Question: The AT&T and T-Mobile Merger?
This transaction is all about consumers. It's about keeping up with consumer demand. It's about having the capacity to drive innovation and competitive prices for consumers. Randall Stephenson, CEO and President, AT&T Inc.44 Beware of habitual monopolists bearing gifts ... The Economist, March 24, 2011 Introduction In March 2011 Deutsche Telekom decided to invest no further in the 4G rollout in the competitive U.S. wireless market and agreed to sell for $39 billion its T-Mobile USA subsidiary to AT&T, the second largest wireless carrier in the United States. T-Mobile was the fourth largest wireless carrier, and the acquisition and merger of the two companies would increase AT&T's U.S. market share to over 40 percent, putting it ahead of Verizon Wireless, a 50-50 joint venture of Verizon Communications and Vodafone. AT&T argued that the merger was necessary to give it the 700 MHz spectrum it needed to provide 4G LTE service, the future of wireless communication.45 With the additional spectrum and infrastructure resulting from the merger, AT&T said it would be able to serve 97 percent of the population and double its existing geographic coverage.
The company also said that the merger would allow it to realize substantial efficiencies from the combined assets of the two companies. AT&T was also acquiring spectrum from Qualcomm. The acquisition and merger required approval by federal agencies. The Federal Communications Commission (FCC) had to approve any transfer of spectrum licenses and communications authorizations from T-Mobile to AT&T. The merger could also be challenged by the Department of Justice (DOJ), since even before the acquisition and merger the market was highly concentrated. AT&T was confident that the merger would be approved. "If the merger fails to gain approval then AT&T will pay T-Mobile a $3 billion breakup fee, transfer over some AWS spectrum it doesn't need for its LTE deployment, and grant them a roaming agreement at a value agreeable to both parties."46 AT&T sought to justify the merger to the antitrust authority on efficiency grounds. It also deployed a nonmarket strategy in support of the merger. Prior to announcing the merger, AT&T had enlisted support from NGOs, the Communications Workers of America (CWA) union, and companies and venture capitalists in Silicon Valley. Their endorsements supported AT&T's political and efficiency arguments in favor of the merger.
The opponents of the merger also deployed nonmarket strategies to counter AT&T's strategy and influence the government agencies with authority over the merger. Both Houses of Congress held hearings on the merger, and the FCC and DOJ demanded extensive data for review of the merger. AT&T was ready with a contingent nonmarket strategy intended to address any antitrust and regulatory concerns that might be raised. The U.S. Wireless Market Verizon was the largest wireless provider with 38 percent of the market followed by AT&T, Sprint, and T-Mobile. With the acquisition of T-Mobile, AT&T would have approximately a 44 percent market share, but market shares varied considerably across local markets. Demand for wireless service had skyrocketed with the introduction of smartphones that allowed users to connect to the Internet, transmit data, and download videos and movies. Innovation was rapid, and technological innovation was expected to continue. AT&T argued that the merger would allow it to roll out a nationwide 4G LTE network more quickly than it otherwise could, which would not only meet rapidly increasing customer demand but encourage further innovation.
Critics, however, argued that the merger would cement the Verizon and AT&T duopoly and control innovation to the advantage of the companies. Telecommunications Council, an advocacy group for the interests of minorities that had never taken a position on a merger, came out in support of it. In a filing with the FCC, the Council's executive director David Honig wrote, "In a democratic society, the nation simply cannot afford to guess wrong and see the digital divide widen. In today's digital age, access to high-speed Internet is no longer a luxury-it is a necessary predicate of first-class citizenship, and thus it is a fundamental right for all Americans."57 Ellen Miller, executive director of the Sunlight Foundation, commented, "They've curried favor with organizations who, whether through direct or indirect expectations, will go to bat for them. That's what a sophisticate lobby does, and AT&T is among the best at this in Washington."58 Self-interest drove many of the supporters of the merger. AT&T was the only wireless provider whose workers were represented by a union, whereas T-Mobile and Sprint had successfully fought unionization.
With AT&T and Sprint the only possible acquirers of T-Mobile, the CWA support for the merger was immediate. CWA president Larry Cohen said, "in contrast to AT&T's strict neutrality policy with respect to union organizing and positive partnership with CWA, Sprint has a long history of hostility to union organizing and workers' rights."59 He also stated, "Sprint has outsourced up to 70 percent of its customer contact workforce to places like the Philippines, India, and Mexico. Sprint is the only U.S. wireless company that outsources network management, .... AT&T and its unions, by comparison, recently negotiated the return of 3,000 DSL-related customer service jobs to the United States, ...."60 Union support led to 77 Democrats in the House endorsing the merger.61 Cohen wrote in USA Today, May 20, 2011, "This merger promises to bridge the digital divide and will, if regulators insist on guarantees of date certain buildout and mapping that is monitored."62 He stated that Deutsche Telekom had made it clear that it would not invest further in the company, and the only other possible buyer was Sprint which did not have the financial resources to acquire T-Mobile.
To solidify CWA support, AT&T pledged to include the T-Mobile workers in the union's bargaining unit. The union would add 23,000 new members to the 43,000 AT&T wireless workers already represented without having to go through a representation election. Through growth in AT&T wireless and several acquisitions, CWA representation had increased from 9,300 to 43,000 within a decade. In 2011 the union was under pressure from Verizon Communications, which sought extensive concessions in pensions, sick days allowed, and health care contributions from workers in its wireline business. In August 45,000 members of the CWA and the International Brotherhood of Electrical Workers went on strike against Verizon in opposition to any concessions. 57Daily Deal/The Deal, May 31, 2011. 58Washington Post, June 1, 2011. 59Larry Cohen, Testimony, Senate Committee on the Judiciary, Subcommittee on Antitrust, Competition Policy, and Consumer Rights, May 11, 2011. 60Ibid. 61Daily Deal/The Deal, July 28, 2011. 62USA Today, May 20, 2011. AT&T traveled to Silicon Valley to line up support from companies and venture capitalists with a stake in wireless.
The company met with 10 large companies and received endorsements for the merger from Facebook, Microsoft, and Yahoo.63 Facebook and other companies filed a statement with the FCC in which they said, "Many policy related efforts will not be able to quickly address near term capacity needs. The FCC must seriously weight the benefits of the merger and approve it."64 AT&T also met with 20 venture capitalists, and received endorsements from Kleiner Perkins Caufield & Byers and Sequoia Capital. Matt Murphy, a partner at Kleiner, said, "A key part of any user experience is how responsive the app is, and that requires low latency, and I don't want us to be in a situation where we don't have the kind of networks we need to make these applications perform as best as they possibly can."65 The Opposition SprintNextel, which was the first company to roll out a nationwide 4G network, vigorously opposed the merger. CEO Daniel R. Hesse stated, "We urge the Department of Justice and the FCC to take a hard look at this transaction and to weigh carefully the irreparable harm to competition, innovation, and customer choice against the purported benefits of combining two overlapping businesses."66 He argued that with the purchase of spectrum from Qualcomm, AT&T could serve rural areas and more customers without the spectrum from T-Mobile.
Hesse also complained about backhaul fees, "Sprint must pay more than $2 billion a year in backhaul fees to its competitors, AT&T and Verizon earn enormous profits from their control over backhaul. By controlling the availability and price of backhaul, AT&T and Verizon are also able, to a large degree, to control their competitors' costs and quality of service."67 The merger was also opposed by the 100 wireless carriers that belonged to the RCA-The Competitive Carriers Association. The carriers primarily served rural areas covering 80 percent of the area of the United States. In testimony before a Senate subcommittee Victor H. Meena, president and CEO of Cellular South and chairman of the RCA, criticized the merger on the grounds of creating a dominant duopoly, dominance of the 700 MHz band and deployment of "essentially proprietary LTE networks and devices that work only on their spectrum," and unwillingness to sign roaming agreements with local service companies.68 Leap Wireless and MetroPCS also opposed the merger, citing the increased concentration in the industry. The Computer and Communications Industry Association (CCIA), which includes Microsoft as a member, strongly opposed the merger for fear that it would stifle competition and delay the rollout of advanced technology.
Ed Black, president and CEO of the CCIA, called it "the most brazen merger proposal in history" and "a clear violation of the relevant antitrust rules."69 He added, "To believe that [regulators] would approve a merger that would give AT&T 45% of the market, especially when they have a duopoly in the wireline market, is very difficult to believe."70 Consumers Union expressed concerns about the merger, stating, "There is a great deal of data and evidence that this transaction will lead to a highly concentrated market, which will likely lead to higher prices and less choice for consumers."71 Parul P. Desai, policy counsel of the Consumers Union, addressed the market concentration issue. "As of 2008, the FCC estimated the HHI to be 2,848, which already exceeds both the DOJ (2,500 HHI) and FCC (2,800 HHI) definition of a heavily concentrated market .... It has been estimated that this acquisition will increase the national HHI by an additional 650-700 points, which means that scrutiny over the proposed acquisition should be increased, with a presumption that the acquisition will enhance market power."72 Desai also complained that special access "rates continue to be a barrier to entry and growth for smaller and regional carriers." The Yankee Group, a research and consulting firm, reported that the concentration in 17 of the 27 largest metropolitan areas would "jump dramatically" as a result of the merger.73
Sprint Nextel broadened its strategy by going to the states. Several states had statutes allowing their public utility commission to review mergers of wired telecommunications companies, and although it was not clear that they could stop a wireless merger, they could express an opinion about it. Sprint wrote to the California Public Utility Commission (PUC) urging it to begin an investigation of the merger. The PUC subsequently decided to do so, and froze its 30-day review rule to allow an extended investigation. The PUC observed that the merger would give AT&T a 47 percent wireless market share in the state. All the other states declined to oppose the merger with the exception of West Virginia which was still reviewing it. An AT&T spokesperson responded, "Spint's letter [to the PUC] merely reiterates substantially the same unfounded accusations it has been peddling to the press, to Congress, and to the FCC. We're confident that the FCC and DOJ, after a full review of the facts, will determine that the transaction will be good for consumers, for workers, and for the economy."74 After holding hearings on the merger Senator Herb Kohl (D-WI), chairman of the Subcommittee on Antitrust, Competition Policy and Consumer Rights of the Judiciary Committee, wrote to Attorney General Eric Holder and FCC chairman Julius Genachowski stating, "I have concluded that this acquisition, if permitted to proceed, would likely cause substantial harm to competition and consumers, would be contrary to antitrust law and not in the public interest, and therefore should be blocked by you agencies."75
The ranking Republican member of the subcommittee Michael S. Lee (R-UT) was more cautious, asking for a "careful review" of the merger. A group of seven NGOs, including the Consumers Union, the National Hispanic Media Coalition, and the Future of Music Coalition, wrote to the FCC chairman asking for public hearings on the merger. The group said, "The AT&T/T-Mobile merger proposal deserves the commission's highest level of scrutiny and consideration."76 Companies and NGOs opposed to the merger formed the No Takeover Project. The Project set up a Web site and used Facebook to spread its message and urge people to write their governors and state attorneys general. AT&T's Contingent Strategy In July AT&T asked to submit new economic data to the FCC, and the FCC stopped the clock on its review of the merger. Jay Schwartzman of the opposition Media Access Project commented, "It suggests that AT&T's initial showing was deemed inadequate. It indicates it's going to take longer and that AT&T is going to have a stiffer burden to meet in justifying this merger to the FCC."77 AT&T's strategy, however, was to propose a fix-it-first plan to relieve potential concerns about concentration in particular markets. It had all along argued that the merger should be evaluated on a market by market basis, and this positioned it to propose a fix-it plan to relieve concentration in particular markets.
An AT&T spokesperson said, "As we said on the day we announced the merger with T-Mobile USA, we anticipate there will be some divestitures, as we have had in past mergers, but any speculation about the amount of divestitures is premature."78 The asset sales could include the sale of some of the 9,200 stores the two companies had, since a number of them were proximate. CoStar Group, which tracks commercial properties, reported that 41 percent of AT&T stores had a T-Mobile store within a mile.79 In addition, AT&T proposed selling assets and spectrum licenses in selected markets. To manage the asset sales the company hired Bank of America-Merrill Lynch. The fix-itfirst plan was viewed as attractive by small wireless carriers that saw an opportunity to acquire spectrum and licenses. Leap Wireless CFO Walter Berger expressed interest in any divested assets, and Braxton Carter, CFO of MetroPCS, also saw the possibility of acquiring divested spectrum or customers.80 In a blunder, lawyers for AT&T filed an unredacted copy of a letter with the FCC for posting on a public Web site rather than a letter with confidential information redacted. The unredacted letter was quickly taken off the Web site, but it had been noticed. According to the Wall Street Journal, "The full version says that AT&T had considered and rejected plans to expand the network to 97% of the U.S. at a cost of $3.8 billion."81
1. How effective is AT&T's strategy? What else should AT&T do?
2. How effective is the opposition?
3. Is the concentration issue likely to be decisive?
4. Should the merger be approved?