Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Monday, May 23, 2011

Comments of Harry First of Proposed AT&T/T-Mobile Merger

Posted by Harry First

Four Things For Antitrust Enforcers To Keep In Mind for the AT&T/T-Mobile Merger

As we all know, modern merger enforcement is a fact-intensive effort, involving the ins-and-outs of specific (sometimes arcane) markets, an understanding of the technology of the industry involved, and some appreciation of the economic models that will be used to predict competitive effects. Without access to all the relevant information, outside observers are at a disadvantage in making enforcement calls. It’s easy to opine on legality of a merger, harder to be sure you are right. Rather than opining, I’ll make four general suggestions for the antitrust enforcers who are taking up this effort. And here I include the FCC as an “antitrust enforcer,” for I take the decision to hire a top-rate antitrust lawyer as Senior Counsel to the Chairman to mean that the FCC may prefer antitrust enforcement to a version of one of my favorite TV programs, “Let’s Make A Deal.”

First: You Can Say No. Enforcement of Section 7—which used to be called an “antimerger law”—has basically turned into a regulatory exercise in which most mergers are approved. Some mergers get challenged, of course. The Department is now challenging a chicken processor merger in the Shenandoah Valley, a 3-2 merger if the Shenandoah Valley really is a properly defined market. Chicken feed, you might say. But the very real threat to challenge NASDAQ’s bid for the NYSE, a merger to monopoly according to the Department, was not chicken feed. So, government enforcers can say no, they just need to say it more often. Relying on regulatory decrees, particularly ones that require continuing supervision, is not antitrust’s first-best approach to remedies. If a merger gives the merged firms incentives to engage in anticompetitive conduct, a fix that doesn’t alter those incentives is good only until the fix expires, five years in some cases. The promise to behave nicely lasts only so long.

Second: This Is Not A Supermarket Merger. According to the Wall Street Journal, AT&T’s CEO had his lawyers do a “market-by-market” analysis of where the overlap with T-Mobile was largest. He concluded that the antitrust risk was “bearable” because AT&T was willing to make “substantial” divestitures in local markets, presumably of subscribers. This is how supermarket mergers get done. The lawyers come in with maps of overlaps in small geographic areas and then offer to divest as many overlapping stores as is necessary. These divestitures not only don’t leave competition as healthy as it was before, they also miss the point that not all competition is local when networks are involved. Even more so for wireless. Competition certainly takes place on a local level. But it also takes place on the level of national networks. A big challenge for enforcers is to move past the fixation on local markets and look at the obvious here: how competition takes place nationally. And if competition is national, that would mean a merger producing two firms with roughly 75 percent of all subscribers in the U.S. Surely that’s a problem.

Third. Don’t Forget Handsets. Complementary products are very important for innovation in telecommunications and maybe the most important one today is smartphones. Wireless carriers distribute them on a variety of price and product quality terms. This competition not only produces a product that is better for consumers (lower priced and with increased functionality) but also affects the “subsidy” the carriers pay to the handset makers for the handsets themselves—a form of buyer power. If we really want innovation in handsets, attention needs to be paid to how the loss of T-Mobile as a distributor/buyer will affect not only consumer pricing but also the incentives for handset-maker innovation. Remember POTS (plain-old-telephone-service)? The last time that AT&T controlled handsets (through its ownership of Western Electric) all we had were black rotary-dial phones. A turquoise Princess phone was considered an innovation. We really can’t have a 21st Century version of this type of market control.

Fourth. Don’t Forget The Systemic Effect of Merger Enforcement. When the Clayton Act was amended in 1950 there was much talk about the “triggering effect” that mergers can have. If we let two firms in an industry merge, then the next two will want to merge, then the next two, and so on. The 21st Century version of this is no longer restricted to the industry involved in the merger. It’s more systemic, involving a general sense of the appropriate scale and size of business enterprises today plus a prediction of enforcement response. Press reports indicate that AT&T was “encouraged” by the approval of the NBC/Comcast merger, “because it felt regulators weren’t about to blanket-ban big mergers.” True, these systemic effects may be hard to quantify or predict—deterrence always is—and may be harder to work into a legal theory under Section 7. But if enforcers are on the line about whether to bring suit, it’s certainly appropriate to let this factor tip the prosecutorial scales to a “no.”

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