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Magazine / Need to Know: Technology

The Urge to Merge

AT&T and T-Mobile need to convince regulators that their union won’t quash competition. So what is “competition,” anyway?

Big deal: AT&T is a major player in Washington.(Spencer Platt/Getty Images)

photo of David  Hatch
March 24, 2011

MCI and Sprint in 2000. DirecTV and Dish Network in 2002. The Google-Yahoo advertising alliance of 2008. All three megadeals were trumpeted with great fanfare … but never happened. The Justice Department’s Antitrust Division rejected the MCI and satellite television mergers, asserting that they would limit competition. The online ad deal unraveled when Justice threatened to block it.

So when officials at AT&T (the country’s second-largest wireless carrier) announced a $39 billion acquisition of T-Mobile (the fourth-largest) last weekend, they had clearly studied history. “The facts show that the U.S. wireless market is one of the most competitive markets in the world,” said Wayne Watts, senior executive vice president and general counsel for AT&T, at a Monday news conference. As far as he is concerned, the Obama administration should not hesitate to approve the transaction, because the cellular business is robust.

Trouble is, that’s not for him to say. The newly combined behemoth would surpass Verizon as the nation’s largest wireless carrier, creating what critics say is a duopoly. (In market share, Sprint is a distant third.) Now, regulators will step in. If they foresee higher prices, fewer choices, and limited access to the latest technologies—because only vigorous competition guarantees those consumer-friendly offerings—they can kill or modify the deal. But first, the Justice Department has to figure out which prices are too high, how many choices are too few, and what, exactly, makes competition vigorous.

 

Antitrust officials will apply the Her­findahl-Hirschman Index, a mathematical formula for evaluating the level of competition in a marketplace. The number “approaches zero when a market consists of a large number of firms of relatively equal size,” according to Justice. “The HHI increases both as the number of firms in the market decreases and as the disparity in size between those firms increases.” The department defines competition differently in various industries, depending on things like whether capital is available for new players to enter the market. But because the wireless market already has so few carriers, it starts with a high—that is, relatively uncompetitive—HHI score. Under federal guidelines, any merger that increases a market’s score by even 100 points prompts a review. According to one count, this one raises the score by more than 600.

Andrew Schwartzman, senior vice president and policy director for the Media Access Project, a public-interest law firm, said that in assessing the transaction, Justice would review the ability of Sprint to compete in the new market. It also would consider whether the merger leaves competitors sufficient access to airwaves and capital. In addition, department officials would gauge the ability of rivals to ink exclusive deals for popular handsets—as AT&T did with the iPhone—and to advertise nationally. “This market is hard to enter because the spectrum is locked up,” Schwartzman said, and ad campaigns, customer service, and retail stores come with high costs.

Federal regulators can amend a marriage if they find it too powerful. “If the determination is that the merger would be anticompetitive, sometimes there are ways to modify the deal to alleviate those anticompetitive effects,” said Kevin Werbach, a law professor at the University of Pennsylvania’s Wharton School and a telecom-policy expert. Spinning off assets to smaller competitors or new entities is one such option. After Justice’s Antitrust Division used the HHI to test Verizon’s $28 billion acquisition of Alltel, which it approved in 2008, it required the new company to stop serving customers in 100 areas—including the entire states of North and South Dakota and portions of 20 others—to “resolve competitive concerns,” according to the settlement with the companies.

Legal experts agree that President Obama’s Justice Department has adopted a stricter view of competition than the Bush administration did. Assistant Attorney General Christine Varney, who heads the Antitrust Division, “indicated early on that she believed that a more strengthened antitrust posture was warranted,” Werbach said. “Conceptually, the Obama administration is committed to a more active role in antitrust and ensuring competition.”

Meanwhile, the Federal Communications Commission will examine whether the proposed union satisfies the public interest, an assessment that also takes the competitive impact into account. Justice and the FCC must each approve the merger before it can proceed.

Both entities have left paper trails that provide hints about their upcoming decisions. In an annual report last May, the FCC for the first time in 14 years failed to conclude that the wireless sector was competitive. For its part, Justice said in a January FCC filing that it “starts from the presumption that in highly concentrated markets, consumers can be significantly harmed when the number of strong competitors declines from four to three, or three to two.”

The AT&T team obviously anticipated those concerns. On Monday, Watts cited FCC statistics that 18 of the 20 largest U.S. wireless markets have five or more competitors, and that a “majority” of Americans can choose among five carriers. “This impressive and intensive competition is only increasing with the entry of new advanced networks, like Clearwire and LightSquared,” he said at the news briefing. “Aggressive competitors are not sitting still. They are expanding into new markets and growing share.” He also cited low-cost, prepaid services, such as Cricket and MetroPCS, as evidence of competition.

Telecom analysts, however, caution that these companies lack the scale of the majors. LightSquared has access to nationwide spectrum, but it plans to act only as a spectrum wholesaler. On Wednesday, the company signed a deal with Best Buy that will allow the electronics chain to offer low-cost cellular service.

AT&T finds itself in the awkward position of arguing that the marketplace will be more competitive after it has removed one of its fiercest rivals. Yet even if the new, supersized carrier delivers on promises to extend advanced 4G wireless technology to most Americans, strengthen network quality, and offer more services, there’s no denying the loss of T-Mobile. Whether the remaining service providers can fill the void is now Washington’s $39 billion question. 

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