche Telecom.  According to just about everyone, the impact was decidedly positive for the DoJ's chances to win its case against AT&T/T-Mobile if it goes to trial next February in Judge Huvelle's courtroom.

The simplified reasoning was that because the government had just prevailed on its most recent horizontal merger challenge, it will likely prevail on its next horizontal merger challenge in the same district.  These stories were the predictable result of a well-known human behavioral bias, known as the "error of recency"--the notion that humans tend to overweight the value of recent actions. While the "hot hand fallacy" and the "gambler's fallacy" were identified with respect to how humans approach "random" (i.e., "unrelated") events over 300 years ago, these biases continue to persist.

What is interesting, though, is that the "hot hand fallacy" infected all major stories reporting, or commenting on, the event.  The result was that the "legitimate" news stories (e.g., Bloomberg and Reuters) were remarkably similar to the interest group blogs.  But, since no one has yet attempted to offer any perspective on the HRB case (unaffected by the error of recency), let's look at how the two cases might be perceived differently by a different court, with a different set of facts.

Market Definition

HRB

This is perhaps the most obvious difference between the two cases.  The HRB case was, strategically, much more of a traditional horizontal merger case.  The basic strategy in a horizontal merger case is for the plaintiff to seek to define the markets (product and/or geographic) very narrowly, and for the defendants to seek the broadest possible market definition.  For example, if the alleged market was soft drinks, defendants would want to argue that all non-alcoholic beverages, including tap water, should be included in the product market.  

It would not be going too far to say that HRB was all about product market definition.  In fact, the court devoted more than half of its opinion to evaluating each party's claims regarding the properly-defined product market.  Only if the court agreed with the DoJ's  contention that DDIY software was a discreet product market, would the government have been able to show sufficiently high concentration numbers to make its case that this merger would lessen competition.

Defendants, on the other hand, were arguing that the market also included professionally-assisted tax preparation, and (fatally) consumers that file their tax returns without any assistance.  The court found this definition impermissably broad, because the inclusion of "pen and paper" filers distorts the market because these filers were not purchasing any product or service, but merely performing a legally-compelled "chore."

Ultimately, the court found the DoJ most persuasively defined the relevant product market.  After adopting "DDIY" as the product market, the concentration numbers were substantial.  The market leader, Intuit, had around a 62% market share, with HRB and 2SS coming in second and third with approximately 15.5% and 13% shares, respectively. Now, let's compare the market definition facts of the AT&T case.

AT&T/T-Mobile

Unlike the HRB merger, there are unlikely to be many, if any, novel proposed market definitions presented by this proposed wireless acquisition versus any of the many others for which the DoJ has alleged the same product and geographic markets it is alleging in the present complaint.
 
Competitive Effects--HRB vs. AT&T/T-Mobile

Contrary to the assumptions of some commenters, however, mergers are not evaluated solely on concentration numbers.  The HRB court, relying on U.S. v. Baker Hughes, explained that "[t]he Herfindahl-Hirschman Index cannot guarantee litigation victories." Opinion at 53 of 86 (internal citations omitted).  So let's compare the alleged anticompetitive effects of both proposed mergers.

First, we have to recognize that under the worst case for AT&T/T-Mobile, almost every geographic market starts with much lower concentration numbers--and smaller increases in concentration due to the merger--than in HRB.  The higher initial concentration numbers, and the greater changes in concentration in HRB, make it easier to understand how the simple removal of one vigorous competitor (the court eschewed the term "maverick") could have an anticompetitive effect.

Second, consider also that the DDIY tax preparation market was a differentiated product market, in which the proposed acquiring/acquired firms were each other's closest substitutes.  Thus, it was fairly easy to understand the DoJ's unilateral effects theory--that HRB could raise the price on its "high end" DDIY services and still capture lost sales through its ownership of the "low end" acquired brand. 

On the other hand, it is unclear whether any true "differentiation" exists in the wireless mobile telecommunications service market.  Unlike in HRB, the government has not alleged that retail consumers perceive AT&T and T-Mobile to be each other's closest substitutes.  Thus, it seems unlikely that this merger will provide the post-merger firm with the opportunity to execute a unilateral price increase.

The Effects of H&R Block on the AT&T/T-Mobile Merger

Did you really think I'd try to answer that question?  I have no idea.  It's obvious that the facts of the HRB merger made it into a more traditional battle over a narrow vs. broad product market.  On the other hand, from the beginning the AT&T/T-Mobile merger has been about competitive effects.  All we really know is that, while it's a gamble to try to predict the outcome of a case based on oral arguments, it's an odds-against bet to try to predict the outcome of one case based on the near-term results of an unrelated case. 
 
November 10, 2011 2:14 PM

Even My Boring Blogs Are Worth Reading

I'll be the first to admit that not everything I write is some kind of jewel that's just going to draw everybody in and make salient, compelling points in a hilariously entertaining fashion.  Truth be told, sometimes I don't even try.  While I always write about subjects that hold some interest for me (and try to make points that other people aren't talking about), sometimes I write about things that seem to only interest me.

One of those times was about 6 weeks ago, in a post entitled "Should the Merger Guidelines Come with Guidelines?  The point of the post was that the Guidelines don't really account for barriers to exit (which increase barriers to prospective entry), especially when merger enforcement could exacerbate already-high entry barriers by adding "barriers to exit", which would not otherwise exist.  Does anyone even follow the reasoning that the agency--by undertaking an enforcement action--can change the original characteristics of the market on which its action is focused?  I didn't think so.

BUT, if you did read the whole post, you would have seen this quote "Perhaps China Telecom, Carlos Slim, SingTel, or some other prolific foreign telecom investor, will, at some point, come to DT's rescue?" (emphasis added)   If you read this far, then you wouldn't have been at all surprised to see this story from Bloomberg a couple days ago, announcing that China Telecom plans to enter the U.S. market sometime in 2012.  Interestingly, the President of China Telecom Americas does not rule out entering on an own-facilities basis, noting that "money is not a problem."

So, on the off chance that the government and AT&T are unable to work out a satisfactory compromise that allows AT&T to expand output, protects consumers and rewards DT's substantial investment, it looks like all hope might not be lost for DT.  I write this for you 4 readers that did read that post.  Rest assured, I'm doing my best to provide a thorough analysis of all potential consequences of government actions--even unintended consequences.

If you're one of my few readers . . .  thank you . . . and please give your friends this message: "Telecomsense: Just Shut Up and Read It!"

November 4, 2011 3:03 PM

The Walking Dead: Still Walking, and Still Dead

I kind of feel like I'm the guy that made it all happen.  All I have to do is to call the Sprint/C Spire antitrust cases against AT&T/DT/T-Mobile "The Walking Dead" on Halloween, and what happens?  Two days later, the court issues an order that really turns these cases into the legal equivalent of zombies, by dismissing all but a fraction of one of Sprint's claims, and preserving C Spire's equally-weak claims.  Doh!  

To be fair, though, after applying the law evenly and giving plaintiffs every benefit of the doubt--the court allowed all adequately-pled claims to move forward; notwithstanding the poor prognosis for these surviving claims.  Now, just what "move forward" means is anybody's guess, but I'll again make some intrepid predictions.

Sure, some of you might say that because the court did not dismiss the private cases in their entirety as I predicted at the beginning of the week, I should be eating at least a little crow--maybe the feathers of the claims that are still left--and that's fair.  So, if you want to make fun of me, please do.  I'm not so important that I can't take a little abuse.  But, since I never get comments, please do me a favor and submit them in the "comments" section--it'll be fun.

Now that we've seen the court's order, let's look at what's left of the private case claims, and try to guess what happens next.

Sprint

Sprint still maintains a small portion of its argument that the merger will injure them in the input market for handsets.  Sprint contends that AT&T's acquisition of T-Mobile will increase AT&T's incentive and ability to use its post-merger buying power to coerce handset/operating systems vendors to disadvantage Sprint by foreclosing access to the most desirable handset models.  Sprint is allowed to try to prove its theory that AT&T's incremental increase in its buying power (as a result of the merger) will cause AT&T to not just get lower prices for itself, but to disadvantage Sprint.

Outcome:  Ouch!  Almost the worst imaginable, because if you were at the oral argument on October 24th, you would have heard the court incredulously ask Sprint, "are you saying AT&T and Verizon control Apple and Google?"  By allowing only this claim to survive, the court pits Sprint not against AT&T, but against the handset vendors.  Why do I say this?

Because in order for this claim to succeed, Sprint needs to get a handset vendor to agree with it in court.  After committing over $20 billion in handset spend over the next 3 years to one vendor (Apple), do you really think Sprint is going to get a vendor to alienate AT&T and Verizon by making such a statement?

But let's just consider the facts as they stand.  Handsets are a worldwide market.  T-Mobile is a wholly owned subsidiary of Deutsche Telecom: a company with 128 million mobile subscribers today (more than either AT&T or VZ).  Hasn't Sprint already seen the "horror" of a competitor with superior buying power?

Moreover, assuming T-Mobile stays a wholly-owned subsidiary of Deutsche Telecom (which recently combined procurement operations with France's Orange), T-Mobile becomes an even bigger threat (under Sprint's theory) as it will have more handset buying power than AT&T, Verizon, and Sprint combined (the joint DT/Orange procurement group will represent 286 million mobile customers).  Sprint is thus in the difficult position of asserting that AT&T--with an estimated post-merger customer base of around 130 million mobile customers--is a more dangerous buyer with T-Mobile, than T-Mobile is with DT and Orange.  Are you buying?

C Spire

The court clearly viewed C Spire's complaint as the better-pled complaint, in that it allowed more of C Spire's handset-related claims to stand, and the court allowed C Spire's roaming injury allegation to stand (that a portion of C Spire's customers are GSM-based and buy roaming from AT&T and T-Mobile now, but will be left with only AT&T post-merger).  

Prognosis:  On the handset claims, C Spire has essentially the same problems as Sprint, but made worse by the fact that C Spire only has 875,000 customers.  U.S. Cellular, Leap, and MetroPCS all have multiples of this number--making these firms (as well as the larger firms) much more attractive to handset vendors.  After all, is it really unnatural, or anticompetitive, that a Sears or WalMart might be able to carry a larger inventory selection (for any product) than a small town general merchandiser?  For an AT&T, with or without T-Mobile, the defense is as simple as "don't hate me 'cuz you ain't me."

C Spire's surviving roaming claims are even less attractive than Sprint's "monopsony" claim.  Instead of pitting C Spire against its own vendors (as the surviving Sprint claim does), this claim pits C Spire against its regulator. You see, in order to prove that the proposed acquisition could harm C Spire's access to a regulated service, C Spire will have to produce some evidence that the regulator can't effectively regulate AT&T's obligation to offer roaming.

What's Next?

Well, considering that the DoJ was well aware of all of these vertical claims, and chose to include none in its complaint, we have to believe the private cases are on the slow burner.  Why? 

First, the court didn't schedule a status conference on discovery and case management until 5 weeks after its order came out--December 9th.  Coincidentally, this status conference occurs two days after the parties to the DoJ case have identified all of their witnesses (by December 7th).  (see scheduling order, para 11).

It's highly unlikely that the court will require AT&T to defend on two fronts--and indulge discovery on these unique (from the DoJ complaint) claims--until after the February 13th trial ends.  Before these claims will go to trial, we'll know the outcome of the DoJ case--most likely rendering these claims moot, either way.  

It seems like a good time for Sprint to consider that, if it really wanted to help DoJ, how effective a witness it will be as an interested party in a related case vs. simply folding a losing hand.