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Today, the Justice Department announced that it is filing suit in federal court to block the proposed merger between AT&T and T-Mobile, saying that it violates Section 7 of the Clayton Act, which prohibits mergers that may "substantially lessen competition, or tend to create a monopoly."
Specifically, the DOJ was concerned with the effects of the consolidation on consumers and innovation, saying that the merger would likely lead to higher prices, poorer quality service, and less innovation and variety in wireless mobile products.
A National Market
One of the things that the DOJ points out quickly is that the merger has concentrating effects on both the local and national levels. While a given consumer in a local market might have the choice of some local provider in addition to the "Big Four" national carriers (AT&T, Verizon, Sprint, and T-Mobile), the DOJ points out that the consolidation still increases market share in each locality significantly. More importantly, though, since the Big Four also compete with each other nationwide across local markets (their pricing, products, and features are uniform across the country), the effect on the national market is also important. The DOJ's filing notes that AT&T itself admitted, in an earlier merger proceeding, that "the predominant forces driving competition among wireless carriers operate at the national level."
Local competitors also lack the nationwide networks that the Big Four have, meaning that they had to rely on the Big Four so that their customers could get cell service while roaming. This meant that local providers depend upon the Big Four for a good chunk of their business, making it highly unlikely (among many other reasons) that they could encourage advances in innovation, service, and pricing in an even more concentrated market.
A Concentrated Market
In analyzing the local markets, the DOJ found that 96 of the 100 largest market areas would become "highly concentrated" after the merger—meaning that their Herfindahl-Hirschman Index ("HHI") would be above 2,500. In more than half of the local markets, the combined company would have more than 40% market share.
At the national level, the combination of the two companies raised the HHI to 3,100—an increase of more than 700 points. By comparison, it's a rule of thumb among antitrust experts that an increase of more than 50 points is a cause for significant concern in an already-concentrated market.
Eliminating a Competitor
The DOJ also focuses on the fact that, for AT&T, acquiring T-Mobile lets them eliminate a particularly innovative and competitive rival. T-Mobile had positioned itself both as a value provider—offering lower prices, good customer service, and innovative products and services. For instance, T-Mobile was the first carrier to have an Android handset, Blackberry wireless email, national WiFi access, and a variety of unlimited service plans. It also was the first to roll out and market an advanced "4G" network based on HSPA+ technology. By eliminating such a competitor, AT&T would also eliminate much of its need to keep its prices, customer service, and products competitive.
AT&T certainly felt the competitive pressure from T-Mobile. An AT&T internal document, cited by the DOJ in its complaint, says that "the more immediate threat to AT&T is T-Mobile…. " It goes on to point out that T-Mobile's rollout of high-speed services forced AT&T to speed its customers' data as well, in an attempt to keep up. The merger thus created competitive problems not just because the national market for wireless carriers was going from four to three, but that the fourth carrier being eliminated was a particularly aggressive one in terms of spurring its competitors to improve.
That's exactly the sort of market concentration that the antitrust laws are intended to prevent—one that would reduce competition, raise prices, reduce the quality and quantity of services, and reduce product innovation and product variety. That these were consequences of the merger has been clear to many for some time—and now it seems that the Justice Department is no different.