The Sprint Standing Skirmish: AT&T Loses Some Ground, DoJ Gets Road Map Forward.
The Sprint Standing Skirmish: AT&T Loses Some Ground, DoJ Gets Road Map Forward.
The Sprint Standing Skirmish: AT&T Loses Some Ground, DoJ Gets Road Map Forward.

    Get Involved Today

    Any tactician knows that battles can be won or
    lost by defining the battlefield. Skirmishes like the fight over whether Sprint
    and C. Spire (formerly Cell South) can go ahead with their private lawsuits
    against AT&T’s acquisition of T-Mobile help define the terrain for the
    bigger fights to come (order here). By ruling on what constitutes a recognizable injury
    under the antitrust rules and making preliminary determinations about the
    nature of the market, the Order sets the boundaries of what arguments DoJ can
    make and what it will need to do to prove its case. Where AT&T manages to
    have certain market definitions locked in and certain potential injuries
    excluded as not cognizable under antitrust in these early rounds, it gains an
    advantage. By contrast, where the court rejects AT&T’s efforts to limit the
    scope of the review by adopting different market definitions or recognizing certain
    injuries as addressed by the antitrust law, DoJ gains an advantage.

    Both Sprint/C. Spire and AT&T claimed victory after Judge Huvelle issued her decision Wed. evening — Sprint/C. Spire for staying in on some claims when AT&T had said they would get thrown out, AT&T on the basis that “most” of Sprint and C. Spire’s claims got dismissed and what remains doesn’t matter. But everyone knows this is just a skirmish in the big battle between AT&T and DoJ. So, setting aside who won or lost this particular round, how does this position AT&T for the real fight? 

    at Huvelle’s Order on whether Sprint and/or C. Spire adequately stated a
    , DoJ (which wasn’t even party to the Order) clearly gained the advantage
    on several key points. Even where Huvelle dismissed claims, the way she did it
    in a number of cases provided a road map for DoJ going forward and thus created
    terrain favorable to DoJ that disadvantages AT&T in future rounds. Notably,
    Huvelle rejected several key arguments by AT&T that would have taken
    certain DoJ arguments off the table or made them more difficult to prove. (As
    an aside, this also shows the danger of trying to judge by oral argument. A lot
    of reporters portrayed Huvelle as aggressive to Sprint and C. Spire and
    focused on whether she appeared to “like” AT&T and would therefore grant
    AT&T’s motion. The reality is that she produced a sophisticated and highly
    nuanced 44-page opinion in 9 days, which is pretty damn impressive.)

    My list
    on what in the Order shapes the ground going forward:

    The Number of Equipment
    Manufacturers Is Irrelevant to the Question of Monopsony Power Over the Equipment

    knows how many times I’ve had this argument with my opposite numbers in
    industry and at neocon think tanks. “How on Earth can you say AT&T or VZ
    has/will have market power when we have so many companies making handsets?”
    They proclaim. When I point out that this argument makes zero economic sense,
    because the market power is determined by the number of potential buyers rather
    than the number of potential sellers and that a large seller to buyer ratio
    actually increases the monopsony power of the buyers because sellers
    have fewer alternatives, I’m usually told I hate free markets and love
    regulation for its own sake. Needless to say, AT&T and its supporters have
    made the “there are so many handset providers we can’t possibly be exercising
    market power” a cornerstone of its argument that the merger will have no impact
    on the handset market.

    imagine my delight to see this sentence in the opinion at page 21:

    there may be and, indeed, by all accounts is, healthy competition among firms
    that sell mobile wireless devices is irrelevant to understanding
    whether, by acquiring T-Mobile, AT&T could so increase its buying power
    as to dictate terms to device manufacturers and otherwise impair plaintiffs’
    access to these necessary inputs” (emphasis in original).

    The court further noted that AT&T’s past actions
    in the market to withhold needed handsets from rivals, while not necessarily an
    antitrust violation in and of itself, is relevant to its likely future actions.
    Accordingly, if AT&T (and VZ) already have some monpsony power to foreclose
    rivals like Sprint from getting handsets, it is still a violation of the antitrust laws to let AT&T acquire T-Mo and give it even more monopsony power.  You may think that rates a “duh,” but you have
    not dealt with FCC staff (or DoJ staff during the Bush years) in “willful disbelief”
    mode. If staff gave a dollar to the High Cost Fund for every time they gave me
    a blank look in response to arguments like this, we wouldn’t need to raise the SLCs to make up for lost ICC revenue. Srsrly.

    O.K., I recognize that’s wildly wonky trash talk even
    for me,
    so let me clarify my point. Normally, AT&T gets a total free pass on
    anything it ever did before, and gets to submit all kinds of theoretical stuff
    to show that it has no incentive to behave in an anticompetitive fashion even
    if that is what it has actually been doing. For the first time, AT&T is
    facing the fact that its past anticompetitive behavior (or simply behavior that
    happens to have an anticompetitive impact but is done for totally legitimate
    reasons) is part of the evaluation process, which makes it harder to rely on
    its usual insistence and theoretical handwaving about how of course they have
    no incentive to behave the way they actually behave. In other words, the fact
    that AT&T kept Sprint from getting the iPhone for five years is not only  relevant to its possible exercise of market
    power post-takeover, the fact that Sprint got the iPhone just in time for the
    hearing doesn’t magically make the issue go away.

    As I stressed in my analysis of the H&R Block
    , there is a big difference between having the opportunity to win the case
    and actually winning it. Still, to go back to my military analogy, AT&T
    lost one of its outer defenses. DoJ (and Sprint and C. Spire) will have the
    opportunity to prove that a combined AT&T/T-Mo would have market power over
    handset manufacturers, and the fact that there are lots of handset
    manufacturers is not an automatic proof for AT&T that the handset market is
    competitive. At the same time, I get to be totally obnoxious about this next
    time I debate one of my opposite numbers. w00t!

    Roaming Regs Are Not An Automatic Defense Against Market Power In the Roaming Market.

    Another front where AT&T lost territory was on
    roaming. AT&T had argued that the FCC’s roaming regs adopted last spring
    took this issue off the table – conveniently ignoring that AT&T has
    challenged the rules and they are now pending before the D.C. Circuit.
    Unfortunately for AT&T, the court found that the presence of the FCC
    regulations did not end its inquiry in the matter. Rather, the court still had
    a duty to see if the FCC regulations “adequately” protected C. Spire (which has
    some GSM networks) from market power post-acquisition. Also importantly,
    AT&T’s history of refusing to negotiate commercial roaming agreements (which
    AT&T disputes, but is a matter of record in the Data Roaming proceeding and
    a justification officially relied upon by the FCC when it adopted the rules)
    are “facts which therefore must be heard to question the adequacy of the FCC’s
    rules.” (p. 38)  

    AT&T’s loss here is not as severe as it was with
    the handset market. The presence of the FCC rules (assuming they remain in
    effect) will be a factor in the analysis for both C. Spire’s case and DoJ’s case. But
    the mere presence of potentially ineffective FCC rules does not take the matter
    off the table. So AT&T loses some ground in this skirmish. Also
    significantly, it points DoJ to develop the evidence submitted by the other GSM
    carriers – including the international carriers with regard to international
    roaming – that AT&T has generally refused to negotiate roaming agreements
    on commercially reasonable terms and that removal of a potential roaming
    partner would have significant anti-competitive impact.  

    Difference Between GSM and CDMA Matters.

    The court recognized that CDMA and GSM are different
    technologies, and that therefore CDMA carriers like Sprint do not suffer an
    antitrust injury from the loss of T-Mobile (a GSM carrier) from the market. So
    AT&T gets those claims dismissed. But the recognition of CDMA and GSM as
    different markets undermines a number of roaming-related and device-related
    issues because in many places, if the market is “GSM carriers” rather than
    “wireless carriers,” the merger goes from being a 4-3 wireless merger to a 2-1 “GSM
    monopoly” merger – a much easier case for DoJ to win.

    AT&T argues that the difference between CDMA and
    GSM are irrelevant for a variety of reasons, chief among them being (a) the
    eventual arrival of LTE, and (b) the irrelevancy of CDMA and GSM to consumers.
    But with the court recognizing both a monopsony claim in devices and a
    monopolization claim in GSM roaming, AT&T becomes vulnerable to attacks by
    DoJ (and at the FCC) on the basis of the “GSM monopoly.” The idea that someday
    LTE will come along and therefore a GSM monopoly does not matter also seems at
    odds with the court’s statement that there is no “de minimis exception to antitrust injury.” (p.37)

    This is an interesting case of AT&T winning the
    skirmish against Sprint on the grounds that its CDMA network made roaming with
    T-Mo impossible, but potentially losing the more important point on the
    importance of the GSM monopoly. While this may not quite prove to be AT&T’s equivalent of Picket’s Charge, it does seem rather reminiscent of
    Harold Godwinson driving the Norman sortie off his defensive position at the Battle
    of Hastings
    , only to get pulled out of position and crushed by William’s
    subsequent assault.

    Also useful to DoJ, the court clarified what
    additional evidence Sprint would have needed to state an initial case. For DoJ,
    this sort of intelligence early in the proceeding with regard to how to expend
    its resources and what aspects of its case to develop convey a serious
    advantage. Of course, AT&T also gains intelligence about where it will need
    to increase its defenses. But since it is DoJ which must prove the case, and
    DoJ that is much more resource constrained than AT&T, the development of
    the road map to winning claims about the roaming market in the future favors
    DoJ far more than it does AT&T.

    Is Possible, But Difficult, to Prove a Claim About Backhaul or Other Indirect
    Anticompetitive Impacts

    AT&T won its clearest victory
    this round in getting the complaint about backhaul dismissed. But even here,
    AT&T took some damage and did not score a clean win. Huvelle did not
    reject the idea that backhaul could be an element despite the fact that
    T-Mobile has no backhaul facilities because it would indirectly lead to
    independent backhaul providers with whom T-Mo currently contracts exiting the
    market when T-Mo switches its backhaul to AT&T – although she expressed
    considerable skepticism. Nevertheless, she was careful to note that: “it has
    been established and as defendants concede (see Reply at 2), such an
    injury would be of the type that the antitrust laws are designed to prevent.”
    (p. 41-42).

    The advantage gained by DoJ on
    this front is intelligence on how Huvelle is likely to evaluate harms based on
    theories of vertical integration and indirect harm as a consequence of the
    merger without the intent to exploit monopoly or monopsony power, and what
    evidence would be necessary to sustain such claims. Even if DoJ decides not to
    pursue a direct argument about the backhaul market, this intelligence fills in
    the gaps in the roadmap to a winning strategy and demonstrates that while such
    claims may be difficult, they are possible to win. Mind you, this section of
    the Order still ranks as an AT&T win, but it is noteworthy that even here
    DoJ picks up a modest tactical advantage at no cost to itself.

    Impact: Settlement Cost Rises Again, Another Reality Check for DT and AT&T

    In the short term, the order has
    two significant impacts. First, it directly raises the cost of settlement by
    keeping in two private parties who now must also be paid off to go away. On top
    of that, the DoJ understands that it’s position has continued to improve. As I
    and others noted at the beginning of the week, the more DoJ’s position
    improves, the greater the concessions AT&T would need to make in any
    settlement offer. Even if you believe (erroneously in my view) that DoJ filed
    the complaint as a negotiating tactic, at some point the cost of a settlement
    exceeds the value of the deal. At that point, AT&T and DT need to give up
    and figure out how to cut their losses.

    In addition, this serves as yet
    another reality check to investors and analysts who have repeatedly and
    unconditionally accepted AT&T’s assurances about how this will unfold.
    AT&T assured everyone the DoJ would not challenge, then DoJ challenged.
    AT&T then told everyone that they had received inside assurances that this
    was “really” just a negotiating tactic, a characterization Acting Antitrust
    Division Chief Sharis Pozen vigorously denied. AT&T insists that DoJ’s
    case is unwinnable because it depends on “outdated” theories of antitrust. Then
    DoJ went and won an antitrust case on precisely the theory it has articulated

    Here, AT&T confidently
    assured everyone that Judge Huvelle’s initial determination to keep the cases
    separate showed both that Sprint and C. Spire had no real claims and that
    Huevelle would be skeptical of the antitrust case against it generally. Turns
    out, not so much. Even discounting my assessment of the Order above, AT&T’s
    effort to spin this into a total win because it got a number of the claims
    dismissed should ring a little hollow after predicting that the court would
    dismiss the entire complaint.

    All in all, between this and the
    H&R Block decision, the analysts still betting that this deal will still
    close and the investors who stand to save money by cutting their loses ought to
    take the events of this past week as a reality check. Things are not working out
    the way AT&T and DT senior management keep promising they will. AT&T
    keeps losing ground and being forced into less defensible positions. While it’s
    still early days, at what point do you stop just accepting the AT&T story
    and start looking to cut your losses by unwinding the deal.