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

November 4, 2011 , , ,

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? 

Looking
at Huvelle’s Order on whether Sprint and/or C. Spire adequately stated a
claim
, 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
Market.

God
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.

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

“That
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
case
, 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!

FCC
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.  

The
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.

It
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.

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

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.

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.


About Harold Feld

Harold Feld is Public Knowledge’s Senior Vice President and author of “The Case for the Digital Platform Act,” (Public Knowledge & Roosevelt Institute 2019) a guide on what government can do to preserve competition and empower individual users in the huge swath of our economy now referred to as “Big Tech.” Former FCC Chairman Tom Wheeler described this book as, “[...] a tour de force of the issues raised by the digital economy and internet capitalism.” For more than 20 years, Feld has practiced law at the intersection of technology, broadband, and media policy in both the private sector and in the public interest community. Feld has an undergraduate degree from Princeton University, a law degree from Boston University, and clerked for the D.C. Circuit Court of Appeals. Feld also writes “Tales of the Sausage Factory,” a progressive blog on media and telecom policy. In 2007, Illinois Senator Dick Durbin praised him and his blog for “[doing] a lot of great work helping people understand how FCC decisions affect people and communities on the ground.”