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!
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?"
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.
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?
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!"
Here, I'm referring to the private antitrust cases filed by Sprint and C Spire (formerly Cellular South) seeking to enjoin the AT&T/T-Mobile merger. It's Halloween, the night on which the dead are said to be able to walk the earth. While the private antitrust cases are not officially "dead", they are (for now) some stuck between the world of the living and the realm of the dead.
A week ago, the court heard oral arguments on AT&T's Motion to Dismiss these private cases. Most news reports correctly noted the court's skepticism as to the viability of these cases--outside of the DoJ's own suit to enjoin the acquisition of T-Mobile by AT&T.
But, it doesn't take a psychic, a medium, or a Ouija board to understand that these cases are effectively among the many "dead" cases that still haunt the courts. Why?
Well, putting aside any of the court's skepticism and the many difficult legal standards these claims must survive, let's just consider whether the court, the public, or even the plaintiffs, stand to win by moving the cases forward. The answer is fairly simple.
If the government wins its case, the private cases become irrelevant because both the government and the private plaintiffs are seeking the same relief--judgment enjoining AT&T, DT, and T-Mobile from consummating the proposed transaction. On the other hand, if the government loses, both private cases will fall as well.
At the court's first hearing (on the U.S. v. AT&T case), Sprint told the court that if the government lost its case, Sprint would not proceed with its own case. While C Spire had not filed at that point, it is clear that C Spire's "injury" claims are simply too speculative to survive, or (even worse) rely on the court accepting a "regulatory evasion" theory (in other words, that even though the conduct feared by C Spire--e.g., the post-merger firm will raise roaming rates--can be addressed by the FCC, the post-merger firm will also be better able to evade such regulation).
So, if you're out tonight and run into these claims, fear not. Shifting metaphors, these are two turkeys that won't make it past Thanksgiving.
If anyone is interested, here are my notes on the court's questions regarding the "vertical" claims (i.e., those that the competitors, as opposed to the government, could bring) from last week's hearing.
Who knew what Hu knew, and when did he know it? The "who"/"Hu" is, of course (for you merger mavens), Victor "Hu" Meena, CEO of C Spire Wireless--the company formerly known as Cellular South, Inc. (Digression: I'm not sure adding "spire" to a letter is ever really a good sign. When I was at CompTel, we had a member named ACSI (American Communication Services, Inc.), which changed its name to "e.spire Communications." You know what happened? It ex-pired--declared bankruptcy just 3 years later. According to the pleadings, "c spire" was looking to con-spire with AT&T not to engage in facilities-based service competition; not good, but name-appropriate. See, AT&T Motion to Dismiss, at 1 (p.7 of 18) Lesson: if you want a new name, stay away from "spire"--it's just bad juju.)
The "what", of course, was that Hu knew that C Spire was going to get the Apple iPhone 4S in the coming weeks. So, why is the "when" so important? Why is it any of my business, or yours? Well, if C Spire was just "some company", we wouldn't care--and even if we did--it would be none of our business.
But C Spire isour business . . . for several reasons. First, wesupport C Spire. In fact, in 2010, we gave C Spire over $161 million in "high cost" subsidies--subsidies that the FCC has decided to no longer make available to wireless companies under the "equal support" rule (which provides wireless carriers with the same support as wireline carriers operating in rural areas even though they don't have equal costs). [For total sum of high cost support for 2010, by company, see Tables 3.22, 3.23, 3.25, 3.27, 3.28, 3.29, 3.30].
Second, Mr. Meena used the time of ourCongress to explain why the AT&T/T-Mobile merger would have the effect of "foreclosing" access to desirable handsets from smaller regional carriers. And, finally, about a month ago--on September 19th--C Spire decided to use our judicial resources to press a merger concern (that it cannot get timely, affordable access to popular devices) that it certainly knew to be specious at the time of filing. See, e.g., para. 26.
So, here's our question, "when did Hu know he was getting the newest iPhone at around the same time as AT&T, Sprint, and Verizon? I'm guessing it was probably for several months--given C Spire's description of how difficult it is for smaller carriers to get the attention of device manufacturers. Was it 5 months ago? Around the time Hu implored the Senate that--if the merger is approved--no one would ever make desirable devices available to small, regional carriers?
C Spire has about 900,000 customers. Let's say their average cost for the iPhone 4S is around $300 (in between the $200 and $400 versions). Let's further assume that C Spire would have to commit to purchasing a not-unreasonable 250,000 units. That's a lot of phones, and a pretty big investment by C Spire--at around $75 million.
I have no experience in the wireless service business, or the device manufacturing business, but I'm guessing that a deal like that would take a few months to work out. After all, the device manufacturer and the service provider have to work out an acceptable price, and unit commitment, that would make a C Spire-specific production run profitable for both parties. Moreover, this was no small commitment by C Spire--probably half, or more, of its USF subsidies for a year. A deal like this does not get done overnight. So what's the point?
Well, C Spire has to convincingly support their theory of merger-specific harm in front of the court on Monday afternoon. By then, I'm guessing C Spire or AT&T will have provided the court with supplemental information pursuant to Rule 15(d) of the Federal Rules of Civil Procedure. Come Monday afternoon, C Spire should expect to be asked when Hu knew about the iPhone, and why are they continuing to press what they have already demonstrated to be an unconvincing theory of harm?
[Since this is my last post before the oral arguments on AT&T's Motions to Dismiss, let me "keep it real"--because no one (not even AT&T) is going to tell you--but the private cases can only be dismissed. Why do I say this?
Because when a business has legitimate concerns about concentration (and possible anticompetitive consequences) resulting from a merger among its input providers, then getting the government to challenge the merger is the name of the game--period. Seriously; that's the best you can do as a potential "victim".
Let's think about it. Imagine you own a car company, and all the tire manufacturers want to merge to monopoly. Well, you can't sell a car without tires, and a tire monopoly could probably eat an additional $500 to $1000 more out of each vehicle sold. So you are really invested in getting the government to stop that merger.
But, here's the deal--and we all know it: if the government doesn't win, then you aren't going to win, either. So why would any rational interested party ever sue on a merger, after the government has already filed to enjoin the transaction? I've never even heard of such a thing . . . until now. Why waste the cash?
Each plaintiff would be working with the same set of facts and the same legal precedent. The trials are always before a judge, and never before a jury. On the same set of facts, you'd get the same judge as every other plaintiff, and you'll get the same verdict when the judge applies the same law to the same facts. Duuh?!!
I'm sorry if this is a "spoiler" for you, but I hope you've enjoyed the "Whale" series as well as this post. Thank you for reading at all. -Jonathan]
We all have bad days, or even bad weeks; that's just the human condition. You know what I'm talking about, right Coco? As a late friend of mine best put it, "sometimes your horse is supposed to lose." But, let's say that you lost a whole lot . . . like, maybe close to all of your credibility . . . in just 6 or 7 weeks? You'd probably wonder whether it was bad luck, or something you were doing--perhaps even suffering the consequences of hubris (in the Greek tragedy sense of the word).
Well, this is exactly the problem encountered by our friend Sprint (a/k/a "the Whale"). On August 31st, Sprint's credibility was at its apex--when they convincingly "sold" their version of the AT&T/T-Mobile merger story to the Antitrust Division of the U.S. Department of Justice. About a week earlier, on August 23rd, your humble blogger outlined a coherent merger strategy for Sprint, giving Sprint's prior statements every benefit of the doubt and allowing it to keep its public voice consistent without being any worse off.
Did Sprint take my advice? Of course not! But let's look at what Sprint actually did in the subsequent several weeks (post 8/31) and you tell me whether they are victims of bad luck, or are suffering something akin to the proverbial tragedy that follows hubris?
Hubris or Bad Luck?
1.) September 6th. Sprint files its own Complaint seeking to enjoin the AT&T/T-Mobile merger. Sprint also sought to be included, for discovery purposes, as a party in the United States' case--a request the court denied.
Hubris? Yes. Given that the DoJ had already filed, Sprint had nothing more to gain by filing its own case. It was an unnecessary and reckless risk. The best they get is a few days of headlines, the worst is that Sprint's credibility comes under scrutiny, as their claims get dismissed.
Consequences. Filing a private merger suit alone is risky enough; no one has ever won this bet. But seeking joinder with the government, even for discovery purposes? As explained in an earlier post, this tactic was contradictory, absurd, and doomed Sprint's private standing. Moreover, even before Sprint's Complaint was filed, one of its allegations of harm (concerns over a failure to get access to popular handsets) had started to unravel by the announcement that Sprint would get the new iPhone at the same time as AT&T and Verizon.
2.) September 22nd. Sprint says only Sprint could buy T-Mobile. Sprint "clarified" that the government is less concerned with the loss of T-Mobile as an alleged fourth "national" competitor than it is with the identity of the "national carrier" acquiring T-Mobile. Sprint contends it is an acceptable acquirer, and AT&T is not. One wonders if the government ever thinks, "with a complainant like this, who needs defendants?"
Hubris? You bet. I'm guessing both the United States and Sprint's lawyers could have done without Sprint revealing its self-serving motives for opposing the merger. Moreover, there is no evidence that the government agrees with Sprint's "clarification."
Consequences. Obviously, this little "clarification" by Sprint, purporting to disclose the "true concerns" of the government is more than a little contradictory to Sprint's economic arguments opposing the proposed acquisition on "consumer protection" grounds. Worse still, it may have focused the attention of investors on whether Sprint really had the kind of money to buy T-Mo, causing a more general scrutiny of Sprint's financial health.
3.) September 29th. Three weeks earlier, according to its Complaint, the proposed acquisition posed an imminent threat to raise Sprint's costs for a critical input--wireless backhaul. Yet, according to early reports regarding the results of the first stage of a nationwide RFP for upgraded, high capacity backhaul, the most competitive carriers (by share of spend) were AT&T, Comcast, and Time Warner Cable. Curiously, AT&T wholesale was identified as the lowest cost provider. The same source noted Sprint's prediction that it "will end up with '25 to 30 significant backhaul providers."
Hubris? No, just bad timing. Sprint might reasonably view its intention to obtain a cheaper, higher capacity infrastructure for its network to be information that they should disclose to their shareholders.
Consequences. This was a publicly-announced "admission against interest." In its Complaint, Sprint alleges that a "unique" harm it will suffer as the result of AT&T's proposed acquisition of T-Mobile is that AT&T and Verizon will control a duopoly in the market for backhaul transmission, and have a greater incentive and ability to increase prices, pari passu. While Sprint never explained how this theory made sense, Sprint's actual recent experience directly contradicts this allegation.
4.) October 7th. Sprint hosts an "Analysts' Day" and explains its optimistic future, with no reference to the proposed acquisition, or (curiously) any real discussion of the iPhone (click here for presentation). Press reports suggest that analysts were a little upset (to put it lightly) by what they perceived as a lack of financial information regarding Sprint's future 4G plans. While a little harsh, the Journal probably best captured reaction to Sprint's big analyst call, "[i]t's not good when they laugh."
Hubris? Yes. The analysts and reporters, for whom the presentations were developed, would likely consider an underestimation of their questions to be a bit grating. Worse still would be if the guests thought that Sprint was being less than candid with them. If Sprint expected the analysts to accept a "faith-based" approach toward its strategy discussion, it was wrong.
Consequences. Aside from financial market consequences, the presentation will not help Sprint's plea for a permanent injunction in its antitrust case. Sprint makes no mention of the merger, and describes a generally optimistic view of its future--especially with regard to its recent performance versus both AT&T and T-Mobile--and its ability to reduce future roaming costs and cost per unit (the remaining allegations of harm in its antitrust complaint).
Tragedy: The Toll of Hubris?
Oral argument on AT&T's Motion to Dismiss Sprint's private antitrust case will be heard next Monday, the 24th. It is not at all unreasonable to expect a decision as early as the 31st. Given this likelihood, coupled with the outbreak of corporate hubris preceding Halloween, should Sprint's executives be considering costumes based on prominent figures in Greek tragedy?
In chess, a gambit is only a gambit (which implies a strategy with a chance of success) if it is not obvious to your opponent. Bluffs don't work unless you can convince the target: 1) that you believe you have the winning hand, and 2) the other players don't know you don't have the winning hand. The point here is that the Whale can have a great strategy, but even the Whale can blow it if he appears reckless, or insincere.
On Wednesday, everything the Whale did was "crazy big" (emphasis on crazy). On two separate occasions--once in the courtroom and once in the press room--Sprint betrayed its gambit, and essentially forfeited any chance of success.
In the courtroom, it would be too generous to say that the Whale took crazy risks. A "risk"--no matter how "risky"--contains the potential for reward. Lottery tickets are risky, yet real people win lotteries every day--you can win. Sprint's courtroom strategy was the equivalent of a legal "suicide bomb", damaging not only Sprint's claims, but its separate antitrust case, and that of Cellular South.
Let's set the stage. As everyone knows, on August 31st, the DoJ filed a complaint to enjoin AT&T from acquiring T-Mobile, because, the complaint alleged, the acquisition would tend to substantially lessen competition for mobile wireless services in violation of Section 7 of the Clayton Act.
Sprint filed an almost identical complaint a week later. Sprint also asked the court (both cases were assigned to the same judge) to allow it to participate in the trial planning/discovery procedures the with the government's case. If successful, this would be a big winner. It would give Sprint the ability to string case out over a much longer period of time, and give it a more controlling role in the case. Unfortunately, no court has ever joined a private plaintiff with the government in a merger injunction case(even for pre-trial purposes). This was a no win bet.
As noted in an earlier blog post, courts are very skeptical of antitrust complaints brought by competitors claiming to be seeking to protect "competition" and "consumers." Accordingly, the Supreme Court has held that private merger litigants must assert that they (vs. the general public) will suffer a specific injury resulting from the merger.
On the other hand, plaintiffs are not joined in litigation unless it is efficient for the courts to try their claims together because they are alleging common injuries as the result of the same event, or conduct (i.e., oil tanker negligently leaks oil, and multiple commercial fishermen lose business). In other words, to be joined with another plaintiff you have to be alleging substantially the same injury as a result of the same alleged illegal conduct of the defendants. Sprint did exactly that on Wednesday.
Does anyone see the problem here? For Sprint to maintain standing in its own antitrust case, they have to allege a unique, personal injury resulting from the merger. But, to be joined with the DoJ, even for discovery purposes, they have to be alleging the same injury as the result of the merger--otherwise they just bog down the government's case.
Obviously, Sprint can't satisfy both standards, which is why this tactic was so reckless. So, in the process of losing a meretricious motion, and effectively conceding its separate companion case, Sprint also destroyed whatever credibility it may have had as a witness for the government.
Why do I say this? After all, Sprint's lawyers aren't Sprint, so how could an ill-conceived legal strategy hurt Sprint's value as a witness? Well, it can't, really. This is the part where Sprint's CEO took over.
Investors Need to Know the Truth
At an "investors' conference" on Wednesday, Sprint's CEO notified investors (and, it would seem, the rest of the world) that Sprint was only kidding when it said mergers that exceed the "HHI" concentration numbers in the antitrust analysis contained in its complaint were illegal. it presented to the government and the FCC were illegal. Fair enough--it's his (and his shareholders') credibility to squander as he chooses.
Rather, Mr. Hesse explained, the government would only be concerned when the other two of the largest three firms attempted to acquire T-Mobile. You see, as Mr. Hesse clarified, the problem the government has with the AT&T merger, is unrelated to its allegations that the market is national and the number of participants would decline from 4 to 3. The government must be so excited to have a company that brags about not needing spectrum, to explain why they would be the perfect firm to take T-Mobile's capacity off the market.
I guess we have to conclude that Sprint's real concern was that if AT&T got any of the capacity it needed, AT&T might become more efficient and put downward pressure on prices. While I never drank Sprint's Kool-Aid on their opposition to the merger being motivated by concerns for the "public interest", I did drink the Kool-Aid on Sprint's Gambit.
The game was going as well as it could have for them, but they couldn't just help the "public interest" by being a witness--they had to be a "playa." Instead of waiting to see if Justice won, and then coming in as a savior for poor little T-Mo, they couldn't wait.
It's a proverb that you can get a lot done in Washington if you don't care who gets the credit. Unfortunately for Sprint, they could not abide this proverb. They had to be the Whale, the big boy in Washington, so they couldn't resist revealing themselves before the game was played out. In doing so, they busted what could have been a beautiful gambit.
I said before that the genius of Sprint's gambit was that--if they could successfully convince the Antitrust Division to accept and endorse a national market with four participants as the starting point for the Division's analysis--Sprint was (by those terms) guaranteed a three firm oligopoly for advanced broadband wireless services, no matter the outcome of the case. The very act of the Department challenging the acquisition would have this effect. Why?
The general answer is that the Department's Complaint is based on an application of the 2010 DoJ/FTC Merger Guidelines, which are a less-structured revision of the 1992/1997 Merger Guidelines. While Guidelines can provide a useful way of learning competitive conditions in most (unregulated) industries, they cannot yield a comprehensive competitive analysis of an industry like mobile wireless telecommunications services. The Guidelines simply do not take into account the degree of interdependence between regulation of critical, government-controlled inputs (like access to spectrum), differing network technologies and deployment cycles, the diversity of services and devices supported by any single network, and the massive capital intensity of the wireless industry.
Even more specifically, though, the Guidelines don't instruct the enforcement agency to consider the effects of its decision--to challenge or approve the transaction--on future competition in an industry already heavily dependent on the decisions of another government agency. But, let's back up before things get too confusing.
The Scarcity of Spectrum and the Need for a Spectrum Regulator
Ideally, the FCC, the NTIA, or some other government agency would act as the "central banker" of spectrum. The spectrum "central banker" could forecast demand, try to free up supply in advance of anticipated demand, and hopefully have some success in at least mitigating situations of shortage or surplus.
This role would balance the needs of government, and the various commercial users of spectrum so that resource scarcity could be somewhat removed from a competition analysis. In the event a firm wanted to exit an industry, the "spectrum banker" could act as a purchaser of last resort. This agency could purchase, hold or re-auction unused spectrum, and would have to be able to oversee the sale of an ongoing business in a manner designed to maximize spectrum utility, and the value created by the exiting firm. One benefit of such an agency would be to allow competition agencies to make decisions based on competitive factors alone. The Effect of Enforcement of the Guidelines on the Guidelines' Analysis
The Guidelines are supposed to explain what effect a combination of firms will have on consumers in the market for the good or service that is the subject of the transaction. A proper Guidelines analysis is supposed to consider the effect that barriers to entry will have on the likelihood of future entry if prices were to increase. When a market is characterized by high barriers to entry, the agency must give careful attention to a merger between firms in that market, because competition lost will not be quickly replaced by new entry. So far, so good--in fact, if you search "barriers to entry" and "merger guidelines", you'll get tons of results.
The problem, though, is that barriers to exit have the effect of raising barriers to entry. For our merger, this is the blind spot in the Guidelines' analysis. If you search "merger guidelines" and "barriers to exit", you don't really get anything (at least not in the first five pages of results that I looked through).
The result is what I would call the Guidelines' version of the "Heisenberg Principle." Said differently, in cases where markets already have high barriers to entry, the failure to account for action pursuant to the Guidelines will, further raise barriers to exit, and thus future entry, than markets with otherwise low barriers to entry.
What Is the Significance of a "Barrier to Exit" in the DoJ v. AT&T/DT Suit?
Well, put yourself in the shoes of Deutsche Telecom. You've invested billions of dollars in the U.S. mobile wireless market to develop spectrum, deploy infrastructure, innovate, create jobs, and add wireless capacity. Now you would like to cash out.
A week later, Sprint got half of what they were looking for when the DoJ filed suit to challenge the proposed AT&T/T-Mobile acquisition. Yesterday, if there were any doubters about Sprint's optimal outcome, Sprint announced its intention to keep those gains by filing their own private antitrust suit to enjoin the merger. Copy of Complaint here.
To hear Sprint's CEO talk, or read their pleadings, Sprint is very small in the marketplace. But around here, they call Sprint the "Whale", because they're a big boy in Washington. Everything they do is CRAZY BIG!! When they heard Justice was suing to enjoin the AT&T/T-Mobile merger, Sprint went all in. You know what I'm talking about, right Coco?
Let's take a look at what Sprint's "won" so far, and the risks that they still face before entering the capacity-constrained "promised land" of 4G with the largest cache of excess capacity.
The Beautiful Genius of Sprint's Gambit
The Guidelines are designed to limit "artificial" output restrictions by firms with market power, but Sprint has successfully convinced the government that the concentration figures in the Guidelines should be applied rigidly (in this instance) to prevent any of the largest 3 firms from quickly expanding capacity by purchasing it from the 4th largest firm (which is both capital and spectrum constrained).
In other words, Sprint understood AT&T's data capacity constraints in a much more real sense than any regulator could possibly understand. Consequently, by persuading the government to challenge the merger, Sprint can possibly compel an output restriction by one, if not two, of the remaining firms providing advanced wireless data services.
By persuading the government that "raw", undeveloped spectrum (which could hit the market in several years) is interchangeable with "working capacity", which can be easily diverted to address present excess consumer demand. Said differently, the beauty of Sprint's advocacy was that they have commandeered the tools of the Guidelines to defeat the purpose of the Guidelines.
How Justice Advanced Sprint's Gambit
First, the one big advantage Sprint gained was moving the merger decision out of the hands of the FCC, and into court with the Antitrust Division. This is important, because the only winner in Sprint's Gambit is Sprint. When other merger opponents realized this, they would have been arguing for merger conditions that allowed smaller, regional firms to become more powerful competitors to Sprint.
Approval of the proposed merger, subject to significant divestitures is a threat to Sprint. Not only is it possible that many markets would "de-concentrate" and become more competitive due to acquisitions by known participants, but large divestitures might open the door for another large telco (for example, a CenturyLink type company) to gain a toe-hold in wireless.
Second, Sprint wins by getting the DoJ to commit to its 2010 Guidelines concentration numbers for purposes of analyzing this, and perhaps future wireless transactions. This represents a potentially significant departure from past analyses, because it has the effect of making the smaller competitors acquisition targets (because they have limited growth ceilings), rather than marketplace threats. For Sprint, the oligopoly is the finish line--it doesn't matter who's left in the market, as long as existing firms will be leaving, and new firms won't be entering.
Third, Sprint--through the DoJ--has succeeded in reducing competition by creating artificial exit barriers. In other words, firms that invest, obtain a measure of success, and then seek to leave the market would now be required to "pay" a "penalty" (accept less than the fair value of their enterprise) in order to get their investment out. So, assuming there is a firm large enough to buy T-Mobile as an ongoing competitor (say China Mobile), and continue to invest in T-Mobile, the Department would minimize that risk for Sprint by declaring T-Mobile to be a "liquidity trap."
The Risks: The Whale No Hesitate--Sprint Goes All-In
Why did Sprint file its own, almost identical, antitrust case? We know that it won't be consolidated with the DoJ case, because--as noted in the 8/23 post--only the Government represents consumers and competition. Sprint, unlike the Government, needs to allege a Sprint-specific injury, which it makes only the vaguest attempt at asserting in a scant, vague 5 paragraphs at the end. Sprint's goal is not to win, but to have a voice in the settlement of the case.
First, Sprint needs this litigation to have a zero-sum outcome, and they've drawn a judge that is known for moving the litigation along. So, the worst case for Sprint is that Justice settles. Why? Because the likely result would be a stronger T-Mo/AT&T competitor plus amped up competition from U.S. Cellular, Metro PCS and Leap who would likely be the beneficiaries of significant divestitures. So even though Sprint's complaint will eventually be dismissed for lack of standing, the presence of the complaint is designed to put added pressure on DOJ not to settle.
Remember, if Justice wins the case, they only enjoin the deal as structured. AT&T can withdraw its existing merger application at any time and come back with a new deal with DT. Because of this omnipresent possibility, it may be the case that, paradoxically, the best outcome for Sprint would be to keep the litigation going if it looks like AT&T will "win." In that sense Sprint's filing is tactical, not substantive.
Second, Sprint's interest foreshadows that Sprint sees a significant role for itself in any Tunney Act proceedings to evaluate any settlement of the DoJ/AT&T litigation. (The Tunney Act requires the DoJ to put out all DoJ antitrust settlements for public comment and that a court review the settlement to ensure that it adequately addresses the concerns identified in the complaint.) This is the big risk that Sprint has overplayed its hand and will provoke a "fix it first" solution wherein the litigation is dismissed, the transaction is restructured so AT&T gets the capacity it needs, and DT gets a fair price for the assets that will go to strengthen smaller competitors.
Virtually from the announcement of the AT&T/T-Mobile merger, both Sprint's advocacy and Sprint's ultimate goal in its opposition to the merger (blocking the merger outright) have been a puzzle to me. Specifically, Sprint's categorical opposition to the merger makes me wonder: "why the opposition?" and "what are they really looking for here?"
Sprint's superficial, substantive arguments against the merger are a fairly generic, typical "Guidelines" style analysis from a consumer welfare (rather than Sprint-specific) perspective. Coming from a competitor, these arguments invite suspicion.
In fact, the Supreme Court has been extremely skeptical of competitors seeking to block mergers on the grounds that "competition" will suffer as a result of the merger. See, e.g., Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477 (1977)(rejecting antitrust standing of competitors seeking to block an acquisition on the basis that it would concentrate the market, and leave the post-merger firm with lower costs, creating a potential threat to plaintiff competitors).
Regardless, it makes little difference whether Sprint's opposition is motivated more by self-interest than the public interest. However, Sprint has been quite clear in its advocacy before the FCC and the Congress that the objective of its advocacy is to see the proposed transaction blocked.
The Puzzling Perplexity of Sprint's Advocacy Goals
If Sprint's preferred outcome is for the proposed transaction to be completely blocked, then we have to ask, how does this outcome maximize Sprint's self-interest? This is the question that is so vexing to me. After all, if a market becomes more concentrated, and leads to price increases and less innovation, one would expect that the last party to complain would be a competitor remaining in the post-merger market.
It seems obvious that Sprint will only benefit from higher retail prices. Less innovation, as well, would have its rewards in terms of reduced capex pressure, and reduced pressure to constantly roll out new bandwidth-gobbling devices. These are real benefits, so why does Sprint want the merger blocked (vs. "conditioned")?
A true "gambit" requires that a player sacrifice something of value to gain a greater strategic advantage. In this gambit, there are at least two very obvious sacrifices that Sprint is willing to accept from the outset.
The first sacrifice is that Sprint will not seek merger conditions, because (according to Sprint) there are no conditions that could mitigate the consumer harms created by this merger. This is a "real" sacrifice, because Sprint could have reasonably expected to extract some valuable concessions.
The other sacrifice is much more significant, but has gone completely ignored by the industry insiders and press. The fact is that Sprint, through its advocacy, has disqualified itself from acquiring T-Mobile. So Sprint is not seeking to disqualify AT&T from acquiring T-Mobile, so that it may subsequently acquire T-Mobile for a lower price.
This sacrifice is an unequivocal and inseparable part of its economic analysis of the merger. As Sprint explains, the current proposed merger allegedly increases the HHI by 700 points, based on market share numbers listed. On the other hand, a Sprint/T-Mobile merger would move the same "highly concentrated" baseline HHI up by 500 points. See Table 4 ("postpaid only" column) in the economics declaration in Sprint's Petition to Deny (p. 257 of 377).
It is, therefore, quite clear that Sprint's analysis--if accepted by the government as a basis to block the merger--would also disqualify Sprint and Verizon as subsequent bidders for T-Mobile, thus "cementing" the "national wireless market" (if you buy this definition) as a 3 firm market. Why do I say 3 carriers when we are left still with 4 "national" providers? Because in that world, T-Mobile is fundamentally crippled from a competitive standpoint and that, in essence, isthe big win.
The Gambit Payoff
Consider the advantages to Sprint of a capacity-constrained 3 firm oligopoly market structure.
1) Customer Share/Acquisition. Constructively, T-Mobile will be an island, cut off from ready access to capital from its parent, Deutsche Telecom. Without a "true" 4G network, T-Mobile will gradually lose customers to other carriers in the market. Many would argue that Sprint is the next best substitute for T-Mobile, so Sprint may gain disproportionately from T-Mobile customer defections.
2) Accelerated Growth in Data Services. Let's assume that Sprint (rationally) believes the fact that AT&T is very data capacity constrained. If the government successfully blocks AT&T's proposed acquisition of T-Mobile, the remaining three 4G carriers (remember, under the Sprint theory we virtually ignore other competitors like Metro PCS who may have 4G networks, too) have no real means to acquire additional spectrum capacity.
The number one provider of wireless data service--AT&T--will be supply inelastic in most cities for the foreseeable future (no capability to acquire sufficient spectrum). This puts AT&T in a "shortage" situation, where it must set prices not to maximize profits, vis-à-vis costs, but to increase prices, and reduce output, in an effort to ration service consumption.
Once AT&T is forced to implement "congestion pricing", it is logical to expect that Verizon, the number two wireless data provider, will adjust its own prices in order to preserve its network capacity in a spectrum-constrained market (it can't acquire spectrum either). The only party that "wins" in this scenario is the firm with the largest excess capacity--Sprint--which through its and Clearwire's holdings has more spectrum, and more capacity than anyone else in the market, including AT&T or Verizon. See FCC's 15th Wireless Competition Report, at Table 28 (Sprint/Clearwire has a weighted avg. of 184.4 MHz of spectrum vs. a combined weighted avg. of 173 MHz for AT&T and Verizon Wireless combined)
3) Peace of Mind. Can you ever really put a price on it? With a tight 3 firm oligopoly, characterized by high barriers to entry, Sprint no longer has to "watch its back" as the undisputed "national" value brand.
The Beautiful Genius of Sprint's Gambit
Sprint's analysis virtually ensures a 3 firm oligopoly going forward, because every potential bidder with the experience and financial capacity to acquire T-Mobile is eliminated. T-Mobile lacks the resources to build out a 4G network, and no other carriers have the kind of money they would need to buy T-Mobile, at their present size, and then upgrade T-Mobile's network to being 4G capable. Finally, if T-Mobile has to continue as an independent carrier, their only realistic alternative for offering "national" 4G services is through . . . Sprint's majority-owned wholesale carrier, Clearwire. This is a brilliant gambit.
I haven't posted anything in a while, and that's because the only thing anyone seems to be focusing on is the AT&T/T-Mobile Merger. In fact, at this point--during the dog days of Summer--I am genuinely bored to death with the banality of the banter between merger opponents. If it seems like the same arguments are being made, it's because they are.
Don't believe me? Then see if you can correctly guess who said what, and when, starting with the proposed 2004 acquisition of AT&T Wireless by Cingular Wireless for $41 billion, which would have made Cingular the largest wireless carrier with a market share of over 40%. Sounds familiar, no? So, we'll start there.
Every assertion listed below is (substantively) part of an argument being made by the merging parties or their opponents at the FCC. All you have to do is guess whether the statement was made previously or now, and whether it was made by a merger opponent or proponent. We'll score you up at the end to rate your DC telecom cynicism.
1) "T-Mobile does not provide a meaningful competitive alternative [to AT&T] as a roaming partner to many cellular carriers and subscribers."
2) "[T-Mobile] is not a significant competitive constraint on AT&T."
3) "In many cases, T-Mobile has been unwilling to even enter into roaming agreements with rural wireless carriers."
4) "At a minimum, the elimination of T-Mobile as a 'benchmark' firm for these purposes [offering roaming agreements to smaller carriers] frustrates the FCC's ability to monitor the emerging marketplace and ensure compliance with the pro-competitive rules adopted by the Commission."
5) "In fact, the statements made by wireless incumbents [including T-Mobile] . . . make clear they have no intention of offering broadband with the freedom to attach any device and run any application." [in other words, "maverick" behavior]
6) "T-Mobile is not merely a direct competitor, but a 'maverick' whose behavior forces pro-consumer responses from larger firms despite T-Mobiles [sic] relatively modest market share."
7) "Consumers make their wireless purchasing decisions at the local level--where they can see the devices, speak with sales representatives about the products and services, and comparison shop among competitors."
8) "The FCC should reject a national market definition. Wireless is sold as a local product. National coverage and calling plans are one characteristic of the service, but it is bought and sold at the local level."
9) "[T]here is clearly substantial competition among the national carriers in those portions of the country where most Americans reside, and in many cases additional competition in areas served by regional carriers . . . ."
The latest inside-the-beltway "tempest in a teapot" involves the opponents of the AT&T/T-Mobile merger impugning the motives of some of the merger's supporters. Several articles have been written that attempt to make an issue of the fact that some (though not all) of AT&T's "public interest" supporters are also supported by AT&T.
Why the big deal, one might ask? After all, the FCC is required to consider the "public interest" in its consideration of the merger application--and the only obvious way to evaluate the "public interest" is to ask the public for comments (which the FCC has done). But, with the "official" pleading cycle closed, my guess for the motivations behind the stories, are that--barring any new facts--what's a "gadfly" to do, but attack the sincerity of the other side's gadflies?
What is revealing, though, is that the groups urging the FCC to disregard the speech of other parties are doing so, based not on the content of the speech, but the identity of the speaker. Even more interesting is that these interest groups go by nifty names like "Public Knowledge" and "Free Press."
It insults the process that the essential message of the interest groups is that the FCC should limit its consideration of certain "public comments" based on the identity of the speaker, rather than the content of the speech. At least as disturbing is that the press stories seem to credulously accept this implicit contention that the FCC is incapable of evaluating the merits of this merger based on the content of its record. Equally distasteful is the cynical, and elitist, view that even Members of Congress expressing a contrary point of view are like sheep, incapable of independent thinking.
In the purely competition-focused world of the antitrust laws, the Supreme Court has addressed this question time and time again, and has always held that the motivation of the person lobbying the government is simply irrelevant should the government make a decision consistent with the interest of the lobbying party. The First Amendment guarantees citizens freedom of speech, freedom of assembly, and the "right to petition the government for a redress of grievances."
The Supreme Court's decision to defend an important civil liberty over a law intended to regulate commerce first arose in 1961 in Eastern Railroads President's Conference v. Noerr Motor Freight, Inc. ("Noerr"), where the Court held that "lobbying" was protected speech, even if the result of the lobbying created laws that allegedly injured the business interests of trucking companies to the advantage of railroads.
The Communications Act of 1934 requires the FCC to perform a "public interest" analysis prior to approving any license transfer, so the issue of a conflict between the right to petition and this provision of the Act would seem to be a legal impossibility. Yet, there are still the few that know what's best for all. These parties continue to insist, in the court of public opinion, that comments filed in support of AT&T by organizations with varying degrees of affiliation with AT&T should be disregarded by the Commission simply because they were consistent with the position of AT&T. This criticism of certain merger supporters, especially of civil liberties groups like the NAACP, GLAAD, and the National Urban League, for exercising their First Amendment rights takes on an air of absurdity.
Instead of focusing on the identity of the commenters, the public interest would be best served if the self-proclaimed guardians of the public interest would keep in mind the wisdom of the Noerr Court 50 years ago, and remember that, like the Sherman Act, the Communications Act was intended to regulate business activity, and not political activity. If the government can take an action, then members of the public--regardless of identity or affiliation--must be allowed to lobby for that action.
"Vertical" issues (how the post-merger firm could limit access to inputs needed by competitors) dominated the questioning. However, this being a "horizontal" merger, the witnesses for the merging parties had to keep referring the questioners to FCC proceedings.
Earlier this week, I published a post that referred to most arguments opposing the merger as being essentially frustrations over regulatory complaints that are best resolved by the FCC--as opposed to merger-specific concerns that would not be exist, absent the merger. The Rural Cellular Association ("RCA") witness, for the most part, made me look like a psychic.
Since 1997, Congress has required the Federal Communications Commission to file annual reports that measure whether certain industries, such as mobile wireless services, are "effectively competitive." Every report the FCC has issued since 1997 has found the wireless market "effectively competitive," until 2010, when the Commission failed to make any finding at all for calendar year 2009. See 2010 Report.
While it is not difficult to understand a bureaucracy's fear of commitment--making no judgment on one matter in the present seems to preserve all options for future matters. There are now news reports, though, that the FCC might take the same "neutral" stance with respect to wireless competition that it took last year. This time, though, that course destroys, rather than preserves, options, and the Commission must reconsider its fear of commitment.
The article notes that the Commission may be afraid of finding the wireless market to be "effectively competitive" for fear of limiting its options in reviewing the proposed AT&T/T-Mobile merger. If this report is correct, the Commission's reasoning is both specious, and dangerous to its present agenda regarding spectrum policy and incentive auctions--an issue that Chairman Genachowski has been aggressively, and correctly, pursuing since the beginning of the year.
Yesterday, Leap Wireless ("Leap") added its voice to those opposed to the AT&T/T-Mobile merger. What is interesting about Leap's opposition, are Leap's claimed concerns about the acquisition. According to Leap's Chairman, Doug Hutcheson, the proposed AT&T/T-Mobile merger:
raises problems of spectrum concentration and impaired access to spectrum by competitive carriers; undercuts access to wholesale voice and data roaming services; and threatens to foster reduced device availability and reduced interoperability of wireless networks and devices, among many other issues.
Mr. Hutcheson expresses some important concerns about the future of the wireless industry, although it's unclear how any of these concerns are necessarily exacerbated by the merger, or would be mitigated by cryogenically preserving T-Mobile in its present state. However, I do sympathize with Mr. Hutcheson's concern over whether smaller carriers have been getting a fair shot at spectrum, and whether things will change for them in the future--though I disagree that the merger is the appropriate target of this frustration. In other words, there is no immediate solution that could mitigate Leap's concerns, or solve AT&T's capacity crunch.