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

November 2, 2011 , , , ,

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theory, and traditional concentration metrics aren’t quite so outdated after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?

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.”