Results tagged “Antitrust Division”

November 4, 2016 11:09 AM

Why Is DoJ Siding Against Consumers in its DirecTV Complaint?

On Wednesday of this week (11/02), the Antitrust Division of the U.S. Department of Justice ("DoJ") sued AT&T arguing that its DirecTV subsidiary was the "ringleader of information sharing agreements" among rivals that "corrupted" competition among rivals to carry the Dodgers' cable TV channel. Complaint at para 2.  According to the DoJ, this is the primary reason that Dodgers' fans in L.A.--living outside of Time Warner Cable's ("TWC") service area have not been able to watch Dodgers' games since the 2013 season.

Unfortunately, the DoJ seems dangerously unaware of findings by a federal court--in an antitrust case on the exact same subject matter being litigated during the same time frame as the facts in the DoJ complaint--that the exclusive sports distribution contracts (that raise consumer rates) may well be the more obvious Sherman Act violation. When we know what DirecTV knew--as a defendant to that litigation--we can better understand why the DoJ could not be more wrong in this case.

L.A. Regional Sports Networks ("RSNs")

Until 2011, Fox Sports was the leading RSN in the L.A. area.  It had two channels, one of which distributed games of the Lakers, Kings, and the Anaheim Angels, and the other of which distributed the games of the Clippers, Dodgers, and Anaheim Ducks. 

But, as Fox's contract with the Lakers was ending in 2011, TWC swooped in and paid $3 billion for the rights to broadcast the Lakers' non-national games for the next 20 years.  As DoJ recounts in its complaint, TWC raised the prices to carry the Lakers (as a standalone channel) well above any range of what any of the other pay TV distributors considered fair value. DoJ Complaint paras. 29-39.
 
In 2013, Guggenheim Partners paid an unheard of $2.15 billion for the Los Angeles Dodgers baseball team ("Dodgers").   The private equity investors then turned around and sold the exclusive rights to distribute Dodgers' games--in the form of a dedicated "Dodgers channel"--to TWC for an even-more-unheard-of price of $8.3 billion.

Reportedly, TWC never budged on its demands, that every pay TV distributor (i.e., competitors and other cable/satellite companies), would have to pay it--on a per-subscriber basis for the rights to broadcast Dodgers games--regardless of how many of these distributor's customers want to watch the games.  Until Wednesday, the narrative was that TWC's "unmitigated disaster" of a deal showed that perhaps there was some limit to the ever skyrocketing costs of sports programming.

DoJ to TWC's Rescue

The DoJ contends that DirecTV privately told other pay TV companies that it was not going to pay TWCs outrageous demands. The DoJ argues that, but for this exchange of information, TWC's competitors, and other pay TV distributors in the L.A. Dodgers home market, would have been happy to pay (and pass along to their consumers) the supra-monopoly prices being demanded by TWC.

Bizarrely, DoJ contrasts the "anticompetitive" situation of today with an earlier--presumably "competitive"--negotiation period, in which TWC (as the new RSN for the Lakers) extorts a price from Cox Communications' subscribers of "60% more" than Cox's internal analysis indicated the content was worth. Complaint at para. 36. No, the DoJ's thinking is that if cable companies aren't just spending their customers' money and passing through rate increases, then something illegal is afoot.

The fact, though, is that the vertical distribution contracts--which are responsible for the sports programming price increases (that  DoJ is incomprehensibly fighting for)--were under antitrust scrutiny, and coming up short, throughout the relevant time period covered by the DoJ suit.  After looking at these contracts in the light of antitrust precedent, we can truly appreciate just how wrong the DoJ was to go after the victim--and not the cause--of spiraling sports programming costs.

Consumers Fight Anticompetitive RSN Contracts

In 2012, consumers filed class action antitrust lawsuits against the MLB and the NHL in the Southern District of New York. See, e.g., Laumann v. NHL, et al. and Garber v. Office of the Commissioner of Baseball, et al., 907 F. Supp.2d. 462 (SDNY 2012).  These cases squarely attacked the contracts at the heart of the exclusive "home television territory" ("HTT") distribution model.  Specifically, consumers alleged that the contracts between the teams, MLB (and the NHL), and the RSNs of DirecTV and Comcast, illegally restricted competition in the broadcasting/streaming markets because these agreements also restrict the right of the "away" team--a non-party to these contracts--to sell its own broadcast feed to anyone in the HTT area of another RSN.
 
MLB fans can only watch games of their "home team" by purchasing a cable package from the RSN (or a distributor of the RSN, such as AT&T, Verizon FiOS, or a satellite or cable company).  Fans of other teams could only watch the games of out-of-market teams by purchasing an out-of-market package ("OMP") from the leagues (for streaming customers) or from the RSN (distributing on behalf of the leagues).

The plaintiffs' successfully argued (at every pre-trial stage) that the complicated web of contracts between the teams, the leagues, and DirecTV and Comcast (which prevented a non-party to the contract (i.e., any "away team") from selling its own independently-produced feed of the game to any fan in any part of the country) were "contracts . . . in restraint of trade" in violation of the Sherman Act.  The plaintiffs' contention was that, but for these contracts, fans could purchase the away-team feeds of games on an "a la carte" basis, even if they did not want to buy home team's cable package.

The Case History/Court Findings

Throughout the case, DirecTV and Comcast (in the same role as TWC in the DoJ case), vigorously argued at every possible stage that, as the RSNs, they were merely accepting terms set forth by the Leagues and that they did not benefit from the exclusivity--and the higher-than-competitive consumer prices--that this exclusivity produced.  The court rejected this argument in both the defendant's motions to dismiss in 2012 (opinion) and their motions for summary judgment in 2014 (opinion).

The court explained that,

evidence that the Television Defendants would not have entered the contracts at the prices prescribed but for the territorial restrictions, is sufficient evidence from which a fact finder could infer a tacit horizontal agreement among the RSNs and MVPDs

See, Opinion Denying Defendant's Motions for Summary Judgment, at 50 (emphasis added). Further, in rejecting the defendant's motions for summary judgment, the court found,

The clubs in each League have entered an express agreement to limit competition between the clubs - and their broadcaster affiliates - based on geographic territories. There is also evidence of a negative impact on the output, price, and perhaps even quality of sports programming.
See, Id. at 30/57.

In May of 2015, the court certified the plaintiff's class to go forward to trial in order to seek injunctive relief, but not money damages, because there was no common monetary impact among the class members. This decision pretty much guaranteed that the case would settle, which it did, on the eve of trial, earlier this year.  The settlement agreement, unfortunately, leaves intact the geographic market exclusivity, which, in turn, ensures that sports content costs will continue to spiral.

To What End?

In many ways, this is/was the perfect case for an antitrust enforcement agency to bring--meritorious, but without the profit potential to ensure the efficacy of private enforcement. However, there is no evidence the DoJ was even aware of this antitrust litigation.

So, instead of taking up the consumer's side, the DoJ chose to sue on behalf of conduct that a United States District Court has already characterized as "express agreement[s] to limit competition between the clubs - and their broadcaster affiliates - based on geographic territories" and their corresponding "evidence of a negative impact on the output, price, and perhaps even quality of sports programming." It is sad that the DoJ didn't follow antitrust developments in this field closely enough to know that agreements which result in distributors paying 60% premiums over value is the result of a "corruption of competition"--rather than competition itself.

Finally, it is interesting to consider that, until several months ago, DirecTV had every reason to believe that a court would be likely to find that its RSN contracts were an illegal restraint of trade.  How ironic that, having dodged a bullet with respect to its RSN agreements, DirecTV would find itself the target of another lawsuit for not agreeing to pay the most anti-consumer RSN contract in America!


April 10, 2014 2:19 PM

Comcast Wins When "Net Neutrality" Issues Take Center Stage

I guess everyone that watched yesterday's Senate Judiciary Committee hearing on the Comcast-Time Warner Cable merger had a different opinion on it.  I had prepped myself by reading all of those "Comcast owns Washington" and "David Cohen is The Man" articles, but I really wasn't prepared . . . for the awful truth.  See and believe (whole hearing here).


Maybe I'm reading this all wrong, but it looked like the Committee Chairman, Sen. Patrick Leahy (D-VT) pretty much indicated that he's cool with the deal--just, you know, as long as they include some net neutrality commitments, or something.  It was almost as if Senator Leahy was listening to Comcast's radio commercial as he spoke.  So, yeah, that pretty much set the tone.

The only Senators that represented my consumer interests, i.e., unchaining broadband Internet customers from the pay-TV business model, were Sen.'s Blumenthal (D-CT), Franken (D-MN), and Lee (R-UT).  I've already explained that the real problem here is the accretion of power that cable-affiliated RSNs have over pay-TV/broadband competitors.  In other words, this merger will harm the ability of consumers to ever use broadband Internet access--from any broadband provider--as a substitute for subscription TV service. 

The rest of the Committee members were distracted--like toddlers chasing soap bubbles--by the agenda of net neutrality "concerns" that we've seen hyped and re-hyped by the press for the last 3 months.  The reason that these "distractions" consumed the attention they did is, some believe, a sign of Comcast's power to intimidate the "real" witnesses away.  

And, according to this report, Comcast's "casting" of the issues covered in the hearing could not have worked out better for them.  Unfortunately, if the only people who are going to speak up about this merger can't pass up a public platform for their "net neutrality/broadband is a utility" shtick--then Comcast really is in great shape.  

3 Reasons Why "Net Neutrality" Is Comcast's Best Friend

1. The only "managed service" Comcast needs is the one they already have.  I can't say it any simpler than that.  When Prof. Susan Crawford went off the handle a couple weeks ago, at the rumor that Apple might have requested a "managed service" from Comcast, she failed to understand that this is precisely what is needed if the Internet is ever going to become a content delivery rival to TV.  If Comcast made "TV quality content delivery" available to some third party, then it would be available--and that's the point.

If a "managed" video delivery service is not available for wholesale purchase by Apple, then it's not available to any competitor to Comcast's cable service.  The fact is that Comcast will be happy to "swear off" offering managed services, because that's just like telling them to shut the door behind them for all those new markets where they'll be the dominant broadband and subscription TV company. 

2. Internet interconnection is not a merger issue (either).  Senator's Klobuchar (D-MN) and Franken (D-MN) wasted a fair amount of their time and attention on this little canard.  In fact, I'd say this line of questions, more than any other, made David Cohen look like the most reasonable person in the room. 

In the media, this issue is hyped a lot by Stacey Higginbotham from GigaOm.  She loves this issue--writes about it constantly (see), even when Comcast isn't buying its rivals.  Not surprisingly, a few days before the hearing, she writes, "expect more questions about paid peering and the Comcast merger."  

The reason this line of inquiry helps Comcast avoid harder issues is that buying transit is a long-established, industry-wide practice, and would exist even if Comcast was a "common carrier." Neither the FCC nor the DoJ, is going to do anything to change this practice in a merger review.

3. Data Caps.  The essence of this complaint is that the heaviest users don't like the ISP's pricing structure.  This complaint, like the previous issue, is a quixotic attempt to establish price regulation on ISPs. 

The "data caps" issue is only an issue for the highest use consumers--who want the lower use consumers to subsidize their consumption.  These people share the Reed Hastings view of net neutrality--averaging out the restaurant bill is fair, especially if you're the only guy drinking $100 champagne. 

At the hearing, TWC said they deal with this issue in an interesting way: they don't impose caps, but if a customer agrees to not exceed a certain amount of data downloads (and be subject to throttling, if they go over), the consumer gets $5 off their monthly bill.  My guess is that Comcast will have no problem offering this one up. 

Prognosis

Look, the net neutrality people aren't the "bad guys" here.  But, if a significant part of the merger opposition is ceded to the usual suspects--the same folks that seem intent on recycling their same net neutrality arguments, no matter the forum--then that's a shame. 

This merger squarely presents the DoJ and the FCC with a very fundamental "crossroads" choice--the future of competition for the broadband Internet versus the cable TV business model.  The public interest cannot settle for a bunch of buttercup-and-whipped-cream "commitments" to net neutrality.  The consequences are too high. 

I wanted to end on a cheerful note, so I'll leave it at this.  Remember, kids, while advocacy from 2005 ages poorly, this still-super fly Chamillionaire video never will.  Enjoy!
 

Maybe, I'll send some "Chamillitary" gear over to Prof.'s Crawford/Wu, and Free Press.  So, you know, at least the crew can be dressed in the "era-appropriate" pop fashion when they hit the NPR circuit.

July 12, 2013 11:39 AM

Bidder Exclusion? Ain't Nobody Got Time for That

So I take my eyes off the spectrum auction debate for a couple months, and what happens?  Well, for the most part, absolutely nothing . . . or so it seems.  Actually, it's worse than nothing happening, because parties have refused to wisely ignore the DoJ's substance-less April ex parte submission.  Instead, a "tire fire" of a debate (toxic, polluting, and burning for far too long) has rather predictably broken out; a fact that confirms the darkest suspicions of many--that one can never underestimate the FCBA crowd's appetite for mindless bickering.


 She obviously read the DoJ ex parte


The putative beneficiaries of DoJ's casual musings--Sprint and T-Mobile--are struggling to animate this theory by adding their own piece parts, like the "Dr. Frankensteins" of economic policy creation.  Others, who oppose these efforts, are also exaggerating the substance (or lack thereof) of the Department's submission so that they can then "slay" the paper tiger of their own creation. 

Fortunately, and finally, one "grownup" expert has, admirably, refused to reflexively engage in the "yea or nay" foreclosure debate, choosing instead to simply, and elegantly, point out that the DoJ submission lacks sufficient substance to even be worthy of discussion.  This expert calmly explains that the DoJ never contends that the likelihood of the auction being subverted by a bidder pursuing an "input foreclosure" strategy is high enough to merit any exceptional analytical framework, or specific prophylactic rules. 

Before I reveal the identity of our helpful expert, I'll give you one hint.  This expert understands, possibly through experience, that the Antitrust Division is well aware of the level of detail and documentation that must accompany a regulatory policy proposal if it is to be taken seriously by the regulator.

When DoJ Is Serious About An Economic Framework

When you think about it, this realization becomes a little more powerful.  The Antitrust Division knows full well how to provide a regulatory agency with enough factual and theoretical support for its theories to give the agency that adopts its proposals a good chance of surviving appellate review.  

A good example of the DoJ at its best is the Department's Evaluation of the Bell Atlantic (Verizon) Application to provide "long distance" service in New York.  The Division filed over 200 pages of advocacy, including 2 economist declarations.  The DoJ's evaluation contains 8 single-spaced pages of citation sources.  In contrast, the DoJ probably devoted twice as many words to cataloguing the sources it used in its New York 271 analysis than it did in its "police sketch" of a foreclosure theory in the April ex parte. 

An even better comparison is the analysis the Antitrust Division provided in its 1992 Comments on rules for the PCS auction, which was the FCC's very first spectrum auction.  The DoJ filed 41 pages of very thorough analysis in November of 1992, which it followed with an equally-thorough 28 pages of Reply Comments in January of 1993. 

Interestingly, the content of the DoJ's rigorous PCS auction comments could not be more different from the more "casual" reasoning in its April ex parte.  Even though there were only 2 mobile wireless providers at the time of the PCS auction, the Division opposed a any flat prohibition on wireless mergers (which the Commission was considering adopting).  While mergers between the new PCS entrants would certainly result in increased concentration, the Division was unwilling to "foreclose" from consideration mergers that would result in enhanced efficiency of spectrum use, because such mergers could benefit consumers.  See 1992 Comments, pp. 23-28. 

When DoJ Wants To Be "Supportive" Without Providing Support

So, I know you're probably wondering which expert rationally declined to join the melee of parties jousting against the DoJ's "windmill" chimera of input foreclosure.  Somewhat ironically, and yet not surprisingly, the expert is former Deputy Assistant Attorney General for Economics of the Antitrust Division, Michael "it's cool for" Katz.  Katz, and some other economists, submitted a declaration (at pp. 5-13) on behalf of AT&T last month.

So how did Katz, et al., cut through the noise surrounding the DoJ ex parte?  Take a look for yourself (pp. 5-13).  The first clue is that it's 8 double spaced pages long, and the first two pages summarize the DoJ filing.  The brevity of the Katz, et al., Declaration is its elegance. 

The Katz Declaration uniquely approaches the DoJ filing from a generously analytical perspective.  Accepting the DoJ's threshold premise--that there could be circumstances in which the largest firms might profitably pursue a foreclosure strategy--Katz, et al., explain essential elements of the theory, as well as factual predicates (i.e., "evidence"), that the DoJ would have discussed if the Department reasonably expected the FCC to adopt such a justification for bidder exclusion.

Professor Katz, of course, is a classy dude, so he never actually says "if the Division was serious . . . ."  That's way too vulgar, and--as far as I can tell--it's the only reason AT&T chose him to make this point instead of me.  Thankfully, Professor Katz and his colleagues have advanced this docket by demonstrating for all participants that there is no risk of the Commission adopting any part of the Division's ex parte.

Given that the DoJ fails to present their "theory" in an economically correct manner, or to even recklessly--much less accurately--assert factual predicates that would require the FCC to consider the DoJ's ex parte, it is safe to assume that the Antitrust Division has no intention of providing the FCC with the requisite legal, factual, and economic testimonial support that would give the FCC even the barest excuse to exclude auction bidders on an "input foreclosure" theory.    Hopefully, all parties, including the FCC, will soon appreciate this reality, and stop wasting valuable time arguing over an ex parte that not even the DoJ expects the FCC to take seriously.

May 1, 2013 11:12 AM

What's the [Low] Frequency, Kenneth? The Government's Uniquely "Consumerless" Concept of Competition

Has anyone else noticed how nutty the news stories have become about the FCC and DoJ fight to promote wireless competition?  Here are some examples: this and this, but I'll summarize for you.  First we have the DoJ "letter" to the FCC; a letter which I think the FCC probably sent the DoJ along with a self-addressed, stamped envelope a few months ago.

I mean, seriously, how could two separate agencies--both independently, and within six months of each other--come up with the same notion that the next available spectrum to be auctioned would be put to its best use by Sprint and T-Mobile (who had not even bid on spectrum the last time it was available) because of its radio frequency characteristics?  That last part was highlighted because it's like the peanuts on top of the walnuts on top of the almonds in this all-nut sundae of a theory.

Like most tin foil hat theories, this one has a small kernel of logic.  For a smaller carrier, especially a new entrant, low-frequency spectrum provides a lot more value per cell site--and requires a lot less cell sites--for a carrier to achieve adequate coverage. But do the FCC and DoJ want to promote smaller carriers or new entrants?  Of course not; that might provide consumers with some value.  And since the FCC/DOJ believe that only national firms count toward improving competition in the marketplace - new entrants as envisioned by these agencies would fail to meet that goal.

The DoJ and the FCC didn't have this theory of theirs until they also seemed to arrive at the conclusion--as near as I can tell, sometime during their analysis of the proposed AT&T/T-Mobile merger--that mobile wireless competition is best measured by market share on a national level.  And, with a market artificially defined as "national", despite the fact that consumers make choices locally, a "market" could only be truly competitive if each firm's share (of customers, of spectrum, of cool new handsets, and crunchy nut confections) is roughly equal.

Does anybody recognize the problem with this raison d'etre?  Does the conclusion at the end of the last paragraph sound a little like the description of a commodity market?  Yeah, it kind've does, doesn't it?  Are wireless services a commodity market?  Well, the AT&T iPhone crowd from 2007 didn't seem to think so; nor did the Verizon Droid evangelizers from 2009.  So, let's just say no; wireless is not a commodity market.  Like with cars, people seem to take a certain personal pride in their selected combination of network and handset.  

Why would anyone expect that differentiated product markets would result in competitors having a roughly equal share of sales?  After all, some people like (and can afford) fancy overpriced compact cars, while others need pimped-out, baller SUVs because . . . that's just how they roll.  So isn't it nice that we have BMWs and Escalades?  Do they have the same market share?  Yeah, probably, but that's beside the point.

The problem with the government's idea of what competition should look like is that it starts from a lot of flawed premises--all of which come from the same flawed premise: consumer preferences don't count.  The relevant geographic market is national, not because this is the way consumers actually purchase wireless service, but because this is the way the government likes to look at it.

To the government, market shares are only unequal because firms have unequal amounts of low frequency spectrum, and not the other way around.  They don't seem to understand that AT&T and Verizon have customers that, for the most part, have chosen not to buy service from at least 3 other firms.  Now that's competition.  

Why doesn't the government just reconcile itself to the reality of consumer driven competition and "wreckanize" that the consequences of choice can produce distinct winners and losers?  Yogi Berra told us a long time ago:  "If the people don't want to come out to the ballpark, nobody's going to stop them."  Why do the DoJ and the FCC keep trying?

April 17, 2013 5:13 PM

The DoJ's FCC Alley-Oop

At the end of last week and in advance of Assistant Attorney General for Antitrust William Baer's appearance before the Senate Judiciary Committee yesterday, the DoJ's Antitrust Division filed an ex parte submission with the FCC offering some serious advice on how to conduct (read: limit participation in) a spectrum auction--specifically, the next spectrum auction.  

The Department's "advice" contained all the acuity, but none of the profanity (and occasional hilarity), of a drunken sports heckler (like Bud Light's Mr. Pro Sports Heckler Guy).  Until I read the DoJ ex parte, I had no idea as to what might be the regulatory equivalent of "catch the ball", "make the basket", or "play defense, you idiots."  Now I know.

The Department's "advice," while generally a meandering discussion of points not in contention, such as the DoJ's horizontal merger analysis and the many benefits of competition, also included such "game changing" spectrum auction tips as "protect competition", "don't award spectrum to buyers that won't use it efficiently", and "spectrum below 1 GHz is cheaper for smaller competitors to use."  

If You're Not Low, You Must Be High

The one "point" the Department puts on its relatively general discourse is its belief that to be successful on a nationwide basis a carrier needs some low frequency spectrum in order to efficiently serve rural areas and to provide service that works inside of buildings.  The DoJ notes that the two "leading" wireless carriers (AT&T and Verizon) have a large amount of low frequency spectrum, but Sprint and T-Mobile have little to none of this spectrum.  

By making this assertion (I would guess?), the DoJ wants us to conclude that "low frequency spectrum" is the only thing distinguishing the leaders from the laggards in wireless market share.  The only reason AT&T and Verizon have the most low frequency spectrum is because, the DoJ explains, they pay a lot more for low frequency spectrum in order to prevent Sprint and T-Mobile from using it.  

The DoJ warns that this trend should be expected to continue into the next spectrum auction as well.  Why the next auction?  Because the next auction is for LOW frequency spectrum, and this is the kind that AT&T and Verizon only buy in order to keep away from Sprint and T-Mobile.   

A Low-Down Dirty Shame

If Sprint and T-Mobile did have some low frequency spectrum, they would totally be able to build it out and offer better service to rural areas and inside of buildings, and thereby steal share from AT&T and Verizon.  But, even if they didn't actually use the spectrum, Sprint and T-Mobile should still be able to gain share because AT&T and Verizon would provide worse service without this spectrum, right?  Either way . . . it's cool, says DoJ.   

You see what they're doing here?  First, you establish that a firm's "success" in terms of market share, or whatever other benchmark you like, is critically dependent on one specific input.  Next, you pick an industry characterized by a shortage of this key input that affects all firms--like wireless--and you're almost home.

Then, postulate that some companies have greater access to the scarce input than their rivals, and the conclusion falls into place.  You see?  The input-favored companies can benefit even if they don't use all of their superior access to inputs to increase output.  This is because they know that their competitors cannot increase output to steal customers from the input-favored firms.  Stick to the basic format, and this argument always works. Cool, huh?  

If the FCC adopts rules that exclude AT&T and Verizon from the next auction, you can bet that they'll be using an iteration of this same argument on their appeal.  But, if DoJ's argument is that transparent, and that malleable, why are they using it now?  

The FCC Lobs . . . And DoJ Dunks!

First, let's dispel any lingering suspicion you may have that the DoJ is offering its theories based on any observable facts.  If AT&T and Verizon were merely warehousing low frequency spectrum to keep their rivals down, the simple way to check would be to see if they're using it.

Let's just assume that both AT&T and Verizon have been using the 850-900 MHz spectrum since the FCC first handed it out to their predecessor companies in the 1980's.  After all, they didn't get to be the two largest companies by not using their "first mover" spectrum.  So, what about all the other low frequency spectrum?

"All the other" low frequency spectrum would be the 700 MHz spectrum that AT&T and Verizon purchased in 2008.  The companies claim to have needed the spectrum to accommodate the very predictable surge in demand for wireless data services.  And, according to no less venerable a source than Wikipedia, AT&T and Verizon are, in fact, using their 700 MHz spectrum to roll out their fancy LTE service, for their fancy data-loving, bandwidth-hogging LTE customers.  So, why is the DoJ insinuating otherwise?

Well, as near as I can tell, low frequency spectrum just became a "thing" in the FCC's NPRM from 6 months ago, where they solicited comments on whether the Commission should change its spectrum screen to account for the perceived greater value of low frequency spectrum.  So, if I had to guess, I would say that the FCC's been waiting for 6 months for some big player to take the low frequency "lob" they put up with the NPRM and slam-dunk it home--and the DoJ is that big playa'.

Lebron dunk.jpgDoJ . . . with no regard for human life!

So, do you think any Senators called out William Baer on this at the oversight hearing yesterday?  According to the trade press, the ranking member of the Antitrust Subcommittee, Senator Mike Lee (R-UT), expressed concern that the Department was suggesting to the FCC that AT&T and Verizon were warehousing spectrum.  You bet he did--because us Lees just happen to know a f@$k-ton of stuff about telecom and antitrust.
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!"

October 19, 2011 12:06 PM

Even Whales Get the Blues . . .

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?

September 23, 2011 11:34 AM

Sprint's (Busted) Gambit: The Whale No Litigate

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.

Courtroom Caprice

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. 

But then Mr. Hesse went on to clarify, on behalf of the United States, that the government wasn't all that committed to the HHI thresholds listed in its complaint.  Said differently, the elimination of T-Mobile as a "maverick" competitor wouldn't be nearly as threatening to competition--in the view of the United States--if a nice firm like Sprint were the purchaser. 

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. 

Requiem

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.
 
September 19, 2011 12:50 PM

Should the Merger Guidelines Come With Guidelines?

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. 

Continue reading Should the Merger Guidelines Come With Guidelines?
September 7, 2011 1:21 PM

Sprint's Gambit: The Whale No Hesitate

A couple weeks ago, I explained how Sprint's "go for broke" gambit produces the most favorable outcome for Sprint, with regard to the AT&T/T-Mobile merger. I must be Sprint's good luck charm, because the day after I published that post, Sprint announced it would be getting the new version of the iPhone at the same time as AT&T and Verizon.  

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.


Continue reading Sprint's Gambit: The Whale No Hesitate