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Why the DOJ means business on AT&T and T-Mobile

The Department of Justice says AT&T's merger with T-Mobile would eliminate a "disruptive" force in the market. And it wants the merger stopped.

The U.S. Department of Justice filed a lawsuit in federal court today that could end the $39 billion merger between AT&T and T-Mobile USA.

AT&T to buy T-Mobile

The Justice Department said in its filing that the proposed $39 billion transaction would substantially lessen competition in the wireless market, resulting in higher prices, poorer quality services, fewer choices, and fewer innovative products.

The agency said the elimination of T-Mobile as a competitor would be particularly harmful to subscribers in rural areas, where there are fewer players to choose from, and among low-income individuals.

"T-Mobile has been an important source of competition among the national carriers, including through innovation and quality enhancements such as the roll-out of the first nationwide high-speed data network," Sharis A. Pozen, acting assistant attorney general in charge of the Department of Justice's Antitrust Division, said in a statement. "Unless this merger is blocked, competition and innovation will be reduced, and consumers will suffer."

AT&T, which will be forced to pay a $3.8 billion break-up fee to T-Mobile if the deal does not get done, said that it plans to fight the Justice Department's lawsuit.

Related stories:
• Justice Dept. to block AT&T's T-Mobile deal
• The Justice Department's lawsuit (PDF)
• Justice Department's statement regarding AT&T and T-Mobile
• ZDNet: Fallout from Justice Department suit
• AT&T and T-Mobile: Wireless megamerger (roundup)

"We are surprised and disappointed by today's action, particularly since we have met repeatedly with the Department of Justice and there was no indication from the Justice Department that this action was being contemplated," Wayne Watts, AT&T senior executive vice president and general counsel said in a statement. "We plan to ask for an expedited hearing so the enormous benefits of this merger can be fully reviewed. The Justice Department has the burden of proving alleged anticompetitive effects and we intend to vigorously contest this matter in court."

The only agency that is required to approve the merger is the Federal Communications Commission. Since the wireless companies have spectrum licenses granted by the FCC, that agency's approval is required to merge the companies. That said, the Justice Department has also been reviewing the merger. And even though its approval is not necessary, if it finds that the merger will violate antitrust laws it can sue to block the merger. That is what the agency is doing now.

AT&T will be allowed to fight the Justice Department's claims in court and if a federal court agrees with AT&T, the deal could still go through. But it still must be approved by the FCC. The FCC says it's still reviewing the merger. But the Justice Department's lawsuit could sway the agency's decision.

"By filing suit today, the Department of Justice has concluded that AT&T's acquisition of T-Mobile would substantially lessen competition in violation of the antitrust laws," FCC chairman Julius Genachowski said in a statement. "Competition is an essential component of the FCC's statutory public interest analysis, and although our process is not complete, the record before this agency also raises serious concerns about the impact of the proposed transaction on competition. Vibrant competition in wireless services is vital to innovation, investment, economic growth and job creation, and to drive our global leadership in mobile. Competition fosters consumer benefits, including more choices, better service and lower prices."

"Antitrust officials give extra weight to a maverick...When a company doesn't play by the rules or is disruptive in some way, it can be a major factor in their assessment."
--Andrew Schwartzman, The Media Access Project

The Department of Justice's main beef with the merger is the fact that AT&T would be taking out a disruptive player in the market. In its complaint it noted that T-Mobile has been responsible for several "firsts" in the market, including the first handset using the Android operating system, BlackBerry wireless e-mail, the Sidekick, and national Wi-Fi "hotspot" access.

The company has also been a leader in price and has long been known for its variety of unlimited service plans. The agency also noted that T-Mobile was the first company to roll out a nationwide high-speed data network based on HSPA+ (High-Speed Packet Access) technology.

In the complaint, it quoted T-Mobile's own description of its strategy, which states that it strives to "attack incumbents and find innovative ways to overcome scale disadvantages. [T-Mobile] will be faster, more agile, and scrappy, with diligence on decisions and costs both big and small. Our approach to market will not be conventional, and we will push to the boundaries where possible..[T-Mobile] will champion the customer and break down industry barriers with innovations."

Andrew Schwartzman, senior vice president of the The Media Access Project, a law firm that represents several consumer groups in opposing the merger, said Justice Department often puts more emphasis on evaluating antitrust cases when the player being acquired is one that takes risks to compete against rivals.

"Antitrust officials give extra weight to a maverick," he said. "When a company doesn't play by the rules or is disruptive in some way, it can be a major factor in their assessment."

The Justice Department's complaint details several ways in which T-Mobile has put competitive pressure on AT&T and other wireless operators. Quoting from T-Mobile's documents, which describe how the company sees its role in the market, the agency points out that T-Mobile sees itself as "the No. 1 value challenger of the established big guys in the market and is well positioned in a consolidated 4-player national market."

Not buying AT&T's arguments
Since announcing the merger in March, AT&T has tried to downplay T-Mobile as a competitive threat. And instead it claimed that regional players, such as Leap Wireless and MetroPCS, are its competitors, along with Verizon Wireless and Sprint Nextel.

But the Justice Department seems to be rejecting that notion. In its complaint, it says that without a national network, regional regional players like Leap and MetroPCS don't offer the same type of competition that other national carriers offer. The agency also noted how difficult it is for a new player to enter the market and compete on a nationwide basis.

The Justice Department also seemed to disregard one of AT&T's biggest arguments. AT&T has said that the merger would create network efficiencies, including allowing AT&T to expand its 4G LTE network to 97 percent of U.S. consumers, up from its planned 80 percent coverage. But according to its filing, the Justice Department said AT&T could achieve the same benefits from the T-Mobile merger if it simply invested more in its own network without eliminating a competitor.

AT&T recently faced additional questioning from the FCC on this issue after a document surfaced noting that the company had considered paying less than one-tenth of its T-Mobile acquisition price to expand its high-speed service across the U.S.

A letter from AT&T lawyers sent to the FCC containing details of AT&T's plans to expand its network using LTE was inadvertently posted on the commission's Web site. And in that letter, AT&T spelled out that it could have spent $3.8 billion to "expand LTE coverage from 80 to 97 percent of the U.S. population." But the company noted that in January AT&T's senior management decided that there was no "viable business case" for expanding plans for the LTE network.

"AT&T senior management concluded that it could not justify expanding its LTE footprint beyond the Plan of Record, despite the potential marketing and competitive benefits of doing so," the letter reads. "Specifically, AT&T senior management concluded that, unless AT&T could find a way to expand its LTE footprint on a significantly more cost-effective basis, an LTE deployment to 80 percent of the U.S. population was the most that could be justified."

Despite the public snafu, AT&T has continued to stick with its argument that without the T-Mobile merger, it would not be able to expand its network.

This argument in particular is central to the deal, because it's one that several lawmakers have pointed to for support of the merger. The idea is that the broadband benefits are simply too good for the FCC to pass up. Rep. Lamar Smith (R-Texas) had said in a letter to the FCC earlier this month that the merger between AT&T and T-Mobile would expand the quality and capacity of wireless broadband networks while also creating new jobs.

Even with the Justice Department's rejection of its justifications for the merger, AT&T says that it will fight on for the merger.

"We remain confident that this merger is in the best interest of consumers and our country," Wayne Watts, AT&T's head lawyer championing the merger, said in a statement. "And the facts will prevail in court."

Updated at 10:15 a.m. PT with additional information from the Justice Department filing as well as background information from Don Reisinger, a contributing writer to CNET.