Antitrust review of the AT&T/T-mobile transaction.

AuthorGrunes, Allen P.
  1. INTRODUCTION II. STANDARD FOR EVALUATING THE MERGER III. THIS MERGER IS PRESUMPTIVELY ANTICOMPETITIVE A. A T&T's Postmerger Market Share Would Exceed Forty Percent B. Entry Barriers Are High C. The Incipiency Standard IV. THE MERGING PARTIES HAVE NOT OVERCOME THE PRESUMPTION OF ILLEGALITY A. The Merging Parties Have Not Established That Consumers Will Overall Benefit with Merger Specific Efficiencies B. AT&T and T-Mobile Have Not Rebutted the Presumption That the Significant Increase in Concentration in an Already Highly Concentrated Industry Will Increase the Likelihood of Tacit Collusion 1. Handset Competition and Innovation 2. Text Messages 3. Parallel Accommodating Conduct 4. Unilateral Effects 5. Exclusionary Effects V. REMEDIES A. Behavioral Remedies B. Divestitures C. Enjoining the Merger VI. CONCLUSION I. INTRODUCTION

    Section 7 of the Clayton Act was intended to arrest the anticompetitive effects of market power in their incipiency. The core question is whether a merger may substantially lessen competition, and necessarily requires a prediction of the merger's impact on competition, present and future. The section can deal only with probabilities, not with certainties. And there is certainly no requirement that the anticompetitive power manifest itself in anticompetitive action before [section] 7 can be called into play. If the enforcement of [section] 7 turned on the existence of actual anticompetitive practices, the congressional policy of thwarting such practices in their incipiency would be frustrated. (1) In this Article, we review the proposed $39 billion merger between AT&T and T-Mobile under federal merger law, under the United States Department of Justice ("DOJ") and Federal Trade Commission ("FTC")'s 2010 Horizontal Merger Guidelines, and with a focus on possible remedies. We find, under a rule of law approach, that the proposed acquisition is presumptively anticompetitive, and the merging parties in their public disclosures have failed to overcome this presumption. Next, we find that under the Merger Guidelines, there is reason to believe that the transaction may result in higher prices to consumers under several different plausible theories. Finally, we turn to the question of possible remedies. We conclude that there is a high likelihood that divestitures will not solve the competitive problems and make the case for enjoining the acquisition.

    On August 31, 2011, the United States brought an action to enjoin the merger. (2) The government's complaint was subsequently amended to include the claims of seven states and Puerto Rico as coplaintiffs. (3) Two competitors also filed suit to enjoin the transaction and the defendants unsuccessfully moved to dismiss their complaints. (4) The government's case is scheduled to go to trial on February 13, 2012. (5)

  2. STANDARD FOR EVALUATING THE MERGER

    The starting point for any evaluation is the statute itself. Section 7 of the Clayton Act prohibits mergers and acquisitions when the effect of the transaction "may be substantially to lessen competition, or to tend to create a monopoly." (6)

    Contemporary merger law is forward looking. Courts are called upon to make judgments about the likely effects of a merger that has not yet taken place. Uncertainty and errors of both overenforcement and underenforcement are inevitable. Some observers counsel for lenient merger review, as they believe the market will invariably correct any mistakes because new firms will enter and market power will quickly disappear. But the lessons from the financial crisis call into question these empirically suspect beliefs. (7) Markets do not always self-correct. (8) Most mergers do not yield significant efficiencies (which, if they did, would warrant a light touch approach to merger review). (9)

    Instead, in the current era of Too-Big-and-Integral-to-Fail, we can see how Congress in the aftermath of World War II got it right. In amending the Clayton Act, Congress saw the dangers of concentrated economic and political power, and sought to arrest these threats in their incipiency. (10) Thus, when evaluating mergers, the enforcers and the courts should respect Congress's desires and err, if anything, on the side of enforcement. Enforcement under the Clayton Act must also consider whether there is a trend toward concentration. "Long-term trends in HHI changes," the Fifth Circuit recently noted, "can be used to examine the structure of markets and are used to determine the effect of mergers on the market." (11) Where the market trends show that the merging parties "have been the dominant players in the relevant markets and do not indicate any trend of reduced concentration ...," then a merger should be enjoined. (12) An immediate danger of monopolization is not needed for a merger to be unlawful. (13)

    The merger law, by its own language and Congress's intent, requires heightened scrutiny of mergers, especially those in already concentrated industries with entry barriers. (14) Thus, the outcome for merger review should significantly differ than the outcome for evaluating antitrust restraints generally under the Sherman Act.

  3. THIS MERGER IS PRESUMPTIVELY ANTICOMPETITIVE

    Under well-established U.S. law, there is a strong presumption of illegality when the merging firms' market shares are significant in an industry with high entry barriers. As the Supreme Court said,

    [A] merger which produces a firm controlling an undue percentage share of the relevant market, and results in a significant increase in the concentration of firms in that market is so inherently likely to lessen competition substantially that it must be enjoined in the absence of evidence clearly showing that the merger is not likely to have such anticompetitive effects." (15) Consistent with the legislative intent of the Clayton Act, courts have regarded a transaction that would lead to further concentration in an already highly concentrated market as presumptively illegal under Section 7. (16) In United States v. Philadelphia National Bank, the Court held that a merger resulting in a single firm controlling thirty percent of a market trending toward concentration in which four firms controlled seventy percent of the sales was presumptively illegal. (17) Unless the merging parties "meet their burden of rebutting this presumption, the merger must be enjoined." (18) That presumption applies to the AT&T/T-Mobile merger in an already highly concentrated industry with high-entry barriers.

    1. AT&T's Postmerger Market Share Would Exceed Forty Percent

      The candidate product market is the market for "mobile wireless telecommunications services." (19) This was the market definition used in prior DOJ cases such as United States v. AT&T Inc. (20) and United States v. Verizon Communications Inc. (21) In those cases, DOJ noted that there were no cost-effective alternatives to mobile wireless telecommunications services, and it is unlikely that a sufficient number of customers would switch away from mobile wireless telecommunications services to make a small but significant nontransitory price increase in those services unprofitable. (22)

      This candidate product market includes voice, text messaging, and data services. The data component of mobile wireless services has been rapidly growing in the past few years. There has been a high smartphone adoption and upgrade rate (close to fifty percent in 2009 according to the FCC's Fourteenth Mobile Wireless Competition Report). (23) There has also been an expansion in the number of non-smartphone handsets that are subject to mandatory data plans. Data plans for mobile phones are typically sold as part of a bundle. At the end of the day, DOJ's product market candidate, which includes voice, messaging, and data, is defensible.

      The candidate geographic markets include both local and national markets. (24) Historically, viewed from the consumer perspective, geographic markets were local. (25) This was because consumers purchasing mobile wireless telecommunications services chose among the providers that offered services where they lived, worked, and traveled on a regular basis. (26) Historically, providers offered different promotions, discounts, calling plans, and equipment subsidies in different geographic areas, varying the price for customers by geographic area. (27)

      By the end of 2008, however, there were four facilities-based mobile wireless service providers that industry observers typically described as "nationwide": AT&T, Sprint Nextel, T-Mobile, and Verizon Wireless. (28) In 2008, all the nationwide operators launched unlimited national flat-rate calling plans. (29) Consumers increasingly have shifted away from restricted plans that included separate roaming charges and into these unlimited service options, and the focus of price competition has shifted accordingly. (30) It now appears that pricing is for the most part set nationally by the four nationwide carriers, and regional and local competitors do not act as significant constraints on national pricing.

      Indeed, in its FCC public interest statements in both the Dobson (31) and Centennial (32) acquisitions, AT&T acknowledged that the geographic market is national precisely for these reasons. As AT&T wrote in its Centennial statement, supported by a declaration from its Chief Marketing Officer, "[i]n the mainland U.S., AT&T establishes its rate plans and pricing on a national basis, without reference to market structure at the [Cellular Market Area] level." (33) AT&T's statement continues: "One of AT&T's objectives is to develop its rate plans, features and prices in response to competitive conditions and offerings at the national levels [sic]--primarily the plans offered by the other national carriers." (34)

      Although pricing by the four nationwide operators appears to be largely national, there may be promotions or discounts (e.g., handset discounts) that occur on a local basis. At trial, the court will likely consider how...

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