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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Turns out there is still life in traditional antitrust theory, and traditional concentration metrics aren’t quite so outdated after all.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?