Why DoJ’s Win Against H&R Block Is Bad News For AT&T/T-Mo.
Why DoJ’s Win Against H&R Block Is Bad News For AT&T/T-Mo.
Why DoJ’s Win Against H&R Block Is Bad News For AT&T/T-Mo.

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    The Department of Justice Antitrust Division (DoJ) just won
    its lawsuit to block H&R Block from acquiring its smaller, “maverick”
    competitor Tax Act
    . Even with the actual Order sealed for a month to let
    parties scrub out the trade secrets, a few important things stand out for why
    this is good news for DoJ in its lawsuit to block AT&T taking over T-Mo. In
    sports terms, this is like DoJ having a super strong exhibition season going
    into the regular season of play. While you still need to play the games to see
    who wins, anyone facing them ought to be worried.

    Here are my major takeaways from what we know so far:

    DoJ snaps losing
    streak on pre-deal enforcement.
    The DoJ hasn’t opposed too many deals in
    recent years, in part because it lost its previous high-profile merger case, Oracle’s purchase of PeopleSoft, back in ‘04. This
    has lead some folks to question whether DoJ can still win a preliminary
    injunction case or whether, for whatever reason, DoJ lacks “merger mojo” and
    would fold like the Red Sox last September. Looks like DoJ has some of that St.
    Louis Card’s magic after all.

    DoJ wins on
    traditional antitrust arguments in the digital world.
    DoJ’s complaint
    against H&R Block/Tax Act relied on pretty much the same arguments it
    outlined in its complaint against AT&T/T-Mo. Notably, DoJ, relied in the complaint against H&R Block on traditional
    market share metrics and on Tax Act’s status as a “maverick firm” forcing
    larger firms to respond through aggressive pricing discounts and new business
    models. DoJ also argued that removing Tax Act would create a “virtual
    duopoly” between the two surviving post-merger firms, H&R Block and Intuit
    (the Turbo Tax guys), creating an increased likelihood of coordinated effects
    between the dominant firms. H&R Block replied with pretty much the same
    arguments that AT&T makes; that DoJ is living in the past and using
    outmoded metrics and measures from the industrial age that don’t apply in a
    dynamic digital market. They also challenged DoJ’s definition of the market.

    Turns out there is still life in traditional antitrust
    theory, and traditional concentration metrics aren’t quite so outdated after
    all. The whole “market share is meaningless because the digital market lets
    anyone enter at any time and capture market share” argument proposed by my
    opposite numbers at various neo-con think tanks is apparently not the law of
    the land after all. This casts considerable doubt on the “don’t worry about
    removing T-Mo or AT&T’s market share post merger because mighty MetroPCS
    and Leap are the real competitors” theory. 
    It also marks the return of the “coordinated effects” doctrine and would
    appear to reject the idea that coordinated effects are inherently impossible in
    digital markets.

    No, this doesn’t prove that DoJ will win its case against
    AT&T.  What it does prove is that the
    DoJ case against AT&T is eminently winnable
    on the theory set out by DoJ – a statement that has until now produced
    indulgent snickers and superior sneers from the Antitrust hipsters who have
    been assuring Wall St. and AT&T supporters that “market share” and “maverick
    firms” are sooooo last century.

    A trial means real
    evidence, cross examination and all that good stuff.
    Most companies win the
    Washington game by making the conversation about theory. Companies produce all
    kinds of theoretical models that describe a hypothetical happy universe and
    generally gloss over the actual state of reality. This allows agencies to
    engage in willful suspension of disbelief. No matter how much real world
    evidence you produce that the models provided by the merging parties have no
    relationship to reality, and no matter what counter models you produce showing
    how awful the world becomes if you permit the merger, the agency can always say:
    “yeah, but maybe it will all work out beautifully just like the merging
    parties’ models predict. And besides, your stuff is just a predictive model
    also. The fact that your model actually includes real world data and has proven
    predictive value when applied historically doesn’t mean it’s automatically
    right.” Indeed, having argued ‘til I am blue in the face on the subject
    numerous times, I can assure you of two things. 1) There is nothing so
    ridiculous that you cannot pay a bunch of economist to come up with a model to
    predict it; and 2) It is entirely possible for FCC staff and Commissioners to
    engage in a willing suspension of disbelief utterly impervious to contrary
    facts or common sense.

    Trials, however, are different. You get to use the actual
    documents produced by the company for the purpose of doing business. You get to
    depose the experts and force them to defend their theoretical models –
    including asking them how they reconcile their theoretical model with actual
    facts. You even get to depose company officials under oath about all kinds of
    fun things, such as any statements or actions they may have made or taken that
    are apparently completely and utterly contradictory to what they have
    previously said in support of the merger.

    While we have no idea what hard evidence DoJ used in making
    its case against H&R Block, the fact that the court is giving the parties
    30 days to scrub the public opinion is a reminder of this fun fact that
    AT&T’s cheerleaders either don’t get or keep glossing over. It’s not just
    ‘your theoretical model against my theoretical model.’ Every single memo and
    email between people conducting business – who never considered that someday
    AT&T might want to buy T-Mobile and this stuff would look real bad at trial
    — is fair game. And it doesn’t stop at AT&T. DoJ has subpoenaed evidence
    from just about everyone in the industry. If handset manufacturers bitch to
    each other in writing about how AT&T dominates the market already, or about
    how AT&T orally threatened to retaliate if they didn’t join the merger
    cheerleading squad, DoJ likely has that email from someone, and will get to
    cross-examine AT&T folks with it.

    Anyone who loudly maintains that the
    DoJ case against AT&T is “thin” or that the complaint is “weak” or “generic” is either ignorant or deliberately glossing over this rather important point. The complaint isn’t even the tip of the iceberg when it comes to what DoJ is actually going to present at trial. People
    have been treating the DoJ complaint as if it were the DoJ’s case, or the
    abstract of the DoJ’s case. In fact, it’s the flipping table of contents for
    the DoJ’s case, with the actual substance to follow at trial.

    More importantly, all the Wall St. analysts and their
    European equivalents evaluating AT&T’s chances of prevailing need to remember
    this unknown joker in the deck. DoJ does not go to litigation lightly, despite
    what AT&T and Deutsche Telekom have told you. Nor does DoJ play hardball by
    filing to force a settlement. When DoJ goes to war, they do it to win. DoJ
    staff reviewed a heck of a lot of potentially incriminating evidence before
    filing its complaint. Anyone seriously evaluating the chances for AT&T to
    prevail should spend a little time asking themselves what DoJ found in the
    document review that makes them so sure they can win.

    It’s not like DoJ has hid this fact. Indeed, the DoJ
    complaint refers in several places to “internal documents” that supported DoJ’s
    theory of the case. AT&T and supporters conveniently ignore this language
    in the DoJ complaint whenever they explain how  weak or thin or whatever the DoJ case is because
    it “only” relies on “outdated” theories about marketshare. Anyone seriously
    trying to handicap the outcome, however, ignores the truckloads of evidence
    that will make their way to trial at their peril.

    Readers may ask, if things are so bleak and potentially so
    embarrassing for AT&T, why haven’t they and DT folded? The answer, in part,
    is that it doesn’t cost the people actual making the decision (e.g., Randal
    Stephenson, Renee Obermann) any personal money to keep pushing – it only costs
    stockholders money. As I have noted before the actual human beings at
    AT&T and DT making the decision are as subject to getting emotionally
    invested in the outcome and making stupid decisions rather than admit defeat as
    anyone else. Despite the belief of folks like Mitt Romney and the Citizens United majority, corporations
    are not actually people. There is no “Mr. AT&T” making a rational decision
    based on a realistic assessment of the chance of winning. It’s a bunch of
    corporate officers with fairly minimal oversight deciding to spend money that
    doesn’t belong to them on the grounds that, hey, maybe they’ll win after all
    and admitting defeat would be extremely embarrassing. The persistent confidence
    statements of AT&T, DT, and their cheerleading squad (which have been
    getting less confident over time) has as much predictive value as my annual
    spring prediction that the Red Sox will win the World Series in the fall.

    It Ain’t Over ‘Til
    It’s Over

    Having said all the above why AT&T should be worried,
    let me also caution against reading too much into DoJ’s win.

    First, antitrust cases are very fact specific. It’s
    important that the case against AT&T is now demonstrably winnable, but that
    doesn’t mean DoJ will actually win. DoJ still has the burden of proof with
    regard to all the key elements, such as market definition, whether T-Mo is, in
    fact, a maverick firm, and whether removing T-Mo from the market (and
    AT&T’s increase in market share) will allow AT&T to exercise (even
    more) market power. Second, AT&T will have the opportunity to explain and defend
    against the collected record evidence, and introduce contrary evidence of its
    own. The right to collect evidence, cross-examine witnesses, and challenge
    experts on their assumptions works both ways.

    Nevertheless, I agree with Stifel Nicholaus analyst David
    Kaut that, at a minimum, the H&R Block win further reduces the likelihood
    of AT&T forcing a settlement. AT&T and its cheerleading squad have
    invested a heck of a lot of effort in the idea that DoJ’s entire theory of the
    case is no longer good law and therefore inherently unwinnable. That’s clearly
    no longer true. As for DoJ, they have their merger mojo back. If nothing else,
    the price AT&T would need to pay to settle – assuming it could force DoJ
    to settle
    , just went up again. With Wall St. analysts already questioning
    whether AT&T could make MetroPCS a suitable ‘T-Mobile Lite,’
     and even Al
    Gore [predicting a DoJ win
    , it’s time for AT&T and DT investors to take a
    serious reality check. Do you keep betting on the AT&T/DT team, despite the
    fact that they’ve been wrong every single time so far, or do you start pressing
    them to cut their losses and go to Plan B?